**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C.   20549**

** **

**FORM 10-K**

 

| **ý**                                                                                                                                         | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|----------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                               |                                                                                          |
| **For  the fiscal year ended December 31, 2002**                                                                                                   |
|                                                                                                                                               |                                                                                          |
| **or**                                                                                                                                             |
|                                                                                                                                               |                                                                                          |
| **o**                                                                                                                                              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                               |                                                                                          |
| **For  the transition period  from         to         ** |

 

| **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**

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title of each class**                              |   | **Name of each exchange on which registered** |   |
|------------------------------------------------------|--------|-----------------------------------------------|--------|
| Common Stock                                         |   | New York and Pacific                          |   |
| $2.06 No Par Cumulative Convertible  Preferred Stock |   | New York and Pacific                          |   |
|                                                 |   |

 

Securities registered pursuant to Section 12(g) of the Act:

 

**NONE**

(Title of Class)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES    ý        NO    o

 

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-Ký

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined by Rule 12b-2 of the Act).

YES    ý        NO    o

 

Aggregate market value of voting stock held by non-affiliatesas of

June 28, 2002         $14,617,705,423

 

Common shares outstanding, February 24, 2003        311,085,338

 

DOCUMENTS INCORPORATED BYREFERENCE

 

| **Document**                                                 |   | **Incorporated Into** |
|--------------------------------------------------------------|--------|-----------------------|
| Proxy statement for the 2003 Annual Meeting of  Stockholders |   | Part III              |
| The Exhibit Index is located on pages 34 to 38.              |   |                  |

 

 

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**ALLTEL Corporation**

**Form 10-K, Part I**

 

**Item 1.    Business**

**THE COMPANY**

 

**GENERAL**

 

ALLTEL Corporation (“ALLTEL” or the “Company”) is a leading provider ofcommunications and information services. The Company owns subsidiaries that provide wireless and wireline local,long-distance, network access and Internet services, wide-area paging service,information processing management services and advanced applicationsoftware.  Telecommunications productsare warehoused and sold by the Company’s distribution subsidiary.  A subsidiary also publishes telephonedirectories for affiliates and other independent telephone companies.  The Company is incorporated in the state ofDelaware.

 

The Company’s web site address is**www.alltel.com**.  ALLTEL files with, or furnishes to, the Securities and ExchangeCommission (the “SEC”) annual reports on Form 10-K, quarterly reports on Form10-Q and current reports on  Form 8-K, as well as various otherinformation.  ALLTEL makes available freeof charge through its web site its annual reports, quarterly reports andcurrent reports, and all amendments to any of those reports, as soon asreasonably practicable after providing such reports to the SEC.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This Form 10-K may include, certain “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject touncertainties that could cause actual future events and results to differmaterially from those expressed in the forward-looking statements.  These forward-looking statements are basedon estimates, projections, beliefs and assumptions and are not guarantees offuture events and results.  Words suchas “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”,“estimates”, and “should”, and variations of these words and similarexpressions, are intended to identify these forward-looking statements.  ALLTEL disclaims any obligation to update orrevise any forward-looking statement based on the occurrence of future events,the receipt of new information, or otherwise.

 

Actual future events and results may differ materially from thoseexpressed in these forward-looking statements as a result of a number ofimportant factors.  Representativeexamples of these factors include (without limitation) adverse changes ineconomic conditions in the markets served by ALLTEL; the extent, timing, andoverall effects of competition in the communications business; material changesin the communications industry generally that could adversely affect vendorrelationships with equipment and network suppliers and customer relationshipswith wholesale customers; material changes in communications technology; therisks associated with the integration of acquired businesses; adverse changesin the terms and conditions of the Company’s wireless roaming agreements; thepotential for adverse changes in the ratings given to our debt securities bynationally 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; ongoing deregulation (and the resulting likelihood of significantlyincreased price and product/service competition) in the communications businessas a result of federal and state legislation, rules, and regulations; the finaloutcome of federal, state and local regulatory initiatives and proceedingsrelated to the terms and conditions of interconnection, access charges,universal service and unbundled network elements and resale rates; and thefinal outcome of pending litigation challenging the Federal CommunicationsCommission’s wireless number portability rules.

 

In addition to these factors, actual future performance, outcomes andresults may differ materially because of other, more general, factors including(without limitation) general industry and market conditions and growth rates,economic conditions, and governmental and public policy changes.

 

 

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** **

**ACQUISITIONS**

 

On August 1, 2002, ALLTEL completed its purchase of local telephoneproperties serving approximately 589,000 wireline customers in Kentucky fromVerizon Communications Inc. (“Verizon”) for $1.93 billion in cash.  The acquired wireline properties overlappedALLTEL’s existing wireless service in northeastern Kentucky.

 

On August 1, 2002, ALLTEL also completed its purchase of substantiallyall of the wireless properties owned by CenturyTel, Inc. (“CenturyTel”) forapproximately $1.59 billion in cash.  Inthis transaction, ALLTEL added properties representing approximately 8.3million potential customers (“POPs”), acquired approximately 762,000 customersand expanded its wireless footprint into new markets across Arkansas, Louisiana,Michigan, Mississippi, Texas and Wisconsin. Also included in the transaction were minority partnership interests incellular operations representing approximately 1.8 million proportionate POPsand Personal Communications Services (“PCS”) licenses covering 1.3 million POPsin Wisconsin and Iowa.

 

On October 3, 2000, ALLTEL purchased wireless properties in NewOrleans, Baton Rouge and three rural service areas in Louisiana from SBCCommunications, Inc. (“SBC”).  Inconnection with this transaction, ALLTEL paid SBC $387.6 million in cash andacquired approximately 150,000 wireless customers and 300,000 pagingcustomers.  The Company disposed of thepaging operations in 2001.

 

On January 31, 2000, ALLTEL, Bell Atlantic Corporation (“BellAtlantic”) and GTE Corporation (“GTE”) signed agreements to exchange wirelessproperties in 13 states.  On April 3,2000, ALLTEL completed the initial exchange of wireless properties with BellAtlantic in five states, acquiring operations in Arizona, New Mexico and Texasand divesting operations in Nevada and Iowa. In addition to the exchange of wireless assets, ALLTEL also paid BellAtlantic $624.3 million in cash to complete this transaction.  On June 30, 2000, ALLTEL completed theremaining wireless property exchanges with Bell Atlantic and GTE, in whichALLTEL acquired operations in Alabama, Florida, Ohio, and South Carolina, anddivested operations in Illinois, Indiana, New York and Pennsylvania.  ALLTEL also transferred to Bell Atlantic orGTE certain of its minority investments in unconsolidated wireless properties,representing approximately 2.6 million POPs. In connection with the transfer of the remaining wireless assets, ALLTELreceived $216.9 million in cash and prepaid vendor credits of $199.6 millionand assumed long-term debt of $425.0 million. Through the completion of the above transactions, ALLTEL acquiredinterests in 27 wireless markets representing about 14.6 million POPs andapproximately 1.5 million wireless customers, while divesting interests in 42wireless markets representing 6.9 million POPs and approximately 778,000customers.

 

During 2000, ALLTEL also acquired the remaining ownership interests inwireless properties in Florida and Georgia in which ALLTEL already owned acontrolling interest.  The Company alsopurchased two information services companies, Benchmark ConsultingInternational, a privately held company that specialized in the design andimprovement of operations processes for financial services providers, andDatamatic Services, Inc., a privately held company that provided data and imageprocessing and back office operations to 28 community banks in Arkansas,Mississippi and Nevada.  In connectionwith these acquisitions, the Company paid $28.1 million in cash and issuedapproximately 730,000 shares of ALLTEL common stock.

 

In September 1999, ALLTEL completed its mergers with Liberty Cellular,Inc. (“Liberty”) and its affiliate, KINI L.C. Liberty, which prior to the merger, provided wireless, long-distance andInternet services under the name “Kansas Cellular” to approximately 200,000communications customers in Kansas.

 

In July 1999, ALLTEL completed its merger with Aliant CommunicationsInc. (“Aliant”), a communications company that provided wireless, wireline,paging, long-distance and Internet services in Nebraska to more than 600,000communications customers.

 

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** **

In January 1999, the Company completed its merger with Standard Group,Inc. (“Standard”), a communications company that served more than 71,000customer lines in northeast Georgia. The customer lines acquired in this transaction were in areas adjacentto the Company’s other wireline market areas in Georgia and increased ALLTEL’stotal wireline customers in the state to more than 550,000.  The transaction also included Standard’scable television operations, which served approximately 30,000 customers.  Including this acquisition, the Companycurrently provides cable television service to approximately 37,000 customersin Georgia and Missouri.  These cabletelevision properties are not significant to the ongoing operations of ALLTEL.

 

During 1999, the Company acquired a 100 percent ownership interest in awireless services business serving the Dothan, Alabama Metropolitan StatisticalArea (“MSA”), representing approximately 135,000 cellular POPs.  The Company also purchased 100 percentownership interests in a wireless services business serving a Colorado RuralService Area (“RSA”) representing approximately 75,000 cellular POPs, and awireless services business serving an Illinois RSA representing more than200,000 cellular POPs.  In addition, theCompany increased its ownership interest to 100 percent in the Richmond,Virginia market, representing approximately 835,000 cellular POPs, through theexchange of its minority interest investment in a partnership serving theOrlando, Florida market.

 

To expand its information services business, ALLTEL completed theacquisitions of ACE Software Sciences (“ACE”), Advanced Information Resources,Limited (“AIR”), Corporate Solutions International (“CSI”), and Southern DataSystems (“Southern Data”) during 1999. ACE produced mortgage servicing software that enhanced ALLTEL’s existingmortgage servicing software products. AIR, a privately held company, provided wholesale commercial lendingsoftware to large global financial institutions.  CSI, a privately held company headquartered in Atlanta, Georgia,developed a consumer loan origination system, which when combined with theCompany’s other loan processing software products, allowed ALLTEL to provide astate-of-the-art loan origination solution to current and prospective clientsin the financial services industry. Southern Data, a privately held company also headquartered in Atlanta,provided a full array of application software and services to the communitybanking market.

 

In 1998, the Company completed its merger with 360° CommunicationsCompany (“360°”), a wireless communications company, that served more than 2.6million customers in 15 states.  Withthis merger, ALLTEL significantly expanded its wireless presence and enhancedits ability to deliver bundled communications services across itsgeographically focused markets.

 

During 1998, the Company acquired a 100 percent ownership interest intwo Georgia RSAs, representing approximately 181,000 cellular POPs.  In addition, the Company increased itsownership interest in wireless properties in North Carolina and Texas.

 

**DISPOSITIONS**

 

On January 28, 2003, ALLTEL signed a definitive agreement to sell thefinancial services division of its information services subsidiary, ALLTELInformation Services, to Fidelity National Financial Inc. (“FidelityNational”), for $1.05 billion, payable as $775.0 million in cash and $275.0million in Fidelity National common stock. As part of this transaction, Fidelity National will acquire ALLTEL’smortgage servicing, retail and wholesale banking and commercial lendingoperations, as well as the community/regional bank division.  Approximately 5,500 employees of the Companywill transition to Fidelity National as part of the transaction, which isexpected to close during the first quarter of 2003.  The Company will report the financial services division as“discontinued operations” beginning with the issuance of its consolidatedfinancial statements as of and for the interim periods ended March 31, 2003 and2002.  The telecom division of ALLTELInformation Services will be retained by the Company and will not be part ofthe transaction.

 

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During 2002, the Company sold its majority ownership interest in aPennsylvania cellular partnership to Verizon for a total cash purchase price of$24.1 million.

 

During 2001, the Company sold 20 PCS licenses in six states to VerizonWireless for a total cash purchase price of $410.0 million.

 

During 2000, the Company sold its PCS operations in Birmingham andMobile, Alabama and PCS licenses in nine other markets for approximately $112.0million in cash.

 

During 1998, the Company sold its 27.9 percent ownership interest in acellular partnership serving the Omaha, Nebraska market for approximately $17.6million in cash.

 

**MANAGEMENT**

 

The Company’s staff at its headquarters and regional offices supervise,coordinate and assist subsidiaries in management activities, investorrelations, acquisitions, corporate planning, tax planning, cash management,insurance, sales and marketing support, government affairs, legal matters,engineering services, and technical research. They also coordinate the financing program for all of the Company’soperations.

 

**EMPLOYEES**

 

At December 31, 2002, the Company had 25,348 employees.  Within the Company’s work force,approximately 1,716 employees are part of collective bargaining units.  During 2002, ALLTEL had no material workstoppages due to labor disputes with its unionized employees.

 

**OPERATINGSEGMENTS**

 

ALLTEL is organized based on the products and services that itoffers.  Under this organizationalstructure, the Company operates in two principal areas: communications andinformation services.  As previouslydiscussed, the Company has entered into a definitive agreement to sell thefinancial services division of its information services subsidiary to FidelityNational.  The telecommunicationsdivision of the subsidiary will be retained by ALLTEL and will be integratedinto the Company’s communications support services business segment.  The transaction is expected to close by theend of the first quarter of 2003.  TheCompany’s communications operations consist of its wireless, wireline andcommunications support services segments. ALLTEL’s wireless segment consists of the Company’s cellular, PCS andpaging operations.  The wireline segmentconsists of ALLTEL’s incumbent local exchange carrier (“ILEC”), competitivelocal exchange carrier (“CLEC”) and Internet access operations.  Communications support services consist ofthe Company’s long-distance and network management services, communicationsproducts and directory publishing operations. For financial information about ALLTEL’s operating segments, refer topages F-63 to F-65 of the Financial Supplement, which is incorporated byreference herein.

 

** **

 

**COMMUNICATIONS SERVICES**

 

Over the past five years, the Company has focused its communicationsbusiness strategy on growing its customer base through strategic acquisitionsand enhancing the value of its customer relationships by offering additionalproducts and services and providing superior customer service.  Since 1998, the Company has significantlyexpanded its communications customer base. The merger with 360° completed in 1998, along with the mergers

 

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with Aliant and Liberty completed in 1999, the property swaps completedwith Bell Atlantic and GTE in 2000, and the acquisition of substantially all ofCenturyTel’s wireless assets in 2002 have significantly expanded ALLTEL’swireless business and enhanced the Company’s ability to provide multiplecommunications services to its customers. The acquisition of Verizon’s wireline properties in Kentucky, completedin the third quarter of 2002, increased ALLTEL’s total number of wirelinecustomers to more than 3 million. Including customers of its wireless, wireline and  long-distanceservices, the Company serves more than 12 million communications customers in26 states.  ALLTEL operates itscommunications businesses as a single operation capable of delivering tocustomers one-stop shopping for a full range of communications products andservices.  In addition to its wireless,wireline and long-distance service offerings, the Company also providesInternet, high-speed data transport services (“DSL”), paging and cabletelevision services in select markets.

 

**WIRELESS OPERATIONS**

 

As of December 31, 2002, the Company provided wireless communicationsservice to approximately 7.6 million customers in 26 states.  ALLTEL owns a majority interest in wirelessoperations in 88 MSAs, representing approximately 38.7 million wireless POPsand a majority interest in 154 RSAs, representing approximately 20.3 millionwireless POPs.  In addition, ALLTEL ownsa minority interest in 55 other wireless markets, including the Chicago,Illinois and Houston, Texas MSAs.  As ofDecember 31, 2002, ALLTEL’s penetration rate (number of customers as apercentage of the total population in the Company’s service areas) was 12.9percent.

 

ALLTEL has offered PCS service in Jacksonville, Florida, since March1998.  As previously discussed, inconnection with the acquisition of the wireless assets from CenturyTel in 2002,ALLTEL acquired PCS licenses covering 1.3 million POPs in Wisconsin andIowa.  In 2000, the Company sold its PCSoperations in Birmingham and Mobile, Alabama and PCS licenses in nine othermarkets, and in 2001, ALLTEL sold 20 additional PCS licenses.  Giving effect to these transactions, theCompany has 49 PCS licenses representing approximately 18.4millionPOPs.  ALLTEL provides paging servicesin select markets to customers on both a facilities-based and resalebasis.  The Company operates wide-area, computer-driven paging networks in Arkansas, Florida andOhio.  As of December 31, 2002, ALLTELprovided paging service to approximately 141,000 customers.

 

During 2002, ALLTEL continued to upgrade it wireless networkinfrastructure and invest in state-of-the-art code division multiple access(“CDMA”) technology, including 1XRTT. Nearly 90 percent of the Company’s wireless markets operate ondigital-based systems.  In addition, theCompany supplements its wireless service coverage area through roamingagreements with other wireless service providers that allow ALLTEL’s customersto obtain wireless services in those U.S. regions in which ALLTEL does notmaintain a network presence.  Throughthese roaming agreements, the Company is able to offer its customers wirelessservices covering approximately 95 percent of the U.S. population.  ALLTEL continues to increase its networkcapacity and coverage area through new network construction, strategic acquisitionsand affiliations with other wireless service providers.

 

**PRODUCTOFFERINGS AND PRICING**

 

Wireless revenues are derived primarily from monthly access and airtimecharges, roaming and long-distance charges and charges for custom calling andother enhanced service features. Wireless revenues comprised 51 percent of ALLTEL’s total operatingrevenues from business segments in 2002, compared to 50 percent in 2001 and 48percent in 2000.  Prices of wirelessservices are not regulated by the Federal Communications Commission (“FCC”) orby state regulatory commissions; however, as more fully discussed under thecaption “Regulation” on page 8, states are permitted to regulate the terms andconditions of wireless services unrelated to either rates or market entry.

 

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ALLTEL seeks to stimulate additional usage, increase penetration andimprove customer retention rates through product offerings and pricingstrategies.  The Company designs local,regional and national service plans to meet customer needs and to addressprevailing market and competitive conditions. The Company’s rate plans are designed to address the needs of customersfrom all market segments.  These planstypically consist of a fixed monthly rate for network access, a package ofairtime minutes included in the monthly rate and a per minute rate for airtimeused in excess of the minutes included in the package.  Customers who frequently use wirelessservice generally prefer rate plans with a fixed monthly rate, a large packageof included minutes and a lower than average per minute airtime rate.  Conversely, customers who use wirelessservice less frequently generally prefer a lower monthly fixed rate and ahigher per minute airtime rate.  ALLTELprovides custom calling features to enhance its product offering.  These features include call waiting, callforwarding, caller identification, three-way calling, no-answer transfer andvoicemail.

 

The Company also offers unlimited local calling plans, advance pay andprepaid calling plans to increase market penetration.  Customers who subscribe to one of ALLTEL’s local calling plansreceive unlimited local airtime for a fixed monthly rate.  The advance-pay and prepaid plans allowcustomers to receive service in a cost-effective manner without entering into aservice contract.  As of December 31,2002, advance pay and prepaid customers represent approximately 8 percent ofALLTEL’s wireless customer base.

 

The wireless industry has shifted to the use of one-rate pricing plans,which include roaming and long-distance at no extra charge for a specifiednumber of minutes.  In order to offerone-rate plans on a profitable basis, the Company has endeavored to negotiatemore favorable terms and conditions under its roaming agreements with otherdomestic wireless companies.  Aspreviously discussed, these roaming agreements provide ALLTEL’s customers withthe capability to use their wireless telephones while traveling outside theCompany’s service areas.  In conjunctionwith the wireless assets exchange transaction completed in 2000, ALLTEL andVerizon (formerly Bell Atlantic and GTE) also signed reciprocal roamingagreements.  These agreements, whichexpire in January 2010, allow customers of each of the companies to roam oneach other’s networks across a footprint that covers approximately 95 percentof the U.S. population.  As a result ofthese roaming agreements, ALLTEL can offer its Total and National Freedom rateplans to customers profitably.  Theserate plans provide national wireless coverage with no long-distance or roamingcharges.  While these national rateplans provide the Company the ability to compete effectively for the highvolume, roaming customer, retail roaming revenues will continue to decline tothe extent customers migrate to these national rate plans.

 

Primarily as a result of decreased wholesale roaming rates, averagerevenue per customer per month decreased to $46.97 in 2002, compared to $47.09in 2001 and $49.40 in 2000.  Thedecreases in average revenue per customer per month were attributable todecreased wholesale roaming rates partially offset in each year by theexpansion of higher-yield local, regional and national calling plans.

 

In conjunction with the continued development and deployment ofALLTEL’s digital networks, the development and expansion of wireless dataapplications will be critical to the continued growth in usage of the Company’snetwork facilities.  With compatiblewireless handsets, the Company has begun to offer its customers access towireless data services provided by third parties, which include access to news,weather, sports, travel information and entertainment sources.  In addition, customers can send and receivetext messages to each other and download ring tones and graphics to theirmobile phones.  Revenues earned fromthese data service offerings are not yet significant to the Company’s wirelessoperations.

 

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Maintaining low postpaid customer churn rates (average monthly rate ofcustomer disconnects) is a primary goal of the Company, particularly ascustomer growth rates slow due to increased competition and higher penetrationlevels occur in the marketplace.  ALLTELexperienced an average monthly postpaid customer churn rate in its wirelessservice areas of 2.23 percent, 2.34 percent and 2.33 percent for the yearsended December 31, 2002, 2001 and 2000, respectively.  To improve customer retention, ALLTEL offers competitively pricedrate plans, proactively analyzes customer usage patterns and migrates customersto digital handsets due to technology advancements.  In addition, ALLTEL continues to upgrade its telecommunicationsnetwork in order to provide enhanced service offerings to customers.  These efforts helped to reduce postpaidcustomer churn in 2002, despite heightened competition and declining economicconditions that adversely affected the wireless industry.

 

**DISTRIBUTIONAND MARKETING**

 

ALLTEL utilizes four methods of distributing its wireless products andservices in each of its markets: Company retail stores, Company retail kiosks, dealers and direct salesrepresentatives.  Using multipledistribution channels in each of its markets enables the Company to provideeffective and extensive marketing of ALLTEL’s products and services and toreduce its reliance on any single distribution channel.  Dealer and direct sales channels remainimportant components of the Company’s overall distribution strategy, with theprimary objective for all channels being to produce the best combination oflower customer acquisition costs and higher customer retention rates.

 

ALLTEL currently conducts its retail operations in more than 1,100locations strategically located in neighborhood retail centers and shoppingmalls to capitalize on favorable demographics and retail traffic patterns.  The Company’s retail focus is to attract newcustomers through competitive service offerings and an efficient salesprocess.  For ALLTEL, the incrementalcost of obtaining a customer through a Company retail store is the lowest ofany distribution channel.

 

ALLTEL also contracts with large national retail stores to sellwireless products and services directly through its own kiosks.  The Company utilizes retail salesrepresentatives at kiosks in large retailers to take advantage of high trafficgenerated by the retailers, to reduce the cost of the sale, and to ensurecustomers receive proper training in the use of wireless equipment andservices.  Existing customers canpurchase wireless telephone accessories, pay bills or inquire about ALLTEL’sservices and features while in retail stores or at kiosks.  Through dedicated customer service at itsretail stores and kiosks, the Company’s goal is to build customer loyalty andincrease the retention rate of new and existing customers.

 

The Company enters into dealer agreements with electronics retailersand discounters in its markets.  Theselocal dealers may offer other wireless services like paging.  In exchange for a commission payment, thesedealers solicit customers for the Company’s wireless service.  The commission payment is subject tocharge-back provisions if the customer fails to maintain service for aspecified period of time.  Thisarrangement increases store traffic and sales volume for the dealers andprovides a valuable source of new customers for the Company.  ALLTEL actively supports its dealers withregular training and promotional support.

 

ALLTEL’s direct sales force focuses its efforts on business customerswith high wireless telephone usage and multiple lines of service.  This channel produces the lowest churncompared with any other distribution channel.

 

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**COMPETITION**

 

Currently, up to 10 wireless carriers (2 cellular, 6 PCS and 2 EnhancedSpecialized Mobile Radio) may operate in the same geographic area, along withany number of resellers that buy bulk wireless services from one of thewireless providers and resell it to their customers.  PCS services generally consist of wireless two-way communicationsservices for voice, data and other transmissions employing digitaltechnology.  The entry of multiplecompetitors, including PCS providers, within the Company’s wireless markets hasmade it increasingly difficult to attract new customers and retain existingones.  Competition for customers amongwireless service providers is based primarily on the types of services andfeatures offered, call quality, customer service, system coverage andprice.  ALLTEL has responded to thisgrowing competitive environment by capitalizing on its position as an incumbentwireless service provider by providing high capacity networks, strongdistribution channels and superior customer service and by developinginnovative rate plans and offering new products and services.  ALLTEL’s ability to compete successfully inthe future will depend upon the Company’s ability to anticipate and respond tochanges in technology, customer preferences, new service offerings, demographictrends, economic conditions and competitors’ pricing strategies.

 

In the current wireless market, ALLTEL’s ability to compete alsodepends on its ability to offer regional and national calling plans to itscustomers.  As previously noted, theCompany depends on roaming agreements with other wireless carriers to provideroaming capabilities in areas not covered by ALLTEL’s network.  These agreements are subject to renewal andtermination if certain events occur, including if network quality standards arenot maintained.  If the Company wereunable to maintain or renew these agreements, ALLTEL’s ability to continue toprovide competitive regional and nationwide wireless service to its customerscould be impaired, which, in turn, would have an adverse effect on its wirelessoperations.

 

**TECHNOLOGY**

 

Second generation digital systems in the U. S. compress voice or datasignals enabling a single radio channel to simultaneously carry multiple signaltransmissions.  As of December 31, 2002,approximately 90 percent of ALLTEL’s wireless POPs were covered by digitalnetwork facilities.  CDMA digital technologyprovides expanded channel capacity and the ability to offer advanced servicesand functionality.  In addition, digitaltechnology improves call quality and offers improved customer call privacy.  ALLTEL continues to transition its remaininganalog markets to CDMA digital technology. ALLTEL believes that its networks have sufficient capacity to handle newcustomer growth in the near term.  TheCompany intends to meet any capacity requirements through frequency planning,network optimization and the deployment of additional networkinfrastructure.  Third generationdigital wireless technologies increase voice capacity, allow high-speedwireless packet data services and are capable of addressing more complex dataapplications.  The Company has begun toinvest in third generation digital technologies in order to offer its customersaccess to high speed wireless data services.

 

**REGULATION**

 

The Company is subject to regulation by the FCC as a provider ofwireless communications services.  TheFCC has rules governing the construction and operation of wirelesscommunications systems and licensing and technical standards for the provisionof wireless communications service.  TheFCC also regulates the terms under which certain ancillary services may beprovided through wireless facilities. The FCC has exercised its authority to refrain from rate regulation ofwireless communications services, but retains its statutory authority to imposesuch regulation.  The 1993 OmnibusBudget Reconciliation Act largely preempted state rate and entry regulation ofwireless carriers, although the states are permitted to regulate the otherterms and conditions of wireless services unrelated to either rates or marketentry.  States may petition the FCC forauthority to regulate rates if the states demonstrate that (1) the market hasfailed to protect consumers from unreasonable, unjust or discriminatory rates;or

 

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(2) market conditions exist such that Commercial Mobile Radio Services(“CMRS”) are a replacement for land line telephone exchange service for a“substantial” portion of the telephone land line exchange service within eachstate.  During 2003, the State ofCalifornia is expected to file a petition with the FCC seeking to assert itsauthority to regulate the pricing of wireless services by challenging the“substantial replacement” provisions of the 1993 Omnibus Budget ReconciliationAct.  Depending upon the outcome of thisproceeding, other states may also petition the FCC to begin regulating theprices of wireless services, which, if it were to occur, could have a materialadverse effect on the Company’s wireless revenues.

 

The Telecommunications Act of 1996 (the “96 Act”) provides wirelesscarriers numerous opportunities to provide an alternative to the telephonyservices provided by local exchange telephone companies and interexchangecarriers.  These opportunities includethe ability to provide calling plans that integrate or bundle both localcalling and long-distance service. Wireless carriers are entitled to compensation from othertelecommunications carriers for calls transmitted from their networks andterminated on the network of the wireless carrier.  Wireless carriers are characterized as “telecommunications carriers”under the 96 Act and not local exchange carriers.  Consequently, wireless carriers are not subject to theinterconnection, resale, unbundling and other obligations applicable to localexchange carriers until such time as the FCC makes a finding that treatment ofwireless carriers as local exchange carriers is warranted.  The 96 Act also eliminated any requirementthat wireless carriers provide subscribers with equal access to their longdistance carrier of choice, although the FCC is empowered under the 96 Act toimpose an equal access requirement on wireless carriers through rule makingshould market conditions so warrant.

 

The Company holds FCC authorizations for Cellular RadiotelephoneService (“CRS”), PCS, and paging services, as well as ancillary authorizationsin the private radio and microwave services (collectively, the “FCCLicenses”).  FCC Licenses are originallyissued for 10-year terms and may be renewed for additional 10-year termssubject to FCC approval of the renewal application.  The Company has routinely sought and been granted renewal of itsFCC Licenses without contest as such licenses become due for renewal andanticipates that future renewals of its FCC Licenses will be granted.  Significant changes in ownership or controlof a FCC license continue to require prior approval by the FCC, and interestedparties are afforded the opportunity to file comments or formal petitionscontesting the transaction.  Minority,non-controlling interests in an FCC license generally may be transferred orassigned without prior FCC approval, subject to compliance with the law’srestriction on ownership interests held by foreign entities.

 

All of the Company’s PCS licenses are for 10 MHz broadband PCSsystems.  PCS licenses are granted for10-year terms and must meet certain network build-out requirements establishedby the FCC to maintain the license in good standing.  In order to meet the FCC’s build-out requirements, the Companymust construct networks in each licensed market that provide coverage to atleast 25 percent of the population in the market within five years after theinitial grant of the license or, alternatively, make a showing of “substantialservice” within that same five-year period. ALLTEL met the FCC’s build out requirements for its PCS licenses byproviding coverage to 25 percent or more of the population in each licensedmarket by the end of the five year build out period, April 28, 2002.

 

Cellular systems operate on one of two 25 MHz frequency blocks that theFCC allocates and licenses for CMRS service. Pursuant to a recent FCC decision, the limitation on the amount oflicensed spectrum that a licensee may hold and the limitation on holding bothcellular licenses in MSA markets were eliminated effective in January2003.  Prior FCC rules prohibited anentity from holding a combined attributable interest in broadband PCS, cellularand specialized mobile radio licenses totaling more than 55 MHz of spectrum ina geographic area and prohibited an entity from having an attributable interestin both of the two cellular licenses in a particular market.  FCC rules, however, continue to prohibit anysingle entity from either owning or having a substantial interest in bothcellular licenses in the same RSA market.

 

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Under rules established by the FCC, effective November 24, 2002, allCMRS providers, which include cellular and PCS carriers, were required toparticipate in a nationwide number conservation program known as “thousandblock number pooling” in accordance with roll out schedules established by theFCC, and to the extent applicable, state-sponsored number pooling trials.  CMRS providers must modify their networks tocomply with FCC and industry performance criteria for number pooling, includingsupport for roaming customers.  Numberpooling is an FCC mandated program intended to alleviate the shortage ofavailable telephone numbers by requiring carriers to return unused numbers intheir inventory to a centrally administered pool and taking assignment of newnumbers in blocks of 1,000 instead of the 10,000 number blocks previouslyassigned.

 

FCC rules also require that CMRS providers implement wireless localnumber portability, an intercarrier network function that permits customers toretain their existing telephone number when moving from one telecommunicationscarrier to another.  On July 26, 2002,compliance with the FCC requirements for wireless local number portability wasextended by one year to November 24, 2003. Rules governing the number of MSAs in which wireless local numberportability must be deployed, as well as the process for triggering a carrier’sobligation to provide wireless local number portability in markets both withinthe top MSAs and below, remain subject to reconsideration by the FCC.  Recently, the FCC denied a request ofVerizon Wireless seeking forbearance of the CMRS provider’s obligation toprovide local number portability.  TheFCC decision has been appealed to the U.S. Court of Appeals for the District ofColumbia Circuit.  Oral argumentsrelated to this appeal are scheduled for April 15, 2003.  ALLTEL has formally intervened in the courtcase on the side of the petitioners seeking to overturn the FCC’sdecision.  ALLTEL expects to comply withthe FCC’s wireless number portability mandate to the extent it becomes legallyobligated to do so.  Accordingly, atthis time, the Company cannot fully quantify the effects on its communicationsoperations of implementing wireless local number portability; however, ALLTELbelieves these requirements, if implemented, would result in a significantindustry-wide increase in both operating costs and customer churn rates.  The effect of wireless local numberportability on the Company’s wireless operations is expected to be similar tothe effects on the wireless industry as a whole.

 

In addition, wireless service carriers must also provide enhanced 911emergency service (“E-911”) in a two-phased approach.  In phase one, carriers must, within six months of receiving arequest from a phase one enabled Public Safety Answering Point (“PSAP”),deliver both the caller’s number and the location of the cell site to the PSAPserving the geographic territory from which the E-911 call originated.  A phase one enabled PSAP is generally one thatis capable of receiving and utilizing the number and location data transmittedby the carrier.  ALLTEL has generallycomplied with the phase one requirements and provides service to phase onecapable PSAPs.  Although due to thestatus of the PSAP, as well as other technology and deployment issues, the sixmonth window in which service is to be provided under the FCC rules has, incertain instances, been extended by mutual agreement between ALLTEL and theparticular PSAPs involved.  In phasetwo, CMRS carriers opting for a handset-based solution, as the Company has,must determine for originated calls the location of the caller within fiftymeters for 67 percent of the originated calls and 150 meters for 95 percent ofthe originated calls.  The second phaserequirements were set to begin by October 1, 2001, but, due to technologyunavailability, the Company requested a limited waiver of theserequirements.  On July 26, 2002, the FCCreleased an order granting a temporary stay of the 911 emergency implementationrules as they apply to the Company.  TheFCC order provides for a phased-in deployment of Automatic LocationIdentification (“ALI”) capable network or  handset-based technology tobegin on March 1, 2003.  ALI capabilitywill permit rapid response in situations where callers are disoriented,disabled, unable to speak or do not know their location by allowing for theimmediate dispatch of emergency assistance to the caller’s location. Under theFCC order, the Company, which has opted to employ handset-based ALI technology,will be required to (1) begin selling and activating ALI-capable handsets nolater than March 1, 2003; (2) ensure that at least 25 percent of all newhandsets activated are ALI capable no later than May 31, 2003; (3) ensure thatat least 50 percent of all new handsets activated are ALI capable no later

 

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than May 31, 2004; and (5) ensure that penetration of ALI capablehandsets among its customers reaches 95 percent no later than December 31,2005.  ALLTEL began selling ALI capablehandsets in June 2002 and expects to comply with the remainingrequirements.  Although at this time,the Company cannot fully quantify the effects on its communications operationsof implementing ALI technology, ALLTEL believes these requirements, when fullyimplemented, could result in a significant increase in its operating costs.

 

Under FCC and Federal Aviation Administration regulations, wirelesscarriers must comply with certain regulations regarding the siting, lightingand construction of transmitter towers and antennas.  In addition, federal environmental regulations require carriersto comply with land use and radio frequency standards and requires thatwireless facilities and handsets comply with radio frequency radiationguidelines.  The siting and constructionof wireless facilities may also be subject to state and local zoning, land useand other regulatory oversight.

 

On December 13, 2002, the FCC released its interim Universal ServiceFund (“USF”) contribution report and order and further notice of proposedrulemaking.  The order raised the safeharbor on wireless carriers, under which wireless carriers may calculate theamount of their interstate revenues, from 15 percent to 28.5 percent.  Carriers must use a single “all-or-nothing”reporting methodology on a company-wide basis. Under this ruling, the method for providing federal universal servicefund contributions will change from the current interstate revenue-basedarrangement to contributions based on projected revenues.  Effective April 1, 2003, carriers must limitthe USF line item on the customer bill to the USF contribution obligation ofthe carrier.  These interim universalservice changes are not expected to have a material adverse effect on theCompany’s wireless operations.

 

**WIRELINE OPERATIONS**

 

The Company’s wireline operations consist of subsidiaries that areILECs, and, as such, provide local telephone service to nearly 3.2 millioncustomers primarily located in rural areas in 15 states.  The wireline subsidiaries also offerfacilities for private line, data transmission and other communicationsservices.  Wireline revenues, whichconsist of local service, network access and long-distance and miscellaneousrevenues, comprised 27 percent of ALLTEL’s total operating revenues frombusiness segments in 2002, compared to 26 percent in 2001 and 25 percent in2000.

 

Local service operations provide lines from telephone exchange officesto customer premises for the origination and termination of telecommunicationsservices including basic dial-tone service and dedicated private linefacilities for the transport of data and video.  ALLTEL also offers various enhanced service features includingcall waiting, call forwarding, caller identification, three-way calling,no-answer transfer and voicemail. Additional local service revenues are derived from charges for equipmentrentals, equipment maintenance contracts, information and directory assistanceand public payphone services.

 

Network access and interconnection services are provided by ALLTEL byconnecting the equipment and facilities of its customers to the communicationsnetworks of long-distance carriers, CLECs, competitive switched and specialaccess providers, and wireless service providers.  These companies pay access and network usage charges to theCompany’s local exchange subsidiaries for the use of their local networks tooriginate and terminate their voice and data transmissions.  Network access revenues include amountsderived from DSL services.  Deploymentof DSL service is an important strategic initiative for the Company.  Currently, DSL service is available toapproximately one half of the Company’s wireline customers.  During 2002, the number of DSL customersnearly tripled to approximately 70,000 customers.  Miscellaneous revenues primarily consist of revenues derived fromthe Company’s Internet access services, charges for billing and collectionsservices provided to long-distance companies, customer premise equipment salesand directory advertising services.

 

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**LOCAL SERVICE - REGULATION**

 

Prior to 1996, ALLTEL’s wireline subsidiaries provided local telephoneservice under exclusive franchises granted by state regulatory commissions andsubject to regulation by those regulatory commissions.  These regulatory commissions have hadprimary jurisdiction over various matters including local and intrastate tollrates, quality of service, the issuance of securities, depreciation rates, thedisposition of public utility property, the issuance of debt, and theaccounting systems used by those subsidiaries. The FCC has historically had primary jurisdiction over the interstatetoll and access rates of these companies and issues related to interstatetelephone service.

 

The 96 Act substantially modified certain aspects of the states’ andthe FCC’s jurisdictions in the regulation of local exchange telephonecompanies.  The 96 Act prohibits statelegislative or regulatory restrictions or barriers to entry regarding theprovision of local telephone service. The 96 Act also requires ILECs to interconnect with the networks ofother telecommunications carriers, unbundle services into network elements,offer their telecommunications services at wholesale rates to allow resale ofthose services, and allow other telecommunications carriers to locate theirequipment on the premises of the incumbent local exchange carriers for thepurpose of exchanging traffic.  The 96Act requires all local exchange telephone companies to compensate one anotherfor the transport and termination of calls on one anothers’ networks.

 

Except for certain of its subsidiaries in Nebraska, Ohio and therecently acquired property in Kentucky, the Company’s local exchange subsidiariesare rural telephone companies, as defined under the 96 Act, and are exempt fromcertain of the foregoing obligations, unless, in connection with a bona fiderequest, a state regulatory commission removes that exemption.  All of the Company’s local exchangesubsidiaries may seek specific suspensions or modification of interconnectionobligations under the 96 Act as a company that serves less than two percent ofthe nation’s access lines, where such interconnection obligations wouldotherwise cause undue economic burden or are technically infeasible.

 

In 1996, the FCC issued regulations implementing the local competitionprovisions of the 96 Act.  Theseregulations established pricing rules for state regulatory commissions tofollow with respect to entry by competing carriers into the local, intrastatemarkets of ILECs and addressed interconnection, unbundled network elements andresale rates.  The FCC’s authority toadopt such pricing rules, including permitting new entrants to “pick andchoose” among the terms and conditions of approved interconnection agreements,was considered first by the U.S. Eighth Circuit Court of Appeals and then bythe U.S. Supreme Court.  In January1999, the Supreme Court reinstated the FCC’s “pick and choose” rule andremanded a portion of the decision to the Eighth Circuit Court for it to ruleon certain issues that it had not previously decided, such as whether the FCC’spricing rules were consistent with the 96 Act. Other issues were remanded to the FCC.

 

In July 2000, the Eighth Circuit Court issued a decision on the earlierremand from the Supreme Court and rejected, as contrary to the 96 Act, the useof hypothetical network costs, including total element long-run incrementalcosts methodology (“TELRIC”), which the FCC had used in developing certain ofits pricing rules.  The Court alsovacated the FCC’s pricing rules related to unbundled network elements (“UNEs”),termination and transport, but upheld its prior decision that ILECs’ universalservice subsidies should not be included in the costs of providing networkelements.  Finally, the Eighth CircuitCourt also vacated the FCC’s rules requiring that: (1) ILECs recombineunbundled network elements for competitors in any technically feasiblecombination; (2) all preexisting interconnection agreements be submitted to thestates for review; and (3) the burden of proof for retention of a ruralexemption be shifted to the ILEC.  TheFCC sought review of the Eighth Circuit’s invalidation of TELRIC and wasgranted certiorari.  On May 13, 2002,the Supreme Court reversed certain of the Eighth Circuit’s findings andaffirmed that the FCC’s rules concerning forward looking economic costs,including TELRIC, were proper under the 96 Act.  The Supreme Court also restored the FCC’s requirement that theILEC’s combine UNEs for competitors when they are unable to do so themselves.

 

 

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In November 1999, the FCC released an order making unbundlingrequirements applicable to all ILEC network elements uniformly.  In December 1999, the FCC released an orderrequiring the provision of unbundled local copper loops enabling CLECs to offercompetitive Digital Subscriber Loop Internet access.  The FCC reconsidered both orders in its first Triennial Review ofits policies on UNEs completed in early 2003, as further discussed below.

 

On February 20, 2003, and in response to the remand of the UnitedStates Court of Appeals for the District of Columbia circuit, the FCC adoptednew rules governing the obligations of ILECs to unbundle the elements of theirlocal networks for use by competitors. UNE-Platform (“UNE-P”)  iscreated when a competing carrier obtains all the network elements needed toprovide service from the ILEC.  TheFCC’s order and the new rules have not been publicly released.  Consequently, the specifics of the new rulesare not yet known.  Generally, the FCCmaintained the obligations of ILECs to unbundle their circuit switched networkswhile deregulating the ILECs provisioning of broadband packet switchednetworks.  The FCC also establishedstandards for determining when a requesting competing carrier’s provision ofservice had been impaired and provided for a substantial role for the statePublic Utility Commissions (“PUCs”) in applying these standards to specificrequests for ILEC interconnection and network elements.  The FCC also issued a further notice ofproposed rulemaking to consider the “pick and choose” rules under which acompeting carrier may select from among the various terms of interconnectionoffered by an ILEC in its various interconnection agreements.  In addition, the FCC took the followingactions:

 

•              Switching for business customersserved by high-capacity loops would no longer be unbundled based on apresumptive finding of no impairment. Under this framework, states will have 90 days to rebut the nationalfinding.  PUCs must complete suchproceedings within nine months.  Upon astate finding of no impairment, a three year period for carriers to transitionoff UNE-P would apply.

 

•                                          ILECsare not required to unbundle packet switching as a stand-alone network elementand are only required to offer unbundled access to their signaling network whena carrier is purchasing unbundled switching. The ILEC must also offer unbundled access to their call-relateddatabases and to their operations support systems for qualifying services.

 

•                                          Theorder clarifies two key components of the FCC’s TELRIC pricing rules to ensurethat UNE prices send appropriate economic signals to ILECs and CLECs.  First, the FCC clarified that therisk-adjusted cost of capital used in calculating UNE prices should reflect therisks associated with a competitive market. Second, the FCC declined to mandate the use of any particular set ofasset lives for depreciation, but clarified that the use of an accelerateddepreciation mechanism may present a more accurate method of calculatingeconomic depreciation.

 

•                                          TheFCC continued its prior position of not permitting CLECs to avoid any liabilityunder contractual early termination clauses in the event they convert a specialaccess circuit to an UNE.  The FCC willalso not intervene in the contract modification process to establish a specifictransition period for each of the rules established in this order.  Finally, the FCC will evaluate these rulesconsistent with the biennial review mechanism established in section 11 of the96 Act.

 

At this time, ALLTEL is currently evaluating the impact of the FCC’sdecision on its wireline operations.

 

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In October 1999, the FCC adopted two orders, later appealed, involvinguniversal service.  In the first order,the FCC completed development of the cost model that will be used to estimatenon-rural ILECs’ forward-looking costs of providing telephone service.  In the second order, the FCC adopted amethodology that uses the costs generated by the cost model to calculate theappropriate level of support for non-rural carriers serving rural areas.  Under the new funding mechanism, high-costsupport will be targeted to the highest cost wire center within the state andsupport will be portable, so that, when a non-rural ILEC loses a customer to acompetitor, the competitor may receive the universal service high-cost supportfor service provided to that customer.

 

In July 2001, the U.S. Tenth Circuit Court of Appeals reversed andremanded aspects of the FCC’s order that dealt with a federal funding mechanismfor non-rural ILECs to support universal service in high cost areas.  The FCC sought and received a RecommendedDecision from the Federal State Joint Board on Universal Service (“FSJB”)regarding the issues remanded by the U.S. Tenth Circuit Court of Appeals.  The FSJB recommended continued use of statewideaverage costs and a national benchmark of 135 percent to determine non-ruralhigh cost support, but recommended that the FCC modify the non-rural high costsupport mechanism by adopting additional measures to induce states to ensurereasonable comparability of urban and rural rates.  On November 5, 2002, the FCC sought comment on the FSJB’sRecommended Decision.  The federalfunding mechanism for non-rural ILECs will remain in effect pending a responsefrom the FCC, which is expected by mid-year 2003.

 

With regard to rural ILECs, the FCC adopted an interim universalservice mechanism on May 23, 2001 that will govern compensation for ruraltelephone companies for the ensuing five years.  Among other provisions, the FCC’s interim plan adopted a modifiedembedded cost mechanism while retaining an indexed cap on the fund.  The high-cost loop support fund will bepermitted to grow, based on annual changes in the Gross Domestic Product -Chained Price Index and the total number of working loops of rural carriers.  This order also adopted three paths for thedisaggregation and targeting of high-cost universal service support.

 

In September 2001, the U.S. Fifth Circuit Court of Appeals remanded theprovision of the FCC order that established a $650.0 million USF.  The Court questioned whether the fundinglevel was appropriate to provide explicit support for poor and ruralcustomers.  The FCC sought comment onthe issues remanded by the Fifth Circuit. The current USF amount will remain in effect pending a response from theFCC.

 

On December 13, 2002, the FCC released its interim USF contributionreport and order and further notice of proposed rulemaking.  Under this ruling, the method for providingfederal universal service fund contributions will change from the currentinterstate revenue-based arrangement to projected collected revenues.  Effective April 1, 2003, carriers must alsolimit the USF line item on the customer bill to the USF contribution obligationof the carrier.  These interim universalservice changes are not expected to have a material adverse effect on theCompany’s wireline operations.  In thefurther notice of proposed rulemaking, the FCC indicated that it continues toconsider what type of USF contribution and assessment methodology to adopt on apermanent basis.

 

Periodically, the Company’s local exchange subsidiaries receiverequests from wireless communications providers for renegotiation of existingtransport and termination agreements. In these cases, the Company’s local exchange subsidiaries renegotiatethe appropriate terms and conditions in compliance with the 96 Act.  The Company’s local exchange subsidiarieshave also executed contracts for transport and termination services with CLECs.

 

 

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Certain states in which ALLTEL’s local exchange subsidiaries operatehave adopted alternatives to rate-of-return regulation, either throughlegislative or regulatory commission actions. The Company has elected alternative regulation for certain of its localexchange subsidiaries in Alabama, Arkansas, Florida, Georgia, Kentucky,Missouri, Nebraska, North Carolina, Pennsylvania, South Carolina andTexas.  Operations in the states ofKentucky (property acquired from Verizon in 2002), Mississippi, New York, Ohio,and Oklahoma are subject to rate-of-return regulation.  The Company continues to evaluatealternative regulation for other states where its local exchange subsidiariesare regulated under  rate-of-return. The following summary sets forth a description of the alternativeregulation plan for each of the states in which the Company has electedalternative regulation:

 

•                                          ALLTEL’sregulated Alabama wireline subsidiary has operated since 1996 under a PublicService Commission (“PSC”) established alternative regulation plan.  Under this plan, basic service rates havebeen capped.  Non-basic service pricesmay be increased annually as long as the aggregate annual change is 10 percentor less.  Access charges are also cappedunder this plan.  The Alabamaalternative regulation plan is presently being reviewed by the state PSC forpossible modifications.

 

•                                          ALLTEL’sregulated Arkansas wireline subsidiary has operated since 1997 under analternative regulation plan established by statute.  Under this plan, basic local rates and access rates may beadjusted annually by up to 75 percent of the annual change in the GrossDomestic Product-Price Index (“GDP-PI”). Other local rates may be changed without PSC approval and becomeeffective upon the filing of revised tariffs.

 

•                                          ALLTEL’sregulated Florida wireline subsidiary operates under alternative regulationestablished by Florida statute.  Underthis plan, basic local rates may be increased once in any twelve-month periodby an amount not to exceed the twelve month change in the GDP-PI less one percent.  The Company may increase rates for non-basicservices as long as the annual increase for any category does not exceed sixpercent in any twelve-month period. Non-basic rates can be increased by up to 20 percent annually inexchanges where another local provider is providing service.  Intrastate access rates can be increased bythe annual change in GDP-PI or three percent, whichever is less, only afteraccess rates reach parity with the Company’s interstate rates.

 

•                                          ALLTEL’sregulated Georgia wireline subsidiaries operate under an alternative regulationplan established by statute.  Under thisplan, basic local rates may be increased annually based on the annual change inGDP-PI.  Other local rates may beincreased by filing revised tariffs.

 

•                                          ALLTELhas two regulated operating subsidiaries in Kentucky.  One subsidiary is subject to rate of return regulation.  The other subsidiary has operated underalternative regulation established by statute beginning in 1998.  Under this plan, the subsidiary may adjustbasic business and residential rates, zone charges and installation once duringany 24 month period by an amount not to exceed the sum of the annual percentagechange in GDP-PI for the immediately preceding two calendar years multiplied bythe existing rate or charge to be adjusted subject to the followinglimitations: (1) basic business and residence rates may not exceed the averagebasic rates of the state’s largest telephone utility, and (2) rates may not beincreased by more than 20 percent. Access charges may not be adjusted if the change would result inintrastate access rates that exceed the company’s interstate rates.  Other local rates may be adjusted by filingtariffs.

 

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**•**                                          ALLTEL’sregulated Missouri wireline subsidiary is subject to alternative regulationelection established by statute.  UnderMissouri’s alternative regulation, basic local service and intrastate accessrates are capped at December 13, 2001 levels for a period of twelve months.  Rate changes thereafter may be changedannually based on changes to the telephone service component of the ConsumerPrice Index.  Prices for non-basicservices may be increased up to eight percent per year after the initialtwelve-month period.  The staff of theMissouri PSC has challenged ALLTEL’s price cap election and has opened aproceeding to resolve any issues.

 

**•**                                          ALLTEL’sregulated Nebraska operations are subject to alternative regulation establishedby statute.  (Nebraska law exemptstelecommunications companies from rate-of-return regulation.)  In exchanges where competition exists,companies are required to file rate lists, which are effective after 10 daysnotice to the PSC.  In exchanges wherecompetition does not exist, companies file rate lists for all services exceptbasic local with 10 days notice to the PSC and basic local rates may beincreased after 90 days notice to affected subscribers.  Basic local rate increases are reviewed bythe PSC only if rates are increased more than 10 percent in twelve consecutivemonths or in response to a formal complaint signed by two percent of affectedsubscribers.

 

**•**                                          ALLTEL’sregulated North Carolina subsidiary has operated since 1998 under alternativeregulation established by the State Utility Commission.  Local rates are adjusted annually by theannual change in GDP-PI less two percent. Rate changes are effective upon 14 days notice.

 

**•**                                          ALLTEL’sregulated Pennsylvania subsidiary has operated under the Alternative Form ofRegulation and Network Modernization Plan established by the PennsylvaniaPublic Utility Commission (“PUC”). Under the plan, rates of competitive services are not regulated, but thePUC retains authority over the quality of these services.  Rate changes for noncompetitive services arerestricted to the GDP-PI less two percent. Revenue neutral rate rebalancing is also permitted for noncompetitiveservices.  Under the plan, the totalamount of an increase in the basic rates cannot exceed $3.50 annually.

 

**•**                                          ALLTEL’sregulated South Carolina operations are subject to alternative regulationestablished by statute.  Local rates forresidential and single line business service cannot exceed the statewideaverage local service rate for a period of two years.  After this two-year period, these rates can be adjusted pursuantto an inflation-based index.  All otherservice rates may be increased subject to a complaint process for abuse ofmarket position.  The PSC hasestablished a generic proceeding to determine what constitutes abuse of marketposition.  Rate increases becomeeffective 14 days after filing.

 

**•**                                          TheCompany has two operating subsidiaries in Texas.  These subsidiaries are subject to alternative regulationestablished by statute.  All rates arecapped for the duration of the plan.

 

**NETWORKACCESS SERVICES - REGULATION**

 

The Company’s local exchange subsidiaries currently receivecompensation from other telecommunications providers, including long-distancecompanies, for origination and termination of inter-exchange traffic through accesscharges or toll settlements that are established in accordance with state andfederal laws.

 

On April 27, 2001, the FCC released a notice of proposed rulemakingaddressing inter-carrier compensation issues. Under this rulemaking, the FCC asked for comment on a “bill and keep”compensation method that would overhaul the existing rules governing reciprocalcompensation and access charge regulation. The outcome of this proceeding could change the way ALLTEL receivescompensation from, and remits compensation to, other carriers and its endusers.  At this time, ALLTEL cannotestimate whether any such changes will occur or,

 

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if they do, what the effect of the changes on its wireline revenues andexpenses would be.

 

On May 22, 2001, the FCC released an order adopting the recommendationof the Federal-State Joint Board to impose an interim freeze of the Part 36category relationships and jurisdictional cost allocation factors for price capILECs and a freeze of all allocation factors for rate-of-return ILECs.  (Part 36 established standard procedures fordetermining jurisdictional separations of telecommunications plant, revenuesand expenses).  This order also gaverate-of-return ILECs a one-time option to freeze their Part 36 categoryrelationships in addition to their jurisdictional allocation factors.  The freeze will continue for five years,from July 1, 2001 through June 30, 2006, or until the FCC has completed comprehensiveseparations reform, whichever comes first. The frozen allocation factors and category relationships will be basedon carriers’ separations studies for calendar year 2000.  ALLTEL opted not to freeze its allocationfactors.

 

On June 14, 2001, the FCC waived certain elements of its Part 69 accesscharge rules to allow non-price cap ILECs to include in their tariff filings anend-user charge to recover their universal service contributions.  (Part 69 established rules for assessingaccess charges for interstate or foreign access services provided bytelecommunications carriers).  ALLTELILECs tariffed the surcharge in their annual interstate access tariff filingand began assessing the surcharge effective August 1, 2001.

 

On October 11, 2001, the FCC adopted rate-of-return access charge reformand initiated a further round of rulemaking to consider other rate-of-returncarrier issues.  The order loweredtraffic sensitive switched access rates, increased the subscriber line charge(“SLC”) over time to bring it in line with SLCs adopted for price cap carriersand phased out carrier common line charges in favor of a new portable“Interstate Common Line Support” universal service mechanism, and retained theauthorized 11.25 percent rate of return. The residential and single-line business SLC cap phase-in began onJanuary 1, 2002, increased on July 1, 2002 and may increase again on July 1,2003, subject to a FCC review of SLC caps for price cap carriers.  The Company does not expect that this orderwill have a material adverse effect on its consolidated financial resultsduring 2003.

 

To date, the Company’s local exchange subsidiaries, except for theNebraska operations and the recently acquired properties in Kentucky, haveelected to remain under rate base rate-of-return regulation with respect tointerstate services.  For companiesremaining under rate-of-return regulation, the FCC authorizes a rate-of-returnthat local exchange companies may earn on interstate services they provide.  The currently prescribed rate of return is11.25 percent.  The Company’s Nebraskaoperations operate under price cap regulation pursuant to waivers granted bythe FCC.  On April 17, 2002, the FCCextended ALLTEL’s waiver of price cap regulation associated with its Nebraska properties.  In the same order, the FCC granted ALLTEL awaiver with respect to the Kentucky properties recently acquired fromVerizon.  The waivers will remain ineffect until the FCC completes a comprehensive review of the waiver process.

 

**COMPETITION**

 

ALLTEL’s ILEC operations have begun to experience some competition intheir local service areas.  Sources ofcompetition to ALLTEL’s local exchange business include, but are not limitedto, resellers of local exchange services, interexchange carriers, satellitetransmission services, wireless communications providers, cable televisioncompanies, radio-based personal communications companies, and competitiveservice providers including those utilizing UNE-P.  Through December 31, 2002, this competition has not had amaterial adverse effect on the results of operations of ALLTEL’s ILECoperations, although competition has begun to affect the Company’s access linegrowth rates.  Excluding the effects ofthe Kentucky acquisition, customer access lines decreased approximately onepercent during 2002, reflecting declines in both primary and secondary accesslines.

 

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Slower economic growth, along with the effects of substitution ofwireless, cable television and high-speed access services for the Company’s wirelineservices, adversely affected the Company’s internal access line growth rates in2002, and the Company expects some degree of access line loss to continue in2003.  To address competition, ALLTEL isfocusing its efforts on marketing and selling additional products and servicesto its customers by bundling together and offering at competitive rates itsvarious product offerings, including long-distance, Internet and DSLservices.  In addition, ALLTEL remains focusedon providing improved customer service, increasing operating efficiencies andmaintaining the quality of its network.

 

The Company believes the local exchange business is in transition fromcircuit switched technology, which forms the basis of the conventional landlinetelephone network, to digital packet-switched networks, which form the basis ofthe Internet protocols (“IP”) used over the Internet.  ALLTEL intends to respond to this challenge by augmenting itscurrent network to extend its DSL services to an ever increasing number of its customers.  The Company believes that significantcapital expenditures will be required to continue increasing the scope of itsDSL networks, which ultimately compete with other broadband service providers,including cable television and satellite transmission service providers, forcustomers.  Under the FCC’s recentdecision in its Triennial Review proceeding, as discussed above, it appearsthat the Company’s provisioning of broadband DSL services will be largely deregulated.  In addition, AT&T has filed a petitionwith the FCC seeking a ruling that IP telephony is not subject to interstateaccess charges.  Although the Companybelieves that the ruling requested by AT&T will not be issued by the FCC,the Company’s ability to charge AT&T and other interexchange carriers foraccess for IP telephone calls would be impaired should the FCC grant theAT&T petition, and in turn, adversely affect the Company’s wirelinerevenues.

 

**CLECOPERATIONS**

 

ALLTEL has received approval to provide competitive local exchange servicein 17 states.  ALLTEL has negotiatedinterconnection agreements with the appropriate incumbent local exchangecarriers in the states where it is currently offering CLEC service.  ALLTEL has invested in state-of-the-artnetworks to provide services on both a facilities-based and resale basis.  ALLTEL’s strategy is to provide localservice in combination with other services provided by subsidiaries of theCompany, including long-distance, wireless and Internet services.  In 2001, during the evaluation of itsexisting CLEC operations, the Company determined that a business model whichrelied heavily on interconnection with other carriers had limited potential forprofitably acquiring market share. Accordingly, in January 2002, the Company announced its plans to exitits CLEC operations in seven states representing less than 20 percent ofALLTEL’s CLEC access lines.  In thecourse of exiting these markets, ALLTEL honored all existing customercontracts, licenses and other obligations and worked to minimize theinconvenience to affected customers by migrating these customers to otherservice providers.  As of December 31,2002, CLEC services were provided in six states.

 

On April 26, 2001 the FCC established a benchmark to govern the accesscharges imposed by CLECs.  The FCCestablished a three year transition process to phase down these access pricesto rates comparable to their ILEC competitors. Specifically, during the first year, CLEC access charges are capped at$.025 per minute, during the second year, the cap drops to $.018 per minute,and during the third year, the cap drops to $.012 per minute.  After that transition, CLEC access chargeswill be capped at the rate charged by their ILEC competitors.  The FCC also adopted an exception that wouldpermit rural CLECs competing with non-rural ILECs to charge access rates abovethose charged by the ILEC in certain circumstances.  The access charges assessed by ALLTEL’s CLEC operations arecurrently below the first year cap, so this order has no immediate financialimpact on ALLTEL’s operations.  ALLTEL’sCLEC operations may be required to lower their rates in subsequent years.  The Company is currently evaluating theeffects on its CLEC operations of the FCC’s Triennial Review proceedingdiscussed above.

 

18

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**COMMUNICATIONS SUPPORT SERVICES**

 

Communications support services consist of the Company’s long-distanceand network management services, product distribution and directory publishingoperations.  Revenues and sales fromcommunications support services comprised 10 percent of ALLTEL’s totaloperating revenues from business segments in 2002, compared to 11 percent in2001 and 13 percent in 2000.

 

**LONG-DISTANCEAND NETWORK MANAGEMENT OPERATIONS**

 

Long-distance telecommunications services are provided on both afacilities-based and resale basis by ALLTEL subsidiaries.  During 2002, approximately 70 percent ofALLTEL’s long-distance traffic was transported on its own fiber opticnetworks.  ALLTEL provides long-distanceservice in all of the states in which the Company provides local exchangeservice.  In addition, ALLTEL offerslong-distance service outside its ILEC service areas.  As of December 31, 2002, ALLTEL provided long-distance service tomore than 1.5 million customers.  Thelong-distance marketplace is extremely competitive and continues to receiverelaxed regulation from both the FCC and state regulatory commissions.  To meet the competitive demands of thelong-distance industry, ALLTEL has created several business and residentialservice offerings to attract potential customers, such as volume pricediscounts, calling cards and simplified one-rate plans.  As a long-distance service provider,ALLTEL’s intrastate long-distance business is subject to limited regulation bystate regulatory commissions, and its interstate business is subject to limitedregulation by the FCC.  State regulatorycommissions currently require long-distance service providers to obtain acertificate of operating authority, and the majority of states, as well as theFCC, also require long-distance service providers to file tariffs.  Most state regulatory commissions alsorequire such companies to meet certain minimum service standards.

 

Network management services are currently marketed to businesscustomers in select areas.  Theseservices are ancillary service offerings and are not yet significant componentsof ALLTEL’s communications operations.

 

**PRODUCTDISTRIBUTION**

 

The Company’s product distribution subsidiary, ALLTEL CommunicationsProducts, Inc. (“Communications Products”), is headquartered in Atlanta,Georgia, and operates five warehouses and ten counter-sales showrooms acrossthe United States.  CommunicationsProducts is a distributor of telecommunications equipment and materials.  Communications Products supplies equipmentto affiliated and non-affiliated communications companies, business systemssuppliers, railroads, governments, and retail and industrial companies.

 

Communications Products offers more than 50,000 products for sale.  Certain of these products are inventoriedincluding single and multi-line telephone sets, local area networks, switchingequipment modules, interior cable, pole line hardware, and various othertelecommunications supply items.  TheCompany has not encountered any material shortages or delays in delivery ofproducts from their suppliers.

 

Communications Products experiences substantial competition throughoutits sales territories from other distribution companies and from direct salesby manufacturers.  Competition is basedprimarily on quality, product availability, service, price, and technicalassistance.  Since other competitorsoffer similar products, Communications Products also offers other servicesincluding expert technical assistance, maintaining wide-ranging inventories instrategically located warehouses and counter-sales showrooms to facilitatesingle supplier sourcing and “just-in-time” delivery, maintaining a full rangeof product lines, and by providing staging, assembly and other services.  The Company periodically evaluates itsproduct and service offerings to meet customer expectations and positionCommunications Products in the market as a quality customer-focuseddistributor.

 

19

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**DIRECTORY PUBLISHING**

 

ALLTEL Publishing Corporation (“ALLTEL Publishing”) coordinatesadvertising, sales, printing, and distribution for 342 telephone directorycontracts in 34 states.  Under terms ofan agreement with Verizon, ALLTEL Publishing provides contract management,production and marketing services.  Assubcontractor, Verizon provides directory sales and printing services through aseparate contract with ALLTEL Publishing. This contract is scheduled to expire on October 15, 2003.

 

Beginning in 2003, for a limited number of directory contracts, ALLTELPublishing will provide all directory publishing services, exceptprinting.  The services to be providedby ALLTEL Publishing will include directory yellow page advertising sales,contract management, production, billing, and marketing.  Printing services will be contracted out toVerizon or another print vendor.

 

**INFORMATION SERVICES**

 

The Company’s information services subsidiary, ALLTEL InformationServices, Inc. (“Information Services”), provides a wide range of informationprocessing services primarily to the financial services and telecommunicationsindustries through information processing centers that it staffs, equips andoperates.  Information processing contractsare generally for a multi-year period. Information Services also develops and markets software worldwide tofinancial services and telecommunications companies operating their owninformation processing departments. Information Services revenues and sales comprised 12 percent, 13 percentand 14 percent of ALLTEL’s total operating revenues from business segments in2002, 2001 and 2000, respectively.  Theprincipal operating units of ALLTEL’s information services business consist ofthe Financial Services Division and the Telecommunications Division.  As discussed earlier under the caption“Dispositions”, on January 28, 2003, ALLTEL signed a definitive agreement tosell the Financial Services Division to Fidelity National.  The transaction is expected to close by theend of the first quarter of 2003.

 

The Financial Services Division markets software and services that havebeen developed and improved continuously and are designed to fulfillsubstantially all of the retail and wholesale information processing andmanagement information requirements of financial institutions.  In addition, the Financial Services Divisionalso provides data processing and related computer software and systems tofinancial institutions originating or servicing single family mortgageloans.  This division’s softwareproducts and processing services, combined with its team of consultants, areintended to offer a cost-effective alternative to the extensive technicalsupport staff and the enlarged group of mortgage bankers, which would otherwisehave to be assembled in-house by each customer.  The Financial Services Division’s on-line systems automateprocessing functions required in the origination of mortgage loans, themanagement of such loans while in inventory before they are sold in thesecondary market, and their subsequent servicing.

 

The Telecommunications Division is primarily engaged in the developmentand marketing of billing services and customer care software, including itsstate-of-the-art Virtuoso II billing and customer care product, to localtelephone, wireless and PCS companies. In addition, the Telecommunications Division provides data processingand outsourcing services to both wireline and wireless telecommunicationsservice providers.

 

**CUSTOMERS**

 

The Financial Services Division’s primary markets for its financialproducts and services are the nation’s commercial banks and savingsinstitutions and financial institutions throughout the world.  Financial software and services are alsomarketed to credit unions and to financial institutions originating orservicing single family mortgage loans. These financial institutions, which include many of the largestservicers of residential mortgages,

 

20

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are located throughout the United States.  In total, more than 23.7 million mortgage loans representing over$2.7 trillion are processed using the Financial Services Division’ssoftware.  The TelecommunicationsDivision’s primary markets for its telecommunications products and servicesconsist of telephone, cellular and PCS companies in the United States andCanada which serve more than 10,000 customers, or a market consisting ofapproximately 200 telecommunications companies.

 

**COMPETITION**

 

The Financial Services Division’s competition primarily comes from“in-house” bank information processing departments and other companies engagedin active competition for financial institution outsourcing contracts. Numerouslarge financial institutions provide information processing for smallerinstitutions in their respective geographic areas, along with other companiesthat perform such services for small institutions.  The Telecommunications Division also faces strong competitionfrom internal information technology departments.  In addition, there are also other information services companiesthat provide information processing and management services to thetelecommunications industry.  TheCompany competes in each of its markets by providing a high level of serviceand support.  Information Servicessubstantially relies upon and enforces contract and trade secret laws andinternal non-disclosure safeguards to protect the proprietary nature of itscomputer software and service methodologies.

 

**EXAMINATION**

 

The Financial Services Division is examined by the federal agencies thathave supervisory authority over banking, thrift, and credit unionoperations.  The Financial ServicesDivision is also classified as one of 12 national vendors that, as a result oftheir market share, process a significant portion of the financial industry’sassets.  These industry leaders are alsoexamined by the federal Financial Institutions Examination Council on anongoing basis.  Information Services’management practices, policies, procedures, standards, and overall financialcondition are components of these reviews. In addition to these corporate examinations, individual processing sitesare subject to examination, as if they were departments of their respectiveclients, by federal and state regulators, as well as the clients’ internalaudit departments and their independent auditing firms.  The same standards of performance areapplied to those information processing centers as are applied to the clientfinancial institutions.  Reports of theindividual data center performance are furnished to the board of directors ofInformation Services and to the board of directors of the examined client.

 

The supervisory agencies include applicable state banking departments,the Federal Deposit Insurance Corporation, the Office of Thrift Supervision,the Office of the Comptroller of the Currency, the Board of Governors of theFederal Reserve System, and the National Credit Union Administration.  Information Services’ processing contractsinclude a commitment to install all necessary changes in its computer softwarethat are required by changes in regulations.

 

**PRODUCTDEVELOPMENT AND SUPPORT**

 

In the past five years, Information Services has spent approximately$672.4 million ($136.1 million in 2002) on mainframe and client/server softwaredesign and development.  InformationServices has developed and continues to develop products that are utilized in aUNIX based environment, including the Telecommunications Division’s Virtuoso IIbilling and customer care product. Changes in regulatory requirements of both state and federalauthorities, increasing competition, and the development of new products andmarkets create the need to continually update or modify existing software andsystems offered to customers. Information Services intends to continue to maintain, improve and expandthe functions and capabilities of its software products.

 

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**INVESTMENTS**

 

The Company owned equity securities representing approximately a 6.5percent interest in Hughes Tele.com Limited (“HTCL”), a public company thatprovides communications services in the state of Maharashtra, India.  In December 2002, ALLTEL exchanged itsshares of HTCL for non-voting, mandatory redeemable convertible preferredshares of Tata Teleservices Limited (“Tata”), a privately held Indiancompany.  Subsequently, ALLTEL decidedto liquidate this investment by selling the Tata preferred shares and completedthe sale of the Tata preferred shares on February 3, 2003.

 

**Item 2.    Properties**

 

The Company’s properties do not provide a basis for description bycharacter or location of principal units. All of the Company’s property is considered to be in good workingcondition and suitable for its intended purposes.  A summary of the Company’s investment in property, plant andequipment segregated between the Company’s regulated wireline operations andall other non-regulated business operations is presented below.

 

**WIRELINEPROPERTY**

The Company’s wireline subsidiaries own property in their respectiveoperating territories which consists primarily of land and buildings, centraloffice equipment, telephone lines, and related equipment.  The telephone lines include aerial andunderground cable, conduit, poles and wires. Central office equipment includes digital switches and peripheralequipment.  The gross investment bycategory in wireline property as of December 31, 2002, was as follows:

 
|                                     |   | **(Millions)** |    |
|------------------------------------------|--------|----------------|---------|
| Land                                     |   | $              | 18.7    |   |
| Buildings and  leasehold improvements    |   | 290.8          |    |
| Central office  equipment                |   | 2,620.4        |    |
| Outside plant                            |   | 3,138.1        |    |
| Furniture,  fixtures, vehicles and other |   | 205.5          |    |
| Total                                    |   | $              | 6,273.5 |   |

 

Certain properties of the wireline subsidiaries are pledged ascollateral on $272.1 million of long-term debt.

 

**OTHERPROPERTY**

Other properties in service consist primarily of property, plant andequipment used in providing wireless communications services and informationservices. Wireless plant consists of cell site towers, switching, controllersand other radio frequency equipment. Non-regulated wireline plant and equipment consists of aerial andunderground cable, switches, and other peripheral equipment used in theprovisioning of Internet, long-distance and competitive local accessservices.  Information services plantconsists of data processing equipment, purchased software and capitalizedinternal use software costs.  Propertiesof the product distribution and directory publishing operations mainly consistof office and warehouse facilities to support the business units in thedistribution of telecommunications products and publication of telephonedirectories.  The total investment bycategory for the non-wireline operations of the Company as of December 31,2002, was as follows:

 
|                                             |   | **(Millions)** |    |
|--------------------------------------------------|--------|----------------|---------|
| Land                                             |   | $              | 270.4   |   |
| Buildings and  leasehold improvements            |   | 903.2          |    |
| Wireless plant  and equipment                    |   | 4,798.3        |    |
| Data processing  equipment and computer software |   | 1,311.7        |    |
| Non-regulated  wireline plant and equipment      |   | 430.0          |    |
| Furniture,  fixtures, vehicles and other         |   | 415.0          |    |
| Total                                            |   | $              | 8,128.6 |   |

 

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** **

**Item 3.  Legal Proceedings**

 

On October 3, 2002, the Environmental Protection Agency (“EPA”) servedthe Company with Notices of Violation of the federal Clean Air Act, the Clean Water Act and the EmergencyPlanning and Community Right to Know Act. These notices resulted from an industry-wide investigation intoenvironmental practices conducted by the EPA during 1998 to 2000 and allegedviolations by the Company, dating from 1997, regarding filing andrecord-keeping requirements for fuel storage tanks, as well as generators andbatteries used to supply emergency power at certain ALLTEL facilities.  On December 5, 2002, the Company met withthe EPA to begin settlement discussions. Management of ALLTEL believes that a settlement by mid-2003 isreasonably likely and may require the Company to pay a penalties totaling up toapproximately $1.0 million and to implement a centralized environmentalmanagement system.

 

The Company is party to various other legal proceedings arising fromthe ordinary course of business. Although the ultimate resolution of these various proceedings cannot bedetermined at this time, management of ALLTEL does not believe that suchproceedings, individually or in the aggregate, will have a material adverseeffect on the future consolidated results of operations or financial conditionof the Company.

 

To the knowledge of ALLTEL’s management, no other material legalproceedings, either private or governmental, currently are contemplated orthreatened.

 

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

 

No matters were submitted to the security holders for a vote during thefourth quarter of 2002.

** **

**Form 10-K, Part II**

 

**Item 5.  Market for the Registrant’s Common Equityand Related Stockholder Matters**

 

The outstanding shares of ALLTEL’s Common Stock are listed and tradedon the New York Stock Exchange and the Pacific Exchange and trade under thesymbol AT.  The following table reflectsthe range of high, low and closing prices of ALLTEL’s Common Stock as reportedby Dow Jones & Company, Inc. for each quarter in 2002 and 2001:

 
| **Year** |   | **Qtr.** | **High** |   | **Low** |   | **Close** |   | **Dividend  Declared** |   |
|----------|--------|----------|----------|--------|---------|--------|-----------|--------|------------------------|--------|
| 2002     |   | 4th      | $        | 56.28  |    | $      | 39.19     |   | $                      | 51.00  |   | $ | .35 |   |
|     |   | 3rd      | $        | 47.99  |    | $      | 35.33     |   | $                      | 40.13  |   | $ | .34 |   |
|     |   | 2nd      | $        | 56.35  |    | $      | 43.55     |   | $                      | 47.00  |   | $ | .34 |   |
|     |   | 1st      | $        | 63.25  |    | $      | 52.15     |   | $                      | 55.55  |   | $ | .34 |   |
| 2001     |   | 4th      | $        | 65.15  |    | $      | 56.90     |   | $                      | 61.73  |   | $ | .34 |   |
|     |   | 3rd      | $        | 65.15  |    | $      | 54.57     |   | $                      | 57.95  |   | $ | .33 |   |
|     |   | 2nd      | $        | 61.30  |    | $      | 50.01     |   | $                      | 61.26  |   | $ | .33 |   |
|     |   | 1st      | $        | 68.69  |    | $      | 49.43     |   | $                      | 52.46  |   | $ | .33 |   |

 

As of February 24, 2003, the approximate number of stockholders ofcommon stock including an estimate for those holding shares in brokers’accounts was 254,521.

 

**Item 6.  Selected Financial Data**

 

For information pertaining to Selected Financial Data of ALLTELCorporation, refer to pages F-31 and F-32 of the Financial Supplement, which isincorporated by reference herein.

 

 

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**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

For information pertaining to Management’s Discussion and Analysis ofFinancial Condition and Results of Operations of ALLTEL Corporation, refer topages F-2 to F-30 of the Financial Supplement, which is incorporated byreference herein.

 

**Item 7A.  Quantitative and Qualitative Disclosures AboutMarket Risk**

 

For information pertaining to the Company’s market risk disclosures,refer to page F-28 of the Financial Supplement, which is incorporated byreference herein.

 

**Item 8.  Financial Statements and SupplementaryData**

 

For information pertaining to Financial Statements and SupplementaryData of ALLTEL Corporation, refer to pages F-33 to F-68 of the FinancialSupplement, which is incorporated by reference herein.

 

**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

On May 7, 2002, the Audit Committee of the Board of Directors of ALLTELauthorized (1) the engagement of PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) as the independent auditors for ALLTEL for the calendar year 2002 and(2) the dismissal of ALLTEL’s existing independent auditors, Arthur AndersenLLP (“Andersen”).

 

During the two fiscal years ended December 31, 2001, and the subsequentinterim period through May 7, 2002, the date of the dismissal of Andersen, (i)there were no disagreements with Andersen on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedures, which disagreements, if not resolved to the satisfaction ofAndersen, would have caused Andersen to make reference in connection with itsreport to the subject matter of the disagreement and (ii) Andersen has notadvised ALLTEL of any reportable events as defined in paragraphs (A) through(D) of Regulation S-K Item 304 (a)(1)(v).

 

The accountant’s report of Andersen on the consolidated financialstatements of ALLTEL and its subsidiaries as of and for the years endedDecember 31, 2001 and 2000 did not contain any adverse opinion or disclaimer ofopinion and was not qualified or modified as to uncertainty, audit scope, or accountingprinciples.  A letter from Andersen wasfiled as Exhibit 16.1. to ALLTEL’s Current Report on Form 8-K dated May 7,2002.

 

During the two fiscal years ended December 31, 2001, and the subsequentinterim period through May 7, 2002, PricewaterhouseCoopers has not beenconsulted by ALLTEL, or by anyone on ALLTEL’s behalf, regarding either theapplication of accounting principles to a specified transaction, eithercompleted or proposed, or the type of audit opinion that might be rendered onthe financial statements of ALLTEL.

 

Since the date of their appointment, there were: (i) no disagreementswith PricewaterhouseCoopers on any matter of accounting principle or practice,financial statement disclosure, or auditing scope or procedure which, if notresolved to PricewaterhouseCoopers’ satisfaction, would have caused them tomake reference to the subject matter in connection with their report onALLTEL’s consolidated financial statements for the fiscal years ended December31, 2002 and 2001; and (ii) there were no reportable events as defined in Item304(a)(1)(v) of Regulation S-K.

 

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**Item 10.  Directors and Executive Officers of theRegistrant**

 

For information pertaining to Directors of ALLTEL Corporation refer to“Election of Directors” in ALLTEL’s Proxy Statement for its 2003 Annual Meetingof Stockholders, which is incorporated herein by reference.  Executive officers of the Company are asfollows:

 

| **Name**            |   | **Age** |   | **Position**                                                                    |
|---------------------|--------|---------|--------|---------------------------------------------------------------------------------|
| Scott T. Ford       |   | 40      |   | President and Chief Executive Officer                                           |
| Kevin L. Beebe      |   | 43      |   | Group President – Communications                                           |
| Jeffrey H. Fox      |   | 40      |   | Group President – Information Services                                     |
| Michael T. Flynn    |   | 54      |   | Group President – Chief Information Officer                                |
| Francis X. Frantz   |   | 49      |   | Executive Vice President– External Affairs, General  Counsel and Secretary |
| Jeffery R. Gardner  |   | 43      |   | Senior Vice President – Chief Financial Officer                            |
| Keith A. Kostuch    |   | 40      |   | Senior Vice President – Strategic Planning                                 |
| C.J. Duvall Jr.     |   | 44      |   | Senior Vice President – Human Resources                                    |
| Sharilyn S. Gasaway |   | 34      |   | Controller                                                                      |
| Scott H. Settelmyer |   | 34      |   | Treasurer                                                                       |

 

There are no arrangements between any officer and any other personpursuant to which he was selected as an officer.  Joe T. Ford served as ALLTEL’s Chief Executive Officer until July1, 2002, whereupon he retired as Chief Executive Officer.  Joe T. Ford continues to serve as Chairmanof ALLTEL’s Board of Directors.  Joe T.Ford’s son, Scott T. Ford, who previously was President and Chief OperatingOfficer, became ALLTEL’s President and Chief Executive Officer, effective July1, 2002.

 

Except for Kevin L. Beebe, Jeffery R. Gardner, Keith A. Kostuch, C.J.Duvall Jr., Sharilyn S. Gasaway, and Scott H. Settelmyer, each of the officersnamed above has been employed by ALLTEL or a subsidiary for the last fiveyears.  Prior to joining ALLTEL inOctober 1999, Mr. Kostuch served as Vice President and Director with The BostonConsulting Group, Inc. (“BCG”).  In hisrole with BCG, Mr. Kostuch specialized in strategic and corporate development,including mergers and acquisitions. Prior to joining ALLTEL in July 1998, Messrs. Beebe and Gardner wereexecutive officers of 360°.  Mr. Beebewas Executive Vice President-Operations of 360° since February 1996.  Mr. Beebe joined 360° in February 1994 asVice President-Marketing and Administration, and in February 1995, he becameVice President-Operations.  Mr. Gardnerwas Senior Vice President-Finance of 360° since July 1997.  Mr. Gardner served as President of 360°’sMid-Atlantic regional operations from February 1994 to June 1997.  Prior to joining ALLTEL in January 1999, Mr.Duvall was Development Manager with Saratoga Financial Systems.  Prior to joining ALLTEL in April 1999, Ms.Gasaway was a manager with the accounting firm of Arthur Andersen LLP in LittleRock, Arkansas.  Prior to joining ALLTELin May 1998, Mr. Settelmyer was a manager with the accounting firm of ArthurAndersen LLP in Chicago, Illinois.

 

**Item 11.  Executive Compensation**

 

For information pertaining to Executive Compensation, refer to “ManagementCompensation” in ALLTEL’s Proxy Statement for its 2003 Annual Meeting ofStockholders, which is incorporated herein by reference.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

For information pertaining to beneficial ownership of ALLTELsecurities, refer to “Security Ownership of Certain Beneficial Owners andManagement” in ALLTEL’s Proxy Statement for its 2003 Annual Meeting ofStockholders, which is incorporated herein by reference.

 

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** **

**ALLTEL Corporation**

**Form 10-K, Part III**

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

Set forth below is additional information as of December 31, 2002,about shares of the Company’s common stock that may be issued upon the exerciseof options under the Company’s existing equity compensation plans, dividedbetween plans approved by ALLTEL’s stockholders and plans not submitted to thestockholders for approval.

** **
| **(Thousands,  except per share amounts**                   |   | **(a)  Number of  securities to be  issued upon  exercise of  outstanding options (2)** |   | **(b)  Weighted-average  exercise price of  outstanding options** |   | **(c)  Number of securities  available for future  issuance under equity compensation plans,  excluding securities  reflected in column (a)** |     |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                        |   |                                                                                    |   |                                                              |   |                                                                                                                                          |     |
| Equity compensation plans approvedby security holders (1)   |   | 17,743.4                                                                                |   | $                                                                 | 56.02  |                                                                                                                                          | 17,291.7 |   |
|                                                        |   |                                                                                    |   |                                                              |   |                                                                                                                                          |     |
| Equity  compensation plans not approved by security holders |   | —                                                                                  |   | —                                                            |   | —                                                                                                                                        |     |
| Total                                                       |   | 17,743.4                                                                                |   | $                                                                 | 56.02  |                                                                                                                                          | 17,291.7 |   |

 

 

(1)                                  Includesthe ALLTEL Corporation 1991 Stock Option Plan, ALLTEL Corporation 1994 StockOption Plan for Employees, ALLTEL Corporation 1994 Stock Option Plan forNonemployee Directors, ALLTEL Corporation 1998 Equity Incentive Plan, and theALLTEL Corporation 2001 Equity Incentive Plan.

 

(2)                                  Doesnot include 574,072 stock options with a weighted average exercise price of$31.12, which were assumed by ALLTEL in connection with the Company’s mergerswith 360° Communications Company in 1998 and Aliant Communications Inc. in1999.  These options were issued underthe Amended and Restated 360° Communications Company 1996 Equity IncentivePlan, 360° Communications Company 1996 Replacement Stock Option Plan, 360° CommunicationsCompany Amended and Restated Director Equity and Deferred Compensation Plan andthe Lincoln Telecommunications Company 1989 Stock and Incentive StockPlan.  These plans have been frozensince the merger dates, with respect to the granting of any additional options.

 

**Item 13.  Certain Relationships and RelatedTransactions**

 

For information pertaining to Certain Relationships and RelatedTransactions, refer to “Certain Transactions” in ALLTEL’s Proxy Statement forits 2003 Annual Meeting of Stockholders, which is incorporated herein byreference.

 

**Item 14.  Controls and Procedures**

 

(a)           Evaluation ofdisclosure controls and procedures.

 

The term “disclosurecontrols and procedures” (defined in SEC Rule 13a-14(c)) refers to the controlsand other procedures of a company that are designed to ensure that informationrequired to be disclosed by a company in the reports that it files under theSecurities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,summarized and reported within required time periods.  ALLTEL’s Chief Executive Officer and Chief Financial Officer haveevaluated the effectiveness of our disclosure controls and procedures as of adate within 90 days before the filing of this annual report (the “EvaluationDate”), and they have concluded that, as of the Evaluation Date, such controlsand procedures were effective.

 

(b)           Changes in internalcontrols.

 

ALLTEL maintains a systemof internal accounting controls that are designed to provide reasonableassurance that its books and records accurately reflect its transactions andthat ALLTEL’s established policies and procedures are followed.  There were no significant changes toALLTEL’s internal controls or in other factors that could significantly affectits internal controls subsequent to its evaluation.

 

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** **

**ALLTEL Corporation**

**Form 10-K, Part IV**

 

**Item 15.  Exhibits, Financial Statement Schedulesand Reports on Form 8-K**

 
| (a)    | The following documents are filed as a part of this  report: |
|--------|--------------------------------------------------------------|
|   |                                                         |   |
|   | 1.                                                           | Financial Statements:

The following Consolidated Financial Statements of  ALLTEL Corporation and subsidiaries for the year ended December 31, 2002,  included in the Financial Supplement, which is incorporated by reference  herein: |
|   |                                                         |   |
|   |                                                         | Reports of  Independent Public Accountants |
|   |                                                         | Consolidated Statements  of Income —

for the years ended  December 31, 2002, 2001 and 2000 |
|   |                                                         | Consolidated Balance Sheets  — as of December 31, 2002 and 2001 |
|   |                                                         | Consolidated  Statements of Cash Flows — |
|   |                                                         | for the years  ended December 31, 2002, 2001 and 2000 |
|   |                                                         | Consolidated  Statements of Shareholders’ Equity — |
|   |                                                         | for the  years ended December 31, 2002, 2001 and 2000 |
|   |                                                         | Notes to  Consolidated Financial Statements |
|   |                                                         |   |
|   |                                                         |   |
|   | 2.                                                           | Financial Statement Schedules: |
|   |                                                         | Reports of Independent Public  Accountants |
|   |                                                         | Schedule  II.  Valuation and Qualifying Accounts |
|   |                                                         |   |
|   | 3.                                                           | Exhibits: |
|   |                                                         | Exhibit Index |
|   |                                                         |   |
| (b)    | Reports on Form 8-K:                                         |
|   |                                                         |   |
|   |                                                         | No reports on Form 8-K were filed during the fourth  quarter of 2002. |
|   |                                                         |   |
|   |                                                         | Current Report on Form 8-K dated January 28, 2003,  reporting under Item 5, Other Events, the Company’s Press Release jointly  announcing the Company’s 2002 fourth quarter and annual unaudited  consolidated results of operations and its decision to sell the financial  services division of ALLTEL Information Services, Inc. to Fidelity National  Financial Inc. |
|        |                                                              |  |  |  |

 

Separate condensed financial statements of ALLTEL Corporation have beenomitted since the Company meets the tests set forth in Regulation S-XRule 4-08(e)(3).  All otherschedules are omitted since the required information is not present or is notpresent in amounts sufficient to require submission of the schedule, or becausethe information required is included in the consolidated financial statementsand notes thereto.

 

27

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
| ALLTEL  Corporation                                   |              |
|-------------------------------------------------------|-------------------|
| Registrant                                            |              |
|                                                  |              |
| By                                                    | /s/ Scott T. Ford | Date: |    March 19,  2003 |
| Scott T. Ford,  President and Chief Executive Officer |              |
|                                                       |                   |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| By                                                                 | /s/ Jeffery R Gardner |                                       | Date:   March  19, 2003 |
|--------------------------------------------------------------------|-----------------------|--------------------------------------------|-----------------------------------|
| Jeffery R.  Gardner, Senior Vice President -                       |                  |                                       |
| Chief Financial  Officer                                           |                  |                                       |
| (Principal  Financial Officer)                                     |                  |                                       |
|                                                               |                  |                                       |
| *Scott T. Ford, President, Chief Executive Officer  and Director   |                  |                                       |
|                                                               |                  | By                                         | /s/ Jeffery R. Gardner            |
| *Sharilyn S. Gasaway, Controller 

(Principal Accounting  Officer) |                  | * (Jeffery R.  Gardner,  Attorney-in-fact) |
|                                                               |                  | Date:   March  19, 2003          |
| *Joe T. Ford, Chairman and Director                                |                  |                                       |
|                                                               |                  |                                       |
| *John R. Belk, Director                                            |                  |                                       |
|                                                               |                  |                                       |
| * Dennis E. Foster, Director                                       |                  |                                       |
|                                                               |                  |                                       |
| *Lawrence L. Gellerstedt III, Director                             |                  |                                       |
|                                                               |                  |                                       |
| *Charles H. Goodman, Director                                      |                  |                                       |
|                                                               |                  |                                       |
| *Emon A. Mahony, Jr., Director                                     |                  |                                       |
|                                                               |                  |                                       |
| *John P. McConnell, Director                                       |                  |                                       |
|                                                               |                  |                                       |
| *Josie C. Natori, Director                                         |                  |                                       |
|                                                               |                  |                                       |
| *Gregory W. Penske, Director                                       |                  |                                       |
|                                                               |                  |                                       |
| *Frank E. Reed, Director                                           |                  |                                       |
|                                                               |                  |                                       |
| *Fred W. Smith, Director                                           |                  |                                       |
|                                                               |                  |                                       |
| *Warren A. Stephens, Director                                      |                  |                                       |
|                                                               |                  |                                       |
| *Ronald Townsend, Director                                         |                  |                                       |

 

28

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CERTIFICATIONS

 

I, Scott T. Ford, Chief Executive Officer and President of ALLTELCorporation, certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of ALLTEL Corporation;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date:  March 19, 2003

 
| /s/ Scott T. Ford                     |   |
|---------------------------------------|--------|
| Scott T. Ford                         |
| Chief Executive Officer and President |

 

29

----

 

I, Jeffery R. Gardner, Senior Vice President - Chief Financial Officerof ALLTEL Corporation, certify that:

 

1.             I have reviewedthis annual report on Form 10-K of ALLTEL Corporation;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)                                      presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 

Date:  March 19, 2003

 

 
| /s/ Jeffery R. Gardner                          |   |
|-------------------------------------------------|--------|
| Jeffery R. Gardner                              |
| Senior Vice President - Chief Financial Officer |

 

 

30

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**Report of IndependentAccountants on**

**FinancialStatement Schedules**

 

To the Shareholders of ALLTEL Corporation:

 

 

Ouraudits of the consolidated financial statements referred to in our report datedJanuary 21, 2003 appearing in this Annual Report on Form 10-K of ALLTELCorporation (the “Company”) also included an audit of the December 31, 2002 and2001 financial statement schedule information listed in Item 15(a) of this Form10-K.  In our opinion, the 2002 and 2001financial statement schedules present fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.  The2000 financial statement schedule information of the Company was audited byother independent accountants who have ceased operations.  Those independent accountants expressed anunqualified opinion on that financial statement schedule information in theirreport dated January 21, 2002.

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
|                           |
| Little Rock, Arkansas,         |
| January 21, 2003               |

 

31

----

 

THIS REPORT IS A COPY OFA PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT ANDHAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

 

To the Shareholders of 

ALLTEL Corporation:

 

We have audited in accordance with auditing standards generallyaccepted in the United States, the financial statements included in ALLTELCorporation’s Financial Supplement incorporated by reference in this Form 10-K,and have issued our report thereon dated January 21, 2002.  Our audit was made for the purpose offorming an opinion on those statements taken as a whole.  The schedule is the responsibility of theCompany’s management and is presented for purposes of complying with theSecurities and Exchange Commission’s rules and is not part of the basicfinancial statements.  This schedule hasbeen subjected to the auditing procedures applied in the audit of the basicfinancial statements and, in our opinion, fairly states in all materialrespects the financial data required to be set forth therein in relation to thebasic financial statements taken as a whole.

 
| /s/ ARTHUR ANDERSEN LLP |   |
|-------------------------|--------|
|                    |
| Little Rock, Arkansas,  |
| January 21, 2002        |

 

32

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33

ALLTEL CORPORATION

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(Dollars in Millions)

 
|                                                                                |   | **Column B**              |          | **Column C**         |   | **Column D**                     |   | **Column E**                       |   |
|-------------------------------------------------------------------------------------|--------|---------------------------|---------------|----------------------|--------|----------------------------------|--------|------------------------------------|--------|
| **Column A**                                                                        |   |                      | **Additions** |                 |   |                             |
| **Description**                                                                     |   | **Per  Previous  Report** |          | **(A)  Adjustments** |   | **Adjusted  Beginning  Balance** |   | **Charged to  Cost and  Expenses** |   | **Charged  to Other  Accounts** |   | **Deductions  Describe** |   | **Balance at  End of  Period** |   |
| Allowance for  doubtful  accounts, customers  and other:                            |   |                      |          |                 |   |                             |   |                               |   |   |   |   |   |   |   |
| December 31,  2002                                                                  |   | $                         | 52.2          |                 | $      | —                           |   | $                                  | 52.2   |   | $ | 267.0 |   | $ | — |   | $ | 247.3 | (B) | $ | 71.9 |   |
| December 31,  2001                                                                  |   | $                         | 52.7          |                 | $      | —                           |   | $                                  | 52.7   |   | $ | 144.0 |   | $ | — |   | $ | 144.5 | (B) | $ | 52.2 |   |
| December 31,  2000                                                                  |   | $                         | 35.0          |                 | $      | 10.4                             |   | $                                  | 45.4   |   | $ | 113.1 |   | $ | — |   | $ | 105.8 | (B) | $ | 52.7 |   |
|                                                                                |   |                      |          |                 |   |                             |   |                               |   |   |   |   |   |   |   |
| Valuation  allowance for  deferred tax assets:                                      |   |                      |          |                 |   |                             |   |                               |   |   |   |   |   |   |   |
| For the years  ended:                                                               |   |                      |          |                 |   |                             |   |                               |   |   |   |   |   |   |   |
| December 31,  2002                                                                  |   | $                         | 3.9           |                 | $      | —                           |   | $                                  | 3.9    |   | $ | 2.1 |   | $ | — |   | $ | — |   | $ | 6.0 |   |
| December 31,  2001                                                                  |   | $                         | 3.4           |                 | $      | —                           |   | $                                  | 3.4    |   | $ | 0.5 |   | $ | — |   | $ | — |   | $ | 3.9 |   |
| December 31,  2000                                                                  |   | $                         | 11.7          |                 | $      | —                           |   | $                                  | 11.7   |   | $ | — |   | $ | — |   | $ | 8.3 | (C) | $ | 3.4 |   |
|                                                                                |   |                      |          |                 |   |                             |   |                               |   |   |   |   |   |   |   |
| Accrued  liabilities related to  merger and integration  expenses and other charges |   |                      |          |                 |   |                             |   |                               |   |   |   |   |   |   |   |
| For the years  ended:                                                               |   |                      |          |                 |   |                             |   |                               |   |   |   |   |   |   |   |
| December 31,  2002                                                                  |   | $                         | 17.1          |                 | $      | —                           |   | $                                  | 17.1   |   | $ | 115.1 | (D) | $ | — |   | $ | 116.5 | (E) | $ | 15.7 |   |
| December 31,  2001                                                                  |   | $                         | 16.5          |                 | $      | —                           |   | $                                  | 16.5   |   | $ | 92.2 | (F) | $ | — |   | $ | 91.6 | (G) | $ | 17.1 |   |
| December 31,  2000                                                                  |   | $                         | 66.5          |                 | $      | —                           |   | $                                  | 66.5   |   | $ | 25.4 | (H) | $ | — |   | $ | 75.4 | (I) | $ | 16.5 |   |

 

 

Notes:

(A)                              Reclassificationof amounts for companies purchased in 2000. See Note 3 on pages F-50 to F-52 of the Financial Supplement, which isincorporated herein by reference, for additional information regarding thecompanies purchased in 2000.

(B)                                Accountscharged off net of recoveries of amounts previously written off.

(C)                                Reductionin valuation allowance due to utilization of state net operating losscarryforwards.

(D)                               Thesecharges included a write-down of $42.3 million in the Company’s investment in abusiness venture, a write-down in the carrying value of certain cell siteequipment of $7.1 million and integration expenses totaling $28.8 millionincurred in connection with the acquisition of wireline properties in Kentuckyand wireless properties from CenturyTel. The integration expenses included branding and signage costs and coststo convert the acquired properties to the Company’s internal billing andoperations support systems.  Inaddition, the Company also recorded charges of $36.9 million in connection withthe restructuring of the Company’s CLEC, call center, retail and productdistribution operations.

(E)                                 Includescash outlays of $68.2 million for expenses paid in 2001 and non-cash charges of$48.3 million, primarily consisting of write-downs in the carrying value ofcapitalized computer software costs and cell site equipment.

(F)                                 During2001, the Company recorded integration expenses and other charges of $77.1million incurred in connection with the restructuring of the Company’s regionalcommunications, information services, product distribution and corporateoperations.  The Company also recordedwrite-downs in the carrying value of certain cell site equipment totaling $15.1million.

(G)                                Includescash outlays of $45.0 million for expenses paid in 2001 and non-cash charges of$46.6 million consisting of write-downs in the carrying value of cell siteequipment and other assets of $24.0 million, $21.5 million in additionalpension and postretirement benefit costs related to a special early retirementprogram offered to employees meeting certain age and service requirements and$1.1 million in compensation expense related to the accelerated vesting ofcertain stock options

(H)                               During2000, the Company recorded integration expenses and other charges incurred inconnection with the acquisition of wireless assets and with certainrestructuring activities of the Company’s information services business.

(I)                                    Includescash outlays of $73.8 million for expenses paid in 2000 and a non-cash chargeof $1.6 million resulting from write-downs in the carrying value of capitalizedleasehold improvements related to facilities abandoned by the Company.

 

See Note 9 on pages F-58 to F-60 of the Financial Supplement, which isincorporated herein by reference, for additional information regarding themerger and integration expenses and other charges recorded by the Company in2002, 2001 and 2000.

 

33

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EXHIBIT INDEX

Number and Name

 
| (3)(a)(1)  |   | Amended and Restated Certificate of Incorporation of  ALLTEL Corporation (incorporated herein by reference to Exhibit B to Proxy  Statement, dated March 9, l990).                                                                                                                                                                                                                                                       |   | *      |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (a)(2)     |   | Amendment No. 1 to Amended and Restated Certificate  of Incorporation of ALLTEL Corporation (incorporated herein by reference to  Annex F of ALLTEL Corporation Registration Statement (File No. 333-51915) on  Form S-4 dated May 6, 1998).                                                                                                                                                                             |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (b)        |   | Bylaws of ALLTEL Corporation (As amended as of  January 29, 1998) (incorporated herein by reference to Exhibit 3(b) to Form  10-K for the fiscal year ended December 31, 1997).                                                                                                                                                                                                                                          |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (4)(a)     |   | Rights Agreement dated as of January 30, l997,  between ALLTEL Corporation and First Union National Bank of North Carolina  (incorporated herein by reference to Form 8-K dated February 3, 1997, filed  with the Commission on February 4, 1997).                                                                                                                                                                       |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (b)        |   | The Company agrees to provide to the Commission,  upon request, copies of any agreement defining rights of long-term debt  holders.                                                                                                                                                                                                                                                                                      |   | — |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (10)(a)(1) |   | Amended and Restated Credit Agreement dated as of  June 28, 2001, between ALLTEL Corporation and Bank of America, N.A., The  Chase Manhattan Bank, Citibank, N.A., KeyBank National Association, and Banc  of America Securities LLC. (incorporated herein by reference to Form 10-K for  the fiscal year ended December 31, 2001).                                                                                      |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (a)(2)     |   | Amendment No. 1 to Amended and Restated Credit  Agreement dated as of June 28, 2001, between ALLTEL Corporation and Bank of  America, N.A., The Chase Manhattan Bank, Citibank, N.A., KeyBank National  Association, and Banc of America Securities LLC. (incorporated herein by  reference to Exhibit 10(a)(2) to Form 10-Q for the period ended September 30,  2002).                                                  |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (b)        |   | 364 Day Revolving Credit Agreement dated as of July  31, 2002 between ALLTEL Corporation and Bank of America, N.A., Merrill Lynch  & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bank of  America Securities LLC, Citibank, N.A., Wachovia Bank, National Association,  and Bank One, N.A. (incorporated herein by reference to Exhibit 10(a)(1) to  Form 10-Q for the period ended June 30, 2002). |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (c)(1)     |   | Change in Control Agreement by and between the  Company and Scott T. Ford effective as of April 25, 1996 (incorporated herein  by reference to Exhibit 10(c)(6) to Form 10-Q for the period ended June 30,  1996).                                                                                                                                                                                                       |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (c)(2)     |   | Change in Control Agreement by and between the  Company and Kevin L. Beebe effective as of July 23, 1998 (incorporated herein  by reference to Exhibit 10(c)(2) to Form 10-K for the fiscal year ended  December 31, 1998).                                                                                                                                                                                              |   | *      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| (c)(3)     |   | Change in Control Agreement by and between the  Company and Michael T. Flynn effective as of July 23, 1998 (incorporated  herein by reference to Exhibit 10(c)(3) to Form 10-K for the fiscal year  ended December 31, 1998).                                                                                                                                                                                            |   | *      |

 

*   Incorporated herein byreference as indicated.

(a) Filed herewith.

 

34

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Number and Name
| (10)(c)(4) |   | Change in Control Agreement by and between the  Company and Jeffrey H. Fox effective as of January 30, 1997 (incorporated  herein by reference to Exhibit 10(c)(4) to Form 10-K for the fiscal year  ended December 31, 1998).                             |   | *      |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (c)(5)     |   | Change in Control Agreement by and between the  Company and Francis X. Frantz effective as of October 24, 1994 (incorporated  herein by reference to Exhibit 10(c)(4) to Form 10-K for the fiscal year  ended December 31, 1994).                          |   | *      |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (c)(6)     |   | Change in Control Agreement by and between the  Company and Jeffrey R. Gardner effective as of January 28, 1999 (incorporated  herein by reference to Exhibit 10(c)(8) to Form 10-K for the fiscal year  ended December 31, 1998).                         |   | *      |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (c)(7)     |   | Change in Control Agreement by and between the  Company and Keith A. Kostuch effective as of February 15, 2001 (incorporated  herein by reference to Exhibit 10(c)(9) to Form 10-K for the fiscal year  ended December 31, 2000).                          |   | *      |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (c)(8)     |   | Change in Control Agreement by and between the  Company and Scott H. Settelmyer effective as of March 8, 2002.                                                                                                                                             |   | (a)    |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (d)        |   | Split-dollar Life Insurance Agreement by and between  the Company and Francis X. Frantz effective as of March 1, 1994 (incorporated  herein by reference to Exhibit 10(d)(2) to Form 10-K for the fiscal year  ended December 31, 1994).                   |   | *      |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (e)        |   | Amended and Restated ALLTEL Corporation Supplemental  Executive Retirement Plan (incorporated herein by reference to Exhibit  10(e)(1) to Form 10-K for the fiscal year ended December 31, 2001).                                                          |   | *      |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(1)     |   | Executive Deferred Compensation Plan of ALLTEL  Corporation, as amended and restated effective October 1, 1993 (incorporated  herein by reference to Exhibit 10(e) to Form 10-K for the fiscal year ended  December 31, 1993).                             |   | *      |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(2)     |   | Amendment No. 1 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective January  29, 1998 (incorporated herein by reference to Exhibit 10(f)(2) to Form 10-K  for the fiscal year ended December 31, 1997). |   | *      |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(3)     |   | Amendment No. 2 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective April 23,  1998.                                                                                                                    |   | (a)    |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(4)     |   | Amendment No. 3 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective January  28, 1999.                                                                                                                  |   | (a)    |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(5)     |   | Amendment No. 4 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective April 21,  1999.                                                                                                                    |   | (a)    |
|       |   |                                                                                                                                                                                                                                                       |   |   |
| (f)(6)     |   | Amendment No. 5 to Executive Deferred Compensation  Plan of ALLTEL Corporation (October 1, 1993 Restatement) effective April 25,  2002.                                                                                                                    |   | (a)    |

 

 

*   Incorporated herein byreference as indicated.

(a) Filed herewith.

 

35

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Number and Name
| (10)(f)(7) |   | Deferred Compensation Plan for Directors of ALLTEL  Corporation, as amended and restated effective October 1, 1993 (incorporated  herein by reference to Exhibit 10(f) to Form 10-K for the fiscal year ended  December 31, 1993).  |   | *      |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|       |   |                                                                                                                                                                                                                                |   |   |
| (f)(8)     |   | Amendment No. 1 to Deferred Compensation Plan for  Directors of ALLTEL Corporation (October 1, 1993 Restatement) (incorporated  herein by reference to Exhibit 10(f)(3) to Form 10-K for the fiscal year  ended December 31, 1996). |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (f)(9)     |   | Amendment No. 2 to Deferred Compensation Plan for  Directors of ALLTEL Corporation (October 1, 1993 Restatement) effective April  25, 2002.                                                                                         |   | (a)    |
|       |   |                                                                                                                                                                                                                                |   |   |
| (f)(10)    |   | ALLTEL Corporation 1998 Management Deferred  Compensation Plan, effective June 23, 1998 (incorporated herein by reference  to Exhibit 10(f)(5) to Form 10-Q for the period ended June 30, 1998).                                    |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (f)(11)    |   | Amendment No. 1 to the ALLTEL Corporation 1998  Management Deferred Compensation Plan effective June 23, 1998.                                                                                                                      |   | (a)    |
|       |   |                                                                                                                                                                                                                                |   |   |
| (f)(12)    |   | Amendment No. 2 to the ALLTEL Corporation 1998  Management Deferred Compensation Plan effective April 25, 2002.                                                                                                                     |   | (a)    |
|       |   |                                                                                                                                                                                                                                |   |   |
| (f)(13)    |   | ALLTEL Corporation 1998 Directors’ Deferred  Compensation Plan, effective June 23, 1998 (incorporated herein by reference  to Exhibit 10(f)(6) to Form 10-Q for the period ended June 30, 1998).                               |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (f)(14)    |   | Amendment No. 1 to the ALLTEL Corporation 1998  Directors’ Deferred Compensation Plan, effective April 25, 2002.                                                                                                               |   | (a)    |
|       |   |                                                                                                                                                                                                                                |   |   |
| (g)(1)     |   | ALLTEL Corporation 1991 Stock Option Plan  (incorporated herein by reference to Exhibit A to Proxy Statement, dated  March 8, 1991).                                                                                                |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (g)(2)     |   | First Amendment to ALLTEL Corporation 1991 Stock  Option Plan (incorporated herein by reference to Exhibit 10(g)(3) to Form  10-K for the fiscal year ended December 31, 2000).                                                     |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (g)(3)     |   | ALLTEL Corporation 1994 Stock Option Plan for  Employees (incorporated herein by reference to Exhibit A to Proxy Statement  dated March 4, 1994).                                                                                   |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (g)(4)     |   | First Amendment to ALLTEL Corporation 1994 Stock  Option Plan for Employees (incorporated herein by reference to Exhibit  10(g)(5) to Form 10-K for the fiscal year ended December 31, 2000).                                       |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (g)(5)     |   | ALLTEL Corporation 1994 Stock Option Plan for  Nonemployee Directors (incorporated herein by reference to Exhibit B to Proxy  Statement dated March 4, 1994).                                                                       |   | *      |
|       |   |                                                                                                                                                                                                                                |   |   |
| (g)(6)     |   | First Amendment to ALLTEL Corporation 1994 Stock  Option Plan for Nonemployee Directors (incorporated herein by reference to  Exhibit 10(g)(5) to Form 10-K for the fiscal year ended December 31, 1996).                           |   | *      |

 

 

*   Incorporated herein byreference as indicated.

(a) Filed herewith.

 

36

----

 

Number and Name
| (10)(g)(7) |   | Second, Third and Fourth Amendments to ALLTEL  Corporation 1994 Stock Option Plan for Nonemployee Directors (incorporated  herein by reference to Exhibit 10(g)(8) to Form 10-K for the fiscal year  ended December 31, 2000).                                                    |   | *      |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (g)(8)     |   | ALLTEL Corporation 1998 Equity Incentive Plan  (incorporated herein by reference to Annex G of ALLTEL Corporation  Registration Statement (File No. 333-51915) on Form S-4 dated May 6, 1998).                                                                                    |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (g)(9)     |   | First and Second Amendments to ALLTEL Corporation  1998 Equity Incentive Plan (incorporated herein by reference to Exhibit  10(g)(9) to Form 10-K for the fiscal year ended December 31, 2000).                                                                                   |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (g)(10)    |   | ALLTEL Corporation 2001 Equity Incentive Plan  (incorporated herein by reference to Appendix C to Proxy Statement dated  March 5, 2001).                                                                                                                                          |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (10)(h)(1) |   | Amended and Restated 360° Communications Company  1996 Equity Incentive Plan (incorporated herein by reference to Form S-8  (File No. 333-88923) of ALLTEL Corporation filed with the Commission on  October 13, 1999).                                                      |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (h)(2)     |   | Lincoln Telecommunications Company 1989 Stock and  Incentive Stock Plan (incorporated herein by reference to Form S-8 (File No.  333-88907) of ALLTEL Corporation filed with the Commission on October 13,  1999).                                                                |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (i)(1)     |   | ALLTEL Corporation Performance Incentive  Compensation Plan as amended, effective January 1, 1993 (Exhibit 10(i) to  Form SE dated February 17, 1993).                                                                                                                            |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (i)(2)     |   | Amendment No. 1 to ALLTEL Corporation Performance  Incentive Compensation Plan, effective January 29, 1998, (incorporated herein  by reference to Exhibit 10(i)(1) to Form 10-K for the fiscal year ended  December 31, 1997).                                                    |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (j)(1)     |   | ALLTEL Corporation Long-Term Performance Incentive  Compensation Plan, as amended and restated effective January 1, 1993 (Exhibit  10(j) to Form SE dated February 17, 1993).                                                                                                     |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (j)(2)     |   | Amendment No. 1 to ALLTEL Corporation Long-Term  Performance Incentive Compensation Plan as amended and restated effective  January 1, 1993, (incorporated herein by reference to Exhibit 10(j)(1) to  Amendment No. 1 to Form 10-K for the fiscal year ended December 31, 1993). |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (j)(3)     |   | Amendment No. 2 to ALLTEL Corporation Long-Term  Performance Incentive Compensation Plan (January 1, 1993 Restatement),  effective January 29, 1998, (incorporated herein by reference to Exhibit  10(j)(2) to Form 10-K for the fiscal year ended December 31, 1997).            |   | *      |
|       |   |                                                                                                                                                                                                                                                                              |   |   |
| (k)(1)     |   | ALLTEL Corporation Pension Plan (January 1, 2001  Restatement) (incorporated herein by reference to Exhibit 10(k) to Form 10-K  for the fiscal year ended December 31, 2001).                                                                                                     |   | *      |

 

 

*   Incorporated herein byreference as indicated.

(a) Filed herewith.

 

37

----

 

Number and Name

 
| (10)(k)(2) |   | Amendment No. 1 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement) (incorporated herein by reference to Exhibit  10(k)(1) to Form 10-Q for the period ended September 30, 2002).          |   | *      |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|       |   |                                                                                                                                                                                                     |   |   |
| (k)(3)     |   | Amendment No. 2 to ALLTEL Corporation Pension Plan  (January 1, 2001 Restatement).                                                                                                                       |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (1)(1)     |   | ALLTEL Corporation Profit-Sharing Plan (January 1,  2002 Restatement) (incorporated herein by reference to Exhibit 10(l)to Form  10-Q for the period ended March 31, 2002).                              |   | *      |
|       |   |                                                                                                                                                                                                     |   |   |
| (1)(2)     |   | Amendment No. 1 to ALLTEL Corporation Profit-Sharing  Plan (January 1, 2002 Restatement).                                                                                                                |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (m)        |   | ALLTEL Corporation Benefit Restoration Plan (January  1, 1996 Restatement) (incorporated herein by reference to Exhibit 10(m) to  Form 10-K for the fiscal year ended December 31, 1995).                |   | *      |
|       |   |                                                                                                                                                                                                     |   |   |
| (n)(1)     |   | Amended and Restated ALLTEL Corporation Supplemental  Medical Expense Reimbursement Plan (incorporated herein by reference to  Exhibit 10(p) to Form 10-K for the fiscal year ended December 31, 1990).  |   | *      |
|       |   |                                                                                                                                                                                                     |   |   |
| (n)(2)     |   | First Amendment to ALLTEL Corporation Supplemental  Medical Expense Reimbursement Plan (incorporated herein by reference to  Exhibit 10(n)(1) to Form 10-K for the fiscal year ended December 31, 2001). |   | *      |
|       |   |                                                                                                                                                                                                     |   |   |
| (o)(1)     |   | ALLTEL Corporation 401(k) Plan (January 1, 2001  Restatement) (incorporated herein by reference to Exhibit 10(o) to Form 10-K  for the fiscal year ended December 31, 2001).                             |   | *      |
|       |   |                                                                                                                                                                                                     |   |   |
| (o)(2)     |   | Amendment No. 1 to ALLTEL Corporation 401(k) Plan  (January 1, 2001 Restatement).                                                                                                                        |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (o)(3)     |   | Amendment No. 2 to ALLTEL Corporation 401(k) Plan  (January 1, 2002 Restatement).                                                                                                                        |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (11)       |   | Statement Re: Computation of per share earnings.                                                                                                                                                         |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (21)       |   | Subsidiaries of ALLTEL Corporation.                                                                                                                                                                      |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (23)       |   | Consent of PricewaterhouseCoopers LLP.                                                                                                                                                                   |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (24)       |   | Power of attorney.                                                                                                                                                                                       |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (99)(a)    |   | Certification of Chief Executive Officer and  President.                                                                                                                                                 |   | (a)    |
|       |   |                                                                                                                                                                                                     |   |   |
| (99)(b)    |   | Certification of Chief Financial Officer.                                                                                                                                                                |   | (a)    |

 

 

*   Incorporated herein byreference as indicated.

(a) Filed herewith.

 

38

----

**ALLTEL CORPORATION**

 

 

**FINANCIAL SUPPLEMENT**

**TO ANNUAL REPORT ON FORM 10-K**

**FOR THE YEAR ENDED DECEMBER 31, 2002**

 

----

 

**ALLTEL CORPORATION**

 

**INDEX TOFINANCIAL SUPPLEMENTTO ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2002**

 
| **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|-------------------------------------------------------------------------------------------------|
|                                                                                            |   |
| **Selected  Financial Data**                                                                    |
|                                                                                            |   |
| **Report  of Management**                                                                       |
|                                                                                            |   |
| **Reports of  Independent Public Accountants**                                                  |
|                                                                                            |   |
| **Annual  Financial Statements:**                                                               |
|                                                                                            |   |
|                                                                                            | Consolidated  Statements of Income  for the years ended December 31, 2002, 2001 and 2000 |
|                                                                                            |   |
|                                                                                            | Consolidated Balance Sheets  as of December 31, 2002 and 2001 |
|                                                                                            |   |
|                                                                                            | Consolidated  Statements of Cash Flows  for the years ended December 31, 2002, 2001 and 2000 |
|                                                                                            |   |
|                                                                                            | Consolidated  Statements of Shareholders’ Equity  for the years ended December 31, 2002, 2001 and 2000 |
|                                                                                            |   |
|                                                                                            | Notes to  Consolidated Financial Statements |

 

F-1

----

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

During 2002, ALLTEL Corporation (“ALLTEL” or the“Company”) achieved solid financial results despite the effects of a sluggisheconomy, increased competition in its wireless business and a slight decline inwireline access lines.  The Companycontinued to expand its core communications business in 2002, as evidenced byALLTEL’s purchase of wireline access lines in Kentucky from VerizonCommunications Inc. (“Verizon”) and the purchase of substantially all of thewireless assets of CenturyTel, Inc. (“CenturyTel”).  The acquired operations have been successfully integrated intoALLTEL’s existing communications business. During 2002, the Company also continued its focus on controlling costsby restructuring its Competitive Local Exchange Carrier (“CLEC”), call centerand retail store operations.

 

On January 28, 2003, ALLTEL signed a definitiveagreement to sell the financial services division of its information servicessubsidiary, ALLTEL Information Services, to Fidelity National Financial Inc.(“Fidelity National”), for $1.05 billion, payable as $775.0 million in cash and$275.0 million in Fidelity National common stock.  As part of this transaction, Fidelity National will acquireALLTEL’s mortgage servicing, retail and wholesale banking and commerciallending operations, as well as the community/regional bank division.  Approximately 5,500 employees of the Companywill transition to Fidelity National as part of the transaction, which isexpected to close by the end of the first quarter of 2003. The telecom divisionof ALLTEL Information Services will be retained by the Company and will not bepart of the transaction.  Thetelecommunications operations retained by ALLTEL represented approximately 12 percentof both the total revenues and sales and total segment income reported by theinformation services segment in 2002.

 

**ACQUISITIONS**

On August 1, 2002, ALLTEL completed its purchase oflocal telephone properties serving approximately 589,000 wireline customers inKentucky from Verizon for $1.93 billion in cash.  The acquired wireline properties overlapped ALLTEL’s existingwireless service in northeastern Kentucky and increased the Company’s totalaccess lines by approximately 23 percent to nearly 3.2 million wirelinecustomers.  Upon signing of the purchaseagreement in October 2001, ALLTEL paid Verizon a deposit equal to 10 percent ofthe total purchase price, or $190.7 million, with the balance of the cashpayment (net of accrued interest on the deposit) due at the time thetransaction was completed.

 

On August 1, 2002, ALLTEL also completed its purchaseof substantially all of the wireless properties owned by CenturyTel forapproximately $1.59 billion in cash. Through the completion of the transaction, ALLTEL added propertiesrepresenting approximately 8.3 million potential customers (“POPs”), acquiredapproximately 762,000 customers, increasing its wireless customer base to morethan 7.5 million customers, and expanded its wireless footprint into newmarkets across Arkansas, Louisiana, Michigan, Mississippi, Texas andWisconsin.  Also included in thetransaction were minority partnership interests in cellular operationsrepresenting approximately 1.8 million proportionate POPs, and PersonalCommunications Services (“PCS”) licenses covering 1.3 million POPs in Wisconsinand Iowa.

 

The accounts and results of operations of the acquiredwireline and wireless properties are included in the accompanying consolidatedfinancial statements from the date of acquisition.  (See Note 3 to the consolidated financial statements foradditional information regarding these acquisitions.)

 

To fund the cost of the acquisitions discussed above,during the second quarter of 2002, ALLTEL sold 27.7 million equity units andreceived net proceeds of $1.34 billion. The equity units had a stated amount of $50 per unit and included apurchase contract pursuant to which the holder agreed to purchase shares ofALLTEL common stock on May 17, 2005. ALLTEL will make quarterly contract adjustment payments to the holder atthe rate of 1.50 percent of the stated amount per year.  The number of shares to be purchased will bedetermined at the time the purchase contracts are settled based on the thencurrent price of ALLTEL’s common stock and will range between 0.8280 and 1.0101shares of ALLTEL common stock per equity unit. The equity units also included $50 principal amount of senior notes,which bear interest at 6.25 percent and mature on May 17, 2007.  In June 2002, the Company also issued $1.5billion of unsecured long-term debt consisting of $800.0 million of 7.0 percentsenior notes due July 1, 2012 and $700.0 million of 7.875 percent senior notesdue July 1, 2032.  Net proceeds fromthis debt issuance were $1.47 billion, after deducting the underwritingdiscount and other offering expenses. (See Note 5 to the consolidated financial statements for additionalinformation regarding these securities offerings.)

 

In addition to the net proceeds from the issuance ofthe equity units and debt securities of $2.81 billion, ALLTEL funded theremaining $521.4 million of the $3.33 billion cost of the wireline and wirelessacquisitions ($3.52 billion total cost less $193.5 million deposit, includingaccrued interest, paid to Verizon upon the signing of the definitive purchaseagreement in October 2001 as noted above) with cash on hand of $78.9 millionand additional borrowings of $442.5 million under ALLTEL’s commercial paperprogram.  As a result of prefunding thewireline and wireless acquisitions

 

F-2

----

 

through the issuance of the equity units and long-termdebt, ALLTEL incurred additional interest expense in 2002 of $35.0 million and,conversely, earned interest income of $8.2 million from investing the cashproceeds from these securities offerings. Accordingly, ALLTEL’s results for the year ended December 31, 2002 wereadversely affected by additional net interest cost (interest expense lessinterest income) of $26.8 million.

 

On October 3, 2000, ALLTEL purchased wirelessproperties in Louisiana from SBC Communications, Inc. (“SBC”).  ALLTEL paid SBC $387.6 million in cash andacquired approximately 150,000 wireless customers and 300,000 pagingcustomers.  During 2000, ALLTEL, BellAtlantic Corporation (“Bell Atlantic”) and GTE Corporation (“GTE”) exchangedwireless properties in 13 states.  OnApril 3, 2000, ALLTEL completed the exchange of wireless properties with BellAtlantic in five states, acquiring operations in Arizona, New Mexico and Texasand divesting operations in Nevada and Iowa. In addition to the exchange of wireless assets, ALLTEL paid BellAtlantic $624.3 million in cash to complete this transaction.  On June 30, 2000, ALLTEL completed the remainingwireless property exchanges with Bell Atlantic and GTE, acquiring operations inFlorida, Ohio, South Carolina and Alabama, while divesting operations inIllinois, Indiana, New York and Pennsylvania. ALLTEL also transferred to Bell Atlantic or GTE certain minorityinvestments in unconsolidated wireless properties, representing approximately2.6 million POPs.  In connection withthe transfer of the remaining wireless assets, ALLTEL received $216.9 millionin cash and prepaid vendor credits of $199.6 million and assumed long-term debtof $425.0 million.  Through thecompletion of the above transactions, ALLTEL acquired interests in 27 wirelessmarkets, representing about 14.6 million POPs and approximately 1.5 millionwireless customers, while divesting interests in 42 wireless markets,representing 6.9 million POPs and approximately 778,000 customers.  ALLTEL accounted for these exchangetransactions as purchases, and accordingly, the accompanying consolidatedfinancial statements include the accounts and results of operations of theacquired wireless properties from the applicable dates of acquisition.

 

**ACCOUNTING AND FINANCIAL REPORTING CHANGES**

Effective January1, 2002, the Company adopted Statement of Financial Accounting Standards(“SFAS”) No. 142 “Goodwill and Other Intangible Assets”.  This standard changed the accounting forgoodwill and other indefinite-lived intangible assets from an amortizationmethod to an impairment-only approach. As of January 1, 2002, ALLTEL ceased amortization of goodwill recordedin conjunction with past business combinations.  In addition, the Company conducted a review of its otheridentifiable intangible assets and determined that its cellular and PCSlicenses met the indefinite life criteria outlined in SFAS No. 142, because theCompany expects both the renewal by the granting authorities and the cash flowsgenerated from these intangible assets to continue indefinitely.  Accordingly, ALLTEL also ceased amortizationof the wireless licenses as of January 1, 2002.  In accordance with the requirements of SFAS No. 142, ALLTEL alsocompleted its initial impairment review of goodwill and indefinite-livedintangible assets and determined that no write-down in the carrying value ofthese assets was required.

 

As of January 1,2002, ALLTEL changed its business segment reporting presentation by reclassifyingthe operating units of its emerging communications businesses to better alignits financial reporting with the Company’s business segment mix and to provideclear comparisons to other communications companies within ALLTEL’s peer group.  In accordance with SFAS No. 131 “Disclosuresabout Segments of an Enterprise and Related Information”, ALLTEL restated allpreviously reported segment information to conform to the new financialreporting presentation.  Under the newpresentation, ALLTEL’s wireless segment consists of its cellular, PCS andpaging operations.  The CLEC andInternet access operations have been combined with ALLTEL’s incumbent localexchange carrier (“ILEC”) operations and reported as the wireline segment.  The information services segment no longerincludes services provided to ALLTEL affiliates.  These affiliate services have been reported in the correspondingcommunications segments, and accordingly, information services operatingresults only reflect the Company’s financial services business andnon-affiliated telecommunications operations. All other segments, which include long-distance and network managementservices, communications products and directory publishing, have been reportedtogether under a segment classification titled “Communications SupportServices”.  These reclassifications didnot affect consolidated operating income, net income or earnings per sharereported by ALLTEL prior to January 1, 2002. To enhance comparability of the consolidated financial informationpresented, the Company also reclassified its intersegment revenues andexpenses.  As a result, consolidatedrevenues and sales for prior periods were reduced for the portion of theinformation services revenues previously billed to the wireline operations thatwere not eliminated pursuant to SFAS No. 71 “Accounting for the Effects ofCertain Types of Regulation”.

 

Also as of January1, 2002, the Company changed to a gross basis the reporting presentation forreimbursements of out-of-pocket expenses received from customers under terms ofits information services agreements in accordance with Emerging Issues TaskForce (“EITF”) Issue 01-14 “IncomeStatement Characterization of Reimbursements Received for Out-of-PocketExpenses Incurred”.  Prior toJanuary 1, 2002, the Company netted these reimbursements against expensesincurred to provide data processing and consulting services and included thenet amount in cost of services.  Revenueand expense

 

F-3

----

 

information prior toJanuary 1, 2002 has been reclassified to conform to the new reportingpresentation.  This change did notaffect operating income or net income reported by the Company prior to January1, 2002.  (See Notes 1 and 2 to theconsolidated financial statements for additional information regarding thesechanges in accounting and financial reporting.)

 

**CONSOLIDATED RESULTS OF OPERATIONS**

 
|                                        |
|---------------------------------------------|
| **(Millions,  except per share amounts)**   |   | **2002** |   | **2001** |   | **2000** |   |
| Revenues and  sales:                        |   |   |   |   |   |   |   |
| Service revenues                            |   | $ | 7,257.3 |   | $ | 6,736.8 |   | $ | 6,325.6 |   |
| Product sales                               |   | 726.1 |   | 768.8 |   | 834.4 |   |
| Total revenues  and sales                   |   | 7,983.4 |   | 7,505.6 |   | 7,160.0 |   |
| Costs and  expenses:                        |   |   |   |   |   |   |   |
| Cost of services                            |   | 2,471.5 |   | 2,269.1 |   | 2,269.5 |   |
| Cost of products  sold                      |   | 891.4 |   | 907.9 |   | 840.1 |   |
| Selling, general,  administrative and other |   | 1,511.2 |   | 1,404.0 |   | 1,369.1 |   |
| Depreciation and  amortization              |   | 1,178.6 |   | 1,167.7 |   | 988.4 |   |
| Integration  expenses and other charges     |   | 115.1 |   | 92.2 |   | 25.4 |   |
| Total costs and  expenses                   |   | 6,167.8 |   | 5,840.9 |   | 5,492.5 |   |
| Operating income                            |   | $ | 1,815.6 |   | $ | 1,664.7 |   | $ | 1,667.5 |   |
| Net income                                  |   | $ | 924.3 |   | $ | 1,067.0 |   | $ | 1,928.8 |   |
| Basic earnings  per share                   |   | $ | 2.97 |   | $ | 3.42 |   | $ | 6.13 |   |
| Diluted earnings  per share                 |   | $ | 2.96 |   | $ | 3.40 |   | $ | 6.08 |   |

 

Revenues and sales increased $477.8 million, or 6percent, in 2002 and $345.6 million, or 5 percent, in 2001.  Service revenues increased $520.5 million,or 8 percent, in 2002 and $411.2 million, or 6 percent, in 2001.  The increases in service revenues in bothyears primarily reflected growth in ALLTEL’s communications customer baseresulting primarily from acquisitions and the corresponding increase in accessrevenues.  The acquisition of thewireline and wireless properties completed in the third quarter of 2002, as previouslydiscussed, accounted for approximately $360.7 million of the overall increasein service revenues and $369.9 million of the overall increase in totalrevenues and sales in 2002.  Theacquisition of wireless properties in Louisiana and the exchange of wirelessproperties with Bell Atlantic and GTE accounted for approximately $248.9million of the overall increase in service revenues and $269.2 million of theoverall increase in total revenues and sales in 2001.  Excluding the effects of the acquisitions in each period, servicerevenues would have increased $159.8 million, or 2 percent, and $162.3 million,or 3 percent, in 2002 and 2001, respectively, while total revenues and saleswould have increased 1 percent in both 2002 and 2001, or $107.9 million and$76.4 million, respectively.  In additionto the effects of the acquisitions, service revenues for both periods alsoreflected growth in the Company’s Internet and long-distance operations, aswell as increased revenues derived from the sale of enhanced communicationservices, such as caller identification, call-waiting, call forwarding, voicemail, and communications equipment protection plans.  These increases were partially offset by lower average revenueper wireless customer compared to 2001 and the loss of wireline access linesdue to broadband and wireless substitution.

 

Product sales decreased $42.7 million, or 6 percent,in 2002 and $65.6 million, or 8 percent, in 2001.  Excluding the effects of the acquisitions discussed above in eachperiod, product sales would have decreased $51.9 million, or 7 percent, and$85.9 million, or 11 percent, in 2002 and 2001, respectively.  Product sales decreased in 2002 primarilydue to a reduction in revenues derived from the sales of wireless handsets andaccessories, reflecting decreases in retail prices driven by competition.  In addition, directory publishing revenuesdecreased in 2002 primarily due to the loss of one major customer.  A decline in customer premise equipmentsales consistent with ALLTEL’s decision to exit certain CLEC markets also contributedto the decrease in product sales in 2002. Product sales decreased in 2001 primarily due to a reduction in sales oftelecommunications and data products to both the Company’s wirelinesubsidiaries and non-affiliates, reflecting a general decline in capitalspending by telecommunications companies due to economic conditions and theindustry’s emphasis on controlling costs. The decrease in sales of these products were partially offset in 2001 byincreases in directory publishing revenues and sales of software licenses bythe Company’s information services subsidiary.

 

Cost of services increased $202.4 million, or 9percent, in 2002 and decreased $0.4 million, or less than 1 percent, in2001.  The acquisition of the wirelineand wireless properties completed in the third quarter of 2002 accounted forapproximately $100.9 million of the overall increase in cost of services in2002.  Cost of services in 2002 alsoreflected increased network-related expenses due to higher network trafficassociated with the nonacquisition-related growth in ALLTEL’s communicationscustomer base and increased bad debt expense of $123.0 million.  Bad debt expense increased primarily due tothe overall decline in economic conditions, weakening consumer credit and theeffects of fourth quarter 2001 marketing programs directed toward thecredit-challenged wireless customer segment. In an effort to reduce future losses

 

F-4

----

 

sustained from bad debts, the Company periodically refinesits customer credit policies, reevaluates minimum deposit requirements forhigh-credit risk customers, and improves collection practices by adding newtechnologies and additional human resources. Bad debt expense for 2002 also included a $14.0 million write-down inreceivables resulting from an interexchange carrier’s bankruptcy filing.  Additional bad debt reserves related toALLTEL’s ongoing business relationship with this carrier or with any othercarriers that may become subject to insolvency proceedings in the future may berequired.  The increases in cost ofservices in 2002 attributable to acquisitions and increased bad debt expensewere partially offset by reduced operating costs in the Company’s informationservices business primarily reflecting the effects of the Company’s variousrestructuring efforts.  The decrease incost of services in 2001 primarily reflected reduced losses sustained fromfraud and reductions in customer service expenses in the Company’scommunications operations, resulting from various restructuring activitiescompleted during 2001, as further discussed below.  The reduced losses from fraud reflected the Company’s continuingefforts to control unauthorized usage of its customers’ wireless telephonenumbers that results in unbillable fraudulent roaming activity.  The effects of the decreases in lossessustained from fraud and customer service expenses were partially offset byincreased bad debt expense of $30.9 million and additional expenses of $62.0million attributable to the wireless property acquisitions completed in 2000.

 

Cost of products sold decreased $16.5 million, or 2percent, in 2002 and increased $67.8 million, or 8 percent, in 2001.  Cost of products sold decreased in 2002consistent with the overall decline in product sales noted above and theeffects of lower gross profit margins earned from the sale oftelecommunications and data products. The reduction in gross profit margins earned by the product distributionoperations reflected lower margins earned on affiliated sales and increasedcompetition from other distributors and from direct sales bymanufacturers.  The increase in cost ofproducts sold in 2001 was consistent with the growth in gross wireless customeractivations, the selling of higher-cost wireless digital handsets and theCompany’s continuing efforts to migrate wireless customers from analog todigital equipment.  The increase in costof products sold attributable to the wireless operations was partially offsetby a reduction in the cost of telecommunications and data products soldconsistent with the decreased sales of those products as noted above.

 

Selling, general, administrative and other operatingexpenses increased $107.2 million, or 8 percent, in 2002 and $34.9 million, or3 percent, in 2001.  The wireless andwireline property acquisitions completed in 2002 accounted for $63.9 million ofthe overall increase in selling, general, administrative and other expenses in2002.  In addition to the effects of theacquisitions, selling, general, administrative and other expenses for 2002reflected increased commission costs of $46.6 million consistent with thegrowth in gross wireless customer additions and increased sales of theCompany’s Total and National Freedom wireless service rate plans.  Commissions expense also reflected increasedcommissions paid to outside agents reflecting a shift in the Company’sdistribution and product mix.  Theincreases resulting from acquisitions and higher commissions costs werepartially offset by cost savings from the Company’s restructuring of its CLECand retail store operations completed during the first quarter, as furtherdiscussed below, and decreased advertising costs of $13.5 million resultingfrom discounted pricing received by ALLTEL due to purchasing advertising inbulk as part of centralizing the Company’s advertising efforts.  The acquisitions of wireless propertiescompleted in 2000 accounted for an increase of $46.9 million in selling,general, administrative and other expenses in 2001.  In addition, advertising costs increased $28.8 million in 2001primarily attributable to a nationwide branding campaign and other promotionalactivities.  The increases attributableto the acquisitions and increased advertising costs were partially offset bydecreased commission costs of $34.1 million. A reduction in overhead expenses, primarily resulting from the Company’s2001 restructuring efforts, also favorably impacted selling, general,administrative and other expenses in 2001.

 

Depreciation and amortization expense increased $10.9million, or 1 percent, in 2002 and $179.3 million, or 18 percent, in 2001.  Depreciation and amortization expense in2002 was favorably impacted by the effect of no longer amortizing goodwill andother indefinite-lived intangible assets in accordance with SFAS No. 142.  Excluding the effects of the amortization ofgoodwill and other indefinite-lived intangible assets in each period,depreciation and amortization expense would have increased $111.6 million, or10 percent, in 2002 and $170.7 million, or 19 percent, in 2001.  When excluding the effects of theamortization of goodwill and other indefinite-lived intangible assets, theincreases in depreciation and amortization expense in both years primarilyreflected growth in telecommunications plant in service.  Depreciation and amortization expense for2002 also included $54.2 million of additional expense attributable to the 2002wireless and wireline property acquisitions. Depreciation and amortization expense for 2001 included $53.4 million ofadditional expense attributable to the 2000 wireless acquisitions.

 

Pension expense, which is included in both cost ofservices and selling, general, administrative and other expenses, remained flatin 2002 compared to 2001.  Pension costsfor 2001 included special termination benefits incurred in connection with anearly retirement program offered by the Company, as further discussed in Note 9to the consolidated financial statements. Primarily as a result of these special termination benefits, pensionexpense in 2001 increased $26.0 million over 2000.  Pension costs for both 2002 and 2001 were both adversely affectedby lower investment returns earned on pension plan assets.

 

F-5

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Operating income increased $150.9 million, or 9percent, in 2002 and decreased $2.8 million, or less than 1 percent, in2001.  The wireline and wirelessacquisitions accounted for $133.5 million of the overall increase in operatingincome in 2002.  The reduction in operatingincome for 2001 primarily reflected additional goodwill and other intangibleassets amortization of approximately $44.0 million related to the acquisitionsof wireless assets completed in 2000, partially offset by $39.3 million ofadditional operating income attributable to those acquisitions.  In addition to the effects of the changes inrevenues and sales and operating expenses discussed above, reported operatingincome for both 2002 and 2001 included the effects of integration expenses,restructuring and other charges as further discussed below.

 

IntegrationExpenses and Other Charges

A summary of the integration and other charges recorded in 2002 byquarter was as follows:

 
|                                                    |   |
|---------------------------------------------------------|--------|
| **(Millions)**                                          |   | **1st  Quarter** | ** ** | **2nd  Quarter** | ** ** | **3rd  Quarter** | ** ** | **4th  Quarter** | ** ** | **Total** | ** ** |
| Severance and  employee benefit costs                   |   | $ | 13.4 |   | $ | — |   | $ | 3.3 |   | $ | (0.5 | ) | $ | 16.2 |   |
| Lease and  contract termination costs                   |   | 12.4 |   | — |   | 2.2 |   | (0.5 | ) | 14.1 |   |
| Computer system  conversion and other integration costs |   | 3.4 |   | 9.0 |   | 8.6 |   | — |   | 21.0 |   |
| Write-down of investment  in business venture           |   | — |   | — |   | — |   | 42.3 |   | 42.3 |   |
| Write-down of  cell site equipment                      |   | 7.1 |   | — |   | — |   | — |   | 7.1 |   |
| Write-down of  software development costs               |   | 4.4 |   | — |   | — |   | — |   | 4.4 |   |
| Branding and  signage costs                             |   | — |   | — |   | 7.8 |   | — |   | 7.8 |   |
| Equipment  removal and other disposal costs             |   | 2.2 |   | — |   | — |   | — |   | 2.2 |   |
| Total  integration expenses and other charges           |   | $ | 42.9 |   | $ | 9.0 |   | $ | 21.9 |   | $ | 41.3 |   | $ | 115.1 |   |
| Number of  employees terminated                         |   | 910 |   | — |   | 212 |   | — |   | 1,122 |   |
| Number of lease  sites terminated                       |   | 31 |   | — |   | 7 |   | 2 |   | 40 |   |

 

On December 13, 2002, ALLTEL and Bradford &Bingley Group announced both companies had agreed to discontinue a businessventure.  The business venture, ALLTELMortgage Solutions, Ltd., was created in 2000 to provide mortgageadministration and information technology products to the mortgage lendingindustry in the United Kingdom. Unfortunately, the existing business climate in the United Kingdomlimited the business venture’s ability to leverage the business across a broadbase of customers.  As a result of thisannouncement, ALLTEL recorded a write-down of its investment in the businessventure, which primarily consisted of capitalized software development coststhat had no alternative future use or functionality.  The write-down also included unamortized leasehold improvementsand other costs to unwind the business venture.  During the fourth quarter of 2002, the Company also recordedlease termination costs of $1.5 million related to the closing of two data processingcenters.  The lease termination costsreflected the estimated minimum contractual commitments over the ensuing one totwo years to terminate leases associated with these operating locations.  The Company also recorded a $2.5 millionreduction in the liabilities associated with the restructuring of its CLECoperations initiated during the first quarter of 2002, as discussed below.  The reduction primarily reflecteddifferences between estimated and actual costs to exit certain CLEC markets andconsisted of $2.0 million in lease termination costs and $0.5 million inseverance and employee benefit costs.

 

During the third quarter of 2002, the Company recordeda restructuring charge of $5.5 million consisting of severance and employeebenefit costs related to a planned workforce reduction and lease terminationcosts primarily related to the closing of seven product distributioncenters.  The lease termination costsconsisted of $1.2 million, primarily representing the estimated minimumcontractual commitments over the ensuing one to four years for operatinglocations that the Company abandoned, net of anticipated sublease income.  The lease termination costs also included anadditional $1.0 million to reflect the revised estimated costs, net ofanticipated sublease income, to terminate leases associated with four operatinglocations.  ALLTEL had previouslyrecorded $9.1 million in lease termination costs related to these fourlocations ($2.8 million during the first quarter of 2002 and $6.3 million in1999), as further discussed below.  Theadditional charge reflected a further reduction in expected sublease incomeattributable primarily to softening in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 212 employees primarily in theCompany’s information services and product distribution operations.  As of December 31, 2002, the Company hadpaid $2.7 million in severance and employee-related expenses, and all of theemployee reductions had been completed.

 

In connection with the purchase of wireline propertiesin Kentucky from Verizon and wireless properties from CenturyTel (see Note 3 tothe consolidated financial statements), the Company incurred branding andsignage costs of $7.8 million during the third quarter of 2002.  In connection with these acquisitions, theCompany also incurred computer system conversion and other integration costsduring each of the first three quarters of 2002.  These expenses

 

F-6

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included internal payroll and employee benefit costs,contracted services, and other computer programming costs incurred inconnection with expanding ALLTEL’s customer service and operations supportfunctions to handle increased customer volumes resulting from the acquisitionsand to convert Verizon’s customer billing and operations support systems toALLTEL’s internal systems.

 

In 2001, during the evaluation of its existing CLECoperations, the Company determined that a business model that relied heavily oninterconnection with other carriers had limited potential for profitablyacquiring market share.  Accordingly, inJanuary 2002, the Company announced its plans to exit its CLEC operations inseven states representing less than 20 percent of ALLTEL’s CLEC accesslines.  In the course of exiting thesemarkets, ALLTEL honored all existing customer contracts, licenses and otherobligations and worked to minimize the inconvenience to affected customers bymigrating these customers to other service providers.  During the first quarter of 2002, the Company also consolidatedits call center and retail store operations. In connection with these activities, the Company recorded arestructuring charge consisting of severance and employee benefit costs relatedto a planned workforce reduction, costs associated with terminating certainCLEC transport agreements and lease termination fees incurred with the closingof certain retail and call center locations. In exiting the CLEC operations, the Company also incurred costs todisconnect and remove switching and other transmission equipment from centraloffice facilities and expenses to notify and migrate customers to other serviceproviders.  ALLTEL also wrote offcertain capitalized software development costs that had no alternative future useor functionality.  The restructuringplans, completed in March 2002, provided for the elimination of 910 employeesprimarily in the Company’s sales, customer service and network operationssupport functions.  As previouslydiscussed, in the fourth quarter of 2002, ALLTEL reduced the liabilitiesassociated with these restructuring plans by $2.5 million.  As of December 31, 2002, the Company hadpaid $11.5 million in severance and employee-related expenses, and all of theemployee reductions had been completed.

 

The $12.4 million in lease and contract terminationcosts recorded in the first quarter of 2002 consisted of $5.0 million,representing the estimated minimum contractual commitments over the next one tofive years for 31 operating locations that the Company abandoned, net ofanticipated sublease income.  The leaseand contract termination costs also included $3.6 million of costs to terminatetransport agreements with six interexchange carriers.  The Company also recorded an additional $2.8 million to reflectthe revised estimated costs, net of anticipated sublease income, to terminateleases associated with four operating locations.  ALLTEL had previously recorded $6.3 million in lease terminationcosts related to these four locations in 1999. The additional charge reflected a reduction in expected sublease incomeprimarily due to softening in the commercial real estate market and thebankruptcy filings by two sublessees. Finally, the lease termination costs also included $1.0 million ofunamortized leasehold improvement costs related to the abandoned locations.

 

In conjunction with a product replacement programinitiated by a vendor in 2001, the Company exchanged certain used cell siteequipment for new equipment.  Theexchange of cell site equipment began during the third quarter of 2001 andcontinued through the first quarter of 2002. As the equipment exchanges were completed, the Company recordedwrite-downs in the carrying value of the used cell site equipment to fairvalue.

 

During 2001, the Company restructured its regionalcommunications, information services, product distribution and corporateoperations.  In connection with theserestructuring efforts, ALLTEL recorded restructuring charges during each of thefour quarters of 2001.  The Company alsorecorded write-downs in the carrying value of certain cell site equipment tofair value in connection with the product replacement program previouslydiscussed.

 

A summary of the restructuring and other chargesrecorded in 2001 by quarter was as follows:

 
|                                      |   |
|-------------------------------------------|--------|
| **(Millions)**                            |   | **1st  Quarter** |   | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |   | **Total** |   |
| Severance and  employee benefit costs     |   | $ | 54.9 |   | $ | 1.6 |   | $ | 5.5 |   | $ | 0.1 |   | $ | 62.1 |   |
| Lease and  contract termination costs     |   | 5.2 |   | 0.5 |   | 0.4 |   | — |   | 6.1 |   |
| Write-down of  software development costs |   | 8.9 |   | — |   | — |   | — |   | 8.9 |   |
| Write-down of  cell site equipment        |   | — |   | — |   | 9.5 |   | 5.6 |   | 15.1 |   |
| Total  restructuring and other charges    |   | $ | 69.0 |   | $ | 2.1 |   | $ | 15.4 |   | $ | 5.7 |   | $ | 92.2 |   |
| Number of  employees terminated           |   | 1,247 |   | 170 |   | 216 |   | 11 |   | 1,644 |   |
| Number of lease  sites terminated         |   | 48 |   | 10 |   | 2 |   | 3 |   | 63 |   |

 

As indicated in the table above, the restructuring charges consisted of$62.1 million in severance and employee benefit costs related to plannedworkforce reductions, $6.1 million in lease termination costs associated withthe closing of

 

F-7

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certain retail and other operating locations and an $8.9 millionwrite-down in the carrying value of certain software development costs.  Included in the severance and employeebenefit component of the restructuring charges were non-cash charges of $22.6million.  These non-cash chargesconsisted of $21.5 million in additional pension and post-retirement benefitcosts related to a special early retirement program offered by the Company toemployees meeting certain age and service requirements and $1.1 million incompensation expense related to the accelerated vesting of certain stockoptions.  Eligible employees who electedthe early retirement incentive received five years of additional vested servicefor purposes of calculating their retirement benefits available under theCompany’s pension and post-retirement benefit plans.  During the first quarter of 2001, 230 employees accepted theretirement incentive offer.  Therestructuring plans were completed in December 2001 and resulted in theelimination of 1,644 employees, including the employees who accepted the earlyretirement incentive.  The work forcereductions occurred primarily in operations management, engineering, sales andthe corporate support functions.  As ofDecember 31, 2002, the Company had paid $39.4 million in severance andemployee-related expenses, and all of the employee reductions had beencompleted.

 

The lease termination costs recorded in 2001 included$5.0 million representing the estimated minimum contractual commitments overthe next one to five years for 63 operating locations that the Companyabandoned, net of anticipated sublease income. The lease termination costs also included $1.1 million of unamortizedleasehold improvement costs related to the abandoned locations.  The write-down in the carrying value ofcertain software development costs resulted from the Company’s formation of abusiness venture with IBM announced in March 2001.  The business venture, which operates as ALLTEL CorebankingSolutions, a majority-owned consolidated subsidiary of ALLTEL, develops andmarkets Corebank, a real-time banking system, to financial serviceorganizations in Europe.  Prior toforming the business venture, ALLTEL had been developing its own real-timeprocessing software.  Following thesigning of the business venture agreement, ALLTEL ceased further development ofits software product and wrote off the portion of the capitalized softwaredevelopment costs that had no alternative future use or functionality.

 

In an effort to realign the cost structure in itsinformation services business, ALLTEL recorded a restructuring charge of $10.1million in 2000.  This charge consistedof $5.9 million in severance and employee benefit costs related to a plannedworkforce reduction and $4.2 million in lease termination costs related to theconsolidation of certain operating locations. The lease termination costs represented the estimated minimumcontractual commitments over the next one to four years for leased facilitiesthat the Company abandoned, net of anticipated sublease income.  As of December 31, 2001, ALLTEL had paid allof the severance and employee-related expenses and completed all of thescheduled employee reductions.

 

In connection with ALLTEL’s purchase of wirelessassets in Louisiana from SBC and the Company’s exchange of wireless assets withBell Atlantic and GTE, the Company recorded integration expenses and othercharges of $19.9 million in 2000.  Thesecharges consisted of $14.6 million in branding and signage costs and $5.3million in severance and employee-related expenses related to a plannedworkforce reduction.  The integrationplan provided for the elimination of 22 employees in the Company’s wirelessoperations management, engineering and sales support functions.  During 2000, the Company paid $5.3 millionin severance and employee-related expenses and completed all of the plannedemployee reductions.

 

As a result of completing the restructuring of itswireline operations initiated in September 1999, the Company recorded a $2.1million reduction in the liabilities associated with this restructuring plan in2000.  The adjustment reflecteddifferences between estimated and actual severance costs paid and a reductionin the number of employees to be terminated under the plan.  During 2000, the Company also recorded a$2.5 million reduction in the liabilities associated with its merger andintegration activities initiated during 1999. The reduction consisted of decreases in estimated severance costs of$2.3 million and $0.2 million, respectively, related to the 1999 acquisitionsof Aliant Communications Inc. (“Aliant”) and Liberty Cellular, Inc.(“Liberty”).  The adjustments primarilyreflected a reduction in the expected number of Aliant employees to beterminated under the merger and integration plans, as well as differencesbetween actual and estimated severance costs paid.  As of December 31, 2002, the remaining unpaid liability relatingto ALLTEL’s acquisitions of Aliant and Liberty was $1.5 million and consistedof unpaid severance and employee-related expenses.

 

As of December 31, 2002, the remaining unpaidliability related to the Company’s integration and restructuring activities was$15.7 million, consisting of severance and employee-related expenses of $3.6million and lease cancellation and contract termination costs of $12.1million.  Cash outlays for the remainingemployee-related expenses and lease termination costs will be disbursed overthe ensuing 12 to 48 months.  Fundingfor the remaining unpaid liability will be internally financed from operatingcash flows.  The integration expensesand other charges decreased net income $62.5 million, $54.8 million and $15.0million for the years ended December 31, 2002, 2001 and 2000,respectively.  (See Note 9 to theconsolidated financial statements for additional information regarding thesecharges.)  The integration expenses andother charges discussed above are not allocated to the Company’s businesssegments, as management evaluates segment performance excluding the effects ofthese items.

 

F-8

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| Non-Operating  Income (Expense), Net            |   |     |   |     |   |     |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(Millions)**                                  |   | **2002** |   | **2001** |   | **2000** |   |
| Equity earnings  in unconsolidated partnerships |   | $        | 65.8   |     | $      | 57.0     |   | $ | 120.5 |   |
| Minority  interest in consolidated partnerships |   | (69.9    | )      | (71.8    | )      | (97.2    | )      |
| Other income,  net                              |   | 2.4      |   | 12.8     |   | 24.0     |   |
| Non-operating  income (expense), net            |   | $        | (1.7   | )        | $      | (2.0     | )      | $ | 47.3 |   |

 

Non-operating expense, net decreased $0.3 million, or15 percent, in 2002 and increased $49.3 million, or 104 percent, in 2001.  Equity earnings in unconsolidatedpartnerships in 2002 included $15.1 million of additional income resulting fromthe acquisition of certain minority partnership interests from CenturyTel, aspreviously discussed.  The increase inequity earnings in 2002 attributable to the CenturyTel acquisition waspartially offset by the fourth quarter 2001 acquisition of a controllinginterest in a Texas wireless partnership, in which the Company previously helda minority ownership interest.  Minorityinterest expense for 2002 included $5.6 million of additional expense resultingfrom the acquisition of certain non-wholly owned partnership interests fromCenturyTel.  The increase in minorityinterest expense attributable to the CenturyTel acquisition was offset in 2002by the transfer to ALLTEL of the remaining ownership interest in two SouthCarolina MSAs as part of the dissolution of a wireless partnership with BellSouthMobility, Inc. (“BellSouth”) that was completed in 2001.  Other income, net for 2002 includedadditional interest income of $8.2 million from investing the cash proceedsfrom ALLTEL’s equity unit and long-term debt offerings, as previously discussed.  Other income, net for 2002 also included netlosses of $12.1 million related to the disposal of property, plant andequipment.  Other income, net for 2001included pretax gains from the sale of miscellaneous stock investments of $8.4million.  The decrease in equityearnings in unconsolidated partnerships in 2001 primarily reflected the sale ofcertain minority investments to Bell Atlantic and GTE completed during 2000 andthe transfer to BellSouth of certain minority investments as part of the dissolutionof the BellSouth partnership.  Thedecrease in minority interest expense in 2001 reflected ALLTEL’s acquisition ofthe remaining ownership interest in a Georgia Rural Service Area (“RSA”)completed in January 2000 and in a Florida RSA completed in August 2000.  Other income, net for 2000 included a pretaxgain of $4.7 million from the sale of a minority interest in a wirelessproperty and pretax gains of $16.7 million realized from the sale ofmiscellaneous stock investments.

 

Interest Expense

Interest expense increased $80.9 million, or 30percent, in 2002 and decreased $24.1 million, or 8 percent, in 2001.  The increase in 2002 primarily reflected theadditional interest expense resulting from ALLTEL’s equity unit and long-termdebt offerings to finance the cost of its wireline and wireless propertyacquisitions, as previously discussed. The decrease in interest expense in 2001 primarily reflected reductionsin both the weighted average borrowing amount and interest rates applicable toALLTEL’s commercial paper program.  Thedecrease in interest expense attributable to reduced borrowings outstandingunder the commercial paper program was partially offset by additional interestcosts related to the $425.0 million of long-term debt assumed by ALLTEL in completingthe wireless property exchange with GTE.

 

Gain on Disposal ofAssets, Write-Down of Investments and Other

In 2002, the Company recorded a pretax gain of $22.1million from the sale of a wireless property in Pennsylvania to VerizonWireless.  The Company also recordedpretax write-downs totaling $15.1 million related to its investment in HughesTele.com Limited (“HTCL”).  The initialwrite-down of $12.5 million was recorded during the second quarter of 2002 inconnection with HTCL’s agreement to merge with a major Indiantelecommunications company and an other-than-temporary decline in the fairvalue of HTCL’s common stock.  InDecember 2002, ALLTEL exchanged its shares of HTCL for non-voting, mandatoryredeemable convertible preferred shares of Tata Teleservices Limited (“Tata”),a privately held Indian company. Subsequently, ALLTEL decided to liquidate this investment by selling theTata preferred shares.  The additional$2.6 million write-down of the Tata investment recorded in the fourth quarter of2002 reflected the difference between the carrying amount of the Tata preferredshares and the estimated sales proceeds to be realized by ALLTEL uponcompletion of the sale, which occurred in February 2003.  During 2002, the Company also recorded apretax adjustment of $4.8 million to reduce the gain recognized from thedissolution of the wireless partnership with BellSouth involving wirelessproperties in four states.  As discussedbelow, this gain was initially recorded in 2001.  This additional adjustment reflected a true up for cashdistributions payable to BellSouth in conjunction with the dissolution of thepartnership.  In 2002, the Company alsorecorded a pretax write-down of $1.2 million related to an other-than-temporarydecline in ALLTEL’s investment in Airspan Networks, Inc., a provider ofwireless telecommunications equipment. These transactions increased net income $0.6 million in 2002.

 

In 2001, ALLTEL recorded pretax gains of $347.8million from the sale of 20 PCS licenses to Verizon Wireless.  The Company also recorded a pretax gain of$9.5 million upon the dissolution of the partnership with BellSouth.  Upon dissolution, the partnership’s assetswere distributed to the partners at fair value resulting in a gain forfinancial reporting purposes.  ALLTELalso recorded pretax gains of $3.2 million from the sale of certain investmentsand prepaid $73.5 million of long-term debt prior to its stated maturitydate.  In connection with the earlyretirement of that debt, ALLTEL

 

F-9

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incurred pretax termination fees of $2.9 million.  These transactions increased net income$212.7 million in 2001.

 

During 2000, the Company recorded pretax gains of$1,345.5 million from the exchange of wireless properties with Bell Atlanticand GTE.  The Company also recordedpretax gains of $36.0 million from the sale of its PCS operations in Birminghamand Mobile, Ala. and nine other PCS licenses, including the license covering thePensacola, Fla. market.  The sales ofthe Mobile, Ala. and Pensacola, Fla. PCS assets were necessary in order forALLTEL to meet the U.S. Department of Justice guidelines regarding the overlapof wireless properties so that the Company could complete the wireless assetexchanges with Bell Atlantic and GTE. The Company also recorded pretax gains totaling $562.0 million from thesale of equity securities, including ALLTEL’s remaining investment in WorldCom,Inc. (“WorldCom”) common stock.  Inaddition, the Company recorded a pretax write-down of $15.0 million on itsinvestment in APEX Global Information Services, Inc. (“APEX”), a provider ofInternet access services.  The write-offwas recorded due to adverse market conditions and APEX’s bankruptcy filing.  These transactions increased net income$1,124.3 million in 2000. (See Note 10 to the consolidated financial statementsfor additional information regarding these items.)

 

Income Taxes

Income tax expense decreased $163.1 million, or 23percent, in 2002 and $681.0 million, or 49 percent, in 2001.  The decreases in income tax expense for bothyears primarily reflected the tax-related effects of the integration expensesand other charges, gain on disposal of assets and write-down of investmentspreviously discussed.  The tax-relatedeffects of these items accounted for $175.3 million and $681.8 million of theoverall decreases in income tax expense in 2002 and 2001, respectively, andwere partially offset by growth in segment income as further discussed belowunder “Results of Operations by Business Segment”.  Income tax expense for 2002 also reflected an approximate twopercent reduction in the Company’s effective income tax rate from 2001 as aresult of no longer amortizing goodwill and other indefinite-lived intangibleassets for financial statement purposes pursuant to SFAS No. 142.  Income tax expense for 2001 also reflected aone percent reduction in the Company’s effective state income tax rate from2000, as state income tax expense for 2000 included the effects of certain gaintransactions taxed in states with statutory rates that exceeded ALLTEL’soverall state tax rates for its communications operations.

 

Cumulative Effectof Accounting Change

In 2001, ALLTEL changed the method of accounting forthe defined benefit pension plan of a subsidiary acquired in 1999 to conform tothe accounting principles followed by the ALLTEL Pension Plan (the “ALLTELPlan”), a defined benefit pension plan covering substantially all employeesworking in the Company’s communications and corporate operations.  The change in accounting was completed inconjunction with the Company’s decision to conform future benefits earned underthe subsidiary’s plan with the ALLTEL Plan, effective June 1, 2001.  The change in accounting, retroactive toJanuary 1, 2001, affected both the computation and amortization of unrecognizedactuarial gains and losses for purposes of computing annual pension costrelated to the subsidiary’s pension plan. The change included modifying the method by which the market-relatedvalue of plan assets was determined from a calculated five-year average toactual fair value.  In addition,unrecognized actuarial gains or losses that exceed 17.5 percent of the greaterof the projected benefit obligation or market-related value of plan assets willbe amortized on a straight-line basis over five years.  Unrecognized actuarial gains and lossesbelow the 17.5 percent corridor will be amortized over the average remainingservice life of active plan participants (approximately 13 years).  Under the method previously followed by thesubsidiary’s plan, only unrecognized actuarial gains and losses in excess of 10percent of the greater of the projected benefit obligation or market-relatedvalue of plan assets were amortized over the average remaining service life ofactive plan participants.  ALLTELbelieves the changes in computing the market-related value of plan assets andaccelerating the amortization periods are preferable because these changesresult in more timely recognition of actuarial gains and losses in computingannual pension cost related to the subsidiary’s plan, and achieve consistencywith the ALLTEL Plan.  The effect ofthese changes in 2001 was to increase pension income by $1.7 million and incomebefore cumulative effect of accounting change by $1.0 million.

 

Effective January 1, 2000, the Company changed itsmethod of recognizing wireless access revenues and certain customer activationfees to conform ALLTEL’s revenue recognition policies to the requirements ofthe Securities and Exchange Commission’s Staff Accounting Bulletin No. 101,“Revenue Recognition in Financial Statements”. Prior to January 1, 2000, the Company recognized monthly non-refundablewireless access revenues when billed in accordance with contractualarrangements with customers.  With thechange in accounting, the Company recognizes wireless access revenues over theperiod in which the corresponding services are provided.  Because ALLTEL bills its customers on acycle basis throughout the month, this accounting change resulted in thecontinuous deferral of approximately 15 days of wireless access revenue.  In addition, ALLTEL previously recognizedwhen billed fees assessed to communications customers to activate service.  With the change in accounting, the Companynow recognizes these fees over the expected life of the customer.  These changes in revenue recognitiondecreased income before cumulative effect of accounting change by $4.6 million,or $.01 per share, in 2000. (See Note 2 to the consolidated financialstatements for additional information regarding these changes in accountingprinciples.)

 

F-10

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Net income decreased $142.7 million, or 13 percent, in2002 and $861.8 million, or 45 percent, in 2001.  Basic and diluted earnings per share both decreased 13 percent in2002 and 44 percent in 2001.  Aspreviously discussed, operating results for 2002 reflected the effects of nolonger amortizing indefinite-lived intangible assets, additional net interestcost due to prefunding ALLTEL’s wireline and wireless acquisitions, integrationexpenses and other charges, and the write-down in receivables due to aninterexchange carrier’s bankruptcy filing. Reported net income and earnings per share for all three years alsoincluded the effects of gains realized from the exchange or sale of assets,investment write-downs, termination fees on the early retirement of long-termdebt and the cumulative effect of accounting changes.  The effects of these items accounted for $171.3 million and$889.8 million of the overall decreases in net income in 2002 and 2001,respectively, and were partially offset by growth in segment income, as furtherdiscussed below under “Results of Operations by Business Segment”.  Excluding the effects of these items in eachyear, net income would have increased $28.6 million, or 3 percent, in 2002 and$28.0 million, or 3 percent, in 2001 and basic and diluted earnings per shareboth would have increased 3 percent in 2002 and 4 percent in 2001.

 

Average Common SharesOutstanding

The average number of common shares outstandingdecreased slightly in 2002 and decreased 1 percent in 2001.  The decreases in both periods were primarilydue to the Company’s repurchase of 3.3 million of its common shares during thesecond quarter of 2001, as further discussed below.  The effects on the average number of common shares outstandingresulting from the repurchase of stock were partially offset in 2002 and 2001by additional shares issued upon the exercise of options granted under ALLTEL’semployee stock-based compensation plans.

 

**RESULTS OF OPERATIONS BY BUSINESSSEGMENT**

Communications-WirelessOperations
| **(Dollars  in millions, customers in thousands)** |   | **2002** |    | **2001** |   | **2000** |   |
|----------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Revenues and  sales:                               |   |     |    |     |   |     |   |
| Service revenues                                   |   | $        | 3,999.2 |     | $      | 3,639.8  |   | $ | 3,349.6 |   |
| Product sales                                      |   | 161.0    |    | 192.2    |   | 187.0    |   |
| Total revenues  and sales                          |   | 4,160.2  |    | 3,832.0  |   | 3,536.6  |   |
| Costs and  expenses:                               |   |     |    |     |   |     |   |
| Cost of services                                   |   | 1,213.8  |    | 1,011.1  |   | 1,011.9  |   |
| Cost of products  sold                             |   | 430.6    |    | 467.1    |   | 322.9    |   |
| Selling, general,  administrative and other        |   | 990.3    |    | 907.1    |   | 854.2    |   |
| Depreciation and  amortization                     |   | 577.6    |    | 619.0    |   | 480.8    |   |
| Total costs and  expenses                          |   | 3,212.3  |    | 3,004.3  |   | 2,669.8  |   |
| Segment income                                     |   | $        | 947.9   |     | $      | 827.7    |   | $ | 866.8 |   |
| Total customers                                    |   | 7,601.6  |    | 6,683.0  |   | 6,241.6  |   |
| Gross customer  additions                          |   | 3,157.0  |    | 2,297.6  |   | 2,906.6  |   |
| Net customer  additions                            |   | 1,032.5  |    | 441.4    |   | 1,223.0  |   |
| Prepaid customer  unit adjustment                  |   | (113.9   | )       | —   |   | —   |   |
| Market  penetration rate                           |   | 12.9     | %       | 13.5     | %      | 12.6     | %      |
| Postpaid  customer churn                           |   | 2.23     | %       | 2.34     | %      | 2.33     | %      |
| Total churn                                        |   | 2.50     | %       | 2.41     | %      | 2.50     | %      |
| Average revenue  per customer per month            |   | $        | 46.97   |     | $      | 47.09    |   | $ | 49.40 |   |
| Cost to acquire  a new customer                    |   | $        | 304     |     | $      | 302      |   | $ | 307 |   |

 

Excluding the effect of acquisitions, ALLTEL addedmore than 2.4 million gross customers in 2002, compared to nearly 2.3 milliongross customers in 2001 and 2.1 million in 2000.  As a result of this increase in gross customer additions, thetotal number of wireless customers served by ALLTEL increased 14 percent during2002, compared to an annual growth rate in customers of 7 percent in 2001.  As previously discussed, on August 1, 2002,the Company completed the purchase of substantially all of the wireless assetsof CenturyTel.  This acquisitionaccounted for approximately 762,000 of the overall increase in wirelesscustomers that occurred during 2002. During the third quarter of 2002, in integrating the operations of theformer CenturyTel properties, ALLTEL upgraded the acquired markets to a CDMA-basednetwork, launched the ALLTEL brand name and began offering regional andnational rate plans.  The Company alsostandardized disconnect policies across its entire wireless operations, theprimary effects of which were a two-month advancement of customer disconnectsamong the Company’s prepaid customer segment and a reduction of ALLTEL’scustomer base by approximately 114,000 customers.  This policy change did not affect reported operating results,because the customer accounts disconnected were inactive.  Overall, the Company’s wireless market penetrationrate (number of customers as a percent of the total population in ALLTEL’sservice areas) decreased to 12.9 percent as of December 31, 2002, primarily dueto lower penetration levels in the markets acquired from CenturyTel.

 

F-11

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In addition to the effects of heightened competitionand increased penetration levels in the wireless industry, economic factors,including weakening customer demand and consumer credit, also affected customergrowth rates in the wireless industry during 2002.  The level of customer growth during 2003 will be dependent uponthe Company’s ability to attract new customers in an increasingly competitivemarketplace currently supporting up to seven competitors in each market.  The Company will continue to focus itsefforts on sustaining value-added customer growth by managing its distributionchannels and customer segments, offering attractively priced rate plans andenhanced services and other features, selling additional phones to existingcustomers and pursuing strategic acquisitions.

 

The Company continues to focus its efforts on loweringpostpaid customer churn (average monthly rate of customer disconnects).  To improve customer retention, the Companyoffers competitively priced rate plans, proactively analyzes customer usagepatterns and migrates customers to digital handsets due to technologyadvancements.  In addition, the Companycontinues to upgrade its telecommunications network in order to provideenhanced service offerings to customers. These efforts helped to reduce postpaid customer churn in 2002, despiteheightened competition and declining economic conditions.  Total churn increased in 2002 primarily dueto the standardization of disconnect policies previously discussed and anincrease in the actual number of prepaid customer disconnects during the fourthquarter of 2002.

 

Wireless revenues and sales increased $328.2 million,or 9 percent, in 2002 and $295.4 million, or 8 percent, in 2001.  Service revenues increased $359.4 million,or 10 percent, in 2002 and $290.2 million, or 9 percent, in 2001.  The increases in service revenues in bothyears primarily reflected growth in ALLTEL’s customer base and the resultingincrease in access revenues.  Theacquisition of the CenturyTel properties accounted for approximately $179.3million of the overall increase in service revenues and $186.4 million of theoverall increase in total revenues and sales in 2002.  The acquisition of wireless properties in Louisiana and the exchangeof wireless properties with Bell Atlantic and GTE accounted for approximately$248.9 million of the overall increase in service revenues and $269.2 millionof the overall increase in total revenues and sales in 2001.  In addition to the effects of theacquisitions, service revenues in 2002 and 2001 also reflected increases in thesale of enhanced services, including call waiting, call forwarding, three-waycalling, voicemail and equipment protection plans.  Revenues from these enhanced services increased $27.3 million and$33.2 million in 2002 and 2001, respectively, reflecting increased demand forthese service offerings.  Fees assessedfor early disconnection, late payment and reconnection services increased $54.4million and $14.4 million in 2002 and 2001, respectively, reflectingenhancements to ALLTEL’s billing systems to consistently charge for theseservices and the overall decline in economic conditions and weakening consumercredit.  Service revenue growth in 2002and 2001 attributable to customer growth, acquisitions, increased accessrevenues and additional revenues earned from enhanced services and fees werepartially offset by lower airtime and retail roaming revenues and a decrease inwholesale roaming rates.  The decreasein airtime and retail roaming revenues primarily reflected the expansion oflocal, regional and national calling areas. Average revenue per customer per month in both 2002 and 2001 continuedto be adversely affected by decreased wholesale roaming rates, the effects ofwhich were partially offset in 2002 by increased sales of the Company’shigher-yield Total and National Freedom rate plans.  In addition to the effects of decreased wholesale roaming rates,the decrease in average revenue per customer per month in 2001 reflected theeffects of the local, regional and national calling plans and continuedpenetration into more competitive retail and non-traditional market segments.

 

Service revenue growth also reflected increases inrental revenues, which increased $16.0 million and $21.1 million in 2002 and2001, respectively.  The increases inboth years primarily resulted from ALLTEL’s agreement with American TowerCorporation (“American Tower”) to lease to American Tower 1,773 of the Company’scell site towers for $531.9 million of cash paid in advance.  This transaction was structured to close inseveral phases and resulted in 869 tower closings in the second quarter of2001, 537 tower closings in the third quarter of 2001 and 342 tower closings inthe fourth quarter of 2001.  The finalphase of the transaction, involving 25 towers, was completed in February2002.  Proceeds from this leasingtransaction are recognized as service revenues on a straight-line basis overthe fifteen-year lease term.

 

Service revenue growth during 2003 will depend uponALLTEL’s ability to maintain market share in an increasingly competitivemarketplace by adding new customers, retaining existing customers, increasingcustomer usage, and selling additional enhanced services.

 

Product sales decreased $31.2 million, or 16 percent,in 2002 and increased $5.2 million, or 3 percent, in 2001.  Excluding the effects of the propertyacquisitions completed in 2002 and 2000, product sales would have decreased$38.3 million, or 20 percent, and $15.0 million, or 10 percent, in 2002 and2001, respectively.  Net of the effectsof the acquisitions, the decreases in product sales in 2002 and 2001 wereprimarily due to lower retail prices driven by increased competition.  Reduced wholesale volumes, as compared to2001, also contributed to the decrease in product sales in 2002.

 

F-12

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Cost of services increased $202.7 million, or 20percent, in 2002.  The acquisition ofthe CenturyTel properties accounted for approximately $48.2 million of theoverall increase in cost of services in 2002. In addition to the effects of the CenturyTel acquisition, cost ofservices for 2002 reflected increases in network-related costs, customer serviceexpenses and bad debts.  Network-relatedexpenses increased $34.2 million in 2002 primarily due to increased networktraffic resulting from customer growth and expansion of calling areas.  Customer service expense increased $20.1million in 2002 reflecting the expansion of ALLTEL’s customer service andoperations support functions to handle increased customer volumes resultingfrom the CenturyTel acquisition.  Baddebt expense increased $100.2 million in 2002 primarily reflecting the effectsof fourth quarter 2001 marketing programs directed toward the credit-challengedcustomer segment and weakening consumer credit, as previously noted.  Cost of services decreased $0.8 million, orless than 1 percent, in 2001.  The decreasein 2001 reflected a $54.0 million reduction in losses sustained from fraud dueto the Company’s continuing efforts to control unauthorized usage of itscustomers’ wireless telephone numbers that results in unbillable fraudulentroaming activity.  Cost of services for2001 also reflected reduced customer service expenses of $63.7 million due toreduced customer retention costs and the effects of the Company’s 2001restructuring efforts.  The reducedlosses sustained from fraud and decreased customer service expenses werepartially offset by $62.0 million of additional expenses attributable to thewireless property acquisitions completed in 2000, increased network-relatedexpenses of $22.2 million and additional bad debt expense of $34.6 million.

 

Cost of products solddecreased $36.5 million, or 8 percent, in 2002.  Excluding the effects of the CenturyTel acquisition, cost ofproducts sold would have decreased $51.3 million, or 11 percent, consistentwith the overall decline in product sales discussed above.  Cost of products sold increased $144.2million, or 45 percent, in 2001 consistent with the growth in gross customeractivations, the selling of higher-priced digital phones and the Company’scontinuing efforts to migrate customers from analog to digital equipment.  The acquisitions of wireless propertiescompleted in 2000 accounted for $67.6 million of the overall increase in costof products sold in 2001.

 

Selling, general,administrative and other expenses increased $83.2 million, or 9 percent, in2002 and $52.9 million, or 6 percent, in 2001. The acquisition of the CenturyTel properties accounted for approximately$41.8 million of the overall increase in selling, general, administrative andother expenses in 2002.  In addition tothe effects of the CenturyTel property acquisition, selling, general,administrative and other expenses for 2002 reflected increased commission costsof $46.6 million consistent with the growth in gross customer additions andincreased sales of the Company’s Total and National Freedom rate plans.  Commissions expense also reflected increasedcommissions paid to outside agents reflecting a shift in the Company’sdistribution and product mix, as further discussed below.  Commission rates paid to the Company’sinternal sales force and outside agents are higher on the sales of theCompany’s more profitable Total and National Freedom rate plans than comparablerates paid on other lower-margin rate plans offered by the Company.  Selling, general, administrative and otherexpenses for 2002 and 2001 also reflected increases in regulatory assessmentfees of $12.1 million and $23.6 million, respectively, consistent with thegrowth in wireless customers.  Theincrease in selling, general, administrative and other expenses in 2002attributable to the CenturyTel acquisition and higher commissions expense andregulatory fees was partially offset by decreased advertising costs of $21.0million.  The decrease in advertisingexpense reflected discounted pricing received by ALLTEL due to purchasingadvertising in bulk, as a result of centralizing the Company’s advertisingefforts.  The acquisitions of wirelessproperties completed in 2000 accounted for $46.9 million of the overallincrease in selling, general, administrative and other expenses in 2001.  Advertising costs increased $42.5 million in2001 primarily attributable to a nationwide branding campaign and otherpromotional activities.  The increase inselling, general, administrative and other expense in 2001 attributable to theacquisitions and increased advertising costs and regulatory fees was partiallyoffset by decreased commission costs of $34.1 million, primarily reflecting ashift in the Company’s distribution mix, as further discussed below.  A reduction in administrative expenses,primarily resulting from the Company’s 2001 restructuring efforts, also favorablyimpacted selling, general, administrative and other expenses in 2001.

 

Depreciation andamortization expense decreased $41.4 million, or 7 percent, in 2002 andincreased $138.2 million, or 29 percent, in 2001.  The decrease in depreciation and amortization expense in 2002,primarily resulted from the effects of no longer amortizing goodwill and otherindefinite-lived intangible assets pursuant to SFAS No. 142, as previouslydiscussed.  Excluding the effects of amortizationof indefinite-lived intangible assets, depreciation and amortization expensewould have increased $49.3 million, or 9 percent, in 2002, reflecting growth inwireless plant in service and $16.4 million of additional depreciation expenseattributable to the CenturyTel acquisition. Conversely, the increase in depreciation and amortization expense in2001 reflected additional amortization of goodwill and other intangible assetsof $43.9 million associated with the acquisitions of wireless assets completedin 2000.  In addition, depreciationexpense increased $94.3 million, reflecting growth in wireless plant in serviceand $53.4 million of additional depreciation expense attributable to the 2000wireless property acquisitions.

 

F-13

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Wireless segment income increased $120.2 million, or15 percent, in 2002, primarily due to the growth in revenues and sales notedabove.  The acquisition of theCenturyTel properties accounted for approximately $65.2 million of the overallincrease in segment income in 2002.  Inaddition to reflecting the CenturyTel acquisition, segment income in 2002 wasalso favorably affected by the cessation of amortizing goodwill and otherindefinite-lived intangibles assets in accordance with SFAS No. 142, aspreviously discussed.  Conversely,segment income in 2002 was adversely affected by $3.1 million related to thewrite-down of receivables due to an interexchange carrier’s bankruptcyfiling.  Excluding the effects ofamortization of indefinite-lived intangible assets and the write-down ofreceivables, wireless segment income would have increased $32.7 million, or 4percent, in 2002.  Wireless segmentincome decreased $39.1 million, or 5 percent, in 2001, as growth in operatingrevenues was more than offset by increased costs and expenses as discussedabove.

 

The cost to acquire a newwireless customer represents sales, marketing and advertising costs and the netequipment cost, if any, for each new customer added.  The increase in per unit customer acquisition costs in 2002primarily reflected the increase in commissions expense.  As previously discussed, the increase during2002 in commissions paid to outside agents reflected a shift in the Company’sdistribution and product mix, as proportionately higher sales volumes weregenerated from ALLTEL’s external sales distribution channels.  Conversely, the decrease in customeracquisition costs in 2001 primarily resulted from lower commissions expense dueto a shift in the Company’s distribution mix, as proportionately higher salesvolumes were generated from ALLTEL’s internal sales distribution channels.  Commissions paid to outside agents alsodecreased in 2001, reflecting a shift in the mix of the Company’s externaldistribution channels from national to local dealers.  The decrease in cost to acquire a new customer in 2001attributable to lower commission costs was partially offset by increasedadvertising costs as noted above.  Inaddition, margins earned from the sale of digital handsets and otheraccessories declined driven by lower retail prices, reflecting very competitivemarket conditions.  The Company hasexpanded its internal sales distribution channels through Company retail storesand kiosks located in shopping malls and other retail outlets and massmerchandisers.  During 2002 and 2001,approximately 70 percent and 80 percent, respectively, of the gross customeradditions came through ALLTEL’s internal distribution channels.  Incremental sales costs at a Company retailstore or kiosk are significantly lower than commissions paid to dealers.  Although ALLTEL intends to manage the costsof acquiring new customers during 2003 by continuing to enhance its internaldistribution channels, the Company will also continue to utilize its largedealer network.

 

A summary of the integration expenses and othercharges related to the wireless operations that were not included in thedetermination of segment income were as follows for the years ended December31:

 
|                                                    |
|---------------------------------------------------------|
| **(Millions)**                                          |   | **2002** |   | **2001** |   | **2000** |   |
| Severance and  employee benefit costs                   |   | $ | 6.4 |   | $ | 29.3 |   | $ | 5.3 |   |
| Lease and  contract termination costs                   |   | 5.2 |   | 2.8 |   | — |   |
| Computer system  conversion and other integration costs |   | 4.0 |   | — |   | — |   |
| Write-down of  cell site equipment                      |   | 7.1 |   | 15.1 |   | — |   |
| Write-down of  software development costs               |   | 0.3 |   | — |   | — |   |
| Branding and  signage costs                             |   | 4.1 |   | — |   | 14.6 |   |
| Reversal of  previous accrued charges                   |   | — |   | — |   | (2.5 | ) |
| Total  integration expenses and other charges           |   | $ | 27.1 |   | $ | 47.2 |   | $ | 17.4 |   |

 

Regulatory Matters-Wireless Operations

The Company is subject toregulation by the Federal Communications Commission (“FCC”) as a provider ofwireless communications services.  TheTelecommunications Act of 1996 (the “96 Act”) provides wireless carriersnumerous opportunities to provide an alternative to the long-distance and localexchange services provided by local exchange telephone companies andinterexchange carriers.  Wirelesscarriers are also entitled to compensation from other telecommunicationscarriers for calls transmitted from the other carriers’ networks and terminatedon the wireless carriers’ networks. Presently, the Company’s wireless operations do not bill access chargesto interexchange carriers.  In April2001, the FCC released a notice of proposed rulemaking addressing inter-carriercompensation issues.  Under thisrulemaking, the FCC has proposed a “bill and keep” compensation method thatwould overhaul the existing rules governing reciprocal compensation and accesscharge regulation.  The outcome of thisproceeding could change the way ALLTEL receives compensation from othercarriers and its wireless customers.  Atthis time, ALLTEL cannot estimate whether any such changes will occur or, ifthey do, what the effect of the changes on its wireless revenues and expenseswould be.

 

Under rules establishedby the FCC, effective November 24, 2002, all Commercial Mobile Radio Services(“CMRS”) providers were required to participate in a nationwide numberconservation program known as thousand block number pooling in accordance withroll out schedules established by the FCC. CMRS providers must modify their networks to comply with FCC andindustry performance criteria for number pooling, including support for roamingcustomers.

 

F-14

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Number pooling is an FCC mandated program intended toalleviate the shortage of available telephone numbers by requiring carriers toreturn unused numbers in their inventory to a centrally administered pool andtaking assignment of new numbers in blocks of 1,000 instead of the 10,000 numberblocks previously assigned.  FCC rulesalso require that CMRS providers implement wireless local number portability,an intercarrier network function that permits customers to retain theirexisting telephone number when moving from one telecommunications carrier toanother.  On July 26, 2002, compliancewith the FCC requirements for wireless local number portability was extended byone year to November 24, 2003.  Rulesgoverning the number of MSAs in which wireless local number portability must bedeployed, as well as the process for triggering a carrier’s obligation toprovide wireless local number portability in markets both within the top MSAsand below, remain subject to reconsideration by the FCC.  Recently, the FCC denied a request ofVerizon Wireless seeking forbearance of the CMRS provider’s obligation toprovide wireless local number portability. The FCC decision has been appealed to the U.S. Court of Appeals for theDistrict of Columbia Circuit.  Oralarguments related to this appeal are scheduled for April 15, 2003.  Although at this time, the Company cannotfully quantify the effects on its communications operations of implementingwireless local number portability, ALLTEL believes these requirements, when implemented,would result in a significant increase in both its operating costs and customerchurn rates.

 

In addition, wirelessservice carriers must also provide 911 emergency service in a two-phasedapproach.  In phase one, the carriersmust provide service capabilities to determine station locations for originatedcalls.  In phase two, wireless carriersmust determine the location of a caller within fifty meters of an originatedcall.  The second phase requirementswere set to begin by October 1, 2001, but, due to technology unavailability, theCompany requested a limited waiver of these requirements.  On July 26, 2002, the FCC released an ordergranting a temporary stay of the 911 emergency implementation rules as theyapply to the Company.  The FCC orderprovides for a phased-in deployment of an Automatic Location Identification(“ALI”) capable network or handset-based technology to begin on March 1,2003.  ALI capability will permit rapidresponse in situations where callers are disoriented, disabled, unable to speakor do not know their location by allowing for the immediate dispatch ofemergency assistance to the caller’s location. Under the FCC order, the Company must employ handset-based ALItechnology and will be required to (1) begin selling and activating ALI-capablehandsets no later than March 1, 2003; (2) ensure that at least 25 percent ofall new handsets activated are ALI capable no later than May 31, 2003; (3)ensure that at least 50 percent of all new handsets activated are ALI capableno later than

May 31, 2004; and (5)ensure that penetration of ALI capable handsets among its customers reaches 95percent no later than December 31, 2005. ALLTEL began selling ALI capable handsets in June 2002 and expects tocomply with the remaining requirements. Although at this time, the Company cannot fully quantify the effects onits communications operations of implementing ALI technology, ALLTEL believesthese requirements, when fully implemented, could result in a significantincrease in its operating costs.

 

Communications-WirelineOperations
| **(Dollars  in millions, except access lines in thousands)** |   | **2002** |    | **2001** |   | **2000** |   |
|--------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Revenues and  sales:                                         |   |     |    |     |   |     |   |
| Local service                                                |   | $        | 1,017.9 |     | $      | 909.6    |   | $ | 840.4 |   |
| Network access  and long-distance                            |   | 943.5    |    | 855.0    |   | 833.8    |   |
| Miscellaneous                                                |   | 218.3    |    | 200.3    |   | 182.0    |   |
| Total revenues  and sales                                    |   | 2,179.7  |    | 1,964.9  |   | 1,856.2  |   |
| Costs and  expenses:                                         |   |     |    |     |   |     |   |
| Cost of services                                             |   | 645.0    |    | 565.5    |   | 545.6    |   |
| Cost of products  sold                                       |   | 24.8     |    | 28.4     |   | 27.4     |   |
| Selling,  general, administrative and other                  |   | 251.3    |    | 226.3    |   | 246.3    |   |
| Depreciation and  amortization                               |   | 465.6    |    | 412.0    |   | 378.2    |   |
| Total costs and  expenses                                    |   | 1,386.7  |    | 1,232.2  |   | 1,197.5  |   |
| Segment income                                               |   | $        | 793.0   |     | $      | 732.7    |   | $ | 658.7 |   |
| Access lines in  service                                     |   | 3,167.3  |    | 2,612.3  |   | 2,572.3  |   |

 

Wireline revenues and sales increased $214.8 million,or 11 percent, in 2002 and $108.7 million, or 6 percent, in 2001.  Wireline operating revenues for 2000included the effect of the $11.5 million litigation settlement with the GeorgiaPublic Service Commission (the “Georgia PSC”). As reported in Note 13 to the consolidated financial statements, inSeptember 2000, ALLTEL and the Georgia PSC reached a final settlement agreementto resolve all pending litigation involving the two parties.  Under terms of the final agreement, ALLTELagreed to issue a one-time credit of about $25 to approximately 450,000wireline customers in Georgia.  Thecredits were issued to business and residential customers during the fourthquarter of 2000 and totaled $11.5 million. The Company recorded the credits as a reduction in wireline operatingrevenues.  The one-time customer creditswere in addition to other commitments agreed to by ALLTEL under an earlierversion of the settlement agreement signed in April 2000.  As part of the earlier agreement, ALLTELagreed to accelerate

 

F-15

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deployment of digital subscriber lines and Internetservice to its customers in Georgia and to reduce certain optional localcalling plan rates prospectively. ALLTEL also agreed to future reductions in funds received from theGeorgia Universal Service Fund.  Theserevenue reductions totaled approximately $26.0 million in 2001 and $11.7million in 2000.

 

As previously discussed, on August 1, 2002, theCompany completed the purchase from Verizon of wireline properties inKentucky.  This acquisition accountedfor approximately 589,000 of the overall increase in wireline customers thatoccurred during 2002.  Excluding the effectsof the acquisition, customer access lines decreased approximately one percentduring 2002, reflecting declines in both primary and second access lines andALLTEL’s decision to exit CLEC markets in seven states, as previouslydiscussed.  Slower economic growth,along with the effects of substitution of wireless, cable television andhigh-speed access services for the Company’s wireline services, also adverselyaffected the Company’s internal access line growth rates in 2002, and theCompany expects some degree of access line loss to continue in 2003.

 

To maintain revenue growth in 2003, the Company willcontinue to emphasize sales of enhanced services and bundling of its variousproduct offerings including Internet, long-distance and high-speed datatransport services.  Deployment of DSLservice is an important strategic initiative for ALLTEL.  Currently, DSL service is available toapproximately one half of the Company’s wireline customers.  During 2002, the number of DSL customers hasnearly tripled to approximately 70,000 customers.

 

Local service revenues increased $108.3 million, or 12percent, in 2002 and $69.2 million, or 8 percent, in 2001.  Local service revenues for 2000 included theeffect of the Georgia PSC litigation settlement previously discussed.  Excluding the effect of this settlement,local service revenues would have increased $57.7 million, or 7 percent, in2001.  The acquisition of wirelineproperties in Kentucky accounted for $91.6 million of the overall increase inlocal service revenues in 2002, while growth in customer access lines accountedfor $17.2 million of the overall growth in local service revenues in 2001.  In addition to the effects of theacquisition and customer growth, local service revenues in 2002 and 2001 alsoreflected growth in revenues derived from the sales of enhanced products andservices, reflecting increased demand for these services.  Revenues from these enhanced servicesincreased $10.0 million in 2002 and $18.4 million in 2001.  Revenues derived from integrated digitalnetwork services, which increased $3.9 million in 2002 and $8.7 million in2001, and from the sale of equipment protection plans, which increased $3.2million in 2002 and $6.8 million in 2001, also contributed to the growth inlocal service revenues in each year.

 

Network access and long-distance revenues increased$88.5 million, or 10 percent, in 2002 and $21.2 million, or 3 percent, in2001.  The acquisition of wirelineproperties in Kentucky accounted for $79.7 million of the overall increase innetwork access and long-distance revenues in 2002.  In addition to the effects of the acquisition, the increase innetwork access and long-distance revenues in 2002 also reflected higher volumesof network usage and growth in revenues from data services, partially offset byreductions in intrastate toll revenues. Network access and long-distance revenues increased in 2001 primarily asa result of higher volumes of network usage and growth in customer accesslines, partially offset by a reduction in intrastate toll revenues.  Network access and long-distance revenuesalso reflected reductions of $8.4 million in 2002 and $14.6 million in 2001 inrevenues received from the Georgia Universal Service Fund.  These revenue reductions resulted from thelitigation settlement between ALLTEL and the Georgia PSC finalized in 2000noted above.

 

Miscellaneous revenues primarily consisted of chargesfor billing and collections services provided to long-distance companies,customer premise equipment sales, directory advertising and Internetservices.  Miscellaneous revenuesincreased $18.0 million, or 9 percent, in 2002 and $18.3 million, or 10percent, in 2001.  The acquisition ofwireline properties in Kentucky accounted for $12.3 million of the overallincrease in miscellaneous revenues in 2002. In addition to the effects of the acquisition, the increase inmiscellaneous revenues in 2002 also reflected growth in Internet service anddirectory advertising revenues. Internet service revenues increased $9.8 million in 2002, primarily dueto customer growth and an increase in the standard monthly rate charged tocustomers for this service initiated during the fourth quarter of 2001, whiledirectory advertising revenues increased $2.4 million in 2002.  Partially offsetting the growth in Internetservice and directory advertising revenues were declines in customer premiseequipment sales, which decreased $12.2 million.  The decrease primarily occurred in the Company’s CLEC operationsand reflected ALLTEL’s strategic decision in 2002 to exit CLEC operations in sevenmarkets, as previously discussed.  Theincrease in miscellaneous revenues in 2001 primarily resulted from increasedInternet service revenues of $10.8 million and growth in directory advertisingrevenues of $4.1 million.

 

Cost of services increased $79.5 million, or 14percent, in 2002 and $19.9 million, or 4 percent, in 2001.  Cost of services for 2002 included theeffect of the write-down of receivables due to an interexchange carrier’sbankruptcy filing previously discussed. Excluding the effect of this write-down, cost of services would haveincreased $68.6 million, or 12 percent, in 2002.  The acquisition of wireline properties in Kentucky accounted for$52.8 million of the overall increase in cost of services in 2002.  In addition to the effects of theacquisition, cost of services for 2002 reflected increased

 

F-16

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network-related costs of$13.1 million, primarily due to increased network usage.  The increase in cost of services in 2001 wasalso attributable to increased network-related expenses consistent with thegrowth in customer access lines and the resulting increase in network usage.

 

Selling, general,administrative and other expenses increased $25.0 million, or 11 percent, in2002 and decreased $20.0 million, or 8 percent, in 2001.  The acquisition of the wireline propertiesin Kentucky accounted for approximately $22.1 million of the overall increasein 2002.  The reduction in selling,general, administrative and other expenses in 2001 primarily reflected costsavings from the Company’s 2001 restructuring efforts, as previously discussed.

 

Depreciation andamortization expense increased $53.6 million, or 13 percent, in 2002 and $33.8million, or 9 percent, in 2001. Depreciation and amortization expense in 2002 included the effects of nolonger amortizing goodwill in accordance with to SFAS No. 142, as previouslydiscussed.  Excluding the effects ofamortization of goodwill, depreciation and amortization expense would haveincreased $58.2 million, or 14 percent, in 2002, primarily reflecting $37.8million of additional depreciation expense attributable to the acquisition ofwireline properties in Kentucky.  Theincrease in depreciation and amortization expense in 2001 primarily reflectedgrowth in wireline plant in service.

 

Wireline segment income increased $60.3 million, or 8percent, in 2002 and $74.0 million, or 11 percent, in 2001.  Segment income in 2002 was also favorablyimpacted by the effect of no longer amortizing goodwill in accordance with SFASNo. 142.  Conversely, wireline segmentincome for 2002 included $10.9 million of the write-down of receivables due toan interexchange carrier’s bankruptcy filing, as previously discussed.  Excluding the effects of the amortization ofgoodwill and write-down of receivables, wireline segment income would haveincreased $66.7 million, or 9 percent, in 2002.  Net of the effects of the goodwill amortization and receivableswrite-down, growth in segment income in 2002 reflected the acquisition of wirelineproperties in Kentucky, which accounted for $68.3 million of the increase insegment income in 2002.  Growth insegment income for 2001 reflected the increases in wireline operating revenuesand reductions in selling, general, administrative and other expenses,primarily resulting from the Company’s restructuring efforts, as previouslydiscussed.  The increase in segmentincome in 2001 attributable to revenue growth and cost savings was partiallyoffset by increases in cost of services and depreciation and amortizationexpense as discussed above.

 

A summary of the integration expenses and othercharges related to the wireline operations that were not included in thedetermination of segment income were as follows for the years ended December31:

 
|                                                    |
|---------------------------------------------------------|
| **(Millions)**                                          |   | **2002** |   | **2001** |   | **2000** |   |
| Severance and  employee benefit costs                   |   | $ | 6.6 |   | $ | 18.5 |   | $ | — |   |
| Lease and  contract termination costs                   |   | 3.8 |   | — |   | — |   |
| Computer system  conversion and other integration costs |   | 17.0 |   | — |   | — |   |
| Write-down of  software development costs               |   | 4.1 |   | — |   | — |   |
| Branding and  signage costs                             |   | 3.7 |   | — |   | — |   |
| Equipment  removal and other disposal costs             |   | 2.2 |   | — |   | — |   |
| Reversal of  previous accrued charges                   |   | — |   | — |   | (2.1 | ) |
| Total  integration expenses and other charges           |   | $ | 37.4 |   | $ | 18.5 |   | $ | (2.1 | ) |

 

RegulatoryMatters-Wireline Operations

Except for the Kentucky properties acquired fromVerizon and the Nebraska operations acquired in 1999, ALLTEL’s ILEC operationsfollow the accounting for regulated enterprises prescribed by SFAS No. 71,“Accounting for the Effects of Certain Types of Regulation”.  Criteria that would give rise to thediscontinuance of SFAS No. 71 include (1) increasing competition restrictingthe ILEC subsidiaries’ ability to establish prices to recover specific costsand (2) significant changes in the manner in which rates are set by regulatorsfrom cost-based regulation to another form of regulation.  The Company periodically reviews thecriteria to determine whether the continuing application of SFAS No. 71 isappropriate.  ALLTEL’s ILEC operationshave begun to experience some competition in their local service areas.  Sources of competition to ALLTEL’s localexchange business include, but are not limited to, resellers of local exchangeservices, interexchange carriers, satellite transmission services, wirelesscommunications providers, cable television companies, radio-based personalcommunications companies, and competitive service providers including thoseutilizing UNE-P (“Unbundled Network Elements-Platform”).  Through December 31, 2002, this competitionhas not had a material adverse effect on the results of operations of ALLTEL’sILEC operations.

 

Although the Company believes that the application ofSFAS No. 71 continues to be appropriate, it is possible that changes inregulation, legislation or competition could result in the Company’s ILECoperations no longer qualifying for the application of SFAS No. 71 in the nearfuture.  If ALLTEL’s ILEC operations nolonger qualified for the application

 

F-17

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of SFAS No. 71, the accounting impact to the Companywould be an extraordinary non-cash charge to operations ranging in an amount ofapproximately $15.0 to $25.0 million. The non-cash charge would consist primarily of the write-off of previouslyestablished regulatory assets and liabilities. ALLTEL does not expect to record any impairment charge related to thecarrying value of its ILEC plant.  UnderSFAS No. 71, ALLTEL currently depreciates its ILEC plant based upon asset livesapproved by regulatory agencies or as otherwise allowed by law.  Upon discontinuance of SFAS No. 71, ALLTELwould be required to revise the lives of its property, plant and equipment toreflect the estimated useful lives of the assets.  ALLTEL does not expect any revisions in asset lives to have amaterial adverse effect on its ILEC operations.

 

Most states in which the Company’s ILEC subsidiariesoperate have adopted alternatives to rate-of-return regulation, either throughlegislative or regulatory commission actions. The Company has elected alternative regulation for certain of its ILECsubsidiaries in Alabama, Arkansas, Florida, Georgia, Kentucky, Missouri,Nebraska, North Carolina, Pennsylvania, South Carolina and Texas.  The Company continues to evaluate alternativeregulation options in other states where its ILEC subsidiaries operate.  The Nebraska ILEC properties and therecently acquired Kentucky properties operate under interstate price capregulation pursuant to waivers granted by the FCC.  On April 17, 2002, the FCC extended ALLTEL’s waiver of price capregulation associated with its Nebraska ILEC properties and, in the same order,the FCC granted ALLTEL a waiver with respect to the Kentucky properties.  Both waivers will remain in effect until theFCC completes a comprehensive review of the waiver process.

 

In April 2001, the FCC released a notice of proposedrulemaking addressing inter-carrier compensation.  Under this rulemaking, the FCC asked for comment on a “bill andkeep” compensation method that would overhaul the existing rules governingreciprocal compensation and access charge regulation.  The outcome of this proceeding could change the way ALLTELreceives compensation from, and remits compensation to, other carriers and itsend users.  At this time, ALLTEL cannotestimate whether or when any such changes will occur or, if they occur, whatwould be the impact of the changes on its ILEC revenues and expenses.

 

In May 2001, the FCC adopted the Rural Task ForceOrder that established an interim universal service mechanism that will governcompensation for rural telephone companies for the ensuing five years.  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 plan for rural carriers.  On December 13, 2002, the FCC released itsinterim Universal Service Fund (“USF”) contribution report and order andfurther notice of proposed rulemaking. Under this ruling, the method for providing federal universal servicefund contributions will change from the current interstate revenue-basedarrangement to contributions based on projected revenues.  Effective April 1, 2003, carriers must alsolimit the USF line item on the customer bill to the USF contribution obligationof the carrier.  These interim universalservice changes are not expected to have a material adverse effect on theCompany’s wireline operations.

 

In May 2001, the FCC also released an order adoptingthe recommendation of the Federal-State Joint Board to impose an interim freezeof the Part 36 category relationships and jurisdictional cost allocationfactors for price cap ILECs and a freeze of all allocation factors forrate-of-return ILECs.  This order alsogave rate-of-return ILECs a one-time option to freeze their Part 36 categoryrelationships in addition to their jurisdictional allocation factors.  ALLTEL opted not to freeze its allocationfactors.  In June 2001, the FCC waivedcertain provisions of its Part 69 access charge rules to allow non-price capILECs to include in their tariff filings an end-user charge to recover theiruniversal service contributions.  ALLTELILECs tariffed the surcharge in their annual interstate access tariff filingand began assessing the surcharge effective August 1, 2001.

 

In October 2001, the FCC adopted rate-of-return accesscharge reform and initiated a further round of rulemaking to consider otherrate-of-return carrier issues.  Theorder lowered traffic sensitive switched access rates, increased the subscriberline charge (“SLC”) over time to bring it in line with SLCs adopted for pricecap carriers and phased out carrier common line charges in favor of a newportable “Interstate Common Line Support” universal service mechanism, andretained the authorized 11.25 percent rate of return.  The residential and single-line business SLC cap phase-in beganon January 1, 2002, increased on July 1, 2002 and may increase again on July 1,2003, subject to a FCC review of SLC caps for price cap carriers.  The Company does not expect that this orderwill have a material adverse effect on its consolidated financial resultsduring 2003.

 

On December 20, 2001, the FCC released a notice ofproposed rulemaking initiating the first triennial review of the FCC’s policieson unbundled network elements (“UNEs”). UNE-P is created when a competing carrier obtains all the networkelements needed to provide service from the ILEC at a discounted rate.  The rulemaking asks whether the FCC shouldretain, modify, or eliminate its existing definitions and requirements forunbundled network elements.  A decisionis expected from the FCC in the first quarter 2003.  At this time, ALLTEL cannot predict the impact of the FCC’sdecision on its ILEC revenues and expenses.

 

F-18

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During the first quarter of 2002, the FCC initiated arulemaking that could result in the deregulation of wireline broadband forInternet access services.  The FCC’stentative conclusion is 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.  At this time, ALLTEL cannot estimate whetheror when any such changes will occur or, if they occur, what the impact of thechanges on its ILEC revenues and expenses would be.

 

Because certain of the regulatory matters discussedabove are under FCC or judicial review, resolution of these matters continuesto be uncertain, and ALLTEL cannot predict at this time the specific effects,if any, that the 96 Act, regulatory decisions and rulemakings, and futurecompetition will ultimately have on its ILEC operations.

 

Communications Support Services Operations
| **(Millions)**                                 |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Revenues and  sales:                           |   |     |   |     |   |     |   |
| Product  distribution                          |   | $        | 371.3  |     | $      | 367.7    |   | $ | 503.9 |   |
| Directory  publishing                          |   | 119.1    |   | 146.2    |   | 130.3    |   |
| Long-distance  and network management services |   | 316.2    |   | 309.9    |   | 272.4    |   |
| Total revenues  and sales                      |   | 806.6    |   | 823.8    |   | 906.6    |   |
| Costs and  expenses:                           |   |     |   |     |   |     |   |
| Cost of services                               |   | 208.7    |   | 190.5    |   | 178.0    |   |
| Cost of products  sold                         |   | 439.2    |   | 444.7    |   | 556.2    |   |
| Selling,  general, administrative and other    |   | 68.1     |   | 75.6     |   | 91.6     |   |
| Depreciation and  amortization                 |   | 27.2     |   | 22.4     |   | 17.4     |   |
| Total costs and  expenses                      |   | 743.2    |   | 733.2    |   | 843.2    |   |
| Segment income                                 |   | $        | 63.4   |     | $      | 90.6     |   | $ | 63.4 |   |

 

Revenues and sales decreased $17.2 million, or 2percent, in 2002 and $82.8 million, or 9 percent, in 2001.  As noted in the table above, the decrease inrevenues and sales in 2002 reflected reductions in directory publishingrevenues, partially offset by growth in sales of telecommunications and dataproducts and increased revenues from long-distance and network managementservices.  Directory publishing revenuesdecreased $27.1 million primarily due to a reduction in the number of directorycontracts published, as a result of the loss of one large customer.  Sales of telecommunications and dataproducts increased $3.6 million in 2002, as sales to affiliates increased $12.5million, primarily due to additional purchases made by the Company’s wirelinesubsidiaries reflecting the Verizon acquisition.  Sales to non-affiliates decreased $8.9 million in 2002,reflecting a reduction in capital spending by telecommunications companies.  Revenues from long-distance and networkmanagement services increased $6.3 million in 2002, primarily driven by growthin ALLTEL’s customer base for these services, partially offset by a decrease incustomer billing rates due to competition.

 

The decrease in revenues and sales in 2001 primarilyresulted from a reduction in sales of telecommunications and data products,which decreased $136.2 million.  Salesto affiliates accounted for $94.2 million of the overall decrease in sales oftelecommunications and data products in 2001, primarily due to a reduction inpurchases made by the Company’s wireline subsidiaries, reflecting timingdifferences in the purchases of materials and equipment related to long-termconstruction projects.  Sales tonon-affiliates also declined $42.0 million in 2001, primarily reflecting ageneral reduction in capital spending by telecommunications companies due toeconomic conditions and the industry’s emphasis on controlling costs.  Revenues from long-distance and networkmanagement services increased $37.5 million in 2001, primarily driven by growthin ALLTEL’s customer base for these services. Directory publishing revenues increased $15.9 million in 2001, primarilyreflecting an increase in the number of directory contracts published.

 

A summary of the integration expenses and othercharges related to the communications support services operations that were notincluded in the determination of segment income were as follows for the yearsended December 31:

 
| **(Millions)**                                |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Severance and  employee benefit costs         |   | $        | 1.4    |     | $      | 1.9      |   | $ | — |   |
| Lease and  contract termination costs         |   | 3.6      |   | 1.0      |   | —   |   |
| Total  integration expenses and other charges |   | $        | 5.0    |     | $      | 2.9      |   | $ | — |   |

 

Excluding the effects of the integration expenses andother charges noted above, the decrease in segment income in 2002 reflected theoverall reduction in revenues and sales noted above, lower gross profit marginsrealized by the product distribution and long-distance operations and anincrease in depreciation expense.  Grossprofit margins for the long-distance operations primarily reflected thereduction in customer billing rates and increased network-related expenses due

 

F-19

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to growth in its customer base. Gross profit margins for the product distribution operations reflectedlower margins earned on affiliated sales and the effects of increasedcompetition from other distributors and from direct sales bymanufacturers.  Depreciation andamortization expense increased $4.8 million in 2002, due mainly to the growthin plant in service supporting the long-distance and network managementoperations.  Although revenues and salesdecreased in 2001, segment income increased primarily due to improved profitmargins realized by the long-distance operations.  The improved profit margins reflected reduced network costs as aresult of transporting more traffic on ALLTEL’s own fiber network as comparedto the prior year.

 

Information Services Operations
| **(Millions)**                              |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Revenues and  sales                         |   | $        | 990.1  |     | $      | 1,035.2  |   | $ | 1,014.6 |   |
| Costs and  expenses:                        |   |     |   |     |   |     |   |
| Cost of services                            |   | 551.5    |   | 616.4    |   | 616.7    |   |
| Cost of products  sold                      |   | 0.1      |   | 0.7      |   | 2.3      |   |
| Selling,  general, administrative and other |   | 182.9    |   | 177.6    |   | 157.6    |   |
| Depreciation and  amortization              |   | 93.7     |   | 94.1     |   | 93.6     |   |
| Total costs and  expenses                   |   | 828.2    |   | 888.8    |   | 870.2    |   |
| Segment income                              |   | $        | 161.9  |     | $      | 146.4    |   | $ | 144.4 |   |

 

Information services revenues and sales decreased$45.1 million, or 4 percent, in 2002 and increased $20.6 million, or 2 percent,in 2001.  Financial services revenues,which includes the residential lending and international operations, decreased$18.8 million in 2002, primarily due to reduced software licensing andprocessing revenues from several large customers, partially offset byadditional revenues earned from existing data processing contracts andadditional software maintenance revenues. The decreases in revenues earned from several large financial servicescustomers in 2002 primarily resulted from lost international operations due to contractterminations, reflecting consolidation in the financial services industry andfrom completion during 2001 of certain customer specific software developmentand conversion projects. Telecommunications revenues decreased $26.3 million in 2002, primarilydue to reduced revenues earned from several large customers, partially offsetby additional services provided to existing customers.  The reduced revenues from several largetelecommunications customers reflected lost operations due to contract terminationsand the completion during 2001 of customer specific conversion projects andother transitional services.  Revenuesand sales increased in 2001 primarily due to growth in the financial servicesoperations.  Financial services revenuesincreased $38.8 million in 2001, primarily due to growth in mortgage processingrevenues, reflecting increased mortgage refinancing activity due to declines inconsumer borrowing rates and additional revenues earned from newbusinesses.  Software licensing andmaintenance revenues increased $9.5 million and $14.2 million, respectively,also contributing to the growth in financial services revenues in 2001.  During the second half of 2000, ALLTELacquired Benchmark Consulting International and Datamatic Services, Inc., twoprivately held companies serving the financial services industry and formedALLTEL Corebanking Solutions, a business venture with IBM to providecorebanking software to financial services organizations in Europe.  As previously discussed, in 2000, the Companyhad also formed ALLTEL Mortgage Solutions, a business venture with Bradford& Bingley Group, that was discontinued in December 2002.  Both of these business ventures aremajority-owned consolidated subsidiaries of ALLTEL.  The acquired businesses and two business ventures accounted for$30.2 million of the overall increase in financial services revenues in2001.  Growth in financial servicesrevenues in 2001 attributable to new business and additional license fee andsoftware maintenance revenues was partially offset by reduced revenues fromseveral large customers and lost operations due to contract terminations.  Telecommunications revenues decreased $18.2million in 2001, primarily as a result of lost operations due to contractterminations, partially offset by growth in existing contracts and the effectof two new outsourcing agreements.

 

The changes in cost of services for 2002 and 2001 wereconsistent with the changes in revenues and sales noted above.  In addition, cost of services for 2002 and2001 also reflected reduced operating costs reflecting the Company’srestructuring activities, as previously discussed.  Selling, general, administrative and other operating expensesincreased in both years due to increased development expense primarily associatedwith the Company’s business ventures discussed above, partially offset byreduced overhead costs reflecting the Company’s restructuring activities.

 

Primarily as a result of reduced operating costs andexpenses, segment income increased $15.5 million, or 11 percent, in 2002.  Segment income increased $2.0 million or 1percent in 2001, primarily as a result of the changes in revenues andsales.  Growth in segment income for2001 attributable to revenue growth and reduced operating and overhead costs waspartially offset by losses sustained by the recently acquired operations andthe business ventures previously discussed.

 

F-20

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A summary of the integration expenses and othercharges related to the information services operations that were not includedin the determination of segment income were as follows for the years endedDecember 31:

 
|                                          |
|-----------------------------------------------|
| **(Millions)**                                |   | **2002** |   | **2001** |   | **2000** |   |
| Severance and  employee benefit costs         |   | $ | 1.8 |   | $ | 9.0 |   | $ | 5.9 |   |
| Lease and  contract termination costs         |   | 1.5 |   | 2.3 |   | 4.2 |   |
| Write-down of  investment in business venture |   | 42.3 |   | — |   | — |   |
| Write-down of  software development costs     |   | — |   | 8.9 |   | — |   |
| Total  integration expenses and other charges |   | $ | 45.6 |   | $ | 20.2 |   | $ | 10.1 |   |

 

In connection with the Company’s business venture withIBM, ALLTEL has capitalized approximately $28.0 million in software developmentcosts.  The Company expects tocapitalize in 2003 approximately $6.0 million of additional softwaredevelopment costs related to this business venture.  The process of developing new software products is complex andrequires the Company to make long-term investments and commit significantresources before realizing revenue streams. Accordingly, the future profitability of this business venture and theCompany’s ability to recover its investment will be dependent upon ALLTEL’ssuccess in marketing the software and related services to customers.

 

Segment CapitalRequirements

The primary uses of cash for ALLTEL’s operating segments are capitalexpenditures for property, plant and equipment and expenditures for capitalizedsoftware development to support the Company’s communications and informationservices businesses.  Capitalexpenditures and expenditures for software development by operating segment areforecasted as follows for the year ended December 31, 2003:

 
|                             |
|----------------------------------|
| **(Millions)**                   |   | **Capital  Expenditures** |   | **Software  Development** |   | **Totals** |   |
| Wireless                         |   | $ |  715.0 | - | $ | 790.0 |   | $ |  50.0 | - | $ | 50.0 |   | $ | 765.0 | - | $ | 840.0 |   |
| Wireline                         |   | 400.0 | - | 410.0 |   | 10.0 | - | 10.0 |   | 410.0 | - | 420.0 |   |
| Communications  support services |   | 20.0 | - | 30.0 |   |   | - |   |   | 20.0 | - | 30.0 |   |
| Information  services            |   | 50.0 | - | 60.0 |   | 30.0 | - | 40.0 |   | 80.0 | - | 100.0 |   |
| Corporate                        |   | 5.0 | - | 10.0 |   |   | - |   |   | 5.0 | - | 10.0 |   |
| Totals                           |   | $ |  1,190.0 | - | $ | 1,300.0 |   | $ |  90.0 | - | $ | 100.0 |   | $ | 1,280.0 | - | $ | 1,400.0 |   |

 

The foregoing forecast does not reflect the pendingdisposition of the Company’s financial services division of its informationservices subsidiary, which is expected to close by the end of the first quarterof 2003.  Approximately 95 percent ofthe total capital requirements for the information services segment listedabove relates to the financial services division.  Capital expenditures for 2003 will be primarily incurred forfurther deployment of digital wireless technology, including wireless 1X datacapabilities, in the Company’s existing and acquired wireless markets.  The forecasted spending levels in 2003 aresubject to revision depending on changes in future capital requirements of theCompany’s business segments.

 

Each of ALLTEL’s operating segments in 2002 generatedpositive cash flows sufficient to fund the segments’ day-to-day operations andto fund their capital requirements.  TheCompany expects each of the operating segments to continue to generatesufficient cash flows in 2003 to fund their operations and capitalrequirements.

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 
|                                       |
|--------------------------------------------|
| **(Millions,  except per share amounts)**  |   | **2002** |   | **2001** |   | **2000** |   |
| Cash flows from  (used in):                |   |   |   |   |   |   |   |
| Operating  activities                      |   | $ | 2,594.9 |   | $ | 2,070.5 |   | $ | 1,496.3 |   |
| Investing  activities                      |   | (4,606.6 | ) | (570.3 | ) | (1,264.3 | ) |
| Financing  activities                      |   | 2,078.9 |   | (1,476.7 | ) | (183.4 | ) |
| Effect of  exchange rate changes           |   | 3.0 |   | (5.4 | ) | 1.0 |   |
| Change in cash  and short-term investments |   | $ | 70.2 |   | $ | 18.1 |   | $ | 49.6 |   |
| Total capital  structure(a)                |   | $ | 12,639.9 |   | $ | 9,480.2 |   | $ | 9,776.8 |   |
| Percent equity  to total capital(b)        |   | 47.5 | % | 58.7 | % | 52.1 | % |
| Interest  coverage ratio(c)                |   | 5.52 | x | 6.54 | x | 5.95 | x |
| Book value per  share(d)                   |   | $ | 19.27 |   | $ | 17.92 |   | $ | 16.28 |   |

 

F-21

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Notes:

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

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

(c)          Computed by dividingincome before income taxes adjusted to exclude interest expense, integrationexpenses and other charges, gain on disposal of assets, write-down ofinvestments and other by interest expense.

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

 

Cash Flows fromOperations

Cash provided from operations continued to be ALLTEL’sprimary source of funds.  Cash providedfrom operations in all three years reflected growth in earnings from theCompany’s business segments.  Inaddition to earnings growth, the increases in 2002 and 2001 also reflectedchanges in working capital requirements, including timing differences in thereceipt and payment of trade receivables, payables and taxes.  Cash provided from operations in 2000 wasadversely affected by working capital changes, including timing differences inthe billing and collection of accounts receivable and additional income taxpayments primarily associated with gains realized from the exchange of wirelessassets and the sale of WorldCom stock.

 

Cash Flows from InvestingActivities

Capital expenditures continued to be ALLTEL’s primaryuse of capital resources.  Capitalexpenditures were $1,194.1 million in 2002, $1,231.9 million in 2001 and$1,164.7 million in 2000.  Capitalexpenditures in each of the past three years were incurred to constructadditional network facilities, to deploy digital wireless technology in theCompany’s existing wireless markets and to upgrade ALLTEL’s telecommunicationsnetwork in order to offer other communications services, includinglong-distance, Internet, DSL and local competitive access services.  Capital expenditures for 2002 also includedadditional spending by ALLTEL to deploy CDMA technology in the propertiesacquired from CenturyTel, as previously discussed.  During each of the past three years, the Company funded most ofits capital expenditures through internally generated funds.  As indicated in the table above under“Segment Capital Requirements”, the Company expects capital expenditures to beapproximately $1,190.0 million to $1,300.0 million for 2003, which will befunded primarily from internally generated funds.

 

Investing activities also included outlays forcapitalized software development costs. Additions to capitalized software were $119.0 million in 2002, $171.4million in 2001 and $117.3 million in 2000. Capitalized software development costs for 2001 included additionalspending on certain of the Company’s proprietary financial services softwareproducts related to customer specific development projects.  Spending levels for capitalized softwaredevelopment costs in 2002 reflected the completion of these projects during2001.  Capitalized software developmentcosts for 2002 and 2001 also included costs incurred for the development andenhancement of internal use software to support the Company’s retailoperations.  As indicated in the tableabove under “Segment Capital Requirements”, the Company expects expendituresfor capitalized software development to be approximately $90.0 million to$100.0 million for 2003, which also will be funded primarily from internallygenerated funds.

 

Cash outlays for the purchase of property, net of cashacquired, were $3,375.8 million for 2002 and primarily consisted of $1,735.2million for the purchase of wireline properties in Kentucky from Verizon($1,928.7 million total purchase price less $193.5 million deposit includingaccrued interest paid in October 2001) and $1,595.3 million for the purchase ofwireless assets from CenturyTel.  In addition,during 2002, ALLTEL also purchased a wireline property in Georgia for $17.9million, acquired additional ownership interests in wireless properties inArkansas, Louisiana and Texas for $17.1 million and purchased two privatelyheld companies serving the financial services industry for $10.3 million incash.

 

Cash flows used in investing activities for 2001included cash outlays of $217.5 million for the purchase of property,principally consisting of the $190.7 million deposit paid by ALLTEL in connectionwith the Company’s pending purchase of wireline properties in Kentucky, aspreviously discussed.  Cash flows usedin investing activities for 2000 included $1,040.0 million of cash outlays forthe acquisition of property.  Thisamount principally consisted of $624.3 million paid by ALLTEL in connectionwith the wireless transaction with Bell Atlantic completed in April 2000 and$387.6 million paid by ALLTEL in October 2000 to acquire wireless properties inLouisiana, as previously discussed. Also during 2000, the Company acquired additional ownership interests inwireless properties in Florida and Georgia and purchased two privately heldcompanies serving the financial services industry.  In connection with these acquisitions, the Company paid $28.1million in cash and issued approximately 730,000 shares of ALLTEL common stock.

 

F-22

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Cash flows from investing activities included $7.5million in 2002 and $524.4 million in 2001 of advance lease payments receivedfrom American Tower for the leasing of 1,773 of the Company’s cell sitetowers.  As further discussed in Note 14to the consolidated financial statements, in December 2000, ALLTEL signed anagreement to lease American Tower certain of the Company’s cell site towers inexchange for cash paid in advance. ALLTEL is obligated to pay American Tower a monthly fee per tower formanagement and maintenance services for the duration of the fifteen-year leaseagreement.

 

Cash flows from investing activities for 2002 includedproceeds from the sale of assets of $24.1 million received by ALLTEL inconnection with the sale of a wireless property in Pennsylvania, as previouslydiscussed.  Cash flows from investingactivities for 2001 included $411.4 million of proceeds from the sale ofassets, principally consisting of $410.1 million received by ALLTEL from thesale of 20 PCS licenses, as previously discussed.  Cash flows from investing activities for 2000 included $328.9 millionof proceeds from the sale of assets. These amounts consisted of $216.9 million received by ALLTEL to completethe exchange of wireless assets with GTE in June 2000 and $112.0 millionreceived from the sale of PCS assets in Birmingham and Mobile, Ala. and PCSlicenses in nine other markets including Pensacola, Fla., as previouslydiscussed.  Cash flows from investingactivities for 2000 included proceeds from the sale of investments of $630.3million and primarily consisted of $595.8 million received from the sale ofALLTEL’s investment in WorldCom common stock. Cash flows from investing activities also included proceeds from thereturn on investments of $51.9 million in 2002, $54.8 million in 2001 and $94.2million in 2000.  These amountsprimarily consisted of cash distributions received from ALLTEL’s wirelessminority investments.  The significantdecrease in distributions received in 2001 primarily reflected the sale ofcertain minority investments to Bell Atlantic and GTE, as previously discussed.

 

The proceeds received in 2001 from the asset sales andthe leasing of cell site towers and the proceeds received in 2000 from thesales of investments and other assets were used primarily to reduce borrowingsunder the Company’s commercial paper program.

 

Cash Flows fromFinancing Activities

Dividend payments remained a significant use of theCompany’s capital resources.  Common andpreferred dividend payments amounted to $423.1 million in 2002, $411.8 millionin 2001 and $403.0 million in 2000.  Theincreases in each year primarily reflected growth in the annual dividend rateson ALLTEL’s common stock.  In October2002, the Company’s Board of Directors increased the quarterly common stockdividend rate from $.34 to $.35 per share. This action raised the annual dividend rate to $1.40 per share andmarked the 42nd consecutive year in which ALLTEL has increased its common stockdividend.  The Company expects tocontinue its cash dividend policy in 2003.

 

During 2002, the Company increased the maximumborrowing capacity of its commercial paper program from $1.25 billion to $1.5billion.  ALLTEL classifies commercialpaper borrowings as long-term debt, because they are intended to be maintainedon a long-term basis and are supported by the Company’s revolving creditagreements.  ALLTEL has a $1.0 billionline of credit under a revolving credit agreement of which $50.0 million willexpire in October 2003 and $950.0 million will expire in October 2005.  On July 31, 2002, the Company entered intoan additional $500.0 million, 364-day revolving credit agreement that willexpire on July 30, 2003, and allows the Company to convert any outstandingborrowings under this agreement into term loans maturing in 2004.  No borrowings were outstanding under therevolving credit agreements as of December 31, 2002, 2001 and 2000.

 

Under the commercial paper program, commercial paperborrowings are deducted from the revolving credit agreements in determining theamount available for borrowing under those agreements.  Accordingly, the total amount outstandingunder the commercial paper program and the indebtedness incurred under therevolving credit agreements may not exceed $1.5 billion.  Commercial paper borrowings outstanding asof December 31, 2002 were $25.0 million, compared to $230.1 million and $835.5million outstanding as of December 31, 2001 and 2000, respectively.  Commercial paper borrowings outstanding asof December 31, 2002 had a weighted average interest rate of 1.4 percent.  As previously discussed, the Companyincurred commercial paper borrowings in the amount of $442.5 million to fund aportion of the purchase price of the Verizon and CenturyTel acquisitions.  Borrowings in 2001 under the commercialpaper program were incurred primarily to finance the deposit delivered inconnection with the Verizon wireline property acquisition and to fund stockrepurchases.  Additional borrowingsunder the commercial paper program in 2000 were incurred to finance thewireless property acquisitions from SBC and Bell Atlantic, to fund the stockrepurchase plan and to retire amounts outstanding under the $1.0 billionrevolving credit agreement.

 

On April 9, 2002, ALLTEL deregistered its May 2001$1.0 billion shelf registration statement, under which no debt securities hadbeen issued.  On March 28, 2002, theCompany filed a new shelf registration statement providing for the issuance ofup to $5.0 billion in the aggregate initial offering price of unsecured debtand equity securities.  As

 

F-23

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previously discussed, during May 2002, the Companysold 27.7 million equity units under this shelf registration statement andreceived net proceeds of $1.34 billion. In June 2002, the Company issued $1.5 billion of unsecured long-termdebt consisting of $800.0 million of 7.0 percent senior notes due July 1, 2012and $700.0 million of 7.875 percent senior notes due July 1, 2032.  Net proceeds from the debt issuance were$1.47 billion, after deducting the underwriting discount and other offering expenses.  The net proceeds from the issuance of theequity units and debt securities of $2.81 billion represented all of thelong-term debt issued in 2002. Long-term debt issued in 2000 was $835.5 million and consisted solely ofadditional borrowings under the Company’s commercial paper program.

 

Retirements of long-term debt totaled $266.4 millionin 2002, $782.5 million in 2001 and $405.9 million in 2000.  The net reductions from December 31, 2001and 2000 in commercial paper borrowings of $205.1 million and $605.4 million,respectively, represented the majority of the long-term debt retired in 2002and 2001.  Retirements of long-term debtfor 2001 also included the early retirement of $73.5 million of high-cost debtcompleted in the second quarter of 2001, as previously discussed.  The net reductions from December 31, 1999 inrevolving credit borrowings of $341.0 million represented the majority of thelong-term debt retired in 2000. Scheduled long-term debt retirements, net of commercial paper andrevolving credit agreement activity and the prepayment of long-term debt,amounted to $61.3 million in 2002, $103.6 million in 2001 and $64.9 million in2000. (See Note 5 to the consolidated financial statements for additionalinformation regarding the Company’s long-term debt.)

 

Distributions to minority investors were $57.9 millionin 2002, compared to $117.8 million in 2001 and $76.8 million in 2000.  The decrease in 2002 period primarilyreflected the transfer to ALLTEL of the remaining ownership interest in twoSouth Carolina MSAs related to the dissolution of a partnership with BellSouthpreviously discussed.  In addition,distributions in 2001 included additional payments of $48.4 million,representing the minority partners’ share of the proceeds received from theleasing of cell site towers discussed above. Distributions in 2001 and 2000 included the effects of the acquisitionof the remaining minority interests in wireless properties in Florida andGeorgia and the disposition of certain majority-owned partnerships inconnection with the property exchanges with Bell Atlantic and GTE, aspreviously discussed.

 

On July 20, 2000, ALLTEL’s Board of Directors adopteda stock repurchase plan that allowed the Company to repurchase up to 7.5million shares of its outstanding common stock.  During 2001, ALLTEL repurchased 1.4 million of its common sharesat a total cost of $78.1 million, compared to 3.0 million common sharesrepurchased at a total cost of $164.3 million in 2000.  In November 2000, the Company entered intothree forward purchase contracts with a financial institution in conjunctionwith the stock repurchase program. Under terms of the contracts, the Company agreed to purchase ALLTELcommon shares from the financial institution at a specified price (the “forwardprice”).  The forward price was equal tothe financial institution’s cost to acquire the shares plus a premium based onthe net carrying cost of the shares to the financial institution and accruedover the period that the contract was outstanding.  During the second quarter of 2001, the Company settled thesecontracts by acquiring 1.9 million of its common shares at a cost of $114.2million.  Through December 31, 2002,ALLTEL had repurchased 6.3 million of the 7.5 million shares the Company was authorizedto repurchase under the stock repurchase plan.

 

Liquidity andCapital Resources

The Company believes it has adequate operating cashflows to finance its ongoing operating requirements including capitalexpenditures and the payment of dividends. Additional sources of funding available to the Company include (1)additional borrowings available to the Company under its commercial paperprogram and revolving credit agreements and (2) additional debt or equitysecurities under the Company’s $5.0 billion shelf registration statement, ofwhich approximately $730 million remained available for issuance at December31, 2002.

 

ALLTEL’s commercial paper and long-term credit ratingswith Moody’s Investors Service (“Moody’s”), Standard & Poor’s Corporation(“Standard & Poor’s”) and Fitch Ratings (“Fitch”) were unchanged fromDecember 31, 2001 and were as follows:

 
|                            |   |
|---------------------------------|--------|
| **Description**                 |   | **Moody’s** |   | **Standard  & Poor’s** |   | **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 affect ALLTEL’s short and long-termcredit ratings would include, but not be limited to, a material decline in theCompany’s operating results and increased debt levels relative to operatingcash flows resulting from future acquisitions or increased capital expenditurerequirements.  If ALLTEL’s creditratings were to be downgraded

 

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from current levels, the Company would incur higherinterest costs on new borrowings, and the Company’s access to the publiccapital markets could be adversely affected. A downgrade in ALLTEL’s current short or long-term credit ratings wouldnot accelerate scheduled principal payments of ALLTEL’s existing long-term debt.

 

During the third quarter of 2002, the Company amendedits $1.0 billion revolving credit agreement to conform certain of itsprovisions to corresponding provisions of the Company’s 364-day revolvingcredit agreement.  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 creditagreement, 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 December 31, 2002, the Company’s total debt to capitalizationratio was 52.2 percent.

 

At December 31, 2002, current maturities of long-termdebt were $495.3 million and included a $450.0 million, 7.125 percent seniorunsecured note due March 1, 2003. ALLTEL expects to fund the payment of this note at maturity through cashon hand or through the issuance of additional commercial paper borrowings orother unsecured long-term debt.

 

As previously discussed, the Company has entered intoa definitive agreement to sell the financial services division of itsinformation services subsidiary to Fidelity National for $1.05 billion, payableas $775.0 million in cash and $275.0 million in Fidelity National commonstock.  The transaction is expected toclose by the end of the first quarter of 2003. The Company anticipates using the net cash proceeds from the transactionto reduce its borrowings under its commercial paper program and for othergeneral corporate purposes.

 

As previously discussed, the Company received $531.9million of cash in advance as prepaid rent in connection with the leasing ofcertain cell site towers to American Tower and is recognizing the proceeds asrevenue on a straight-line basis over the fifteen-year lease term.  Participants in the telecommunications andcell tower industry currently are experiencing a more difficult operating andfinancial environment than when the tower transaction with ALLTEL wascompleted.  Accordingly, although ALLTELcurrently considers the likelihood to be remote, in the event ALLTEL’s towerlessee were to file or become subject to bankruptcy proceedings, it is possiblethat the bankruptcy court could require that the tower transaction be rescindedand ALLTEL be required to refund the unutilized portion of the prepaid rent.

 

Pension Plans

ALLTEL maintains a qualified defined benefit pensionplan, which covers substantially all employees other than employees of ALLTEL’sinformation services and directory publishing subsidiaries.  The Company also maintains a supplementalexecutive retirement plan that provides unfunded, non-qualified supplementalretirement benefits to a select group of management or other highly-compensatedemployees.  In addition, the Company hasentered into individual retirement agreements with certain retired executivesproviding for unfunded supplemental pension benefits.  As further illustrated in Note 7 to the consolidated financialstatements, total pension expense (income) related to these plans was $8.8million in 2002, $8.8 million in 2001 and $(17.2) million in 2000.  As a result of unfavorable investmentreturns and a decrease in long-term interest rates during 2002, ALLTEL’spension expense for 2003 will be approximately $41.0 million.

 

Annual pension expense is calculated based upon anumber of actuarial assumptions, including an expected long-term rate of returnon qualified pension plan assets of 8.50 percent and a discount rate of 6.85percent.  In developing the expectedlong-term rate of return assumption, ALLTEL evaluated historical investmentperformance, as well as input from its investment advisors.  Projected returns by such advisors werebased on broad equity and bond indices. The Company also considered the pension plan’s historical returns since1975 of 10.7 percent.

 

ALLTEL’s expected long-term rate of return onqualified pension plan assets is based on a targeted asset allocation of 70percent to equities, with an expected long-term rate of return of 10 percent,and 30 percent to fixed income assets, with an expected long-term rate ofreturn of 5 percent.  Because of marketfluctuations and cash contributions funded in late December to the qualifiedpension plan by ALLTEL of $50.0 million and the qualified pension plan ofVerizon related to the acquired Kentucky wireline assets of $49.0 million thathad not yet been reinvested, the actual asset allocation as of December 31,2002 was 58.3 percent to equities, 25.4 percent to fixed income assets and 16.3percent in money market funds and other interest bearing investments.  ALLTEL regularly reviews the actual assetallocation of its qualified pension plan and periodically rebalances itsinvestments to achieve the targeted allocation.  ALLTEL continues to believe that 8.50 percent is a reasonablelong-term rate of return on its qualified pension plan assets, despite themarket downturn which resulted in a loss in the qualified pension plan assetsfor the year ended December 31, 2002.

 

F-25

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ALLTEL will continue to evaluate its actuarialassumptions, including the expected rate of return, at least annually, and willadjust them as necessary.  Lowering theexpected long-term rate of return on the qualified pension plan assets by 0.5percent (from 8.50 percent to 8.0 percent) would result in an increase inpension expense of approximately $3.5 million in 2003.

 

The discount rate selected is based on a review ofcurrent market interest rates of high-quality, fixed-rate debt securitiesadjusted to reflect the duration of expected future cash outflows for pensionbenefit payments.  In developing thediscount rate assumption for 2002, ALLTEL reviewed the high grade bond indicespublished by Moody’s as of December 31, 2002, which are based on debtsecurities with average maturities of 30 years.  These maturities are shorter than the term of the Company’sexpected future cash outflows, reflecting the younger workforce in theCompany’s wireless business.  To accountfor the longer duration of its expected future pension benefit payments, theCompany analyzed market data and yield curves for U.S. Treasury securities andestimated an appropriate duration adjustment. The discount rate determined on this basis decreased from 7.25 percentat December 31, 2001 to 6.85 percent at December 31, 2002.  Lowering the discount rate by 0.25 percent(from 6.85 percent to 6.60 percent) would result in an increase in pensionexpense of approximately $7.7 million in 2003.

 

As of December 31, 2002, ALLTEL had cumulativeunrecognized actuarial losses of $209.6 million, which will result in increasedpension expense beginning in 2003, as these actuarial losses are included inthe calculation of annual pension expense. For the Company, unrecognized actuarial gains or losses that exceed 17.5percent of the greater of the projected benefit obligation or market-relatedvalue of plan assets are amortized into pension expense on a straight-linebasis over five years.  Unrecognizedactuarial gains and losses below the 17.5 percent corridor are amortized overthe average remaining service life of active plan participants (approximately14 years at December 31, 2002).  Inapplying this amortization method, the estimated pension expense of $41.0million for 2003 includes $20.6 million of the unrecognized actuarial loss atDecember 31, 2002.

 

ALLTEL made a voluntary $50.0 million contribution toits qualified pension plan in December 2002. ALLTEL does not expect that any contributions to the plan calculated inaccordance with the minimum funding requirements of the Employee RetirementIncome Security Act of 1974 will be required in 2003.  Future contributions to the plan will depend on various factors,including future investment performance, changes in future discount rates andchanges in the demographics of the population participating in the Company’squalified pension plan.

 

Contractual Obligationsand Commitments

Set forth below is a summary of ALLTEL’s material contractualobligations and commitments as of December 31, 2002:

 
|                                           |
|------------------------------------------------|
|                                           |   | **Payments  Due by Period** |   |
| **(Millions)**                                 |   | **Less than  1 Year** |   | **1-3  Years** |   | **3-5  Years** |   | **More than  5 Years** |   | **Total** |   |
| Long-term debt,  excluding commercial paper    |   | $ | 495.3 |   | $ | 544.0 |   | $ | 2,079.8 |   | $ | 3,496.7 |   | $ | 6,615.8 |   |
| Commercial paper                               |   | 25.0 |   | — |   | — |   | — |   | 25.0 |   |
| Operating leases                               |   | 119.3 |   | 151.9 |   | 80.8 |   | 92.2 |   | 444.2 |   |
| Site maintenance  fees – cell sites       |   | 27.4 |   | 58.9 |   | 64.9 |   | 363.2 |   | 514.4 |   |
| Agreement to  purchase wireless properties     |   | 72.0 |   | — |   | — |   | — |   | 72.0 |   |
| Total  contractual obligations and commitments |   | $ | 739.0 |   | $ | 754.8 |   | $ | 2,225.5 |   | $ | 3,952.1 |   | $ | 7,671.4 |   |

 

On November 25, 2002, the Company signed a definitiveagreement to purchase wireless properties, representing approximately 360,000POPs in southern Mississippi, from Cellular XL Associates, a privately heldcompany, for $72.0 million in cash.  Thetransaction is expected to close during the first quarter of 2003.

 

In connection with the offering of the Company’snationwide prepaid wireless services, ALLTEL has entered into a reselleragreement.  The agreement allowscustomers who purchase ALLTEL’s nationwide prepaid product offering to obtainwireless services in those U.S. regions in which ALLTEL does not maintain anetwork presence.  Under terms of thethree-year agreement, ALLTEL is committed to purchasing minutes of usage atrates that vary based on the actual volume of minutes of usage purchased by theCompany.  Depending upon the actualusage volumes incurred, ALLTEL’s commitment under this agreement could rangebetween approximately $5.0 million and $90.0 million over the next three years.  Due to the uncertainty of the timing and theamount of cash outlays, this commitment has not been reflected in the tableabove.

 

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Under the Company’s long-term debt borrowingagreements, acceleration of principal payments would occur upon payment default,violation of debt covenants not cured within 30 days or breach of certain otherconditions set forth in the borrowing agreements.  At December 31, 2002, the Company was in compliance with all ofits debt covenants. There are no provisions within the Company’s leasingagreements that would trigger acceleration of future lease payments.  (See Notes 5, 8 and 14 to the consolidatedfinancial statements for additional information regarding the obligations andcommitments listed above.)

 

The Company does not use securitization of tradereceivables, affiliation with special purpose entities, variable interestentities or synthetic leases to finance its operations.  Additionally, the Company has not enteredinto any arrangement requiring ALLTEL to guarantee payment of third party debtor to fund losses of an unconsolidated special purpose entity.

 

Legal Proceedings

ALLTEL is party to various legal proceedings arisingin the ordinary course of business. Although the ultimate resolution of these various proceedings cannot bedetermined at this time, management of the Company does not believe that suchproceedings, individually or in the aggregate, will have a material adverseeffect on the future results of operations or financial condition of ALLTEL.  In addition, management of the Company iscurrently not aware of any environmental matters that, individually or in theaggregate, would have a material adverse effect on the consolidated financialcondition or results of operations of the Company.

 

Recently Issued Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143 “Accountingfor Asset Retirement Obligations”.  SFASNo. 143 will apply to fiscal years beginning after June 15, 2002, and willaddress financial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  This standard applies to legalobligations associated with the retirement of long-lived assets that result fromthe acquisition, construction, development or normal use of the assets andrequires that a liability for an asset retirement obligation be recognized whenincurred, recorded at fair value and classified as a liability in the balancesheet.  When the liability is initiallyrecorded, the entity will capitalize the cost and increase the carrying valueof the related long-lived asset.  Theliability is then accreted to its present value each period and the capitalizedcost is depreciated over the estimated useful life of the related asset.  At the settlement date, the entity willsettle the obligation for its recorded amount or recognize a gain or loss uponsettlement.

 

The Company has evaluated the effects of SFAS No. 143on its operations and has determined that for telecommunications and other operatingfacilities in which the Company owns the underlying land, ALLTEL has nocontractual or legal obligation to remediate the property if the Company wereto abandon, sell or otherwise dispose of those facilities.  For the Company’s leased non-wirelinetelecommunications and operating facilities, primarily consisting of cellsites, office and retail locations, ALLTEL has determined that the adoption ofSFAS No. 143 will not have a material impact on its consolidated financialstatements.

 

In accordance with federal and state regulations,depreciation expense for the Company’s wireline operations have historicallyincluded an additional provision for cost of removal.  Effective with the adoption of SFAS No. 143, the additional costof removal provision will no longer be included in depreciation expense,because it does not meet the recognition and measurement principles of an assetretirement obligation under SFAS No. 143. On December 20, 2002, the FCC notified wireline carriers that theyshould not adopt the provisions of SFAS No. 143 unless specifically required bythe FCC in the future.  As a result ofthe FCC ruling, the Company will continue to record a regulatory liability forcost of removal for its wireline subsidiaries that follow SFAS No. 71 accounting.  For the acquired Kentucky and Nebraskawireline operations not subject to SFAS No. 71, effective January 1, 2003, theCompany will cease recognition of the cost of removal provision in depreciationexpense and eliminate the cumulative cost of removal included in accumulateddepreciation.  The cumulative effect ofretroactively applying these changes to periods prior to January 1, 2003, willresult in a non-cash pretax credit of approximately $34.0 million.

 

In June 2002, the FASB issued SFAS No. 146 “Accountingfor Costs Associated with Exit or Disposal Activities”.  SFAS No. 146 requires that a liability for acost that is associated with an exit or disposal activity be recognized whenthe liability is incurred.  Coststypically associated with exit or disposal activities include employeetermination costs, contract cancellation provisions and relocation costs.  This standard nullifies the guidance ofEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)”.  SFAS No. 146 also establishes that fairvalue is the objective for the initial measurement of the liability.  SFAS No. 146 will be effective for exit ordisposal activities that are initiated after December 31, 2002.  The Company does not believe that theadoption of SFAS 146 will have a material impact on its consolidated financialstatements.

 

F-27

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In December 2002, the FASB issued SFAS No. 148“Accounting for Stock-Based Compensation – Transition and Disclosure, anAmendment of FASB Statement No. 123”. SFAS No. 148 provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation prescribed by SFAS No. 123, “Accounting for Stock-BasedCompensation”.  SFAS No. 148 also amendsthe disclosure requirements of SFAS No. 123 to require disclosure in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  As the Company continues toaccount for stock-based employee compensation using the intrinsic value methodunder Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” and related Interpretations, the Company, as required, has onlyadopted the revised disclosure requirements of SFAS No. 148 as of December 31,2002.  (See “Stock-Based Compensation”section of Note 1 to the consolidated financial statements.)

 

In November 2002, the FASB issued FASB InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others”.  FIN 45 requires that upon issuance of aguarantee, a guarantor must recognize a liability for the fair value of anobligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in itsinterim and annual financial statements about the obligations associated withguarantees issued.  The recognitionprovisions of FIN 45 are effective for guarantees issued after December 31,2002, while the disclosure requirements were effective for financial statementsfor periods ending after December 15, 2002. At December 31, 2002, the Company had not entered into any materialarrangement that would be subject to the disclosure requirements of FIN 45.  In addition, ALLTEL does not believe thatthe adoption of FIN 45 will have a material impact on its consolidatedfinancial statements.

 

In November 2002, the EITF reached a consensus onIssue 00-21 “Accounting for Revenue Arrangements With MultipleDeliverables”.  The guidance in Issue00-21 is effective for revenue arrangements entered into in fiscal yearsbeginning after June 15, 2003.  Issue00-21 addresses the accounting by a vendor for arrangements under which it willperform multiple revenue-generating activities.  Specifically, Issue 00-21 addresses how to determine whether anarrangement involving multiple deliverables contains one or more units ofaccounting and how arrangement consideration should be measured and allocatedto the separate units of accounting.  The Company is currently assessing the expected impact of applying theguidance in Issue 00-21 to its communications and information servicesoperations.

 

Market Risk

The Company is exposed to market risk from changes ininterest rates and foreign exchange rates. The Company has estimated its market risk using sensitivityanalysis.  Market risk is defined as thepotential change in earnings due to a hypothetical adverse change in marketprices or interest rates.  The resultsof the sensitivity analysis used to estimate market risk are presented below,although the actual results may differ from these estimates.

 

Interest Rate Risk

The Company’s earnings are affected by changes invariable interest rates related to ALLTEL’s issuance of short-term commercialpaper and interest rate swap agreements. The Company enters into interest rate swap agreements to obtain atargeted mixture of variable and fixed-interest-rate debt such that the portionof debt subject to variable rates does not exceed 30 percent of ALLTEL’s totaldebt outstanding.  The Company has establishedpolicies and procedures for risk assessment and the approval, reporting, andmonitoring of interest rate swap activity. ALLTEL does not enter into interest rate swap agreements, or otherderivative financial instruments, for trading or speculative purposes.  Management periodically reviews ALLTEL’sexposure to interest rate fluctuations and implements strategies to manage theexposure.

 

As of December 31, 2002, the Company had $25.0 millionof outstanding commercial paper.  TheCompany also had entered into six, pay variable receive fixed, interest rateswap agreements on notional amounts totaling $1.0 billion to convert fixedinterest rate payments to variable as of December 31, 2002.  The maturities of the six interest rateswaps range from March 1, 2006 to November 1, 2013.  The weighted average fixed rate received by ALLTEL on these swapsis 5.5 percent, and the variable rate paid by ALLTEL is the three month LIBOR(London-Interbank Offered Rate).  Theweighted average variable rate paid by ALLTEL was 1.5 percent at December 31,2002.  A hypothetical increase of 100basis points would reduce pre-tax earnings by approximately $10.3 million.  Conversely, a hypothetical decrease of 100basis points would increase pre-tax earnings by approximately $10.3 million.

 

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As of December 31, 2001, the Company had $230.1million of outstanding commercial paper. In addition, as of December 31, 2001, the Company had entered into four,pay variable receive fixed, interest rate swap agreements on notional amountstotaling $500.0 million to convert fixed interest rate payments tovariable.  The maturities of the fourinterest rate swaps range from March 1, 2006 to November 1, 2013.  The weighted average fixed rate received byALLTEL on these swaps is 5.7 percent, and the variable rate paid by ALLTEL isthe three month LIBOR.  The weightedaverage variable rate paid by ALLTEL was 2.1 percent at December 31, 2001.  At December 31, 2001, a hypotheticalincrease of 100 basis points in variable interest rates would reduce pre-taxearnings by $7.3 million.  Conversely, ahypothetical decrease of 100 basis points in variable interest rates wouldincrease pre-tax earnings by $7.3 million.

 

Foreign Exchange Risk

The Company’s business operations in foreign countriesare not material to the Company’s consolidated operations, financial conditionand liquidity.  Foreign currencytranslation gains and losses were not material to the Company’s consolidatedresults of operations for the years ended December 31, 2002 and 2001.  Additionally, the Company is not currentlysubject to material foreign currency exchange rate risk from the effects thatexchange rate movements of foreign currency would have on the Company’s futurecosts or on future cash flows it would receive from its foreignsubsidiaries.  The Company has notentered into any material foreign currency forward exchange contracts or otherderivative financial instruments to hedge the effects of adverse fluctuationsin foreign currency exchange rates.

 

Critical AccountingPolicies

ALLTEL prepares its consolidated financial statementsin accordance with accounting principles generally accepted in the UnitedStates.  ALLTEL’s significant accountingpolicies are discussed in detail in Note 1 to the consolidated financialstatements.  Certain of these accountingpolicies as discussed below require management to make estimates andassumptions about future events that could materially affect the reportedamounts of assets, liabilities, revenues and expenses and disclosure ofcontingent assets and liabilities. These critical accounting polices include the following:

 

Service revenues for the Company’s communicationsbusiness are recognized based upon minutes of use processed and contractedfees, net of any credits and adjustments. Due to varying customer billing cycle cut-off times, the Company mustestimate service revenues earned but not yet billed at the end of eachreporting period.  These estimates arebased on historical minutes of use processed. Changes in estimates for revenues are recognized in the period in whichthey are determinable, and such changes could occur and have a material effecton the Company’s consolidated operating results in the period of change.  Fees assessed to communications customers toactivate service are deferred and recognized over the expected life of thecustomer relationship that is based on historical weighted average servicelives of customers.  ALLTEL does notanticipate any significant changes to the expected life of its communicationscustomer base, but a material increase in the churn rates associated with thecustomer base could materially affect the Company’s future consolidatedoperating results.  Thepercentage-of-completion method of accounting is utilized for informationservices contracts that include a software license element.  Under this method, revenue and profit arerecognized throughout the term of the contract, based upon estimates of the totalcosts to be incurred and revenues to be generated throughout the term of thecontract.  Changes in estimates forrevenues, costs and profits are recognized in the period in which they aredeterminable, and such changes have occurred in the past and have beenmaterial.  Accordingly, changes inrevenue, cost and profit estimates related to the Company’s contracts couldoccur and have a material effect on the Company’s consolidated operatingresults in the period of change.

 

In evaluating the collectibility of its tradereceivables, ALLTEL assesses a number of factors including a specificcustomer’s ability to meet its financial obligations to the Company, as well asgeneral factors, such as the length of time the receivables are past due andhistorical collection experience.  Basedon these assessments, the Company records both specific and general reservesfor bad debt to reduce the related receivables to the amount the Companyultimately expects to collect from customers. If circumstances related to specific customers change or economicconditions worsen such that the Company’s past collection experience is nolonger relevant, ALLTEL’s estimate of the recoverability of its tradereceivables could be further reduced from the levels provided for in theconsolidated financial statements.

 

At each balance sheet date, ALLTEL performs a detailedassessment of its capitalized software development costs to be marketed whichincludes a review of, among other factors, projected revenues, customer demandrequirements, product lifecycle, changes in software and hardware technologies,and product development plans.  Based onthis analysis, ALLTEL records adjustments, when appropriate, to reflect the netrealizable value of its capitalized software development costs.  The estimates of expected future revenues generatedby the software, the remaining economic life of the software, or both, could bereduced in the near term, materially affecting the carrying value ofcapitalized software development costs and the Company’s consolidated operatingresults in the period of change.

 

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The calculation of the annual costs of providingpension and postretirement benefits are based on certain key actuarialassumptions as disclosed in Note 7 to the consolidated financial statements.  As previously discussed, the discount rateselected is based on a review of current market interest rates on high-quality,fixed-rate debt securities adjusted to reflect the Company’s longer duration ofexpected future cash outflows for benefit payments.  The expected return on plan assets reflects management’s view ofthe long-term returns available in the investment market based on historicalaverages and consultation with investment advisors.  The healthcare cost trend rate is based on the Company’s actualmedical claims experience and future projections of medical costs.  Changes in these key assumptions could havea material effect on the projected benefit obligations, funding requirementsand future periodic benefit costs incurred by the Company.

 

The calculation of depreciation and amortizationexpense is based on the estimated economic useful lives of the underlyingproperty, plant and equipment and intangible assets.  Although ALLTEL believes it is unlikely that any significantchanges to the useful lives of its tangible or intangible assets will occur inthe near term, rapid changes in technology or changes in market conditionscould result in revisions to such estimates that could materially affect thecarrying value of these assets and the Company’s future consolidated operatingresults.

 

Other Information

On May 7, 2002, the Audit Committee of the Board ofDirectors of ALLTEL authorized (1) the engagement of PricewaterhouseCoopers LLP(“PwC”) as the independent auditors for ALLTEL for the calendar year 2002 and(2) the dismissal of Arthur Andersen LLP as ALLTEL’s independent auditors.

 

During 2002, ALLTEL paid PwC $506,793 related to a2001 engagement for expatriate tax and administration services.  Billings related to these services areexpected to continue through the first quarter of 2003.  The Audit Committee has adopted a policythat requires all non-audit services be approved in advance by the AuditCommittee and that no non-audit services, other than tax-related services, maybe requested of ALLTEL’s independent auditors. PwC has advised the Audit Committee that performing the foregoingexpatriate tax and administrative services did not jeopardize the independenceof PwC or violate the requirements of the Sarbanes-Oxley Act of 2002.  In addition, PwC has not performed taxservices for any of ALLTEL’s executive officers.

 

Forward-LookingStatements

This Management’s Discussion and Analysis of FinancialCondition and Results of Operations includes, and future filings by the Companyon Form 10-K, Form 10-Q and Form 8-K and future oral and written statements byALLTEL and its management may include, certain “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are subject touncertainties that could cause actual future events and results to differmaterially from those expressed in the forward-looking statements.  These forward-looking statements are basedon estimates, projections, beliefs and assumptions and are not guarantees offuture events and results.  Words suchas “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”,“estimates”, and “should”, and variations of these words and similarexpressions, are intended to identify these forward-looking statements.  Examples of such forward-looking statementsinclude statements regarding ALLTEL’s future cash dividend policy, forecasts ofsegment capital requirements for 2003, and future contractual obligation andcommitment payments.  ALLTEL disclaimsany obligation to update or revise any forward-looking statement based on theoccurrence of future events, the receipt of new information, or otherwise.

 

Actual future events and results may differ materiallyfrom those expressed in these forward-looking statements as a result of anumber of important factors. Representative examples of these factors include (without limitation)adverse changes in economic conditions in the markets served by ALLTEL; theextent, timing, and overall effects of competition in the communicationsbusiness; material changes in the communications industry generally that couldadversely affect vendor relationships with equipment and network suppliers andcustomer relationships with wholesale customers; material changes in communicationstechnology; the risks associated with the integration of acquired businesses;the potential for adverse changes in the ratings given to our 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 litigation; ongoing deregulation (and theresulting likelihood of significantly increased price and product/servicecompetition) in the communications business as a result of federal and statelegislation, rules, and regulations; the final outcome of federal, state andlocal regulatory initiatives and proceedings related to the terms andconditions of interconnection, access charges, universal service and unbundlednetwork elements and resale rates; and the final outcome of pending litigationchallenging the Federal Communications Commission’s wireless number portabilityrules.

 

In addition to these factors, actual futureperformance, outcomes and results may differ materially because of other, moregeneral, factors including (without limitation) general industry and marketconditions and growth rates, economic conditions, and governmental and publicpolicy changes.

 

F-30

----

 

**SELECTEDFINANCIAL DATA**

** **
| **For the years ended December 31,  (Millions, except per share amounts)** |   | **2002** |       | **2001** |       | **2000** |       | **1999** |       | **1998** |       | **1997** |       |
|----------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| **Revenues and sales**                                                     |   | $        | 7,983.4    |     | $          | 7,505.6  |       | $        | 7,160.0    |     | $          | 6,501.9  |       | $ | 5,779.2 |   | $ | 5,076.0 |   |
| Operating  expenses                                                        |   | 6,052.7  |       | 5,748.7  |       | 5,467.1  |       | 4,886.3  |       | 4,446.3  |       | 3,929.9  |       |
| Merger and  integration expenses and other charges                         |   | 115.1    |       | 92.2     |       | 25.4     |       | 90.5     |       | 252.0    |       | —   |       |
| Provision to  reduce carrying value of certain assets                      |   | —   |       | —   |       | —   |       | —   |       | 55.0     |       | 16.9     |       |
| Total costs and  expenses                                                  |   | 6,167.8  |       | 5,840.9  |       | 5,492.5  |       | 4,976.8  |       | 4,753.3  |       | 3,946.8  |       |
| **Operating income**                                                       |   | 1,815.6  |       | 1,664.7  |       | 1,667.5  |       | 1,525.1  |       | 1,025.9  |       | 1,129.2  |       |
| Non-operating  income (expense), net                                       |   | (1.7     | )          | (2.0     | )          | 47.3     |       | 13.0     |       | 41.2     |       | 8.2      |       |
| Interest expense                                                           |   | (349.4   | )          | (268.5   | )          | (292.6   | )          | (250.4   | )          | (254.9   | )          | (260.6   | )          |
| Gain on disposal  of assets, write-down of investments and other           |   | 1.0      |       | 357.6    |       | 1,928.5  |       | 43.1     |       | 292.7    |       | 209.6    |       |
| Income before  income taxes                                                |   | 1,465.5  |       | 1,751.8  |       | 3,350.7  |       | 1,330.8  |       | 1,104.9  |       | 1,086.4  |       |
| Income taxes                                                               |   | 541.2    |       | 704.3    |       | 1,385.3  |       | 547.2    |       | 501.8    |       | 433.9    |       |
| Income before  cumulative effect of accounting change                      |   | 924.3    |       | 1,047.5  |       | 1,965.4  |       | 783.6    |       | 603.1    |       | 652.5    |       |
| Cumulative  effect of accounting change                                    |   | —   |       | 19.5     |       | (36.6    | )          | —   |       | —   |       | —   |       |
| Net income                                                                 |   | 924.3    |       | 1,067.0  |       | 1,928.8  |       | 783.6    |       | 603.1    |       | 652.5    |       |
| Preferred  dividends                                                       |   | 0.1      |       | 0.1      |       | 0.1      |       | 0.9      |       | 1.2      |       | 1.3      |       |
| Net income  applicable to common shares                                    |   | $        | 924.2      |     | $          | 1,066.9  |       | $        | 1,928.7    |     | $          | 782.7    |       | $ | 601.9 |   | $ | 651.2 |   |
| **Earnings per share:**                                                    |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| Income before  cumulative effect of accounting change:                     |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| Basic                                                                      |   | $        | 2.97       |     | $          | 3.36     |       | $        | 6.25       |     | $          | 2.50     |       | $ | 1.97 |   | $ | 2.12 |   |
| Diluted                                                                    |   | $        | 2.96       |     | $          | 3.34     |       | $        | 6.20       |     | $          | 2.47     |       | $ | 1.95 |   | $ | 2.10 |   |
| Net income:                                                                |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |     | ** ** |
| Basic                                                                      |   | $        | 2.97       |     | $          | 3.42     |       | $        | 6.13       |     | $          | 2.50     |       | $ | 1.97 |   | $ | 2.12 |   |
| Diluted                                                                    |   | $        | 2.96       |     | $          | 3.40     |       | $        | 6.08       |     | $          | 2.47     |       | $ | 1.95 |   | $ | 2.10 |   |
| Dividends per  common share                                                |   | $        | 1.37       |     | $          | 1.33     |       | $        | 1.29       |     | $          | 1.235    |       | $ | 1.175 |   | $ | 1.115 |   |
| Weighted average  common shares:                                           |   |     |       |     |       |     |       |     |       |     |       |     |       |
| Basic                                                                      |   | 311.0    |       | 311.4    |       | 314.4    |       | 312.8    |       | 305.3    |       | 307.9    |       |
| Diluted                                                                    |   | 312.3    |       | 313.5    |       | 317.2    |       | 316.8    |       | 308.4    |       | 309.9    |       |
| Pro forma  amounts assuming accounting changes applied retroactively:      |   |     |       |     |       |     |       |     |       |     |       |     |       |
| Net income                                                                 |   | $        | 924.3      |     | $          | 1,047.5  |       | $        | 1,969.5    |     | $          | 766.9    |       | $ | 595.9 |   | $ | 652.1 |   |
| Basic earnings  per share                                                  |   | $        | 2.97       |     | $          | 3.36     |       | $        | 6.26       |     | $          | 2.45     |       | $ | 1.95 |   | $ | 2.11 |   |
| Diluted earnings  per share                                                |   | $        | 2.96       |     | $          | 3.34     |       | $        | 6.21       |     | $          | 2.42     |       | $ | 1.93 |   | $ | 2.10 |   |
| Total assets                                                               |   | $        | 16,389.1   |     | $          | 12,609.0 |       | $        | 12,182.0   |     | $          | 10,774.2 |       | $ | 10,155.5 |   | $ | 9,232.0 |   |
| Total  shareholders’ equity                                           |   | $        | 5,998.1    |     | $          | 5,565.8  |       | $        | 5,095.4    |     | $          | 4,205.7  |       | $ | 3,632.0 |   | $ | 3,052.0 |   |
| Total redeemable  preferred stock and long-term debt                       |   | $        | 6,146.5    |     | $          | 3,862.8  |       | $        | 4,613.1    |     | $          | 3,751.9  |       | $ | 3,683.6 |   | $ | 3,859.8 |   |

 

Notesto Selected Financial Information:

A.           Net income for 2002 included pretax chargesof $42.3 million incurred in connection with discontinuing a business venturewith Bradford & Bingley Group to provide mortgage administration andinformation technology products to the mortgage lending industry in the UnitedKingdom.  The pretax charges primarilyconsisted of the write-off of capitalized software development costs with noalternative future use or functionality and other costs to unwind the businessventure.  The Company also incurredpretax charges of $31.4 million incurred in connection with the restructuringof the Company’s competitive local exchange carrier (“CLEC”), call center andretail store operations.  ALLTEL alsorecorded a restructuring charge of $5.5 million related to a planned workforcereduction and the closing of seven product distribution centers.  During 2002, the Company also incurredintegration expenses of $28.8 million related to its acquisitions of wirelineproperties from Verizon Communications, Inc. and wireless properties fromCenturyTel, Inc.  The Company alsorecorded write-downs in the carrying value of certain cell site equipment of$7.1 million.  These charges decreased netincome $62.5 million or $.20 per share. (See Note 9 to the consolidated financialstatements.)  Net income for 2002included a pretax gain of $22.1 million realized from the sale of a wirelessproperty, partially offset by pretax write-downs of $16.3 million related tothe Company’s investments in Hughes Tele.com Limited and Airspan Networks,Inc.  The Company also recorded a pretaxadjustment of $4.8 million to reduce the gain recognized from the dissolutionof a wireless partnership that was initially recorded in 2001.  These transactions increased net income $0.6million or less than $.01 per share. (See Note 10 to the consolidated financialstatements.)

 

As further discussed inNote 1 to the consolidated financial statements, effective January 1, 2002, theCompany changed its accounting for goodwill and other indefinite-lived intangibleassets from an amortization method to an impairment-only approach in accordancewith SFAS No. 142.  Accordingly, theCompany ceased amortization of goodwill and indefinite-lived intangible assetsas of January 1, 2002.

 

F-31

----

 

The adjusted after-taxincome before cumulative effect of accounting change, net income and earningsper share effects, assuming that the change in accounting to eliminate theamortization of goodwill and other indefinite-lived intangible assets wasapplied retroactively were as follows for the years ended December 31:

* *
| **(Millions,  except per share amounts)**             |   | **2001** |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|-------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|--------|----------|--------|
| Income before  cumulative effect of accounting change |   | $        | 1,140.6 |     | $      | 2,057.0  |   | $        | 836.9  |     | $      | 649.1 |   | $ | 696.4 |   |
| Basic earnings  per share                             |   | $        | 3.66    |     | $      | 6.55     |   | $        | 2.67   |     | $      | 2.12 |   | $ | 2.26 |   |
| Diluted earnings  per share                           |   | $        | 3.64    |     | $      | 6.49     |   | $        | 2.64   |     | $      | 2.10 |   | $ | 2.24 |   |
|                                                  |   |     |    |     |   |     |   |     |   |     |   |
| Net income                                            |   | $        | 1,160.1 |     | $      | 2,020.4  |   | $        | 836.9  |     | $      | 649.1 |   | $ | 696.4 |   |
| Basic earnings  per share                             |   | $        | 3.72    |     | $      | 6.43     |   | $        | 2.67   |     | $      | 2.12 |   | $ | 2.26 |   |
| Diluted earnings  per share                           |   | $        | 3.70    |     | $      | 6.37     |   | $        | 2.64   |     | $      | 2.10 |   | $ | 2.24 |   |

 

B.             Net income for 2001 included pretax gains of$347.8 million from the sale of PCS licenses, a pretax gain of $9.5 millionfrom the dissolution of a wireless partnership and a pretax gain of $3.2million from the sale of certain investments. Net income also included pretax termination fees of $2.9 millionincurred due to the early retirement of debt. These transactions increased net income $212.7 million or $.68 pershare. (See Note 10 to the consolidated financial statements.)  Net income also included pretax charges of$77.1 million incurred in connection with the restructuring of the Company’sregional communications, information services, product distribution andcorporate operations.  The Company alsorecorded write-downs in the carrying value of certain cell site equipmenttotaling $15.1 million.  These chargesdecreased net income $54.8 million or $.18 per share. (See Note 9 to theconsolidated financial statements.) Effective January 1, 2001, the Company changed its method of accountingfor a subsidiary’s pension plan to conform to the Company’s primary pensionplan.  The cumulative effect of thisaccounting change resulted in a non-cash credit of $19.5 million, net of incometax expense of $13.0 million or $.06 per share. (See Note 2 to the consolidatedfinancial statements.)

 

C.             Net income for 2000 included pretax gains of$1,345.5 million from the exchange of wireless properties with Bell AtlanticCorporation and GTE Corporation, pretax gains of $36.0 million from the sale ofcertain PCS assets and pretax gains of $562.0 million from the sale ofinvestments, principally consisting of WorldCom, Inc. (“WorldCom”) commonstock.  Net income also included apretax write-down of $15.0 million in the Company’s investment in an Internetaccess service provider.  Thesetransactions increased net income $1,124.3 million or $3.58 per share. (SeeNote 10 to the consolidated financial statements.)  Net income also included integration costs and other charges of$25.4 million primarily incurred in connection with the acquisition of wirelessassets and with certain restructuring activities of the Company’s informationservices business.  These chargesdecreased net income $15.0 million or $.05 per share. (See Note 9 to theconsolidated financial statements.)  TheCompany also incurred a pretax charge of $11.5 million in connection with alitigation settlement.  This chargedecreased net income $7.0 million or $.02 per share. (See Note 13 to theconsolidated financial statements.) Effective January 1, 2000, the Company changed its method of recognizingwireless access revenues and certain customer activation fees.  The cumulative effect of this accountingchange resulted in a non-cash charge of $36.6 million, net of income taxbenefit of $23.3 million or $.12 per share. (See Note 2 to the consolidatedfinancial statements.)

 

D.            Net income for 1999 included a pretax gainof $43.1 million from the sale of WorldCom common stock.  The gain increased net income by $27.2million or $.08 per share.  Net incomealso included a pretax charge of $90.5 million in connection with the closingof the Company’s mergers with Aliant Communications Inc., Liberty Cellular,Inc. and its affiliate KINI L.C., Advanced Information Resources, Limited andSouthern Data Systems and with certain loss contingencies and otherrestructuring activities.  These chargesdecreased net income $66.1 million or $.21 per share.

 

E.              Net income for 1998 included pretax gains of$296.2 million from the sale of certain investments, principally consisting ofWorldCom common stock.  These gainsincreased net income by $179.7 million or $.59 per share.  Net income also included merger andintegration expenses of $252.0 million related to the closing of the mergerwith 360° Communications Company.  Thesemerger and integration expenses decreased net income $201.0 million or $.66 pershare.  Net income also included apretax charge of $55.0 million resulting from changes in a customer care andbilling contract with a major customer and termination fees of $3.5 millionincurred due to the early retirement of long-term debt.  These charges decreased net income $35.7million or $.12 per share.

 

F.              Net income for 1997 included pretax gains of$209.6 million from the sale of certain investments, principally consisting ofWorldCom common stock and from the sale of the Company’s healthcareoperations.  These gains increased netincome by $121.5 million or $.40 per share. Net income also included a pretax write-down of $16.9 million to reflectthe fair value less cost to sell the Company’s wire and cable operations.  This write-down decreased net income $11.7million or $.04 per share.

 

F-32

----

 

**REPORT OF MANAGEMENT**

 

 

ALLTELCorporation’s management is responsible for the integrity and objectivity ofall financial data included in this Financial Supplement.  The consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The financial datainclude amounts that are based on the best estimates and judgments ofmanagement.  All financial informationin this Financial Supplement is consistent with that in the consolidatedfinancial statements.

 

Managementmaintains a system of internal controls designed to provide reasonableassurance, at an appropriate cost-benefit relationship, that the Company’sassets are protected from improper use and that transactions are authorized,recorded and reported properly.  Keyelements in ALLTEL’s system of internal controls include selection of qualifiedmanagers, appropriate division of responsibilities and communication ofpolicies and standards.  The Company’sEthics in the Workplace Program serves as a guide for all employees withrespect to business conduct and conflicts of interest.

 

Managementcontinually monitors, evaluates and where appropriate, modifies the system ofinternal controls in response to changes in business conditions and operationsand the recommendations made by ALLTEL’s internal and external auditors.  We believe the system of internal controlsprovides reasonable assurance that ALLTEL’s assets are safeguarded and that thefinancial information is reliable.

 

PricewaterhouseCoopersLLP, Independent Public Accountants, have audited these consolidated financialstatements for the years ended December 31, 2002 and 2001 and have expressedherein their unqualified opinion.

 

The AuditCommittee of the Board of Directors, composed of independent directors (asdefined by the New York Stock Exchange), meets periodically with management,the independent accountants and the internal auditors to review mattersrelating to the Company’s annual financial statements, internal audit program,internal controls and non-audit services provided by the independentaccountants.  As a matter of policy, theinternal auditors and the independent accountants periodically meet alone withthe Audit Committee and have access to the Audit Committee at any time.

 

Dated March 3,2003

 
| Scott T. Ford           | Jeffery R. Gardner      |
|-------------------------|-------------------------|
| President and           | Senior Vice President-  |
| Chief Executive Officer | Chief Financial Officer |

 

F-33

----

 

**REPORTOF INDEPENDENT ACCOUNTANTS**

 

 

To theShareholders of ALLTEL Corporation:

 

 

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of income, cash flowsand of shareholders’ equity present fairly, in all material respects, thefinancial position of ALLTEL Corporation and its subsidiaries (the “Company”)as of December 31, 2002 and 2001, and the results of its operations and itscash flows for the years then ended in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibility of the Company’smanagement; our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.  The financial statements of the Company as of December 31, 2000and for the year then ended before the revisions described in Note 1,“Reclassifications”, were audited by other independent accountants who haveceased operations.  Those independentaccountants expressed an unqualified opinion on those financial statements intheir report dated January 21, 2002.

 

As discussed above, the financial statements ofthe Company as of December 31, 2000, and for the year then ended, were auditedby other independent accountants who have ceased operations.  As described in Note 1, these financialstatements have been revised to reflect the adoption of Emerging Issues TaskForce Issue No. 01-14 (“EITF No. 01-14”), “Income Statement Characterization ofReimbursements Received for Out-of-Pocket Expenses Incurred”, and to reclassifythe operating units of the Company’s emerging communications businesses inaccordance with Statement of Financial Accounting Standards No. 131 (“SFAS No.131”), “Disclosures about Segments of an Enterprise and RelatedInformation”.  We audited theadjustments described in Note 1 that were applied to revise the 2000 financialstatements.  As described in Note 1, theCompany has changed its accounting for goodwill and other intangible assetsupon adoption of Statement of Financial Accounting Standards No. 142 (“SFAS No.142”), “Goodwill and Other Intangible Assets” as of January 1, 2002.  As described in Note 1, these financialstatements have also been revised to include the transitional disclosuresrequired by SFAS No. 142.  Wealso audited the transitional disclosures described in Note 1.  In our opinion, the adjustments in Note 1for 2000 are appropriate and have been properly applied, and the transitionaldisclosures for 2000 in Note 1 are appropriate.  However, we were not engaged to audit, review, or apply anyprocedures to the 2000 financial statements of the Company other than withrespect to such adjustments and disclosures and, accordingly, we do not expressan opinion or any other form of assurance on the 2000 financial statementstaken as a whole.

 

As discussed in Note 1, the Company has changed its method ofaccounting for goodwill and other intangible assets as a result of adoptingSFAS No. 142 as of January 1, 2002. Also, as discussed in Note 2 to the financial statements, effectiveJanuary 1, 2001, the Company changed its method of accounting for computing andamortizing unrecognized actuarial gains and losses related to a subsidiary’sdefined benefit pension plan.

 

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
| Little Rock, AR                |
| January 21, 2003               |

 

F-34

----

 

THIS REPORT IS ACOPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT AND HAS NOT BEENREISSUED BY ARTHUR ANDERSEN LLP

 

 

**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

 

To theShareholders of ALLTEL Corporation:

 

 

We have audited the accompanying consolidated balance sheets of ALLTELCorporation (a Delaware corporation) and subsidiaries as of December 31, 2001and 2000, and the related consolidated statements of income, shareholders’equity and cash flows for each of the three years in the period ended December31, 2001.  These financial statementsare the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of ALLTEL Corporationand subsidiaries as of December 31, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2001, in conformity with accounting principles generally acceptedin the United States.

 

As explained in Note 2 to the financial statements, effective January1, 2001, the Company changed its method of accounting for computing andamortizing unrecognized actuarial gains and losses related to a subsidiary’sdefined benefit pension plan, and effective January 1, 2000, the Companychanged its method of accounting for certain communications revenues.

 

 
| /s/ ARTHUR ANDERSEN LLP |   |
|-------------------------|--------|
|                    |
| Little Rock, Arkansas,  |
| January 21, 2002        |

 

F-35

----

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

 
| **For the years ended December 31,  (Millions, except per share amounts)**               |   | **2002** |       | **2001** |       | **2000** |       |
|------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **Revenues and sales:**                                                                  |   |     |       |     |       |     |       |
| Service revenues                                                                         |   | $        | 7,257.3    |     | $          | 6,736.8  |       | $ | 6,325.6 |   |
| Product sales                                                                            |   | 726.1    |       | 768.8    |       | 834.4    |       |
| Total revenues  and sales                                                                |   | 7,983.4  |       | 7,505.6  |       | 7,160.0  |       |
| **Costs and expenses:**                                                                  |   |     |       |     |       |     |       |
| Cost of services  (excluding depreciation of $816.7, $723.4 and $647.7 included below)   |   | 2,471.5  |       | 2,269.1  |       | 2,269.5  |       |
| Cost of products  sold                                                                   |   | 891.4    |       | 907.9    |       | 840.1    |       |
| Selling,  general, administrative and other                                              |   | 1,511.2  |       | 1,404.0  |       | 1,369.1  |       |
| Depreciation and  amortization                                                           |   | 1,178.6  |       | 1,167.7  |       | 988.4    |       |
| Integration  expenses and other charges                                                  |   | 115.1    |       | 92.2     |       | 25.4     |       |
| Total costs and  expenses                                                                |   | 6,167.8  |       | 5,840.9  |       | 5,492.5  |       |
| **Operating income**                                                                     |   | 1,815.6  |       | 1,664.7  |       | 1,667.5  |       |
|                                                                                     |   |     |       |     |       |     |       |
| Equity earnings  in unconsolidated partnerships                                          |   | 65.8     |       | 57.0     |       | 120.5    |       |
| Minority  interest in consolidated partnerships                                          |   | (69.9    | )          | (71.8    | )          | (97.2    | )          |
| Other income,  net                                                                       |   | 2.4      |       | 12.8     |       | 24.0     |       |
| Interest expense                                                                         |   | (349.4   | )          | (268.5   | )          | (292.6   | )          |
| Gain on disposal  of assets, write-down of investments and other                         |   | 1.0      |       | 357.6    |       | 1,928.5  |       |
|                                                                                     |   |     |       |     |       |     |       |
| Income before  income taxes                                                              |   | 1,465.5  |       | 1,751.8  |       | 3,350.7  |       |
| Income taxes                                                                             |   | 541.2    |       | 704.3    |       | 1,385.3  |       |
|                                                                                     |   |     |       |     |       |     |       |
| Income before  cumulative effect of accounting change                                    |   | 924.3    |       | 1,047.5  |       | 1,965.4  |       |
| Cumulative  effect of accounting change                                                  |   |     |       |     |       |     |       |
| (net of income  taxes of $13.0 in 2001 and tax benefit of $23.3 in 2000)                 |   | —   |       | 19.5     |       | (36.6    | )          |
|                                                                                     |   |     |       |     |       |     |       |
| Net income                                                                               |   | 924.3    |       | 1,067.0  |       | 1,928.8  |       |
| Preferred  dividends                                                                     |   | 0.1      |       | 0.1      |       | 0.1      |       |
| Net income  applicable to common shares                                                  |   | $        | 924.2      |     | $          | 1,066.9  |       | $ | 1,928.7 |   |
| **Earnings per share:**                                                                  |   |     | ** ** |     | ** ** |     | ** ** |
| Basic:                                                                                   |   |     |       |     |       |     |       |
| Income before  cumulative effect of accounting change                                    |   | $        | 2.97       |     | $          | 3.36     |       | $ | 6.25 |   |
| Cumulative  effect of accounting change                                                  |   | —   |       | .06      |       | (.12     | )          |
| Net income                                                                               |   | $        | 2.97       |     | $          | 3.42     |       | $ | 6.13 |   |
| Diluted:                                                                                 |   |     |       |     |       |     |       |
| Income before  cumulative effect of accounting change                                    |   | $        | 2.96       |     | $          | 3.34     |       | $ | 6.20 |   |
| Cumulative  effect of accounting change                                                  |   | —   |       | .06      |       | (.12     | )          |
| Net income                                                                               |   | $        | 2.96       |     | $          | 3.40     |       | $ | 6.08 |   |
| Pro forma  amounts assuming changes in accounting principles were applied retroactively: |   |     |       |     |       |     |       |
| Net income as  reported:                                                                 |   | $        | 924.3      |     | $          | 1,067.0  |       | $ | 1,928.8 |   |
| Effect of change  in revenue recognition                                                 |   | —   |       | —   |       | 36.6     |       |
| Effect of change  in pension accounting                                                  |   | —   |       | (19.5    | )          | 4.1      |       |
| Net income as  adjusted                                                                  |   | $        | 924.3      |     | $          | 1,047.5  |       | $ | 1,969.5 |   |
| Earnings per  share as adjusted:                                                         |   |     |       |     |       |     |       |
| Basic                                                                                    |   | $        | 2.97       |     | $          | 3.36     |       | $ | 6.26 |   |
| Diluted                                                                                  |   | $        | 2.96       |     | $          | 3.34     |       | $ | 6.21 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-36

----

 

**CONSOLIDATEDBALANCE SHEETS******December 31,(Dollars in millions, except per share amounts)

 
|                                                                                                                                                    |   |     |       |     |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|
| **Assets**                                                                                                                                              |   | **2002** |       | **2001** |       |
| **Current Assets:**                                                                                                                                     |   |     |       |     |       |
| Cash and  short-term investments                                                                                                                        |   | $        | 155.5      |     | $          | 85.3 |   |
| Accounts  receivable (less allowance for doubtful accounts of $71.9 and $52.2,  respectively)                                                           |   | 1,290.4  |       | 1,241.2  |       |
| Inventories                                                                                                                                             |   | 139.9    |       | 163.8    |       |
| Prepaid expenses  and other                                                                                                                             |   | 60.2     |       | 277.5    |       |
| Total current  assets                                                                                                                                   |   | 1,646.0  |       | 1,767.8  |       |
| Investments                                                                                                                                             |   | 327.4    |       | 251.6    |       |
| Goodwill                                                                                                                                                |   | 4,795.5  |       | 2,676.5  |       |
| Other  intangibles                                                                                                                                      |   | 1,346.5  |       | 755.6    |       |
| **Property, Plant and Equipment:**                                                                                                                      |   |     | ** ** |     | ** ** |
| Land                                                                                                                                                    |   | 289.1    |       | 239.8    |       |
| Buildings and  improvements                                                                                                                             |   | 1,194.0  |       | 1,051.4  |       |
| Wireline                                                                                                                                                |   | 6,188.5  |       | 5,501.3  |       |
| Wireless                                                                                                                                                |   | 4,798.3  |       | 4,160.6  |       |
| Information  services                                                                                                                                   |   | 1,311.7  |       | 1,166.8  |       |
| Other                                                                                                                                                   |   | 620.5    |       | 578.0    |       |
| Under construction                                                                                                                                      |   | 366.0    |       | 384.1    |       |
| Total property,  plant and equipment                                                                                                                    |   | 14,768.1 |       | 13,082.0 |       |
| Less accumulated  depreciation                                                                                                                          |   | 7,059.4  |       | 6,300.7  |       |
| Net property,  plant and equipment                                                                                                                      |   | 7,708.7  |       | 6,781.3  |       |
| Other assets                                                                                                                                            |   | 565.0    |       | 376.2    |       |
| **Total Assets**                                                                                                                                        |   | $        | 16,389.1   |     | $          | 12,609.0 |   |
|                                                                                                                                                    |   |     |       |     |       |
| **Liabilities and Shareholders’  Equity**                                                                                                          |   |     | ** ** |     | ** ** |
| **Current Liabilities:**                                                                                                                                |   |     | ** ** |     | ** ** |
| Current  maturities of long-term debt                                                                                                                   |   | $        | 495.3      |     | $          | 51.6 |   |
| Accounts payable                                                                                                                                        |   | 587.8    |       | 522.1    |       |
| Advance payments  and customer deposits                                                                                                                 |   | 261.5    |       | 218.0    |       |
| Accrued taxes                                                                                                                                           |   | 46.8     |       | 141.0    |       |
| Accrued  dividends                                                                                                                                      |   | 109.6    |       | 105.9    |       |
| Accrued interest                                                                                                                                        |   | 123.8    |       | 66.4     |       |
| Other current  liabilities                                                                                                                              |   | 194.4    |       | 180.1    |       |
| Total current  liabilities                                                                                                                              |   | 1,819.2  |       | 1,285.1  |       |
| Long-term debt                                                                                                                                          |   | 6,145.5  |       | 3,861.5  |       |
| Deferred income  taxes                                                                                                                                  |   | 1,158.5  |       | 738.0    |       |
| Other  liabilities                                                                                                                                      |   | 1,267.8  |       | 1,158.6  |       |
| **Shareholders’ Equity:**                                                                                                                          |   |     | ** ** |     | ** ** |
| Preferred stock,  Series C, $2.06, no par value, 15,635 shares in 2002 and 16,880 shares in  2001 issued and outstanding                                |   | 0.4      |       | 0.4      |       |
| Common stock,  par value $1 per share, 1.0 billion shares authorized, 311,182,950 shares in  2002 and 310,529,902 shares in 2001 issued and outstanding |   | 311.2    |       | 310.5    |       |
| Additional  paid-in capital                                                                                                                             |   | 695.7    |       | 769.2    |       |
| Unrealized  holding loss on investments                                                                                                                 |   | —   |       | (4.5     | )          |
| Foreign currency  translation adjustment                                                                                                                |   | (6.9     | )          | (9.9     | )          |
| Retained  earnings                                                                                                                                      |   | 4,997.7  |       | 4,500.1  |       |
| Total  shareholders’ equity                                                                                                                        |   | 5,998.1  |       | 5,565.8  |       |
| **Total Liabilities and Shareholders’  Equity**                                                                                                    |   | $        | 16,389.1   |     | $          | 12,609.0 |   |

 

The accompanyingnotes are an integral part of these consolidated balance sheets.

 

F-37

----

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS******For the years ended December 31,(Millions)

 
|                                                                          |   | **2002** |       | **2001** |       | **2000** |       |
|-------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|------------|
| **Cash Provided from Operations:**                                            |   |     | ** ** |     | ** ** |     | ** ** |
| Net income                                                                    |   | $        | 924.3      |     | $          | 1,067.0  |       | $ | 1,928.8 |   |
| Adjustments to  reconcile net income to net cash provided from operations:    |   |     |       |     |       |     |       |
| Depreciation and  amortization                                                |   | 1,178.6  |       | 1,167.7  |       | 988.4    |       |
| Provision for  doubtful accounts                                              |   | 267.0    |       | 144.0    |       | 113.1    |       |
| Cumulative  effect of accounting change                                       |   | —   |       | (19.5    | )          | 36.6     |       |
| Non-cash portion  of integration expenses and charges                         |   | 48.3     |       | 46.6     |       | 1.6      |       |
| Gain on disposal  of assets, write-down of investments and other              |   | (1.0     | )          | (357.6   | )          | (1,928.5 | )          |
| Increase in  deferred income taxes                                            |   | 373.0    |       | 216.2    |       | 77.9     |       |
| Other, net                                                                    |   | 15.2     |       | 24.9     |       | (56.0    | )          |
| Changes in  operating assets and liabilities, net of effects of acquisitions: |   |     |       |     |       |     |       |
| Accounts  receivable                                                          |   | (236.2   | )          | (151.8   | )          | (380.5   | )          |
| Inventories                                                                   |   | 27.3     |       | 71.4     |       | (71.2    | )          |
| Accounts payable                                                              |   | 110.3    |       | (166.2   | )          | 170.1    |       |
| Other current  liabilities                                                    |   | (77.7    | )          | (59.8    | )          | 498.5    |       |
| Other, net                                                                    |   | (34.2    | )          | 87.6     |       | 117.5    |       |
| Net cash  provided from operations                                            |   | 2,594.9  |       | 2,070.5  |       | 1,496.3  |       |
| **Cash Flows from Investing  Activities:**                                    |   |     | ** ** |     | ** ** |     | ** ** |
| Additions to  property, plant and equipment                                   |   | (1,194.1 | )          | (1,231.9 | )          | (1,164.7 | )          |
| Additions to  capitalized software development costs                          |   | (119.0   | )          | (171.4   | )          | (117.3   | )          |
| Additions to  investments                                                     |   | (9.4     | )          | (5.3     | )          | (16.2    | )          |
| Purchases of  property, net of cash acquired                                  |   | (3,375.8 | )          | (217.5   | )          | (1,040.0 | )          |
| Proceeds from  the lease of cell site towers                                  |   | 7.5      |       | 524.4    |       | —   |       |
| Proceeds from  the sale of assets                                             |   | 24.1     |       | 411.4    |       | 328.9    |       |
| Proceeds from  the sale of  investments                                  |   | —   |       | 2.6      |       | 630.3    |       |
| Proceeds from  the return on investments                                      |   | 51.9     |       | 54.8     |       | 94.2     |       |
| Other, net                                                                    |   | 8.2      |       | 62.6     |       | 20.5     |       |
| Net cash used in  investing activities                                        |   | (4,606.6 | )          | (570.3   | )          | (1,264.3 | )          |
| **Cash Flows from Financing  Activities:**                                    |   |     | ** ** |     | ** ** |     | ** ** |
| Dividends on  preferred and common stock                                      |   | (423.1   | )          | (411.8   | )          | (403.0   | )          |
| Reductions in  long-term debt                                                 |   | (266.4   | )          | (782.5   | )          | (405.9   | )          |
| Purchases of  common stock                                                    |   | —   |       | (192.3   | )          | (164.3   | )          |
| Preferred stock  redemptions and purchases                                    |   | —   |       | (0.1     | )          | (0.1     | )          |
| Distributions to  minority investors                                          |   | (57.9    | )          | (117.8   | )          | (76.8    | )          |
| Long-term debt  issued, net of issuance costs                                 |   | 2,809.1  |       | —   |       | 835.5    |       |
| Common stock  issued                                                          |   | 17.2     |       | 27.8     |       | 31.2     |       |
| Net cash  provided from (used in) financing activities                        |   | 2,078.9  |       | (1,476.7 | )          | (183.4   | )          |
| Effect of  exchange rate changes on cash and short-term investments           |   | 3.0      |       | (5.4     | )          | 1.0      |       |
|                                                                          |   |     |       |     |       |     |       |
| Increase in cash  and short-term investments                                  |   | 70.2     |       | 18.1     |       | 49.6     |       |
| **Cash and Short-term Investments:**                                          |   |     | ** ** |     | ** ** |     | ** ** |
| Beginning of the  year                                                        |   | 85.3     |       | 67.2     |       | 17.6     |       |
| End of the year                                                               |   | $        | 155.5      |     | $          | 85.3     |       | $ | 67.2 |   |
|                                                                          |   |     | ** ** |     | ** ** |     | ** ** |
| **Supplemental Cash Flow Disclosures:**                                       |   |     | ** ** |     | ** ** |     | ** ** |
| Interest paid,  net of amounts capitalized                                    |   | $        | 294.2      |     | $          | 289.0    |       | $ | 302.1 |   |
| Income taxes  paid                                                            |   | $        | 268.2      |     | $          | 515.7    |       | $ | 704.7 |   |
| **Non-Cash Investing and Financing  Activity:**                               |   |     | ** ** |     | ** ** |     | ** ** |
| Change in fair  value of interest rate swap agreements                        |   | $        | 99.2       |     | $          | 6.0      |       | $ | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-38

----

 

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY******(Millions)

 
|                                                                           |   | **Preferred  Stock** |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Unrealized  Holding  Gain  (Loss) On  Investments** |   | **Foreign  Currency  Translation  Adjustment** |   | **Retained  Earnings** |   | **Total** |   |
|--------------------------------------------------------------------------------|--------|----------------------|--------|-------------------|--------|----------------------------------|--------|-------------------------------------------------------|--------|------------------------------------------------|--------|------------------------|--------|-----------|--------|
| Balance at  December 31, 1999                                                  |   | $                    | 0.6    |              | $      | 314.3                            |   | $                                                     | 973.3  |                                           | $      | 599.6                  |   | $         | (5.5   | ) | $ | 2,323.4 |   | $ | 4,205.7 |   |
| Net income                                                                     |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | 1,928.8                |   | 1,928.8   |   |
| Other  comprehensive loss, net of tax: (See Note 12)                           |   |                 |   |              |   |                             |   |                                                  |   |                                           |   |                   |   |      |   |
| Unrealized  holding losses on investments, net of reclassification adjustments |   | —               |   | —            |   | —                           |   | (589.9                                                | )      | —                                         |   | —                 |   | (589.9    | )      |
| Foreign currency  translation adjustment                                       |   | —               |   | —            |   | —                           |   | —                                                |   | 1.0                                            |   | —                 |   | 1.0       |   |
| Comprehensive  income                                                          |   | —               |   | —            |   | —                           |   | (589.9                                                | )      | 1.0                                            |   | 1,928.8                |   | 1,339.9   |   |
| Acquisition of  subsidiaries                                                   |   | —               |   | 0.7               |   | 57.3                             |   | —                                                |   | —                                         |   | —                 |   | 58.0      |   |
| Employee plans,  net                                                           |   | —               |   | 0.9               |   | 30.2                             |   | —                                                |   | —                                         |   | —                 |   | 31.1      |   |
| Tax benefit for  non-qualified stock options                                   |   | —               |   | —            |   | 29.4                             |   | —                                                |   | —                                         |   | —                 |   | 29.4      |   |
| Conversion of  preferred stock                                                 |   | (0.1                 | )      | 0.1               |   | 0.1                              |   | —                                                |   | —                                         |   | —                 |   | 0.1       |   |
| Repurchase of  stock                                                           |   | —               |   | (3.0              | )      | (161.3                           | )      | —                                                |   | —                                         |   | —                 |   | (164.3    | )      |
| Dividends:                                                                     |   |                 |   |              |   |                             |   |                                                  |   |                                           |   |                   |   |      |   |
| Common - $1.29  per share                                                      |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | (404.4                 | )      | (404.4    | )      |
| Preferred                                                                      |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | (0.1                   | )      | (0.1      | )      |
| Balance at  December 31, 2000                                                  |   | $                    | 0.5    |              | $      | 313.0                            |   | $                                                     | 929.0  |                                           | $      | 9.7                    |   | $         | (4.5   | ) | $ | 3,847.7 |   | $ | 5,095.4 |   |
| Net income                                                                     |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | 1,067.0                |   | 1,067.0   |   |
| Other  comprehensive loss, net of tax: (See Note 12)                           |   |                 |   |              |   |                             |   |                                                  |   |                                           |   |                   |   |      |   |
| Unrealized  holding losses on investments, net of reclassification adjustments |   | —               |   | —            |   | —                           |   | (14.2                                                 | )      | —                                         |   | —                 |   | (14.2     | )      |
| Foreign currency  translation adjustment                                       |   | —               |   | —            |   | —                           |   | —                                                |   | (5.4                                           | )      | —                 |   | (5.4      | )      |
| Comprehensive  income                                                          |   | —               |   | —            |   | —                           |   | (14.2                                                 | )      | (5.4                                           | )      | 1,067.0                |   | 1,047.4   |   |
| Employee plans,  net                                                           |   | —               |   | 0.7               |   | 24.5                             |   | —                                                |   | —                                         |   | —                 |   | 25.2      |   |
| Tax benefit for  non-qualified stock options                                   |   | —               |   | —            |   | 4.5                              |   | —                                                |   | —                                         |   | —                 |   | 4.5       |   |
| Conversion of  preferred stock                                                 |   | (0.1                 | )      | 0.1               |   | 0.2                              |   | —                                                |   | —                                         |   | —                 |   | 0.2       |   |
| Repurchase of  stock                                                           |   | —               |   | (3.3              | )      | (189.0                           | )      | —                                                |   | —                                         |   | —                 |   | (192.3    | )      |
| Dividends:                                                                     |   |                 |   |              |   |                             |   |                                                  |   |                                           |   |                   |   |      |   |
| Common - $1.33  per share                                                      |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | (414.5                 | )      | (414.5    | )      |
| Preferred                                                                      |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | (0.1                   | )      | (0.1      | )      |
| Balance at  December 31, 2001                                                  |   | $                    | 0.4    |              | $      | 310.5                            |   | $                                                     | 769.2  |                                           | $      | (4.5                   | )      | $         | (9.9   | ) | $ | 4,500.1 |   | $ | 5,565.8 |   |
| Net income                                                                     |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | 924.3                  |   | 924.3     |   |
| Other  comprehensive income, net of tax: (See Note 12)                         |   |                 |   |              |   |                             |   |                                                  |   |                                           |   |                   |   |      |   |
| Unrealized  holding gains on investments, net of reclassification adjustments  |   | —               |   | —            |   | —                           |   | 4.5                                                   |   | —                                         |   | —                 |   | 4.5       |   |
| Foreign currency  translation adjustment                                       |   | —               |   | —            |   | —                           |   | —                                                |   | 3.0                                            |   | —                 |   | 3.0       |   |
| Comprehensive  income                                                          |   | —               |   | —            |   | —                           |   | 4.5                                                   |   | 3.0                                            |   | 924.3                  |   | 931.8     |   |
| Employee plans,  net                                                           |   | —               |   | 0.6               |   | 16.7                             |   | —                                                |   | —                                         |   | —                 |   | 17.3      |   |
| Tax benefit for  non-qualified stock options                                   |   | —               |   | —            |   | 2.7                              |   | —                                                |   | —                                         |   | —                 |   | 2.7       |   |
| Conversion of  preferred stock                                                 |   | —               |   | 0.1               |   | 0.2                              |   | —                                                |   | —                                         |   | —                 |   | 0.3       |   |
| Present value of  contract adjustment liability                                |   | —               |   | —            |   | (93.1                            | )      | —                                                |   | —                                         |   | —                 |   | (93.1     | )      |
| Dividends:                                                                     |   |                 |   |              |   |                             |   |                                                  |   |                                           |   |                   |   |      |   |
| Common - $1.37  per share                                                      |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | (426.6                 | )      | (426.6    | )      |
| Preferred                                                                      |   | —               |   | —            |   | —                           |   | —                                                |   | —                                         |   | (0.1                   | )      | (0.1      | )      |
| Balance at  December 31, 2002                                                  |   | $                    | 0.4    |              | $      | 311.2                            |   | $                                                     | 695.7  |                                           | $      | —                 |   | $         | (6.9   | ) | $ | 4,997.7 |   | $ | 5,998.1 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-39

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1.**              **Summary of Significant****Accounting Policies**:

Description of Business– ALLTEL Corporation (“ALLTEL” or the “Company”), a Delaware corporation, is aleading provider of communications and information services.  The Company owns subsidiaries that providewireless and wireline local, long-distance, network access and Internetservices, and information processing management services and advancedapplication software. Telecommunications products are warehoused and sold by the Company’sdistribution subsidiary.  A subsidiaryalso publishes telephone directories for affiliates and other independenttelephone companies.  (See Note 15 foradditional information regarding ALLTEL’s business segments.)

 

Basis of Presentation– ALLTEL prepares its consolidated financial statements in accordance withaccounting principles generally accepted in the United States, which requiremanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses and disclosure of contingentassets and liabilities.  The estimatesand assumptions used in the accompanying consolidated financial statements arebased upon management’s evaluation of the relevant facts and circumstances as ofthe date of the financial statements. Actual results may differ from the estimates and assumptions used inpreparing the accompanying consolidated financial statements and suchdifferences could be material.  Theconsolidated financial statements include the accounts of ALLTEL, itssubsidiary companies, majority-owned partnerships and controlled businessventures.  Investments in 20% to 50%owned entities and all unconsolidated partnerships are accounted for using theequity method.  Investments in less than20% owned entities and in which the Company does not exercise significantinfluence over operating and financial policies are accounted for under thecost method.  All intercompanytransactions, except those with certain affiliates described below, have beeneliminated in the consolidated financial statements.

 

Service revenues consist of wireless access andnetwork usage revenues, local service, network access, Internet access,long-distance and miscellaneous wireline operating revenues, information services’data processing and software maintenance revenues.  Product sales primarily consist of the product distribution anddirectory publishing operations, information services’ software licensingrevenues and sales of communications and data processing equipment.

 

Cost of services include the costs related tocompleting calls over the Company’s telecommunications network, includingaccess, interconnection, toll and roaming charges paid to other wirelessproviders, as well as the costs to operate and maintain the network.  Additionally, cost of services includes thecosts to provide information services, bad debt expense and business taxes.

 

Reclassifications– Certain prior-year amounts have been reclassified to conform with the 2002financial statement presentation, including the reclassification of theoperating units of the Company’s emerging communications businesses.  In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 131 “Disclosures about Segments of anEnterprise and Related Information”, all prior period segment information hasbeen restated to conform to this new financial reporting presentation.  Under the new reporting presentation,ALLTEL’s wireless segment consists of the Company’s cellular, PersonalCommunications Services (“PCS”) and paging operations.  The competitive local exchange carrier(“CLEC”) and Internet access operations have been combined with ALLTEL’sincumbent local exchange carrier (“ILEC”) operations and reported as thewireline segment.  The informationservices segment no longer includes services provided to ALLTELaffiliates.  These affiliate serviceshave been reported in the corresponding communications segments, andaccordingly, information services operating results only reflect the Company’sfinancial services business and non-affiliated telecommunicationsoperations.  All other segments, whichinclude long-distance and network management services, communications productsand directory publishing, have been reported together under a segment classificationtitled “Communications Support Services”. These reclassifications did not affect consolidated operating income,net income or earnings per share reported by ALLTEL prior to January 1, 2002.  To enhance comparability of the consolidatedfinancial information presented, the Company also reclassified its intersegmentrevenues and expenses.  As a result,both consolidated revenues and sales and operating expenses for 2001 and 2000were reduced by $123.8 million and $120.6 million, respectively, for theportion of the information services previously billed to the wirelineoperations that were not eliminated pursuant to SFAS No. 71 “Accounting for theEffects of Certain Types of Regulation”.

 

The Company also changed to a gross basis thereporting presentation for reimbursements of out-of-pocket expenses receivedfrom customers under terms of its information services agreements in accordancewith Emerging Issues Task Force (“EITF”)Issue No. 01-14 “Income Statement Characterization of Reimbursements Receivedfor Out-of-Pocket Expenses Incurred”. Previously, the Company netted these reimbursements against expensesincurred to provide data processing and consulting services and included thenet amount in cost of services.  Revenueand expense information prior to January 1, 2002 has been reclassified toconform to the new reporting presentation. As a result of this reclassification, both consolidated revenues andsales and operating expenses for 2001 and 2000 were increased by $30.5 millionand $26.7 million, respectively.  Thischange did not affect operating income or net income reported by the Companyprior to January 1, 2002.

 

F-40

----

 

Regulatory Accounting– The Company’s wireline subsidiaries, except for certain operations acquiredin Kentucky in 2002 and Nebraska in 1999, follow the accounting for regulatedenterprises prescribed by SFAS No. 71. This accounting recognizes the economic effects of rate regulation by recordingcosts and a return on investment as such amounts are recovered through ratesauthorized by regulatory authorities. Accordingly, SFAS No. 71 requires the Company’s wireline subsidiaries todepreciate wireline plant over the useful lives approved by regulators, whichcould be different than the useful lives that would otherwise be determined bymanagement.  SFAS No. 71 also requiresdeferral of certain costs and obligations based upon approvals received fromregulators to permit recovery of such amounts in future years.  Criteria that would give rise to thediscontinuance of SFAS No. 71 include (1) increasing competition restrictingthe wireline subsidiaries’ ability to establish prices to recover specificcosts and (2) significant changes in the manner in which rates are set byregulators from cost-based regulation to another form of regulation.  The Company periodically reviews thecriteria to determine whether the continuing application of SFAS No. 71 isappropriate.

 

Transactions with CertainAffiliates – ALLTEL Communications Products, Inc. sellsequipment to wireline subsidiaries of the Company ($152.9 million in 2002,$108.3 million in 2001 and $165.2 million in 2000) as well as to otheraffiliated and non-affiliated communications companies and other companies inrelated industries.  The cost ofequipment sold to the wireline subsidiaries is included, principally, inwireline plant in the consolidated financial statements.  ALLTEL Publishing Corporation (“ALLTELPublishing”) provides directory publishing services to the wireline subsidiaries($80.2 million in 2002, $77.6 million in 2001 and $74.8 million in 2000).  Wireline revenues and sales includedirectory royalties received from Publishing ($52.4 million in 2002, $50.0million in 2001 and $49.8 million in 2000) and amounts billed to otheraffiliates ($87.3 million in 2002, $74.5 million in 2001 and $45.3 million in2000) for interconnection and toll services. These intercompany transactions have not been eliminated because therevenues received from the affiliates and the prices charged by thecommunications products and directory publishing subsidiaries are included inthe wireline subsidiaries’ (excluding the acquired operations in Kentucky andNebraska) rate base and/or are recovered through the regulatory process.

 

Advertising– Advertising costs are expensed as incurred. Advertising expense totaled $144.1 million in 2002, $157.6 million in2001 and $128.8 million in 2000.

 

Cash and Short-termInvestments – Cash and short-term investments consist ofhighly liquid investments with original maturities of three months or less.

 

Inventories– Inventories are stated at the lower of cost or market value.  Cost is determined primarily using either anaverage original cost or first-in, first-out method of valuation.  For wireless equipment, market is determinedusing replacement cost.

 

Goodwill and OtherIntangible Assets – Goodwill represents the excess of costover the fair value of net identifiable tangible and intangible assets acquiredthrough various business combinations. The Company has acquired identifiable intangible assets through itsacquisitions of interests in various wireless and wireline properties andinformation services companies.  Thecost of acquired entities at the date of the acquisition is allocated toidentifiable assets and the excess of the total purchase price over the amountsassigned to identifiable assets is recorded as goodwill.

 

Effective January 1, 2002, the Company adopted SFASNo. 142 “Goodwill and Other Intangible Assets”.  This standard changed the accounting for goodwill and otherindefinite-lived intangible assets from an amortization method to animpairment-only approach.  As of January1, 2002, ALLTEL ceased amortization of goodwill recorded in conjunction withpast business combinations.  In addition,the Company conducted a review of its other identifiable intangible assets anddetermined that its cellular and PCS licenses (the “wireless licenses”) met theindefinite life criteria outlined in SFAS No. 142, because the Company expectsboth the renewal by the granting authorities and the cash flows generated fromthese intangible assets to continue indefinitely.  Accordingly, ALLTEL also ceased amortization of the wirelesslicenses as of January 1, 2002.  SFASNo. 142 requires intangible assets with indefinite lives to be tested forimpairment on an annual basis, by comparing the fair value of the assets totheir carrying amounts, with the initial impairment review completed during thefirst interim period following adoption of the standard.  In the first quarter of 2002, ALLTELcompleted the initial impairment review of its wireless licenses and determinedthat no write-down in the carrying value of these assets was required.  The wireless licenses are operated as asingle asset supporting the Company’s wireless business, and accordingly wereaggregated for purposes of testing impairment. The fair value of these intangible assets was determined based on thediscounted cash flows of the wireless business segment.  SFAS No. 142 also requires intangible assetswith finite lives to be amortized over their estimated useful lives.  ALLTEL determined that, with respect to itsintangible assets with finite lives, primarily customer lists, no changes inthe remaining useful lives of these assets were required.

 

F-41

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In accordance with SFAS No. 142, goodwill is to beassigned to a company’s reporting units and tested for impairment annuallyusing a consistent measurement date, which for the Company is January 1st ofeach year.  The impairment test forgoodwill requires a two-step approach, which is performed at a reporting unitlevel.  Step one of the test identifiespotential impairments by comparing the fair value of a reporting unit to itscarrying amount.  Step two, which isonly performed if the fair value of a reporting unit is less than its carryingvalue, calculates the impairment loss as the difference between the carryingamount of the reporting unit’s goodwill and the implied fair value of thatgoodwill.  During 2001, the Companydetermined its applicable reporting units and assigned goodwill to them.  During 2002, ALLTEL completed step one ofthe initial impairment review of goodwill and determined that no write-down inthe carrying value of goodwill for any of its reporting units wasrequired.  Fair value of the reportingunits was determined utilizing a combination of the discounted cash flows ofthe reporting units and calculated market values of comparable public companiesas determined by a third party appraiser. Prior to December 31, 2001, goodwill was amortized on a straight-linebasis over its estimated useful life, which ranged from 7 to 40 years.  Goodwill amortization amounted to $87.1million in 2001 and $91.3 million in 2000.

 

The changes in the carrying amount of goodwill bybusiness segment for the year ended December 31, 2002 were as follows:

 
|                          |
|-------------------------------|
| **(Millions)**                |   | **Wireless** | ** ** | **Wireline** | ** ** | **Communications  Support  Services** | ** ** | **Information  Services** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2001 |   | $ | 2,430.9 |   | $ | 226.8 |   | $ | 2.3 |   | $ | 16.5 |   | $ | 2,676.5 |   |
| Acquired during  the period   |   | 1,088.8 |   | 1,020.9 |   | — |   | 9.3 |   | 2,119.0 |   |
| Balance at  December 31, 2002 |   | $ | 3,519.7 |   | $ | 1,247.7 |   | $ | 2.3 |   | $ | 25.8 |   | $ | 4,795.5 |   |

 

Other intangible assets primarily consist of the costof PCS licenses, cellular licenses, franchise rights and customer lists.  The carrying value (cost less accumulatedamortization through December 31, 2001) of indefinite-lived intangible assetsother than goodwill no longer subject to amortization after January 1, 2002 wereas follows at December 31:

 
|                              |
|-----------------------------------|
| **(Millions)**                    |   | **2002** |   | **2001** |   |
| Cellular  licenses                |   | $ | 720.2 |   | $ | 506.2 |   |
| PCS licenses                      |   | 76.9 |   | 76.0 |   |
| Franchise rights  – wireline |   | 265.0 |   | — |   |
|                              |   | $ | 1,062.1 |   | $ | 582.2 |   |

 

Prior to December 31, 2001, both the cellular licensesand PCS licenses were amortized on a straight-line basis over their estimateduseful lives, which was 40 years. Amortization of the PCS licenses began upon commencement of the relatedoperations.  Amortization expense forintangible assets no longer subject to amortization after January 1, 2002amounted to $13.6 million in 2001 and $1.0 million in 2000.

 

Intangible assets subject to amortization were asfollows at December 31:

 
|                    |
|-------------------------|
|                    |   | **2002** |   |
| **(Millions)**          |   | **Gross  Cost** |   | **Accumulated  Amortization** |   | **Net  Carrying  Value** |   |
| Customer lists          |   | $ | 374.6 |   | $ | (101.0 | ) | $ | 273.6 |   |
| Franchise rights        |   | 22.5 |   | (11.9 | ) | 10.6 |   |
| Non-compete  agreements |   | 2.9 |   | (2.7 | ) | 0.2 |   |
|                    |   | $ | 400.0 |   | $ | (115.6 | ) | $ | 284.4 |   |

 
|                    |
|-------------------------|
|                    |   | **2001** | ** ** |
| **(Millions)**          |   | **Gross  Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Value** | ** ** |
| Customer lists          |   | $ | 219.1 |   | $ | (58.7 | ) | $ | 160.4 |   |
| Franchise rights        |   | 22.5 |   | (10.3 | ) | 12.2 |   |
| Non-compete  agreements |   | 4.8 |   | (4.0 | ) | 0.8 |   |
|                    |   | $ | 246.4 |   | $ | (73.0 | ) | $ | 173.4 |   |

 

F-42

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Intangible assets subject to amortization areamortized on a straight-line basis over their estimated useful lives, which are5 to 10 years for customer lists, 15 years for franchise rights and 6 years fornon-compete agreements.  Amortizationexpense for intangible assets subject to amortization was $45.4 million in2002, $38.3 million in 2001 and $2.7 million in 2000.  Amortization expense for intangible assets subject toamortization is estimated to be $59.4 million in 2003, $59.1 million in 2004,$58.4 million in 2005, $39.8 million in 2006 and $23.1 million in 2007.

 

See Note 3 for a discussion of the significantacquisitions completed during 2002 that resulted in the recognition of goodwilland other intangible assets.  Theafter-tax income before cumulative effect of accounting change, net income andearnings per share effects, assuming that the change in accounting to eliminatethe amortization of goodwill and other indefinite-lived intangible assets wasapplied retroactively by class of indefinite-lived intangible asset, were asfollows for the years ended December 31:

 
|                                                                                  |
|---------------------------------------------------------------------------------------|
| **(Millions,  except per share amounts)**                                             |   | **2001** |   | **2000** |   |
| Effects on  income before cumulative effect of accounting change and net income:      |   |   |   |   |   |
| Income before  cumulative effect of accounting change as reported                     |   | $ | 1,047.5 |   | $ | 1,965.4 |   |
| Goodwill  amortization, net of tax                                                    |   | 80.5 |   | 90.6 |   |
| Cellular  licenses amortization, net of tax                                           |   | 12.3 |   | 0.6 |   |
| PCS licenses  amortization, net of tax                                                |   | 0.3 |   | 0.4 |   |
| Income before  cumulative effect of accounting change as adjusted                     |   | 1,140.6 |   | 2,057.0 |   |
| Cumulative  effect of accounting change                                               |   | 19.5 |   | (36.6 | ) |
| Net income as  adjusted                                                               |   | $ | 1,160.1 |   | $ | 2,020.4 |   |
|                                                                                  |   |   |   |   |   |
| Effects on basic  earnings per share:                                                 |   |   |   |   |   |
| Basic earnings  per share before cumulative effect of accounting change as reported   |   | $ | 3.36 |   | $ | 6.25 |   |
| Goodwill  amortization, net of tax                                                    |   | .26 |   | .29 |   |
| Cellular  licenses amortization, net of tax                                           |   | .04 |   | .01 |   |
| PCS licenses  amortization, net of tax                                                |   | — |   | — |   |
| Basic earnings  per share before cumulative effect of accounting change as adjusted   |   | $ | 3.66 |   | $ | 6.55 |   |
| Cumulative  effect of accounting change                                               |   | .06 |   | (.12 | ) |
| Basic earnings  per share as adjusted                                                 |   | $ | 3.72 |   | $ | 6.43 |   |
|                                                                                  |   |   |   |   |   |
| Effects on  diluted earnings per share:                                               |   |   |   |   |   |
| Diluted earnings  per share before cumulative effect of accounting change as reported |   | $ | 3.34 |   | $ | 6.20 |   |
| Goodwill  amortization, net of tax                                                    |   | .26 |   | .29 |   |
| Cellular  licenses amortization, net of tax                                           |   | .04 |   | — |   |
| PCS licenses  amortization, net of tax                                                |   | — |   | — |   |
| Diluted earnings  per share before cumulative effect of accounting change as adjusted |   | $ | 3.64 |   | $ | 6.49 |   |
| Cumulative  effect of accounting change                                               |   | .06 |   | (.12 | ) |
| Diluted earnings  per share as adjusted                                               |   | $ | 3.70 |   | $ | 6.37 |   |

 

Investments–  Investments in unconsolidatedpartnerships are accounted for using the equity method.  Investments in equity securities areclassified as available for sale and are recorded at fair value in accordancewith SFAS No. 115, “Accounting for Certain Investments in Debt and EquitySecurities”.  All other investments areaccounted for using the cost method. Investments are periodically reviewed for impairment.  If the carrying value of the investmentexceeds its fair value and the decline in value is determined to beother-than-temporary, an impairment loss would be recognized for thedifference.  Investments were as followsat December 31:

 
|                                        |
|---------------------------------------------|
| **(Millions)**                              |   | **2002** |   | **2001** |   |
| Investments in  unconsolidated partnerships |   | $ | 275.1 |   | $ | 173.3 |   |
| Equity  securities                          |   | 0.2 |   | 19.1 |   |
| Other cost  investments                     |   | 52.1 |   | 59.2 |   |
|                                        |   | $ | 327.4 |   | $ | 251.6 |   |

 

F-43

----

 

Investments in unconsolidated partnerships include therelated excess of the purchase price paid over the underlying net book value ofthe wireless partnerships.  Prior toJanuary 1, 2002, the excess cost was amortized on a straight-line basis overperiods up to 40 years.  As of December31, 2002 and 2001, the carrying value (cost less accumulated amortizationthrough December 31, 2001) of excess cost included in investments was $21.3million and $21.0 million, respectively. Amortization expense was $0.5 million in 2001 and $2.9 million in 2000and was included in equity earnings in unconsolidated partnerships in theaccompanying consolidated statements of income.

 

Property, Plant andEquipment – Property, plant and equipment are stated atoriginal cost.  Wireless plant consistsof cell site towers, switching, controllers and other radio frequencyequipment.  Wireline plant consists ofaerial and underground cable, conduit, poles, switches and other central officeand transmission-related equipment. Information services plant consists of data processing equipment,purchased software and capitalized internal use software costs.  Other plant consists of furniture, fixtures,vehicles, machinery and equipment.  Thecosts of additions, replacements and substantial improvements are capitalized,while the costs of maintenance and repairs are expensed as incurred.  For the Company’s non-regulated operations,when depreciable plant is retired or otherwise disposed of, the related costand accumulated depreciation are deducted from the plant accounts, with thecorresponding gain or loss reflected in operating results.  The Company’s wireline subsidiaries utilizegroup composite depreciation.  Underthis method, when plant is retired, the original cost, net of salvage value, ischarged against accumulated depreciation, and no gain or loss is recognized onthe disposition of the plant.

 

Depreciation expense amounted to $1,043.0 million in2002, $943.2 million in 2001 and $824.8 million in 2000.  Depreciation for financial reportingpurposes is computed using the straight-line method over the followingestimated useful lives:

 
|                        |   | **Depreciable  Lives** |   |
|-----------------------------|--------|------------------------|--------|
| Buildings and  improvements |   | 5-50 years             |   |
| Wireline                    |   | 7-58 years             |   |
| Wireless                    |   | 5-20 years             |   |
| Information  services       |   | 3-10 years             |   |
| Other                       |   | 3-25 years             |   |

 

The Company capitalizes interest in connection withthe acquisition or construction of plant assets.  Capitalized interest is included in the cost of the asset with acorresponding reduction in interest expense. Capitalized interest amounted to $15.9 million in 2002, $20.4 million in2001 and $18.2 million in 2000.

 

Impairment of Long-LivedAssets – Long-lived assets and intangible assets subject toamortization are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying value of the asset may not be recoverable fromfuture, undiscounted net cash flows expected to be generated by the asset.  If the asset is not fully recoverable, animpairment loss would be recognized for the difference between the carryingvalue of the asset and its estimated fair value based on discounted net futurecash flows or quoted market prices. Assets to be disposed of that are not classified as discontinuedoperations are reported at the lower of their carrying amount or fair valueless cost to sell.

 

Capitalized SoftwareDevelopment Costs – For the Company’s information servicesoperations, research and development expenditures related to internallydeveloped computer software are charged to expense as incurred.  Software development costs incurred in theapplication development stage of internal use software are capitalized andrecorded in plant in the accompanying consolidated balance sheets.  The development costs of software to bemarketed are charged to expense until technological feasibility isestablished.  After that time, theremaining software development costs are capitalized and recorded in otherassets in the accompanying consolidated balance sheets.  Total capitalized software development costswere as follows at December 31:

 
|                                         |
|----------------------------------------------|
| **(Millions)**                               |   | **2002** |   | **2001** |   |
| Capitalized  software development costs      |   | $ | 972.8 |   | $ | 902.4 |   |
| Accumulated  amortization                    |   | (526.7 | ) | (437.7 | ) |
| Capitalized  software development costs, net |   | $ | 446.1 |   | $ | 464.7 |   |

 

Amortization of the capitalized amounts is computed ona product-by-product basis using the straight-line method over the remainingestimated economic life of the product, generally three to six years forsoftware to be marketed.  Internal usesoftware is amortized over periods ranging from three to ten years.  Amortization expense amounted to $90.2million in 2002, $85.5 million in 2001 and $68.6 million in 2000.  The Company periodically evaluates the carryingvalue of capitalized

 

F-44

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software development costs to be marketed.  If the net realizable value of thecapitalized software development costs is less than its carrying value, animpairment loss is recognized for the difference.  The determination of net realizable value requires considerablejudgment by management with respect to certain external factors, including, butnot limited to, expected future revenues generated by the software, theestimated economic life of the software and changes in software and hardwaretechnologies.  Accordingly, it isreasonably possible that estimates of expected future revenues generated by thesoftware, the remaining economic life of the software, or both, could bereduced in the near term, materially affecting the carrying value of capitalizedsoftware development costs.

 

Derivative Instruments– The Company uses derivative instruments to obtain a targeted mixture ofvariable and fixed-interest-rate long-term debt, such that the portion of debtsubject to variable rates does not exceed 30 percent of the Company’s totallong-term debt outstanding.  The Companyhas established policies and procedures for risk assessment and the approval,reporting and monitoring of derivative instrument activities.  Derivative instruments are entered into forperiods consistent with the related underlying exposure and are not enteredinto for trading or speculative purposes. The Company has entered into interest rate swap agreements anddesignated these derivatives as fair value hedges.  In accordance with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, the interest rate swaps are recorded asassets or liabilities in the consolidated balance sheets at fair value, withchanges in the fair value of the derivative and of the underlying hedged itemattributable to the hedged risk recognized in earnings.  Settlements of the interest rate swapagreements are recorded as adjustments to interest expense in the consolidatedstatements of income when paid or received. In the event a designated hedged item is sold, extinguished or maturesprior to the termination of the related derivative instrument, the derivativeinstrument would be closed and the resulting gain or loss would be recognizedin income.

 

Preferred Stock– Cumulative preferred stock is issuable in series.  The Board of Directors is authorized to designate the number ofshares and fix the terms.  There are50.0 million shares of no par value cumulative non-voting preferred stock and50.0 million shares of $25 par value voting cumulative preferred stockauthorized.  Two series of no par valuepreferred stock, Series C and Series D, were outstanding at December 31, 2002and 2001.  There were no shares of $25par value preferred stock outstanding at December 31, 2002 and 2001.  The Series C non-redeemable preferred sharesare convertible into 5.963 shares of ALLTEL common stock.  The Series D redeemable preferred shares areconvertible at any time prior to redemption into 5.486 shares of ALLTEL commonstock.  The Series D shares may be redeemedat the option of the Company or the holder at the $28 per share statedvalue.  There were 36,221 shares and44,881 shares of Series D stock outstanding at December 31, 2002 and 2001,respectively.  The outstanding Series Dstock of $1.0 million and $1.3 million at December 31, 2002 and 2001,respectively, is included in other liabilities in the accompanying consolidatedbalance sheets.  During 2002, $243,000of Series D stock was converted into ALLTEL common stock compared to $150,000in 2001 and $84,000 in 2000.

 

Unrealized Holding Gain(Loss) on Investments – Equity securities of certain publiclytraded companies owned by the Company have been classified asavailable-for-sale and are reported at fair value, with cumulative unrealizedgains and losses reported, net of tax, as a separate component of shareholders’equity.  The Company had unrealizedgains (losses), net of tax, on investments in equity securities of $(4.5)million and $9.7 million at December 31, 2001 and 2000, respectively.  The unrealized gains (losses), including therelated tax impact, are non-cash items, and accordingly, have been excludedfrom the accompanying consolidated statements of cash flows.

 

Foreign CurrencyTranslation Adjustment – For the Company’s foreignsubsidiaries, assets and liabilities are translated from the applicable localcurrency to U.S. dollars using the current exchange rate as of the balancesheet date.  Revenue and expenseaccounts are translated using the weighted average exchange rate in effectduring the period.  The resultingtranslation gains or losses are recorded as a separate component ofshareholders’ equity.

 

Revenue Recognition– Communications revenues are primarily derived from usage of the Company’snetworks and facilities.  Wirelessaccess and wireline local access revenues are recognized over the period thatthe corresponding services are rendered to customers.  Revenues derived from other telecommunications services,including interconnection, long-distance and custom calling feature revenuesare recognized monthly as services are provided.  Sales of communications products including wireless handsets andaccessories represent a separate earnings process and are recognized whenproducts are delivered and accepted by customers.  For transactions involving both the activation of service and thesale of equipment, the Company recognizes revenues as follows: (1) Feesassessed to communications customers to activate service are deferred andrecognized over the expected life of the customer relationship, which isgenerally three years.  Directincremental customer acquisition costs incurred in the activation of serviceare deferred up to the amount of the related revenues.  Costs in excess of the deferred activationrevenues are expensed as incurred.  (2)Handset revenue and the related cost are recognized at the point of sale,because the handset sale represents a separate earnings process from theservice.

 

F-45

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Information services revenues are recognized inaccordance with AICPA Statement of Position (“SOP”) 97-2 “Software RevenueRecognition” and SOP 98-9 “Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions”.  Data processing revenues are recognized as services areperformed.  Revenue and incrementaldirect costs related to professional services implementation are deferred andrecognized over the term of the data processing agreement.  Software licensing fees are recognized whena contract exists, the fee is fixed or determinable, software delivery hasoccurred and collection of the receivable is probable.  Software maintenance revenue is recognizedratably over the maintenance period. Certain arrangements involve the licensing of software with rights toreceive replacement products and releases, as well as maintenanceservices.  For software arrangementsinvolving multiple elements, maintenance services are recognized ratably overthe maintenance term at an amount equal to vendor-specific objective evidence(“VSOE”) of fair value established through substantive renewal rates.  If VSOE of fair value for maintenance doesnot exist, then the entire arrangement fee is recognized in revenue equallyover the maintenance period.  Servicesnot essential to the functionality of the software are recognized in revenue asthe services are provided in a value equal to VSOE established through thepricing of such services when sold separately. License fees are recognized under the residual method in accordance withSOP 98-9 after deferral of all of the above elements has occurred by referenceto their respective VSOE of fair value. When the arrangement with the customer includes significant production,modification or customization of the software, the Company uses contract accounting,as required by SOP 97-2.  The Companyuses the multiple element accounting required by SOP 97-2 and accounts forcertain elements of the arrangement separately as the services are performedbased on the element’s VSOE of fair value (i.e., maintenance and certain otherservices).  For the one or more elementsaccounted for under SOP 81-1 “Accounting for Performance of Construction-Typeand Certain Production-Type Contracts”, the Company uses the percentage-of-completionmethod.  Under this method, revenue andprofit are recognized throughout the term of the contract, based upon estimatesof the total costs to be incurred and revenues to be generated throughout theterm of the contract.  Changes inestimates for revenues, costs and profits are recognized in the period in whichthey are determinable.  When suchestimates indicate that costs will exceed future revenues and a loss on thecontract exists, a provision for the entire loss is then recognized.  Due to the uncertainty of these estimates,it is reasonably possible that these estimates could change in the near termand the change could be material to the accompanying consolidated financialstatements.

 

Directory publishing and advertising revenues alongwith the related costs are recognized by ALLTEL Publishing upon initialdistribution of the directories, because ALLTEL Publishing has no secondarydelivery obligation to non-affiliated companies and the secondary deliveryobligation to affiliates is not significant. The royalties paid by ALLTEL Publishing to the Company’s wirelinesubsidiaries are recognized as revenue over the life of the correspondingcontract, which is generally twelve months. For all other operations, revenue is recognized when products aredelivered and accepted by customers or when services are rendered to customersin accordance with contract terms.

 

Included in accounts receivable are unbilledreceivables of $217.2 million and $217.1 million at December 31, 2002 and 2001,respectively.  Included in theseunbilled receivables are amounts totaling $28.9 million and $36.3 million atDecember 31, 2002 and 2001, respectively, which represent costs and estimatedearnings in excess of billings related to information services contractsaccounted for under the percentage-of-completion method, as discussed above.

 

Income Taxes– Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases.  Deferred tax balances are adjusted to reflect tax rates, based oncurrently enacted tax laws, which will be in effect in the years in which thetemporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in the results of operations in the period that includesthe enactment date.  For the Company’sregulated operations, the adjustment in deferred tax balances for the change intax rates is reflected as regulatory assets or liabilities.  These regulatory assets and liabilities areamortized over the lives of the related depreciable asset or liabilityconcurrent with recovery in rates.  Avaluation allowance is recorded to reduce the carrying amounts of deferred taxassets unless it is more likely than not that such assets will be realized.

 

Stock-Based Compensation– The Company’s stock-based compensation plans are more fully discussed in Note6.  The Company accounts for these plansunder the recognition and measurement principles of Accounting Principles Board(“APB”) Opinion 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.  For performance-based options, compensationexpense was recognized over the expected vesting period of the options and wasadjusted for changes in the number of options expected to vest and the marketvalue of ALLTEL’s common stock. Compensation expense (credit) for the performance-based options amountedto $(2.3) million in 2001 and $0.2 million in 2000.

 

F-46

----

 

The following table illustrates the effects on netincome and earnings 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 years ended December 31:

 
|                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------|
| **(Millions,  except per share amounts)**                                                                                        |   | **2002** |   | **2001** |   | **2000** |   |
| Net income as  reported                                                                                                          |   | $ | 924.3 |   | $ | 1,067.0 |   | $ | 1,928.8 |   |
| Deduct  stock-based employee compensation expense determined under fair value method  for all awards, net of related tax effects |   | (31.1 | ) | (26.8 | ) | (18.9 | ) |
| Pro forma net  income                                                                                                            |   | $ | 893.2 |   | $ | 1,040.2 |   | $ | 1,909.9 |   |
| Basic earnings  per share:                                                                                                       | As reported |   | $ | 2.97 |   | $ | 3.42 |   | $ | 6.13 |   |
|                                                                                                                             | Pro forma |   | $ | 2.87 |   | $ | 3.34 |   | $ | 6.07 |   |
| Diluted earnings  per share:                                                                                                     | As reported |   | $ | 2.96 |   | $ | 3.40 |   | $ | 6.08 |   |
|                                                                                                                             | Pro forma |   | $ | 2.86 |   | $ | 3.32 |   | $ | 6.02 |   |

 

The pro forma amounts presented above may not berepresentative of the future effects on reported net income and earnings pershare, since the pro forma compensation expense is allocated over the periodsin which options become exercisable, and new option awards may be granted eachyear.

 

Earnings Per Share– Basic earnings per share of common stock was computed by dividing net incomeapplicable to common shares by the weighted average number of common sharesoutstanding during each year.  Dilutedearnings per share reflects the potential dilution that could occur assumingconversion or exercise of all unexercised stock options and outstandingpreferred stock.  Options to purchaseapproximately 13.8 million, 9.6 million and 8.3 million shares of common stockat December 31, 2002, 2001 and 2000, respectively, were excluded from thecomputation of diluted earnings per share because the effect of including themwas anti-dilutive.  A reconciliation ofthe net income and numbers of shares used in computing basic and dilutedearnings per share was as follows for the years ended December 31:

 
|                                                                                                                              |
|-----------------------------------------------------------------------------------------------------------------------------------|
| **(Millions,  except per share amounts)**                                                                                         |   | **2002** |   | **2001** |   | **2000** |   |
| Basic earnings  per share:                                                                                                        |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change                                                                             |   | $ | 924.3 |   | $ | 1,047.5 |   | $ | 1,965.4 |   |
| Preferred  dividends                                                                                                              |   | 0.1 |   | 0.1 |   | 0.1 |   |
| Net income  applicable to common shares before cumulative effect of accounting change                                             |   | $ | 924.2 |   | $ | 1,047.4 |   | $ | 1,965.3 |   |
| Weighted average  common shares outstanding for the year                                                                          |   | 311.0 |   | 311.4 |   | 314.4 |   |
| Basic earnings  per share before cumulative effect of accounting change                                                           |   | $ | 2.97 |   | $ | 3.36 |   | $ | 6.25 |   |
| Diluted earnings  per share:                                                                                                      |   |   |   |   |   |   |   |
| Net income  applicable to common shares before cumulative effect of accounting change                                             |   | $ | 924.2 |   | $ | 1,047.4 |   | $ | 1,965.3 |   |
| Adjustment for  convertible preferred stock dividends                                                                             |   | 0.1 |   | 0.1 |   | 0.1 |   |
| Net income  applicable to common shares before cumulative effect of accounting change and  assuming conversion of preferred stock |   | $ | 924.3 |   | $ | 1,047.5 |   | $ | 1,965.4 |   |
| Weighted average  common shares outstanding for the year                                                                          |   | 311.0 |   | 311.4 |   | 314.4 |   |
| Increase in  shares, which would result from the assumed:                                                                         |   |   |   |   |   |   |   |
| Exercise of  stock options                                                                                                        |   | 1.0 |   | 1.8 |   | 2.4 |   |
| Conversion of  convertible preferred stock                                                                                        |   | 0.3 |   | 0.3 |   | 0.4 |   |
| Weighted average  common shares, assuming conversion of the above securities                                                      |   | 312.3 |   | 313.5 |   | 317.2 |   |
| Diluted earnings  per share before cumulative effect of accounting change                                                         |   | $ | 2.96 |   | $ | 3.34 |   | $ | 6.20 |   |

 

As more fully discussed in Note 5, the Company issuedequity units in 2002, which obligates the holder to purchase ALLTEL commonstock on May 17, 2005.  Prior to theissuance of shares of ALLTEL common stock upon settlement of the purchasecontracts, the equity units will be reflected in the diluted earnings per sharecalculations using the treasury stock method. Under this method, the number of shares of common stock used incalculating diluted earnings per share is increased by the excess, if any, ofthe number of shares issuable upon settlement of the purchase contracts overthe number of shares that could be purchased by ALLTEL in the market, at theaverage market price during the period, using the proceeds received uponsettlement.  The Company anticipatesthat there will be no dilutive effect on its earnings per share related to theequity units,

 

F-47

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except during periods when the average market price ofa share of ALLTEL common stock is above the threshold appreciation price of$60.39.  Because the average marketprice of ALLTEL’s common stock during the year ended December 31, 2002, wasbelow this threshold appreciation price, the shares issuable under the purchasecontract component of the equity units were excluded from the diluted earningsper share calculation for 2002.

 

Recent AccountingPronouncements – In June 2001, the FASB issued SFAS No. 143“Accounting for Asset Retirement Obligations”. SFAS No. 143 will apply to fiscal years beginning after June 15, 2002,and will address financial accounting and reporting for obligations associatedwith the retirement of tangible long-lived assets and the associated assetretirement costs.  This standard appliesto legal obligations associated with the retirement of long-lived assets thatresult from the acquisition, construction, development or normal use of theassets and requires that a liability for an asset retirement obligation berecognized when incurred, recorded at fair value and classified as a liabilityin the balance sheet.  When theliability is initially recorded, the entity will capitalize the cost andincrease the carrying value of the related long-lived asset.  The liability is then accreted to itspresent value each period and the capitalized cost is depreciated over theestimated useful life of the related asset. At the settlement date, the entity will settle the obligation for itsrecorded amount or recognize a gain or loss upon settlement.

 

The Company has evaluated the effects of SFAS No. 143on its operations and has determined that for telecommunications and otheroperating facilities in which the Company owns the underlying land, ALLTEL hasno contractual or legal obligation to remediate the property if the Companywere to abandon, sell or otherwise dispose of those facilities.  For the Company’s leased non-wirelinetelecommunications and operating facilities, primarily consisting of cellsites, office and retail locations, ALLTEL has determined that the adoption ofSFAS No. 143 will not have a material impact on its consolidated financialstatements.

 

In accordance with federal and state regulations,depreciation expense for the Company’s wireline operations have historicallyincluded an additional provision for cost of removal.  Effective with the adoption of SFAS No. 143, the additional costof removal provision will no longer be included in depreciation expense, becauseit does not meet the recognition and measurement principles of an assetretirement obligation under SFAS No. 143. On December 20, 2002, the FCC notified wireline carriers that theyshould not adopt the provisions of SFAS No. 143 unless specifically required bythe FCC in the future.  As a result ofthe FCC ruling, the Company will continue to record a regulatory liability forcost of removal for its wireline subsidiaries that follow SFAS No. 71accounting.  For the acquired Kentuckyand Nebraska wireline operations not subject to SFAS No. 71, effective January1, 2003, the Company will cease recognition of the cost of removal provision indepreciation expense and eliminate the cumulative cost of removal included inaccumulated depreciation.  The cumulativeeffect of retroactively applying these changes to periods prior to January 1,2003, will result in a non-cash pretax credit of approximately $34.0 million.

 

In June 2002, the FASB issued SFAS No. 146 “Accountingfor Costs Associated with Exit or Disposal Activities”.  SFAS No. 146 requires that a liability for acost that is associated with an exit or disposal activity be recognized whenthe liability is incurred.  Coststypically associated with exit or disposal activities include employee terminationcosts, contract cancellation provisions and relocation costs.  This standard nullifies the guidance ofEmerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)”.  SFAS No. 146 also establishes that fairvalue is the objective for the initial measurement of the liability.  SFAS No. 146 will be effective for exit ordisposal activities that are initiated after December 31, 2002.  The Company does not believe that theadoption of SFAS 146 will have a material impact on its consolidated financialstatements.

 

In December 2002, the FASB issued SFAS No. 148“Accounting for Stock-Based Compensation – Transition and Disclosure, anAmendment of FASB Statement No. 123”. SFAS No. 148 provides alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation prescribed by SFAS No. 123. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 torequire disclosure in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.  Asthe Company continues to account for stock-based employee compensation usingthe intrinsic value method under APB Opinion No. 25, the Company, as required,has only adopted the revised disclosure requirements of SFAS No. 148 as ofDecember 31, 2002.  (See “Stock-BasedCompensation” section of Note 1.)

 

F-48

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In November 2002, the FASB issued FASB InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others”.  FIN 45 requires that upon issuance of aguarantee, a guarantor must recognize a liability for the fair value of anobligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in itsinterim and annual financial statements about the obligations associated withguarantees issued.  The recognitionprovisions of FIN 45 are effective for guarantees issued after December 31,2002, while the disclosure requirements were effective for financial statementsfor periods ending after December 15, 2002. At December 31, 2002, the Company had not entered into any materialarrangement that would be subject to the disclosure requirements of FIN 45.  ALLTEL does not believe that the adoption ofFIN 45 will have a material impact on its consolidated financial statements.

 

In November 2002, the EITF reached a consensus onIssue 00-21 “Accounting for Revenue Arrangements With MultipleDeliverables”.  The guidance in Issue00-21 is effective for revenue arrangements entered into in fiscal yearsbeginning after June 15, 2003.  Issue00-21 addresses the accounting by a vendor for arrangements under which it willperform multiple revenue-generating activities.  Specifically, Issue 00-21 addresses how to determine whether anarrangement involving multiple deliverables contains one or more units ofaccounting and how arrangement consideration should be measured and allocatedto the separate units of accounting.  The Company is currently assessing the expected impact of applying theguidance in Issue 00-21 to its communications and information servicesoperations.

 

**2.****              CumulativeEffect of Accounting Change**:

In the second quarter of 2001, the Company changed itsmethod of accounting for the defined benefit pension plan of a subsidiaryacquired in 1999 to conform with the accounting principles followed by theALLTEL Pension Plan (the “ALLTEL Plan”), a defined benefit pension plancovering substantially all employees working in the Company’s communicationsand corporate operations.  The change inaccounting was completed in conjunction with the Company’s decision to conformfuture benefits earned under the subsidiary’s plan with the ALLTEL Plan,effective June 1, 2001.  The change inaccounting, retroactive to January 1, 2001, affected both the computation andamortization of unrecognized actuarial gains and losses for purposes ofcalculating annual pension cost related to the subsidiary’s pension plan.  The change included modifying the method bywhich the market-related value of plan assets was determined from a calculatedfive-year average to actual fair value. In addition, unrecognized actuarial gains or losses that exceed 17.5% ofthe greater of the projected benefit obligation or market-related value of planassets are amortized on a straight-line basis over five years.  Unrecognized actuarial gains and lossesbelow the 17.5% corridor are amortized over the average remaining service lifeof active plan participants (approximately 13 years).

 

Under the method previously followed by thesubsidiary’s plan, only unrecognized actuarial gains and losses in excess of10% of the greater of the projected benefit obligation or market-related valueof plan assets were amortized over the average remaining service life of activeplan participants.  The Company believesthe changes in computing the market-related value of plan assets andaccelerating the amortization periods are preferable because these changesresult in more timely recognition of actuarial gains and losses in computingannual pension cost related to the subsidiary’s pension plan, and achieveconsistency with the ALLTEL Plan. Effective January 1, 2002, the subsidiary’s plan was merged into theALLTEL Plan.  The effect of thesechanges in 2001 was to increase pension income by $1.7 million and incomebefore cumulative effect of accounting change by $1.0 million.  The cumulative effect of retroactivelyapplying these changes to periods prior to 2001 resulted in a one-time non-cashcredit of $19.5 million, net of income tax expense of $13.0 million, and isincluded in net income for the year ended December 31, 2001.

 

Effective January 1, 2000, the Company changed itsmethod of recognizing wireless access revenues and certain customer activationfees to conform its revenue recognition policies to the requirements of theSecurities and Exchange Commission’s Staff Accounting Bulletin No. 101,“Revenue Recognition in Financial Statements”. In prior years, the Company recognized monthly non-refundable wireless accessrevenues when billed in accordance with contractual arrangements withcustomers.  With the change, the Companynow recognizes wireless access revenues over the period in which thecorresponding services are provided. Because the Company bills its customers on a cycle basis throughout themonth, this change in accounting resulted in the continuous deferral ofapproximately 15 days of wireless access revenue.  In addition, certain fees assessed to communications customers toactivate service were previously recognized when billed.  With the change in accounting, the Companynow recognizes these fees over the expected life of the customer.  The effect of these changes in revenuerecognition for 2000 was to decrease income before cumulative effect of accountingchange by $4.6 million, or $.01 per share. The cumulative effect of retroactively applying this change inaccounting principle to periods prior to 2000 resulted in a one-time non-cashcharge of $36.6 million, net of income tax benefit of $23.3 million, and isincluded in net income for the year ended December 31, 2000.

 

F-49

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**3.****              Acquisitions:**

On August 1, 2002, ALLTEL purchased substantially allof the wireless assets owned by CenturyTel, Inc. (“CenturyTel”) forapproximately $1.59 billion in cash.  Inthis transaction, ALLTEL added properties representing approximately 8.3million POPs, or potential customers, and acquired approximately 762,000wireless customers, minority partnership interests in cellular operationsrepresenting approximately 1.8 million proportionate POPs and PCS licensescovering 1.3 million POPs in Wisconsin and Iowa.  The accompanying consolidated financial statements include theaccounts and results of operations of the acquired wireless properties from thedate of acquisition.  During the thirdquarter of 2002, the Company completed the purchase price allocation of thisacquisition based upon the appraised fair values of the property, plant andequipment and identifiable intangible assets acquired.  The excess of the aggregate purchase priceover the fair market value of the tangible net assets acquired of $1.38 billionwas assigned to customer list, cellular licenses and goodwill.  The customer list recorded in connectionwith this transaction is being amortized on a straight-line basis over itsestimated useful life of six years.  Thecellular licenses are classified as indefinite-lived intangible assets and arenot subject to amortization.  Of thetotal amount assigned to goodwill, approximately $481.0 million is expected tobe deductible for income tax purposes.

 

On August 1, 2002, ALLTEL also completed the purchaseof local telephone properties in the state of Kentucky from VerizonCommunications, Inc. (“Verizon”) for approximately $1.93 billion in cash.  In this transaction, ALLTEL addedapproximately 589,000 wireline customers. The accompanying consolidated financial statements include the accountsand results of operations of the acquired wireline properties from the date ofacquisition.  During the fourth quarterof 2002, the Company completed the purchase price allocation of thisacquisition based upon the appraised fair values of the property, plant andequipment and identifiable intangible assets acquired.  The excess of the aggregate purchase priceover the fair market value of the tangible net assets acquired of $1.34 billionwas assigned to customer list, franchise rights and goodwill.  The customer list recorded in connection withthis transaction is being amortized on a straight-line basis over its estimateduseful life of ten years.  The franchiserights are classified as indefinite-lived intangible assets and are not subjectto amortization.  Of the total amountassigned to goodwill, approximately $1.0 billion is expected to be deductiblefor income tax purposes.

 

During 2002, ALLTEL also purchased a wireline propertyin Georgia, acquired additional ownership interests in wireless properties inArkansas, Louisiana and Texas and purchased two privately held companies servingthe financial services industry.  Inconnection with these acquisitions, the Company paid $45.3 million in cash andassigned the excess of the aggregate purchase price over the fair market valueof the tangible net assets acquired of $40.4 million to goodwill.

 

The following table summarizes the fair value of theassets acquired and liabilities assumed for the various business combinationscompleted during 2002:

 
|                           |
|--------------------------------|
| **(Millions)**                 |   | **Acquired  from** |   |   |   |
|                           |   | **Century  Tel** |   | **Verizon** |   | **Other** |   | **Combined  Totals** |   |
| Assets acquired:               |   |   |   |   |   |   |   |   |   |
| Current assets                 |   | $ | 57.2 |   | $ | 38.0 |   | $ | 1.7 |   | $ | 96.9 |   |
| Investments                    |   | 79.5 |   | — |   | — |   | 79.5 |   |
| Property, plant  and equipment |   | 192.9 |   | 608.6 |   | 11.3 |   | 812.8 |   |
| Goodwill                       |   | 1,075.5 |   | 1,003.1 |   | 40.4 |   | 2,119.0 |   |
| Cellular  licenses             |   | 214.0 |   | — |   | — |   | 214.0 |   |
| Franchise rights               |   | — |   | 265.0 |   | — |   | 265.0 |   |
| Customer list                  |   | 89.0 |   | 67.6 |   | — |   | 156.6 |   |
| Other assets                   |   | 0.4 |   | — |   | 3.0 |   | 3.4 |   |
| Total assets  acquired         |   | 1,708.5 |   | 1,982.3 |   | 56.4 |   | 3,747.2 |   |
| Liabilities  assumed:          |   |   |   |   |   |   |   |   |   |
| Current  liabilities           |   | (55.6 | ) | (44.6 | ) | (2.0 | ) | (102.2 | ) |
| Long-term debt                 |   | — |   | — |   | (9.1 | ) | (9.1 | ) |
| Other  liabilities             |   | (57.6 | ) | (9.0 | ) | — |   | (66.6 | ) |
| Total  liabilities assumed     |   | (113.2 | ) | (53.6 | ) | (11.1 | ) | (177.9 | ) |
| Net cash paid                  |   | $ | 1,595.3 |   | $ | 1,928.7 |   | $ | 45.3 |   | $ | 3,569.3 |   |

 

F-50

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The purchase price paid for the CenturyTel and Verizontransactions discussed above was based on estimates of future cash flows of theproperties acquired.  The purchase ofwireless properties from CenturyTel expanded the Company’s wireless footprintinto new markets across Arkansas, Louisiana, Michigan, Mississippi, Texas andWisconsin.  Similarly, the wirelineproperties acquired from Verizon overlap ALLTEL’s existing wireless service innortheastern Kentucky.  ALLTEL paid apremium (i.e., goodwill) over the fair value of the net tangible and identifiedintangible assets acquired for a number of reasons, including but not limitedto the following:  First, the scale andscope of ALLTEL’s entire communications business was enhanced by the additionof the combined 1,351,000 geographically clustered communicationscustomers.  As a result, fixedoperations cost will be spread over a larger base and very little incrementaloverhead will be added.  Second, in thewireless properties acquired from CenturyTel, ALLTEL should realize, over time,accelerated customer growth and higher average revenue per customer as a resultof the Company’s higher revenue national rate plans.  Finally, the wireline operations in Kentucky generated a loweroperating margin than ALLTEL’s wireline business primarily due to coststructure differences.  ALLTEL believes,over time, that the Company can improve the margins in the newly acquiredKentucky operations to be more in line with the margins in its existingwireline operations.

 

On October 3, 2000, ALLTEL purchased wirelessproperties in Louisiana from SBC Communications, Inc. (“SBC”).  In connection with this transaction, ALLTELpaid SBC $387.6 million in cash and acquired approximately 150,000 wirelesscustomers and 300,000 paging customers. The accompanying consolidated financial statements include the accountsand results of operations of the acquired wireless properties from the date ofacquisition.

 

In 2000, ALLTEL, Bell Atlantic Corporation (“BellAtlantic”) and GTE Corporation (“GTE”) exchanged wireless properties in 13states.  On April 3, 2000, ALLTELcompleted the exchange of wireless properties with Bell Atlantic in fivestates, acquiring operations in Arizona, New Mexico and Texas and divestingoperations in Nevada and Iowa.  Inaddition to the exchange of wireless assets, ALLTEL also paid Bell Atlantic$624.3 million in cash to complete this transaction.  On June 30, 2000, ALLTEL completed the remaining wirelessproperty exchanges with Bell Atlantic and GTE, acquiring operations in Florida,Ohio, South Carolina and Alabama, while divesting operations in Illinois,Indiana, New York and Pennsylvania. ALLTEL also transferred to Bell Atlantic or GTE certain of its minorityinvestments in unconsolidated wireless properties.  In connection with the transfer of the remaining wireless assets,ALLTEL received $216.9 million in cash and prepaid vendor credits of $199.6million and assumed long-term debt of $425.0 million.  ALLTEL accounted for these exchange transactions as purchasebusiness combinations, and accordingly, the accompanying consolidated financialstatements include the accounts and results of operations of the acquiredproperties from the applicable dates of acquisition.  In 2001, the Company recorded the final purchase price allocationrelated to wireless property acquisitions with Bell Atlantic, GTE and SBC.  Amortization of the customer lists, cellularlicenses and goodwill was recorded on a straight-line basis over 6, 40 and 25years, respectively.

 

The following unaudited pro forma consolidated resultsof operations of the Company for the years ended December 31, 2002 and 2001assume that the acquisition of wireless properties from CenturyTel and theacquisition of wireline properties from Verizon were completed as of January 1,2001.  The unaudited pro formaconsolidated results of operations of the Company for the year ended December31, 2000 assume that the wireless property exchanges with Bell Atlantic and GTEwere completed as of January 1, 2000:

 
|                                                               |
|--------------------------------------------------------------------|
| **(Millions,  except per share amounts)**                          |   | **2002** |   | **2001** |   | **2000** |   |
| Revenues and  sales                                                |   | $ | 8,473.8 |   | $ | 8,370.9 |   | $ | 7,265.4 |   |
| Income before  cumulative effect of accounting change              |   | $ | 997.7 |   | $ | 1,091.0 |   | $ | 1,090.0 |   |
| Earnings per  share before cumulative effect of accounting change: |   |   |   |   |   |   |   |
| Basic                                                              |   | $ | 3.21 |   | $ | 3.50 |   | $ | 3.47 |   |
| Diluted                                                            |   | $ | 3.19 |   | $ | 3.48 |   | $ | 3.44 |   |
| Net income                                                         |   | $ | 997.7 |   | $ | 1,110.5 |   | $ | 1,053.4 |   |
| Earnings per  share:                                               |   |   |   |   |   |   |   |
| Basic                                                              |   | $ | 3.21 |   | $ | 3.56 |   | $ | 3.35 |   |
| Diluted                                                            |   | $ | 3.19 |   | $ | 3.54 |   | $ | 3.32 |   |

 

The pro forma amounts represent the historicaloperating results of the properties acquired from CenturyTel, Verizon, BellAtlantic and GTE with appropriate adjustments that give effect to depreciationand amortization and interest expense. The pretax gain of $1,345.5 million (net of related tax expense of$565.9 million) recognized by ALLTEL in 2000 related to the wireless propertyexchanges with Bell Atlantic and GTE (see Note 10) has been excluded from thepro forma net income and earnings per share amounts presented.  The effects of the other non-acquisitionrelated items discussed in Notes 9 and 10 are included in the pro forma amountspresented above.  The pro forma amountsare not necessarily indicative of the operating

 

F-51

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results that would have occurred if the acquiredproperties had been operated by ALLTEL during the periods presented.  In addition, the pro forma amounts do notreflect potential cost savings related to full network optimization and theredundant effect of selling, general and administrative expenses.

 

Operating results of the wireless properties divestedin the transactions with Bell Atlantic and GTE included in the Company’sconsolidated results of operations for the year ended December 31, 2000 were asfollows:

 
|                |   |
|---------------------|--------|
| **(Millions)**      |   |   |   |
| Revenues and  sales |   | $ | 216.5 |   |
| Operating income    |   | $ | 73.1 |   |
|                     |        |  |  |  |  |

 

During 2000, the Company also acquired the remainingownership interests in wireless properties in Florida and Georgia in which ALLTELalready owned a controlling interest. Additionally, the Company purchased two privately held companies servingthe financial services industry.  Inconnection with these acquisitions, the Company paid $28.1 million in cash andissued approximately 730,000 shares of ALLTEL common stock.  The following table summarizes the assetsacquired, liabilities assumed, common stock issued and assets exchanged,reflecting the final purchase price adjustments, for the various businesscombinations completed during 2000:

 
|                                                                  |
|-----------------------------------------------------------------------|
| **(Millions)**                                                        |   | **Acquired  from** |   |   |   |
|                                                                  |   | **Bell  Atlantic** |   | **GTE** |   | **SBC** |   | **Other** |   | **Combined  Totals** |   |
| Fair value of  assets acquired                                        |   | $ | 332.3 |   | $ | 596.8 |   | $ | 70.2 |   | $ | 18.7 |   | $ | 1,018.0 |   |
| Goodwill                                                              |   | 487.3 |   | 629.4 |   | 162.3 |   | 70.0 |   | 1,349.0 |   |
| Cellular  licenses                                                    |   | 175.0 |   | 273.0 |   | 61.0 |   | — |   | 509.0 |   |
| Customer lists                                                        |   | 51.0 |   | 134.0 |   | 27.0 |   | — |   | 212.0 |   |
| Net deferred tax  assets (liabilities) established on acquired assets |   | 38.5 |   | (25.9 | ) | 98.1 |   | — |   | 110.7 |   |
| Liabilities  assumed                                                  |   | — |   | (425.0 | ) | (31.0 | ) | (2.6 | ) | (458.6 | ) |
| Common stock  issued                                                  |   | — |   | — |   | — |   | (58.0 | ) | (58.0 | ) |
| Fair value of  assets exchanged                                       |   | (459.8 | ) | (1,399.2 | ) | — |   | — |   | (1,859.0 | ) |
| Net cash paid  (received)                                             |   | $ | 624.3 |   | $ | (216.9 | ) | $ | 387.6 |   | $ | 28.1 |   | $ | 823.1 |   |

 

In connection with the acquisitions discussed above,the Company recorded integration expenses and other charges in 2002 and2000.  (See Note 9.)

 

**4.**              **Financial Instruments and Investments**:

The carrying amount of cash and short-term investmentsapproximates fair value due to the short maturities of the instruments.  The fair values of the Company’sinvestments, long-term debt, redeemable preferred stock and interest rate swapswere as follows at December 31:

 
|                        |
|-----------------------------|
| **(Millions)**              |   | **2002** |   | **2001** |   |
|                        |   | **Fair  Value** |   | **Carrying  Amount** |   | **Fair  Value** |   | **Carrying  Amount** |   |
| Investments                 |   | $ | 327.4 |   | $ | 327.4 |   | $ | 251.6 |   | $ | 251.6 |   |
| Long-term debt              |   | $ | 7,379.1 |   | $ | 6,640.8 |   | $ | 3,955.7 |   | $ | 3,913.1 |   |
| Redeemable  preferred stock |   | $ | 10.1 |   | $ | 1.0 |   | $ | 15.2 |   | $ | 1.3 |   |
| Interest rate  swaps        |   | $ | 105.2 |   | $ | 105.2 |   | $ | 6.0 |   | $ | 6.0 |   |

 

The fair value of investments was based on quoted marketprices and the carrying value of investments for which there were no quotedmarket prices.  The fair value oflong-term debt, including current maturities, was estimated based on theoverall weighted rates and maturities of the Company’s long-term debt comparedto rates and terms currently available in the long-term financing markets.  The fair value of the redeemable preferredstock was estimated based on the conversion of the Series D convertibleredeemable preferred stock to common stock of the Company.  Fair values of the interest rate swaps werebased on quoted market prices.  Therewas no material impact to earnings due to hedge ineffectiveness for theinterest rate swaps designated as fair value hedges.  The fair value of all other financial instruments was estimatedby management to approximate carrying value.

 

F-52

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**5.****              Debt:**

Long-term debt was as follows at December 31:

 
|                                                     |
|----------------------------------------------------------|
| **(Millions)**                                           |   | **2002** |   | **2001** |   |
| Debentures and  notes, without collateral,               |   |   |   |   |   |
| Weighted rate  7.4% in 2002 and 7.3% in 2001             |   |   |   |   |   |
| Weighted  maturity 11 years in 2002 and 9 years in 2001  |   | $ | 4,853.5 |   | $ | 3,383.4 |   |
| Equity unit  notes,                                      |   |   |   |   |   |
| Weighted rate  6.3% in 2002                              |   |   |   |   |   |
| Weighted  maturity 4 years in 2002                       |   | 1,385.0 |   | — |   |
| Commercial paper  borrowings,                            |   |   |   |   |   |
| Weighted rate  1.4% in 2002 and 2.2% in 2001             |   |   |   |   |   |
| Weighted  maturity 3 years in 2002 and 4 years in 2001   |   | 25.0 |   | 230.1 |   |
| Rural Telephone  Bank and Federal Financing Bank notes,  |   |   |   |   |   |
| Weighted rate  6.7% in 2002 and 2001                     |   |   |   |   |   |
| Weighted  maturity 13 years in 2002 and 14 years in 2001 |   | 198.7 |   | 210.6 |   |
| Rural Utilities  Service notes,                          |   |   |   |   |   |
| Weighted rate  4.9% in 2002 and 2001                     |   |   |   |   |   |
| Weighted  maturity 13 years in 2002 and 14 years in 2001 |   | 54.6 |   | 59.3 |   |
| First mortgage  bonds and collateralized notes,          |   |   |   |   |   |
| Weighted rate  6.8% in 2002 and 6.7% in 2001             |   |   |   |   |   |
| Weighted  maturity 2 years in 2002 and 3 years in 2001   |   | 14.9 |   | 19.1 |   |
| Industrial  revenue bonds,                               |   |   |   |   |   |
| Weighted rate  3.0% in 2002 and 6.1% in 2001             |   |   |   |   |   |
| Weighted  maturity 5 years in 2002 and 6 years in 2000   |   | 3.9 |   | 4.6 |   |
| Other-market  value of interest rate swaps               |   | 105.2 |   | 6.0 |   |
|                                                     |   | 6,640.8 |   | 3,913.1 |   |
| Less current  maturities                                 |   | (495.3 | ) | (51.6 | ) |
| Total long-term  debt                                    |   | $ | 6,145.5 |   | $ | 3,861.5 |   |
| Weighted rate                                            |   | 7.1 | % | 6.9 | % |
| Weighted  maturity                                       |   | 10 years |   | 9 years |   |

 

Commercial Paper– The Company has established a commercial paper program with a maximumborrowing capacity of $1.5 billion. Commercial paper borrowings consist of discounted notes that are exemptfrom registration under the Securities Act of 1933.  Commercial paper borrowings are classified as long-term debt,because borrowings under this program are intended to be maintained on along-term basis and are supported by the revolving credit agreements.

 

Revolving Credit Agreements– The Company has a $1.0 billion unsecured line of credit under a revolvingcredit agreement.  This agreement wasamended in 2001 to provide that $50.0 million will expire in October 2003 and$950.0 million will expire in October 2005. The Company intends to continue to renew this agreement.  On July 31, 2002, the Company entered intoan additional $500.0 million, 364-day revolving credit agreement which willexpire on July 30, 2003, and allows the Company to convert any outstandingborrowings under this agreement into term loans maturing in 2004.  Commercial paper borrowings are deducted indetermining the total amount available for borrowing under the revolving creditagreements.  Accordingly, the totalamount outstanding under the commercial paper program and the indebtednessincurred under the revolving credit agreements may not exceed $1.5billion.  At December 31, 2002, theamount available for borrowing under the revolving credit agreements was$1,475.0 million.

 

The revolving credit agreements contain variouscovenants and restrictions including a requirement that, at the end of eachcalendar quarter, ALLTEL maintain a total debt-to-capitalization ratio of lessthan 65 percent.  For purposes ofcalculating this ratio under the agreement, total debt would include amountsclassified as long-term debt (excluding mark-to-market adjustments for interestrate swaps), current maturities of long-term debt outstanding, short-term debtand any letters of credit or other guarantee obligations.  As of December 31, 2002, the Company’slong-term debt to capitalization ratio was 52.2 percent.  In addition, the indentures and borrowingagreements, as amended, provide, among other things, for various restrictionson the payment of dividends by the Company. Retained earnings unrestricted as to the payment of dividends by theCompany amounted to $4,665.9 million at December 31, 2002.  Certain assets of the wireline subsidiarieshave been pledged as collateral on $272.1 million of obligations.

 

F-53

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Equity Units– During 2002, the Company issued and sold 27.7 million equity units in anunderwritten public offering and received net proceeds of $1.34 billion.  Each equity unit consists of a corporateunit, with a $50 stated amount, comprised of a purchase contract and $50principal amount of senior notes.  Thecorporate unit may be converted by the holder into a treasury unit consistingof the purchase contract and a treasury portfolio of zero-coupon U.S.Government treasury securities by substituting the treasury securities for thesenior notes.  The holder of an equityunit owns the underlying senior notes or treasury portfolio but has pledged thesenior notes or treasury portfolio to ALLTEL to secure the holder’s obligationsunder the purchase contract.  Thepurchase contract obligates the holder to purchase, and obligates ALLTEL tosell, on May 17, 2005, for $50, a variable number of newly issued common sharesof ALLTEL.  The number of ALLTEL sharesissued will be determined at the time the purchase contracts are settled basedupon the then current price of ALLTEL’s common stock.  If the price of ALLTEL’s common stock is equal to or less than$49.50, then ALLTEL will deliver 1.0101 shares to the holder of the equityunit.  If the price of ALLTEL’s commonstock is greater than $49.50 but less than $60.39, then ALLTEL will deliver afraction of shares equal to $50 divided by the then current price of ALLTEL’scommon stock.  Finally, if the price ofALLTEL’s common stock is equal to or greater than $60.39, then ALLTEL willdeliver 0.8280 shares to the holder. Accordingly, upon settlement of the purchase contracts on May 17, 2005,ALLTEL will receive proceeds of approximately $1,385.0 million and will deliverbetween 22.9 million and 28.0 million common shares in the aggregate.  The proceeds will be credited toshareholders’ equity and allocated between the common stock and additionalpaid-in-capital accounts.  ALLTEL willmake quarterly contract adjustment payments to the equity unit holders at arate of 1.50 percent of the stated amount per year until the purchase contractis settled, although the Company has the right to defer these payments until nolater than May 17, 2005.

 

Each corporate unit also included $50 principal amountof senior notes that will mature on May 17, 2007.  The notes are pledged by the holders to secure their obligationsunder the purchase contracts.  ALLTELwill make quarterly interest payments to the holders of the notes initially atan annual rate of 6.25 percent.  On orafter February 17, 2005, the notes will be remarketed.  At that time, ALLTEL’s remarketing agentwill be entitled to reset the interest rate on the notes in order to generatesufficient remarketing proceeds to satisfy the holder’s obligation under thepurchase contract.  In the event of anunsuccessful remarketing, the Company will exercise its rights as a securedparty to obtain and extinguish the notes. The total distributions payable on the equity units are at an annualrate of 7.75 percent, consisting of interest (6.25 percent) and contractadjustment payments (1.50 percent).  Thecorporate units are listed on the New York Stock Exchange under the symbol“AYZ”.

 

The present value of the contract adjustment paymentsof $57.1 million was accrued upon the issuance of the equity units as a chargeto additional paid-in capital and is included in other liabilities in theaccompanying consolidated balance sheet at December 31, 2002.  Subsequent contract adjustment payments willbe allocated between this liability account and interest expense based on aconstant rate calculation over the life of the transaction.  Additional paid-in capital for 2002 alsoreflected a charge of $36.0 million representing a portion of the equity unitissuance costs that were allocated to the purchase contracts.

 

Interest expense was as follows for the years endedDecember 31:

 
|                                        |
|---------------------------------------------|
| **(Millions)**                              |   | **2002** |   | **2001** |   | **2000** |   |
| Interest expense  related to long-term debt |   | $ | 363.5 |   | $ | 285.5 |   | $ | 302.8 |   |
| Other interest                              |   | 1.8 |   | 3.4 |   | 8.0 |   |
| Less:  Capitalized interest                 |   | (15.9 | ) | (20.4 | ) | (18.2 | ) |
|                                        |   | $ | 349.4 |   | $ | 268.5 |   | $ | 292.6 |   |

 

Maturities and sinking fund requirements for the fouryears after 2003 for long-term debt outstanding, excluding commercial paperborrowings, as of December 31, 2002, were $301.2 million, $242.8 million,$651.4 million and $1,428.4 million for the years 2004 through 2007,respectively.

 

**6.**              **Stock-Based****Compensation Plans:**

Under the Company’s stock-based compensation plans,ALLTEL may grant fixed and performance-based incentive and non-qualified stockoptions to officers and other key employees. The maximum number of shares of the Company’s common stock that may beissued to officers and other key employees under all stock option plans ineffect at December 31, 2002 was 34.6 million shares.  Fixed options granted under the stock option plans generallybecome exercisable over a period of one to five years after the date ofgrant.  Certain fixed options granted in2000 become exercisable in increments of 50%, 25% and 25% over a five-yearperiod beginning three years after the date of grant.  Certain fixed options granted in 1997 become exercisable in equalincrements over a six-year period beginning three years after the date of grant.  In 1997, performance- based options weregranted that become exercisable one year after the date in which certainperformance goals related to

 

F-54

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operating income growth and return on invested capitalare achieved for the four most recent consecutive calendar quarters.  Four separate levels of performance goaltargets were established, each specifying different minimum growth and rates ofreturn.  Depending upon which of thefour performance goal target levels is attained, 25%, 50%, 75% or 100% of theoption award will vest and become exercisable. Options related to the 25% performance goal target have vested.  In 2001, all remaining unvested performanceoptions were cancelled, as the remaining performance targets were not achieved.

 

Under the Company’s stock option plan for non-employeedirectors (the “Directors’ Plan”), the Company grants fixed, non-qualifiedstock options to directors for up to 1.0 million shares of common stock.  Under the Directors’ Plan, directors receivea one-time option grant to purchase 10,000 shares of common stock when theyjoin the Board.  Directors are alsogranted each year, on the date of the annual meeting of stockholders, an optionto purchase a specified number of shares of common stock (currently 6,500 shares).  Options granted under the Directors’ Planbecome exercisable the day immediately preceding the date of the first annualmeeting of stockholders following the date of grant.

 

For all plans, the exercise price of the option equalsthe market value of ALLTEL’s common stock on the date of grant.  For fixed stock options, the maximum termfor each option granted is 10 years. The fair value of each stock option granted as identified below wascalculated using the Black-Scholes option-pricing model and the followingweighted average assumptions:

 
|                     |
|--------------------------|
|                     |   | **2002** |   | **2001** |   | **2000** |   |
| Expected life            |   | 5.0 years |   | 5.0 years |   | 5.0 years |   |
| Expected  volatility     |   | 29.7 | % | 29.4 | % | 26.0 | % |
| Dividend yield           |   | 2.5 | % | 2.2 | % | 2.0 | % |
| Risk-free  interest rate |   | 4.6 | % | 5.0 | % | 6.3 | % |

 

Set forth below is certain information related tostock options outstanding under ALLTEL’s stock-based compensation plans:

 
|                                                                  |
|-----------------------------------------------------------------------|
|                                                                  |   | **(Thousands)  Shares** |   | **Weighted  Average Price  Per Share** |   |
|                                                                  |   | **2002** |   | **2001** | ** ** | **2000** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Outstanding at  beginning of period                                   |   | 16,254.5 |   | 14,859.7 |   | 10,814.2 |   | $ | 54.45 |   | $ | 51.81 |   | $ | 42.71 |   |
| Granted                                                               |   | 3,146.3 |   | 3,283.0 |   | 5,710.2 |   | 54.72 |   | 61.27 |   | 65.49 |   |
| Exercised                                                             |   | (610.6 | ) | (946.9 | ) | (971.2 | ) | 28.03 |   | 32.91 |   | 30.34 |   |
| Forfeited                                                             |   | (472.7 | ) | (814.0 | ) | (693.5 | ) | 59.76 |   | 62.57 |   | 52.58 |   |
| Expired                                                               |   | — |   | (127.3 | ) | — |   | — |   | 31.30 |   | — |   |
| Outstanding at  end of period                                         |   | 18,317.5 |   | 16,254.5 |   | 14,859.7 |   | $ | 55.24 |   | $ | 54.45 |   | $ | 51.81 |   |
|                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable at  end of period                                         |   | 7,180.7 |   | 5,409.0 |   | 4,067.3 |   | $ | 48.02 |   | $ | 43.08 |   | $ | 36.72 |   |
| Non-vested at  end of period:                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed                                                                 |   | 11,136.8 |   | 10,845.5 |   | 10,667.5 |   |   |   |   |   |   |   |
| Performance-based                                                     |   | — |   | — |   | 124.9 |   |   |   |   |   |   |   |
| Weighted average  fair value of stock options granted during the year |   | $ | 14.19 |   | $ | 16.98 |   | $ | 18.59 |   |   |   |   |   |   |   |
|                                                                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following is a summary of stock optionsoutstanding as of December 31, 2002:

 
|   |
|--------|
|   |   |   | **Options  Outstanding** |   | **Options  Exercisable** |   |
|   | **Range of  Exercise Price** |   | **Number of  Shares** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** |
|   | $20.24 - $27.88 |   | 308.3 |   | 2.5 years |   | $ | 26.21 |   | 308.3 |   | $ | 26.21 |   |
|   | $29.00 - $37.75 |   | 3,351.2 |   | 4.1 years |   | 32.95 |   | 2,922.7 |   | 32.71 |   |
|   | $39.19 - $47.30 |   | 890.7 |   | 5.1 years |   | 43.20 |   | 714.7 |   | 43.21 |   |
|   | $51.88 - $63.75 |   | 7,543.1 |   | 8.3 years |   | 58.03 |   | 521.3 |   | 56.08 |   |
|   | $64.56 - $68.25 |   | 6,030.7 |   | 7.0 years |   | 66.85 |   | 2,575.6 |   | 66.42 |   |
|   | $70.75 - $73.25 |   | 193.5 |   | 6.6 years |   | 72.20 |   | 138.1 |   | 71.97 |   |
|   |   |   | 18,317.5 |   | 6.9 years |   | $ | 55.24 |   | 7,180.7 |   | $ | 48.02 |   |
|        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-55

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**7.**              **Employee Benefit Plans and Postretirement BenefitsOther Than Pensions:**

The Company maintains a qualified defined benefitpension plan, which covers substantially all employees other than employees ofALLTEL’s information services and directory publishing subsidiaries.  Assets of this plan include ALLTEL commonstock.  At December 31, 2002 and 2001,the plan’s investment in ALLTEL common stock was $35.2 million and $41.4million, respectively.  The Company alsomaintains a supplemental executive retirement plan that provides unfunded,non-qualified supplemental retirement benefits to a select group of managementor other highly-compensated employees. In addition, the Company has entered into individual retirementagreements with certain retired executives providing for unfunded supplementalpension benefits.  The Company providespostretirement healthcare and life insurance benefits for eligible employees.  Employees share in the cost of thesebenefits.  The Company funds the accruedcosts of these plans as benefits are paid. During 2001, the Company incurred special termination benefits relatedto an early retirement program offered to employees meeting certain age andservice requirements.  (See Note 9 for afurther discussion of these special termination benefits incurred by ALLTEL in2001.)  The components of pensionexpense (income), including provision for executive retirement agreements, andpostretirement expense were as follows for the years ended December 31:

 
|                                           |
|------------------------------------------------|
|                                           |   | **Pension  Benefits** |   | **Postretirement  Benefits** |   |
| **(Millions)**                                 |   | **2002** |   | **2001** |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| Benefits earned  during the year               |   | $ | 27.1 |   | $ | 25.1 |   | $ | 24.3 |   | $ | 0.6 |   | $ | 0.7 |   | $ | 0.6 |   |
| Interest cost on  benefit obligation           |   | 48.2 |   | 45.7 |   | 43.1 |   | 13.3 |   | 9.1 |   | 8.9 |   |
| Amortization of  transition (asset) obligation |   | (2.2 | ) | (2.6 | ) | (2.6 | ) | 0.8 |   | 1.0 |   | 1.0 |   |
| Amortization of  prior service (credit) cost   |   | (3.7 | ) | (8.5 | ) | (0.6 | ) | 1.6 |   | 0.2 |   | 0.2 |   |
| Recognized net  actuarial (gain) loss          |   | 0.2 |   | (4.1 | ) | (16.1 | ) | 5.2 |   | 1.3 |   | 1.0 |   |
| Excepted return  on plan assets                |   | (60.8 | ) | (63.7 | ) | (65.3 | ) | — |   | — |   | — |   |
| Net periodic  benefit (income) expense         |   | 8.8 |   | (8.1 | ) | (17.2 | ) | 21.5 |   | 12.3 |   | 11.7 |   |
| Special  termination benefits and curtailment  |   | — |   | 16.9 |   | — |   | — |   | 4.6 |   | — |   |
| Total net  periodic benefit (income) expense   |   | $ | 8.8 |   | $ | 8.8 |   | $ | (17.2 | ) | $ | 21.5 |   | $ | 16.9 |   | $ | 11.7 |   |

 

A summary of plan assets, projected benefit obligationand funded status of the plans were as follows at December 31:

 
|                                                               |
|--------------------------------------------------------------------|
|                                                               |   | **Pension  Benefits** |   | **Postretirement  Benefits** |   |
| **(Millions)**                                                     |   | **2002** |   | **2001** |   | **2002** |   | **2001** |   |
| Fair value of  plan assets at beginning of year                    |   | $ | 711.4 |   | $ | 783.1 |   | $ | — |   | $ | — |   |
| Employer  contributions                                            |   | 53.8 |   | 6.3 |   | 11.1 |   | 8.1 |   |
| Transfer from  other plan for acquisitions                         |   | 49.0 |   | — |   | — |   | — |   |
| Participant  contributions                                         |   | — |   | — |   | 4.2 |   | 4.2 |   |
| Actual return on  plan assets                                      |   | (74.9 | ) | (31.3 | ) | — |   | — |   |
| Benefits paid                                                      |   | (46.4 | ) | (46.7 | ) | (15.3 | ) | (12.3 | ) |
| Fair value of  plan assets at end of year                          |   | 692.9 |   | 711.4 |   | — |   | — |   |
| Projected  benefit obligation at beginning of year                 |   | 678.4 |   | 618.2 |   | 185.9 |   | 121.1 |   |
| Benefits earned                                                    |   | 27.1 |   | 25.1 |   | 0.6 |   | 0.7 |   |
| Interest cost on  projected benefit obligation                     |   | 48.2 |   | 45.7 |   | 13.3 |   | 9.1 |   |
| Participant  contributions                                         |   | — |   | — |   | 4.2 |   | 4.2 |   |
| Special  termination benefits and curtailment                      |   | — |   | 16.9 |   | — |   | 4.6 |   |
| Plan amendments                                                    |   | — |   | (7.5 | ) | — |   | 14.4 |   |
| Effect of  acquisitions                                            |   | 49.7 |   | — |   | 7.3 |   | — |   |
| Actuarial loss                                                     |   | 45.5 |   | 26.7 |   | 6.2 |   | 44.1 |   |
| Benefits paid                                                      |   | (46.4 | ) | (46.7 | ) | (15.3 | ) | (12.3 | ) |
| Projected  benefit obligation at end of year                       |   | 802.5 |   | 678.4 |   | 202.2 |   | 185.9 |   |
| Plan assets in  excess of (less than) projected benefit obligation |   | (109.6 | ) | 33.0 |   | (202.2 | ) | (185.9 | ) |
| Unrecognized  actuarial loss                                       |   | 209.6 |   | 24.4 |   | 71.0 |   | 71.0 |   |
| Unrecognized  prior service  cost (credit)                    |   | (0.5 | ) | (0.7 | ) | 16.2 |   | 17.8 |   |
| Unrecognized net  transition (asset) obligation                    |   | (1.2 | ) | (3.4 | ) | 8.3 |   | 9.1 |   |
| Net amount  recognized                                             |   | $ | 98.3 |   | $ | 53.3 |   | $ | (106.7 | ) | $ | (88.0 | ) |
| Amounts  recognized in the consolidated balance sheet:             |   |   |   |   |   |   |   |   |   |
| Prepaid benefit  cost                                              |   | $ | 145.3 |   | $ | 95.4 |   | $ | — |   | $ | — |   |
| Accrued benefit  cost liability                                    |   | (47.0 | ) | (42.1 | ) | (106.7 | ) | (88.0 | ) |
| Net amount  recognized                                             |   | $ | 98.3 |   | $ | 53.3 |   | $ | (106.7 | ) | $ | (88.0 | ) |

 

F-56

----

 

Actuarial assumptions used to calculate the projectedbenefit obligations were as follows for the years ended December 31:

 
|                            |
|---------------------------------|
|                            |   | **Pension  Benefits** |   | **Postretirement  Benefits** |   |
|                            |   | **2002** |   | **2001** |   | **2002** |   | **2001** |   |
| Discount rate                   |   | 6.85 | % | 7.25 | % | 6.85 | % | 7.25 | % |
| Expected return  on plan assets |   | 8.50 | % | 8.50 | % | — |   | — |   |
| Rate of  compensation increase  |   | 3.50 | % | 4.50 | % | — |   | — |   |
| Healthcare cost  trend rate     |   | — |   | — |   | 9.00 | % | 10.00 | % |

 

For the supplemental retirement pension plans withaccumulated benefit obligations in excess of plan assets, the projected benefitobligation was $50.5 million and $44.9 million at December 31, 2002 and 2001,respectively.  The accumulated benefitobligation related to these plans was $45.4 million and $41.0 million atDecember 31, 2002 and 2001, respectively. There are no assets held in these plans, as the Company funds theaccrued costs of the plans as benefits are paid.

 

The healthcare cost trend rate will decrease on agraduated basis to an ultimate rate of five percent in 2006.  For the year ended December 31, 2002, a onepercent increase in the assumed healthcare cost trend rate would increase thepostretirement benefit cost by approximately $1.3 million, while a one percentdecrease in the rate would reduce the postretirement benefit cost byapproximately $1.1 million.  As ofDecember 31, 2002, a one percent increase in the assumed healthcare cost trendrate would increase the postretirement benefit obligation by approximately$18.2 million, while a one percent decrease in the rate would reduce thepostretirement benefit obligation by approximately $15.4 million.

 

In 2000, ALLTEL changed its method of amortizing unrecognizedactuarial gains and losses as a component of determining its annual pensioncost.  In prior years, the Companyamortized unrecognized actuarial gains and losses over the average remainingservice life of active employees (approximately 13 years).  With this change, ALLTEL amortizesunrecognized gains or losses that exceed 17.5% of the greater of the projectedbenefit obligation or market-related value of plan assets on a straight-linebasis over 5 years.  Unrecognizedactuarial gains and losses below the 17.5% corridor continue to be amortizedover the average remaining service life of active employees.  The Company believes the acceleratedamortization method is preferable as it results in more timely recognition ofsignificant actuarial gains and losses in computing ALLTEL’s annual pensioncost.  The effect of this change in 2000was to increase pension income by $4.1 million and income before cumulativeeffect of accounting change by $2.4 million. There was no cumulative effect of retroactively applying this change inaccounting principle to periods prior to 2000. (See Note 2 for a discussion of a similar change in accounting for asubsidiary’s pension plan completed in 2001.)

 

The Company has a non-contributory definedcontribution plan in the form of profit-sharing arrangements for eligibleemployees, except bargaining unit employees. The amount of profit-sharing contributions to the plan is determinedannually by the ALLTEL’s Board of Directors. Profit-sharing expense amounted to $32.3 million in 2002, $26.1 millionin 2001 and $26.4 million in 2000.  TheCompany also sponsors employee savings plans under section 401(k) of theInternal Revenue Code.  The plans coversubstantially all full-time employees, except bargaining unit employees.  Employees may elect to contribute to theplans a portion of their eligible pretax compensation up to certain limits asspecified by the plans.  The Companyalso makes annual contributions to the plans. Expense recorded by the Company related to these plans amounted to $10.9million in 2002, $16.9 million in 2001 and $16.2 million in 2000.

 

**8.****              LeaseCommitments:**

Minimum rental commitments for all non-cancelableoperating leases, consisting principally of leases for office space, officeequipment, real estate and tower space were as follows as of December 31, 2002:

 
|       |   |                 |   |
|------------|--------|----------------------|--------|
| **Year**   |   | ** (Millions)** |   |
| 2003       |   | $                    | 119.3  |   |
| 2004       |   | 86.4                 |   |
| 2005       |   | 65.5                 |   |
| 2006       |   | 47.5                 |   |
| 2007       |   | 33.3                 |   |
| Thereafter |   | 92.2                 |   |
| Total      |   | $                    | 444.2  |   |

 

Rental expense totaled $128.4 million in 2002, $114.2million in 2001 and $104.3 million in 2000.

 

F-57

----

 

**9.**              **Integration Expenses and Other Charges:**

A summary of the integration and other chargesrecorded in 2002 by quarter was as follows:

 
|                                                    |   |             |   |             |   |             |   |             |   |      |   |
|---------------------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|-----------|--------|
| **(Millions)**                                          |   | **1st  Quarter** |   | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |   | **Total** |   |
| Severance and  employee benefit costs                   |   | $                | 13.4   |             | $      | —           |   | $                | 3.3    |      | $      | (0.5 | ) | $ | 16.2 |   |
| Lease and  contract termination costs                   |   | 12.4             |   | —           |   | 2.2              |   | (0.5             | )      | 14.1      |   |
| Computer system  conversion and other integration costs |   | 3.4              |   | 9.0              |   | 8.6              |   | —           |   | 21.0      |   |
| Write-down of  investment in business venture           |   | —           |   | —           |   | —           |   | 42.3             |   | 42.3      |   |
| Write-down of  cell site equipment                      |   | 7.1              |   | —           |   | —           |   | —           |   | 7.1       |   |
| Write-down of  software development costs               |   | 4.4              |   | —           |   | —           |   | —           |   | 4.4       |   |
| Branding and  signage costs                             |   | —           |   | —           |   | 7.8              |   | —           |   | 7.8       |   |
| Equipment  removal and other disposal costs             |   | 2.2              |   | —           |   | —           |   | —           |   | 2.2       |   |
| Total  integration expenses and other charges           |   | $                | 42.9   |             | $      | 9.0              |   | $                | 21.9   |      | $      | 41.3 |   | $ | 115.1 |   |
| Number of  employees terminated                         |   | 910              |   | —           |   | 212              |   | —           |   | 1,122     |   |
| Number of lease  sites terminated                       |   | 31               |   | —           |   | 7                |   | 2                |   | 40        |   |

 

On December 13, 2002, ALLTEL and Bradford &Bingley Group announced both companies had agreed to discontinue a businessventure.  The business venture, ALLTELMortgage Solutions, Ltd., a majority-owned consolidated subsidiary of ALLTEL,was created in 2000 to provide mortgage administration and informationtechnology products in the United Kingdom. Unfortunately, the existing business climate in the United Kingdomlimited the venture’s ability to leverage the business across a broad base ofcustomers.  As a result of thisannouncement, ALLTEL recorded a write-down of its investment in the businessventure, which primarily consisted of capitalized software development coststhat had no alternative future use or functionality.  The write-down also included unamortized leasehold improvementsand other costs to unwind the business venture.  During the fourth quarter of 2002, the Company also recordedlease termination costs of $1.5 million related to the closing of two dataprocessing centers.  The leasetermination costs reflected the estimated minimum contractual commitments overthe ensuing one to two years to terminate leases associated with theseoperating locations.  The Company alsorecorded a $2.5 million reduction in the liabilities associated with therestructuring of its CLEC operations initiated during the first quarter of2002, as discussed below.  The reductionprimarily reflected differences between estimated and actual costs to exitcertain CLEC markets and consisted of $2.0 million in lease termination costsand $0.5 million in severance and employee benefit costs.

 

During the third quarter of 2002, the Company recordeda restructuring charge of $5.5 million consisting of severance and employeebenefit costs related to a planned workforce reduction and lease terminationcosts primarily related to the closing of seven product distributioncenters.  The lease termination costsconsisted of $1.2 million, primarily representing the estimated minimumcontractual commitments over the ensuing one to four years for operatinglocations that the Company abandoned, net of anticipated sublease income.  The lease termination costs also included anadditional $1.0 million to reflect the revised estimated costs, net ofanticipated sublease income, to terminate leases associated with four operatinglocations.  ALLTEL had previouslyrecorded $9.1 million in lease termination costs related to these fourlocations ($2.8 million during the first quarter of 2002 and $6.3 million in1999), as further discussed below.  Theadditional charge reflected a further reduction in expected sublease incomeattributable primarily to softening in the commercial real estate market.  The restructuring plan, completed inSeptember 2002, provided for the elimination of 212 employees primarily in theCompany’s information services and product distribution operations.  As of December 31, 2002, the Company hadpaid $2.7 million in severance and employee-related expenses, and all of the employeereductions had been completed.

 

In connection with the purchase of wireline propertiesin Kentucky from Verizon and wireless properties from CenturyTel (see Note 3),the Company incurred branding and signage costs of $7.8 million during thethird quarter of 2002.  In connectionwith these acquisitions, the Company also incurred computer system conversionand other integration costs during each of the first three quarters of 2002.  These expenses included internal payroll andemployee benefit costs, contracted services, and other computer programmingcosts incurred in connection with expanding ALLTEL’s customer service andoperations support functions to handle increased customer volumes resultingfrom the acquisitions and to convert Verizon’s customer billing and operationssupport systems to ALLTEL’s internal systems.

 

In January 2002, ALLTEL announced its plans to exitits CLEC operations in seven states. The Company also consolidated its call center and retail storeoperations during the first quarter of 2002. In connection with these activities, ALLTEL recorded a restructuringcharge consisting of severance and employee benefit costs related to a plannedworkforce reduction, costs associated with terminating certain CLEC transportagreements and lease termination fees related to the closing of certain retailand call

 

 

F-58

----

 

center locations. In exiting the CLEC operations, the Company also incurred costs todisconnect and remove switching and other transmission equipment from centraloffice facilities and expenses to notify and migrate customers to other serviceproviders.  ALLTEL also wrote offcertain capitalized software development costs that had no alternative futureuse or functionality.  The restructuringplans, completed in March 2002, provided for the elimination of 910 employeesprimarily in the Company’s sales, customer service and network operationssupport functions.  As previouslydiscussed, in the fourth quarter of 2002, ALLTEL reduced the liabilitiesassociated with these restructuring plans by $2.5 million.  As of December 31, 2002, the Company hadpaid $11.5 million in severance and employee-related expenses, and all of theemployee reductions had been completed.

 

The $12.4 million in lease and contract terminationcosts recorded in the first quarter of 2002 consisted of $5.0 million,representing the estimated minimum contractual commitments over the next one tofive years for 31 operating locations that the Company abandoned, net ofanticipated sublease income.  The leaseand contract termination costs also included $3.6 million of costs to terminatetransport agreements with six interexchange carriers.  The Company also recorded an additional $2.8 million to reflectthe revised estimated costs, net of anticipated sublease income, to terminateleases associated with four operating locations.  As previously discussed, ALLTEL had initially recorded $6.3million in lease termination costs related to these four locations in1999.  The additional charge reflected areduction in expected sublease income primarily attributable to softening inthe commercial real estate market and bankruptcy filings by twosublessees.  Finally, the leasetermination costs also included $1.0 million of unamortized leaseholdimprovement costs related to the abandoned locations.

 

In conjunction with a product replacement programinitiated by a vendor in 2001, the Company exchanged certain used cell siteequipment for new equipment.  Theexchange of cell site equipment began during the third quarter of 2001 andcontinued through the first quarter of 2002. As the equipment exchanges were completed, the Company recordedwrite-downs in the carrying value of the used cell site equipment to fairvalue.

 

During 2001, the Company restructured its regionalcommunications, information services, product distribution and corporateoperations.  In connection with theserestructuring efforts, the Company recorded restructuring charges during eachof the four quarters of 2001.  TheCompany also recorded write-downs in the carrying value of certain cell siteequipment to fair value in connection with the product replacement programpreviously discussed.  A summary of therestructuring and other charges recorded in 2001 by quarter was as follows:

 
|                                      |   |             |   |             |   |             |   |             |   |      |   |
|-------------------------------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|-----------|--------|
| **(Millions)**                            |   | **1st  Quarter** |   | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |   | **Total** |   |
| Severance and  employee benefit costs     |   | $                | 54.9   |             | $      | 1.6              |   | $                | 5.5    |      | $      | 0.1 |   | $ | 62.1 |   |
| Lease and  contract termination costs     |   | 5.2              |   | 0.5              |   | 0.4              |   | —           |   | 6.1       |   |
| Write-down of  software development costs |   | 8.9              |   | —           |   | —           |   | —           |   | 8.9       |   |
| Write-down of  cell site equipment        |   | —           |   | —           |   | 9.5              |   | 5.6              |   | 15.1      |   |
| Total  restructuring and other charges    |   | $                | 69.0   |             | $      | 2.1              |   | $                | 15.4   |      | $      | 5.7 |   | $ | 92.2 |   |
| Number of  employees terminated           |   | 1,247            |   | 170              |   | 216              |   | 11               |   | 1,644     |   |
| Number of lease  sites terminated         |   | 48               |   | 10               |   | 2                |   | 3                |   | 63        |   |

 

As indicated in the table above, the restructuringcharges consisted of $62.1 million in severance and employee benefit costsrelated to planned workforce reductions, $6.1 million in lease terminationcosts associated with the closing of certain retail and other operatinglocations and a $8.9 million write-down in the carrying value of certainsoftware development costs.  Included inthe severance and employee benefit component of the restructuring charges werenon-cash charges of $22.6 million. These non-cash charges consisted of $21.5 million in additional pensionand postretirement benefit costs related to a special early retirement programoffered by the Company to employees meeting certain age and servicerequirements and $1.1 million in compensation expense related to theaccelerated vesting of certain stock options. Eligible employees who elected the early retirement incentive receivedfive years of additional vested service for purposes of calculating theirretirement benefits available under the Company’s pension and postretirementbenefit plans.  During the first quarterof 2001, 230 employees accepted the retirement incentive offer.  The restructuring plans were completed inDecember 2001 and resulted in the elimination of 1,644 employees, including theemployees who accepted the early retirement incentive.  The work force reductions occurred primarilyin operations management, engineering, sales and the corporate supportfunctions.  As of December 31, 2002, theCompany had paid $39.4 million in severance and employee-related expenses andall of the employee reductions had been completed.

 

The lease termination costs consisted of $5.0 millionrepresenting the estimated minimum contractual commitments over the next one tofive years for 63 operating locations that the Company abandoned, net ofanticipated sublease income.  The leasetermination costs also included $1.1 million of unamortized leaseholdimprovement costs related to the abandoned locations.

 

F-59

----

 

The write-down in the carrying value of certainsoftware development costs resulted from the Company’s formation of a venturewith IBM announced in March 2001.  Theventure, which operates as ALLTEL Corebanking Solutions, a majority ownedconsolidated subsidiary of ALLTEL, develops and markets Corebank, a real-timebanking system, to financial service organizations in Europe.  Prior to forming the venture, ALLTEL had beendeveloping its own real-time processing software.  Following the signing of the business venture agreement, theCompany ceased further development of its software product and wrote off theportion of the capitalized software development costs that had no alternativefuture use or functionality.

 

In an effort to realign the cost structure in itsinformation services business, the Company recorded a restructuring charge of$10.1 million in 2000.  This chargeconsisted of $5.9 million in severance and employee benefit costs related to aplanned workforce reduction and $4.2 million in lease termination costs relatedto the consolidation of certain operating locations.  The restructuring plan, which resulted in the elimination of 199employees, was completed in July 2000. As of December 31, 2001, the Company had paid $5.9 million in severanceand employee-related expenses and all of the employee reductions had beencompleted.  The lease termination costsrepresent the estimated minimum contractual commitments over the next one tofour years for facilities that the Company abandoned, net of anticipatedsublease income.

 

In connection with ALLTEL’s purchase of wirelessassets from SBC and the Company’s exchange of wireless assets with BellAtlantic and GTE, the Company recorded integration expenses and other chargesof $19.9 million in 2000.  These chargesconsisted of $14.6 million in branding and signage costs and $5.3 million inseverance and employee benefit costs related to a planned workforcereduction.  The integration planprovided for the elimination of 22 employees in the Company’s wirelessoperations management, engineering and sales support functions.  During 2000, the Company paid $5.3 millionin severance and employee-related expenses and completed all of the employeereductions associated with these integration activities.

 

As a result of completing the restructuring of itswireline operations initiated in 1999, the Company recorded a $2.1 millionreduction in the liabilities associated with this restructuring plan in2000.  The adjustment reflecteddifferences between estimated and actual severance costs paid and a reductionin the number of employees to be terminated under the plan.  During 2000, the Company also recorded a$2.5 million reduction in the liabilities associated with its merger andintegration activities initiated during 1999. The reduction consisted of decreases in estimated severance costs of$2.3 million and $0.2 million, respectively, related to the 1999 acquisitionsof Aliant Communications Inc. (“Aliant”) and Liberty Cellular, Inc.(“Liberty”).  The adjustments primarilyreflected a reduction in the expected number of Aliant employees to beterminated under the merger and integration plans, as well as differencesbetween actual and estimated severance costs paid.  As of December 31, 2002, the remaining unpaid liability relatingto ALLTEL’s acquisitions of Aliant and Liberty was $1.5 million and consistedof unpaid severance and employee-related expenses.

 

The following is a summary of activity related to theliabilities associated with the Company’s integration expenses and othercharges at December 31:

 
|                                    |   |     |   |     |   |
|-----------------------------------------|--------|----------|--------|----------|--------|
| **(Millions)**                          |   | **2002** |   | **2001** |   |
| Balance,  beginning of year             |   | $        | 17.1   |     | $      | 16.5 |   |
| Integration  expenses and other charges |   | 117.6    |   | 92.2     |   |
| Reversal of  accrued liabilities        |   | (2.5     | )      | —   |   |
| Non-cash charges  for employee benefits |   | —   |   | (22.6    | )      |
| Non-cash  write-down of assets          |   | (48.3    | )      | (24.0    | )      |
| Cash outlays                            |   | (68.2    | )      | (45.0    | )      |
| Balance, end of  year                   |   | $        | 15.7   |     | $      | 17.1 |   |

 

As of December 31, 2002, the remaining unpaidliability related to the Company’s integration and restructuring activitiesconsisted of lease cancellation and contract termination costs of $12.1 millionand severance and employee-related expenses of $3.6 million and is included inother current liabilities in the accompanying consolidated balance sheets.  The integration expenses and other chargesdecreased net income $62.5 million, $54.8 million and $15.0 million for theyears ended December 31, 2002, 2001 and 2000, respectively.

 

**10.**       **Gain on Disposal of Assets, Write-Downof Investments and Other:**

In the fourth quarter of 2002, ALLTEL recorded apretax gain of $22.1 million from the sale of a wireless property inPennsylvania to Verizon Wireless.  Inaddition, the Company also recorded a pretax write-down of $2.6 million relatedto its investment in Hughes Tele.com Limited (“HTCL”).  In December 2002, ALLTEL exchanged itsshares of HTCL for non-voting, mandatory redeemable convertible preferredshares of Tata Teleservices Limited (“Tata”), a privately held Indian

 

F-60

----

 

company. Subsequently, ALLTEL decided to liquidate this investment by selling theTata preferred shares.  The write-downreflected the difference between the carrying value of the Tata preferredshares and the estimated sales proceeds to be realized by ALLTEL uponcompletion of the sale, which occurred in February 2003.  In the third quarter of 2002, the Companyrecorded a pretax adjustment of $4.8 million to reduce the gain recognized fromthe dissolution of a wireless partnership with BellSouth Mobility, Inc.(“BellSouth”).  As discussed below, thisgain was initially recorded in the first quarter of 2001 and subsequentlyrevised in the second quarter of 2001. This additional adjustment reflected a true up for cash distributionspayable to BellSouth in conjunction with the dissolution of thepartnership.  In the second quarter of2002, ALLTEL recorded a pretax write-down of $12.5 million on its investment inHTCL, a public company and provider of communications services in India.  The write-down was recorded in connectionwith HTCL’s agreement to merge with a major Indian telecommunications companyand an other-than-temporary decline in the fair value of HTCL’s commonstock.  In addition, the Company alsorecorded a pretax write-down of $1.2 million related to an other-than-temporarydecline in ALLTEL’s investment in Airspan Networks, Inc., a provider ofwireless telecommunications equipment. These transactions increased net income $0.6 million.

 

In the second quarter of 2001, the Company recorded apretax adjustment of $4.4 million to reduce the gain recognized from thedissolution of a wireless partnership with BellSouth initially recorded in thefirst quarter of 2001.  The Company alsorecorded a pretax adjustment of $2.4 million to increase the gain recognizedfrom the sale of PCS licenses to Verizon Wireless also completed during thefirst quarter of 2001.  Theseadjustments primarily reflected differences between the actual and estimatedbook values of the properties transferred. In addition, during the second quarter of 2001, the Company prepaid$73.5 million of long-term debt prior to its stated maturity date and incurredpretax termination fees of $2.9 million in connection with the early retirementof that debt.  In the first quarter of2001, the Company recorded a pretax gain of $345.4 million from the sale of 20PCS licenses to Verizon Wireless completed in February 2001.  In addition, the Company recorded a pretaxgain of $13.9 million upon the dissolution of a wireless partnership withBellSouth involving properties in four states. Upon dissolution, the partnership assets were distributed to thepartners at fair value resulting in a gain for financial reporting purposes.  Also in the first quarter of 2001, theCompany recorded pretax gains of $3.2 million from the sale of certaininvestments.  These transactionsincreased net income $212.7 million.

 

During 2000, the Company recorded pretax gains of$1,345.5 million from the exchange of wireless properties with Bell Atlanticand GTE.  The Company also recordedpretax gains of $36.0 million from the sale of its PCS operations in Birminghamand Mobile, Ala. and nine other PCS licenses, including the license coveringthe Pensacola, Fla. market.  The salesof the Mobile, Ala. and Pensacola, Fla. PCS assets were necessary in order forALLTEL to meet the U.S. Department of Justice guidelines regarding the overlapof wireless properties so that the Company could complete the wireless assetexchanges with Bell Atlantic and GTE. The Company also recorded pretax gains totaling $562.0 million from thesale of equity securities, including ALLTEL’s remaining investment in WorldCom,Inc. common stock.  Proceeds from thesales of equity securities amounted to $618.2 million.  In addition, the Company recorded a pretaxwrite-down of $15.0 million on its investment in APEX Global InformationServices, Inc. (“APEX”), a provider of Internet access services.  The write-off was recorded due to adversemarket conditions and APEX’s bankruptcy filing.  These transactions increased net income $1,124.3 million.

 

**11.****       IncomeTaxes:**

Income tax expense was as follows for the years endedDecember 31:

 
|                             |   |     |   |     |   |     |   |
|----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **(Millions)**                   |   | **2002** |   | **2001** |   | **2000** |   |
| Current:                         |   |     |   |     |   |     |   |
| Federal                          |   | $        | 175.5  |     | $      | 506.5    |   | $ | 703.7 |   |
| State and other                  |   | 10.4     |   | 74.7     |   | 186.1    |   |
|                             |   | 185.9    |   | 581.2    |   | 889.8    |   |
| Deferred:                        |   |     |   |     |   |     |   |
| Federal                          |   | 298.0    |   | 102.5    |   | 417.4    |   |
| State and other                  |   | 57.3     |   | 21.0     |   | 79.8     |   |
|                             |   | 355.3    |   | 123.5    |   | 497.2    |   |
| Investment tax  credit amortized |   | —   |   | (0.4     | )      | (1.7     | )      |
|                             |   | $        | 541.2  |     | $      | 704.3    |   | $ | 1,385.3 |   |

 

Deferred income tax expense for 2002 and 2001primarily resulted from temporary differences between depreciation expense forincome tax purposes and depreciation expense recorded in the financialstatements.  Deferred income tax expensefor 2002 also included the effects of no longer amortizing indefinite-livedintangible assets for financial statement purposes in accordance with SFAS No.142, as previously discussed.  Theseintangible assets continue to be amortized for income tax purposes.

 

F-61

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Deferred income tax expense for 2000 primarilyreflected the difference in the gain amount recognized for income tax purposesand the gain amount recorded in the financial statements related to thewireless property exchanges with Bell Atlantic and GTE.

 

Differences between the federal income tax statutoryrates and effective income tax rates, which include both federal and stateincome taxes, were as follows for the years ended December 31:

 
|                                        |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory  federal income tax rates         |   | 35.0     | %      | 35.0     | %      | 35.0     | %      |
| Increase  (decrease):                       |   |     |   |     |   |     |   |
| State income  taxes, net of federal benefit |   | 3.0      |   | 3.5      |   | 5.1      |   |
| Amortization of  intangibles                |   | —   |   | 1.6      |   | 1.0      |   |
| Other items, net                            |   | (1.1     | )      | 0.1      |   | 0.2      |   |
| Effective income  tax rates                 |   | 36.9     | %      | 40.2     | %      | 41.3     | %      |

 

The significant components of the net deferred incometax liability were as follows at December 31:

 
| **(Millions)**                          |   | **2002** |    | **2001** |   |
|-----------------------------------------|--------|----------|---------|----------|--------|
| Property, plant  and equipment          |   | $        | 886.2   |     | $      | 698.5 |   |
| Goodwill and  other intangibles         |   | 181.3    |    | (86.9    | )      |
| Capitalized  software development costs |   | 97.4     |    | 93.4     |   |
| Pension and  other employee benefits    |   | 29.1     |    | 16.1     |   |
| Partnership  investments                |   | 1.6      |    | 68.4     |   |
| Deferred  compensation                  |   | (38.6    | )       | (35.6    | )      |
| Operating loss  carryforwards           |   | (7.0     | )       | (5.4     | )      |
| Other, net                              |   | 2.5      |    | (14.4    | )      |
|                                    |   | 1,152.5  |    | 734.1    |   |
| Valuation  allowance                    |   | 6.0      |    | 3.9      |   |
| Deferred income  taxes                  |   | $        | 1,158.5 |     | $      | 738.0 |   |

 

At December 31, 2002 and 2001, total deferred taxassets were $153.3 million and $229.6 million, respectively, and total deferredtax liabilities were $1,311.8 million and $967.6 million, respectively.  As of December 31, 2002 and 2001, theCompany had available tax benefits associated with federal and state operatingloss carryforwards of $7.0 million and $5.4 million, respectively, which expireannually in varying amounts to 2021. The valuation allowance primarily represents tax benefits of certainstate operating loss carryforwards and other deferred tax assets, which mayexpire and not be utilized.

 

**12.**       **Other Comprehensive Income (Loss):**

Other comprehensive income (loss) consists ofunrealized holding gains (losses) on its investments in equity securities andforeign currency translation adjustments. Other comprehensive income (loss) were as follows for the years endedDecember 31:

 
| **(Millions)**                                                                                |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Unrealized  holding losses on investments:                                                    |   |     |   |     |   |     |   |
| Unrealized  holding losses arising in the period                                              |   | $        | (6.2   | )        | $      | (19.3    | )      | $ | (375.9 | ) |
| Income tax  expense (benefit)                                                                 |   | (2.3     | )      | (6.5     | )      | (123.2   | )      |
|                                                                                          |   | (3.9     | )      | (12.8    | )      | (252.7   | )      |
| Less:  reclassification adjustments for (gains) losses included in net income for  the period |   | 13.7     |   | (2.4     | )      | (562.0   | )      |
| Income tax  expense (benefit)                                                                 |   | (5.3     | )      | 1.0      |   | 224.8    |   |
|                                                                                          |   | 8.4      |   | (1.4     | )      | (337.2   | )      |
| Net unrealized  gains (losses) in the period                                                  |   | 7.5      |   | (21.7    | )      | (937.9   | )      |
| Income tax  expense (benefit)                                                                 |   | 3.0      |   | (7.5     | )      | (348.0   | )      |
|                                                                                          |   | 4.5      |   | (14.2    | )      | (589.9   | )      |
| Foreign currency  translation adjustment                                                      |   | 3.0      |   | (5.4     | )      | 1.0      |   |
| Other  comprehensive income (loss) before tax                                                 |   | 10.5     |   | (27.1    | )      | (936.9   | )      |
| Income tax  expense (benefit)                                                                 |   | 3.0      |   | (7.5     | )      | (348.0   | )      |
| Other  comprehensive income (loss)                                                            |   | $        | 7.5    |     | $      | (19.6    | )      | $ | (588.9 | ) |

 

F-62

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**13.****       Litigation-Claimsand Assessments:**

In July 1996, the Georgia Public Service Commission(the “Georgia PSC”) issued an order requiring that ALLTEL’s wirelinesubsidiaries which operate within its jurisdiction reduce their annual networkaccess charges by $24.0 million, prospectively, effective July 1, 1996.  The Georgia PSC’s action was in response tothe Company’s election to move from a rate-of-return method of pricing to anincentive rate structure, as provided by a 1995 Georgia telecommunicationslaw.  The Georgia PSC’s authority toconduct the rate proceeding was considered first by the Superior Court ofFulton County, Georgia (the “Superior Court”) and then by the Georgia Court ofAppeals and finally the Georgia Supreme Court. In 1998, the Georgia Supreme Court ruled that the Georgia PSC had theauthority to conduct the rate proceeding. The case was remanded to the Superior Court for it to rule on certainissues that it had not previously decided. In 1999, the Superior Court vacated and reversed the 1996 Georgia PSCorder and remanded the case with instructions to dismiss.  The Georgia PSC appealed the SuperiorCourt’s decision.  In April 2000, ALLTELsigned a settlement agreement with the Georgia PSC to settle this case.  As part of the agreement, ALLTEL agreed toaccelerate deployment of digital subscriber lines and Internet service to itscustomers in Georgia and to reduce certain optional local calling planrates.  In addition, ALLTEL agreed tofuture reductions in funds received from the Georgia Universal Service Fund.  These revenue reductions totaled $11.7million in 2000 and approximately $26.0 million in 2001.  In exchange for the Company’s commitments,the Georgia PSC agreed to withdraw its appeal of the Superior Court’s 1999decision.  In June 2000, the GeorgiaCourt of Appeals acknowledged that the case had been settled and thus itsruling was moot, but denied the motion to dismiss and reversed the SuperiorCourt’s decision.  In September 2000,ALLTEL and the Georgia PSC reached a final settlement agreement to resolve allpending litigation involving the two parties. Under terms of the final agreement, ALLTEL issued a one-time credit ofabout $25 to approximately 450,000 wireline customers in Georgia.  The credits, which totaled $11.5 million,were issued during the fourth quarter of 2000, and were recorded as a reductionin wireline operating revenues.  Theseone-time credits were in addition to the other commitments agreed to by ALLTELunder the settlement agreement signed in April 2000, as discussed above.

 

The Company is party to various other legalproceedings arising from 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 theaggregate, will have a material adverse effect on the future consolidatedresults of operations or financial condition of the Company.

 

**14.**       **Agreement to Lease Cell Site Towers:**

In December 2000, ALLTEL signed a definitive agreementwith American Tower Corporation (“American Tower”) to lease to American Towercertain of the Company’s cell site towers in exchange for cash paid inadvance.  Under terms of the 15-yearlease agreement, American Tower will manage, maintain and remarket theremaining space on the towers, while ALLTEL will continue to own the cell sitefacilities.  ALLTEL is obligated to payAmerican Tower a monthly fee for management and maintenance services for theduration of the agreement amounting to $1,200 per tower per month, subject toescalation not to exceed five percent annually.  American Tower has the option to purchase the towers foradditional consideration at the end of the lease term.  Upon completion of this transaction, theCompany had leased 1,773 cell site towers to American Tower and receivedproceeds of $531.9 million.  Proceedsfrom this leasing transaction were recorded by ALLTEL as deferred rental incomeand are recognized as service revenues on a straight-line basis over thefifteen-year lease term.  Deferredrental income of $481.9 million and $506.6 million at December 31, 2002 and2001, respectively, is included in other liabilities in the accompanyingconsolidated balance sheets.

 

**15.**       **Business Segments:**

ALLTEL disaggregates its business operations basedupon differences in products and services. Wireless operations include cellular, PCS and paging services and areprovided in 26 states.  The Company’swireline subsidiaries provide local service and network access in 15states.  Wireline operations alsoinclude ALLTEL’s local competitive access and Internet access operations.  Local competitive access services arecurrently provided in select markets. Communications support services consist of the Company’s long-distance,network management, product distribution and directory publishingoperations.  Long-distance and Internetaccess services are currently marketed in 25 and 17 states, respectively.  Information services provide informationprocessing, outsourcing services and application software primarily to financialand telecommunications customers.  Theprincipal markets for information services’ products and services arecommercial banks, financial institutions and telecommunications companies inthe United States and major international markets.  Corporate items include general corporate expenses, headquartersfacilities and equipment, investments, and other items not allocated to thesegments.  The accounting policies usedin measuring segment assets and operating results are the same as thosedescribed in Note 1.  The Companyevaluates performance of the segments based on segment income, which iscomputed as revenues and sales less operating expenses, excluding the effectsof the items discussed in Notes 9 and 10. These items are not allocated to the segments and are included incorporate operations.  The Companyaccounts for intercompany sales at current market prices or in accordance withregulatory requirements.

 

F-63

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**(Millions)**
|                                             |   | **For the  year ended December 31, 2002** |    |
|--------------------------------------------------|--------|-------------------------------------------|---------|
|                                             |   | **Wireless**                              |    | **Wireline** |   | **Communications  Support  Services** |   | **Information  Services** |   | **Total  Segments** |   |
| Revenues and  sales from unaffiliated customers: |   |                                      |    |   |   |   |   |   |   |   |   |
| Domestic                                         |   | $                                         | 4,160.2 |   | $ | 2,027.2 |   | $ | 433.1 |   | $ | 863.6 |   | $ | 7,484.1 |   |
| International                                    |   | —                                    |    | — |   | — |   | 126.5 |   | 126.5 |   |
|                                             |   | 4,160.2                                   |    | 2,027.2 |   | 433.1 |   | 990.1 |   | 7,610.6 |   |
| Intercompany  revenues and sales                 |   | —                                    |    | 152.5 |   | 373.5 |   | — |   | 526.0 |   |
| Total revenues  and sales                        |   | 4,160.2                                   |    | 2,179.7 |   | 806.6 |   | 990.1 |   | 8,136.6 |   |
| Operating  expenses                              |   | 2,634.7                                   |    | 921.1 |   | 716.0 |   | 734.5 |   | 5,006.3 |   |
| Depreciation and  amortization                   |   | 577.6                                     |    | 465.6 |   | 27.2 |   | 93.7 |   | 1,164.1 |   |
| Total costs and  expenses                        |   | 3,212.3                                   |    | 1,386.7 |   | 743.2 |   | 828.2 |   | 6,170.4 |   |
| Segment income                                   |   | $                                         | 947.9   |   | $ | 793.0 |   | $ | 63.4 |   | $ | 161.9 |   | $ | 1,966.2 |   |
| Assets                                           |   | $                                         | 9,409.0 |   | $ | 5,075.5 |   | $ | 471.6 |   | $ | 622.0 |   | $ | 15,578.1 |   |
| Investments in  unconsolidated partnerships      |   | $                                         | 275.1   |   | $ | — |   | $ | — |   | $ | — |   | $ | 275.1 |   |
| Capital  expenditures                            |   | $                                         | 717.1   |   | $ | 399.6 |   | $ | 31.5 |   | $ | 40.7 |   | $ | 1,188.9 |   |

 
|                                             |   | **For the  year ended December 31, 2001** |    |
|--------------------------------------------------|--------|-------------------------------------------|---------|
|                                             |   | **Wireless**                              |    | **Wireline** |   | **Communications  Support  Services** |   | **Information  Services** |   | **Total  Segments** |   |
| Revenues and  sales from unaffiliated customers: |   |                                      |    |   |   |   |   |   |   |   |   |
| Domestic                                         |   | $                                         | 3,832.0 |   | $ | 1,824.9 |   | $ | 503.1 |   | $ | 871.4 |   | $ | 7,031.4 |   |
| International                                    |   | —                                    |    | — |   | — |   | 163.8 |   | 163.8 |   |
|                                             |   | 3,832.0                                   |    | 1,824.9 |   | 503.1 |   | 1,035.2 |   | 7,195.2 |   |
| Intercompany  revenues and sales                 |   | —                                    |    | 140.0 |   | 320.7 |   | — |   | 460.7 |   |
| Total revenues  and sales                        |   | 3,832.0                                   |    | 1,964.9 |   | 823.8 |   | 1,035.2 |   | 7,655.9 |   |
| Operating  expenses                              |   | 2,385.3                                   |    | 820.2 |   | 710.8 |   | 794.7 |   | 4,711.0 |   |
| Depreciation and  amortization                   |   | 619.0                                     |    | 412.0 |   | 22.4 |   | 94.1 |   | 1,147.5 |   |
| Total costs and  expenses                        |   | 3,004.3                                   |    | 1,232.2 |   | 733.2 |   | 888.8 |   | 5,858.5 |   |
| Segment income                                   |   | $                                         | 827.7   |   | $ | 732.7 |   | $ | 90.6 |   | $ | 146.4 |   | $ | 1,797.4 |   |
| Assets                                           |   | $                                         | 7,525.3 |   | $ | 3,449.7 |   | $ | 505.6 |   | $ | 665.5 |   | $ | 12,146.1 |   |
| Investments in  unconsolidated partnerships      |   | $                                         | 173.3   |   | $ | — |   | $ | — |   | $ | — |   | $ | 173.3 |   |
| Capital  expenditures                            |   | $                                         | 721.4   |   | $ | 390.3 |   | $ | 37.0 |   | $ | 61.9 |   | $ | 1,210.6 |   |

 
|                                             |   | **For the  year ended December 31, 2000** |    |
|--------------------------------------------------|--------|-------------------------------------------|---------|
|                                             |   | **Wireless**                              |    | **Wireline** |   | **Communications  Support  Services** |   | **Information  Services** |   | **Total  Segments** |   |
| Revenues and  sales from unaffiliated customers: |   |                                      |    |   |   |   |   |   |   |   |   |
| Domestic                                         |   | $                                         | 3,536.6 |   | $ | 1,727.5 |   | $ | 546.2 |   | $ | 880.5 |   | $ | 6,690.8 |   |
| International                                    |   | —                                    |    | — |   | — |   | 134.1 |   | 134.1 |   |
|                                             |   | 3,536.6                                   |    | 1,727.5 |   | 546.2 |   | 1,014.6 |   | 6,824.9 |   |
| Intercompany revenues  and sales                 |   | —                                    |    | 128.7 |   | 360.4 |   | — |   | 489.1 |   |
| Total revenues  and sales                        |   | 3,536.6                                   |    | 1,856.2 |   | 906.6 |   | 1,014.6 |   | 7,314.0 |   |
| Operating  expenses                              |   | 2,189.0                                   |    | 819.3 |   | 825.8 |   | 776.6 |   | 4,610.7 |   |
| Depreciation and  amortization                   |   | 480.8                                     |    | 378.2 |   | 17.4 |   | 93.6 |   | 970.0 |   |
| Total costs and  expenses                        |   | 2,669.8                                   |    | 1,197.5 |   | 843.2 |   | 870.2 |   | 5,580.7 |   |
| Segment income                                   |   | $                                         | 866.8   |   | $ | 658.7 |   | $ | 63.4 |   | $ | 144.4 |   | $ | 1,733.3 |   |
| Assets                                           |   | $                                         | 7,269.2 |   | $ | 3,454.9 |   | $ | 762.6 |   | $ | 668.5 |   | $ | 12,155.2 |   |
| Investments in  unconsolidated partnerships      |   | $                                         | 231.8   |   | $ | — |   | $ | — |   | $ | — |   | $ | 231.8 |   |
| Capital  expenditures                            |   | $                                         | 580.8   |   | $ | 431.3 |   | $ | 82.5 |   | $ | 54.6 |   | $ | 1,149.2 |   |

 

F-64

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A reconciliation of the total business segments to theapplicable amounts in the Company’s consolidated financial statements was asfollows as of and for the year ended December 31:

 
| **(Millions)**                                            |   | **2002** |     | **2001** |   | **2000** |   |
|-----------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Revenues and  sales:                                      |   |     |     |     |   |     |   |
| Total business  segments                                  |   | $        | 8,136.6  |     | $      | 7,655.9  |   | $ | 7,314.0 |   |
| Less:  intercompany eliminations(1)                       |   | (153.2   | )        | (150.3   | )      | (154.0   | )      |
| Total  consolidated revenues and sales                    |   | $        | 7,983.4  |     | $      | 7,505.6  |   | $ | 7,160.0 |   |
|                                                      |   |     |     |     |   |     |   |
| Operating  income:                                        |   |     |     |     |   |     |   |
| Total business  segment income                            |   | $        | 1,966.2  |     | $      | 1,797.4  |   | $ | 1,733.3 |   |
| Corporate  operations                                     |   | (35.5    | )        | (40.5    | )      | (40.4    | )      |
| Integration  expenses and other charges                   |   | (115.1   | )        | (92.2    | )      | (25.4    | )      |
| Total  consolidated operating income                      |   | $        | 1,815.6  |     | $      | 1,664.7  |   | $ | 1,667.5 |   |
|                                                      |   |     |     |     |   |     |   |
| Depreciation and  amortization expense:                   |   |     |     |     |   |     |   |
| Total business  segments                                  |   | $        | 1,164.1  |     | $      | 1,147.5  |   | $ | 970.0 |   |
| Corporate  operations                                     |   | 14.5     |     | 20.2     |   | 18.4     |   |
| Total  consolidated depreciation and amortization expense |   | $        | 1,178.6  |     | $      | 1,167.7  |   | $ | 988.4 |   |
|                                                      |   |     |     |     |   |     |   |
| Assets:                                                   |   |     |     |     |   |     |   |
| Total business  segments                                  |   | $        | 15,578.1 |     | $      | 12,146.1 |   | $ | 12,155.2 |   |
| Corporate assets(2)                                       |   | 853.8    |     | 532.7    |   | 329.7    |   |
| Less:  elimination of intercompany receivables            |   | (42.8    | )        | (69.8    | )      | (302.9   | )      |
| Total  consolidated assets                                |   | $        | 16,389.1 |     | $      | 12,609.0 |   | $ | 12,182.0 |   |
|                                                      |   |     |     |     |   |     |   |
| Capital  expenditures:                                    |   |     |     |     |   |     |   |
| Total business  segments                                  |   | $        | 1,188.9  |     | $      | 1,210.6  |   | $ | 1,149.2 |   |
| Corporate  operations                                     |   | 5.2      |     | 21.3     |   | 15.5     |   |
| Total  consolidated capital expenditures                  |   | $        | 1,194.1  |     | $      | 1,231.9  |   | $ | 1,164.7 |   |

 

Notes:

(1)                 See “Transactionswith Certain Affiliates” in Note 1 for a discussion of intercompany revenuesand sales not eliminated in preparing the consolidated financial statements.

(2)                 Corporate assetsconsist of fixed assets, investments and other assets not allocated to thesegments.

 

Supplemental information pertaining to theCommunications Support Services segment was as follows for the year endedDecember 31:

 
| **(Millions)**                                            |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                      |   |     |   |     |   |     |   |
| Revenues and  sales from unaffiliated customers:          |   |     |   |     |   |     |   |
| Product  distribution                                     |   | $        | 215.2  |     | $      | 224.1    |   | $ | 266.1 |   |
| Directory  publishing                                     |   | 38.9     |   | 68.6     |   | 55.5     |   |
| Long-distance  and network management services            |   | 179.0    |   | 210.4    |   | 224.6    |   |
|                                                      |   | $        | 433.1  |     | $      | 503.1    |   | $ | 546.2 |   |
| Intercompany  revenues and sales:                         |   |     |   |     |   |     |   |
| Product  distribution                                     |   | $        | 156.1  |     | $      | 143.6    |   | $ | 237.8 |   |
| Directory  publishing                                     |   | 80.2     |   | 77.6     |   | 74.8     |   |
| Long-distance  and network management services            |   | 137.2    |   | 99.5     |   | 47.8     |   |
|                                                      |   | $        | 373.5  |     | $      | 320.7    |   | $ | 360.4 |   |
| Total revenues  and sales:                                |   |     |   |     |   |     |   |
| Product  distribution                                     |   | $        | 371.3  |     | $      | 367.7    |   | $ | 503.9 |   |
| Directory  publishing                                     |   | 119.1    |   | 146.2    |   | 130.3    |   |
| Long-distance  and network management services            |   | 316.2    |   | 309.9    |   | 272.4    |   |
| Total  communications support services revenues and sales |   | $        | 806.6  |     | $      | 823.8    |   | $ | 906.6 |   |

 

F-65

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**16.****       QuarterlyFinancial Information - (Unaudited):**

(Millions, exceptper share amounts)

 
|                                                  |   | **For the  year ended December 31, 2002** |    |
|-------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                  |   | **Total**                                 |    | **4th** |   | **3rd** |   | **2nd** |   | **1st** |   |
| Revenues and  sales                                   |   | $                                         | 7,983.4 |   | $ | 2,143.7 |   | $ | 2,082.4 |   | $ | 1,924.4 |   | $ | 1,832.9 |   |
| Operating income                                      |   | $                                         | 1,815.6 |   | $ | 481.7 |   | $ | 489.9 |   | $ | 436.1 |   | $ | 407.9 |   |
| Income before  cumulative effect of accounting change |   | $                                         | 924.3   |   | $ | 256.6 |   | $ | 237.7 |   | $ | 216.2 |   | $ | 213.8 |   |
| Cumulative  effect of accounting change               |   | —                                    |    | — |   | — |   | — |   | — |   |
| Net income                                            |   | 924.3                                     |    | 256.6 |   | 237.7 |   | 216.2 |   | 213.8 |   |
| Preferred  dividends                                  |   | 0.1                                       |    | — |   | — |   | 0.1 |   | — |   |
| Net income  applicable to common shares               |   | $                                         | 924.2   |   | $ | 256.6 |   | $ | 237.7 |   | $ | 216.1 |   | $ | 213.8 |   |
| Basic earnings  per share:                            |   |                                      |    |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change |   | $                                         | 2.97    |   | $ | .82 |   | $ | .76 |   | $ | .70 |   | $ | .69 |   |
| Cumulative  effect of accounting change               |   | —                                    |    | — |   | — |   | — |   | — |   |
| Net income                                            |   | $                                         | 2.97    |   | $ | .82 |   | $ | .76 |   | $ | .70 |   | $ | .69 |   |
| Diluted earnings  per share:                          |   |                                      |    |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change |   | $                                         | 2.96    |   | $ | .82 |   | $ | .76 |   | $ | .69 |   | $ | .68 |   |
| Cumulative  effect of accounting change               |   | —                                    |    | — |   | — |   | — |   | — |   |
| Net income                                            |   | $                                         | 2.96    |   | $ | .82 |   | $ | .76 |   | $ | .69 |   | $ | .68 |   |

 
|                                                  |   | **For the  year ended December 31, 2001** |    |
|-------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                  |   | **Total**                                 |    | **4th** |   | **3rd** |   | **2nd** |   | **1st** |   |
| Revenues and  sales                                   |   | $                                         | 7,505.6 |   | $ | 1,904.1 |   | $ | 1,875.4 |   | $ | 1,899.1 |   | $ | 1,827.0 |   |
| Operating income                                      |   | $                                         | 1,664.7 |   | $ | 448.5 |   | $ | 435.4 |   | $ | 434.8 |   | $ | 346.0 |   |
| Income before  cumulative effect of accounting change |   | $                                         | 1,047.5 |   | $ | 231.4 |   | $ | 221.4 |   | $ | 218.5 |   | $ | 376.2 |   |
| Cumulative  effect of accounting change               |   | 19.5                                      |    | — |   | — |   | — |   | 19.5 |   |
| Net income                                            |   | 1,067.0                                   |    | 231.4 |   | 221.4 |   | 218.5 |   | 395.7 |   |
| Preferred  dividends                                  |   | 0.1                                       |    | — |   | — |   | 0.1 |   | — |   |
| Net income  applicable to common shares               |   | $                                         | 1,066.9 |   | $ | 231.4 |   | $ | 221.4 |   | $ | 218.4 |   | $ | 395.7 |   |
| Basic earnings  per share:                            |   |                                      |    |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change |   | $                                         | 3.36    |   | $ | .75 |   | $ | .71 |   | $ | .70 |   | $ | 1.20 |   |
| Cumulative  effect of accounting change               |   | .06                                       |    | — |   | — |   | — |   | .06 |   |
| Net income                                            |   | $                                         | 3.42    |   | $ | .75 |   | $ | .71 |   | $ | .70 |   | $ | 1.26 |   |
| Diluted earnings  per share:                          |   |                                      |    |   |   |   |   |   |   |   |   |
| Income before  cumulative effect of accounting change |   | $                                         | 3.34    |   | $ | .74 |   | $ | .71 |   | $ | .70 |   | $ | 1.19 |   |
| Cumulative  effect of accounting change               |   | .06                                       |    | — |   | — |   | — |   | .06 |   |
| Net income                                            |   | $                                         | 3.40    |   | $ | .74 |   | $ | .71 |   | $ | .70 |   | $ | 1.25 |   |

 

Notes to Quarterly Financial Information:

A.           In the fourth quarter of 2002, the Companyincurred pretax charges of $42.3 million related to discontinuing a businessventure with Bradford & Bingley Group to provide mortgage administrationand information technology products to the mortgage lending industry in theUnited Kingdom.  The pretax chargesprimarily consisted of the write-off of capitalized software development coststhat had no alternative future use or functionality and other costs to unwindthe business venture.  During the fourthquarter of 2002, the Company also recorded lease termination costs of $1.5million related to the closing of two data processing centers.  The Company also recorded a $2.5 millionreduction in the liabilities associated with the restructuring of its CLEC operationsinitiated during the first quarter of 2002, as discussed below.  These charges decreased net income $17.8million or $.06 per share. (See Note 9.) ALLTEL also recorded a pretax gain of $22.1 million realized from thesale of a wireless property, partially offset by a $2.6 million write-down inthe carrying value of an investment. These transactions increased net income $11.9 million or $.04 per share.(See Note 10.)

 

B.             In the third quarter of 2002, the Companyincurred pretax charges of $16.4 million related to its acquisitions of wirelineproperties in Kentucky from Verizon and wireless properties fromCenturyTel.  The Company also recorded arestructuring charge of $5.5 million related to a planned workforce reductionand the closing of seven product distribution centers.  These charges decreased net income $13.2million or $.04 per share. (See Note 9.) ALLTEL also recorded a pretax adjustment of $4.8 million to reduce thegain recognized from the dissolution of a wireless partnership with BellSouthMobility, Inc. (“BellSouth”).  As discussedbelow, this gain was initially recorded in the first quarter of 2001 andsubsequently revised in the second quarter of 2001.  This adjustment decreased net income $2.9 million or $.01 pershare. (See Note 10.)

 

F-66

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C.             In the second quarter of 2002, the Companyincurred pretax charges of $9.0 million related to its pending acquisitions ofwireline properties in Kentucky from Verizon and wireless properties fromCenturyTel.  These charges decreased netincome $5.4 million or $.02 per share. (See Note 9.)  ALLTEL also recorded pretax write-downs of $13.7 million toreflect other-than-temporary declines in the fair values of two equity securityinvestments.  The write-downs decreasednet income $8.4 million or $.03 per share. (See Note 10.)

 

D.            In the first quarter of 2002, the Companyrecorded pretax charges of $32.4 million in connection with the restructuringof its CLEC, call center and retail store operations.  The Company also recorded pretax write-downs of $7.1 million inthe carrying value of certain cell site equipment to fair value as part of aproduct replacement program initiated by a vendor in 2001.  In addition, the Company incurred pretaxcharges of $3.4 million related to its pending acquisition of wirelineproperties in Kentucky from Verizon. These charges decreased net income $26.1 million or $.08 per share. (SeeNote 9.)

 

E.              In the fourth quarter of 2001, the Companyrecorded additional severance of $0.1 million in connection with the restructuringof its product distribution operations and pretax write-downs of $5.6 millionin the carrying value of certain cell site equipment to fair value as part ofthe equipment exchange program initiated in the third quarter of 2001.  These charges decreased net income $3.4million or $.01 per share. (See Note 9.)

 

F.              In the third quarter of 2001, the Companyrecorded pretax charges of $5.9 million in connection with the restructuring ofits information services operations and additional charges incurred inconnection with its first quarter 2001 restructuring of its regionalcommunications and corporate operations. The Company also recorded pretaxwrite-downs of $9.5 million in the carrying value of certain cell siteequipment to fair value.  The write-downsin cell site equipment resulted from the Company’s exchange of its existingequipment for new equipment under terms of a product replacement programinitiated by a vendor in 2001.  Thesetransactions decreased net income $9.3 million or $.03 per share. (See Note 9.)

 

G.             In the second quarter of 2001, the Companyrecorded a pretax adjustment of $2.4 million to increase the gain recognized onthe sale of PCS licenses and a pretax adjustment of $4.4 million to reduce thegain realized upon the dissolution of a wireless partnership initially recordedin the first quarter of 2001.  TheCompany also incurred pretax termination fees of $2.9 million related to theearly retirement of long-term debt and recorded additional pretax charges of$2.1 million in connection with its first quarter 2001 restructuringactivities.  These transactionsdecreased net income $4.1 million or $.01 per share. (See Notes 9 and 10.)

 

H.            In the first quarter of 2001, the Companyrecorded a pretax gain of $345.4 million from the sale of PCS licenses, apretax gain of $13.9 million from the dissolution of a wireless partnership anda pretax gain of $3.2 million from the sale of investments.  These transactions increased net income$215.6 million or $.69 per share. Operating income included a pretax charge of $69.0 million incurred inconnection with the restructuring of the Company’s regional communications,product distribution and corporate operations. These charges decreased net income $40.9 million or $.13 per share.  Effective January 1, 2001, the Companychanged the accounting for a subsidiary’s pension plan.  The cumulative effect of this accountingchange resulted in a one-time non-cash credit of $19.5 million, net of incometax expense of $13.0 million or $.06 per share. (See Notes 2, 9 and 10.)

 

I.                 In the opinion of management, alladjustments necessary for a fair presentation of results for each period havebeen included.

 

**17.****       Subsequent Event - PendingSale of the Company’s Financial Services Business:**

On January 28, 2003, ALLTEL signed a definitiveagreement to sell the financial services division of its information servicessubsidiary, ALLTEL Information Services, to Fidelity National Financial Inc.(“Fidelity National”), for $1.05 billion, payable as $775.0 million in cash and$275.0 million in Fidelity National common stock.  As part of this transaction, Fidelity National will acquireALLTEL’s mortgage servicing; retail and wholesale banking and commerciallending operations, as well as the community/regional bank division.  Approximately 5,500 employees of the Companywill transition to Fidelity National as part of the transaction, which isexpected to close by the end of the first quarter of 2003.  The telecom division of ALLTEL InformationServices will be retained by the Company and will not be part of thetransaction.  The telecommunicationsoperations retained by ALLTEL represented approximately 12 percent of bothtotal revenues and sales and total segment income reported by the informationservices segment in 2002.

 

F-67

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The following table summarizes the assets andliabilities of the financial services division as of December 31, 2002:

 
| **(Millions)**                 |   |   |   |
|--------------------------------|--------|--------|--------|
| Current assets                 |   | $      | 161.6  |   |
| Property, plant  and equipment |   | 115.3  |   |
| Goodwill                       |   | 25.8   |   |
| Other assets                   |   | 239.6  |   |
| Total assets                   |   | $      | 542.3  |   |
|                           |   |   |   |
| Current  liabilities           |   | $      | 134.1  |   |
| Deferred income  taxes         |   | 43.0   |   |
| Other  liabilities             |   | 54.1   |   |
| Total  liabilities             |   | $      | 231.2  |   |

 

F-68

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