Summary of WINDSTREAM CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Basis of Presentation
The following is a discussion and analysis of the historical results of operations and financial condition of Windstream Corporation ("Windstream", "we", or the "Company"). This discussion should be read in conjunction with the unaudited consolidated financial statements, including the notes thereto, for the interim periods ended March 31, 2007 and 2006, Windstream's Annual report on Form 10-K for the year ended December 31, 2006, and the 2007 Proxy Statement filed on March 30, 2007.
The Company is organized based on the products and services that it offers. Under this organizational structure, its operations consist of its wireline and product distribution segments, and other operations. The Company's wireline segment consists of its retail and wholesale telecommunications services, including local, long distance, network access, video services, broadband and data services. The product distribution segment consists of warehouse and logistics operations, and it procures and sells telecommunications infrastructure and equipment to both affiliated and non-affiliated businesses. The Company's other operations include the Company's directory publishing and telecommunications information services operations. After the merger with Valor Communications Group, Inc. ("Valor"), telecommunications information services are no longer offered as Valor was the only external customer. As discussed in detail below, the Company has announced that it will split off the directory publishing business.
The management of the Company believes that the assumptions underlying its financial statements are reasonable. However, the Company's financial statements included herein may not necessarily reflect its results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had it been a separate, stand-alone company during the periods prior to the spin-off from Alltel Corporation ("Alltel"). The following discussion should be read in conjunction with the unaudited interim consolidated financial statements and the related notes.
EXECUTIVE SUMMARY
Windstream is a customer-focused telecommunications company that provides local telephone, long distance, network access, video services, broadband and high-speed data services to approximately 3.2 million residential and business customers primarily located in rural areas in 16 states. Among the highlights in the first quarter of 2007:
Х The Company added approximately 59,000 broadband customers, increasing its broadband customer base to over 715,000. The growth in broadband customers continues to more than offset the loss of local access lines.

Х Revenues and sales increased $80.7 million compared to the first quarter of 2006, due primarily to the acquisition of Valor. The acquisition of Valor accounted for an increase in revenue and sales of $123.6 million. An offsetting decrease in revenues and sales of $42.9 million was primarily due to the loss of access lines discussed below, and the increase in intercompany eliminations due to the discontinuance of the application of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation," as further discussed below. Average revenue per wireline customer, however, increased 7 percent from a year ago to $77.53 due primarily to growth in broadband revenues.

Х Operating income increased 55 percent from a year ago, primarily reflecting the acquisition of Valor, the termination of a licensing agreement with Alltel as of June 30, 2006, and a decline in depreciation and amortization resulting from reductions in depreciation rates for certain assets associated with studies performed during 2006.

Х The Company paid approximately $120.0 million in dividends to shareholders, and finished the quarter with almost $400.0 million in cash and short-term investments.

Х The Company incurred $114.7 million in interest expense in the first quarter of 2007 primarily due to the debt issued and assumed in conjunction with the spin-off from Alltel and merger with Valor.

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During the remainder of 2007, the Company will continue to face significant challenges resulting from competition in the telecommunications industry and changes in the regulatory environment, including the effects of potential changes to the rules governing universal service and inter-carrier compensation. In addressing competition, the Company will continue to focus its efforts on improving customer service, increasing broadband penetration and expanding its service offerings.
Pending Transaction
As discussed in Note 15 in the accompanying notes to the unaudited interim financial statements, the Company has entered into an agreement to split off its directory publishing business to Welsh, Carson, Anderson & Stowe ("WCAS") in a transaction currently valued at approximately $540.0 million. As a result of the transaction, the Company will retire approximately 19.6 million shares of its common stock currently held by WCAS, and will retire approximately $250.0 million of debt obligations. In return for this consideration, the Company will forego its royalty fee on directories published by WCAS in its service territories for a period of 50 years ("the Publishing Agreement"). The portion of the gain on sale of the publishing business that is attributed to the Publishing Agreement will be deferred over the term of the agreement. This transaction is expected to be completed in the third quarter of 2007, although approximately 20 percent of the share exchange may occur in the fourth quarter of 2007.
Adoption of Accounting Standards
Windstream adopted Financial Accounting Standards Board Interpretation ("FIN") No. 48 "Accounting for Uncertainty in Income Taxes" on January 1, 2007. The adoption of FIN 48 resulted in no impact to either the Company's reserves for uncertain tax positions or to retained earnings. At the adoption date, and as of March 31, 2007, the Company had approximately $1.3 million of gross unrecognized tax benefits, all of which relate to periods preceding the spin-off from Alltel, and all of which would impact its effective tax rate if recognized. The Company is indemnified for these reserves for uncertain tax positions in accordance with the Tax Sharing Agreement with Alltel dated July 17, 2006; consequently, a corresponding receivable from Alltel equaling the gross unrecognized tax benefits plus accrued interest expense has been recognized. Interest and penalties related to uncertain tax positions are recognized in income tax expense. As of the date of adoption, the Company had accrued approximately $0.2 million of interest expense and penalties related to uncertain tax positions. For the three months ended March 31, 2007, interest expense recognized related to these uncertain positions was not significant. The tax years 2003 - 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company has identified its federal tax return and state tax returns in Arkansas, Florida, Georgia, Kentucky, Nebraska, North Carolina, and Texas as "major" taxing jurisdictions. The Company does not reasonably estimate that the unrecognized tax benefits will change significantly within the next twelve months.

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