Management’s Discussion and Analysis
of Financial Condition and Results of Operations

SEGMENT RESULTS OF OPERATIONS (2 OF 3)

Wireline

The Wireline segment provides customers with communication products and services, including voice, broadband video and data, network access, long distance, and other services, to residential and small business customers and carriers, as well as next-generation IP network services and communications solutions to medium and large businesses and government customers globally.

The results of operations presented below exclude the local exchange and related business assets in Maine, New Hampshire and Vermont that were spun-off on March 31, 2008.

Operating Revenues and Selected Operating Statistics

Mass Markets

Mass Markets revenue includes local exchange (basic service and end-user access), long distance (including regional toll), broadband services (including high-speed Internet and FiOS Internet) and FiOS TV services for residential and small business subscribers.

Mass Markets revenue during 2009 decreased by $44 million, or 0.2%, compared to 2008. The decrease was primarily driven by a decline in local exchange revenues principally due to a 10.0% decline in switched access lines as of December 31, 2009 compared to December 31, 2008, primarily as a result of competition and technology substitution. The majority of the decrease was sustained in the residential retail market, which experienced an 11.0% access line loss primarily due to substituting traditional landline services with wireless, VoIP, broadband and cable services. Also contributing to the decrease was a decline of nearly 7.0% in small business retail access lines, primarily reflecting economic conditions, competition and a shift to both IP and high-speed circuits. Partially offsetting these decreases was the expansion of FiOS services (Voice, Internet and TV).

As we continue to expand the number of premises eligible to order FiOS services and extend our sales and marketing efforts to attract new FiOS subscribers, we have continued to grow our subscriber base and consistently improved penetration rates within our FiOS service areas. Our bundled pricing strategy allows us to provide competitive offerings to our customers and potential customers. Consequently, we added 547,000 net new broadband connections, including 952,000 net new FiOS Internet subscribers in 2009. In addition, we added 943,000 net new FiOS TV subscribers in 2009, for a total of 2,861,000 at December 31, 2009. As of December 31, 2009, we achieved penetration rates of 28.1% and 24.5% for FiOS Internet and FiOS TV, respectively, compared to penetration rates of 24.9% and 20.8% for FiOS Internet and FiOS TV, respectively, at December 31, 2008.

Our Mass Markets revenue in 2008 increased by $229 million, or 1.2%, compared to 2007. This increase was primarily driven by continued expansion of consumer and business FiOS services (Voice, Internet and TV), which are typically sold in bundles, partially offset by lower demand and usage of our basic local exchange and accompanying services, attributable to consumer subscriber line losses driven by competition and technology substitution, including wireless and VoIP.

We added 660,000 net new broadband connections, including 956,000 net new FiOS Internet connections, in 2008. We ended 2008 with 8,673,000 net broadband connections, including 2,481,000 net FiOS Internet subscribers, representing an 8.2% increase in total broadband connections compared to 8,013,000 connections at December 31, 2007. In addition, we added approximately 975,000 net new FiOS TV subscribers in 2008 and ended the year with a total of 1,918,000, an increase of approximately 103.4%. As of December 31, 2008, for FiOS Internet and FiOS TV, we achieved penetration rates of 24.9% and 20.8%, respectively, across all markets where we have been selling these services.

Declines in switched access lines in service of 10.0% in 2009 and 9.3% in 2008 were mainly driven by the effects of competition and technology substitution. Residential retail access lines declined as customers substituted wireless, VoIP, broadband and cable services for traditional voice landline services. At the same time, small business retail access lines declined primarily reflecting competition and a shift to high-speed access lines.

Global Enterprise

Global Enterprise offers voice, data and Internet communications services to medium and large business customers, multi-national corporations, and state and federal government customers. In addition to traditional voice and data services, Global Enterprise offers managed and advanced products and solutions including IP services and value-added solutions that make communications more secure, reliable and efficient. Global Enterprise also provides managed network services for customers that outsource all or portions of their communications and information processing operations and data services such as private IP, private line, frame relay and asynchronous transfer mode (ATM) services, both domestically and internationally. In addition, Global Enterprise offers professional services in more than 30 countries supporting a range of solutions including network service, managing a move to IP-based unified communications and providing application performance support.

Global Enterprise revenues during 2009 decreased by $791 million, or 5.0%, compared to 2008. The revenue decline was due to lower long distance and traditional circuit based data revenues and lower customer premises equipment revenue, combined with the negative effect of movements in foreign exchange rates versus the U.S. dollar. The decline in long distance revenue is driven by a 2.2% decline in MOUs compared to 2008, due to continuing global economic conditions and competitive rate pressures, which adversely impact our business customers. Traditional circuit based services such as frame relay, private line and ATM services declined compared to the similar period last year as our customer base continues its migration to next generation IP services. Customer premises equipment revenue decreased approximately 6.0% compared to 2008 reflecting cautious investment decisions in the marketplace in response to the uncertain economic environment. Partially offsetting these declines was an increase of 11.0% in IP and security solutions revenues. Strategic services continues to be Global Enterprise’s fastest growing suite of offerings, reflecting a 4.3% increase in revenue for 2009, compared to 2008.

Global Enterprise revenues in 2008 increased by $69 million, or 0.4%, compared to 2007. The revenue increase was due to increases in customer premise equipment revenue and security solutions revenue, partially offset by revenue decline due to certain customers moving traffic off of our network and lower long distance and traditional circuit based data revenues combined with the negative effects of movements in foreign exchange rates versus the U.S. dollar. The IP and service suite of products continue to be Global Enterprise’s fastest growing and includes private IP, IP, VPN, Managed Services, Web Hosting and VOIP.

Global Wholesale

Global Wholesale revenues are primarily earned from long distance and other carriers who use our facilities to provide services to their customers. Switched access revenues are generated from fixed and usage-based charges paid by carriers for access to our local network, interexchange wholesale traffic sold in the U.S., as well as internationally destined traffic that originates in the U.S. Special access revenues are generated from carriers that buy dedicated local exchange capacity to support their private networks. Wholesale services also include local wholesale revenues from unbundled network elements and interconnection revenues from competitive local exchange carriers and wireless carriers. A portion of Global Wholesale revenues are generated by a few large telecommunication companies, many of whom compete directly with us.

Global Wholesale revenues during 2009 decreased by $723 million, or 7.0%, compared to 2008, primarily due to decreased MOUs in traditional voice products, and continued rate compression due to competition in the marketplace. Switched access and interexchange wholesale MOUs declined primarily as a result of wireless substitution and access line losses. Wholesale lines declined by 19.7% in 2009 due to the continued impact of competitors deemphasizing their local market initiatives coupled with the impact of technology substitution as well as the continued level of economic pressure, as compared to an 18.8% decline in 2008. Changes in foreign exchange rates resulted in a revenue decline of approximately 1.0% in 2009, compared to 2008. Continuing demand for high-capacity, high-speed digital services was partially offset by lower demand for older, low-speed data products and services. As of December 31, 2009, customer demand, as measured in DS1 and DS3 circuits, for high-capacity and digital data services increased 2.2% compared to an increase of 5.1% in 2008.

Global Wholesale revenues in 2008 decreased by $390 million, or 3.6%, compared to 2007 due to declines in switched access revenues in traditional voice products and local wholesale revenues and continued rate compression in the marketplace, partially offset by increases in special access revenues. Switched MOUs declined in 2008, reflecting the impact of access line losses and wireless substitution. Wholesale lines decreased by 18.8% in 2008 due to the continued impact of competitors deemphasizing their local market initiatives coupled with the impact of technology substitution compared to a 16.1% decline in 2007. Special access revenue growth reflects continuing demand for high-capacity, high-speed digital services, partially offset by lower demand for older, low-speed data products and services. As of December 31, 2008, customer demand, as measured in DS1 and DS3 circuits, for high-capacity and digital data services increased 5.1% compared to an increase of 8.2% in 2007.

The FCC regulates the rates charged to customers for interstate access services. See “Other Factors That May Affect Future Results – Regulatory and Competitive Trends – FCC Regulation” for additional information on FCC rulemaking concerning federal access rates, universal service and certain broadband services.

Other Revenues

Other revenues include such services as local exchange and long distance services from former MCI mass market customers, operator services, pay phone, card services and supply sales, as well as dial around services including 10-10-987, 10-10-220, 1-800-COLLECT and prepaid cards. Revenues from other services during 2009 decreased $576 million, or 25.3%, compared to 2008, mainly due to the discontinuation of non-strategic product lines and reduced business volumes, including former MCI mass market customer losses.

Other revenues decreased by $823 million, or 26.6% in 2008, mainly due to the discontinuation of non-strategic product lines and reduced business volumes.