Verizon Annual Report 2008

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FY2008 Annual Report · Verizon

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Verizon Communications

2008 Annual Report

Financial Highlights
(as of December 31, 2008)

CONSOLIDATED
REVENUES
(billions)

OPERATING CASH FLOW
FROM CONTINUING
OPERATIONS
(billions)

DECLARED DIVIDENDS
PER SHARE

REPORTED DILUTED
EARNINGS PER SHARE

ADJUSTED DILUTED
EARNINGS PER SHARE
(non-GAAP)

$93.5 $97.4

$88.2

$26.3 $26.6

$23.0

$1.62

$1.67

$1.78

$2.26

$2.12

$1.90

$2.54

$2.39

$2.54

Corporate Highlights

> 5.1% consolidated revenue growth
> 9.2% operating income growth
> 7.6% EPS growth
> 7% annual dividend increase
> $1.4 billion in share repurchases

Note: Prior-period amounts have been reclassified to reflect comparable results.

See www.verizon.com/investor for reconciliations to generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this annual report. Verizon’s results for the periods
presented have been adjusted to reflect the spinoff of local exchange and related business assets in Maine, New Hampshire and Vermont in March 2008. These reclassifications were determined using
specific information where available and allocations where data is not maintained on a state-specific basis within the Company’s books and records. Verizon’s 2006 reported results include revenues and
expenses from the former MCI, Inc., subsequent to the close of the merger in January 2006. Information provided in this annual report on a pro-forma (non-GAAP) basis presents the combined operating
results of Verizon and the former MCI on a comparable basis. Discontinued operations include Verizon’s former directory publishing unit, which was spun off to shareowners in the fourth quarter 2006, and
the operations of Verizon Dominicana C. por A. (Verizon Dominciana) and Telecomunicaciones de Puerto Rico Inc. (TELPRI) following second quarter 2006 agreements to sell the businesses. The Verizon
Dominicana sale closed in the fourth quarter 2006. The TELPRI sale closed in the first quarter of 2007.

Corporate Highlights shown above are presented on a pro forma and adjusted basis. Intra- and inter-segment transactions have not been eliminated from the business group revenue totals cited in
this document.

In keeping with Verizon’s commitment to protect the environment, this report was printed on paper certified by the Forest Stewardship Council (FSC). By selecting FSC-certified paper, Verizon is helping to
make a difference by supporting responsible forest management practices.

Chairman’s Letter to
Shareowners

v e r i zo n co m m u n i c at i o n s i n c . 20 0 8 a n n ua l r e p o r t

Ivan Seidenberg
Chairman and Chief Executive Officer

At Verizon, our business model is based on a few core beliefs.
We believe our superior networks differentiate us and provide great
communications experiences to customers. We believe our focus
on the fundamentals of running a good business – operating
excellence, financial discipline and strong values – gives us the
ability to plan our future and manage through all economic
conditions. We believe that investing for growth is the key
to creating value for our shareowners. And we believe that the
communications products and services we deliver are, and
will continue to be, hugely important in the lives of our customers,
our communities and our world.

By staying focused on this basic business model, Verizon has remained a source of relative

stability in a tumultuous market. Our performance in 2008 bears this out and shows the funda-

mental strength of our company.

Our main growth engines are wireless voice and data; high-speed consumer broadband and

video services; and Internet Protocol (IP) networks, applications and professional services for

global businesses. Each of these gained market share and attracted new customers in 2008. As a

result of this strong performance in our strategic businesses, Verizon delivered growth in rev-

enues, earnings and cash flow in 2008. Operating revenues for the year were $97.4 billion, an

increase of 4.2 percent or 5.1 percent on an adjusted basis. Adjusted operating income was $18.1

billion, up 9.2 percent for the year. Operating cash flows from continuing operations totaled $26.6

billion, up 1.2 percent from 2007. Adjusted earnings from continuing operations were $2.54 per

share, up 7.6 percent.

WIRELESS
REVENUE
(billions)

$38.0

$49.3

$43.9

WIRELESS
CUSTOMERS
(millions)

65.7

59.1

By way of comparison, only three companies in the Dow Jones 30 generated more cash from

operations than Verizon. Because of our strong financial position, we were able to invest $17.2

billion in networks, pay $5 billion in dividends and repurchase $1.4 billion of Verizon stock. In

September, we increased our quarterly dividend by 7 percent, to $.46 per share – an expression of

our Board’s confidence in our future and commitment to returning value to shareowners.

In 2008, we remained focused on building and creating the premier assets in our industry

and continued to shift our center of gravity toward the growing wireless and broadband markets.

For example, we expanded our wireless footprint by acquiring Rural Cellular and by winning

extremely valuable wireless spectrum in the FCC auction, which positions us strongly for the next

phase of growth in the wireless market. Also, in a transaction that closed in January 2009, we

acquired the nation’s number-five wireless company, Alltel Corporation, making us the U.S. leader

in wireless customers and revenues. At a time when even healthy companies found it difficult to

tap into the credit markets, our ability to finance and execute a transaction of this magnitude

affirms our financial solidity and healthy balance sheet. We also spun off some of our telephone

properties in northern New England and merged them with Fairpoint Communications, a leading

provider of local exchange services.

72.1

purchase of spectrum in the FCC auction expanded our inventory by 60 percent, which gives us

We continued to invest in the superior network technologies that are Verizon’s hallmark. Our

additional capacity to accommodate the rapid growth of wireless data services such as text

messaging, e-mail and Internet access. We passed more than 3 million additional homes with our

industry-leading fiber-optic network, FiOS, and are now beginning to expand into big city markets

like New York City, Philadelphia and Washington, D.C. Our fiber network now passes 12.7 million

homes, or about 40 percent of the households in our footprint, putting us two-thirds of the way to

our target of passing 18 million homes by 2010. In the business market, our high-speed networks

provide a sophisticated communications and computing platform for multinationals and govern-

ment customers, and in 2008 we added to the security and robustness of our network

infrastructure in the U.S., Europe and the Asia-Pacific region. We also led a consortium that built a

high-speed submarine fiber link connecting China, South Korea, Taiwan and the United States.

Transforming Verizon to Deliver the Best Wireless and

Broadband Experience

From
Voice and
Data

To
Content and
Applications

From
Separate
Platforms

To
Unified
Platforms

We’ve spent the last decade remaking our wireless, landline and Internet
backbone networks and expanding the range of products, applications and
services we can deliver to our customers. Today our customers do much
more than make phone calls and send e-mail messages. They use our
networks to watch high-definition (HD) TV, surf the Internet, share photos,
watch videos online and conduct videoconferences around the globe.
We’re prepared for the next wave of growth that will come from a new
generation of broadband devices, applications and services that
will use our wireless and fiber networks to deliver advances in entertain-
ment, education, commerce and health care.

One of the biggest challenges for customers is bringing together all their
digital experiences to make their lives more convenient and productive.
We’ll soon be able to provide a technical solution to the challenge of
convergence by designing applications that work across all our networks –
broadband, global IP and wireless. Our customers will no longer be
stranded on separate islands of technology because we’ll be able to build
an application once and have the network deliver it to customers anytime,
anywhere, and on any device. Giving customers new tools to better
manage their digital lives will be one of the great business opportunities in
the coming years.

v e r i zo n co m m u n i c at i o n s i n c . 20 0 8 a n n ua l r e p o r t

WIRELESS
DATA REVENUE
(billions)

$10.7

$7.4

$4.5

WIRELESS RETAIL
SERVICE ARPU

Our philosophy is that by investing in the best networks, we can offer the best and most

innovative services and enhance our competitiveness across the board. That proved true in 2008.

We saw solid revenue growth in all our strategic businesses in 2008: 12.4 percent in wireless, 42

percent in broadband and video, and 16 percent in strategic business services. We added more

than 6 million new wireless customers, 956,000 FiOS Internet customers and 975,000 customers

for FiOS TV. Rising monthly average-revenue-per-user for wireless and broadband shows that our

customers are finding these products more and more vital and useful in their daily lives. And in

the business market, nearly 70 percent of our customers have or are in the process of transitioning

to private IP networks, making this service the fastest growing in this business.

In wireless, we launched 36 new devices in 2008. More than one-third of them were smart

phones, which reflects the evolution of wireless from a voice-only product to a full-service

platform that allows customers to surf the Internet, check e-mail, watch video, exchange pictures

and more. This growing array of data services now generates nearly 27 percent of wireless service

revenues. Going forward, we believe that wireless growth will increasingly be driven by mobile

connections built into a wide variety of products such as cameras, energy systems, vehicles,

buildings and appliances. To accommodate these new services, we are preparing to launch our

fourth-generation wireless network, which we believe will make Verizon’s wireless network the

$50.44 $51.57 $51.88

on-ramp for innovation in the next phase of this dynamic industry.

With FiOS, we are redefining the consumer telecom business as a broadband and video

business. FiOS delivers ultra-fast Internet speeds and more high-definition video channels than

any cable provider in the market today. These features have helped us achieve 25 percent market

share for FiOS Internet and 21 percent for FiOS TV in four short years. We are well-positioned for

the next wave of innovation in telecom, which will be driven by high-definition teleconferencing,

three-dimensional video and other advanced services requiring the unique speed and capacity

advantages of our all-fiber network.

In the global enterprise market, customers are looking for communications companies that

can provide them with a full range of strategic capabilities – from security, professional services,

information technology solutions, and private IP services to global networking. Verizon is one of

Transforming Verizon to Deliver the Best Wireless and

Broadband Experience

From
Providing
Service

To
Offering
Compelling
Experiences

From
Connecting
Users

To
Creating
Communities

We’re transforming our networks to provide for the bandwidth-intensive
applications our customers will need in the future. Our all-fiber network
will deliver all the advanced HD and Internet services that are being
developed. You’ll walk through virtual stores, attend classes held thousands
of miles away, or consult with your doctor – all without leaving home.
Wireless smart phones will provide advanced Internet, video and computer
applications to keep customers informed and entertained on the go. And
our global network will support a new wave of productivity-enhancing
applications like secure global transactions, electronic supply chains and
manufacturing processes, and virtual-reality videoconferencing.

Verizon is doing much more than simply connecting individuals. We’re
developing innovative network services that create communities where
friends and neighbors, buyers and sellers, or teachers and students around
the world can come together in unique and exciting ways. We’re enabling
these valuable social networks by providing our customers the tools to
share experiences with each other whenever and wherever they happen.
We’re also helping address social issues that are critical to the well-being
of our communities by building advanced broadband networks that are
creating the jobs of the future, making communities more competitive and
driving innovation and growth.

FIOS INTERNET
CUSTOMERS
(thousands)

2,481

the world’s premier providers of all these capabilities. We are also building relationships with

world-class partners like Accenture to leverage our complementary capabilities and provide

customers with superior solutions for their businesses. Looking ahead, we expect companies to

look for ways to use communications to run their businesses more efficiently, reduce travel

expenses, save energy costs and connect their increasingly global workforces and supply chains.

1,525

With our global reach and networking expertise, we have a great opportunity to be a strategic

687

FIOS TV
CUSTOMERS
(thousands)

943

partner in helping our major customers achieve these goals.

Once again in 2008, our products earned Verizon top marks for quality and customer satisfac-

tion. Consumer Reports ranked us number-one among wireless companies in customer

satisfaction in 87 percent of the cities it studied. (By the way, Alltel was number-one in the other 13

percent.) PCMag.com named FiOS Internet the fastest and most satisfying service in the U.S. and

listed FiOS as one of its 100 best products of 2008. Industry analysts such as Gartner and Forrester

have recognized Verizon Business as a leader for global networks and services.

What this shows is that the market is responding to Verizon’s record of innovation.

So we feel confident about our long-range growth opportunities. This is not to say we are

unaffected by the economic slowdown or by the ongoing structural changes in the communica-

tions market. The traditional fixed-line telephone business continues to decline as customers

1,918

disconnect their wired phones and shift to wireless, cable and other newer technologies. In

addition, the faltering economy depressed volumes in the large-business market in the fourth

quarter, as businesses began to curtail their spending and unemployment rose.

But all in all, 2008 was another year of operational excellence and strategic gains for our

company. As for our stock performance, Verizon’s total return for 2008 was down 18 percent, as

compared with declines of 32 percent for the Dow Jones Industrial Average and 37 percent for the

207

Standard & Poor’s 500. If there’s a silver lining in these numbers, it’s that, on a relative basis,

Verizon’s performance was in the top one-third of both the S&P and the Dow 30, which says that

the market recognizes our earnings and dividend stability. A longer-term view of our performance

over the period from 2006 to 2008 shows Verizon’s total return growing by 35 percent, as com-

pared with a decline of 23 percent for the Standard & Poor’s 500.

In other words, Verizon has outperformed the market on a relative basis over the past year

and has generated attractive returns on an absolute basis over three years. This is cold comfort to

investors suffering through the current market crisis. You can be assured that the leaders of our

company are focused on what we control – productivity, innovation, customer service, and a

3-Year Total Return

Verizon

S&P 500

80%

40%

-40%

34.8%

-23.0%

12/30/05

6/30/06

12/30/06

6/30/07

12/30/07

6/30/08

12/30/08

VERIZON BUSINESS
STRATEGIC SERVICES
REVENUE
(billions)

$6.0

$5.2

$4.1

CAPITAL EXPENDITURES
(billions)

$17.1 $17.5 $17.2

v e r i zo n co m m u n i c at i o n s i n c . 20 0 8 a n n ua l r e p o r t

strong dividend – to translate the strength of our company into excellence for our customers and

value for our investors.

I want to express my appreciation to our employees for their rock-solid dedication to our

customers and sterling record of ethical management, diversity and volunteerism. In 2008, they

volunteered 600,000 hours, contributed tens of millions of dollars to charities and community

organizations, and responded with tremendous skill when ice storms, hurricanes and other

emergencies threatened our customers’ vital communications lines. Their adherence to our values

continues in bad times as well as good and is one of the major reasons I’m optimistic about our

future, despite the challenges of the current economic environment.

I also would like to cite our Board of Directors, whose forethought and steadfastness in

pursuing our strategic goals has been critical to our success. Special thanks go to longtime board

member Robert Storey, who retired in 2008 with 23 years of service.

Finally, all Verizon shareowners owe a debt of gratitude to two executives who have put their

mark on our company and our industry. William Barr retired at the end of 2008, having served as

Verizon’s general counsel since our inception. Bill paved the way for a growing, competitive

communications marketplace by leading the charge to reform the way our industry is regulated.

He set the standard for what it means to be a superior general counsel. Our chief financial officer,

Doreen Toben, will retire this year with decades of service to our company, the last seven as CFO.

Doreen’s contributions to Verizon are profound. You can see her imprint on our culture of financial

discipline, our strong balance sheet, our diversified asset base, and our passion for execution. Her

influence will be visible for many years to come.

For all the challenges in our environment, we approach the future with confidence. In fact, I

believe Verizon will be one of the companies that will help put our economy back on the path to

prosperity and growth. Our products and services are indispensable in the lives of millions of

customers. Our services will be key tools for businesses looking to work smarter and faster. Our

technologies can help solve the big social challenges of our time such as energy efficiency and

health care reform. We have the financial strength to grow and invest in the future. And we have

great people, who want to do right by our customers, our company, our communities and our

country. I couldn’t be more proud of their performance.

Last year in this space, I said Verizon’s goal was to be the best company in the communica-

tions sector, period. To achieve that kind of sustained leadership requires several things. You need

the right ideas about where the market is going and what differentiates your company in your

industry. You need the right values to create the relationships on which long-term success is built.

And you need the right culture of accountability to turn those ideas, beliefs and values into action

and results.

That’s how we run our business. Our idea of the future, our values, and our commitment

to accountability will keep us focused on our pursuit of excellence, regardless of how rocky the

road ahead.

Tough times give us the opportunity to lead. I am confident that we will rise to the challenge

of delivering value for our shareowners and customers in 2009.

Ivan Seidenberg

Chairman and Chief Executive Officer

Any Time, Anywhere
Broadband Connectivity

At Verizon, we saw early on that wireless customers wanted to do more
than just make phone calls, so we invested in wireless broadband
technology to provide them with the bandwidth, speed and mobility they
desire. Today our customers can check e-mail, get driving directions, take
photos, share videos and explore the Internet, all with their mobile phones.
We have the largest high-speed third-generation (3G) wireless network in
America. With its size, scope and reliability, this advanced network provides
the best wireless broadband experience in the industry and strong growth
opportunities for our company.

But as our customers’ needs continue to evolve, they’ll want new ways
to communicate whenever and wherever they choose – anywhere around
the globe. They’ll need more bandwidth, innovative phones and other
advanced services that enhance their mobile world. In fact, soon we won’t
think only in terms of a wireless “phone.” The next generation of wireless
broadband will be embedded into all kinds of consumer and business
electronics including cameras, cars, credit cards, security systems, shipping
containers, medical monitoring devices and even home appliances.

So in 2010, we’ll roll out our fourth-generation (4G) wireless network
using Long Term Evolution (LTE) technology. This will enable customers to
access data at even faster speeds, and it will provide a common wireless
technology platform with true global scale. LTE will create additional

growth opportunities by delivering an unprecedented wireless broadband
experience for high-performance mobile computing, advanced multimedia
applications and sophisticated electronic devices.

We envision a future where a wide variety of wireless products and
services from a growing portfolio of developers will be available for use on
the Verizon Wireless network. To encourage this new round of innovation,
Verizon Wireless is providing network options for using wireless devices,
software and applications provided by third-party developers. Our Open
Development Initiative is part of our strategy to expand the wireless market
and offer our customers more wireless choices. Our goal is to create new
opportunities for businesses, consumers and shareowners by driving
broadband innovation deeper into the wireless marketplace.

To help deliver the broadband future, Verizon purchased valuable
wireless spectrum from the FCC in 2008. This spectrum is a critical piece
of our overall broadband strategy to take advantage of the enormous
opportunity for growth in data services in the future. The spectrum will
allow Verizon to capture the full potential of our 4G LTE network, our Open
Development Initiative and the resulting next wave of wireless innovation.
Our investments will help us continue to maintain our network
superiority, satisfy our customers’ broadband needs and provide additional
value to our shareowners in the years ahead.

Any Time, Anywhere

Broadband Connectivity

v e r i zo n co m m u n i c at i o n s i n c . 20 0 8 a n n ua l r e p o r t

The Most Reliable Wireless Network is Now the Biggest

With the acquisition of Alltel in early 2009, Verizon Wireless now
provides service to millions more customers across the United States
on its own network. The merger created an enhanced platform of
network coverage, spectrum and customer care to better serve the
growing needs of both Alltel and Verizon Wireless customers for
basic voice and advanced broadband wireless services. Our wireless
network coverage now reaches approximately 288 million people –
nearly the entire U.S. population – and our wireless customer base
has increased to more than 80 million subscribers, making us the
largest wireless carrier in the country.

Both Alltel and Verizon Wireless have long track records of
delivering a high-quality customer experience in the marketplace,
and the combination of the two companies will continue to improve
on that heritage. Customers of both companies now have access
to the country’s largest mobile to mobile calling community. Alltel

customers also will benefit from an expanded range of products and
services, including a premier lineup of wireless devices and access to
the nation’s largest 3G high-speed wireless broadband network.

The transaction puts the Alltel markets and customers on
a path to advanced 4G services as Verizon Wireless deploys LTE
technology throughout its network over the next several years. In
addition, Alltel’s customers will reap the benefits of Verizon Wireless’
Open Development initiative, which welcomes third-party devices
and services on the Verizon Wireless network.

The acquisition also provides opportunities for enhanced value

for our shareowners. Both companies use a common network tech-
nology, which provides advantages of a seamless transition for Alltel
customers, ease in integrating the two companies’ networks, and
scale efficiencies in operating the larger integrated network.

Verizon Wireless and Alltel Combined Networks

Verizon Wireless
former Alltel

colored areas indicate verizon Wireless
coverage, excluding roaming

FiOS TV – the Future of Television

As the nation’s premier broadband and entertainment provider,
Verizon leads the way in delivering ultra-fast broadband using
fiber-optic technology. Other companies claim to use fiber, but
only Verizon FiOS delivers 100% fiber-optics – providing virtually
unmatched bandwidth – on hair-thin strands of glass directly to
our customers’ homes. Our all-fiber network offers an extraordinary
experience in TV, Internet and phone, and provides immense
capacity that will meet our customers’ bandwidth needs well into
the future.

Cable companies deliver their broadband and TV services
over coaxial cable, which has a fraction of the bandwidth available
on our all-fiber network. In addition, cable customers share
their broadband with other subscribers in their neighborhood,
causing users to compete for available bandwidth during periods
of high usage.

Verizon’s advanced technology and superior services have
made FiOS the top-rated broadband service in America. Thanks
to its unique architecture, Verizon’s all-fiber network has virtually

unlimited capacity, which delivers faster two-way speeds and bet-
ter picture quality than cable companies can offer. Our FiOS TV and
Internet services don’t have to struggle for bandwidth, because
they’re delivered over separate high-capacity wavelengths of light.
With the immense bandwidth of fiber, we can offer more HD chan-
nels than any cable provider, and our uncompressed HD signal
guarantees pure HD picture and sound.

But as recent history has shown, the amount of bandwidth that

people use today is far less than they will want tomorrow. This is
good news for Verizon because bandwidth growth is what makes
FiOS so appealing. Our fiber network can be easily expanded to
provide additional capacity by simply upgrading the lasers on the
end points of the fiber cable. We avoid the labor-intensive costs of
replacing our infrastructure, and we can grow as our customers’
broadband needs evolve, providing superior service and an efficient
return on our network investment for years to come.

v e r i zo n co m m u n i c at i o n s i n c . 20 0 8 a n n ua l r e p o r t

An All-Fiber Network for the
Ultimate Entertainment Experience

The explosion of entertainment and information services has given
Verizon new opportunities for growth in the broadband market. As
Internet and high-definition video use continues to grow, consumers are
demanding more capacity, speed and interactivity to send and receive
bandwidth-intensive videos, photo albums and music files. Today’s digital
home includes a wide variety of broadband devices, and the growth of
Internet-capable consumer electronics will only increase future bandwidth
demand. Tomorrow’s digital home will include dozens of “smart” devices,
including multiple HDTVs; networked PCs and gaming consoles; appliance
monitoring services; remote lighting and temperature controls; and
interactive security systems.

Because our 100% fiber-optic network delivers a broader, more
vibrant entertainment experience than any other provider, our customers
get the best TV viewing experience possible. The high-capacity of fiber
allows us to deliver more than 100 HD channels in every FiOS TV market. We
offer a vast selection of programming, with more than 245 all-digital chan-
nels and 14,000 video-on-demand titles each month, including
more than 1,200 HD titles per month. Our Home Media Digital Video
Recorder (DVR) technology allows customers to record programming on
one DVR that can be watched on up to six TV sets throughout the home.

Fiber also allows Verizon customers to experience the fastest upload

and download connection speeds. FiOS Internet is available with download
speeds up to 50 megabits per second (Mbps) and upload speeds up to
20 Mbps. With these speeds customers no longer have to wait while large
files are downloading, and they can upload 200 photos to their friends in
about 90 seconds. Finally, in anticipation of the day when tomorrow’s digi-
tal home requires even more bandwidth, we’re already testing download
speeds of 100 Mbps.

The immense bandwidth and two-way interactivity of Verizon’s
all-fiber network will help make the ultra-fast broadband future a reality
because it’s perfectly suited for our customers’ evolving entertainment
needs. As a result, the market penetration or our FiOS TV and Internet
services continues to grow as more households opt for the superior band-
width capacity of a direct fiber connection.

We’re uniquely positioned to offer customers superior broadband
and entertainment services that fit today’s digital lifestyle, as well as the
advanced applications our customers will require tomorrow.

Delivering
A World of Experience

The global marketplace continues to change, creating communication
challenges for multinational corporations faced with widely dispersed
employees, incompatible systems, limited resources and increasing
competition. These organizations require a communications partner that
can provide end-to-end solutions for the complex business needs of global
enterprise customers.

As one of the leading providers of global communications, IT and

security solutions, Verizon Business owns and maintains the world’s
most-connected public IP network. Our vast experience, global reach and
advanced technologies provide governments and businesses innovative
solutions for a rapidly changing global environment.

Our strategic IP-based services are the essential building blocks for the

integrated communications and IT solutions that Verizon Business offers
worldwide. Strategic services include security and IT solutions as well as a
full spectrum of professional and managed IP services that help customers
make the most of IP communications, infrastructure and technology. The
ongoing strong demand for these advanced services underscores that
multinational customers see superior value in services that can help them
maintain their competitive edge under any market conditions.

The growth of strategic services shows that multinational corporations

and government agencies continue to look for ways to communicate and
collaborate more effectively with customers, employees, suppliers and
other key stakeholders around the globe. Verizon Business offers a range
of video-related products, including a telepresence solution. Telepresence
is the next-generation virtual meeting service that goes beyond video
conferencing by creating the impression that everyone is assembled face-
to-face in a single conference room. Working with the industry’s leading
equipment manufacturers, Verizon Business provides the ideal telepresence
platform through its Private IP and Ethernet offerings.

In 2008, we expanded and improved what was already one of the
world’s few truly global networks, resulting in enhanced speed, availability,
diversity and resiliency for business and government customers worldwide.
These improvements were part of approximately $17 billion we invested
last year building, operating and integrating our advanced broadband
wireless and wireline networks.

We continue to invest in global network enhancements and
innovative technologies that give our customers a competitive edge,
whether they are across town or around the globe.

v e r i zo n co m m u n i c at i o n s i n c . 20 0 8 a n n ua l r e p o r t

Connecting Nations Across the Globe

To meet the needs of businesses that operate around the world,
Verizon has made strategic investments to become a leading pro-
vider of global communications, IT and security solutions with the
world’s most connected public IP network. As a founding mem-
ber of the Trans-Pacific Express (TPE) Cable Consortium, Verizon
Business has played a key role in helping to design, engineer
and build the 18,000 kilometer (11,000 mile) TPE cable network,
which is now in service. The TPE cable connects the United States
to mainland China, South Korea and Taiwan.

As the only U.S.-based founding member of the consortium,

Verizon Business guided the direction of the TPE cable and
provided all U.S. operational needs for the TPE Consortium.

These include responsibility for activities at the cable station in
Oregon, on the U.S. network cable routes and in the TPE network
operations center, all of which allow us to provide a high level
of network management functions for our customers. The next
planned phase of the TPE system, with the addition of NTT
Communications to the consortium, will provide new connections
from Japan to China, Taiwan and South Korea.

Our involvement allows our customers to take full

advantage of the cable system and the Verizon Business network,
providing direct connectivity to our ultra-long haul and global
mesh networks.

Making a Difference in Our Communities

At Verizon, we understand our reputation isn’t limited to our performance
in the marketplace. It also includes the quality of our products, our
impact on the environment, the spirit of our employees and our standing
in the community. We strive to make our broadband technologies as widely
available as possible and to use our leadership and resources to create new
solutions to the big problems facing our society. Even in these difficult
economic times, we remain committed to using our signature programs
to help create a better quality of life for the neighborhoods we live in and
serve.

The Verizon Foundation connects our financial, technological and

human resources with critical social issues that affect our employees,
customers and communities. We focus on the issues of education and
literacy, and safety and health. Our work is done through strategic
partnerships with nonprofit organizations, informed grant-making that
represents an investment in results, and the exceptional volunteer spirit of
Verizon’s 223,900 employees. Our goal is to help people achieve the skills
they need to live, learn and work in the 21st Century.

Thinkfinity.org is the Verizon Foundation’s free, comprehensive

Web site containing more than 55,000 educational resources, including

standards-based, grade-specific, K-12 lesson plans; online educational
games; videos; and other materials provided in partnership with many of
the nation’s leading educational organizations. Since the Web site’s
launch in March 2007, the Verizon Foundation has committed more than
$34 million to update and expand Thinkfinity.org and provide training
to teachers.

The Verizon Wireless HopeLine® program collects no-longer-used

phones, batteries and accessories from any wireless service provider
at our Communications Stores nationwide. We then put the nation’s most
reliable wireless network to work in our communities by providing these
phones as a vital link to emergency or support services for individuals who
have suffered from abusive relationships. We also provide cash grants to
local shelters and nonprofit organizations that focus on domestic violence
prevention and awareness.

For more information on how Verizon is making a difference in our
communities, please view our corporate responsibility report online at
verizon.com/responsibility.

Selected Financial Data

2008

2007

(dollars in millions, except per share amounts)
2004

2005

2006

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

Results of Operations
Operating revenues
Operating income
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change

Per common share – basic
Per common share – diluted

Net income available to common shareowners

Per common share – basic
Per common share – diluted

Cash dividends declared per common share

Financial Position
Total assets
Debt maturing within one year
Long-term debt
Employee benefit obligations
Minority interest
Shareowners’ investment

$ 97,354
16,884

93,469
15,578

88,182
13,373

69,518
12,581

65,751
10,870

6,428
2.26
2.26
6,428
2.26
2.26
1.78

5,510
1.90
1.90
5,521
1.91
1.90
1.67

5,480
1.88
1.88
6,197
2.13
2.12
1.62

6,027
2.18
2.16
7,397
2.67
2.65
1.62

5,899
2.13
2.11
7,831
2.83
2.79
1.54

$ 202,352
4,993
46,959
32,512
37,199
41,706

$ 186,959
2,954
28,203
29,960
32,288
50,581

$ 188,804
7,715
28,646
30,779
28,337
48,535

$ 168,130
6,688
31,569
17,693
26,433
39,680

$ 165,958
3,476
34,970
16,796
24,709
37,560

• Significant events affecting our historical earnings trends in 2006 through 2008 are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
• 2005 data includes sales of business, lease impairment, severance, pension and benefit charges and other items.
• 2004 data includes sales of business, severance, pension and benefit charges and other items.

Stock Performance Graph

Comparison of Five-Year Total Return Among Verizon, S&P 500 Telecom Services Index and S&P 500 Stock Index

Verizon

S&P 500 Telecom Services

S&P 500

s
r
a
l
l

o
D

$200

$180

$160

$140

$120

$100

$80

$60

$40

$20

2003

2004

2005

2006

2007

2008

Data Points in Dollars

Verizon
S&P Telecom Services
S&P 500

2003

100.0
100.0
100.0

2004

120.2
119.9
110.9

At December 31,

2005

93.7
113.5
116.3

2006

126.0
155.0
134.7

2007

153.9
173.4
142.1

2008

126.1
120.6
89.5

The graph compares the cumulative total returns of Verizon, the S&P 500 Telecommunications Services Index, and the S&P 500 Stock Index over a five-year period, adjusted for the spin-off of
our local exchange and related business assets in Maine, New Hampshire and Vermont and our domestic print and Internet yellow pages directories business. It assumes $100 was invested on
December 31, 2003, with dividends reinvested.

$60.0

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

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

Overview

Verizon Communications Inc., (Verizon or the Company) is one of the
world’s leading providers of communications services. Our domestic
wireless business, operating as Verizon Wireless, provides wireless voice
and data products and services across the United States (U.S.) using one
of the most extensive and reliable wireless networks. Our wireline busi-
ness provides communications services, including voice, broadband
data and video services, network access, nationwide long-distance and
other communications products and services, and also owns and oper-
ates one of the most expansive end-to-end global Internet Protocol (IP)
networks. Stressing diversity and commitment to the communities in
which we operate, we have a highly diverse workforce of approximately
223,900 employees.

In the sections that follow we provide information about the important
aspects of our operations and investments, both at the consolidated and
segment levels, and discuss our results of operations, financial position
and sources and uses of cash. In addition, we highlight key trends and
uncertainties to the extent practicable. The content and organization of
the financial and non-financial data presented in these sections are con-
sistent with information used by our chief operating decision makers for,
among other purposes, evaluating performance and allocating resources.
We also monitor several key economic indicators as well as the state of
the economy in general, primarily in the United States where the majority
of our operations are located, in evaluating our operating results and
assessing the potential impacts of these trends on our businesses. While
most key economic indicators, including gross domestic product, affect
our operations to some degree, we historically have noted higher cor-
relations to non-farm employment, personal consumption expenditures
and capital spending, as well as more general economic indicators such
as inflationary or recessionary trends and housing starts.

Revenue Growth – To generate revenue growth we are devoting our
resources to higher growth markets such as the wireless voice and data
markets, the broadband and video markets, and the provision of stra-
tegic services to business markets, rather than to the traditional wireline
voice market. During 2008, revenues from these higher growth markets
offset continuing declines in the traditional voice mass market, and we
reported consolidated revenue growth of 4.2%. We continue developing
and marketing innovative product bundles to include local, long-distance,
wireless and broadband services for consumer and general business retail
customers. We anticipate that these efforts will help counter the effects of
competition and technology substitution that have resulted in access line
losses, and will enable us to continue to grow consolidated revenues.

Market Share Gains – In our wireless business, our goal is to be the market
leader in providing wireless voice and data communication services in
the United States. To gain market share, we are focused on providing the
highest network reliability and new and innovative products and services
such as Mobile Broadband and our Evolution-Data Optimized (EV-
DO) service. We also continue to expand our wireless data, messaging
and multi-media offerings for both consumer and business customers.
During 2008,

• our total number of customers increased 9.7% to 72.1 million; and
• average revenue per customer per month (ARPU) from service reve-
nues increased by 1.2% to $51.59 from increased use of our messaging
and other data services.

With our acquisition of Alltel Corporation (Alltel) in January 2009, we
became the largest wireless provider in the U.S. as measured by the total
number of customers.

In our wireline business, our goal is to become the leading broadband
provider in every market in which we operate. During 2008,

Our results of operations, financial position and sources and uses of cash
in the current and future periods reflect our focus on the following stra-
tegic imperatives:

• we passed 12.7 million premises with our high-capacity fiber optics

network operated under the FiOS service mark;

• we added 660,000 net wireline broadband connections, for a total of

8,673,000 connections; and

• we added approximately 975,000 net new FiOS TV customers, for a

total of 1,918,000 FiOS TV customers.

With FiOS, we have created the opportunity to increase revenue per
customer as well as improve retention and profitability as the traditional
fixed-line telephone business continues to decline as customers migrate
to wireless, cable and other newer technologies. We are also focused on
gaining market share in the enterprise business by the deployment of
strategic service offerings – including expansion of our VoIP and inter-
national Ethernet capabilities, the introduction of video and web-based
conferencing capabilities, and enhancements to our virtual private net-
work portfolio. In 2008, revenues from strategic services grew 16.1%.

Profitability Improvement – Our goal is to increase operating income
and margins. In 2008,

• operating income rose 8.4% compared to 2007;
• income before provision for income taxes, discontinued operations

and extraordinary item rose 2.8% compared to 2007; and

• operating income margin rose 4% to 17.3% compared to 2007.

To position our company for sustainable, long-term profitability, we are
directing our capital spending primarily toward higher growth markets.
High-speed wireless data services, fiber optics to the premises, as well
as expanded services to enterprise customers, are examples of these
growth markets. During 2008, capital expenditures were $17,238 million
compared with capital expenditures of $17,538 million in 2007, excluding

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

COnsOlidated results Of OperatiOns

In this section, we discuss our overall results of operations and highlight
items that are not included in our business segment results. We have
two reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are
Domestic Wireless and Wireline.

This section and the following “Segment Results of Operations” section
also highlight and describe those items of a non-recurring or non-oper-
ational nature separately to ensure consistency of presentation. In the
following section, we review the performance of our two reportable seg-
ments. We exclude the effects of certain items that management does
not consider in assessing segment performance, primarily because of
their non-recurring and/or non-operational nature as discussed below
and in the “Other Consolidated Results” and “Other Items” sections. We
believe that this presentation will assist readers in better understanding
our results of operations and trends from period to period.

On March 31, 2008, we completed the spin-off of our local exchange
and related business assets in Maine, New Hampshire and Vermont.
Accordingly, Wireline results from divested operations have been reclassi-
fied to Corporate and Other and reflect comparable operating results.

discontinued operations. We expect 2009 capital expenditures, excluding
amounts related to the acquisition of Alltel, to be lower than 2008
capital expenditures.

Operational Efficiency – While focusing resources on revenue growth
and market share gains, we are continually challenging our management
team to lower expenses, particularly through technology-assisted produc-
tivity improvements, including self-service initiatives. The effect of these
and other efforts, such as real estate consolidations, call center routing
improvements, the formation of a centralized shared services organiza-
tion, and centralizing information technology and marketing efforts, has
led to changes in our cost structure as well as maintaining and improving
operating income margins. With our deployment of the FiOS network, we
expect to realize savings annually in our ongoing operating expenses as
a result of efficiencies gained from fiber network facilities. As the deploy-
ment of the FiOS network gains scale and installation and automation
improvements occur, average costs per home connected are expected
to decline.

Customer Service – Our goal is to be the leading company in customer
service in every market we serve. We view superior product offerings and
customer service experiences as a competitive differentiator and a cata-
lyst to growing revenues and gaining market share. We are committed
to providing high-quality customer service and continually monitoring
customer satisfaction in all facets of our business. We believe that we
have the most loyal customer base of any wireless service provider in the
United States, as measured by customer churn.

Performance-Based Culture – We embrace a culture of accountability,
based on individual and team objectives that are performance-based and
tied to Verizon’s strategic imperatives. Key objectives of our compensa-
tion programs are pay-for-performance and the alignment of executives’
and shareowners’ long-term interests. We also employ a highly diverse
workforce, since respect for diversity is an integral part of Verizon’s culture
and a critical element of our competitive success.

We create value for our shareowners by investing the cash flows gen-
erated by our business in opportunities and transactions that support
the aforementioned strategic imperatives, thereby increasing customer
satisfaction and usage of our products and services. In addition, we use
our cash flows to repurchase shares and maintain and grow our dividend
payout to shareowners. Reflecting continued strong cash flows and con-
fidence in Verizon’s business model, Verizon’s Board of Directors increased
the Company’s quarterly dividend 6.2% during the third quarter of 2007
and 7.0% during the third quarter of 2008. During 2008, we repurchased
$1,368 million of our common stock as part of our previously announced
share buyback program. Net cash provided by operating activities – con-
tinuing operations for the year ended December 31, 2008 of $26,620
million increased by $311 million from $26,309 million for the year ended
December 31, 2007.

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

Consolidated Revenues

Years Ended December 31,

2008

2007

% Change

2007

(dollars in millions)
% Change

2006

Domestic Wireless
Wireline
Verizon Telecom
Verizon Business

Intrasegment eliminations

Corporate and Other
Consolidated Revenues

nm – not meaningful

49,332

43,882

12.4

43,882

38,043

15.3

29,912
21,126
(2,824)
48,214
(192)
97,354

30,780
21,109
(2,760)
49,129
458
93,469

(1.9)
nm
4.2

30,780
21,109
(2,760)
49,129
458
93,469

31,759
20,546
(2,801)
49,504
635
88,182

(0.8)
(27.9)
6.0

2008 Compared to 2007
Consolidated revenues in 2008 increased by $3,885 million, or 4.2%, com-
pared to 2007. This increase was primarily the result of continued strong
growth at Domestic Wireless.

2007 Compared to 2006
Consolidated revenues in 2007 increased by $5,287 million, or 6.0%, com-
pared to 2006. This increase was primarily the result of continued strong
growth at Domestic Wireless.

Domestic Wireless’s revenues in 2008 increased by $5,450 million, or
12.4%, compared to 2007 due to increases in service revenues and
equipment and other revenue. Service revenues during 2008 increased
$4,619 million, or 12.2%, compared to 2007 primarily due to increases in
data revenues and customers. Equipment and other revenue increased
principally as a result of increases in the number of existing customers
upgrading their wireless devices. Total data revenues increased by $3,265
million, or 44.2% in 2008 compared to 2007. There were 72.1 million total
Domestic Wireless customers as of December 31, 2008, an increase of
9.7% from December 31, 2007. Domestic Wireless’s retail customer base as
of December 31, 2008 was approximately 70 million, a 9.9% increase from
2007, and represented approximately 97.2% of its total customer base.
Service ARPU increased by 1.2% to $51.59 in 2008 compared to 2007,
primarily attributable to increases in Data ARPU driven by increased use
of our messaging and other data services. Retail Service ARPU increased
by 0.6% to $51.88 in 2008 compared to 2007.

Wireline’s revenues in 2008 decreased $915 million, or 1.9%, compared
to 2007, primarily driven by lower demand and usage of our basic local
exchange and accompanying services, partially offset by continued
growth from broadband and strategic services. During 2008, we added
660,000 net new broadband connections, including 956,000 net new
FiOS data connections, offset by a net decline of 296,000 high speed
Internet connections. As of December 31, 2008 we served 8,673,000
connections, including 2,481,000 for FiOS Internet, representing an 8.2%
increase in total broadband connections from December 31, 2007. In
addition, we added 975,000 net new FiOS TV customers in 2008, for a
total of 1,918,000 at December 31, 2008. The revenue growth at Verizon
Telecom driven by broadband and video services was more than offset by
a 3,722,000 decline in subscriber access lines resulting from competition
and technology substitution, including wireless and VoIP. Revenues at
Verizon Business increased primarily due to higher demand for Internet-
related product offerings, specifically Private IP products and the impact
of foreign currency exchange rates on services billed in local currencies,
partially offset by lower voice revenues.

Domestic Wireless’s revenues in 2007 increased by $5,839 million, or
15.3%, compared to 2006 due to increases in service revenues and
equipment and other revenue. Equipment and other revenue increased
principally as a result of increases in the number of existing customers
upgrading their wireless devices. Total data revenues increased by $2,911
million, or 65.0% in 2007 compared to 2006 driven by increased use of our
messaging and other data services. There were approximately 65.7 million
total Domestic Wireless customers as of December 31, 2007, an increase of
11.3% from December 31, 2006. Domestic Wireless’s retail customer base
as of December 31, 2007 was approximately 63.7 million, a 12.2% increase
from 2006, and represented approximately 97% of its total customer base.
Service ARPU increased by 2.3% to $50.96 in 2007 compared to 2006, pri-
marily attributable to increases in data revenue per customer. Retail ARPU
increased by 2.2% to $51.57 in 2007 compared to 2006.

Wireline’s revenues in 2007 decreased $375 million, or 0.8%, compared
to 2006, primarily driven by lower demand and usage of our basic local
exchange and accompanying services, partially offset by continued
growth from broadband and strategic services. During 2007, we added
1,227,000 new broadband connections, an increase of 18.1%, including
847,000 for FiOS, for a total of 8,013,000 lines at December 31, 2007. In
addition, we added 736,000 FiOS TV customers in 2007, for a total of
943,000 at December 31, 2007. Revenues at Verizon Business increased
during 2007 compared to 2006 primarily due to higher demand for
strategic products. These increases were offset by a decline in voice
revenues at Verizon Telecom due to a 3.5 million decline in subscribers
resulting from competition and technology substitution, such as wireless
and VoIP, including those subscribers who have migrated to our other
service offerings.

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

Consolidated Operating Expenses

Years Ended December 31,

Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Consolidated Operating Expenses

2008

39,007
26,898
14,565
80,470

2007

% Change

37,547
25,967
14,377
77,891

3.9
3.6
1.3
3.3

2007

37,547
25,967
14,377
77,891

2006

35,309
24,955
14,545
74,809

(dollars in millions)
% Change

6.3
4.1
(1.2)
4.1

2008 Compared to 2007
Cost of Services and Sales
Cost of services and sales includes the following costs directly attribut-
able to a service or product: salaries and wages, benefits, materials and
supplies, contracted services, network access and transport costs, wire-
less equipment costs, customer provisioning costs, computer systems
support, costs to support our outsourcing contracts and technical facili-
ties and contributions to the universal service fund. Aggregate customer
care costs, which include billing and service provisioning, are allocated
between cost of services and sales and selling, general and administra-
tive expense.

Consolidated cost of services and sales in 2008 increased $1,460 mil-
lion, or 3.9%, compared to 2007, primarily as a result of higher wireless
network costs and wireless equipment costs. The increase was partially
offset by the impact of productivity improvement initiatives and lower
cost of services and sales driven by a decline in switched access lines
in service and wholesale voice connections. The higher wireless network
costs in 2008 were primarily caused by increased network usage for voice
and data services, increased roaming, increased use of data services and
applications and increased payments related to network leases. Cost of
wireless equipment sales increased in 2008 compared to 2007 primarily
as a result of an increase in the number of equipment upgrades by cus-
tomers, combined with an increase in average cost per unit. The increase
in cost of services and sales was also impacted by unfavorable foreign
exchange rates, higher utility costs and the inclusion of the results of
operations of a security services firm acquired on July 1, 2007.

Consolidated cost of services and sales in 2008 and 2007 include $24 mil-
lion and $32 million, respectively, of costs primarily associated with the
integration of MCI into our wireline business. Consolidated cost of ser-
vices and sales in 2008 also included $16 million related to the spin-off of
local exchange and related business assets in Maine, New Hampshire and
Vermont and $65 million for severance, pension and benefits charges.

Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries and wages
and benefits not directly attributable to a service or product, bad debt
charges, taxes other than income taxes, advertising and sales commis-
sion costs, customer billing, call center and information technology costs,
professional service fees and rent for administrative space.

Consolidated selling, general and administrative expense in 2008
increased $931 million, or 3.6%, compared to 2007. The increase resulted
from higher sales commission expense, bad debt expense and adver-
tising and promotion costs, partially offset by lower salary and benefits
related expense and the impact of productivity initiatives.

Consolidated selling, general and administrative expense in 2008 included
$885 million for severance, pension and benefits charges (see “Other
Items”), $150 million for merger integration costs, primarily comprised of
Wireline systems integration activities related to businesses acquired and
$87 million related to the spin-off of local exchange and related business
assets in Maine, New Hampshire and Vermont.

Consolidated selling, general and administrative expense in 2007 included
charges of $772 million for severance and related expenses (see “Other
Items”), $146 million for merger integration costs, primarily comprised
of Wireline systems integration activities related to businesses acquired
and $84 million related to the spin-off of local exchange and related
business assets in Maine, New Hampshire and Vermont. In addition,
during 2007 we contributed $100 million of the proceeds from the sale
of our investment in Telecomunicaciones de Puerto Rico, Inc. (TELPRI) to
the Verizon Foundation.

Depreciation and Amortization Expense
Depreciation and amortization expense in 2008 increased $188 million,
or 1.3%, compared to 2007. The increase was mainly driven by growth in
depreciable telephone plant and non-network software from additional
capital spending.

2007 Compared to 2006
Cost of Services and Sales
Consolidated cost of services and sales expense in 2007 increased $2,238
million, or 6.3%, compared to 2006, primarily as a result of higher wireless
network costs and wireless equipment costs, as well as higher costs asso-
ciated with Wireline’s growth businesses. The increase was partially offset
by the impact of productivity improvement initiatives and decreases in
net pension and other postretirement benefit costs.

The higher wireless network costs were caused by increased network
usage relating to both voice and data services in 2007 compared to
2006, partially offset by decreased local interconnection, long distance
and roaming rates. Cost of wireless equipment sales increased in 2007
compared to 2006, primarily as a result of an increase in wireless devices
sold due to an increase in equipment upgrades.

Consolidated cost of services and sales expense in 2007 and 2006
included $32 million and $25 million, respectively, of costs associated
with the integration of MCI into our wireline business.

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

Selling, General and Administrative Expense
Consolidated selling, general and administrative expense in 2007
increased $1,012 million, or 4.1%, compared to 2006. The increase was
primarily attributable to higher salary and benefits expenses. Also contrib-
uting to the increase was higher sales commission expense at Domestic
Wireless and higher advertising costs at Wireline. Partially offsetting the
increases were lower bad debt expenses and cost reduction initiatives.

Consolidated selling, general and administrative expense in 2007 included
charges of $772 million for severance and related expenses (see “Other
Items”), $146 million for merger integration costs, primarily comprised of
Wireline systems integration activities related to businesses acquired and
$84 million related to the spin-off of local exchange and related business
assets in Maine, New Hampshire and Vermont. In addition, during 2007
we contributed $100 million of the proceeds from the sale of our invest-
ment in TELPRI to the Verizon Foundation.

Consolidated selling, general and administrative expense in 2006
included $56 million related to pension settlement losses incurred in
connection with our benefit plans and a pretax charge of $369 million
for employee severance and severance-related activities in connection
with the involuntary separation of approximately 4,100 employees who
were separated in 2006. Consolidated selling, general and administrative
expense in 2006 also included $207 million of merger integration costs,
primarily for advertising and other costs related to re-branding initiatives
and systems integration activities, and a pretax charge of $184 million for
Verizon Center relocation costs.

Depreciation and Amortization Expense
Depreciation and amortization expense in 2007 decreased $168 million,
or 1.2%, compared to 2006. The decrease was primarily due to lower
rates of depreciation as a result of changes in the estimated useful lives
of certain asset classes at Wireline and fully amortized customer lists at
Domestic Wireless, partially offset by growth in depreciable telephone
plant as a result of increased capital expenditures.

Other Consolidated Results

Equity in Earnings of Unconsolidated Businesses

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Vodafone Omnitel
CANTV
Other
Total

655
–
(88)
567

597
–
(12)
585

703
182
(112)
773

Equity in earnings of unconsolidated businesses in 2008 decreased by
$18 million, or 3.1%, compared to 2007. The decrease was primarily
driven by the gain on the sale of an international investment in 2007,
partially offset by higher earnings at Vodafone Omnitel N.V. (Vodafone
Omnitel) in 2008.

Equity in earnings of unconsolidated businesses in 2007 decreased by
$188 million, or 24.3%, compared to 2006. The decrease was primarily
driven by the nationalization of Compañía Anónima Nacional Teléfonos
de Venezuela (CANTV) during 2007, as well as the effect of lower tax ben-
efits at Vodafone Omnitel.

Other Income and (Expense), Net

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Interest income
Foreign exchange gains (losses), net
Other, net
Total

362
(46)
(34)
282

168
14
29
211

201
(3)
197
395

Other Income and (Expense), Net in 2008 increased $71 million, or
33.6%, compared to 2007. The increase was primarily attributable to
higher interest income, primarily from our investment in Alltel’s debt
obligations. Partially offsetting the increase were foreign exchange losses
at our international Wireline operations and an impairment charge of
$48 million recorded during the fourth quarter of 2008 related to an
other-than-temporary decline in fair value of our investments in certain
marketable securities.

Other Income and (Expense), Net in 2007 decreased $184 million, or
46.6%, compared to 2006. The decline was primarily attributable to a gain
on the sale of a Wireline investment in 2006, as well as decreased interest
income as a result of lower average cash balances.

Interest Expense

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Total interest costs on debt balances
Less capitalized interest costs
Interest expense

$ 2,566
747
$ 1,819

2,258
429
1,829

2,811
462
2,349

Weighted average debt outstanding
Effective interest rate

$ 41,064
6.25%

$ 32,964
6.85%

$ 41,500
6.78%

Total interest costs in 2008 increased $308 million, compared to 2007, due
to an increase in the weighted average debt level, partially offset by lower
interest rates compared to last year. Interest Expense in 2008 decreased
$10 million compared to 2007 primarily due to higher capitalized interest
costs. Capitalized interest costs include approximately $557 million
related to the development of wireless licenses for commercial service,
primarily as a result of the spectrum acquired in the 700 MHz auction.
The increase in weighted average debt outstanding was primarily driven
by the issuance of $8,000 million of fixed rate notes with varying maturi-
ties, in the first half of 2008, and to a lesser extent, the Verizon Wireless
borrowings during the second half of 2008 (see “Consolidated Financial
Condition”). Partially offsetting this increase in the weighted average debt
outstanding were debt reductions.

Total interest costs in 2007 decreased $553 million, compared to 2006, pri-
marily due to a decrease in average debt levels, partially offset by slightly
higher interest rates. Debt levels decreased primarily as a result of the
approximately $7,100 million reduction from the spin-off of our domestic
print and Internet yellow pages directories business in November 2006,
as well as from debt redemptions and retirements funded by proceeds
from the spin-off and the divestiture of our Caribbean and Latin American
investments during 2006 and the first quarter of 2007.

Minority Interest

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Minority interest

$ 6,155

5,053

4,038

The increase in minority interest in 2008 compared to 2007, and in 2007
compared to 2006, was due to the higher earnings in our Domestic
Wireless segment, which has a significant minority interest attributable
to Vodafone Group Plc (Vodafone).

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

Extraordinary Item
In January 2007, the Bolivarian Republic of Venezuela (the Republic)
declared its intent to nationalize certain companies, including CANTV. On
February 12, 2007, we entered into a Memorandum of Understanding
(MOU) with the Republic, which provided that the Republic offer to pur-
chase all of the equity securities of CANTV, including our 28.5% interest,
through public tender offers in Venezuela and the United States. Under
the terms of the MOU, the prices in the tender offers would be adjusted
downward to reflect any dividends declared and paid subsequent to
February 12, 2007. During 2007, the tender offers were completed and
Verizon received an aggregate amount of approximately $572 million,
which included $476 million from the tender offers as well as $96 million
of dividends declared and paid subsequent to the MOU. During 2007,
based upon our investment balance in CANTV, we recorded an extraor-
dinary loss of $131 million, including taxes of $38 million, or $.05 per
diluted share.

Cumulative Effect of Accounting Change
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payments, utilizing the modified prospective method. The impact to
Verizon primarily resulted from Domestic Wireless, for which we recorded
a $42 million ($.01 per diluted share) cumulative effect of accounting
change, net of taxes and after minority interest, to recognize the effect of
initially measuring the outstanding liability for awards granted to Domestic
Wireless employees at fair value utilizing a Black-Scholes model.

segment results Of OperatiOns

We have two reportable segments, Domestic Wireless and Wireline, which
we operate and manage as strategic business units and organize by prod-
ucts and services. We previously measured and evaluated our reportable
segments based on segment income. Beginning in 2008, we measure
and evaluate our reportable segments based on segment operating
income, which is reflected in all periods presented. The use of segment
operating income is consistent with the chief operating decision makers’
assessment of segment performance. You can find additional information
about our segments in Note 17 to the consolidated financial statements.

Corporate, eliminations and other includes unallocated corporate
expenses, intersegment eliminations recorded in consolidation, the results
of other businesses such as our investments in unconsolidated businesses,
lease financing, and other adjustments and gains and losses that are not
allocated in assessing segment performance due to their non-recurring
or non-operational nature. Although such transactions are excluded from
the business segment results, they are included in reported consolidated
earnings. Gains and losses that are not individually significant are included
in all segment results, since these items are included in the chief oper-
ating decision makers’ assessment of segment performance.

Provision for Income Taxes

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Provision for income taxes
Effective income tax rate

$ 3,331
34.1%

3,982
42.0%

2,674
32.8%

The effective income tax rate is the provision for income taxes as a per-
centage of income from continuing operations before the provision for
income taxes. The effective income tax rate in 2008 was lower than 2007
primarily due to recording $610 million of foreign and domestic taxes and
expenses in 2007 specifically relating to our share of Vodafone Omnitel’s
distributable earnings. Verizon received net distributions from Vodafone
Omnitel in April 2008 and December 2007 of approximately $670 million
and $2,100 million, respectively.

The effective income tax rate in 2007 compared to 2006 was higher
primarily due to taxes recorded in 2007 related to distributions from
Vodafone Omnitel as discussed above. The 2007 rate was also increased
due to higher state taxes in 2007 as compared to 2006, as well as greater
benefits from foreign operations in 2006 compared to 2007. These
increases were partially offset by lower expenses recorded for unrecog-
nized tax benefits in 2007 as compared to 2006.

A reconciliation of the statutory federal income tax rate to the effective
income tax rate for each period is included in Note 16 to the consoli-
dated financial statements.

Discontinued Operations
In accordance with Statement of Financial Accounting Standard (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
have classified TELPRI, Verizon Dominicana and our former domestic print
and Internet yellow pages directories publishing operations as discon-
tinued operations in the consolidated financial statements for all periods
presented through the date of the divestiture or spin-off.

On March 30, 2007, after receiving Federal Communications Commission
(FCC) approval, we completed the sale of our 52% interest in TELPRI and
received gross proceeds of approximately $980 million. The sale resulted
in a pretax gain of $120 million ($70 million after-tax, or $.02 per diluted
share). Additionally, $100 million of the proceeds were contributed to the
Verizon Foundation.

The sale of Verizon Dominicana closed in December 2006, and primarily
due to taxes on previously unremitted earnings, a pretax gain of $30 mil-
lion resulted in an after-tax loss of $541 million ($.18 per diluted share).

We completed the spin-off of our domestic print and Internet yellow
pages directories business to our shareowners on November 17, 2006,
which resulted in an $8,695 million increase to contributed capital in
shareowner’s investment. In addition, we recorded pretax charges of
$117 million ($101 million after-tax, or $.03 per diluted share) for costs
related to this spin-off. These costs primarily consisted of debt retirement
costs, costs associated with accumulated vested benefits of employees,
investment banking fees and other transaction costs related to the spin-
off, which are included in discontinued operations.

Income from discontinued operations, net of tax, decreased by $617
million, or 81.3%, in 2007 compared to 2006. The decrease was primarily
driven by the assets disposed of in 2006, partially offset by the after-tax
gain recorded in 2007 on the sale of our investment in TELPRI.

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

Domestic Wireless

Our Domestic Wireless segment provides wireless voice and data ser-
vices, other value-added services and equipment sales across the United
States. This segment primarily represents the operations of our joint ven-
ture with Vodafone, operating as Verizon Wireless. We own a 55% interest
in the joint venture and Vodafone owns the remaining 45%. All financial
results included in the tables below reflect the consolidated results of
Verizon Wireless.

in the number of customers upgrading their wireless devices. Other rev-
enue in 2007 also increased due to increases in cost recovery surcharges
and regulatory fees.

Total data revenue in 2007 was $7,386 million and accounted for 19.4%
of service revenue, compared to $4,475 million and 13.6% of service
revenue in 2006. Total data ARPU increased by 45.8% to $9.90 in 2007,
compared to $6.79 in 2006, as a result of increased use of messaging ser-
vice, Broadband Access and e-mail services, and other data services.

Operating Revenue

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Service ARPU increased by 2.3% to $50.96 in 2007 compared to $49.80 in
2006. Retail Service ARPU increased by 2.2% to $51.57 in 2007 compared
to $50.44 in 2006.

Service revenue
Equipment and other
Total Domestic Wireless
Operating Revenue

$ 42,635
6,697

$ 38,016
5,866

$ 32,796
5,247

Operating Expenses

Years Ended December 31,

2008

(dollars in millions)
2006

2007

$ 49,332

$ 43,882

$ 38,043

Domestic Wireless’s total operating revenue in 2008 increased by $5,450
million, or 12.4%, compared to 2007. Service revenue increased by $4,619
million, or 12.2%, in 2008 compared to 2007. The increase in service
revenue was primarily driven by an increase in data revenue in 2008
compared to 2007, and to a lesser extent, an increase in customers as
of December 31, 2008 compared to December 31, 2007. Equipment and
other revenue increased by $831 million, or 14.2%, in 2008 compared
to 2007, primarily as a result of an increase in the number of customers
upgrading their wireless devices. Other revenue also increased due to
increases in cost recovery surcharges and regulatory fees.

Total data revenue in 2008 was $10,651 million and accounted for 25.0%
of service revenue, compared to $7,386 million and 19.4% of service
revenue in 2007. Total data ARPU increased by 30.2% to $12.89 in 2008,
compared to $9.90 in 2007, primarily as a result of increased use of our
messaging service, Mobile Broadband and e-mail services, data transport
charges, and newer data services such as VZ Navigator.

Service ARPU increased by 1.2% to $51.59 in 2008, compared to $50.96 in
2007. Retail Service ARPU increased by 0.6% to $51.88 in 2008, compared
to $51.57 in 2007.

Domestic Wireless had approximately 70 million retail customers as of
December 31, 2008, an increase of 6.3 million, or 9.9%, compared to
approximately 63.7 million retail customers as of December 31, 2007.
Retail (non-wholesale) customers are customers who are directly served
and managed by Verizon Wireless and who buy its branded services.
Domestic Wireless had 72.1 million total customers as of December 31,
2008, of which 97.2% were retail customers, compared to approximately
65.7 million total customers as of December 31, 2007, of which 97.0% were
retail customers. Our Domestic Wireless customer base as of December
31, 2008 was 92.9% retail postpaid, unchanged compared to December
31, 2007. Customer acquisitions and adjustments during 2008 included
approximately 650,000 net total customer additions, after conforming
adjustments, acquired from Rural Cellular Corporation (Rural Cellular).
As a result of the exchange with AT&T consummated on December 22,
2008, Domestic Wireless transferred a net of approximately 122,000 total
customers. The total average monthly customer churn rate was 1.25% in
2008, compared to 1.21% in 2007. The average monthly retail postpaid
customer churn rate was 0.96% in 2008, compared to 0.91% in 2007.

Domestic Wireless’s total operating revenue in 2007 increased by $5,839
million, or 15.3%, compared to 2006. Service revenue in 2007 increased by
$5,220 million, or 15.9%, compared to 2006. The service revenue increase
was primarily due to an 11.3% increase in customers as of December 31,
2007 compared to December 31, 2006, and increased average revenue
per customer. Equipment and other revenue in 2007 increased by $619
million, or 11.8%, compared to 2006, principally as a result of increases

Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses

$ 15,660
14,273
5,405
$ 35,338

$ 13,456
13,477
5,154
$ 32,087

$ 11,491
12,039
4,913
$ 28,443

Cost of Services and Sales
Cost of services and sales includes costs to operate the wireless network
as well as the cost of roaming and long distance, the cost of data services
and applications and the cost of equipment sales. Cost of services and
sales in 2008 increased by $2,204 million, or 16.4%, compared to 2007.
The increase in cost of services was driven by higher wireless network
costs on increased network usage for voice and data services, increased
roaming, increased use of data services and applications, as well as
increased payments related to network related leases. Cost of equipment
sales increased by 18.9%, in 2008 compared to 2007. This increase was pri-
marily attributable to an increase in the number of equipment upgrades
by customers combined with an increase in average cost per unit.

Cost of services and sales in 2007 increased by $1,965 million, or 17.1%,
compared to 2006, primarily due to higher wireless network costs in
2007 caused by increased network usage, partially offset by lower rates
for long distance, roaming and local interconnection. Cost of equipment
sales grew by 20.2% in 2007 compared to 2006. The increase was pri-
marily attributed to an increase in equipment upgrades, together with
an increase in cost per unit as a result of increased sales of higher cost
advanced wireless devices.

Selling, General and Administrative Expense
Selling, general and administrative expense in 2008 increased by $796
million, or 5.9%, compared to 2007. This increase was primarily due to
an increase in sales commission expense, primarily from an increase in
equipment upgrades in our indirect channel, as well as higher adver-
tising and promotion expense, bad debt expense and regulatory fees.
The increases in selling, general and administrative expense were par-
tially offset by a decrease in salary and benefits related expense.

Selling, general and administrative expense in 2007 increased by $1,438
million, or 11.9%, compared to 2006. This increase was primarily due to
an increase in salary and benefits expense, resulting from an increase in
employees in the sales and customer care areas, and higher per employee
salary and benefit costs.

Depreciation and Amortization Expense
Depreciation and amortization expense in 2008 increased by $251 mil-
lion, or 4.9%, compared to 2007 and increased by $241 million, or 4.9%,
in 2007 compared to 2006. These increases were primarily due to an
increase in depreciable assets. Partially offsetting this increase in 2007
was lower amortization expense resulting from customer lists becoming
fully amortized during 2006.

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

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 for FiOS
Internet, 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 FiOS TV customers in 2008 and ended
the year with a total of 1,918,000, an increase of approximately 103.4%
compared to 943,000 FiOS TV customers at December 31, 2007. As of
December 31, 2008, for FiOS Internet and FiOS TV, we achieved penetra-
tion rates of 24.9% and 20.8%, respectively, across all markets where we
have been selling these services.

Wholesale
Wholesale revenues are earned from long distance and other carriers who
use our local exchange 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. 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
(UNEs) and interconnection revenues from competitive local exchange
carriers (CLECs) and wireless carriers.

Wholesale revenues in 2008 decreased by $203 million, or 2.6%,
compared to 2007 and by $243 million, or 3.0% in 2007 compared to
2006, due to declines in switched access revenues and local wholesale
revenues. These declines were partially offset by increases in special
access revenues. Switched minutes of use (MOUs) declined in 2008 and
2007, reflecting the impact of access line loss and wireless substitution.
Wholesale lines decreased by 16.0% 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 operator services (including
deaf relay services), public (coin) telephone, card services and supply
sales, as well as dial around services including 10-10-987, 10-10-220,
1-800-COLLECT and Prepaid Cards. Verizon Telecom’s revenues from
other services decreased by $350 million, or 20.4% in 2008, and by $483
million, or 22.0% in 2007, mainly due to the discontinuation of non-stra-
tegic product lines and reduced business volumes.

Operating Income

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Operating Income

$ 13,994

$ 11,795

9,600

Operating income in 2008 increased by $2,199 million, or 18.6%, com-
pared to 2007 and increased by $2,195 million, or 22.9%, in 2007
compared to 2006, primarily due to the impact of operating revenue and
operating expenses described above.

Wireline

The Wireline segment consists of the operations of Verizon Telecom,
which provides communication services, including voice, broadband
video and data, network access, long distance, and other services to resi-
dential and small business customers and carriers, and Verizon Business,
which provides voice, data and Internet communications services as well
as next-generation IP network services to medium and large business cus-
tomers, multi-national corporations, and state and federal government
customers globally. The results of operations presented below exclude
the local exchange and related businesses in Maine, New Hampshire and
Vermont that were spun-off on March 31, 2008.

Operating Revenues

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Verizon Telecom
Mass Markets
Wholesale
Other

Verizon Business
Enterprise Business
Wholesale

International and Other
Intrasegment eliminations
Total Wireline Operating Revenues

$ 20,974
7,571
1,367

$ 21,289
7,774
1,717

$ 21,542
8,017
2,200

14,411
3,341
3,374
(2,824)
$ 48,214

14,550
3,345
3,214
(2,760)
$ 49,129

14,164
3,281
3,101
(2,801)
$ 49,504

Verizon Telecom
Mass Markets
Verizon Telecom’s Mass Markets revenue includes local exchange (basic
service and end-user access), value-added services, long distance,
broadband services for residential and small business accounts and FiOS
TV services. Long distance includes both regional toll services and long
distance services. Broadband services include high speed Internet and
FiOS Internet.

Our Mass Markets revenue in 2008 decreased by $315 million, or 1.5%,
compared to 2007 and decreased by $253 million, or 1.2% in 2007, com-
pared to 2006. These decreases were primarily driven 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. These decreases
were partially offset by growth from broadband and video services.

Declines in switched access lines in service of 9.3% in 2008 and 8.1% in
2007 were mainly driven by the effects of competition and technology
substitution. Residential retail access lines declined 11.4% in 2008 and
9.5% in 2007, as customers substituted wireless, VoIP, broadband and
cable services for traditional voice landline services. At the same time,
small business retail access lines declined 5.0% in 2008 and 4.0% in 2007,
primarily reflecting competition and a shift to high-speed access lines.
The resulting total retail access line loss was 9.1% and 7.6% in 2008 and
2007, respectively.

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

Operating Expenses

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Cost of services and sales
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses

$ 24,274
11,047
9,031
$ 44,352

$ 24,181
11,527
8,927
$ 44,635

$ 23,806
11,998
9,309
$ 45,113

Cost of Services and Sales
Cost of services and sales includes costs directly attributable to a service
or product, including salaries and wages, benefits, materials and sup-
plies, contracted services, network access and transport costs, customer
provisioning costs, computer systems support, costs to support our out-
sourcing contracts and technical facilities, contributions to the universal
service fund, and cost of products sold. Aggregate customer care costs,
which include billing and service provisioning, are allocated between cost
of services and sales and selling, general and administrative expense.

Cost of services and sales in 2008 increased by $93 million, or 0.4%,
compared to 2007. These increases were primarily due to higher costs
associated with our growth businesses, primarily FiOS services, including
TV and Internet services, and IP services, partially offset by productivity
improvement initiatives, headcount reductions and lower switched
access lines in service as well as lower wholesale voice connections.
The increase in cost of services and sales expense was also impacted by
unfavorable foreign exchange rate changes, higher utility costs and the
inclusion of the results of operations of a security services firm acquired
on July 1, 2007.

Cost of services and sales in 2007 increased by $375 million, or 1.6%, com-
pared to 2006. This increase was primarily due to higher costs associated
with our growth businesses, annual wage increases and higher customer
premise equipment costs, partially offset by productivity improvement
initiatives, headcount reductions and lower switched access lines in ser-
vice, as well as lower wholesale voice connections.

Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries, wages
and benefits not directly attributable to a service or product, bad debt
charges, taxes other than income, advertising and sales commission
costs, customer billing, call center and information technology costs, pro-
fessional service fees and rent for administrative space.

Selling, general and administrative expenses in 2008 decreased by $480
million or 4.2%, compared to 2007. This decrease was primarily due to
declines in compensation expense, in part driven by headcount reduc-
tions, cost reduction initiatives and lower bad debt costs, partially offset
by the inclusion of the results of operations of a security services firm
acquired on July 1, 2007.

Selling, general and administrative expenses in 2007 decreased by $471
million or 3.9%, compared to 2006. The decrease was primarily due to
headcount reductions, cost reduction initiatives, as well as the impact
of gains from real estate sales and lower bad debt costs, partially offset
by higher advertising costs and the inclusion of the results of operations
of the former MCI business subsequent to the close of the merger on
January 6, 2006.

Verizon Business
Enterprise Business
Our Enterprise Business channel offers voice, data and Internet communi-
cations services to medium and large business customers, multi-national
corporations, and state and federal government customers. In addition
to traditional voice and data services, Enterprise Business offers managed
and advanced products and solutions through our Strategic Services. This
encompasses our focus areas of growth, including IP services and value-
added solutions that make communications more secure, reliable and
efficient. Enterprise Business 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 ATM services, both domestically and inter-
nationally. In addition, Enterprise Business offers professional services in
more than 30 countries around the world, supporting a range of solu-
tions including network service, managing a move to IP-based unified
communications and providing application performance support.

Enterprise Business revenues in 2008 decreased by $139 million, or 1.0%,
compared to 2007. The revenue decline is due to certain customers
moving traffic off of our network, partially offset by increases in customer
premise equipment revenue and security solutions revenue. The IP and
services suite of products continues to be Enterprise Business’ fastest
growing and includes Private IP, IP, VPN, Managed Services, Web Hosting
and VoIP. Enterprise Business revenues in 2007 increased by $386 million,
or 2.7%, compared to 2006, primarily reflecting growth in demand for our
strategic products, specifically IP services, Managed Services and security,
as well as the inclusion of the results of operations of the former MCI
business subsequent to the close of the merger on January 6, 2006.

Wholesale
Our Wholesale revenues relate to domestic wholesale services and
include all interexchange wholesale traffic sold in the United States, as
well as internationally destined traffic that originates in the United States.
The Wholesale line of business is comprised of numerous large and small
customers that predominately resell voice services to their own customer
base. A portion of this revenue is generated by a few large telecommuni-
cation carriers, many of whom compete directly with Verizon.

Verizon Business Wholesale revenues in 2008 decreased by $4 million,
or 0.1%, compared to 2007, primarily due to continued rate compres-
sion due to competition in the marketplace partially offset by increased
MOUs in traditional voice products. Verizon Business Wholesale revenues
in 2007 increased by $64 million, or 2.0% as compared to 2006, primarily
due to increased MOUs in traditional voice products, partially offset by
continued rate compression due to competition in the marketplace, as
well as the inclusion of the results of operations of the former MCI busi-
ness subsequent to the close of the merger on January 6, 2006.

International and Other
Our International operations serve retail and wholesale customers,
including enterprise businesses, government entities and telecommu-
nication carriers outside of the United States, primarily in Europe, the
Middle East, Africa, the Asia Pacific region, Latin America and Canada.
These operations provide telecommunications services, which include
voice, data services, Internet and managed network services.

International and other revenue in 2008 increased by $160 million, or
5.0%, compared to 2007, reflecting strong growth in our Internet suite
of products, specifically Private IP products, and the impact of favorable
foreign currency exchange rates on services billed in local currencies.
International and other revenue in 2007 increased by $113 million, or
3.6%, compared to 2006 as a result of higher revenue growth in our stra-
tegic products, specifically IP services. This increase was partially offset
by competitive rate compression and lower volumes with respect to our
voice products.

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

Depreciation and Amortization Expense
Depreciation and amortization expense in 2008 increased $104 million,
or 1.2%, compared to 2007, mainly driven by growth in depreciable tele-
phone plant and non-network software from additional capital spending,
partially offset by lower rates of depreciation as a result of changes in the
estimated useful lives of certain asset classes. Depreciation and amortiza-
tion expense in 2007 decreased $382 million, or 4.1%, compared to 2006,
mainly driven by lower rates of depreciation as a result of changes in the
estimated useful lives of certain asset classes, partially offset by growth in
depreciable telephone plant from increased capital spending.

Operating Income

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Operating Income

$ 3,862

4,494

4,391

Segment operating income in 2008 decreased by $632 million, or 14.1%,
compared to 2007 and increased by $103 million, or 2.3% in 2007 com-
pared to 2006, due to the impact of operating revenues and operating
expenses described above. Non-recurring or non-operational items not
included in Verizon Wireline’s segment income totaled $993 million, $726
million and $458 million in 2008, 2007 and 2006, respectively.

Non-recurring or non-operational items in 2008 primarily included sev-
erance and severance-related costs, pension settlement losses, costs
associated with continued merger integration initiatives, the results
of operations spun-off during the first quarter of 2008 and the costs
incurred in connection with the spin-off related to network, non-network
software, and other activities (see “Recent Developments”).

Non-recurring or non-operational items in 2007 included costs associated
with severance and other related charges, costs incurred related to net-
work, non-network software, and other activities in connection with the
spin-off of local exchange assets in Maine, New Hampshire and Vermont,
as well as costs associated with merger integration initiatives, principally
related to the acquisition of MCI and other items.

Non-recurring or non-operational items in 2006 included costs associ-
ated with severance activity, pension settlement losses, Verizon Center
relocation-related costs and merger integration costs. Merger integra-
tion costs primarily included costs related to advertising and re-branding
initiatives, facility exit costs, severance costs, labor and contractor costs
related to information technology integration initiatives and employee
retention expenses.

Other items

During the fourth quarter of 2007, we recorded charges of $772 million
($477 million after-tax, or $.16 per diluted share) primarily in connection
with workforce reductions of 9,000 employees and related charges, 4,000
of whom were separated in the fourth quarter of 2007 with the remaining
reductions occurring throughout 2008. In addition, we adjusted our actu-
arial assumptions for severance to align with future expectations.

During 2006, we recorded net pretax severance, pension and benefits
charges of $425 million ($258 million after-tax, or $.09 per diluted share).
These charges included net pretax pension settlement losses of $56 mil-
lion ($26 million after-tax) related to employees that received lump-sum
distributions primarily resulting from our separation plans. These charges
were recorded in accordance with SFAS No. 88. Also included are pretax
charges of $369 million ($228 million after-tax), for employee severance
and severance-related costs in connection with the involuntary separa-
tion of approximately 4,100 employees.

During 2006, we recorded pretax charges of $184 million ($118 million
after-tax, or $.04 per diluted share) in connection with the relocation of
employees and business operations to Verizon Center in Basking Ridge,
New Jersey.

Merger Integration Costs

In 2008, 2007, and 2006, we recorded pretax charges of $172 million ($107
million after-tax, or $.03 per diluted share), $178 million ($112 million after-
tax, or $.04 per diluted share) and $232 million ($146 million after-tax, or
$.05 per diluted share), respectively, primarily related to the MCI acquisi-
tion that were comprised mainly of systems integration activities.

Telephone Access Lines Spin-off

In 2008 and 2007, we recorded pretax charges of $103 million ($81 million
after-tax, or $.03 per diluted share) and $84 million ($80 million after-
tax, or $.03 per diluted share), respectively, for costs incurred related to
network, non-network software, and other activities to enable the opera-
tions in Maine, New Hampshire and Vermont to operate on a stand-alone
basis subsequent to the spin-off of our telephone access line operations
in those states, as well as professional advisory and legal fees in connec-
tion with this transaction.

Investment Impairment Charges

During 2008, we recorded a pretax charge of $48 million ($31 million after-
tax, or $.01 per diluted share) related to an other-than-temporary decline
in the fair value of our investments in certain marketable securities.

Facility and Employee-Related Items

International Taxes

During 2008, we recorded net pretax severance, pension and benefits
charges of $950 million ($588 million after-tax, or $.21 per diluted share).
This charge primarily included $586 million ($363 million after-tax) for
workforce reductions in connection with the separation of approximately
8,600 employees and related charges; 3,500 of whom were separated
in the second half of 2008, with the remaining reductions expected to
occur in 2009, in accordance with SFAS No. 112, Employers’ Accounting
for Postemployment Benefits. Also included are net pretax pension settle-
ment losses of $364 million ($225 million after-tax) related to employees
that received lump-sum distributions primarily resulting from our separa-
tion plans. These charges were recorded in accordance with SFAS No. 88,
Employers’ Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits (SFAS No. 88), which requires
that settlement losses be recorded once prescribed payment thresholds
have been reached.

In December 2007, Verizon received a net distribution from Vodafone
Omnitel of approximately $2,100 million and received an additional
$670 million net distribution in April 2008. During 2007, we recorded
$610 million ($.21 per diluted share) of foreign and domestic taxes
and expenses specifically relating to our share of Vodafone Omnitel’s
distributable earnings.

Other

In 2006, we recorded pretax charges of $26 million ($16 million after-
tax, or $.01 per diluted share) resulting from the extinguishment of debt
assumed in connection with the MCI merger.

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

COnsOlidated finanCial COnditiOn

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Cash Flows Provided By (Used In)
Operating Activities:

Continuing operations
Discontinued operations
Investing Activities:
Continuing operations
Discontinued operations

Financing activities:

Continuing operations
Discontinued operations
Increase (Decrease) In Cash and
Cash Equivalents

$ 26,620
–

$ 26,309
(570)

$ 23,030
1,076

(31,579)
–

(16,865)
757

(17,422)
1,806

13,588
–

(11,697)
–

(5,752)
(279)

$ 8,629

(2,066)

2,459

We use the net cash generated from our operations to fund network
expansion and modernization, repay external financing, pay dividends,
purchase Verizon common stock for treasury and invest in new busi-
nesses. Additional external financing is obtained when necessary. While
our current liabilities typically exceed current assets, our sources of funds,
primarily from operations and, to the extent necessary, from readily avail-
able external financing arrangements, are sufficient to meet ongoing
operating and investing requirements. We expect that capital spending
requirements will continue to be financed primarily through internally
generated funds. Additional debt or equity financing may be needed to
fund additional development activities or to maintain our capital struc-
ture to ensure our financial flexibility.

Although conditions in the credit markets through December 31, 2008
did not have a significant impact on our ability to obtain financing, such
conditions resulted in higher fixed interest rates on borrowings than
those we have paid in recent years. The recent disruption in the global
financial markets has also affected some of the financial institutions with
which we do business. A continuing sustained decline in the stability of
financial institutions could affect our access to financing. We completed
$21.9 billion of new financing in 2008, including the issuance of $9.2 bil-
lion of new notes during the fourth quarter of 2008. As of December 31,
2008, more than two-thirds in aggregate principal amount of our total
debt portfolio consisted of fixed rate indebtedness (including the effect
of all interest rate swap agreements on our debt portfolio). Furthermore,
we have had, and continue to have, access to the commercial paper mar-
kets, although we were required during a brief period of time in the third
quarter of 2008 to pay interest rates on our commercial paper that were
significantly higher than the rates we have paid in recent years. If the
national or global economy or credit market conditions in general were
to deteriorate further, it is possible that such changes could adversely
affect our cash flows through increased interest costs or our ability to
obtain external financing or to refinance our existing indebtedness.

Cash Flows Provided By (Used In) Operating Activities

Our primary source of funds continues to be cash generated from opera-
tions. Net cash provided by operating activities – continuing operations
in 2008 increased $0.3 billion, compared to 2007, primarily due to higher
earnings, partially offset by lower dividends received from Vodafone
Omnitel. The increase in Net cash provided by operating activities – con-
tinuing operations in 2007, compared to 2006, was primarily due to the
distributions from Vodafone Omnitel and CANTV, increased operating
cash flows from Domestic Wireless and lower interest payments on out-
standing debt, partially offset by changes in working capital.

The net changes in cash flow from operating activities – discontinued
operations for the periods presented were primarily due to income taxes
paid in 2007 related to the fourth quarter 2006 disposition of Verizon
Dominicana, as well as the disposal of the discontinued operations in the
fourth quarter of 2006.

Cash Flows Provided By (Used In) Investing Activities

Capital expenditures continue to be our primary use of cash flows from
operations, as they facilitate the introduction of new products and ser-
vices, enhance responsiveness to competitive challenges and increase
the operating efficiency and productivity of our networks. Capital
spending at Domestic Wireless represents our continuing effort to invest
in this high growth business. We invested $6.5 billion in our Domestic
Wireless business in 2008, compared to $6.5 billion and $6.6 billion in
2007 and 2006, respectively. We invested $9.8 billion in our Wireline busi-
ness in 2008, compared to $11.0 billion and $10.3 billion in 2007 and
2006, respectively.

In 2008, we invested $15.9 billion in acquisitions and investments in
businesses and wireless licenses. We invested $9.4 billion to acquire
twenty-five 12 MHz licenses in the A block, seventy-seven 12 MHz
licenses in the B Block and seven 22 MHz (nationwide, except Alaska)
licenses in the C block resulting from participation in the FCC’s Auction
73. On August 7, 2008, Verizon Wireless completed its acquisition of Rural
Cellular for cash consideration of $0.9 billion, net of cash acquired after
an exchange transaction with another carrier to complete the required
divestiture of certain markets. In connection with the Alltel transaction,
Verizon Wireless purchased from third parties approximately $5.0 billion
aggregate principal amount of debt obligations of certain subsidiaries
of Alltel for approximately $4.8 billion plus accrued and unpaid interest.
On January 9, 2009, Verizon Wireless paid approximately $5.9 billion for
the equity of Alltel (see “Recent Developments”). In 2007, we paid $0.4
billion, net of cash received, to acquire a network security business and
$0.2 billion to purchase several wireless properties and licenses. In 2006,
we invested $1.4 billion in acquisitions and investments in businesses,
including $2.8 billion to acquire thirteen 20 MHz licenses in connection
with the FCC Advanced Wireless Services auction, as well as the acquisi-
tion of other wireless properties. This was offset by MCI’s cash balances of
$2.4 billion we acquired at the date of the merger.

Our short-term investments include cash equivalents held in trust
accounts for payment of employee benefits. In 2008, we decreased
our annual trust funding to $0.1 billion, which is included in Short-term
investments in the consolidated balance sheets. In 2007 and 2006, we
invested $1.7 billion and $1.9 billion, respectively, in short-term invest-
ments, primarily to pre-fund active employees’ health and welfare
benefits. Proceeds from the sales of all short-term investments, principally
for the payment of these benefits, were $1.8 billion, $1.9 billion and $2.2
billion in the years 2008, 2007 and 2006, respectively.

Other, net investing activities in 2008 primarily include cash proceeds of
$0.3 billion from the sale of properties and sale of select non-strategic
assets, a cash payment of $0.2 billion in connection with the settlement
of foreign currency forward contracts and $0.1 billion receivable from a
money market fund managed by a third party, which is in the process of
being liquidated and returned to Verizon. Other, net investing activities in
2007 primarily included cash proceeds of $0.8 billion from property sales
and sales of select non-strategic assets, as well as $0.5 billion from the
disposition of our interest in CANTV. Other, net investing activities in 2006
primarily included cash proceeds of $0.3 billion from property sales.

In 2007, investing activities of discontinued operations primarily included
gross proceeds of approximately $1.0 billion in connection with the sale

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

of our investment in TELPRI. In 2006, investing activities of discontinued
operations included net pretax cash proceeds of $2.0 billion in connec-
tion with the sale of Verizon Dominicana.

Cash Flows Provided By (Used In) Financing Activities

During 2008, net cash provided by financing activities was $13.6 billion,
compared with the net cash used in financing activities of $11.7 billion in
2007. Proceeds from borrowings during 2008 were approximately $24.0
billion. Cash flow used in financing activities primarily included net debt
repayments of $4.1 billion, dividend payments of $5.0 billion, and pur-
chases of Verizon common stock for treasury of $1.4 billion.

Our total debt increased by $20.8 billion in 2008. Verizon Communications
issued $11.5 billion of fixed rate debt with varying maturities. Domestic
Wireless issued $10.4 billion of debt for the purchase of Alltel’s debt obli-
gations acquired in the second quarter, the purchase of Rural Cellular and
subsequent repayment of Rural Cellular debt, and to raise cash to finance
a portion of the purchase price of the Alltel acquisition which closed on
January 9, 2009. Partially offsetting the increase in total debt, including
an increase in commercial paper outstanding, was the repayment of $4.1
billion of term debt.

In November 2008, Verizon issued $2.0 billion of 8.75% notes due 2018
and $1.3 billion of 8.95% notes due 2039, which resulted in cash proceeds
of $3.2 billion net of discount and issuance costs. In April 2008, Verizon
issued $1.3 billion of 5.25% notes due 2013, $1.5 billion of 6.10% notes
due 2018, and $1.3 billion of 6.90% notes due 2038, resulting in cash
proceeds of $4.0 billion, net of discounts and issuance costs. In February
2008, Verizon issued $0.8 billion of 4.35% notes due 2013, $1.5 billion of
5.50% notes due 2018, and $1.8 billion of 6.40% notes due 2038, resulting
in cash proceeds of $4.0 billion, net of discounts and issuance costs. In
January 2008, Verizon utilized a $0.2 billion fixed rate vendor financing
facility due 2010.

Verizon Wireless’s financing activities included:

• On December 19, 2008, Verizon Wireless and Verizon Wireless Capital
LLC as the borrowers, entered into a $17.0 billion credit facility (Bridge
Facility) in order to complete the acquisition of Alltel and repay certain
of Alltel’s outstanding debt. On December 31, 2008, the Bridge Facility
was reduced to $12.5 billion. On January 9, 2009, Verizon Wireless bor-
rowed $12.4 billion under the Bridge Facility and the unused commit-
ments under the Bridge Facility were terminated. The Bridge Facility
has a maturity date of January 8, 2010. Interest on borrowings under
the Bridge Facility is calculated based on the London Interbank Offered
Rate (LIBOR) for the applicable period, the level of borrowings on speci-
fied dates and a margin that is determined by reference to our long-
term credit rating issued by Standard and Poor’s Rating Service (S&P). If
the aggregate outstanding principal amount under the Bridge Facility is
greater than $6.0 billion on July 8, 2009 (the 180th day after the closing
date of the Alltel acquisition), we are required to repay $3.0 billion on
that date (less the amount of specified mandatory or optional prepay-
ments that have been made as of that date). The remaining aggregate
outstanding principal amount must be repaid on the maturity date. We
expect to refinance or repay the borrowings under the Bridge Facility
within the next 12 months by utilizing a combination of internally gen-
erated free cash flows, net proceeds from the required disposition of
assets in connection with the Alltel acquisition and new borrowings.

• In December 2008, Verizon Wireless obtained net proceeds of $2.4
billion from the issuance of €0.7 billion of 7.625% notes due 2011, €0.5
billion of 8.750% notes due 2015 and £0.6 billion of 8.875% notes due
2018. Concurrent with the borrowings, Verizon Wireless entered into

cross currency swaps primarily to exchange the proceeds from British
Pound Sterling and Euros into U.S. dollars and fix its future interest
and principal payments in U.S. dollars. As a result of these swaps,
Verizon Wireless exchanged the aggregate principal amounts for cash
proceeds of $2.4 billion, which were used to finance a portion of the
purchase price of the Alltel acquisition on January 9, 2009.

• In November 2008, Verizon Wireless obtained proceeds of $3.5 billion,
net of discounts and issuance costs, from the issuance in a private
placement of $1.3 billion of 7.375% notes due November 2013 and
$2.3 billion of 8.500% notes due November 2018.

• On September 30, 2008, Verizon Wireless and Verizon Wireless Capital
LLC entered into a $4.4 billion Three-Year Term Loan Facility Agreement
(Three-Year Term Facility) with Citibank, N.A., as Administrative Agent,
with a maturity date of September 30, 2011. Verizon Wireless borrowed
$4.4 billion under the Three-Year Term Facility in order to repay a por-
tion of the 364-Day Credit Agreement as described below. Of the $4.4
billion, $0.4 billion must be repaid at the end of the first year, $2.0 bil-
lion at the end of the second year, and $2.0 billion upon final maturity.
Interest on borrowings under the Three-Year Term Facility is calculated
based on the LIBOR rate for the applicable period and a margin that
is determined by reference to the long-term credit rating of Verizon
Wireless issued by S&P and Moody’s Investors Service (if Moody’s sub-
sequently determines to provide a credit rating for the Three-Year Term
Facility). Borrowings under the Three-Year Term Facility currently bear
interest at a variable rate based on LIBOR plus 100 basis points. The
Three-Year Term Facility includes a requirement to maintain a certain
leverage ratio.

• On June 5, 2008, Verizon Wireless entered into a $7.6 billion 364-
Day Credit Agreement with Morgan Stanley Senior Funding Inc. as
Administrative Agent, which included a $4.8 billion term facility and
a $2.8 billion delayed draw facility. On June 10, 2008, Verizon Wireless
borrowed $4.8 billion under the 364-Day Credit Agreement in order
to purchase the Alltel debt obligations acquired in the second quarter
and, during the third quarter, borrowed $2.8 billion under the delayed
draw facility to complete the purchase of Rural Cellular and to repay
Rural Cellular’s debt and pay fees and expenses incurred in connection
therewith. During 2008, $4.4 billion of the 364-Day Credit Agreement
was repaid using proceeds from the Three-Year Term Loan Facility;
the remainder of the borrowings under the 364-Day Credit Agreement
was also repaid during 2008.

• On February 4, 2009, Verizon Wireless and Verizon Wireless Capital LLC
co-issued in a private placement $3.5 billion of 5.55% notes due 2014
and $0.8 billion of 5.25% notes due 2012, resulting in cash proceeds of
$4.2 billion, net of discounts and issuance costs. Verizon Wireless will use
the net proceeds from the sale of these notes to repay a portion of the
borrowings outstanding under the Bridge Facility described above.

As of December 31, 2008, we had current assets of $26.1 billion, including
cash and cash equivalents of $9.8 billion and short-term investments of
$0.5 billion. Our current liabilities of $25.9 billion included debt maturing
within one year of $5.0 billion.

Historically, we fund our operations primarily with cash from operations,
cash on hand, and access to the commercial paper markets. However, if
the economic conditions should worsen or we do not maintain our cash
flows from operations, we could see a negative impact on our liquidity in
2009. We believe we can meet our debt service requirements in the next
twelve months as we expect to continue to generate free cash flow and
maintain access to the commercial paper markets.

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

As of December 31, 2008, we had approximately $5.6 billion of unused
bank lines of credit consisting of a three-year committed facility that
expires in September 2009. We also entered into a vendor provided credit
facility that provided $0.2 billion of financing capacity. We have a shelf
registration available for the issuance of up to $6.8 billion of additional
unsecured debt or equity securities.

In addition to the repayments of the $7.6 billion 364-Day Credit Agreement,
we made other debt repayments of approximately $4.1 billion in 2008,
including $0.2 billion of 5.55% notes issued by Verizon Northwest Inc.,
$0.1 billion of 6.0% notes issued by Verizon South Inc., $0.3 billion of 6.0%
notes issued by Verizon New York, $0.1 billion of 7.0% notes issued by
Verizon California Inc., $0.3 billion of 6.9% notes issued by Verizon North
Inc., $0.3 billion of 5.65% notes issued by Verizon North Inc., and $3.0
billion of other corporate borrowings, which included the repayment
of Rural Cellular’s debt and $1.0 billion of Verizon Communications Inc.
4.0% notes. As a result of the spin-off of our local exchange business and
related activities in Maine, New Hampshire and Vermont, in March 2008,
our net debt was reduced by approximately $1.4 billion.

Our total debt was reduced by $5.2 billion in 2007. We repaid approxi-
mately $1.7 billion of Wireline debt, including the early repayment of
previously guaranteed $0.3 billion 7.0% debentures issued by Verizon
South Inc. and $0.5 billion 7.0% debentures issued by Verizon New
England Inc., as well as approximately $1.6 billion of other borrowings.
Also, we redeemed $1.6 billion principal of our outstanding floating rate
notes, which were called on January 8, 2007, and the $0.5 billion 7.9%
debentures issued by GTE Corporation. Partially offsetting the reduction
in total debt were cash proceeds of $3.4 billion in connection with fixed
and floating rate debt issued during 2007.

Cash of $1.9 billion was used to reduce our debt in 2006. We repaid $6.8
billion of Wireline debt, including premiums associated with the retire-
ment of $5.7 billion of aggregate principal amount of long-term debt
assumed in connection with the MCI merger. The Wireline repayments
also included the early retirement/prepayment of $0.7 billion of long-
term debt and $0.2 billion of other long-term debt at maturity. We repaid
approximately $2.5 billion of Domestic Wireless 5.375% fixed rate notes
that matured on December 15, 2006. Also, we redeemed the $1.4 bil-
lion accreted principal of our remaining zero-coupon convertible notes
and retired $0.5 billion of other corporate long-term debt at maturity.
These repayments were partially offset by our issuance of long-term debt
resulting in cash proceeds of approximately $4.0 billion, net of discounts,
issuance costs and the receipt of cash proceeds related to hedges on the
interest rate of an anticipated financing. In connection with the spin-off
of our domestic print and Internet yellow pages directories business, we
received net cash proceeds of approximately $2.0 billion and retired debt
in the aggregate principal amount of approximately $7.1 billion.

Our ratio of debt to debt combined with shareowners’ equity was 55.5%
at December 31, 2008 compared to 38.1% at December 31, 2007.

The amount of cash that we need to service our debt substantially
increased with the acquisition of Alltel. Our ability to make payments on
our debt will depend largely upon our cash balances and future operating
performance. While we anticipate the challenging credit environment to
continue in 2009, we do not expect this to have a material impact on our
ability to obtain financing due to our investment grade ratings which we
expect to maintain. The debt securities of Verizon Communications and
its subsidiaries continue to be accorded high ratings by the three primary
rating agencies.

S&P assigns an ‘A’ Corporate Credit Rating and an ‘A-1’ short-term debt
rating to Verizon Communications. In early June 2008 S&P revised
its outlook on Verizon’s ratings to negative from stable following the
announcement of the agreement to acquire Alltel. At the same time, S&P
affirmed all Verizon’s ratings, including its ‘A’ Corporate Credit Rating, ‘A-1’
short-term rating and the ‘A’ Corporate Credit Rating on Cellco Partnership
(d/b/a Verizon Wireless). In November 2008 S&P affirmed the ‘A’ Corporate
Credit Rating with a negative outlook on Cellco Partnership and Verizon
Communications.

Moody’s Investors Service (Moody’s) assigns an ‘A3’ long-term debt
rating and a ‘P-2’ short-term debt rating to Verizon Communications. In
June 2008 Moody’s placed Verizon on “Review for Possible Downgrade”
following the announcement of the agreement to acquire Alltel. In
October 2008 Moody’s concluded its review and revised the outlook on
Verizon Communication’s ratings from stable to negative. The ‘P-2’ short-
term rating was affirmed. In November 2008 Moody’s initiated a Cellco
Partnership (d/b/a Verizon Wireless) long-term debt rating of ‘A2’ with a
negative outlook.

Fitch Ratings (Fitch) assigns an ‘A’ long-term Issuer Default Rating and an
‘F1’ short-term rating with stable outlook to Verizon Communications.
In June 2008 Fitch placed Verizon Communications on “Rating Watch
Negative” following the announcement of the Alltel acquisition. In
November 2008 Fitch downgraded the long-term debt rating of Verizon
to ‘A’ from ‘A+’ with a stable outlook, affirmed the ‘F1’ short-term rating
and removed Verizon’s ratings from “Rating Watch Negative”. In that same
action, Fitch initiated a Cellco Partnership (d/b/a Verizon Wireless) rating
at ‘A’ with a stable outlook.

While we do not anticipate a ratings downgrade, the three primary rating
agencies have identified factors which they believe could result in a rat-
ings downgrade for Verizon Communications and/or Cellco Partnership in
the future including sustained leverage levels at Verizon Communications
and/or Cellco Partnership resulting from: (i) diminished wireless oper-
ating performance as a result of a weakening economy and competitive
pressures; (ii) failure to achieve significant synergies in the Alltel integra-
tion; (iii) accelerated wireline losses; or (iv) a material acquisition or sale
of operations that causes a material deterioration in its credit metrics. A
ratings downgrade would increase the cost of refinancing existing debt
and might constrain Verizon Communications’ access to certain short-
term debt markets.

Both the Verizon Wireless Three-Year Term Credit Facility and $12.5 billion
Bridge Facility contain covenants including a Leverage Ratio of 3.25:1 as
defined in the agreement. Each also contains events of default that are
customary for companies maintaining an investment grade credit rating.
As of December 31, 2008, we and our consolidated subsidiaries were in
compliance with all of our debt covenants.

Common stock has been used from time to time to satisfy some of the
funding requirements of employee and shareowner plans. On February 7,
2008, the Board of Directors replaced the current share buy back program
with a new program for the repurchase of up to 100 million common
shares terminating no later than the close of business on February 28,
2011. The Board also determined that no additional shares were to be
purchased under the prior program. We repurchased $1.4 billion, $2.8 bil-
lion and $1.7 billion of our common stock during 2008, 2007 and 2006,
respectively.

As in prior periods, dividend payments were a significant use of cash flows
from operations in 2008. We determine the appropriateness of the level
of our dividend payments on a periodic basis by considering such fac-

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

tors as long-term growth opportunities, internal cash requirements and
the expectations of our shareowners. During the third quarter of 2008,
Verizon’s Board of Directors increased the Company’s quarterly dividend
payments 7.0% to $.460 per share from $.430 per share in 2007, with a
goal of moving to an annual dividend increase model. In the third quarter
of 2007, we increased our dividend payments 6.2% to $.430 per share
from $.405 per share in the first two quarters of 2007.

Increase (Decrease) In Cash and Cash Equivalents

Our Cash and cash equivalents at December 31, 2008 totaled $9.8 bil-
lion, an $8.6 billion increase compared to Cash and cash equivalents at
December 31, 2007. Our Cash and cash equivalents at December 31,
2007 totaled $1.2 billion, a $2.1 billion decrease compared to Cash and
cash equivalents at December 31, 2006.

Employee Benefit Plan Funded Status and Contributions

We operate numerous qualified and nonqualified pension plans and other
postretirement benefit plans. These plans primarily relate to our domestic
business units. We contributed $332 million, $612 million and $451 mil-
lion in 2008, 2007 and 2006, respectively, to our qualified pension plans.
We also contributed $155 million, $125 million and $117 million to our
nonqualified pension plans in 2008, 2007 and 2006, respectively.

Based on the funded status of the plans at December 31, 2008, we antici-
pate making qualified pension trust contributions of $300 million in 2009.
Our estimate of required qualified pension trust contributions for 2010 is
approximately $800 million. The estimated contribution in 2010 is based
on a range of $600 million to $900 million which depends primarily upon
asset returns and interest rates in 2009. Nonqualified pension contribu-
tions are estimated to be approximately $120 million for 2009 and $130
million for 2010, respectively.

Off Balance Sheet Arrangements and Contractual Obligations

Contributions to our other postretirement benefit plans generally relate
to payments for benefits on an as-incurred basis since the other postre-
tirement benefit plans do not have funding requirements similar to the
pension plans. We contributed $1,227 million, $1,048 million and $1,099
million to our other postretirement benefit plans in 2008, 2007 and 2006,
respectively. Contributions to our other postretirement benefit plans are
estimated to be approximately $1,770 million in 2009 and $1,890 million
in 2010.

Refer to Note 1 in the consolidated financial statements for a discussion
of the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R), which was effective December 31, 2006.

Leasing Arrangements

We are the lessor in leveraged and direct financing lease agreements for
commercial aircraft and power generating facilities, which comprise the
majority of the portfolio along with telecommunications equipment, real
estate property, and other equipment. These leases have remaining terms
up to 42 years as of December 31, 2008. Minimum lease payments receiv-
able represent unpaid rentals, less principal and interest on third-party
nonrecourse debt relating to leveraged lease transactions. Since we have
no general liability for this debt, which holds a senior security interest
in the leased equipment and rentals, the related principal and interest
have been offset against the minimum lease payments receivable in
accordance with GAAP. All recourse debt is reflected in our consolidated
balance sheets.

Contractual Obligations and Commercial Commitments
The following table provides a summary of our contractual obligations and commercial commitments at December 31, 2008. Additional detail about
these items is included in the notes to the consolidated financial statements.

Contractual Obligations

Long-term debt(1)
Capital lease obligations (see Note 9)
Total long-term debt, including current maturities
Interest on long-term debt(1)
Operating leases (see Note 9)
Purchase obligations (see Note 20)
Income tax audit settlements(2)
Other long-term liabilities(3)
Total contractual obligations

Payments Due By Period

(dollars in millions)

Total

$ 50,075
390
50,465
36,426
7,302
737
97
4,950
$ 99,977

Less than
1 year

3,443
63
3,506
3,080
1,620
435
97
2,160
$ 10,898

1-3 years

3-5 years

$ 10,533
132
10,665
5,786
2,378
237
–
2,790
$ 21,856

9,854
90
9,944
4,430
1,309
55
–
–
$ 15,738

More than
5 years

26,245
105
26,350
23,130
1,995
10
–
–
51,485

(1) Long-term debt includes a $4,440 million Three-Year Term Facility Agreement which currently bears interest based on LIBOR plus 100 basis points (see Note 10).
(2) Income tax audit settlements includes gross unrecognized tax benefits of $40 million as determined under Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48) and related gross interest of $57 million. We are not able to make a reliable estimate of when the balance of $2,582 million of unrecognized tax benefits
and related interest and penalties will be settled with the respective taxing authorities until issues or examinations are further developed (see Note 16).

(3) Other long-term liabilities include estimated qualified pension plan contributions of $300 million in 2009 and $800 million in 2010. The estimated contribution in 2010 is based on a range of

$600 million to $900 million which depends primarily upon asset returns and interest rates in 2009 (see Note 15).

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

Guarantees

In connection with the execution of agreements for the sale of businesses
and investments, Verizon ordinarily provides representations and warran-
ties to the purchasers pertaining to a variety of nonfinancial matters, such
as ownership of the securities being sold, as well as financial losses.

As of December 31, 2008, letters of credit totaling approximately $200
million were executed in the normal course of business, which support
several financing arrangements and payment obligations to third parties.

market risk

We are exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations, changes in equity investment and commodity
prices and changes in corporate tax rates. We employ risk management
strategies which may include the use of a variety of derivatives, including
cross currency swaps, foreign currency forwards and collars, equity
options, interest rate and commodity swap agreements and interest rate
locks. We do not hold derivatives for trading purposes.

It is our general policy to enter into interest rate, foreign currency and
other derivative transactions only to the extent necessary to achieve our
desired objectives in limiting our exposure to the various market risks. Our
objectives include maintaining a mix of fixed and variable rate debt to
lower borrowing costs within reasonable risk parameters and to protect
against earnings and cash flow volatility resulting from changes in market
conditions. We do not hedge our market risk exposure in a manner that
would completely eliminate the effect of changes in interest rates and
foreign exchange rates on our earnings. We do not expect that our net
income, liquidity and cash flows will be materially affected by these risk
management strategies.

Interest Rate Risk

The table that follows summarizes the fair values of our long-term debt
and interest rate and cross currency swap derivatives as of December 31,
2008 and 2007. The table also provides a sensitivity analysis of the esti-
mated fair values of these financial instruments assuming 100-basis-point
upward and downward shifts in the yield curve. Our sensitivity analysis
does not include the fair values of our commercial paper and bank loans,
if any, because they are not significantly affected by changes in market
interest rates.

At December 31, 2008

Fair Value

Fair Value
assuming
+100 basis
point shift

(dollars in millions)
Fair Value
assuming
–100 basis
point shift

Long-term debt and related
derivatives

At December 31, 2007

Long-term debt and related
derivatives

51,258

48,465

54,444

31,930

30,154

33,957

Alltel Interest Rate Swaps
In connection with the Alltel acquisition (see “Recent Developments”),
Verizon Wireless acquired seven interest rate swap agreements with a
notional value of $9.5 billion that pay fixed and receive variable rates
based on three-month and one-month LIBOR with maturities ranging
from 2009 to 2013. Until they are terminated, the swap agreements are
guaranteed by Verizon Wireless. Upon closing of the acquisition, these
swap agreements will be recorded at fair value as of the closing date as
part of the purchase price allocation and subsequent changes in the fair
value will be recorded in earnings. Based on recent trends in the credit
markets, changes in interest rates may have a significant impact on our
earnings as long as the contracts are outstanding. We estimate that a
10-basis point change in rates can result in an approximately $30 mil-
lion impact on pretax earnings. We anticipate that these contracts will be
settled during the first half of 2009.

Foreign Currency Translation

The functional currency of our foreign operations is generally the local cur-
rency. For these foreign entities, we translate income statement amounts
at average exchange rates for the period, and we translate assets and
liabilities at end-of-period exchange rates. We record these translation
adjustments in Accumulated other comprehensive loss, a separate com-
ponent of Shareowners’ Investment, in our consolidated balance sheets.
We report exchange gains and losses on intercompany foreign currency
transactions of a long-term nature in Accumulated other comprehen-
sive loss. Other exchange gains and losses are reported in income. At
December 31, 2008, our primary translation exposure was to the British
Pound Sterling, the Euro and the Australian Dollar.

During 2008, we entered into cross currency swaps designated as cash
flow hedges to exchange the net proceeds from the December 18, 2008
Verizon Wireless and Verizon Wireless Capital LLC offering from British
Pound Sterling and Euros into U.S. dollars, to fix our future interest and
principal payments in U.S. dollars as well as mitigate the impact of for-
eign currency transaction gains or losses. We record these contracts at
fair value and any gains or losses on these contracts will, over time, offset
the gains or losses on the underlying debt obligations.

During 2007, we entered into foreign currency forward contracts to
hedge a portion of our net investment in Vodafone Omnitel. Changes
in fair value of these contracts due to Euro exchange rate fluctuations
are recognized in Accumulated other comprehensive loss and partially
offset the impact of foreign currency changes on the value of our net
investment. During 2008, our positions in these foreign currency forward
contracts were settled. As of December 31, 2008, Accumulated other
comprehensive loss includes unrecognized losses of approximately $166
million ($108 million after-tax) related to these hedge contracts, which
along with the unrealized foreign currency translation balance on the
investment hedged, remain in Accumulated other comprehensive loss
until the investment is sold.

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

CritiCal aCCOunting estimates and reCent
aCCOunting prOnOunCements

Critical Accounting Estimates

A summary of the critical accounting estimates used in preparing our
financial statements is as follows:

• Goodwill and Other intangible assets, net are a significant compo-
nent of our consolidated assets. At December 31, 2008, goodwill at
Wireline and Domestic Wireless was $4,738 million and $1,297 million,
respectively. As required by SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), goodwill is periodically evaluated for impair-
ment. The evaluation of goodwill for impairment is primarily based
on a discounted cash flow model that includes estimates of future
cash flows. There is inherent subjectivity involved in estimating future
cash flows, which can have a material impact on the amount of any
potential impairment. Wireless licenses of $61,974 million represent
the largest component of our intangible assets. Our wireless licenses
are indefinite-lived intangible assets, and as required by SFAS No. 142,
are not amortized but are periodically evaluated for impairment. Any
impairment loss would be determined by comparing the aggregated
fair value of the wireless licenses with the aggregated carrying value.
The direct value approach is used to determine fair value by estimating
future cash flows.

• We maintain benefit plans for most of our employees, including pen-
sion and other postretirement benefit plans. At December 31, 2008,
in the aggregate, pension plan benefit obligations exceeded the fair
value of pension plan assets which will result in higher future pension
plan expense. Other postretirement benefit plans have larger benefit
obligations than plan assets, resulting in expense. Significant benefit
plan assumptions, including the discount rate used, the long-term rate
of return on plan assets and health care trend rates are periodically
updated and impact the amount of benefit plan income, expense,
assets and obligations. A sensitivity analysis of the impact of changes
in these assumptions on the benefit obligations and expense (income)
recorded as of December 31, 2008 and for the year then ended per-
taining to Verizon’s pension and postretirement benefit plans is pro-
vided in the table below.

Percentage
point
change

Benefit obligation
increase
(decrease) at
December 31, 2008

(dollars in millions)
Expense increase
(decrease) for the
year ended
December 31, 2008

Pension plans
discount rate*

Long-term rate of return
on pension plan assets

Postretirement plans
discount rate*

Long-term rate of return
on postretirement
plan assets

Health care trend rates

+ 0.50
- 0.50

+ 1.00
- 1.00

+ 0.50
- 0.50

+ 1.00
- 1.00

$ (1,281)
1,399

–
–

(1,401)
1,547

–
–

2,891
(2,399)

(29)
41

(375)
375

(99)
110

(39)
39

460
(318)

*The discount rate assumptions at December 31, 2008 were determined from hypothetical
double A yield curves represented by a series of annualized individual discount rates devel-
oped using actual bonds available in the market. From the yield curves a single equivalent
discount rate is determined at which the future stream of benefit payments could be settled.
Each bond issue included in developing the yield curves is required to have a rating of double
A or better by a nationally recognized rating agency and be non-callable with at least $150
million par outstanding.

• Our current and deferred income taxes, and associated valuation
allowances, are impacted by events and transactions arising in the
normal course of business as well as in connection with the adop-
tion of new accounting standards, acquisitions of businesses and
non-recurring items. Assessment of the appropriate amount and clas-
sification of income taxes is dependent on several factors, including
estimates of the timing and realization of deferred income tax assets
and the timing of income tax payments. We account for tax benefits
taken or expected to be taken in our tax returns in accordance with FIN
48, which requires the use of a two-step approach for recognizing and
measuring tax benefits taken or expected to be taken in a tax return
and disclosures regarding uncertainties in income tax positions. Actual
collections and payments may materially differ from these estimates as
a result of changes in tax laws as well as unanticipated future transac-
tions impacting related income tax balances.

• Verizon’s plant, property and equipment balance represents a sig-
nificant component of our consolidated assets. Depreciation expense
on Verizon’s local telephone operations is principally based on the
composite group remaining life method and straight-line composite
rates, which provides for the recognition of the cost of the remaining
net investment in telephone plant, less anticipated net salvage value,
over the remaining asset lives. We depreciate other plant, property
and equipment generally on a straight-line basis over the estimated
useful life of the assets. Changes in the remaining useful lives of assets
as a result of technological change or other changes in circumstances,
including competitive factors in the markets where we operate, can
have a significant impact on asset balances and depreciation expense.

Recent Accounting Pronouncements

In December 2008, the FASB issued FSP FAS No. 132 (R)-1, Employers’
Disclosures about Postretirement Benefit Plan Assets (FSP 132 (R)-1). FSP
132 (R)-1 requires Verizon, as plan sponsor, to provide improved disclo-
sures about plan assets, including categories of plan assets, nature and
amount of concentrations of risk and disclosure about fair value mea-
surements of plan assets, similar to those required by SFAS No. 157, Fair
Value Measurements. FAS 132 (R)-1 is effective for fiscal years ending after
December 15, 2009. We do not expect that the adoption of FSP 132 (R)-1
will have a significant impact on our consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 removes the require-
ment under SFAS No. 142, Goodwill and Other Intangible Assets to consider
whether an intangible asset can be renewed without substantial cost or
material modifications to the existing terms and conditions, and replaces
it with a requirement that an entity consider its own historical experience
in renewing similar arrangements, or a consideration of market partici-
pant assumptions in the absence of historical experience. FSP 142-3 also
requires entities to disclose information that enables users of financial
statements to assess the extent to which the expected future cash flows
associated with the asset are affected by the entity’s intent and/or ability
to renew or extend the arrangement. We were required to adopt FSP
142-3 effective January 1, 2009 on a prospective basis. The adoption of
FSP 142-3 on January 1, 2009 did not have an impact on our consolidated
financial statements.

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

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133, (SFAS No. 161). This statement requires additional disclosures for
derivative instruments and hedging activities that include how and why
an entity uses derivatives, how these instruments and the related hedged
items are accounted for under SFAS No. 133 and related interpretations,
and how derivative instruments and related hedged items affect the
entity’s financial position, results of operations and cash flows. SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The adoption of SFAS No.
161 on January 1, 2009 did not have an impact on our consolidated
financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations,
(SFAS No. 141(R)), to replace SFAS No. 141, Business Combinations. SFAS No.
141(R) requires the use of the acquisition method of accounting, defines
the acquirer, establishes the acquisition date and broadens the scope
to all transactions and other events in which one entity obtains control
over one or more other businesses. This statement is effective for busi-
ness combinations or transactions entered into for fiscal years beginning
on or after December 15, 2008. Upon the adoption of SFAS No. 141(R)
we will be required to expense certain transaction costs and related fees
associated with business combinations that were previously capitalized.
This will result in additional expenses being recognized relating to the
2009 closing of the Alltel transaction. In addition, with the adoption of
SFAS No. 141(R) changes to valuation allowances for deferred income tax
assets and adjustments to unrecognized tax benefits generally will be
recognized as adjustments to income tax expense rather than goodwill.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51, (SFAS
No. 160). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the retained interest
and gain or loss when a subsidiary is deconsolidated. This statement is
effective for financial statements issued for fiscal years beginning on or
after December 15, 2008 which will be applied prospectively, except
for the presentation and disclosure requirements which will be applied
retrospectively for all periods presented. Upon the initial adoption of
this statement we will change the classification and presentation of
Noncontrolling Interest in our financial statements, which we currently
refer to as minority interest. Additionally, we conduct certain business
operations in certain markets through non-wholly owned entities. Any
changes in these ownership interests may be required to be measured
at fair value and recognized as a gain or loss, if any, in earnings. SFAS No.
160 will also result in a lower effective income tax rate for the Company
due to the inclusion of income attributable to noncontrolling interest in
income before the provision for income taxes. However, the income tax
provision will not be adjusted as a result of SFAS No. 160.

Refer to Note 1 in the consolidated financial statements for a discussion
of the accounting pronouncements adopted during 2008.

Other faCtOrs that may affeC t future results

Recent Developments

Alltel Corporation
On June 5, 2008, Verizon Wireless entered into an agreement and plan
of merger with Alltel and its controlling stockholder, Atlantis Holdings
LLC, an affiliate of private investment firms TPG Capital and GS Capital
Partners, to acquire 100% of the equity of Alltel in an all-cash merger.
After satisfying all closing conditions, including receiving the required
regulatory approvals, Verizon Wireless closed the acquisition on January
9, 2009 and paid approximately $5.9 billion for the equity of Alltel.
Immediately prior to the closing, the Alltel debt associated with the
transaction, net of cash, was approximately $22.2 billion. Alltel provides
wireless voice and advanced data services to residential and business
customers in 34 states.

In connection with this transaction, on June 10, 2008, Verizon Wireless
purchased from third parties approximately $5.0 billion aggregate prin-
cipal amount of debt obligations of certain subsidiaries of Alltel for
approximately $4.8 billion plus accrued and unpaid interest. These debt
obligations are included in the amount of Alltel net debt, referenced
above, immediately prior to the closing referenced above.

Rural Cellular Corporation
On August 7, 2008, Verizon Wireless acquired 100% of the outstanding
common stock and redeemed all of the preferred stock of Rural Cellular in
a cash transaction. Rural Cellular was a wireless communications service
provider operating under the trade name of “Unicel,” focusing primarily
on rural markets in the United States. Verizon Wireless believes that the
acquisition will further enhance its network coverage in markets adjacent
to its existing service areas and will enable Verizon Wireless to achieve
operational benefits through realizing synergies in reduced roaming and
other operating expenses. Under the terms of the acquisition agreement,
Verizon Wireless paid Rural Cellular’s common shareholders $728 million
in cash ($45 per share). Additionally, all classes of Rural Cellular’s preferred
shareholders received cash in the aggregate amount of $571 million.

As part of its approval process for the Rural Cellular acquisition, the FCC
and Department of Justice (DOJ) required the divestiture of six oper-
ating markets, including all of Rural Cellular’s operations in Vermont
and New York as well as its operations in Okanogan and Ferry, WA (the
Divestiture Markets). On December 22, 2008, Verizon Wireless com-
pleted an exchange transaction with AT&T. Pursuant to the terms of the
exchange agreement, as amended, AT&T received the assets relating to
the Divestiture Markets and a cellular license for part of the Madison, KY
market. In exchange, Verizon Wireless received cellular operating markets
in Madison and Mason, KY and 10 MHz PCS licenses in Las Vegas, NV,
Buffalo, NY, Erie, PA, Sunbury-Shamokin, PA and Youngstown, OH. Verizon
Wireless also received AT&T’s minority interests in three entities in which
Verizon Wireless holds interests plus a cash payment. The preliminary
aggregate value of properties exchanged was approximately $500 mil-
lion. In addition, subject to FCC approval, Verizon Wireless will acquire
PCS licenses in Franklin, NY (except Franklin county) and the entire state
of Vermont from AT&T in a separate cash transaction that is expected to
close in the first half of 2009.

Telephone Access Lines Spin-off
On January 16, 2007, we announced a definitive agreement with FairPoint
Communications, Inc. (FairPoint) providing for Verizon to establish a sepa-
rate entity for its local exchange and related business assets in Maine,
New Hampshire and Vermont, spin-off that new entity into a newly
formed company, known as Northern New England Spinco Inc. (Spinco),
to Verizon’s shareowners, and immediately merge it with and into

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

FairPoint. On March 31, 2008, we completed the spin-off of the shares of
Spinco to Verizon shareowners and the merger of Spinco with FairPoint,
resulting in Verizon shareowners collectively owning approximately 60
percent of FairPoint common stock. FairPoint issued approximately 53.8
million shares of FairPoint common stock to Verizon shareowners in
the merger, and Verizon shareowners received one share of FairPoint
common stock for every 53.0245 shares of Verizon common stock they
owned as of March 7, 2008. FairPoint paid cash in lieu of any fraction of
a share of FairPoint common stock. As a result of the spin-off, our net
debt was reduced by approximately $1.4 billion. Both the spin-off and
merger qualify as tax-free transactions, except for the cash payments for
fractional shares which are generally taxable.

Environmental Matters
During 2003, under a government-approved plan, remediation com-
menced at the site of a former Sylvania facility in Hicksville, New York
that processed nuclear fuel rods in the 1950s and 1960s. Remediation
beyond original expectations proved to be necessary and a reassessment
of the anticipated remediation costs was conducted. A reassessment of
costs related to remediation efforts at several other former facilities was
also undertaken. In September 2005, the Army Corps of Engineers (ACE)
accepted the Hicksville site into the Formerly Utilized Sites Remedial
Action Program. This may result in the ACE performing some or all of the
remediation effort for the Hicksville site with a corresponding decrease
in costs to Verizon. To the extent that the ACE assumes responsibility for
remedial work at the Hicksville site, an adjustment to a reserve previously
established for the remediation may be made. Adjustments to the reserve
may also be necessary based upon actual conditions discovered during
the remediation at any of the sites requiring remediation.

New York Recovery Funding
In August 2002, President Bush signed the Supplemental Appropriations
bill that included $5.5 billion in New York recovery funding. Of that
amount, approximately $750 million was allocated to cover utility res-
toration and infrastructure rebuilding as a result of the September 11th
terrorist attacks on lower Manhattan. These funds will be distributed
through the Lower Manhattan Development Corporation and Empire
State Development Corporation (ESDC) following an application and
audit process. As of September 2004, we had applied for reimbursement
of approximately $266 million under Category One and in 2004 and 2005
we applied for reimbursement of an additional $139 million of Category
Two losses. Category One funding relates to Emergency and Temporary
Service Response while Category Two funding is for permanent restora-
tion and infrastructure improvement. According to the plan, permanent
restoration is reimbursed up to 75% of the loss. On November 3, 2005, we
received the results of preliminary audit findings disallowing all but $49.9
million of our $266 million of Category One application. On December 8,
2005, we provided a detailed rebuttal to the preliminary audit findings.
We received a copy of the final audit report for Verizon’s Category One
applications largely confirming the preliminary audit findings and, on
January 4, 2007, we filed an appeal. That appeal is pending. On November
9, 2007, Verizon submitted an additional Category Two application for
approximately $16 million. ESDC has approved approximately $17 million
in advances to Verizon on its Category Two applications. Based on the
progress of these audits, Verizon recorded a portion of these advances to
income in June 2008. The Category Two audits remain pending.

Regulatory and Competitive Trends

Competition and Regulation
Technological, regulatory and market changes have provided Verizon
both new opportunities and challenges. These changes have allowed
Verizon to offer new types of services in an increasingly competitive
market. At the same time, they have allowed other service providers
to broaden the scope of their own competitive offerings. Current and
potential competitors for network services include other telephone
companies, cable companies, wireless service providers, foreign telecom-
munications providers, satellite providers, electric utilities, Internet service
providers, providers of VoIP services, and other companies that offer net-
work services using a variety of technologies. Many of these companies
have a strong market presence, brand recognition and existing customer
relationships, all of which contribute to intensifying competition and may
affect our future revenue growth. Many of our competitors also remain
subject to fewer regulatory constraints than Verizon.

We are unable to predict definitively the impact that the ongoing
changes in the telecommunications industry will ultimately have on our
business, results of operations or financial condition. The financial impact
will depend on several factors, including the timing, extent and success
of competition in our markets, the timing and outcome of various regula-
tory proceedings and any appeals, and the timing, extent and success of
our pursuit of new opportunities.

FCC Regulation
The FCC has jurisdiction over our interstate telecommunications ser-
vices and other matters for which the FCC has jurisdiction under the
Communications Act of 1934, as amended (Communications Act). The
Communications Act generally provides that we may not charge unjust
or unreasonable rates, or engage in unreasonable discrimination when
we are providing services as a common carrier, and regulates some of the
rates, terms and conditions under which we provide certain services. The
FCC also has adopted regulations governing various aspects of our busi-
ness including: (i) use and disclosure of customer proprietary network
information; (ii) telemarketing; (iii) assignment of telephone numbers to
customers; (iv) provision to law enforcement agencies of the capability to
obtain call identifying information and call content information from calls
pursuant to lawful process; (v) accessibility of services and equipment to
individuals with disabilities if readily achievable; (vi) interconnection with
the networks of other carriers; and (vii) customers’ ability to keep (or “port”)
their telephone numbers when switching to another carrier. In addition,
we pay various fees to support other FCC programs, such as the universal
service program discussed below. Changes to these mandates, or the
adoption of additional mandates, could require us to make changes to
our operations or otherwise increase our costs of compliance.

Broadband
The FCC has adopted a series of orders that recognize the competitive
nature of the broadband market and impose lesser regulatory require-
ments on broadband services and facilities than apply to narrowband
or traditional telephone services. With respect to facilities, the FCC has
determined that certain unbundling requirements that apply to narrow-
band facilities do not apply to broadband facilities such as fiber to the
premise loops and packet switches. With respect to services, the FCC has
concluded that broadband Internet access services offered by telephone
companies and their affiliates qualify as largely deregulated information
services. The same order also concluded that telephone companies may
offer the underlying broadband transmission services that are used as an
input to Internet access services through private carriage arrangements
on negotiated commercial terms. The order was upheld on appeal. In addi-
tion, a Verizon petition asking the FCC to forbear from applying common

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

carrier regulation to certain broadband services sold primarily to larger
business customers when those services are not used for Internet access
was deemed granted by operation of law when the FCC did not deny the
petition by the statutory deadline. The relief has been upheld on appeal,
but is subject to a continuing challenge before the FCC.

Video
The FCC has a body of rules that apply to cable operators under Title VI
of the Communications Act of 1934, and these rules also generally apply
to telephone companies that provide cable services over their networks.
In addition, companies that provide cable service over a cable system
generally must obtain a local cable franchise. The FCC has interpreted the
Cable Act to limit the franchise fees and other requirements that local
franchise authorities may impose on cable operators and has found that
some prior practices of franchise authorities constituted an unreasonable
refusal to award a competitive local franchise under the requirements of
federal law. This order has been upheld on appeal.

Interstate Access Charges and Intercarrier Compensation
The current framework for interstate access rates was established in the
Coalition for Affordable Local and Long Distance Services (CALLS) plan
which the FCC adopted on May 31, 2000. The CALLS plan has three main
components. First, it establishes portable interstate access universal
service support of $650 million for the industry that replaces implicit sup-
port previously embedded in interstate access charges. Second, the plan
simplifies the patchwork of common line charges into one subscriber line
charge (SLC) and provides for de-averaging of the SLC by zones and class
of customers. Third, the plan set into place a mechanism to transition to
a set target of $.0055 per minute for switched access services. Once that
target rate is reached, local exchange carriers are no longer required to
make further annual price cap reductions to their switched access prices.
As a result of tariff adjustments which became effective in July 2003, vir-
tually all of our switched access lines reached the $.0055 benchmark.

The FCC currently is conducting a broad rulemaking proceeding to con-
sider new rules governing intercarrier compensation including, but not
limited to, access charges, compensation for Internet traffic and recip-
rocal compensation for local traffic. The FCC has sought comments about
intercarrier compensation in general and requested input on a number
of specific reform proposals. On November 5, 2008, the FCC issued
an order on remand relating to intercarrier compensation for dial-up
Internet-bound traffic. In April 2001, the FCC had found that this traffic
is not subject to reciprocal compensation under Section 251(b)(5) of the
Telecommunications Act of 1996. Instead, in that order, the FCC estab-
lished federal rates per minute for this traffic that declined from $.0015 to
$.0007 over a three-year period, and required incumbent local exchange
carriers to offer to both bill and pay reciprocal compensation for local
traffic at the same rate as they are required to pay on Internet-bound
traffic. The U.S. Court of Appeals for the D.C. Circuit rejected part of the
FCC’s rationale, but declined to vacate the order while it is on remand.
On July 8, 2008, the D.C. Circuit issued an order requiring the FCC to issue
its order on remand by November 5, 2008. The FCC’s November 2008
order provided a new rationale to support the compensation regime
the FCC had announced in April 2001. The November 2008 order is now
on appeal to the U.S. Court of Appeals for the D.C. Circuit. Disputes also
remain pending in a number of forums relating to the appropriate com-
pensation for Internet-bound traffic during previous periods under the
terms of our interconnection agreements with other carriers.

The FCC is also conducting a rulemaking proceeding to address the
regulation of services that use Internet protocol. The issues raised in the
rulemaking as well as in several petitions currently pending before the
FCC include whether, and under what circumstances, access charges
should apply to voice or other Internet protocol services and the scope
of federal and state commission authority over these services. The FCC
previously has held that one provider’s peer-to-peer Internet protocol
service that does not use the public switched network is an interstate
information service and is not subject to access charges, while a service
that utilizes Internet protocol for only one intermediate part of a call’s
transmission is a telecommunications service that is subject to access
charges. The FCC also declared the services offered by one provider of
a voice over Internet protocol service to be jurisdictionally interstate and
stated that its conclusion would apply to other services with similar char-
acteristics. This order was affirmed on appeal.

The FCC also has adopted rules for special access services that provide for
pricing flexibility and ultimately the removal of services from price regu-
lation when prescribed competitive thresholds are met. More than half of
special access revenues are now removed from price regulation. The FCC
currently has a rulemaking proceeding underway to update the public
record concerning its pricing flexibility rules and to determine whether
any changes to those rules are warranted.

Universal Service
The FCC also has a body of rules implementing the universal service
provisions of the Telecommunications Act of 1996, including rules gov-
erning support to rural and non-rural high-cost areas, support for low
income subscribers and support for schools, libraries and rural health
care. The FCC’s current rules for support to high-cost areas served by
larger “non-rural” local telephone companies were previously remanded
by U.S. Court of Appeals for the Tenth Circuit, which had found that the
FCC had not adequately justified these rules. The FCC has initiated a
rulemaking proceeding in response to the court’s remand, but its rules
remain in effect pending the results of the rulemaking. On April 29, 2008,
the FCC adopted a cap on the amount of support competitive carriers
(including all wireless carriers) may receive. That cap is the subject of a
pending appeal. The FCC is considering additional changes to the high-
cost portion of the universal service fund but has not to date taken
industry-wide action. However, in its November 4, 2008 order approving
Verizon Wireless’s acquisition of Alltel, the FCC required Verizon Wireless
to phase out the high-cost support the merged company receives from
the universal service fund by 20 percent during the first year following
completion of the acquisition and by an additional 20 percent for each
of the following three years, after which no support will be provided. In
addition, the FCC is considering other changes to the rules governing
contributions to, and disbursements from, the fund. Any change in the
current rules could result in a change in the contribution that local tele-
phone companies, wireless carriers or others must make and that would
have to be collected from customers, or in the amounts that these pro-
viders receive from the fund.

Unbundling of Network Elements
Under Section 251 of the Telecommunications Act of 1996, incum-
bent local exchange carriers are required to provide competing carriers
with access to components of their network on an unbundled basis,
known as UNEs, where certain statutory standards are satisfied. The
Telecommunications Act of 1996 also adopted a cost-based pricing stan-
dard for these UNEs, which the FCC interpreted as allowing it to impose
a pricing standard known as “total element long run incremental cost”
or “TELRIC.” The FCC’s rules defining the unbundled network elements
that must be made available at TELRIC prices have been overturned
on multiple occasions by the courts. In its most recent order issued in

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

response to these court decisions, the FCC eliminated the requirement to
unbundle mass market local switching on a nationwide basis, and estab-
lished criteria for determining whether high-capacity loops, transport or
dark fiber transport must be unbundled in individual wire centers. The
FCC also eliminated the obligation to provide dark fiber loops and found
that there is no obligation to provide UNEs exclusively for wireless or long
distance service. The decision was upheld on appeal.

As noted above, the FCC has concluded that the requirement under
Section 251 of the Telecommunications Act of 1996 to provide unbun-
dled network elements at TELRIC prices generally does not apply with
respect to broadband facilities, such as fiber to the premises loops, the
packet-switched capabilities of hybrid loops and packet switching. The
FCC also has held that any separate unbundling obligations that may be
imposed by Section 271 of the Telecommunications Act of 1996 do not
apply to these same facilities. Those decisions were upheld on appeal.

Wireless Services
The FCC regulates the licensing, construction, operation, acquisition and
transfer of wireless communications systems, including the systems that
Verizon Wireless operates, pursuant to the Communications Act, other
legislation, and the FCC’s rules. The FCC and Congress continuously con-
sider changes to these laws and rules. Adoption of new laws or rules
may raise the cost of providing service or require modification of Verizon
Wireless’s business plans or operations.

To use the radio frequency spectrum, wireless communications systems
must be licensed by the FCC to operate the wireless network and mobile
devices in assigned spectrum segments. Verizon Wireless holds FCC
licenses to operate in several different radio services, including the cel-
lular radiotelephone service, personal communications service, wireless
communications service, and point-to-point radio service. The technical
and service rules, the specific radio frequencies and amounts of spec-
trum we hold, and the sizes of the geographic areas we are authorized
to operate in, vary for each of these services. However, all of the licenses
Verizon Wireless holds allow it to use spectrum to provide a wide range
of mobile and fixed communications services, including both voice and
data services, and Verizon Wireless operates a seamless network that uti-
lizes those licenses to provide services to customers. Because the FCC
issues licenses for only a fixed time, generally 10 years, Verizon Wireless
must periodically seek renewal of those licenses. Although the FCC has
routinely renewed all of Verizon Wireless’s licenses that have come up for
renewal to date, challenges could be brought against the licenses in the
future. If a wireless license were revoked or not renewed upon expira-
tion, Verizon Wireless would not be permitted to provide services on the
licensed spectrum in the area covered by that license.

The FCC has also imposed specific mandates on carriers that operate
wireless communications systems, which increase Verizon Wireless’s costs.
These mandates include requirements that Verizon Wireless: (i) meet
specific construction and geographic coverage requirements during
the license term; (ii) meet technical operating standards that, among
other things, limit the radio frequency radiation from mobile devices
and antennas; (iii) deploy “Enhanced 911” wireless services that provide
the wireless caller’s number, location and other information to a state or
local public safety agency that handles 911 calls; (iv) provide roaming
services to other wireless service providers; and (v) comply with regula-
tions for the construction of transmitters and towers that, among other
things, restrict siting of towers in environmentally sensitive locations and
in places where the towers would affect a site listed or eligible for listing
on the National Register of Historic Places. Changes to these mandates
could require Verizon Wireless to make changes to operations or increase
its costs of compliance. In its November 4, 2008 order approving Verizon

Wireless’s acquisition of Alltel, the FCC adopted conditions that impose
additional requirements on Verizon Wireless in its provision of Enhanced
911 services and roaming services.

The Communications Act imposes restrictions on foreign ownership of
U.S. wireless systems. The FCC has approved the interest that Vodafone
Group Plc holds, through various of its subsidiaries, in Verizon Wireless.
The FCC may need to approve any increase in Vodafone’s interest or the
acquisition of an ownership interest by other foreign entities. In addition,
as part of the FCC’s approval of Vodafone’s ownership interest, Verizon
Wireless, Verizon and Vodafone entered into an agreement with the
U.S. Department of Defense, Department of Justice and Federal Bureau
of Investigation which imposes national security and law enforce-
ment-related obligations on the ways in which Verizon Wireless stores
information and otherwise conducts its business.

Verizon Wireless anticipates that it will need additional spectrum to meet
future demand. It can meet spectrum needs by purchasing licenses or
leasing spectrum from other licensees, or by acquiring new spectrum
licenses from the FCC. Under the Communications Act, before Verizon
Wireless can acquire a license from another licensee in order to expand
its coverage or its spectrum capacity in a particular area, it must file an
application with the FCC, and the FCC can grant the application only after
a period for public notice and comment. This review process can delay
acquisition of spectrum needed to expand services. The Communications
Act also requires the FCC to award new licenses for most commercial wire-
less services through a competitive bidding process in which spectrum
is awarded to bidders in an auction. Verizon Wireless has participated in
spectrum auctions to acquire licenses for radio spectrum in various bands.
Most recently, it participated in the FCC’s auction of spectrum in the 700
MHz band. This spectrum is currently used for UHF television operations.
By law those operations were to have ceased no later than February 17,
2009. However, a new law has been enacted that extends this date until
June 12, 2009. We do not believe that this extension will have a material
adverse effect on our testing of LTE technology or our planned deploy-
ment of a 4G wireless broadband network using LTE.

On November 26, 2008, the FCC granted Verizon Wireless 109 licenses
in this band for which it was the winning bidder. The FCC also adopted
service rules that will impose costs on licensees that acquire the 700
MHz band spectrum, including minimum coverage mandates by specific
dates during the license terms, and, for approximately one-third of the
spectrum, “open access” requirements, which generally require licensees
of that spectrum to allow customers to use devices and applications of
their choice, subject to certain limits. Seven of the licenses that Verizon
Wireless acquired in the 700 MHz auction, which in the aggregate cover
the United States except for Alaska, are subject to these requirements.
The open access requirements are the subject of a pending appeal in
which Verizon Wireless has intervened. The timing of future auctions may
not match Verizon Wireless’s needs, and the company may not be able
to secure the spectrum in the amounts and/or in the markets it seeks
through any future auction.

The FCC is also conducting several proceedings to explore making
additional spectrum available for licensed and/or unlicensed use. These
proceedings could increase radio interference to Verizon Wireless’s opera-
tions from other spectrum users and could impact the ways in which
it uses spectrum, the capacity of that spectrum to carry traffic, and the
value of that spectrum.

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

Verizon Wireless (as well as AT&T and Sprint-Nextel) is a party to an
Assurance of Voluntary Compliance (AVC) with 33 State Attorneys
General. The AVC, which generally reflected Verizon Wireless’s practices at
the time it was entered into in July 2004, obligates the company to dis-
close certain rates and terms during a sales transaction, to provide maps
depicting coverage, and to comply with various requirements regarding
advertising, billing, and other practices.

At the state and local level, wireless facilities are subject to zoning and
land use regulation. Under the Communications Act, neither state nor
local governments may categorically prohibit the construction of wireless
facilities in any community or take actions, such as indefinite moratoria,
which have the effect of prohibiting service. Nonetheless, securing state
and local government approvals for new tower sites has been and is
likely to continue to be a difficult, lengthy and expensive process. Finally,
state and local governments continue to impose new or higher fees and
taxes on wireless carriers.

State Regulation and Local Approvals
Telephone Operations
State public utility commissions regulate our telephone operations with
respect to certain telecommunications intrastate rates and services and
other matters. Our competitive local exchange carrier and long distance
operations are generally classified as nondominant and lightly regu-
lated the same as other similarly situated carriers. Our incumbent local
exchange operations are generally classified as dominant. These latter
operations predominantly are subject to alternative forms of regulation
(AFORs) in the various states, although they remain subject to rate of
return regulation in a few states. Arizona, Illinois, Nevada, Oregon and
Washington are rate of return regulated with various levels of pricing
flexibility for competitive services. California, Connecticut, Delaware, the
District of Columbia, Florida, Indiana, Maryland, Michigan, Massachusetts,
New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island,
South Carolina, Texas, Virginia, West Virginia and Wisconsin are under
AFORs with various levels of pricing flexibility, detariffing, and service
quality standards. None of the AFORs include earnings regulation. In
Idaho, Verizon has made the election under a statutory amendment into
a deregulatory regime that phases out all price regulation.

Video
Companies that provide cable service over a cable system are typically
subject to state and/or local cable television rules and regulations. As
noted above, cable operators generally must obtain a local cable fran-
chise from each local unit of government prior to providing cable service
in that local area. Some states have recently enacted legislation that
enables cable operators to apply for, and obtain, a single cable franchise
at the state, rather than local, level. To date, Verizon has applied for and
received state-issued franchises in California, Indiana, Florida, New Jersey,
Texas and the unincorporated areas of Delaware. We also have obtained
authorization from the state commission in Rhode Island to provide cable
service in certain areas in that state, have obtained required state com-
mission approvals for our local franchises in New York, and will need to
obtain additional state commission approvals in these states to provide
cable service in additional areas. Virginia law provides us the option of
entering a given franchise area using state standards if local franchise
negotiations are unsuccessful.

Wireless Services
The rapid growth of the wireless industry has led to an increase in efforts
by some state legislatures and state public utility commissions to regu-
late the industry in ways that may impose additional costs on Verizon
Wireless. The Communications Act generally preempts regulation by
state and local governments of the entry of, or the rates charged by, wire-
less carriers. Although a state may petition the FCC to allow it to impose
rate regulation, no state has done so. In addition, the Communications
Act does not prohibit the states from regulating the other “terms and
conditions” of wireless service. While numerous state commissions do
not currently have jurisdiction over wireless services, state legislatures
may decide to grant them such jurisdiction, and those commissions that
already have authority to impose regulations on wireless carriers may
adopt new rules.

State efforts to regulate wireless services have included proposals to
regulate customer billing, termination of service, trial periods for service,
advertising, network outages, the use of handsets while driving, and
reporting requirements for system outages and the availability of broad-
band wireless services. Over the past several years, only a few states have
imposed regulation in one or more of these areas, and in 2006 a federal
appellate court struck down one such state statute, but Verizon Wireless
expects these efforts to continue. Some states also impose their own uni-
versal service support regimes on wireless and other telecommunications
carriers, and other states are considering whether to create such regimes.

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

CautiOnary statement COnCerning
fOrward-lOOking statements

In this annual report on Form 10-K we have made forward-looking state-
ments. These statements are based on our estimates and assumptions
and are subject to risks and uncertainties. Forward-looking statements
include the information concerning our possible or assumed future
results of operations. Forward-looking statements also include those pre-
ceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes”
or similar expressions. For those statements, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.

The following important factors, along with those discussed elsewhere
in this annual report, could affect future results and could cause those
results to differ materially from those expressed in the forward-looking
statements:

• the effects of adverse conditions in the U.S. and international

economies;

• the effects of competition in our markets;
• materially adverse changes in labor matters, including workforce levels
and labor negotiations, and any resulting financial and/or operational
impact, in the markets served by us or by companies in which we have
substantial investments;

• the effects of material changes in available technology;
• any disruption of our suppliers’ provisioning of critical products or

services;

• significant increases in benefit plan costs or lower investment returns

on plan assets;

• the impact of natural or man-made disasters or existing or future litiga-

tion and any resulting financial impact not covered by insurance;

• technology substitution;
• an adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations or adverse conditions in
the credit markets impacting the cost, including interest rates, and/or
availability of financing;

• any changes in the regulatory environments in which we operate,
including any loss of or inability to renew wireless licenses, and the final
results of federal and state regulatory proceedings and judicial review
of those results;

• the timing, scope and financial impact of our deployment of fiber-to-

the-premises broadband technology;

• changes in our accounting assumptions that regulatory agencies,
including the SEC, may require or that result from changes in the
accounting rules or their application, which could result in an impact
on earnings;

• our ability to successfully integrate Alltel Corporation into Verizon
Wireless’s business and achieve anticipated benefits of the acquisition;
and

• the inability to implement our business strategies.

Report of Management on Internal Control Over
Financial Reporting

Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

We, the management of Verizon Communications Inc., are responsible
for establishing and maintaining adequate internal control over financial
reporting of the company. Management has evaluated internal control
over financial reporting of the company using the criteria for effective
internal control established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

Management has assessed the effectiveness of the company’s internal
control over financial reporting as of December 31, 2008. Based on this
assessment, we believe that the internal control over financial reporting
of the company is effective as of December 31, 2008. In connection with
this assessment, there were no material weaknesses in the company’s
internal control over financial reporting identified by management.

The company’s financial statements included in this annual report have
been audited by Ernst & Young LLP, independent registered public
accounting firm. Ernst & Young LLP has also provided an attestation
report on the company’s internal control over financial reporting.

Ivan G. Seidenberg
Chairman and Chief Executive Officer

Doreen A. Toben
Executive Vice President and Chief Financial Officer

Thomas A. Bartlett
Senior Vice President and Controller

To The Board of Directors and Shareowners of Verizon
Communications Inc.:

We have audited Verizon Communications Inc. and subsidiaries’ (Verizon)
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Verizon’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting included
in the accompanying Report of Management on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assur-
ance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external pur-
poses in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those poli-
cies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assur-
ance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and direc-
tors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or dis-
position of the company’s assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evalua-
tion of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, Verizon maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based
on the COSO criteria.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of Verizon as of December 31, 2008 and 2007, and the
related consolidated statements of income, cash flows and changes in
shareowners’ investment for each of the three years in the period ended
December 31, 2008 of Verizon and our report dated February 20, 2009
expressed an unqualified opinion thereon.

Ernst & Young LLP
New York, New York

February 20, 2009

Report of Independent Registered Public Accounting
Firm on Financial Statements

To The Board of Directors and Shareowners of Verizon
Communications Inc.:

We have audited the accompanying consolidated balance sheets of
Verizon Communications Inc. and subsidiaries (Verizon) as of December
31, 2008 and 2007, and the related consolidated statements of income,
cash flows and changes in shareowners’ investment for each of the three
years in the period ended December 31, 2008. These financial statements
are the responsibility of Verizon’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those stan-
dards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Verizon
at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period
ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.

As discussed in Note 1 to the financial statements, Verizon changed its
methods of accounting for uncertainty in income taxes and for leveraged
lease transactions effective January 1, 2007, stock-based compensation
effective January 1, 2006 and pension and other post-retirement obliga-
tions effective December 31, 2006.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Verizon’s internal
control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control–Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 20, 2009 expressed an
unqualified opinion thereon.

Ernst & Young LLP
New York, New York

February 20, 2009

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

2008

(dollars in millions, except per share amounts)
2006

2007

$ 97,354

93,469

88,182

39,007
26,898
14,565
80,470

16,884
567
282
(1,819)
(6,155)

9,759
(3,331)

6,428
–
–
–
6,428

2.26
–
–
–
2.26
2,849

2.26
–
–
–
2.26
2,850

37,547
25,967
14,377
77,891

15,578
585
211
(1,829)
(5,053)

9,492
(3,982)

5,510
142
(131)
–
5,521

1.90
.05
(.05)
–
1.91
2,898

1.90
.05
(.05)
–
1.90
2,902

35,309
24,955
14,545
74,809

13,373
773
395
(2,349)
(4,038)

8,154
(2,674)

5,480
759
–
(42)
6,197

1.88
.26
–
(.01)
2.13
2,912

1.88
.26
–
(.01)
2.12
2,938

Consolidated Statements of Income

Years Ended December 31,

Operating Revenues

Operating Expenses
Cost of services and sales (exclusive of items shown below)
Selling, general and administrative expense
Depreciation and amortization expense
Total Operating Expenses

Operating Income
Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Income Before Provision for Income Taxes, Discontinued Operations,
Extraordinary Item and Cumulative Effect of Accounting Change
Provision for income taxes
Income Before Discontinued Operations, Extraordinary Item
and Cumulative Effect of Accounting Change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income

Basic Earnings Per Common Share(1)
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Weighted-average shares outstanding (in millions)

Diluted Earnings Per Common Share(1)
Income before discontinued operations, extraordinary item
and cumulative effect of accounting change
Income from discontinued operations, net of tax
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Net Income
Weighted-average shares outstanding (in millions)

(1) Total per share amounts may not add due to rounding.

See Notes to Consolidated Financial Statements.

Consolidated Balance Sheets

At December 31,

Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances of $941 and $1,025

Inventories

Prepaid expenses and other
Total current assets

Plant, property and equipment
Less accumulated depreciation

Investments in unconsolidated businesses
Wireless licenses
Goodwill
Other intangible assets, net
Other investments
Other assets
Total assets

Liabilities and Shareowners’ Investment
Current liabilities
Debt maturing within one year
Accounts payable and accrued liabilities
Other
Total current liabilities

Long-term debt
Employee benefit obligations
Deferred income taxes
Other liabilities

Minority interest

Shareowners’ investment
Series preferred stock ($.10 par value; none issued)
Common stock ($.10 par value; 2,967,610,119 and

2,967,610,119 shares issued)

Contributed capital
Reinvested earnings
Accumulated other comprehensive loss
Common stock in treasury, at cost
Deferred compensation-employee stock ownership plans and other
Total shareowners’ investment
Total liabilities and shareowners’ investment

See Notes to Consolidated Financial Statements.

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

(dollars in millions, except per share amounts)
2007
2008

9,782
509
11,703
2,092
1,989
26,075

215,605
129,059
86,546
3,393
61,974
6,035
5,199
4,781
8,349
$ 202,352

4,993
13,814
7,099
25,906

46,959
32,512
11,769
6,301

37,199

–

297
40,291
19,250
(13,372)
(4,839)
79
41,706
$ 202,352

1,153
2,244
11,736
1,729
1,836
18,698

213,994
128,700
85,294
3,372
50,796
5,245
4,988
–
18,566
186,959

2,954
14,462
7,325
24,741

28,203
29,960
14,784
6,402

32,288

–

297
40,316
17,884
(4,506)
(3,489)
79
50,581
186,959

Consolidated Statements of Cash Flows

Years Ended December 31,

Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities –
continuing operations:

Depreciation and amortization expense
Loss on sale of discontinued operations
Employee retirement benefits
Deferred income taxes
Provision for uncollectible accounts
Equity in earnings of unconsolidated businesses, net of dividends received
Extraordinary item, net of tax
Cumulative effect of accounting change, net of tax
Changes in current assets and liabilities, net of effects from acquisition/disposition

of businesses:

Accounts receivable

Inventories
Other assets
Accounts payable and accrued liabilities
Other, net

Net cash provided by operating activities – continuing operations
Net cash provided by (used in) operating activities – discontinued operations
Net cash provided by operating activities

Cash Flows from Investing Activities
Capital expenditures (including capitalized software)
Acquisitions of licenses, investments and businesses, net of cash acquired
Net change in short-term investments
Other, net
Net cash used in investing activities – continuing operations
Net cash provided by investing activities – discontinued operations
Net cash used in investing activities

Cash Flows from Financing Activities
Proceeds from long-term borrowings
Repayments of long-term borrowings and capital lease obligations
Increase (decrease) in short-term obligations, excluding current maturities
Dividends paid
Proceeds from sale of common stock
Purchase of common stock for treasury
Other, net
Net cash provided by (used in) financing activities – continuing operations
Net cash used in financing activities – discontinued operations
Net cash provided by (used in) financing activities

Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

See Notes to Consolidated Financial Statements.

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

2008

2007

(dollars in millions)
2006

6,428

5,521

6,197

14,565
–
1,955
2,183
1,085
212
–
–

(1,085)
(188)
(59)
(1,701)
3,225
26,620
–
26,620

(17,238)
(15,904)
1,677
(114)
(31,579)
–
(31,579)

21,598
(4,146)
2,389
(4,994)
16
(1,368)
93
13,588
–
13,588

14,377
–
1,720
408
1,047
1,986
131
–

(1,931)
(255)
(140)
(567)
4,012
26,309
(570)
25,739

(17,538)
(763)
169
1,267
(16,865)
757
(16,108)

3,402
(5,503)
(3,252)
(4,773)
1,274
(2,843)
(2)
(11,697)
–
(11,697)

14,545
541
1,923
(252)
1,034
(731)
–
42

(1,312)
8
52
(383)
1,366
23,030
1,076
24,106

(17,101)
(1,422)
290
811
(17,422)
1,806
(15,616)

3,983
(11,233)
7,944
(4,719)
174
(1,700)
(201)
(5,752)
(279)
(6,031)

8,629
1,153
9,782

(2,066)
3,219
1,153

2,459
760
3,219

Consolidated Statements of Changes in Shareowners’ Investment

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

2,967,610
–
2,967,610

(90,786)
(36,779)

468
7
(127,090)

Years Ended December 31,

Common Stock
Balance at beginning of year
Shares issued–MCI/Price acquisitions
Balance at end of year

Contributed Capital
Balance at beginning of year
Shares issued-employee and shareowner plans
Shares issued-MCI/Price acquisitions
Domestic print and Internet yellow pages directories
business spin-off
Other
Balance at end of year

Reinvested Earnings
Balance at beginning of year
Adoption of tax accounting standards (See Note 1)
Adjusted balance at beginning of year
Net income
Dividends declared ($1.78, $1.67 and $1.62 per share)
Other
Balance at end of year

Accumulated Other Comprehensive Loss
Balance at beginning of year
Spin-off of local exchange businesses in Maine,
New Hampshire and Vermont (see Note 3)
Adjusted balance at beginning of year
Foreign currency translation adjustments
Unrealized gains (losses) on marketable securities
Unrealized gains (losses) on cash flow hedges
Defined benefit pension and postretirement plans
Minimum pension liability adjustment
Other
Other comprehensive income (loss)
Adoption of pension and postretirement benefit
accounting standard (See Note 1)
Balance at end of year

Treasury Stock
Balance at beginning of year
Shares purchased
Shares distributed
Employee plans
Shareowner plans
Balance at end of year

Deferred Compensation–ESOPs and Other
Balance at beginning of year
Amortization
Other
Balance at end of year
Total Shareowners’ Investment

Comprehensive Income
Net income
Other comprehensive income (loss) per above
Total Comprehensive Income (Loss)

See Notes to Consolidated Financial Statements.

2008
Amount

(dollars in millions, except per share amounts, and shares in thousands)
2006
Amount

2007
Amount

297
–
297

2,967,652
(42)
2,967,610

297
–
297

2,774,865
192,787
2,967,652

277
20
297

40,316
–
–

–
(25)
40,291

17,884
–
17,884
6,428
(5,062)
–
19,250

(4,506)

44
(4,462)
(231)
(97)
(40)
(8,542)
–
–
(8,910)

–
(13,372)

(3,489)
(1,368)

18
–
(4,839)

79
–
–
79
$ 41,706

6,428
(8,910)
$ (2,482)

(56,147)
(68,063)

33,411
13
(90,786)

40,124
58
–

–
134
40,316

17,324
(134)
17,190
5,521
(4,830)
3
17,884

(7,530)

–
(7,530)
838
(4)
1
1,948
–
241
3,024

–
(4,506)

(1,871)
(2,843)

1,224
1
(3,489)

191
(112)
–
79
50,581

5,521
3,024
8,545

(11,456)
(50,066)

5,355
20
(56,147)

25,369
(1)
6,010

8,695
51
40,124

15,905
–
15,905
6,197
(4,781)
3
17,324

(1,783)

–
(1,783)
1,196
54
14
–
526
(128)
1,662

(7,409)
(7,530)

(353)
(1,700)

181
1
(1,871)

265
(74)
–
191
48,535

6,197
1,662
7,859

Notes to Consolidated Financial Statements

NOTE 1

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Description of Business
Verizon Communications Inc., (Verizon or the Company) is one of the
world’s leading providers of communications services. We have two
reportable segments, Domestic Wireless and Wireline, which we operate
and manage as strategic business units and organize by products and
services. For further information concerning our business segments, see
Note 17.

Verizon’s Domestic Wireless segment, operating as Verizon Wireless, pro-
vides wireless voice and data products and other value-added services
and equipment across the United States (U.S.) using one of the most
extensive and reliable wireless networks. Verizon Wireless continues
to expand our wireless data, messaging and multi-media offerings at
broadband speeds for both consumer and business customers.

Our Wireline segment provides communications services, including
voice, broadband video and data, network access, nationwide long-dis-
tance and other communications products and services, and also owns
and operates one of the most expansive end-to-end global Internet
Protocol (IP) networks. We continue to deploy advanced broadband
network technology, with our fiber-to-the-premises network, operated
under the FiOS service mark, creating a platform with sufficient band-
width and capabilities to meet customers’ current and future needs. FiOS
allows us to offer our customers a wide array of broadband services,
including advanced data and video offerings. Our IP network includes
over 485,000 route miles of fiber optic cable and provides access to
over 150 countries across six continents, enabling us to provide next-
generation IP network products and information technology services to
medium and large businesses and government customers worldwide.

Consolidation
The method of accounting applied to investments, whether consoli-
dated, equity or cost, involves an evaluation of all significant terms of
the investments that explicitly grant or suggest evidence of control or
influence over the operations of the investee. The consolidated financial
statements include our controlled subsidiaries. Investments in businesses
which we do not control, but have the ability to exercise significant
influence over operating and financial policies, are accounted for using
the equity method. Investments in which we do not have the ability to
exercise significant influence over operating and financial policies are
accounted for under the cost method. Equity and cost method invest-
ments are included in Investments in unconsolidated businesses in our
consolidated balance sheets. Certain of our cost method investments
are classified as available-for-sale securities and adjusted to fair value
pursuant to the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115).

All significant intercompany accounts and transactions have been
eliminated.

We have reclassified prior year amounts to conform to the current year
presentation.

v e r i zo n co m m u n i c at i o n s i n c . a n d s u b s i d i a r i e s

Use of Estimates
We prepare our financial statements using U.S. generally accepted
accounting principles (GAAP), which require management to make esti-
mates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates.

Examples of significant estimates include: the allowance for doubtful
accounts, the recoverability of plant, property and equipment, the
recoverability of intangible assets and other long-lived assets, unbilled
revenues, fair values of financial instruments, unrecognized tax benefits,
valuation allowances on tax assets, accrued expenses, equity in income
of unconsolidated entities, pension and postretirement benefit assump-
tions, contingencies and allocation of purchase prices in connection
with business combinations.

Revenue Recognition
Domestic Wireless
Our Domestic Wireless segment earns revenue by providing access to
and usage of our network, which includes voice and data revenue. In
general, access revenue is billed one month in advance and recognized
when earned. Access revenue and usage revenue are recognized when
service is rendered. Equipment sales revenue associated with the sale
of wireless handsets and accessories is recognized when the products
are delivered to and accepted by the customer, as this is considered
to be a separate earnings process from the sale of wireless services.
Customer activation fees are considered additional consideration, and
to the extent that handsets are sold to customers at a discount, these
fees are recorded as equipment sales revenue at the time of customer
acceptance. For agreements involving the resale of third-party services
in which we are considered the primary obligor in the arrangements, we
record the revenue gross.

Wireline
Our Wireline segment earns revenue based upon usage of our network
and facilities and contract fees. In general, fixed monthly fees for voice,
video, data and certain other services are billed one month in advance
and recognized when earned. Revenue from services that are not fixed
in amount and are based on usage is recognized when such services
are provided.

We recognize equipment revenue for services, in which we bundle the
equipment with maintenance and monitoring services, when the equip-
ment is installed in accordance with contractual specifications and ready
for the customer’s use. The maintenance and monitoring services are
recognized monthly over the term of the contract as we provide the
services. Long-term contracts are accounted for using the percentage
of completion method. We use the completed contract method if we
cannot estimate the costs with a reasonable degree of reliability.

Customer activation fees, along with the related costs up to but not
exceeding the activation fees, are deferred and amortized over the cus-
tomer relationship period.

We report taxes imposed by governmental authorities on revenue-
producing transactions between us and our customers that are within
the scope of EITF No. 06-3, How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income
Statement in the consolidated financial statements on a net basis.

Notes to Consolidated Financial Statements continued

Discontinued Operations, Assets Held for Sale, and Sales of
Businesses and Investments
We classify as discontinued operations for all periods presented any
component of our business that we hold for sale or disposal that has
operations and cash flows that are clearly distinguishable operationally
and for financial reporting purposes from the rest of Verizon. For those
components, Verizon has no significant continuing involvement after dis-
posal and their operations and cash flows are eliminated from Verizon’s
ongoing operations. Sales of significant components of our business
not classified as discontinued operations are reported as either Equity in
earnings of unconsolidated businesses or Other income and (expense),
net in our consolidated statements of income.

local telephone operations, which are stated principally at average
original cost, except that specific costs are used in the case of large indi-
vidual items.

Plant and Depreciation
We record plant, property and equipment at cost. Our local telephone
operations’ depreciation expense is principally based on the composite
group remaining life method and straight-line composite rates. This
method provides for the recognition of the cost of the remaining net
investment in local telephone plant, less anticipated net salvage value,
over the remaining asset lives. This method requires the periodic revi-
sion of depreciation rates.

Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, princi-
pally to Cost of services and sales as these costs are incurred.

Plant, property and equipment of other wireline and wireless operations
are generally depreciated on a straight-line basis.

The asset lives used by our operations are presented in the following
table:

Advertising Costs
Advertising costs for advertising products and services as well as other
promotional and sponsorship costs are charged to Selling, general and
administrative expense in the periods in which they are incurred (see
Note 19).

Earnings Per Common Share
Basic earnings per common share are based on the weighted-average
number of shares outstanding during the period. Diluted earnings per
common share include the dilutive effect of shares issuable under our
stock-based compensation plans, an exchangeable equity interest and
zero-coupon convertible notes (see Note 13). As of December 31, 2006,
the exchangeable equity interest and zero-coupon convertible notes
were no longer outstanding.

Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents. Cash equivalents are stated
at cost, which approximates market value and include amounts held
in money market funds. Prior to the close of the acquisition of Alltel
Corporation (Alltel) we redeemed approximately $8.9 billion of these
money market funds (see Note 2).

Short-Term Investments
Our short-term investments, which are stated at fair value, consist pri-
marily of money market funds, a portion of which is held in trust to pay
for certain employee benefits.

Marketable Securities
Marketable securities are included in the accompanying consolidated
balance sheets in Short-term investments, Investments in uncon-
solidated businesses or Other assets. We continually evaluate our
investments in marketable securities for impairment due to declines
in market value considered to be other-than-temporary. That evalua-
tion includes, in addition to persistent, declining stock prices, general
economic and company-specific evaluations. In the event of a determi-
nation that a decline in market value is other-than-temporary, a charge
to earnings is recorded for the loss, and a new cost basis in the invest-
ment is established.

Inventories
Inventory consists of wireless and wireline equipment held for sale,
which is carried at the lower of cost (determined principally on either
an average cost or first-in, first-out basis) or market. We also include in
inventory new and reusable supplies and network equipment of our

Average Useful Lives (in years)

Buildings
Central office equipment
Other network equipment
Outside communications plant
Copper cable
Fiber cable (including undersea cable)
Poles, conduit and other
Furniture, vehicles and other

8 – 45
3 – 11
3 – 15

13 – 18
11 – 25
30 – 50
1 – 20

When we replace, retire or otherwise dispose of depreciable plant used
in our local telephone network, we deduct the carrying amount of such
plant from the respective accounts and charge it to accumulated depre-
ciation. When the depreciable assets of our other wireline and wireless
operations are retired or otherwise disposed of, the related cost and
accumulated depreciation are deducted from the plant accounts, and
any gains or losses on disposition are recognized in income.

We capitalize network software purchased or developed along with
related plant assets. We also capitalize interest associated with the acqui-
sition or construction of network-related assets. Capitalized interest is
reported as part of the cost of the network-related assets and as a reduc-
tion in interest expense.

In connection with our ongoing review of the average useful lives of
plant, property and equipment, we determined, effective January 1,
2009 that the average useful lives of fiber cable would be increased to
25 years from 20 to 25 years and the average useful lives of copper cable
would be changed to 15 years from 13 to 18 years. These changes are not
expected to have a significant impact on our depreciation expense for
2009. Effective January 1, 2008 the average useful lives of fiber cable was
increased from 20 years to 20 to 25 years. This change did not result in
a significant impact to depreciation expense for 2008. Effective January
1, 2007, the average useful lives of certain of the circuit equipment was
lengthened from 8 years to 9 years based on subsequent modifications to
our fiber optic cable deployment plan. The average useful lives of certain
buildings at Wireline was also increased from 42 years to 45 years. The
reduction in depreciation resulting from these adjustments in 2007 was
partially offset by increased depreciation resulting from the shortening
of the lives of various types of wireless plant, property and equipment.
While the timing and extent of current deployment plans are subject to
modification, we believe the current estimates of impacted asset lives
are reasonable and subject to ongoing analysis.

Notes to Consolidated Financial Statements continued

Interest expense incurred while qualifying wireless licenses are developed
for service is capitalized as part of Wireless licenses. The capitalization
period ends when the development is completed and the licenses are
placed in commercial service.

Intangible Assets Subject to Amortization
Our intangible assets that do not have indefinite lives (primarily customer
lists and non-network internal-use software) are amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144), whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. If any indications
were present, we would test for recoverability by comparing the carrying
amount of the asset to the net undiscounted cash flows expected to be
generated from the asset. If those net undiscounted cash flows do not
exceed the carrying amount (i.e., the asset is not recoverable), we would
perform the next step, which is to determine the fair value of the asset
and record an impairment, if any. We reevaluate the useful life determi-
nations for these intangible assets each reporting period to determine
whether events and circumstances warrant a revision in their remaining
useful lives.

For information related to the carrying amount of goodwill by segment,
wireless licenses and other intangible assets, as well as the major com-
ponents and average useful lives of our other acquired intangible assets,
see Note 4.

Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and establishes a hierarchy that categorizes and
prioritizes the sources to be used to estimate fair value. SFAS No. 157 also
expands financial statement disclosures about fair value measurements.
Under SFAS No. 157, fair value is defined as an exit price, representing
the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. SFAS No.
157 also establishes a three-tier hierarchy for inputs used in measuring
fair value, which prioritizes the inputs used in the valuation methodolo-
gies in measuring fair value:

Level 1 – Quoted prices in active markets for identical assets

or liabilities

Level 2 – Observable inputs other than quoted prices in active markets

for identical assets and liabilities
Level 3 – No observable pricing inputs in the market

Financial assets and financial liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurements. Our assessment of the significance of a particular input
to the fair value measurements requires judgment, and may affect the
valuation of the assets and liabilities being measured and their place-
ment within the fair value hierarchy.

Computer Software Costs
We capitalize the cost of internal-use network and non-network software
which has a useful life in excess of one year. Subsequent additions, modi-
fications or upgrades to internal-use network and non-network software
are capitalized only to the extent that they allow the software to perform
a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Also, we
capitalize interest associated with the development of internal-use
network and non-network software. Capitalized non-network internal-
use software costs are amortized using the straight-line method over
a period of 2 to 7 years and are included in Other intangible assets, net
in our consolidated balance sheets. For a discussion of our impairment
policy for capitalized software costs, see “Goodwill and Other Intangible
Assets” below. Also, see Note 4 for additional detail of internal-use non-
network software reflected in our consolidated balance sheets.

Goodwill and Other Intangible Assets
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the
fair value of the identifiable net assets acquired. Impairment testing
for goodwill is performed annually or more frequently if indications
of potential impairment exist under the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). The impairment
test for goodwill uses a two-step approach, which is performed at the
reporting unit level. We have determined that in our case, the reporting
units are our operating segments since that is the lowest level at which
discrete, reliable financial and cash flow information is available. Step
one compares the fair value of the reporting unit (calculated using a
market approach and a discounted cash flow method) to its carrying
value. If the carrying value exceeds the fair value, there is a potential
impairment and step two must be performed. Step two compares the
carrying value of the reporting unit’s goodwill to its implied fair value
(i.e., fair value of reporting unit less the fair value of the unit’s assets
and liabilities, including identifiable intangible assets). If the fair value of
goodwill is less than the carrying amount of goodwill, an impairment
is recognized.

Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are wireless licenses that
provide our wireless operations with the exclusive right to utilize des-
ignated radio frequency spectrum to provide cellular communication
services. While licenses are issued for only a fixed time, generally ten years,
such licenses are subject to renewal by the Federal Communications
Commission (FCC). Renewals of licenses have occurred routinely and at
nominal cost. Moreover, we have determined that there are currently
no legal, regulatory, contractual, competitive, economic or other factors
that limit the useful life of our wireless licenses. As a result, we treat the
wireless licenses as an indefinite-lived intangible asset under the provi-
sions of SFAS No. 142. We reevaluate the useful life determination for
wireless licenses each reporting period to determine whether events
and circumstances continue to support an indefinite useful life.

We test our wireless licenses for potential impairment annually or more
frequently if indications of impairment exist. We evaluate our licenses
on an aggregate basis using a direct value approach. The direct value
approach determines fair value using estimates of future cash flows
associated specifically with the licenses. If the fair value of the aggre-
gated wireless licenses is less than the aggregated carrying amount of
the licenses, an impairment is recognized.

Notes to Consolidated Financial Statements continued

As a result of the implementation of FIN 48, we recorded adjustments
to liabilities that resulted in a net $79 million increase in the liability for
unrecognized tax benefits with an offsetting reduction to reinvested
earnings as of January 1, 2007. The implementation of FIN 48 also resulted
in adjustments to prior acquisitions accounted for under purchase
accounting, resulting in a reduction in the liability for tax contingencies
in the amount of $635 million and corresponding reductions to good-
will and wireless licenses of $100 million and $535 million, respectively.
The implementation impact included a reduction in deferred income
taxes of approximately $3 billion, offset with a similar increase in Other
liabilities as of January 1, 2007.

FASB Staff Position (FSP) No. FAS 13-2, Accounting for a Change or Projected
Change in the Timing of Cash Flows Relating to Income Taxes Generated by
a Leveraged Lease Transaction (FSP 13-2), requires that changes in the
projected timing of income tax cash flows generated by a leveraged
lease transaction be recognized as a gain or loss in the year in which
the change occurs. We adopted FSP 13-2 effective January 1, 2007. The
cumulative effect of initially adopting FSP 13-2 was a reduction to rein-
vested earnings of $55 million, after-tax.

Stock-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payment (SFAS No. 123(R)) utilizing the modified prospective method.
SFAS No. 123(R) requires the measurement of stock-based compensa-
tion expense based on the fair value of the award on the date of grant.
Under the modified prospective method, the provisions of SFAS No.
123(R) apply to all awards granted or modified after the date of adoption.
The impact to Verizon resulted from the Domestic Wireless segment, for
which we recorded a $42 million cumulative effect of accounting change
as of January 1, 2006, net of taxes and after minority interest, to recog-
nize the effect of initially measuring the outstanding liability for Value
Appreciation Rights (VARs) granted to Domestic Wireless employees at
fair value utilizing a Black-Scholes model.

Foreign Currency Translation
The functional currency of our foreign operations is generally the local
currency. For these foreign entities, we translate income statement
amounts at average exchange rates for the period, and we translate
assets and liabilities at end-of-period exchange rates. We record these
translation adjustments in Accumulated other comprehensive loss, a
separate component of Shareowners’ Investment, in our consolidated
balance sheets. We report exchange gains and losses on intercompany
foreign currency transactions of a long-term nature in Accumulated
other comprehensive loss. Other exchange gains and losses are reported
in income.

On February 12, 2008, FASB issued FASB Staff Position (FSP) No. FAS
157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), which delays
the effective date of SFAS No. 157 for one year for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis. We elected
a partial deferral of SFAS No. 157 under the provisions of FSP 157-2
related to the measurement of fair value used when evaluating good-
will, other intangible assets, wireless licenses and other long-lived assets
for impairment and valuing asset retirement obligations and liabilities
for exit or disposal activities. On October 10, 2008, the FASB issued FSP
157-3, Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active, (FSP 157-3), which clarifies application of SFAS
No. 157 in a market that is not active. FSP 157-3 was effective upon issu-
ance, including prior periods for which financial statements have not
been issued. The impact of partially adopting SFAS No. 157 on January
1, 2008 and the related FSPs 157-2 and 157-3 was not material to our
financial statements.

SFAS No. 159
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
- Including an Amendment of SFAS No. 115 (SFAS No. 159), permits but does
not require us to measure financial instruments and certain other items
at fair value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. As we did not elect to
fair value any of our financial instruments under the provisions of SFAS No.
159, our adoption of this statement effective January 1, 2008 did not have
an impact on our consolidated financial statements.

Income Taxes
Verizon and its domestic subsidiaries file a consolidated federal income
tax return.

Deferred income taxes are provided for temporary differences in the
bases between financial statement and income tax assets and liabilities.
Deferred income taxes are recalculated annually at rates then in effect.
We record valuation allowances to reduce our deferred tax assets to the
amount that is more likely than not to be realized.

Effective January 1, 2007, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), which requires the
use of a two-step approach for recognizing and measuring tax benefits
taken or expected to be taken in a tax return and disclosures regarding
uncertainties in income tax positions. The first step is recognition: we
determine whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not rec-
ognition threshold, we presume that the position will be examined by
the appropriate taxing authority that has full knowledge of all relevant
information. The second step is measurement: a tax position that meets
the more-likely-than-not recognition threshold is measured to determine
the amount of benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Differences
between tax positions taken in a tax return and amounts recognized in
the financial statements will generally result in one or more of the fol-
lowing: an increase in a liability for income taxes payable, a reduction of
an income tax refund receivable, a reduction in a deferred tax asset, or
an increase in a deferred tax liability.

Notes to Consolidated Financial Statements continued

Employee Benefit Plans
Pension and postretirement health care and life insurance benefits
earned during the year as well as interest on projected benefit obliga-
tions are accrued currently. Prior service costs and credits resulting from
changes in plan benefits are amortized over the average remaining ser-
vice period of the employees expected to receive benefits. Expected
return on plan assets is determined by applying the return on assets
assumption to the market-related value of assets.

As of July 1, 2006, Verizon management employees no longer earn
pension benefits or earn service towards the company retiree medical
subsidy (see Note 15).

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158).
Effective December 31, 2006, SFAS No. 158 requires the recognition of a
defined benefit postretirement plan’s funded status as either an asset or
liability on the balance sheet. SFAS No. 158 also requires the immediate
recognition of the unrecognized actuarial gains and losses and prior
service costs and credits that arise during the period as a component
of Other accumulated comprehensive loss, net of applicable income
taxes. We adopted SFAS No. 158 effective December 31, 2006, which
resulted in a net decrease to shareowners’ investment of $7,409 million.
This included a net increase in pension obligations of $2,007 million, an
increase in Other Postretirement Benefits Obligations of $10,828 million
and an increase in Other Employee Benefit Obligations of $31 million,
offset by an increase in deferred taxes of $5,457 million. Additionally,
plan assets are measured at fair value as of the Company’s year-end.

Derivative Instruments
We have entered into derivative transactions to manage our exposure
to fluctuations in foreign currency exchange rates, interest rates and
commodity prices. We employ risk management strategies which may
include the use of a variety of derivatives including cross currency swaps,
foreign currency forwards and collars, equity options, interest rate and
commodity swap agreements and interest rate locks. We do not hold
derivatives for trading purposes.

In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133) and related amendments and inter-
pretations, we measure all derivatives, including derivatives embedded
in other financial instruments, at fair value and recognize them as either
assets or liabilities on our consolidated balance sheets. Changes in the
fair values of derivative instruments not qualifying as hedges or any
ineffective portion of hedges are recognized in earnings in the cur-
rent period. Changes in the fair values of derivative instruments used
effectively as fair value hedges are recognized in earnings, along with
changes in the fair value of the hedged item. Changes in the fair value
of the effective portions of cash flow hedges are reported in other com-
prehensive income (loss) and recognized in earnings when the hedged
item is recognized in earnings.

Recent Accounting Pronouncements
In December 2008, the FASB issued FSP FAS No. 132 (R)-1, Employers’
Disclosures about Postretirement Benefit Plan Assets (FSP 132 (R)-1). FSP
132 (R)-1 requires Verizon, as plan sponsor, to provide improved disclo-
sures about plan assets, including categories of plan assets, nature and
amount of concentrations of risk and disclosure about fair value mea-
surements of plan assets, similar to those required by SFAS No. 157. FAS
132 (R)-1 is effective for fiscal years ending after December 15, 2009. We
do not expect that the adoption of FSP 132 (R)-1 will have a significant
impact on our consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of
the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 removes the
requirement under SFAS No. 142, Goodwill and Other Intangible Assets to
consider whether an intangible asset can be renewed without substan-
tial cost or material modifications to the existing terms and conditions,
and replaces it with a requirement that an entity consider its own histor-
ical experience in renewing similar arrangements, or a consideration of
market participant assumptions in the absence of historical experience.
FSP 142-3 also requires entities to disclose information that enables users
of financial statements to assess the extent to which the expected future
cash flows associated with the asset are affected by the entity’s intent
and/or ability to renew or extend the arrangement. We were required
to adopt FSP 142-3 effective January 1, 2009 on a prospective basis. The
adoption of FSP 142-3 on January 1, 2009 did not have an impact on our
consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement
No. 133, (SFAS No. 161). This statement requires additional disclosures
for derivative instruments and hedging activities that include how and
why an entity uses derivatives, how these instruments and the related
hedged items are accounted for under SFAS No. 133 and related inter-
pretations, and how derivative instruments and related hedged items
affect the entity’s financial position, results of operations and cash flows.
SFAS No. 161 is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008. The adoption
of SFAS No. 161 on January 1, 2009 did not have an impact on our con-
solidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations,
(SFAS No. 141(R)), to replace SFAS No. 141, Business Combinations. SFAS
No. 141(R) requires the use of the acquisition method of accounting,
defines the acquirer, establishes the acquisition date and broadens the
scope to all transactions and other events in which one entity obtains
control over one or more other businesses. This statement is effective
for business combinations or transactions entered into for fiscal years
beginning on or after December 15, 2008. Upon the adoption of SFAS
No. 141(R) we will be required to expense certain transaction costs and
related fees associated with business combinations that were previously
capitalized. This will result in additional expenses being recognized
relating to the 2009 closing of the Alltel transaction. In addition, with
the adoption of SFAS No. 141(R) changes to valuation allowances for
deferred income tax assets and adjustments to unrecognized tax ben-
efits generally will be recognized as adjustments to income tax expense
rather than goodwill.

Notes to Consolidated Financial Statements continued

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51, (SFAS
No. 160). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the retained interest
and gain or loss when a subsidiary is deconsolidated. This statement is
effective for financial statements issued for fiscal years beginning on or
after December 15, 2008 which will be applied prospectively, except
for the presentation and disclosure requirements which will be applied
retrospectively for all periods presented. Upon the initial adoption of
this statement, we will change the classification and presentation of
Noncontrolling Interest in our financial statements, which we currently
refer to as minority interest. Additionally, we conduct certain business
operations in certain markets through non-wholly owned entities. Any
changes in these ownership interests may be required to be measured
at fair value and recognized as a gain or loss, if any, in earnings. SFAS No.
160 will also result in a lower effective income tax rate for the Company
due to the inclusion of income attributable to noncontrolling interest in
income before the provision for income taxes. However, the income tax
provision will not be adjusted as a result of SFAS No. 160.

NOTE 2

ACQUISITIONS

We expect to experience substantial operational benefits from the
Alltel acquisition, including additional combined overall cost savings
from reduced roaming costs by moving more traffic to our own net-
work, reduced network-related costs from the elimination of duplicate
facilities, consolidation of platforms, efficient traffic consolidation, and
reduced overall expenses relating to advertising, overhead and head-
count. We expect reduced overall combined capital expenditures as a
result of greater economies of scale and the rationalization of network
assets. We also anticipate that the use of the same technology platform
will enable us to rapidly integrate Alltel’s operations with ours while
enabling a seamless transition for customers.

The Alltel acquisition will be accounted for as a business combination
under SFAS No. 141(R). While Verizon Wireless has commenced the
appraisals necessary to assess the fair values of the tangible and intan-
gible assets acquired and liabilities assumed, the amounts of assets and
liabilities arising from contingencies, the fair value of noncontrolling
interests, and the amount of goodwill to be recognized as of the acqui-
sition date, the initial purchase price allocation is not yet available.

On June 10, 2008, in connection with the agreement to acquire Alltel,
Verizon Wireless purchased from third parties $5.0 billion aggregate
principal amount of debt obligations of certain subsidiaries of Alltel for
approximately $4.8 billion, plus accrued and unpaid interest. The matu-
rity dates of these obligations range from 2015 to 2017. Verizon Wireless’s
investment in Alltel debt obligations is classified as available-for-sale and
is included in Other investments in the consolidated balance sheet at
December 31, 2008.

Alltel Divestiture Markets
As a condition of the regulatory approvals by the United States
Department of Justice (DOJ) and the FCC that were required to com-
plete the Alltel acquisition, Verizon Wireless will divest overlapping
properties in 105 operating markets in 24 states (the Alltel Divestiture
Markets). These markets consist primarily of Alltel operations, but also
include the pre-merger operations of Verizon Wireless in four markets as
well as operations in Southern Minnesota and Western Kansas that were
acquired from Rural Cellular Corporation (Rural Cellular). As a result of
these divestiture requirements, Verizon Wireless has placed the licenses
and assets in the Alltel Divestiture Markets in a management trust that
will continue to operate the markets under their current brands until
they are sold.

Notes to Consolidated Financial Statements continued

Repayment of Alltel Debt and New Borrowings
On December 19, 2008, Verizon Wireless and Verizon Wireless Capital
LLC, as the borrowers, entered into the $17.0 billion credit facility
(Bridge Facility) with Bank of America, N.A., as Administrative Agent.
On December 31, 2008, the Bridge Facility was reduced to $12.5 billion.
As of December 31, 2008, there were no amounts outstanding under
this facility.

On January 9, 2009, immediately prior to the closing of the Alltel acquisi-
tion, we borrowed $12,350 million under the Bridge Facility in order to
complete the acquisition of Alltel and repay certain of Alltel’s outstanding
debt. The remaining commitments under the Bridge Facility were ter-
minated. The Bridge Facility has a maturity date of January 8, 2010.
Interest on borrowings under the Bridge Facility is calculated based on
the London Interbank Offered Rate (LIBOR) for the applicable period, the
level of borrowings on specified dates and a margin that is determined
by reference to our long-term credit rating issued by S&P. If the aggre-
gate outstanding principal amount under the Bridge Facility is greater
than $6.0 billion on July 8th, 2009 (the 180th day after the closing of the
Alltel acquisition), we are required to repay $3.0 billion on that date (less
the amount of specified mandatory or optional prepayments that have
been made as of that date). The Bridge Facility includes a requirement
to maintain a certain leverage ratio. We are required to prepay indebted-
ness under the Bridge Facility with the net cash proceeds of specified
asset sales, issuances and sales of equity and incurrences of borrowed
money indebtedness, subject to certain exceptions.

On February 4, 2009, Verizon Wireless and Verizon Wireless Capital LLC
co-issued a private placement of $3,500 million of 5.55% notes due 2014
and $750 million of 5.25% notes due 2012, resulting in cash proceeds
of $4,211 million, net of discounts and issuance costs. The net proceeds
from the sale of these notes were used to repay a portion of the borrow-
ings outstanding under the Bridge Facility.

After the completion of the Alltel acquisition and repayments of Alltel
debt, including repayments completed through January 28, 2009,
approximately $2.5 billion of Alltel debt that is owed to third parties
remained outstanding.

Rural Cellular Corporation
On August 7, 2008, Verizon Wireless acquired 100% of the outstanding
common stock and redeemed all of the preferred stock of Rural Cellular
in a cash transaction. Rural Cellular was a wireless communications
service provider operating under the trade name of “Unicel,” focusing
primarily on rural markets in the United States. Verizon Wireless believes
that the acquisition will further enhance its network coverage in mar-
kets adjacent to its existing service areas and will enable Verizon
Wireless to achieve operational benefits through realizing synergies in
reduced roaming and other operating expenses. Under the terms of the
acquisition agreement, Verizon Wireless paid Rural Cellular’s common
shareholders $728 million in cash ($45 per share). Additionally, all classes
of Rural Cellular’s preferred shareholders received cash in the aggregate
amount of $571 million.

The consolidated financial statements include the results of Rural
Cellular’s operations from the date the acquisition closed. Had this
acquisition been consummated on January 1, 2008 or 2007, the results
of Rural Cellular’s acquired operations would not have had a significant
impact on our consolidated income statement. In connection with the
acquisition, Verizon Wireless assumed $1.5 billion of Rural Cellular’s debt.
This debt was redeemed on September 5, 2008, using proceeds from
new debt borrowings by Verizon Wireless (see Note 10). The aggregate
value of the net assets acquired was $1.3 billion based on the cash con-
sideration, as well as closing and other direct acquisition-related costs of
approximately $12 million.

In accordance with SFAS No. 141, the cost of the acquisition was pre-
liminarily allocated to the assets acquired and liabilities assumed based
on their fair values as of the close of the acquisition, with the amounts
exceeding the fair value being recorded as goodwill. As the values of
certain assets and liabilities are preliminary in nature, they are subject
to adjustment as additional information is obtained. The valuations will
be finalized within 12 months of the close of the acquisition. When the
valuations are finalized, any changes to the preliminary valuation of
assets acquired or liabilities assumed may result in adjustments to the
fair value of the identifiable intangible assets acquired and goodwill.

The following table summarizes the preliminary allocation of the acqui-
sition cost to the assets acquired, including cash acquired of $42 million,
and liabilities assumed as of the acquisition date and adjustments made
thereto during the three months ended December 31, 2008:

As of

August 7, 2008 Adjustments

(dollars in millions)
Adjusted as of
August 7, 2008

Assets acquired
Wireless licenses
Goodwill

Intangible assets subject
to amortization
Other acquired assets
Total assets acquired

Liabilities assumed
Long-term debt
Deferred income taxes
and other liabilities
Total liabilities assumed
Net assets acquired

1,014
935

197
1,007
3,153

1,505

342
1,847
1,306

82
(2)

1
(34)
47

–

42
42
5

1,096
933

198
973
3,200

1,505

384
1,889
1,311

Included in Other acquired assets are $490 million of assets that have
been divested pursuant to the exchange agreement with AT&T, as
described below. Adjustments were primarily related to ongoing revi-
sions to preliminary valuations of wireless licenses and other tangible
and intangible assets acquired that were subsequently divested to AT&T,
and revised estimated tax bases of acquired assets and liabilities.

Wireless licenses acquired have an indefinite life, and accordingly, are
not subject to amortization. The customer relationships are being
amortized using an accelerated method over 6 years, and other
intangibles are being amortized on a straight-line basis over 12 months.
Goodwill of approximately $115 million is expected to be deductible
for tax purposes.

Notes to Consolidated Financial Statements continued

Divestiture Markets and Exchange Agreements with AT&T
As part of its regulatory approval for the Rural Cellular acquisition, the
FCC and DOJ required the divestiture of six operating markets, including
all of Rural Cellular’s operations in Vermont and New York as well as its
operations in Okanogan and Ferry, WA (the Divestiture Markets).

On December 22, 2008, Verizon Wireless completed an exchange with
AT&T. Pursuant to the terms of the exchange agreement, as amended,
AT&T received the assets relating to the Divestiture Markets and a cel-
lular license for part of the Madison, KY market. In exchange, Verizon
Wireless received cellular operating markets in Madison and Mason, KY
and 10 MHz PCS licenses in Las Vegas, NV, Buffalo, NY, Erie, PA, Sunbury-
Shamokin, PA and Youngstown, OH. Verizon Wireless also received
AT&T’s minority interests in three entities in which Verizon Wireless holds
interests plus a cash payment. The preliminary aggregate value of prop-
erties exchanged was approximately $500 million. There was no gain or
loss recognized on the exchange. In addition, subject to FCC approval,
Verizon Wireless will acquire PCS licenses in Franklin, NY (except Franklin
county) and the entire state of Vermont from AT&T in a separate cash
transaction that is expected to close in the first half of 2009.

Other Acquisitions
In July 2007, Verizon acquired a security-services firm for $435 million,
primarily resulting in goodwill of $343 million and other intangible assets
of $81 million. This acquisition was made to enhance our managed infor-
mation security services to large business and government customers
worldwide. This acquisition was integrated into the Wireline segment.

In connection with the 2006 acquisition of MCI, Inc. (MCI), we recorded
certain severance and severance-related costs and contract termination
costs associated with the merger, pursuant to Emerging Issues Task Force
Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination. At December 31, 2007, there was approximately
$36 million remaining for these obligations which were substantially
resolved during 2008. During 2008, 2007 and 2006, we recorded pretax
charges of $172 million ($107 million after-tax), $178 million ($112 mil-
lion after-tax) and $232 million ($146 million after-tax), respectively,
primarily related to the MCI acquisition that were comprised mainly of
systems integration activities.

NOTE 3

DISCONTINUED OPERATIONS , ExTRAORDINARY ITEM AND
OTHER DISPOSITIONS

Discontinued Operations
Telecomunicaciones de Puerto Rico, Inc.
On March 30, 2007, we completed the sale of our 52% interest in
Telecomunicaciones de Puerto Rico, Inc. (TELPRI) and received gross
proceeds of approximately $980 million. The sale resulted in a pretax
gain of $120 million ($70 million after-tax). Verizon contributed $100 mil-
lion ($65 million after-tax) of the proceeds to the Verizon Foundation.

Verizon Dominicana C. por A.
On December 1, 2006, we closed the sale of Verizon Dominicana C. por
A (Verizon Dominicana). The transaction resulted in net pretax cash
proceeds of $2,042 million, net of a purchase price adjustment of $373
million. The U.S. taxes that became payable and were recognized at the
time the transaction closed exceeded the $30 million pretax gain on the
sale resulting in an overall after-tax loss of $541 million.

Verizon Information Services
In October 2006, we announced our intention to spin-off our domestic
print and Internet yellow pages directories publishing operations, which
have been organized into a newly formed company known as Idearc
Inc. On October 18, 2006, the Verizon Board of Directors declared a divi-
dend consisting of 1 share of the newly formed company for each 20
shares of Verizon owned. In making its determination to effect the spin-
off, Verizon’s Board of Directors considered, among other things, that the
spin-off may allow each company to separately focus on its core busi-
ness, which may facilitate the potential expansion and growth of Verizon
and the newly formed company, and allow each company to determine
its own capital structure.

On November 17, 2006, we completed the spin-off of our domestic print
and Internet yellow pages directories business. Cash was paid for frac-
tional shares. The distribution of common stock of the newly formed
company to our shareowners was considered a tax free transaction for
us and for our shareowners, except for the cash payments for fractional
shares which were generally taxable.

At the time of the spin-off, the exercise price and number of shares of
Verizon common stock underlying options to purchase shares of Verizon
common stock, restricted stock units (RSU’s) and performance stock
units (PSU’s) were adjusted pursuant to the terms of the applicable
Verizon equity incentive plans, taking into account the change in the
value of Verizon common stock as a result of the spin-off.

In connection with the spin-off, Verizon received approximately $2 bil-
lion in cash from the proceeds of loans under a term loan facility of the
newly formed company and transferred to the newly formed company
debt obligations in the aggregate principal amount of approximately
$7.1 billion thereby reducing Verizon’s outstanding debt at that time.
We incurred pretax charges of approximately $117 million ($101 million
after-tax), including debt retirement costs, costs associated with accu-
mulated vested benefits of employees of the newly formed company,
investment banking fees and other transaction costs related to the spin-
off, which are included in discontinued operations.

Notes to Consolidated Financial Statements continued

In accordance with SFAS No. 144 we have classified TELPRI, Verizon
Dominicana and our former domestic print and Internet yellow page
directories publishing operations as discontinued operations in the con-
solidated financial statements for all periods presented through the date
of the divestiture or spin-off.

Income from discontinued operations, net of tax, presented in the con-
solidated statements of income included the following:

Years Ended December 31,

2008

Operating revenues

Income before provision for income taxes
Provision for income taxes
Income from discontinued operations,

net of tax

–

–
–

–

(dollars in millions)
2006

2007

306

185
(43)

142

5,077

2,041
(1,282)

759

Extraordinary Item
Compañía Anónima Nacional Teléfonos de Venezuela (CANTV)
In January 2007, the Bolivarian Republic of Venezuela (the Republic)
declared its intent to nationalize certain companies, including CANTV.
On February 12, 2007, we entered into a Memorandum of Understanding
(MOU) with the Republic, which provided that the Republic offer to pur-
chase all of the equity securities of CANTV, including our 28.5% interest,
through public tender offers in Venezuela and the United States. Under
the terms of the MOU, the prices in the tender offers would be adjusted
downward to reflect any dividends declared and paid subsequent to
February 12, 2007. During 2007, the tender offers were completed and
Verizon received an aggregate amount of approximately $572 million,
which included $476 million from the tender offers as well as $96 million
of dividends declared and paid subsequent to the MOU. During 2007,
based upon our investment balance in CANTV, we recorded an extraor-
dinary loss of $131 million, including taxes of $38 million.

Other Dispositions
Telephone Access Lines Spin-off
On January 16, 2007, we announced a definitive agreement with
FairPoint Communications, Inc. (FairPoint) providing for Verizon to estab-
lish a separate entity for its local exchange and related business assets
in Maine, New Hampshire and Vermont, spin-off that new entity into a
newly formed company, known as Northern New England Spinco Inc.
(Spinco), to Verizon’s shareowners, and immediately merge it with and
into FairPoint.

On March 31, 2008, we completed the spin-off of the shares of Spinco to
Verizon shareowners and the merger of Spinco with FairPoint, resulting
in Verizon shareowners collectively owning approximately 60 percent
of FairPoint common stock. FairPoint issued approximately 53.8 million
shares of FairPoint common stock to Verizon shareowners in the merger,
and Verizon shareowners received one share of FairPoint common stock
for every 53.0245 shares of Verizon common stock they owned as of
March 7, 2008. FairPoint paid cash in lieu of any fraction of a share of
FairPoint common stock.

On April 1, 2008, the number of shares of restricted stock units (RSUs)
and performance stock units (PSUs) previously issued by Verizon were
adjusted pursuant to the terms of the applicable Verizon equity incentive
plans, taking into account the change in the value of Verizon common
stock as a result of the spin-off.

We also entered into other agreements that defined responsibility for
obligations arising before or that may arise after the spin-off, including,
among others, obligations relating to Verizon employees whose primary
duties relate to Spinco’s business, certain transition services and taxes.
In general, the agreements governed the exchange of services between
us and FairPoint through January 2009 at specified cost-based or com-
mercial rates.

As a result of the spin-off, our net debt was reduced by approximately $1.4
billion. The consolidated income statements for the periods presented
include the results of operations of the local exchange and related busi-
ness assets in Maine, New Hampshire and Vermont through March 31,
2008, the date of completion of the spin-off. The consolidated balance
sheet as of December 31, 2008 reflects the spin-off as of March 31, 2008,
which increased shareowners’ investment by approximately $16 million,
and included approximately $79 million ($44 million after-tax) related
to defined benefit pension and postretirement benefit plans, which is
reflected as a reduction to the beginning balance of Accumulated other
comprehensive loss.

During 2008, we recorded pretax charges of $103 million ($81 million
after-tax) for costs incurred related to the separation of the wireline
facilities and operations in Maine, New Hampshire and Vermont from
Verizon at the closing of the transaction, as well as for professional advi-
sory and legal fees in connection with this transaction. During 2007, we
recorded pretax charges of $84 million ($80 million after-tax) for costs
incurred related to the separation of the wireline facilities and opera-
tions in Maine, New Hampshire and Vermont.

NOTE 4

WIRELESS LICENSES , GOODWILL AND OTHER INTANGIBLE
ASSETS

Wireless Licenses
Changes in the carrying amount of wireless licenses are as follows:

Balance as of December 31, 2006
Wireless licenses acquired
Capitalized interest on wireless licenses
Other, net
Balance as of December 31, 2007
Wireless licenses acquired
Capitalized interest on wireless licenses
Other, net
Balance as of December 31, 2008

(dollars in millions)

$ 50,959
170
203
(536)
$ 50,796
10,626
557
(5)
$ 61,974

As of December 31, 2008 and 2007, $12.4 billion and $3.0 billion, respec-
tively, of wireless licenses were not in service.

During 2007, Other, net primarily included the impact of adopting FIN
48 (see Note 1) of $535 million.

On March 20, 2008, the FCC announced the results of Auction 73 of
wireless spectrum licenses in the 700 MHz band. We were the suc-
cessful bidder for twenty-five 12 MHz licenses in the A-Block frequency,
seventy-seven 12 MHz licenses in the B-Block frequency and seven 22
MHz licenses (nationwide with the exception of Alaska) in the C-Block
frequency, with an aggregate bid price of $9,363 million. We have made
all required payments to the FCC for these licenses. The FCC granted us
these licenses on November 26, 2008.

Notes to Consolidated Financial Statements continued

Goodwill
Changes in the carrying amount of goodwill are as follows:

Domestic
Wireless

345
–
–
345
954
(2)
1,297

Wireline

5,310
343
(753)
4,900
–
(162)
4,738

(dollars in millions)

Total

5,655
343
(753)
5,245
954
(164)
6,035

Balance at December 31, 2006
Acquisitions
Reclassifications and adjustments
Balance at December 31, 2007
Acquisitions
Reclassifications and adjustments
Balance at December 31, 2008

Reclassifications and adjustments to goodwill include the impact of
adopting FIN 48 (see Note 1) of $100 million as of January 1, 2007, as
well as to reflect revised estimated tax bases of acquired assets and lia-
bilities during 2008 and 2007.

Other Intangible Assets
The following table displays the details of other intangible assets:

Finite-lived intangible assets:
Customer lists (3 to 10 years)
Non-network internal-use software

(2 to 7 years)
Other (1 to 25 years)
Total

Gross
Amount

Accumulated
Amortization

At December 31, 2008
Net
Amount

1,415

8,099
465
9,979

595

4,102
83
4,780

820

3,997
382
5,199

(dollars in millions)
At December 31, 2007
Net
Amount

Accumulated
Amortization

459

4,147
44
4,650

848

3,969
171
4,988

Gross
Amount

1,307

8,116
215
9,638

Customer lists and Other at December 31, 2008 include $198 million
related to the Rural Cellular acquisition. Amortization expense was $1,383
million, $1,341 million, and $1,423 million for the years ended December
31, 2008, 2007 and 2006, respectively and is estimated to be $1,430 mil-
lion in 2009, $1,139 million in 2010, $934 million in 2011, $713 million in
2012 and $552 million in 2013.

During 2008, we entered into an agreement to acquire a non-exclusive
license (the IP License) to a portfolio of intellectual property owned by
an entity formed for the purpose of acquiring and licensing intellectual
property. We paid an initial fee of $100 million for the IP License, which
is included in Other intangible assets and is being amortized over the
expected useful lives of the licensed intellectual property. In addition, we
executed a subscription agreement (with a capital commitment of $250
million, of which approximately $214 million is remaining to be funded
at December 31, 2008, as required through 2012) to become a member
in a limited liability company (the LLC) formed by the same entity for
the purpose of acquiring and licensing additional intellectual property.
In connection with this investment, we will receive non-exclusive license
rights to certain intellectual property acquired by the LLC for an annual
license fee.

Notes to Consolidated Financial Statements continued

NOTE 5

NOTE 6

MARKETABLE SECURITIES AND OTHER INVESTMENTS

PLANT, PROPERT Y AND EQUIPMENT

The following table displays the details of plant, property and equip-
ment, which is stated at cost:

At December 31,

Land
Buildings and equipment
Network equipment
Furniture, office and data processing equipment
Work in progress
Leasehold improvements
Other

Less accumulated depreciation
Total

(dollars in millions)
2007

2008

815
20,440
175,757
10,477
1,279
4,155
2,682
215,605
129,059
$ 86,546

839
19,734
173,654
11,912
1,988
3,612
2,255
213,994
128,700
$ 85,294

Verizon Center Relocation, Net
During 2006, we recorded pretax charges of $184 million ($118 million
after-tax) in connection with the relocation of employees and business
operations to Verizon Center located in Basking Ridge, New Jersey.

We have investments in marketable securities which are considered
“available-for-sale” under the provisions of SFAS No. 115. These invest-
ments have been included in our consolidated balance sheets in
Short-term investments, Other investments, Investments in unconsoli-
dated businesses and Other assets.

Investment Impairment Charge
During 2008, we recorded a pretax charge of $48 million ($31 million
after-tax) related to an other-than-temporary decline in the fair value of
our investments in certain marketable securities.

The following table shows certain summarized information related to
our investments in marketable securities:

(dollars in millions)

Gross Unrealized

Cost

Gains

Losses

Fair
Value

362

(5) $

359

342

4,781
684
$ 6,169

497

286
661
1,444

–

–
4
6

42
31
94

(52)

290

–
(9)

4,781
679
(66) $ 6,109

–

–
–
–

518

328
692
1,538

At December 31, 2008
Short-term investments
Investments in

unconsolidated
businesses (Note 7)

Other investments (Notes 2

and 12)
Other assets

At December 31, 2007
Short-term investments
Investments in

unconsolidated
businesses (Note 7)

Other assets

Our short-term investments are primarily bonds and mutual funds.

Certain other investments in securities that we hold are not adjusted to
market values because those values are not readily determinable and/
or the securities are not marketable. We do, however, adjust the car-
rying values of these securities in situations where we believe declines
in value below cost were other–than-temporary. The carrying values for
investments not adjusted to market value were $28 million at December
31, 2008 and $15 million at December 31, 2007.

Notes to Consolidated Financial Statements continued

NOTE 7

NOTE 8

INVESTMENTS IN UNCONSOLIDATED BUSINESSES

MINORIT Y INTEREST

Our investments in unconsolidated businesses are comprised of the
following:

At December 31,

Ownership

2008
Investment

(dollars in millions)
2007
Investment

Ownership

Equity Investees
Vodafone Omnitel
Other
Total equity investees

Cost Investees
Total investments

in unconsolidated
businesses

Various

23.1% $ 2,182
877
3,059

23.1% $

Various

334

Various

2,313
744
3,057

315

$ 3,393

3,372

Dividends and repatriations of foreign earnings received from these
investees amounted to $779 million in 2008, $2,571 million in 2007 and
$42 million in 2006.

Equity Method Investments
Vodafone Omnitel
Vodafone Omnitel is the second largest wireless communications
company in Italy. At December 31, 2008 and 2007, our investment in
Vodafone Omnitel included goodwill of $1,105 million and $1,154
million, respectively. During 2008 and 2007, Verizon received a net dis-
tribution from Vodafone Omnitel of approximately $670 million and
$2,100 million, respectively. As a result, in 2007 we recorded $610 million
of foreign and domestic taxes and expenses specifically relating to our
share of Vodafone Omnitel’s distributable earnings.

Other Equity Investees
Verizon has limited partnership investments in entities that invest in
affordable housing projects, for which Verizon provides funding as a
limited partner and receives tax deductions and tax credits based on
its partnership interests. At December 31, 2008 and 2007, Verizon had
equity investments in these partnerships of $761 million and $637
million, respectively. Verizon currently adjusts the carrying value of
these investments for any losses incurred by the limited partnerships
through earnings.

The remaining investments include wireless partnerships in the U.S. and
other smaller domestic and international investments.

Cost Method Investments
Some of our cost investments are carried at their current market value.
Other cost investments are carried at their original cost, except in cases
where we have determined that a decline in the estimated market value
of an investment is other-than-temporary.

Minority interests in equity of subsidiaries were as follows:

At December 31,

Minority interests in consolidated subsidiaries:
Wireless joint venture
Cellular partnerships and other

(dollars in millions)
2007

2008

$ 36,683
516
$ 37,199

$ 31,782
506
$ 32,288

Wireless Joint Venture
The wireless joint venture was formed in April 2000 in connection with
the combination of the U.S. wireless operations and interests of Verizon
and Vodafone. The wireless joint venture operates as Verizon Wireless.
Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone
owns the remaining 45%.

Under the terms of an investment agreement, Vodafone had the right
to require Verizon Wireless to purchase up to an aggregate of $20 billion
worth of Vodafone’s interest in Verizon Wireless at designated times (put
windows) at its then fair market value, not to exceed $10 billion in any
one put window. The last of these put windows opened on June 10 and
closed on August 9 in 2007. Vodafone did not exercise its right during
this period and no longer has any right to require the purchase of any of
its interest in Verizon Wireless.

Cellular Partnerships and Other
In August 2002, Verizon Wireless and Price Communications Corp. (Price)
combined Price’s wireless business with a portion of Verizon Wireless.
The resulting limited partnership, Verizon Wireless of the East LP (VZ
East), is controlled and managed by Verizon Wireless. In exchange for
its contributed assets, Price received a limited partnership interest in
VZ East which was exchangeable into the common stock of Verizon
Wireless if an initial public offering of that stock occurred, or into the
common stock of Verizon on the fourth anniversary of the asset contri-
bution date. On August 15, 2006, Verizon delivered 29.5 million shares of
newly-issued Verizon common stock to Price valued at $1,007 million in
exchange for Price’s limited partnership interest in VZ East.

Noncontrolling Interests in Consolidated Financial Statements
See Note 1 for a discussion of the pending implementation of SFAS
No. 160.

Notes to Consolidated Financial Statements continued

NOTE 9

LEASING ARRANGEMENTS

As Lessor
We are the lessor in leveraged and direct financing lease agreements for commercial aircraft and power generating facilities, which comprise the
majority of the portfolio along with telecommunications equipment, real estate property, and other equipment. These leases have remaining terms
up to 42 years as of December 31, 2008. Minimum lease payments receivable represent unpaid rentals, less principal and interest on third-party
nonrecourse debt relating to leveraged lease transactions. Since we have no general liability for this debt, which holds a senior security interest in
the leased equipment and rentals, the related principal and interest have been offset against the minimum lease payments receivable in accordance
with GAAP. All recourse debt is reflected in our consolidated balance sheets.

Finance lease receivables, which are included in Prepaid expenses and other and Other assets in our consolidated balance sheets are comprised of
the following:

At December 31,

Minimum lease payments receivable
Estimated residual value
Unamortized initial direct costs
Unearned income

Allowance for doubtful accounts
Finance lease receivables, net
Current
Noncurrent

Leveraged
Leases

$ 2,734
1,501
–
(1,400)
$ 2,835

Direct
Finance
Leases

133
12
1
(24)
122

2008

Total

$ 2,867
1,513
1
(1,424)
2,957
(159)
$ 2,798
$
46
$ 2,752

Leveraged
Leases

2,834
1,559
–
(1,483)
2,910

Direct
Finance
Leases

131
16
1
(25)
123

(dollars in millions)
2007

Total

2,965
1,575
1
(1,508)
3,033
(168)
2,865
36
2,829

$
$
$

Accumulated deferred taxes arising from leveraged leases, which are
included in Deferred Income Taxes, amounted to $2,218 million at
December 31, 2008 and $2,307 million at December 31, 2007.

Amortization of capital leases is included in depreciation and amortiza-
tion expense in the consolidated statements of income. Capital lease
amounts included in plant, property and equipment are as follows:

The following table is a summary of the components of income from
leveraged leases:

At December 31,

Years Ended December 31,

Pretax lease income
Income tax expense
Investment tax credits

2008

74
30
4

(dollars in millions)
2006

2007

78
30
4

96
57
4

The future minimum lease payments to be received from noncancelable
leases, net of nonrecourse loan payments related to leveraged leases,
along with payments relating to direct financing leases for the periods
shown at December 31, 2008, are as follows:

Years

2009
2010
2011
2012
2013
Thereafter
Total

(dollars in millions)
Operating
Leases

Capital
Leases

240
148
114
124
124
2,117
$ 2,867

26
19
14
7
5
12
83

As Lessee
We lease certain facilities and equipment for use in our operations under
both capital and operating leases. Total rent expense from continuing
operations under operating leases amounted to $1,835 million in 2008,
$1,712 million in 2007 and $1,608 million in 2006.

Capital leases
Accumulated amortization
Total

(dollars in millions)
2007

2008

298
(97)
201

329
(153)
176

The aggregate minimum rental commitments under noncancelable
leases for the periods shown at December 31, 2008, are as follows:

Years

2009
2010
2011
2012
2013
Thereafter
Total minimum rental commitments
Less interest and executory costs
Present value of minimum lease payments
Less current installments
Long-term obligation at December 31, 2008

(dollars in millions)
Operating
Leases

Capital
Leases

1,620
1,339
1,039
770
539
1,995
7,302

90
81
76
56
51
126
480
(90)
390
(63)
327

As of December 31, 2008, the total minimum sublease rentals to be
received in the future under noncancelable operating subleases was
approximately $57 million.

Notes to Consolidated Financial Statements continued

NOTE 10

DEBT

Debt Maturing Within One Year
Debt maturing within one year is as follows:

At December 31,

Long-term debt maturing within one year
Commercial paper
Total debt maturing within one year

(dollars in millions)
2007

2008

$ 3,506
1,487
$ 4,993

2,564
390
2,954

The weighted average interest rate for our commercial paper at December
31, 2008 and December 31, 2007 was 2.9% and 4.6%, respectively.

Capital expenditures (primarily acquisition and construction of network
assets) are partially financed pending long-term financing through
bank loans and the issuance of commercial paper payable within
12 months.

At December 31, 2008, we had approximately $5,600 million of unused
bank lines of credit which consisted of a three-year committed facility
that expires in September 2009. In addition, at December 31, 2008, we
had entered into a vendor provided credit facility that provided $150
million of financing capacity. Certain of these lines of credit contain
requirements for the payment of commitment fees.

Long-Term Debt
Outstanding long-term debt obligations are as follows:

At December 31,

Notes payable

Verizon Wireless – notes payable and other

Telephone subsidiaries – debentures

Interest Rates %

Maturities

4.35 – 5.50
5.55 – 6.90
7.25 – 8.95

2009 – 2018
2012 – 2038
2009 – 2039

7.38 – 8.88
LIBOR plus 1.00%

2011 – 2018
2009 – 2011

4.63 – 7.00
7.15 – 7.88
8.00 – 8.75

2009 – 2033
2012 – 2032
2010 – 2031

Other subsidiaries – debentures and other

6.84 – 8.75

2009 – 2028

Employee stock ownership plan loans – NYNEx debentures

9.55

2010

Capital lease obligations (average rate 6.2% and 6.8%)

Unamortized discount, net of premium
Total long-term debt, including current maturities
Less debt maturing within one year
Total long-term debt

(dollars in millions)
2007

2008

7,878
8,741
8,822

5,983
4,440

9,654
1,449
1,080

2,200

390

5,872
3,550
5,501

–
–

10,580
1,449
1,080

2,450

312

(219)
50,465
(3,506)
46,959

(97)
30,767
(2,564)
28,203

Notes Payable
In November 2008, Verizon issued $2,000 million of 8.75% notes due
2018 and $1,250 million of 8.95% notes due 2039, which resulted in cash
proceeds of $3,189 million net of discount and issuance costs. In April
2008, Verizon issued $1,250 million of 5.25% notes due 2013, $1,500 mil-
lion of 6.10% notes due 2018, and $1,250 million of 6.90% notes due
2038, resulting in cash proceeds of $3,950 million, net of discounts and

issuance costs. In February 2008, Verizon issued $750 million of 4.35%
notes due 2013, $1,500 million of 5.50% notes due 2018, and $1,750
million of 6.40% notes due 2038, resulting in cash proceeds of $3,953
million, net of discounts and issuance costs. In January 2008, Verizon uti-
lized a $239 million fixed rate vendor financing facility due 2010. During
the first quarter of 2008, $1,000 million of Verizon Communications Inc.
4.0% notes matured and were repaid.

Notes to Consolidated Financial Statements continued

In April 2007, Verizon issued $750 million of 5.50% notes due 2017, $750
million of 6.25% notes due 2037, and $500 million of floating rate notes
due 2009 resulting in cash proceeds of $1,977 million, net of discounts
and issuance costs. In March 2007, Verizon issued $1,000 million of
13-month floating rate exchangeable notes with an original maturity of
2008. These notes were exchangeable periodically at the option of the
note holder into similar notes until 2017. The exchangeable notes were
not exchanged and are now due April 2009. In February 2007, Verizon
utilized a $425 million floating rate vendor financing facility due 2013.

In January 2007, we redeemed $1,580 million principal of the remaining
outstanding floating rate notes due August 15, 2007, at a redemption
price equal to 100% of the principal amount of the notes being redeemed
plus accrued and unpaid interest through the date of redemption. The
total payment on the date of redemption was approximately $1,593 mil-
lion. Approximately $1,600 million of other borrowings were redeemed
during 2007.

We recorded pretax charges of $26 million ($16 million after-tax) during
the first quarter of 2006 resulting from the extinguishment of $5,665
million aggregate principal amount of long-term debt assumed in con-
nection with the MCI merger.

Verizon Wireless – Notes Payable and Other
Unless indicated, the following notes were co-issued or co-borrowed
by Verizon Wireless and Verizon Wireless Capital LLC. Verizon Wireless
Capital LLC is a wholly owned subsidiary of Verizon Wireless. It is a lim-
ited liability company formed under the laws of Delaware on December
7, 2001 as a special purpose finance subsidiary to facilitate the offering
of debt securities of Verizon Wireless by acting as co-issuer. Other than
the financing activities as a co-issuer of Verizon Wireless indebtedness,
Verizon Wireless Capital LLC has no material assets, operations or reve-
nues. Verizon Wireless is jointly and severally liable with Verizon Wireless
Capital LLC for these notes.

On December 18, 2008, Verizon Wireless and Verizon Wireless Capital
LLC, co-issued €650 million of 7.625% notes due 2011, €500 million of
8.750% notes due 2015 and £600 million of 8.875% notes due 2018.
Concurrent with these offerings, we entered into cross currency swaps
to fix our future interest and principal payments in U.S. dollars as well
as to exchange the proceeds from British Pound Sterling and Euros into
U.S. dollars (see Note 11). The cash proceeds of $2,410 million, net of
discounts and issuance costs were used in connection with the Alltel
acquisition on January 9, 2009 (see Note 2).

On November 21, 2008, Verizon Wireless and Verizon Wireless Capital
LLC co-issued a private placement of $1,250 million of 7.375% notes
due 2013 and $2,250 million of 8.500% notes due 2018 resulting in cash
proceeds of $3,451 million net of discounts and issuance costs. The net
proceeds from the sale of these notes were used in connection with
the Alltel acquisition on January 9, 2009 (see Note 2). The co-issuers
are required to file a registration statement with respect to an offer to
exchange these notes for a new issue of notes registered under the
Securities Act of 1933 and use their reasonable best efforts to cause the
registration statement to be declared effective within 330 days after the
closing of the offering of these notes.

On September 30, 2008, Verizon Wireless and Verizon Wireless Capital LLC
entered into a $4,440 million Three-Year Term Loan Facility Agreement
(Three-Year Term Facility) with Citibank, N.A., as Administrative Agent,
with a maturity date of September 30, 2011. Verizon Wireless borrowed
$4,440 million under the Three-Year Term Facility in order to repay
a portion of the 364-Day Credit Agreement as described below. Of
the $4,440 million, $444 million must be repaid at the end of the first
year, $1,998 million at the end of the second year, and $1,998 million
upon final maturity. Interest on borrowings under the Three-Year Term
Facility is calculated based on the LIBOR rate for the applicable period
and a margin that is determined by reference to the long-term credit
rating of Verizon Wireless issued by Standard & Poor’s Rating Services
and Moody’s Investors Service (if Moody’s subsequently determines
to provide a credit rating for the Three-Year Term Facility). Borrowings
under the Three-Year Term Facility currently bear interest at a variable
rate based on LIBOR plus 100 basis points. The Three-Year Term Facility
includes a requirement to maintain a certain leverage ratio.

On June 5, 2008, Verizon Wireless entered into a $7,550 million 364-
Day Credit Agreement with Morgan Stanley Senior Funding Inc. as
Administrative Agent. During 2008, Verizon Wireless utilized this facility
primarily to purchase the Alltel debt obligations acquired in the second
quarter and pay fees and expenses incurred in connection therewith,
finance the acquisition of Rural Cellular and repay the outstanding Rural
Cellular debt and pay fees and expenses incurred in connection there-
with. During 2008, the borrowings under the 364-Day Credit Agreement
were repaid.

See Note 2 regarding the recent repayment of Alltel debt and related
borrowings subsequent to December 31, 2008.

Telephone and Other Subsidiary Debt
During the fourth quarter of 2008, $200 million of Verizon Northwest
5.55% notes, $250 million 6.9% notes and $250 million 5.65% notes of
Verizon North Inc. matured and were repaid. During the second quarter
of 2008, $100 million of Verizon California Inc. 7.0% notes and $250
million of Verizon New York Inc. 6.0% notes matured and were repaid.
Additionally, during first half of 2008, $250 million of GTE Corporation
6.46% notes and $125 million of Verizon South Inc. 6.0% notes matured
and were repaid.

During the fourth quarter of 2007, Verizon New England Inc. redeemed
previously guaranteed $480 million 7.0% debentures, Series B, issued
by Verizon New England Inc. due 2042 at par plus accrued and unpaid
interest to the redemption dates. During the third quarter of 2007, $150
million Verizon Pennsylvania Inc. 7.375% notes matured and were repaid.
During the second quarter of 2007, $125 million Verizon New England
Inc. 7.65% notes and the $225 million Verizon South Inc. 6.125% notes
matured and were repaid. During the first quarter of 2007, $150 million
GTE Southwest Inc. 6.23% notes and the $275 million Verizon California
Inc. 7.65% notes matured and were repaid. In addition, we redeemed
$500 million of GTE Corporation 7.9% debentures due February 1, 2027
and $300 million Verizon South Inc. 7.0% debentures, Series F, due 2041
at par plus accrued and unpaid interest to the redemption dates. During
the first quarter of 2007, we recorded pretax charges of $28 million ($18
million after-tax) in connection with the early extinguishments of debt.

Notes to Consolidated Financial Statements continued

Guarantees
We guarantee the debt obligations of GTE Corporation (but not the
debt of its subsidiary or affiliate companies) that were issued and out-
standing prior to July 1, 2003. As of December 31, 2008, $2,200 million
principal amount of these obligations remained outstanding. Verizon
Communications Inc. and NYNEx Corporation are the joint and several
co-obligors of the 20-Year 9.55% Debentures due 2010 previously issued
by NYNEx on March 26, 1990. As of December 31, 2008, $47 million prin-
cipal amount of this obligation remained outstanding. NYNEx and GTE
no longer issue public debt or file SEC reports.

Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our
debt covenants.

Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2008 are as
follows:

Years

2009
2010
2011
2012
2013
Thereafter

(dollars in million)

3,506
5,018
5,647
4,306
5,638
26,350

NOTE 11

FINANCIAL INSTRUMENTS

Derivatives
The ongoing effect of SFAS No. 133 and related amendments and inter-
pretations on our consolidated financial statements will be determined
each period by several factors, including the specific hedging instru-
ments in place and their relationships to hedged items, as well as market
conditions at the end of each period.

Interest Rate Risk Management
We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt, where we principally receive fixed
rates and pay variable rates based on LIBOR. These swaps are designated
as fair value hedges and hedge against changes in the fair value of our
debt portfolio. We record the interest rate swaps at fair value in our bal-
ance sheet as assets and liabilities and adjust debt for the change in
its fair value due to changes in interest rates. During 2008, we entered
into domestic interest rate swaps, designated as fair value hedges, with a
notional principal value of approximately $2 billion. The fair value of our
entire portfolio of interest rate swaps at December 31, 2008 included in
Other assets and Long-term debt was $415 million.

Foreign Exchange Risk Management
During 2008, we entered into cross currency swaps designated as cash
flow hedges to exchange the net proceeds from the December 18, 2008
Verizon Wireless and Verizon Wireless Capital LLC offering (see Note 10)
from British Pound Sterling and Euros into U.S. dollars, to fix our future
interest and principal payments in U.S. dollars as well as mitigate the
impact of foreign currency transaction gains or losses. We record these
contracts at fair value and any gains or losses on the contract will, over
time, offset the gains or losses on the underlying debt obligations.

Net Investment Hedges
During 2007, we entered into foreign currency forward contracts to
hedge a portion of our net investment in Vodafone Omnitel. Changes
in fair value of these contracts due to Euro exchange rate fluctuations
are recognized in Accumulated other comprehensive loss and partially
offset the impact of foreign currency changes on the value of our net
investment. During 2008, our positions in these foreign currency forward
contracts were settled. As of December 31, 2008, Accumulated other
comprehensive loss includes unrecognized losses of approximately
$166 million ($108 million after-tax) related to these hedge contracts,
which along with the unrealized foreign currency translation balance on
the investment hedged, remain in Accumulated other comprehensive
loss until the investment is sold.

Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk con-
sist primarily of temporary cash investments, short-term and long-term
investments, trade receivables, certain notes receivable, including lease
receivables, and derivative contracts. Our policy is to deposit our tem-
porary cash investments with major financial institutions. Counterparties
to our derivative contracts are also major financial institutions. The finan-
cial institutions have all been accorded high ratings by primary rating
agencies. We limit the dollar amount of contracts entered into with any
one financial institution and monitor our counterparties’ credit ratings.
We generally do not give or receive collateral on swap agreements due
to our credit rating and those of our counterparties. While we may be
exposed to credit losses due to the nonperformance of our counterpar-

Notes to Consolidated Financial Statements continued

(dollars in millions)

Level 3

After-tax interest expense related to zero-

ties, we consider the risk remote and do not expect the settlement of
these transactions to have a material effect on our results of operations
or financial condition.

NOTE 12

FAIR VALUE MEASUREMENTS

The following table presents the balances of assets and liabilities mea-
sured at fair value on a recurring basis as of December 31, 2008:

(dollars in millions)

Level 1(1)

Level 2(2)

Level 3 (3)

Total

Assets:
Short-term investments

Investments in
unconsolidated
businesses

Other investments
Other assets

Liabilities:
Other liabilities

180

329

–

509

290
–
–

–
–
1,158

–
4,781
–

290
4,781
1,158

–

(1) quoted prices in active markets for identical assets or liabilities
(2) observable inputs other than quoted prices in active markets for identical assets

and liabilities

(3) no observable pricing inputs in the market

A reconciliation of the beginning and ending balance of items mea-
sured at fair value using significant unobservable inputs as of December
31, 2008 is as follows:

Balance at January 1, 2008
Total gains (losses) (realized/unrealized):

Included in earnings
Included in other comprehensive loss

Purchases, issuances and settlements
Discount amortization included in earnings
Transfers in (out) of Level 3
Balance at December 31, 2008

–

–
–
4,767
14
–
$ 4,781

Short-term investments include a fund comprised of cash equivalents
held in trust for the payment of certain employee benefits and are classi-
fied as Level 2. These temporary cash investments are stated at fair value
using matrix pricing as they are not actively traded in an established
market. Short-term investments and Investments in unconsolidated
businesses also include equity securities, mutual funds, U.S. Treasuries,
and obligations of the U.S. government, which are generally measured
using quoted prices in active markets and are classified as Level 1.

Other investments are comprised of our investment in Alltel debt, which
was acquired in June 2008, and is classified as Level 3. The fair value of
the investment in Alltel debt is based upon internally developed valu-
ation techniques since the underlying obligations are not registered or
traded in an active market. Upon closing of the Alltel acquisition (see
Note 2), the investment in Alltel debt became an intercompany loan
that will be eliminated in consolidation.

Other assets are primarily comprised of domestic and foreign corporate
and government bonds. While quoted prices in active markets for certain
of these debt securities are available, for some they are not. As permitted
under SFAS No. 157, we use alternative matrix pricing as a practical
expedient resulting in our debt securities being classified as Level 2.

Our derivative contracts, included in Other assets or Other liabilities,
are primarily comprised of interest rate swaps, are valued using models
based on readily observable market parameters for all substantial terms
of our derivative contracts and thus are classified within Level 2. As
permitted by SFAS No. 157, we use mid-market pricing for fair value
measurements of our derivative instruments.

The fair value of our short-term and long-term debt, excluding capital
leases, is determined based on market quotes for similar terms and
maturities or future cash flows discounted at current rates. The fair value
of our long-term and short-term debt, excluding capital leases, was
$53,174 million and $32,380 million at December 31, 2008 and 2007,
respectively, as compared to the carrying value of $51,562 million and
$30,845 million, respectively at December 31, 2008 and 2007.

NOTE 13

EARNINGS PER SHARE AND SHAREOWNERS ’ INVESTMENT

Earnings Per Share
The following table is a reconciliation of the numerators and denomina-
tors used in computing earnings per common share:

Years Ended December 31,

(dollars and shares in millions, except per share amounts)
2006

2008

2007

Income Before Discontinued

Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change

After-tax minority interest expense related

to exchangeable equity interest

coupon convertible notes
Income Before Discontinued

Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change – after assumed conversion
of dilutive securities

Weighted-average shares

outstanding – basic
Effect of dilutive securities:
Stock options

Exchangeable equity interest
Zero-coupon convertible notes

Weighted-average shares
outstanding – diluted

Earnings Per Common Share from
Income Before Discontinued
Operations, Extraordinary Item and
Cumulative Effect of Accounting
Change

Basic
Diluted

$ 6,428

5,510

5,480

–

$ 6,428

5,510

5,511

2,849

2,898

2,912

1
–
–

4
–
–

1
18
7

2,850

2,902

2,938

$
$

2.26
2.26

$
$

1.90
1.90

$
$

1.88
1.88

Certain outstanding options to purchase shares were not included in
the computation of diluted earnings per common share because they
were not dilutive, including approximately 158 million weighted-average
shares during 2008, 170 million weighted-average shares during 2007
and 228 million weighted-average shares during 2006.

The zero-coupon convertible notes were retired on May 15, 2006 and
the exchangeable equity interest was converted on August 15, 2006 by
issuing 29.5 million Verizon shares (see Note 8).

Notes to Consolidated Financial Statements continued

Shareowners’ Investment
Our certificate of incorporation provides authority for the issuance of up
to 250 million shares of Series Preferred Stock, $.10 par value, in one or
more series, with such designations, preferences, rights, qualifications,
limitations and restrictions as the Board of Directors may determine.

We are authorized to issue up to 4.25 billion shares of common stock.

On February 7, 2008, the Board of Directors approved a share buy back
program which authorized the repurchase of up to 100 million shares
of Verizon common stock terminating no later than the close of busi-
ness on February 28, 2011. During 2008, 2007 and 2006, we repurchased
approximately 37 million, 68 million and 50 million common shares
under programs previously authorized by the Board of Directors.

NOTE 14

STOCK-BASED COMPENSATION

The following table summarizes Verizon’s Restricted Stock Unit activity:

(shares in thousands)

Outstanding, January 1, 2006
Granted
Cancelled/forfeited
Outstanding, December 31, 2006
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2007
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2008

Restricted
Stock Units

6,869
9,116
(392)
15,593
6,779
(602)
(197)
21,573
7,277
(6,869)
(161)
21,820

Weighted-
Average
Grant-Date
Fair Value

36.12
31.88
35.01
33.67
37.59
36.75
34.81
34.80
36.64
36.06
35.45
35.01

Refer to Note 1 for a discussion of the adoption of SFAS No. 123(R), which
was effective January 1, 2006.

Verizon Communications Long Term Incentive Plan
The Verizon Communications Long Term Incentive Plan (the Plan), per-
mits the granting of nonqualified stock options, incentive stock options,
restricted stock, restricted stock units, performance shares, performance
share units and other awards. The maximum number of shares for awards
is 207 million.

Restricted Stock Units
The Plan provides for grants of RSUs that generally vest at the end of
the third year after the grant. The RSUs are classified as liability awards
because they will be paid in cash upon vesting. The RSU award liability is
measured at its fair value at the end of each reporting period and, there-
fore, will fluctuate based on the performance of Verizon’s stock. Dividend
equivalent units are also paid to participants at the time the RSU award
is paid.

Performance Share Units
The Plan also provides for grants of PSUs that generally vest at the end
of the third year after the grant. As defined by the Plan, the Human
Resources Committee of the Board of Directors determines the number
of PSUs a participant earns based on the extent to which the corre-
sponding goals have been achieved over the three-year performance
cycle. All payments are subject to approval by the Human Resources
Committee. The PSUs are classified as liability awards because the PSU
awards are paid in cash upon vesting. The PSU award liability is measured
at its fair value at the end of each reporting period and, therefore, will
fluctuate based on the price of Verizon’s stock as well as performance
relative to the targets. Dividend equivalent units are also paid to partici-
pants at the time that the PSU award is determined and paid, and in the
same proportion as the PSU award.

The following table summarizes Verizon’s Performance Share Unit
activity:

(shares in thousands)

Outstanding, January 1, 2006
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2006
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2007
Granted
Payments
Cancelled/forfeited
Outstanding, December 31, 2008

Performance
Share Units

19,091
14,166
(3,607)
(1,227)
28,423
10,371
(5,759)
(900)
32,135
11,194
(7,597)
(2,518)
33,214

Weighted-
Average
Grant-Date
Fair Value

36.84
32.05
38.54
37.25
34.22
37.59
36.75
36.18
34.80
36.64
36.06
36.00
35.04

As of December 31, 2008, unrecognized compensation expense related
to the unvested portion of Verizon’s RSUs and PSUs was approximately
$308 million and is expected to be recognized over a weighted-average
period of approximately two years.

Notes to Consolidated Financial Statements continued

Verizon Wireless’s Long-Term Incentive Plan
The 2000 Verizon Wireless Long-Term Incentive Plan (the Wireless Plan)
provides compensation opportunities to eligible employees and other
participating affiliates of Verizon Wireless (the Partnership). The Wireless
Plan provides rewards that are tied to the long-term performance of
the Partnership. Under the Wireless Plan, VARs were granted to eligible
employees. As of December 31, 2008, all VARs were fully vested.

VARs reflect the change in the value of the Partnership, as defined in
the Wireless Plan, similar to stock options. Once VARs become vested,
employees can exercise their VARs and receive a payment that is equal
to the difference between the VAR price on the date of grant and the
VAR price on the date of exercise, less applicable taxes. VARs are fully
exercisable three years from the date of grant with a maximum term
of 10 years. All VARs are granted at a price equal to the estimated fair
value of the Partnership, as defined in the Wireless Plan, at the date of
the grant.

With the adoption of SFAS No. 123(R), the Partnership began estimating
the fair value of VARs granted using a Black-Scholes option valuation
model. The following table summarizes the assumptions used in the
model during 2008:

Stock Options
The Verizon Long Term Incentive Plan provides for grants of stock options
to employees at an option price per share of 100% of the fair market
value of Verizon Stock on the date of grant. Each grant has a 10 year life,
vesting equally over a three year period, starting at the date of the grant.
We have not granted new stock options since 2004.

The following table summarizes Verizon’s stock option activity:

(shares in thousands)

Outstanding, January 1, 2006
Exercised
Cancelled/forfeited
Outstanding, December 31, 2006
Exercised
Cancelled/forfeited
Outstanding, December 31, 2007
Exercised
Cancelled/forfeited
Options outstanding, December 31, 2008

Stock
Options

259,760
(3,371)
(27,025)
229,364
(33,079)
(21,422)
174,863
(218)
(39,878)
134,767

225,067
174,838
134,767

Weighted-
Average
Exercise
Price

46.01
32.12
43.72
46.48
38.50
48.26
47.78
38.00
48.13
47.69

46.69
47.78
47.69

Risk-free rate
Expected term (in years)
Expected volatility

Ranges

0.6% – 3.3%
1.2 – 3.0
33.9% – 58.5%

Options exercisable, December 31,
2006
2007
2008

The following table summarizes information about Verizon’s stock options
outstanding as of December 31, 2008:

Range of
Exercise Prices

Shares
(in thousands)

Weighted-
Average
Remaining Life

Weighted-
Average
Exercise Price

20.00 – 29.99
30.00 – 39.99
40.00 – 49.99
50.00 – 59.99
60.00 - 69.99
Total

24
19,327
54,190
60,884
342
134,767

3.7 years
4.6
2.2
1.1
0.8
2.1

27.86
36.41
44.03
54.46
60.48
47.69

The total intrinsic value for stock options outstanding was not signifi-
cant as of December 31, 2008. The total intrinsic value for stock options
exercised was $147 million in 2007 and not significant in 2008 and 2006.
The amount of cash received from the exercise of stock options was
not significant in 2008, $1,274 million in 2007 and $101 million in 2006,
respectively. The related tax benefits were not significant. The after-tax
compensation expense for stock options was not significant for 2007
and 2006. There was no stock option expense for 2008.

The risk-free rate is based on the U.S. Treasury yield curve in effect at the
time of the measurement date. The expected term of the VARs granted
was estimated using a combination of the simplified method historical
experience, and management judgment. Expected volatility was based
on a blend of the historical and implied volatility of publicly traded peer
companies for a period equal to the VARs expected life, ending on the
measurement date, and calculated on a monthly basis.

The following table summarizes the Value Appreciation Rights activity:

(shares in thousands)

Outstanding rights, January 1, 2006
Exercised
Cancelled/forfeited
Outstanding rights, December 31, 2006
Exercised
Cancelled/forfeited
Outstanding rights, December 31, 2007
Exercised
Cancelled/forfeited
Outstanding rights, December 31, 2008

VARs

108,923
(7,448)
(7,008)
94,467
(30,848)
(3,207)
60,412
(31,817)
(351)
28,244

Weighted-
Average
Grant-Date
Fair Value

17.12
13.00
23.25
16.99
15.07
24.55
17.58
18.47
19.01
16.54

Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related
to RSUs, PSUs, and VARs described above included in net income as
reported was $375 million, $750 million and $535 million for 2008, 2007
and 2006, respectively.

Notes to Consolidated Financial Statements continued

NOTE 15

EMPLOYEE BENEFITS

We maintain non-contributory defined benefit pension plans for many
of our employees. In addition, we maintain postretirement health care
and life insurance plans for our retirees and their dependents, which
are both contributory and non-contributory and include a limit on the
Company’s share of cost for certain recent and future retirees. We also
sponsor defined contribution savings plans to provide opportunities for
eligible employees to save for retirement on a tax-deferred basis. We use
a measurement date of December 31 for our pension and postretire-
ment health care and life insurance plans.

Refer to Note 1 for a discussion of the adoption of SFAS No. 158, which
was effective December 31, 2006.

Pension and Other Postretirement Benefits
Pension and other postretirement benefits for many of our employees
are subject to collective bargaining agreements. Modifications in bene-
fits have been bargained from time to time, and we may also periodically
amend the benefits in the management plans.

As of June 30, 2006, Verizon management employees no longer earned
pension benefits or earned service towards the company retiree medical
subsidy. In addition, new management employees hired after December
31, 2005 are not eligible for pension benefits and managers with less
than 13.5 years of service as of June 30, 2006 are not eligible for com-
pany-subsidized retiree healthcare or retiree life insurance benefits.
Beginning July 1, 2006, management employees receive an increased
company match on their savings plan contributions.

The following tables summarize benefit costs, as well as the benefit obli-
gations, plan assets, funded status and rate assumptions associated with
pension and postretirement health care and life insurance benefit plans:

Obligations and Funded Status

At December 31,

Change in Benefit

Obligations
Beginning of year
Service cost
Interest cost
Plan amendments
Actuarial (gain) loss, net
Benefits paid
Termination benefits
Curtailment gain
Acquisitions and
divestitures, net

Settlements
End of year

Change in Plan Assets
Beginning of year
Actual return on plan assets
Company contributions
Benefits paid
Settlements
Acquisitions and
divestitures, net

End of year

Funded Status
End of year

Amounts recognized on

the balance sheet
Noncurrent assets
Current liabilities
Noncurrent liabilities
Total

Amounts recognized in
Accumulated Other
Comprehensive Loss
(Pretax)
Actuarial loss, net
Prior service cost

Total

2008

Pension
2007

(dollars in millions)
Health Care and Life
2007

2008

$ 32,495
382
1,966
300
(154)
(2,577)
32
–

$ 34,159
442
1,975
–
123
(4,204)
–
–

$ 27,306
306
1,663
24
(483)
(1,529)
7
(29)

$ 27,330
354
1,592
–
(409)
(1,561)
–
–

(183)
(1,867)
$ 30,394

–
–
$ 32,495

(169)
–
$ 27,096

–
–
$ 27,306

$ 42,659
(10,680)
487
(2,577)
(1,867)

$ 41,509
4,591
737
(4,204)
–

$ 4,142
(1,285)
1,227
(1,529)
–

4,303
352
1,048
(1,561)
–

(231)
$ 27,791

26
$ 42,659

–
$ 2,555

–
4,142

$ (2,603) $ 10,164

$ (24,541) $ (23,164)

$ 3,132
(122)
(5,613)

$ 13,745
(130)
(3,451)
$ (2,603) $ 10,164

–
–
(360)
(496)
(22,804)
(24,045)
$ (24,541) $ (23,164)

$ 13,296
1,162
$ 14,458

13
932
945

$ 6,848
3,235
$ 10,083

6,040
3,636
9,676

Changes in benefit obligations were caused by factors including changes
in actuarial assumptions and settlements.

The accumulated benefit obligation for all defined benefit pension plans
was $29,405 million and $31,343 million at December 31, 2008 and 2007,
respectively.

Information for pension plans with an accumulated benefit obligation in
excess of plan assets follows:

At December 31,

Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets

(dollars in millions)
2007

2008

$ 27,171
26,641
21,436

$ 11,001
10,606
8,868

During 2008, the decline in the fair value of pension assets increased the
number of plans having accumulated benefit obligations in excess of
plan assets as of December 31, 2008 compared to December 31, 2007.

Notes to Consolidated Financial Statements continued

Net Periodic Cost
The following table displays the details of net periodic pension and other postretirement costs:

Years Ended December 31,

Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Actuarial loss, net
Net periodic benefit (income) cost
Termination benefits
Settlement loss
Curtailment loss and other, net
Subtotal
Total (income) cost

2008

382
1,966
(3,187)
62
40
(737)
32
364
–
396
(341)

2007

442
1,975
(3,175)
43
98
(617)
–
–
–
–
(617)

Pension
2006

581
1,995
(3,173)
44
182
(371)
47
56
–
103
(268)

2008

306
1,663
(321)
395
222
2,265
7
–
24
31
$ 2,296

(dollars in millions)
Health Care and Life
2006

356
1,499
(328)
360
290
2,177
14
–
–
14
2,191

2007

354
1,592
(317)
392
316
2,337
–
–
–
–
2,337

Other pretax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:

At December 31,

Other changes in plan assets and benefit obligations recognized

in other comprehensive (income) loss (pretax)

Actuarial (gain) loss, net
Prior service cost
Reversal of amortization items:

Prior service cost
Actuarial loss, net

Total recognized in other comprehensive (income) loss (pretax)

The estimated net loss and prior service cost for the defined benefit
pension plans that will be amortized from Accumulated other com-
prehensive loss into net periodic benefit cost over the next fiscal year
are $114 million and $112 million, respectively. The estimated net loss
and prior service cost for the defined benefit postretirement plans that
will be amortized from Accumulated other comprehensive loss into net
periodic benefit cost over the next fiscal year are $238 million and $401
million, respectively.

Additional Information
As a result of the adoption of SFAS No. 158 in 2006, we no longer record
an additional minimum pension liability. In prior years, as a result of
changes in interest rates and changes in investment returns, an adjust-
ment to the additional minimum pension liability was required for a
number of plans, as indicated below. The adjustment in the liability was
recorded as a charge or (credit) to Accumulated other comprehensive
loss, net of tax, in shareowners’ investment in the consolidated balance
sheets. The Additional Minimum Pension Liability at December 31, 2006,
was reduced by $809 million, ($526 million after-tax) based on the final
measurement just prior to the adoption of SFAS No. 158. The remaining
$396 million, ($262 million after-tax), was reversed as a result of the
adoption of SFAS No. 158.

Years Ended December 31,

2008

Pension
2007

(dollars in millions)
Health Care and Life
2007

2008

13,686
293

(62)
(404)
13,513

(1,317)
–

(43)
(98)
(1,458)

$ 1,030
(6)

(395)
(222)
407

(444)
–

(392)
(316)
(1,152)

2008

2007

(dollars in millions)
2006

Decrease in minimum liability included in other comprehensive income, net of tax

–

(526)

Notes to Consolidated Financial Statements continued

Assumptions
The weighted-average assumptions used in determining benefit obligations follow:

At December 31,

Discount rate
Rate of compensation increases

The weighted-average assumptions used in determining net periodic cost follow:

Years Ended December 31,

Discount rate
Expected return on plan assets
Rate of compensation increase

2008

6.50%
8.50
4.00

2007

6.00%
8.50
4.00

In order to project the long-term target investment return for the total
portfolio, estimates are prepared for the total return of each major asset
class over the subsequent 10-year period, or longer. Those estimates are
based on a combination of factors including the current market interest
rates and valuation levels, consensus earnings expectations, historical
long-term risk premiums and value-added. To determine the aggregate
return for the pension trust, the projected return of each individual asset
class is then weighted according to the allocation to that investment
area in the trust’s long-term asset allocation policy.

The assumed Health Care Cost Trend Rates follow:

At December 31,

Health care cost trend rate assumed

for next year

Rate to which cost trend rate

gradually declines

Year the rate reaches level it is assumed

Health Care and Life
2006

2007

2008

9.00%

10.00%

5.00

to remain thereafter

2014

2013

2011

2008

6.75%
4.00

Pension

2006

5.75%
8.50
4.00

Pension
2007

Health Care and Life
2007

2008

6.50%
4.00

6.75%
N/A

6.50%
4.00

Health Care and Life

2008

6.50%
8.25
4.00

2007

6.00%
8.25
4.00

2006

5.75%
8.25
4.00

Plan Assets
Pension Plans
The weighted-average asset allocations for the pension plans by asset
category follow:

At December 31,

Asset Category
Equity securities
Debt securities
Real estate
Other
Total

2008

2007

46%
20
9
25
100%

59%
18
6
17
100%

Equity securities include Verizon common stock of $87 million and
$127 million at December 31, 2008 and 2007, respectively. Other assets
include cash and cash equivalents (primarily held for the payment of
benefits), private equity and investments in absolute return strategies.

Health Care and Life Plans
The weighted-average asset allocations for the other postretirement
benefit plans by asset category follow:

A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:

One-Percentage-Point

Effect on 2008 service and interest cost
Effect on postretirement benefit obligation as of

December 31, 2008

(dollars in millions)
Decrease

Increase

279

( 224)

2,891

(2,399)

At December 31,

Asset Category
Equity securities
Debt securities
Other
Total

2008

2007

67%
26
7
100%

74%
21
5
100%

In our health care and life plans, there was not a significant amount of
Verizon common stock held at the end of 2008 and none in 2007.

Our portfolio strategy emphasizes a long-term equity orientation,
significant global diversification, the use of both public and private
investments and professional financial and operational risk controls.
Assets are allocated according to long-term risk and return estimates.
Both active and passive management approaches are used depending
on perceived market efficiencies and various other factors.

Notes to Consolidated Financial Statements continued

Cash Flows
In 2008, we contributed $332 million to our qualified pension plans,
$155 million to our nonqualified pension plans and $1,227 million to
our other postretirement benefit plans. We estimate required qualified
pension plan contributions for 2009 to be approximately $300 million.
We also anticipate approximately $120 million in contributions to our
non-qualified pension plans and $1,770 million to our other postretire-
ment benefit plans in 2009.

Estimated Future Benefit Payments
The benefit payments to retirees, which reflect expected future service,
are expected to be paid as follows:

(dollars in millions)

Health Care and Life
Prior to Medicare
Prescription
Drug Subsidy

Expected
Medicare Prescription
Drug Subsidy

Severance, Pension and Benefit Related Charges
During 2008, we recorded net pretax severance, pension and benefits
charges of $950 million ($588 million after-tax). This charge primarily
included $586 million ($363 million after-tax) for workforce reductions
in connection with the separation of approximately 8,600 employees
and related charges; 3,500 of whom were separated in the second half
of 2008, with the remaining reductions expected to occur in 2009, in
accordance with SFAS No. 112. Also included are net pretax pension
settlement losses of $364 million ($225 million after-tax) related to
employees that received lump-sum distributions primarily resulting
from our separation plans. These charges were recorded in accordance
with SFAS No. 88, Employers’ Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits (SFAS No. 88),
which requires that settlement losses be recorded once prescribed pay-
ment thresholds have been reached.

1,979
2,085
2,174
2,195
2,221
10,928

89
99
109
122
134
837

During the fourth quarter of 2007, we recorded charges of $772 million
($477 million after-tax) primarily in connection with workforce reductions
of 9,000 employees and related charges, 4,000 of whom were separated
in the fourth quarter of 2007 with the remaining reductions occurring
throughout 2008. In addition, we adjusted our actuarial assumptions for
severance to align with future expectations.

Pension
Benefits

4,101
3,110
2,769
2,324
2,338
11,292

2009
2010
2011
2012
2013
2014 – 2018

During 2006, we recorded net pretax severance, pension and benefits
charges of $425 million ($258 million after-tax). These charges included
net pretax pension settlement losses of $56 million ($26 million after-
tax) related to employees that received lump-sum distributions primarily
resulting from our separation plans. These charges were recorded
in accordance with SFAS No. 88. Also included are pretax charges of
$369 million ($228 million after-tax) for employee severance and sev-
erance-related costs in connection with the involuntary separation of
approximately 4,100 employees.

Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOP).
Only one plan currently has unallocated shares. We match a certain per-
centage of eligible employee contributions to the savings plans with
shares of our common stock from this ESOP. At December 31, 2008, the
number of unallocated and allocated shares of common stock in this
ESOP were 3 million and 68 million, respectively. All leveraged ESOP
shares are included in earnings per share computations.

Total savings plan costs were $683 million, $712 million, and $669 mil-
lion in 2008, 2007 and 2006, respectively.

Severance Benefits
The following table provides an analysis of our severance liability
recorded in accordance with SFAS No. 112, Employers’ Accounting for
Postemployment Benefits (SFAS No. 112):

Year

2006
2007
2008

Beginning
of Year

Charged to
Expense

Payments

Other End of Year

(dollars in millions)

596
644
1,024

343
743
570

(383)
(363)
(509)

88
–
19

644
1,024
1,104

The remaining severance liability is actuarially determined and includes
the impact of the activities described in “Severance, Pension and Benefit
Related Charges” below. The 2008 expense includes charges for the
involuntary separation of approximately 8,600 employees, including
approximately 800 during the fourth quarter of 2008 and 5,100 expected
during 2009. The 2007 expense includes charges for the involuntary sep-
aration of 9,000 employees as described below.

Notes to Consolidated Financial Statements continued

NOTE 16

INCOME TAxES

Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax are
shown in the following table:

The components of Income Before Provision for Income Taxes,
Discontinued Operations, Extraordinary Item and Cumulative Effect of
Accounting Change are as follows:

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Domestic
Foreign

$ 8,838
921
$ 9,759

8,508
984
9,492

7,000
1,154
8,154

At December 31,

Employee benefits
Tax loss and credit carry forwards
Uncollectible accounts receivable
Other – assets

Valuation allowance
Deferred tax assets

The components of the provision for income taxes from continuing
operations are as follows:

Years Ended December 31,

Current
Federal
Foreign
State and local

Deferred
Federal
Foreign
State and local

Investment tax credits
Total income tax expense

2008

365
240
543
1,148

2,214
(91)
66
2,189
(6)
$ 3,331

(dollars in millions)
2006

2007

2,568
461
545
3,574

397
66
(48)
415
(7)
3,982

2,364
141
421
2,926

(9)
(45)
(191)
(245)
(7)
2,674

The following table shows the principal reasons for the difference
between the effective income tax rate and the statutory federal income
tax rate:

Years Ended December 31,

2008

2007

2006

Statutory federal income tax rate
State and local income tax, net of federal tax

benefits

Distributions from foreign investments
Equity in earnings from unconsolidated

businesses

Other, net
Effective income tax rate

35.0 %

4.1
(0.8)

3.4
5.9

1.8
–

(2.4)
(1.8)
34.1 %

(2.3)
–
42.0 %

(3.8)
(0.2)
32.8 %

The effective income tax rate is the provision for income taxes as a per-
centage of income from continuing operations before the provision
for income taxes. The effective income tax rate in 2008 was lower than
2007 primarily due to recording $610 million of foreign and domestic
taxes and expenses in 2007 specifically relating to our share of Vodafone
Omnitel’s distributable earnings. Verizon received net distributions from
Vodafone Omnitel in April 2008 and December 2007 of approximately
$670 million and $2,100 million, respectively.

(dollars in millions)
2007

2008

$ 13,174
2,634
341
953
17,102
(2,995)
14,107

7,067
2,711
400
852
11,030
(2,944)
8,086

1,818
8,157
2,218
12,957
823
25,973
$ 11,866

1,977
7,045
2,307
11,634
349
23,312
$ 15,226

Former MCI intercompany accounts receivable

basis difference

Depreciation
Leasing activity
Wireless joint venture including wireless licenses
Other – liabilities
Deferred tax liabilities
Net deferred tax liability

Employee benefits deferred tax assets include $10,344 million and
$4,929 million at December 31, 2008 and 2007, respectively, recognized
in accordance with SFAS No. 158 (see Notes 1 and 15).

At December 31, 2008, undistributed earnings of our foreign subsid-
iaries indefinitely invested outside of the United States amounted to
approximately $800 million. We have not provided deferred taxes on
these earnings because we intend that they will remain indefinitely
invested outside of the United States. Determination of the amount of
unrecognized deferred taxes related to these undistributed earnings is
not practical.

At December 31, 2008, we had tax loss and credit carry forwards for
income tax purposes of approximately $3,000 million. Of these tax
loss and credit carry forwards, approximately $2,420 million will expire
between 2009 and 2028 and approximately $580 million may be carried
forward indefinitely. The amount of tax loss and credit carry forwards
reflected as a deferred tax asset above has been reduced by approxi-
mately $614 million and $661 million at December 31, 2008 and 2007,
respectively, due to federal and state tax law limitations on utilization of
net operating losses.

During 2008, the valuation allowance increased $51 million. Beginning
January 1, 2009, due to the issuance of SFAS No. 141(R), the valuation
allowance as of December 31, 2008, if recognized, will be reflected in
income tax expense.

Notes to Consolidated Financial Statements continued

FASB Interpretation No. 48
FIN 48 prescribes the recognition, measurement and disclosure
standards for uncertainties in income tax positions. A reconciliation
of the beginning and ending balance of unrecognized tax benefits is
as follows:

Balance at January 1,
Additions based on tax positions related

to the current year

Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements
Lapses of statutes of limitations
Balance at December 31,

(dollars in millions)
2007

2008

$ 2,883

2,958

251
344
(651)
(126)
(79)
$ 2,622

141
291
(420)
(11)
(76)
2,883

Included in the total unrecognized tax benefits at December 31, 2008
and 2007 is $1,631 million and $1,245 million, respectively, that if recog-
nized, would favorably affect the effective income tax rate. Of the $1,631
million at December 31, 2008, $383 million of unrecognized tax benefits
are from a prior acquisition and pursuant to SFAS No. 141(R), if recog-
nized, would favorably affect the effective income tax rate.

We recognize any interest and penalties accrued related to unrecog-
nized tax benefits in income tax expense. During 2008 we recognized
a net after tax benefit in the income statement related to interest and
penalties of approximately $55 million. We had approximately $538 mil-
lion (after-tax) and $598 million (after-tax) for the payment of interest
and penalties accrued in the balance sheets at December 31, 2008 and
December 31, 2007, respectively.

During the year ended December 31, 2007, we recognized approximately
$175 million (after-tax) in the income statement for the payment of
interest and penalties. We had approximately $598 million (after-tax)
and $444 million (after-tax) for the payment of interest and penalties
accrued in the balance sheet at December 31, 2007 and January 1,
2007, respectively.

Verizon or one of its subsidiaries files income tax returns in the U.S. fed-
eral jurisdiction, and various state, local and foreign jurisdictions. The
Company is generally no longer subject to U.S. federal, state and local,
or non-U.S. income tax examinations by tax authorities for years before
2004. The Internal Revenue Service (IRS) will begin its examination of the
Company’s U.S. income tax returns for years 2004 through 2006 in the
first quarter of 2009. As a result of the anticipated resolution of various
income tax audits within the next twelve months, we believe that it is
reasonably possible that the amount of unrecognized tax benefits will
decrease. An estimate of the range of the possible change cannot be
made until issues are further developed.

NOTE 17

SEGMENT INFORMATION

Reportable Segments
We have two reportable segments, which we operate and manage
as strategic business units and organize by products and services. We
previously measured and evaluated our reportable segments based
on segment income. Beginning in 2008, we measure and evaluate our
reportable segments based on segment operating income, which is
reflected in all periods presented. The use of segment operating income
is consistent with the chief operating decision makers’ assessment of
segment performance.

Corporate, eliminations and other includes unallocated corporate
expenses, intersegment eliminations recorded in consolidation, the
results of other businesses such as our investments in unconsolidated
businesses, lease financing, and other adjustments and gains and losses
that are not allocated in assessing segment performance due to their
non-recurring or non-operational nature. Although such transactions
are excluded from the business segment results, they are included
in reported consolidated earnings. Gains and losses that are not
individually significant are included in all segment results, since these
items are included in the chief operating decision makers’ assessment
of segment performance.

The below reconciliation of segment operating revenues and expenses
to consolidated operating revenues and expenses also include those
items of a non-recurring or non-operational nature. We exclude from
segment results the effects of certain items that management does not
consider in assessing segment performance, primarily because of their
non-recurring or non-operational nature.

In 2008, we completed the spin-off of our local exchange and related
business assets in Maine, New Hampshire and Vermont. Accordingly,
Wireline results from divested operations, including the impact of the
non strategic assets sold during the first quarter of 2007, have been
reclassified to Corporate and Other and reflect comparable operating
results. In 2007, we completed the sale of our 52% interest in TELPRI and
our interest in CANTV. In 2006, we closed the sale of Verizon Dominicana.
Consequently, with these three transactions, we completed the disposi-
tion of our International segment. Also in 2006, we completed the spin-off
of our Information Services segment which included our domestic print
and Internet yellow pages directories business. For further information
concerning the disposition of the International and Information Services
segments, see Note 3.

Our segments and their principal activities consist of the following:

Segment

Description

Domestic Wireless

Domestic Wireless’s products and services include wire-
less voice, data services and other value-added services
and equipment sales across the United States.

Wireline

Wireline’s communications services include voice,
Internet access, broadband video and data, next genera-
tion Internet Protocol network services, network access,
long distance and other services. We provide these ser-
vices to consumers, carriers, businesses and government
customers both in the United States and internationally
in 150 countries.

Notes to Consolidated Financial Statements continued

The following table provides operating financial information for our two reportable segments:

2008

Domestic Wireless

Wireline

(dollars in millions)
Total Segments

External revenues
Intersegment revenues
Total operating revenues
Cost of services and sales
Selling, general & administrative expense
Depreciation & amortization expense
Total operating expenses
Operating income

Assets
Plant, property and equipment, net
Capital expenditures

2007

Assets
Plant, property and equipment, net
Capital expenditures

2006

Assets
Plant, property and equipment, net
Capital expenditures

49,226
106
49,332
15,660
14,273
5,405
35,338
13,994

$ 111,979
27,136
6,510

43,777
105
43,882
13,456
13,477
5,154
32,087
11,795

83,755
25,971
6,503

37,930
113
38,043
11,491
12,039
4,913
28,443
9,600

81,989
24,659
6,618

46,978
1,236
48,214
24,274
11,047
9,031
44,352
3,862

90,386
58,287
9,797

47,889
1,240
49,129
24,181
11,527
8,927
44,635
4,494

92,264
58,702
10,956

48,352
1,152
49,504
23,806
11,998
9,309
45,113
4,391

92,274
57,031
10,259

96,204
1,342
97,546
39,934
25,320
14,436
79,690
17,856

$ 202,365
85,423
16,307

91,666
1,345
93,011
37,637
25,004
14,081
76,722
16,289

176,019
84,673
17,459

86,282
1,265
87,547
35,297
24,037
14,222
73,556
13,991

174,263
81,690
16,877

Notes to Consolidated Financial Statements continued

Reconciliation To Consolidated Financial Information
A reconciliation of the segment operating revenues and expenses to the consolidated operating revenues and expenses is as follows:

2008

2007

(dollars in millions)
2006

Operating Revenues
Total reportable segments
Reconciling items:

Impact of dispositions and operations sold

Corporate, eliminations and other
Consolidated operating revenues – reported

Operating Expenses
Total reportable segments
Reconciling items:
Merger integration costs (see Note 2)
Access line spin-off related charges (see Note 3)
Taxes on foreign distributions (see Note 7)
Verizon Center relocation (see Note 6)
Severance, pension and benefit charges, net (see Note 15)
Impact of disposition and operations sold (see Note 3)

Verizon Foundation contribution (see Note 3)
Corporate, eliminations and other
Consolidated operating expenses – reported

97,546

258
(450)
97,354

79,690

174
103
–
–
950
214
–
(661)
80,470

93,011

87,547

1,094
(636)
93,469

76,722

178
84
15
–
772
912
100
(892)
77,891

1,191
(556)
88,182

73,556

232
–
–
184
425
1,016
–
(604)
74,809

A reconciliation of the total of the reportable segments’ operating income to consolidated Income Before Provision for Income Taxes, Discontinued
Operations, Extraordinary Item and Cumulative Effect of Accounting Change is as follows:

Operating Income
Total segment operating income
Total reconciling items
Corporate, eliminations and other
Consolidated operating income – reported

Equity in earnings of unconsolidated businesses
Other income and (expense), net
Interest expense
Minority interest
Income Before Provision for Income Taxes, Discontinued Operations,
Extraordinary item and Cumulative Effect of Accounting Change

Assets
Total reportable segments
Corporate, eliminations and other
Total consolidated – reported

2008

17,856
(1,183)
211
16,884

567
282
(1,819)
(6,155)

9,759

$ 202,365
(13)
$ 202,352

2007

16,289
(967)
256
15,578

585
211
(1,829)
(5,053)

9,492

176,019
10,940
186,959

(dollars in millions)
2006

13,991
(666)
48
13,373

773
395
(2,349)
(4,038)

8,154

174,263
14,541
188,804

We generally account for intersegment sales of products and services and asset transfers at current market prices. We are not dependent on any
single customer. International operating revenues and long-lived assets are not significant.

Notes to Consolidated Financial Statements continued

NOTE 18

COMPREHENSIVE INCOME

Comprehensive income (loss) consists of net income and other gains
and losses affecting shareowners’ investment that, under GAAP, are
excluded from net income. Significant changes in the components of
Other comprehensive income (loss), net of income tax expense (ben-
efit), are described below.

Foreign Currency Translation

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Foreign Currency Translation

Adjustments:

Vodafone Omnitel
CANTV
Verizon Dominicana
Other international operations

(119)
–
–
(112)
(231)

397
412
–
29
838

330
–
786
80
1,196

Net Unrealized Gains (Losses) on Cash Flow Hedges
The changes in Unrealized Gains (Losses) on Cash Flow Hedges were
as follows:

Years Ended December 31,

2008

(dollars in millions)
2006

2007

(43)

(2)

Unrealized Gains (Losses) on

Cash Flow Hedges

Unrealized gains (losses), net of taxes
Less reclassification adjustments

for losses realized in net income,
net of taxes

Net unrealized gains (losses) on

cash flow hedges

(40)

(3)

Unrealized Gains (Losses) on Marketable Securities
The changes in Unrealized Gains (Losses) on Marketable Securities were
as follows:

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss are as
follows:

At December 31,

(dollars in millions)
2007

2008

Foreign currency translation adjustments
Net unrealized losses on hedging
Unrealized gains (losses) on marketable securities
Defined benefit pension and postretirement plans
Accumulated Other Comprehensive Loss

936
(50)
(37)
(14,221)
$ (13,372)

1,167
(10)
60
(5,723)
(4,506)

Foreign Currency Translation Adjustments
The change in foreign currency translation adjustments at December
31, 2008 was primarily driven by the settlement of the foreign currency
forward contracts which hedged a portion of our net investment in
Vodafone Omnitel (see Note 11) and the devaluation of the Euro. During
2007 we sold our interest in CANTV. During 2006 we sold our interest in
Verizon Dominicana. See Note 3 for information on CANTV and Verizon
Dominicana.

Defined Benefit Pension and Postretirement Plans
The change in defined benefit pension and postretirement plans of
$8.5 billion, net of taxes of $5.4 billion, at December 31, 2008 was attrib-
utable to the change in the funded status of the plans in connection
with the annual pension and postretirement valuation in accordance
with SFAS No. 158. The funded status was impacted by changes in asset
performance, actuarial assumptions, and plan experience. In addition
to the pension and postretirement items, we recorded a reduction to
the beginning balance of Accumulated other comprehensive loss of
$79 million ($44 million after-tax) in connection with the spin-off of our
local exchange and related business assets in Maine, New Hampshire
and Vermont.

Unrealized Gains (Losses) on

Marketable Securities

Unrealized gains (losses), net of taxes
Less reclassification adjustments
for gains (losses) realized in

net income, net of taxes

Net unrealized gains (losses) on

(142)

(45)

marketable securities

(97)

(4)

Notes to Consolidated Financial Statements continued

NOTE 19

NOTE 20

ADDITIONAL FINANCIAL INFORMATION

COMMITMENTS AND CONTINGENCIES

The tables that follow provide additional financial information related to
our consolidated financial statements:

Income Statement Information

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Depreciation expense
Interest cost incurred
Capitalized interest
Advertising costs

$ 13,182
2,566
(747)
2,754

$ 13,036
2,258
(429)
2,463

$ 13,122
2,811
(462)
2,271

Balance Sheet Information

At December 31,

Accounts Payable and Accrued Liabilities
Accounts payable
Accrued expenses
Accrued vacation, salaries and wages
Interest payable
Accrued taxes

Other Current Liabilities
Advance billings and customer deposits
Dividends payable
Other

(dollars in millions)
2007

2008

$ 3,856
2,299
4,871
652
2,136
$ 13,814

$ 2,651
1,584
2,864
$ 7,099

4,491
2,400
4,828
473
2,270
$ 14,462

2,476
1,266
3,583
7,325

Cash Flow Information

Years Ended December 31,

2008

(dollars in millions)
2006

2007

Cash Paid
Income taxes, net of amounts refunded
Interest, net of amounts capitalized

$ 1,206
1,664

2,491
1,682

3,299
2,103

Supplemental Investing and Financing

Transactions

Cash acquired in business combinations
Assets acquired in business combinations
Liabilities assumed in business

combinations

Debt assumed in business combinations
Shares issued to Price to acquire limited
partnership interest in VZ East (Note 8)

397
2,803

384
1,505

17
589

154
–

2,361
18,511

7,813
6,169

–

1,007

Other, net cash provided by operating activities – continuing operations
primarily included the add back of the minority interest’s share of Verizon
Wireless earnings, net of dividends paid to minority partners, of $5,218
million in 2008, $3,953 million in 2007 and $3,232 million in 2006.

Several state and federal regulatory proceedings may require our tele-
phone operations to pay penalties or to refund to customers a portion
of the revenues collected in the current and prior periods. There are also
various legal actions pending to which we are a party and claims which,
if asserted, may lead to other legal actions. We have established reserves
for specific liabilities in connection with regulatory and legal actions,
including environmental matters that we currently deem to be probable
and estimable. We do not expect that the ultimate resolution of pending
regulatory and legal matters in future periods, including the Hicksville
matter described below, will have a material effect on our financial con-
dition, but it could have a material effect on our results of operations for
a given reporting period.

During 2003, under a government-approved plan, remediation com-
menced at the site of a former Sylvania facility in Hicksville, New York
that processed nuclear fuel rods in the 1950s and 1960s. Remediation
beyond original expectations proved to be necessary and a reassessment
of the anticipated remediation costs was conducted. A reassessment of
costs related to remediation efforts at several other former facilities was
also undertaken. In September 2005, the Army Corps of Engineers (ACE)
accepted the Hicksville site into the Formerly Utilized Sites Remedial
Action Program. This may result in the ACE performing some or all of the
remediation effort for the Hicksville site with a corresponding decrease
in costs to Verizon. To the extent that the ACE assumes responsibility for
remedial work at the Hicksville site, an adjustment to a reserve previously
established for the remediation may be necessary. Adjustments to the
reserve may also be necessary based upon actual conditions discovered
during the remediation at any of the sites requiring remediation.

In connection with the execution of agreements for the sales of busi-
nesses and investments, Verizon ordinarily provides representations and
warranties to the purchasers pertaining to a variety of nonfinancial mat-
ters, such as ownership of the securities being sold, as well as indemnity
from certain financial losses.

Subsequent to the sale of Verizon Information Services Canada in 2004,
we continue to provide a guarantee to publish directories, which was
issued when the directory business was purchased in 2001 and had a
30-year term (before extensions). The preexisting guarantee continues,
without modification, despite the subsequent sale of Verizon Information
Services Canada and the spin-off of our domestic print and Internet
yellow pages directories business. The possible financial impact of the
guarantee, which is not expected to be adverse, cannot be reasonably
estimated since a variety of the potential outcomes available under the
guarantee result in costs and revenues or benefits that may offset each
other. In addition, performance under the guarantee is not likely.

We have several commitments primarily to purchase network services,
equipment and software from a variety of suppliers totaling $737 million.
Of this total amount, $435 million, $162 million, $75 million, $29 million,
$26 million and $10 million are expected to be purchased in 2009, 2010,
2011, 2012, 2013 and thereafter, respectively.

Notes to Consolidated Financial Statements continued

NOTE 21

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarter Ended

2008
March 31
June 30
September 30
December 31

2007
March 31
June 30
September 30
December 31

(dollars in millions, except per share amounts)

Income Before Discontinued Operations, Extraordinary Item
and Cumulative Effect of Accounting Change

Operating
Revenues

Operating
Income

$ 23,833
24,124
24,752
24,645

$ 22,584
23,273
23,772
23,840

$ 4,333
4,546
4,173
3,832

3,796
4,149
4,210
3,423

Amount

$ 1,642
1,882
1,669
1,235

1,484
1,683
1,271
1,072

Per Share-
Basic

Per Share-
Diluted

Net Income

.57
.66
.59
.43

.51
.58
.44
.37

.57
.66
.59
.43

.51
.58
.44
.37

$ 1,642
1,882
1,669
1,235

1,495
1,683
1,271
1,072

• Results of operations for the first quarter of 2008 include after-tax charges of $18 million for merger integration costs and $81 million related to access line spin-off charges.
• Results of operations for the second quarter of 2008 include after-tax charges of $22 million for merger integration costs.
• Results of operations for the third quarter of 2008 include after-tax charges of $32 million for merger integration costs and $164 million for severance, pension and benefit charges.
• Results of operations for the fourth quarter of 2008 include after-tax charges of $35 million for merger integration costs, $31 million investment related charges attributable to an other-than-

temporary decline in the fair value of our investments in marketable securities, and $424 million for severance, pension and other charges.

• Results of operations for the first quarter of 2007 include after-tax charges of $9 million for merger integration costs, $131 million for an extraordinary charge related to the nationalization of

CANTV, a $70 million after-tax gain on the sale of our interest in TELPRI and a $65 million after tax contribution to the Verizon Foundation.

• Results of operations for the second quarter of 2007 include after-tax charges of $17 million for merger integration costs.
• Results of operations for the third quarter of 2007 include after-tax charges of $28 million for merger integration costs, $44 million related to access line spin-off charges and $471 million asso-

ciated with taxes on foreign distributions.

• Results of operations for the fourth quarter of 2007 include after-tax charges of $58 million for merger integration costs, $36 million related to access line spin-off charges, $139 million associ-

ated with taxes on foreign distributions, and $477 million for severance, pension and other charges.
Income before discontinued operations per common share is computed independently for each quarter and the sum of the quarters may not equal the annual amount.

Board of Directors

Richard L. Carrión
Chairman, President and
Chief Executive Officer
Popular, Inc.
and Chairman and Chief Executive Officer
Banco Popular de Puerto Rico

M. Frances Keeth
Retired Executive Vice President
Royal Dutch Shell plc

Robert W. Lane
Chairman and Chief Executive Officer
Deere & Company

Sandra O. Moose
President
Strategic Advisory Services LLC

Joseph Neubauer
Chairman and Chief Executive Officer
ARAMARK Holdings Corporation

Donald T. Nicolaisen
Former Chief Accountant
United States Securities and
Exchange Commission

Thomas H. O’Brien
Retired Chairman and Chief Executive Officer
The PNC Financial Services Group, Inc.
and PNC Bank, N.A.

Clarence Otis, Jr.
Chairman and Chief Executive Officer
Darden Restaurants, Inc.

Hugh B. Price
Visiting Professor and Lecturer
Woodrow Wilson School of Public and
International Affairs, Princeton University
and Non-Resident Senior Fellow
The Brookings Institution

Ivan G. Seidenberg
Chairman and Chief Executive Officer
Verizon Communications Inc.

John W. Snow
President
JWS Associates, LLC

John R. Stafford
Retired Chairman and Chief Executive Officer
Wyeth

Retired in 2008:

Robert D. Storey
Retired Partner
Thompson Hine LLP

Corporate Officers and
Executive Leadership

Ivan G. Seidenberg
Chairman and Chief Executive Officer

Dennis F. Strigl
President and Chief Operating Officer

Doreen A. Toben*
Executive Vice President and
Chief Financial Officer

Thomas A. Bartlett
Senior Vice President and Controller

John W. Diercksen
Executive Vice President –
Strategy, Development and Planning

Marianne Drost
Senior Vice President, Deputy General
Counsel and Corporate Secretary

Patrick R. Gaston
President – Verizon Foundation

Shaygan Kheradpir
Executive Vice President and
Chief Information Officer

John F. Killian*
President – Verizon Business

Ronald H. Lataille
Senior Vice President – Investor Relations

Kathleen H. Leidheiser
Senior Vice President – Internal Auditing

Richard J. Lynch
Executive Vice President and
Chief Technology Officer

Lowell C. McAdam
Executive Vice President and
President and Chief Executive Officer –
Verizon Wireless

Daniel S. Mead
President – Verizon Telecom

Randal S. Milch
Executive Vice President and
General Counsel

Marc C. Reed
Executive Vice President –
Human Resources

Virginia P. Ruesterholz
President – Verizon Services Operations

John G. Stratton
Executive Vice President and
Chief Marketing Officer

Thomas J. Tauke
Executive Vice President –
Public Affairs, Policy and Communications

Catherine T. Webster
Senior Vice President and Treasurer

* Doreen Toben will serve as Executive Vice President
until her retirement in mid-2009. Effective March 1,
2009, John Killian became Executive Vice President
and Chief Financial Officer and Francis J. Shammo
became President – Verizon Business.

Investor Information

Registered Shareowner Services
Questions or requests for assistance regarding changes to or transfers
of your registered stock ownership should be directed to our transfer
agent, Computershare Trust Company, N.A. at:

Verizon Communications Shareowner Services
c/o Computershare
P.O. Box 43078
Providence, RI 02940-3078
Phone: 800 631-2355
Website: www.computershare.com/verizon
Email: verizon@computershare.com

Persons outside the U.S. may call: 781 575-3994

Persons using a telecommunications device for the deaf (TDD) may call:
800 524-9955

On-line Account Access – Registered shareowners can view account
information on-line at: www.computershare.com/verizon

Click on “Create login” to register. For more information, contact
Computershare.

Direct Dividend Deposit Service – Verizon offers an electronic funds
transfer service to registered shareowners wishing to deposit dividends
directly into savings or checking accounts on dividend payment dates.
For more information, contact Computershare.

Direct Invest Stock Purchase and Ownership Plan – Verizon offers a
direct stock purchase and share ownership plan. The plan allows cur-
rent and new investors to purchase common stock and to reinvest the
dividends toward the purchase of additional shares. To receive a Plan
Prospectus and enrollment form, contact Computershare or visit their
website.

eTree® Program – Worldwide, Verizon is acting to conserve natural
resources in a variety of ways. Now we are proud to offer shareowners
an opportunity to be environmentally responsible. By receiving links
to proxy, annual report and shareowner materials online, you can help
Verizon reduce the amount of materials we print and mail. As a thank
you for choosing electronic delivery, Verizon will plant a tree on your
behalf. It’s fast and easy and you can change your electronic delivery
options at any time. Sign up at www.eTree.com/verizon or call
800 631-2355 or 781 575-3994.

Corporate Governance
Verizon’s Corporate Governance Guidelines are available on our
website – www.verizon.com/investor

If you would prefer to receive a printed copy in the mail, please contact
the Assistant Corporate Secretary:

Verizon Communications Inc.
Assistant Corporate Secretary
140 West Street, 29th Floor
New York, NY 10007

v e r i zo n co m m u n i c at i o n s i n c . 2 0 0 8 a n n ua l r e p o r t

Investor Services
Investor Website – Get company information and news on our
website – www.verizon.com/investor

VZ Mail – Get the latest investor information delivered directly to your
computer desktop. Subscribe to VzMail at our investor information
website.

Stock Market Information
Shareowners of record at December 31, 2008: 798,938

Verizon is listed on the New York Stock Exchange
(ticker symbol: VZ)

Also listed on the Chicago, London, Swiss, Amsterdam and Frankfurt
exchanges.

Common Stock Price and Dividend Information

2008
Fourth Quarter
Third Quarter
Second Quarter
First Quarter*

2007*
Fourth Quarter
Third Quarter
Second Quarter
First Quarter

Market Price
High

Low

$ 34.90 $ 23.07
30.25
33.84
33.00

36.34
39.94
44.12

Cash
Dividend
Declared

$ 0.460
0.460
0.430
0.430

46.03 $
44.55
43.79
38.60

40.59
39.09
36.59
35.44

$ 0.430
0.430
0.405
0.405

*Prices have been adjusted for the spin-off of our local exchange and related
business assets in Maine, New Hampshire and Vermont.

Form 10–K
To receive a copy of the 2008 Annual Report on Form 10-K, which is
filed with the Securities and Exchange Commission, contact Investor
Relations:

Verizon Communications Inc.
Investor Relations
One Verizon Way
Basking Ridge, NJ 07920
Phone: 212 395-1525

Certifications Regarding Public Disclosures & Listing Standards
The 2008 Annual Report on Form 10-K filed with the Securities and
Exchange Commission includes the certifications required by Section
302 of the Sarbanes-Oxley Act regarding the quality of Verizon’s
public disclosure. In addition, the annual certification of the chief
executive officer regarding compliance by Verizon with the corporate
governance listing standards of the New York Stock Exchange was
submitted without qualification following the 2008 annual meeting of
shareholders.

Equal Opportunity Policy
Verizon maintains a long-standing commitment to equal opportunity
and valuing the diversity of its employees, suppliers and customers.
Verizon is fully committed to a workplace free from discrimination and
harassment for all persons, without regard to race, color, religion, age,
gender, national origin, sexual orientation, marital status, citizenship
status, veteran status, disability or other protected classifications.

Verizon Communications Inc.
140 West Street
New York, New York 10007
212 395-1000

verizon.com

Cert no. SCS-COC-00648