UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number: 001-32422

VALOR COMMUNICATIONS GROUP, INC.

201 E. John Carpenter Freeway, Suite 200, Irving, Texas                     75062

Registrant’s telephone number, including area code: (972) 373-1000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 5, 2005, 70,735,454 shares of common stock, par value $0.0001 per share, were outstanding.

VALOR COMMUNICATIONS GROUP, INC.
TABLE OF CONTENTS

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ITEM 1: FINANCIAL STATEMENTS

Valor Communications Group, Inc.

See accompanying notes to condensed consolidated financial statements.

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Valor Communications Group, Inc.

See accompanying notes to condensed consolidated financial statements.

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Valor Communications Group, Inc.

See Note 13 for supplemental cash flow information.

See accompanying notes to condensed consolidated financial statements.

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Valor Communications Group, Inc.

(1) Background and Basis of Presentation

The consolidated financial statements include the accounts of Valor Communications Group, Inc., (“Valor”) and its wholly owned subsidiaries (collectively, the “Company”). All significant intercompany transactions have been eliminated. Valor is a holding company and has no direct operations. Valor was formed for the sole purpose of reorganizing our corporate structure and consummation of our initial public offering. Valor’s principle assets are the direct and indirect equity interest of its subsidiaries, Valor Telecommunications, LLC (“VTC”), Valor Telecommunications Southwest, LLC (“VTS”) and Valor Telecommunications Southwest II, LLC (“VTS II”). The historical consolidated financial statements prior to the initial public offering represent those of VTC.

The Consolidated Financial Statements included herein have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of our Management, the Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information in accordance with GAAP. The financial information for the three months ended March 31, 2004 and 2005 has not been audited by an independent registered public accounting firm. The results of operations for the first three months of the year are not necessarily indicative of the results of operations that might be expected for the entire year. The Consolidated Financial Statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2004.

Initial Public Offering and Senior Notes Offering - On February 9, 2005, the Company completed its initial public offering (“Offering”) through registering 29,375,000 shares of common stock at an offering price of $15. Concurrent with the initial public offering, the Company issued $400,000 principal amount of 7 3/4% senior notes due in 2015. The proceeds from the Offering and the issuance of the senior notes were used to repay the second lien loan of $265,000, senior subordinated loan of $135,000, a portion of the existing credit facility of $373,400 and associated fees and expenses of approximately $64,700. In connection with the Offering, certain of the Company’s stockholders granted an option to the underwriters to purchase up to 4,406,250 additional shares in the aggregate at the Offering price less the underwriting discount. On March 16, 2005, the underwriters exercised their over-allotment option in full. The Company received no proceeds from the over-allotment exercise.

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Reorganization - Immediately prior to and in connection with the Offering, the Company consummated a reorganization pursuant to which the existing equity holders contributed all their equity interests, including Class A common, Class B common, Class C, redeemable preferred interests, redeemable preferred interests of subsidiary and minority interests, in VTC and VTS to Valor in exchange for 39,537,574 shares of common stock in the aggregate. Following the reorganization, Valor exists as a holding company with no direct operations and each of VTC, VTS and VTS II are either a direct or an indirect wholly owned subsidiary of Valor.

As a result of the reorganization, all partnership operations of Valor became wholly owned (directly or indirectly) by the Company, and the operations of the Company and all wholly owned subsidiaries and affiliates became included in a consolidated federal corporate tax return.

Amendment to Senior Credit Facility - In connection with the Offering the Company amended its senior credit facility. The amended senior credit facility resulted in the reduction of the commitment amount of Tranche B Term Loan to $750,000, Tranche C Term Loan to $50,000 and Tranche D Term Loan to $5,556. Under the amended credit facility, the entire principal balances on the Tranches B, C and D are due at maturity, February 2012.

As a result of the repayment of existing indebtedness, the Company recorded a loss on extinguishment of debt of $29,262 primarily due to prepayment premiums, breakage costs and the write-off of related previously deferred debt costs in the first quarter of 2005.

Stock Compensation - Concurrent with the Offering, the Company terminated the Valor Telecom Executive Incentive Plan and cancelled all equity incentive non-qualifying stock options in Class B common interests. The Company finalized the 2005 Long-Term Incentive Plan (“LTIP”) resulting in the issuance of restricted stock. The Company granted 1,895,697 shares of restricted stock to management during the quarter, which vest on the Offering date and thereafter on January 1, 2006, 2007 and 2008. The Company recorded $6,387 of expense as a result of the issuance of the restricted stock in the first quarter of 2005.

(2) Stock-Based Compensation

The Company accounts for its employee stock compensation plan using the intrinsic value based method in accordance with APB Opinion No. 25 as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation”. No stock-based employee compensation cost is reflected in net income related to options, since options granted under the plan had an exercise price equal to the market value of the underlying common

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stock on the date of grant. If compensation cost for the options had been determined in accordance with SFAS No. 123, the Company’s net income and per owner unit amounts for the three months ended March 31, 2004 and 2005 would have been as follows:

As discussed in Note 1, the Company cancelled all equity incentive non-qualifying stock options in Class B common interests in connection with the Offering in February 2005.

(3) Net Property, Plant and Equipment

Net property, plant and equipment is composed of the following:

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(4) Investments and Other Assets

Investments and other assets consist of the following:

(5) Long-Term Debt

As a result of the amended credit facility in February 2005, the Company is required to reduce the risk of interest rate volatility with at least 50% of its indebtedness. To manage interest rate risk exposure and fulfill requirements under the credit facility, the Company entered into seven agreements, three interest rate caps and four interest rate swaps, with investment grade financial institutions in March 2005 (collectively, “Agreements”). While the Company may be exposed to credit losses due to non-performance of the counterparties, the Company considers the risk to be remote. In connection with entering the interest rate cap agreements, the Company paid $854.

The following represents a summary of the Agreements as of March 31:

The Company’s interest rate caps are not treated as hedges as prescribed by the accounting literature; therefore, the fair value of the instruments is recorded each reporting period in “Other assets” on the Consolidated Balance Sheets with the change in fair value recorded in the Consolidated Statements of Operations in “Loss on interest rate

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hedging arrangements.” The interest rate swaps effectively convert the Company’s variable rate debt to fixed rate debt. The swap agreements qualify for hedge accounting under SFAS No. 133; therefore, they are carried at fair market value and are included in “Other assets” on the Consolidated Balance Sheets with changes in fair value recorded as “Other comprehensive income” in the accompanying Consolidated Statements of Operations. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

(6) Deferred Credits and Other Liabilities

Deferred credits and other liabilities were composed of the following:

(7) Income Taxes

In connection with the Offering in February 2005, the Company completed a reorganization, which resulted in the operations of all entities within Valor and VTC becoming reportable in a consolidated corporate federal tax return. As a result of the reorganization the Company’s previous owners contributed approximately $308,000 of Net Operating Losses (“NOL’s”) that the Company will be able to use, subject to certain limitations, to reduce future taxable income. Furthermore, the Company has cumulative book/tax differences of approximately $519,000 resulting from items such as goodwill amortization and accelerated tax depreciation that the Company has deducted faster for tax purposes under the tax code than for financial reporting purposes.

The tax effect of the NOL’s and the cumulative differences were recorded on the Company’s balance sheet at the reorganization and resulted in a net deferred tax liability of approximately $79,000.

The Company also has other items totaling $760,000, which consist of $644,000 related to unamortized goodwill and $116,000 related to the step-up in tax basis of assets as a result of the reorganization. Unamortized goodwill represents tax deductions through 2015 that will result in a future deferred tax liability for financial reporting purposes

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due to the book/tax basis difference related to the goodwill. Due to the fact there is no step-up in basis for book purposes, the step-up in our tax basis of assets will represent a permanent difference.

Prior to the reorganization in February 2005, only VTS II had elected to be taxed as a corporation for federal income tax purposes. Each legal operating entity owned directly or indirectly by VTS II is legally formed either as a limited liability company, a limited partnership, or a corporation. However, each of these entities was treated for federal income tax purposes either as a corporation or a disregarded entity (a division of a corporation). Operations for all entities directly or indirectly owned by VTS II were included in a consolidated federal income tax return filed by VTS II. Since VTS II had elected to be treated as a corporation for tax purposes, the income tax expense and the deferred tax assets and liabilities reported in the consolidated results of operations are reported under this entity’s name and are computed based upon the consolidated Southwest II operations.

The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes”. The Company records its net deferred income tax asset and liability for all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, computed based on provisions of the enacted tax law.

Income tax expense (benefit) was as follows:

The differences between the federal income tax statutory rate and the Company’s effective income tax rate of 3.5% for the three months ended March 31, 2004 is primarily related to consolidated entities not subject to income taxes. The differences between the federal income tax statutory rate and the Company’s effective income tax rate of 30.1% for the three months ended March 31, 2005 is primarily related to consolidated entities not subject to income taxes prior the effective date of the Company’s Offering.

(8) Pension and Postretirement Benefits

The Company sponsors a qualified pension plan and a postretirement benefit plan for the union employees. The pension plan is noncontributory. The Company’s postretirement health care plans are generally contributory and include a limit on the Company’s share

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of the cost for recent and future retirees. The Company accrues the costs, as determined by an actuary, of the pension and the postretirement benefits over the period from the date of hire until the date the employee becomes fully eligible for benefits.

The following tables provide the components of net periodic benefit cost for the three months ended March 31:

(9) Restructuring Charges

The following table provides a reconciliation of the changes in the employee termination benefits obligation for the three months ended March 31, 2005:

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(10) Commitments and Contingencies

In the normal course of business, there are various legal proceedings outstanding, including both commercial and regulatory litigation. In the opinion of management, these proceedings will not have a material adverse effect on the results of operations or financial condition of the Company.

(11) Related Party Transactions

The Company had the following transactions with related parties:

The Company had the following balances with related parties:

Under the terms of the CGKC&H (wireless affiliate) partnership agreement, the general partners have designated the Company to act as the operating partner of CGKC&H. The agreement provides that the Company is to be reimbursed for all reasonable and necessary expenses incurred on behalf of CGKC&H. During 2004 and 2005, the Company was reimbursed approximately $230 and $271, respectively, from CGKC&H for these services.

Effective January 1, 2005, the Company terminated the management agreement, whereby, the Company paid Sponsors management fees for advisory services.

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(12) Earnings Per Share

On February 9, 2005, the Company completed the initial public offering issuing 29,375,000 shares of common stock and 41,458,333 shares of common stock in exchange for all outstanding ownership interests in VTC and its subsidiaries outstanding prior to the Offering and issuance of shares to management under the Long-Term Incentive Plan. As of March 31, 2005, the Company had 70,868,777 shares of common stock issued and 70,648,109 outstanding, including unvested restricted shares issued to management.

The following table sets forth the computation of earnings per share for the period from February 9 through March 31, 2005:

There were 1,501,770 of unvested shares issued to management that were excluded from the computation of diluted earnings per share for the period from February 9 through March 31, 2005 because the effect would be anti-dilutive.

The following table sets forth the computation of earnings per owners’ unit for the quarter ended March 31, 2004 and the period from January 1 through February 8, 2005:

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(13) Supplemental Cash Flow Information

Cash payments for interest were $20,864 and $26,451 for the quarters ended March 31, 2004 and 2005, respectively.

In connection with the Offering, the Company redeemed all outstanding interests for 39,537,574 shares of Valor common stock and recorded a net deferred tax liability from the existing equity owners of VTC prior to becoming a federal corporate taxpayer as follows:

In connection with the Offering, the Company issued 1,866,133 shares of restricted stock. The Company recorded $27,992 to deferred equity compensation, common stock and additional paid-in capital. As a result, we recorded $6,387 of non-cash stock based compensation expense related to the issuance of restricted stock to our management.

Concurrent with the Offering, the Company exchanged shares of Valor common stock with a value of $1,351 for all outstanding units under the Valor Telecom Executive Incentive Plan.

In March 2005, certain unvested shares of restricted stock were forfeited. Restricted stock forfeitures of $3,310 were recorded as deferred equity compensation with a corresponding offset to paid-in capital and treasury stock.

In connection with the amendment of the credit facility in February 2005, the Company wrote-off $9,869 of unamortized debt issuance costs.

In March 2005, the Company declared a cash dividend of $12,486 that was payable in April 2005.

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The Company accrued $1,525 of Offering and debt issuance costs that was not yet paid as of March 31, 2005.

(14) Guarantor Subsidiaries

The Senior Notes issued will be guaranteed jointly and severally by all of Valor’s existing subsidiaries (“the guarantor subsidiaries”) and such guarantees will be full and unconditional. Existing subsidiaries include VTC, Southwest including its operating entities, and Southwest II including its operating entities. Valor has no independent assets or operations. Separate financial information has not been presented for the guarantor subsidiaries because the guarantor subsidiaries will effectively comprise all of Valor’s assets and operations.

Provisions of the senior credit agreement that the Company entered in conjunction with the initial public offering restricts the ability of all of the guarantor subsidiaries to transfer funds to the Company. The senior credit agreement also precludes the guarantor subsidiaries from transferring funds to Valor:

(15) Recently Issued Accounting Pronouncements

In January 2004, FASB Staff Position (FSP) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued. FSP No. 106-1 permits the deferral of recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the accounting for post-retirement health care plans under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and in providing disclosures related to the plan required by SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” In May 2004, FSP 106-2, “Accounting and Disclosure Requirement Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued. FSP 106-2 provides guidance that measures the accumulated post-retirement benefit obligation (“APBO”) and net periodic postretirement benefit cost on or after the date of enactment shall reflect the effects of the Act. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. Upon the effective date FSP 106-2 will supersede FSP 106-1. The deferral of the accounting for the Act will continue until FSP 106-2 is effective. We have elected the deferral provided by FSP 106-1 and are evaluating the magnitude of the potential favorable impact on our results of operations and financial position. The effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 have not been reflected for interim disclosure purposes. The Company is currently evaluating the options available under the Act and has yet to determine if the plan is actuarially equivalent to the standard Medicare Part D benefit. Therefore, any measures of APBO or Net Periodic Postretirement Benefit Cost do not reflect the effects of the Act on the plan.

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143”, which clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” The term conditional asset retirement obligation refers to an obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An obligation exists when a law, regulation or contract requires an entity to perform an asset retirement activity. The interpretation requires an entity to recognize a liability–– generally upon acquisition, construction or development–– for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. In circumstances where sufficient information is not available, the liability should be recognized in the period in which sufficient information becomes available to estimate its fair value. The interpretation is effective no later than the end of fiscal years ending after December 15, 2005. Management is currently evaluating the effect that adoption of this interpretation will have on the Company’s financial position and results of operations.

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(16) Subsequent Events

In April 2005, the Company made an optional prepayment of $10,000 on the outstanding Tranche B Term loan indebtedness.

On May 2, the Communications Workers of America (CWA) informed the Company that the union membership had ratified the three-year, tentative collective bargaining agreement reached between the Company and the CWA on April 5, 2005. The new agreement will cover the period March 1, 2005 through February 29, 2008.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Three months March 31, 2005 compared to three months March 31, 2004

Forward-Looking Statements

As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we caution that the statements in this quarterly report on Form 10-Q relating to matters that are not historical facts, including, but not limited to, statements found in this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 3 — “Quantitative and Qualitative Disclosures About Market Risk,” are forward-looking statements that represent management’s beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as “believes,” “intends,” “may,” “should,” “anticipates,” “expects” or comparable terminology or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this quarterly report and those described from time to time in materials filed with the Company’s other filings with the SEC. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to, the following:

•	our high degree of leverage and significant debt service obligations;
•	our ability to refinance our existing indebtedness on terms acceptable to us, or at all;
•	any adverse changes in law or government regulation;
•	the risk that we may not be able to retain existing customers or obtain new customers;
•	the risk of technological innovations outpacing our ability to adapt or replace our equipment to offer comparable services;
•	the possibility of labor disruptions;
•	the risk of increased competition in the markets we serve;
•	the impact of pricing decisions;
•	the risk of weaker economic conditions within the United States;
•	potential difficulties in integrating completed or future acquisitions;

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•	uncertainties associated with new product development;
•	environmental matters;
•	potential outcome of future income tax audits;
•	possible future litigation or regulatory proceedings;
•	potential increasing costs of providing healthcare and postretirement benefits to our existing and former employees;
•	changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States; and
•	other risks and uncertainties.

Should one or more of these risks materialize (or the consequences of such a development worsen) or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. We disclaim any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise.

Overview

We provide telecommunications services primarily in rural areas of Texas, Oklahoma, New Mexico and Arkansas. We formed our company in 2000 in connection with the acquisition of select telephone assets from GTE Southwest Corporation, which is now part of Verizon. In January 2002, we acquired the local telephone company serving Kerrville, Texas. The rural telephone businesses that we own have been operating in the markets we serve for over 75 years. Since our inception, we have invested substantial resources to improve and expand our network infrastructure. In the markets we serve, we provide a full range of voice and data services, including integrated packages of local, long distance, high-speed data and Internet access, as well as a variety of enhanced services such as voicemail and caller identification. We provide reliable, personalized customer care through three call centers, and we have automated many of our customer service functions to enable our customers to interact with our company 24 hours a day, 365 days a year.

We are subject to regulation primarily by federal and state government agencies. At the federal level, the FCC has jurisdiction over interstate and international telecommunications services. State telecommunications regulators exercise jurisdiction over intrastate telecommunications services. We operate under price cap regulation at the federal level and at the state level in Texas and New Mexico. We are regulated as a rural telephone company in Oklahoma. We are regulated on a rate of return basis in Arkansas.

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Significant transactions

On February 9, 2005, we completed our initial public offering registering 29,375,000 shares of Valor common stock for $15 per share. The net proceeds from the initial public offering were used to repay certain existing indebtedness. In conjunction with the initial public offering, we completed a reorganization of our company. In connection with the initial public offering, certain of the company’s stockholders granted an option to the underwriters to purchase up to 4,406,250 additional shares in the aggregate at the Offering price less the underwriting discount. On March 16, 2005, the underwriters exercised their over-allotment option in full. We received no proceeds from the over-allotment exercise.

Concurrently with the initial public offering, our subsidiary Valor Telecommunications Enterprises, LLC and its direct wholly-owned subsidiary, Valor Telecommunications Enterprises Finance Corp., as co-issuers, issued $400 million aggregate principal amount of ten year senior notes in a private offering pursuant to Rule 144A of the Securities Act of 1933. We used the net proceeds from such issuance to repay certain existing indebtedness.

Expenses related to our Offering that have been recorded in the three months ended March 31, 2005 include the following:

     • $29.3 million in fees and expenses associated with our repayment of existing indebtedness, including write-off of certain deferred debt costs, prepayment premiums and breakage fees;

     • $1.7 million in compensation expense for the portion of cash transaction bonuses that were paid and accrued to members of our management team in connection with the Offering; and

     • $6.4 million in compensation expense for restricted shares issued to members of our management team.

Regulatory Matters

We operate in a regulated industry, and the majority of our revenues come from the provision of regulated telecommunications services, including state and federal support for the provision of telephone services in high-cost rural areas. Operating in this regulated industry means that we are also generally subject to certification, service quality, rate regulation, tariff filing and other ongoing regulatory requirements by state and federal regulators.

     State Regulation. We operate in Texas, Oklahoma, New Mexico and Arkansas and each state has its own regulatory framework for intrastate services.

     In Texas, most of our operations are subject to price caps on our basic telecommunications services, while we maintain pricing flexibility on some non-basic services.

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     In New Mexico, we operate under an Alternative Form of Regulation Plan that is specific to our company. We recently played an instrumental role in the development and passage of access reform legislation. Under the provisions of the new law, Valor’s intrastate access rates will be reduced to Valor’s interstate access rate in effect on January 1, 2006 in a phased implementation during the period April 2006 to May 2008. The access revenue reductions will be revenue neutral to Valor through a combination of increases in prices charged for basic local services and payments from a new state universal service fund.

     In Oklahoma, legislation was enacted in May 2004 that regulates us as a rural telephone company thereby allowing us significant pricing freedom for our basic services and reducing our costs of regulation.

     We also operate under rate of return regulation in the provision of intrastate telecommunications services in Texarkana, Arkansas, our only market in Arkansas. Pursuant to an agreement with the Arkansas Public Service Commission, our Arkansas tariffs mirror the prices charged for retail services in our Texas tariffs.

     Federal Regulation. Most of our interstate access revenues are regulated pursuant to the FCC’s price cap rules. Generally, these rules establish an upper limit for access prices, but allow annual formula-based adjustments and limited pricing flexibility.

     Universal Service Fund (USF)

     In furtherance of public policy, we receive USF revenues from the State of Texas and the federal government to support the high cost of providing telecommunications services in rural markets.

     Texas Universal Service Fund. The Texas USF supports eligible telecommunications providers that serve high cost markets.

     Federal Universal Service Fund. The federal USF revenue we receive helps to offset interstate access charges, defrays the high fixed switching costs in areas with fewer than 50,000 access lines and provides support where our average cost per line exceeds 115% of the national average cost per line.

Results of Operations

We have two operating segments, rural local exchange carrier, or RLEC, and Other.

As an RLEC, we provide regulated telecommunications services to customers in our service areas. These services include local calling services to residential and business customers, as well as providing interexchange carriers (IXC) with call origination and termination services, on both a flat-rate and usage-sensitive basis, allowing them to complete long distance calls for their customers who reside in the Company’s service areas.

In Other, we provide unregulated telecommunications services to customers throughout our RLEC service areas. These services include long distance and Internet services. Long distance is provided through resale agreements with national long distance carriers.

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We have considered the aggregation criteria in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” and determined the operating segments are considered one reportable segment as further described in Note 2 to the “Consolidated Financial Statements” in the Annual Report on Form 10-K.

We generated revenues of $125.9 million in the quarters ended March 31, 2005 and 2004. Operating income for the period ended March 31, 2005 and 2004 was $37.6 million and $45.5 million, respectively. Net loss for the quarter ended March 31, 2005 was $12.6 million compared to net income of $15.6 million for the quarter ended March 31, 2004.

Consolidated Operating Revenues

The following table provides the detail of revenues for the quarter ended March 31:

The following table sets forth several key metrics for the quarter ended March 31:

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Reflecting a general trend in the rural local exchange carrier industry, the number of access lines that we serve as an incumbent local exchange carrier has been decreasing. Several factors explain the loss of access lines, including the increasing availability of DSL service, which reduces the need for second lines, and competition from wireless and cable service providers. We have implemented a number of initiatives to gain new access lines and retain existing access lines, including greater marketing of our services and sale of bundled services that include a second access line and services that may make wireless and cable alternatives less attractive or competitive. In spite of these efforts, we anticipate that we will continue to lose access lines at least for the foreseeable future.

Our consolidated revenues were flat for the three-month period ended March 31, 2005 compared to the same period in 2004. We had an increase of $2.8 million as a result of adding DSL and long distance subscribers. DSL subscribers grew to 31,208 at March 31, 2005, which represented an increase of 212%. We added an average of 26,741 long distance subscribers from March 31, 2004 to March 31, 2005. Operating revenues further increased due to $0.6 million of revenue from the favorable resolution of a regulatory proceeding we had pending before the Texas Public Utility Commission (“TPUC”) related to an expanded local calling surcharge that was approved by the TPUC in the fourth quarter of 2004. Our ability to bill and collect this surcharge will expire on December 31, 2005.

Offsetting the above increase, we experienced a decrease of $2.5 million as a result of access line loss, lower access rates and reduction in minutes of use. Our USF revenues decreased $0.5 million due to the fact that our Federal USF high cost support was reduced effective January 1, 2005 due to increases in the national average loop cost by the FCC. The remaining $0.6 million of the decrease in USF revenues is attributable to lower access line counts and the related effect on our revenues received from both Federal USF CALLS support and the Texas Universal Service Fund.

Operating Expenses

The following table sets forth operating expenses for the quarter ended March 31:

Operating expenses increased $8.0 million primarily due to $6.4 million of non-cash stock compensation related to the issuance of restricted stock to our management. The restricted stock vests based on various percentages from the initial public offering date

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through January 1, 2008. We expect to incur approximately $6.4 million of expense each year through January 1, 2008. Further increase was due to $1.7 million in bonuses paid and accrued to management related to the initial public offering. Offsetting the above increases was a decrease of $0.8 million due to vendor price reductions associated with certain back-office functions we have outsourced to a third party service provider and a $0.8 million decrease in employee salary and benefit costs related to reduced headcount. Finally, depreciation and amortization also increased $1.4 million due to our increased investment in property, plant, and equipment to improve our network infrastructure.

Interest Expense

The following table sets forth interest expense for the quarter ended March 31:

The decrease in interest expense was primarily due to lower average principal outstanding primarily as a result of repayment of approximately $400 million from the net proceeds of the Offering and lower average interest rates on our debt.

Loss on Interest Rate Hedging Arrangements

The following table sets forth loss on interest rate hedging arrangements for the quarter ended March 31:

The adjustment to mark our hedging arrangements to market value resulted in non-cash income of $2.4 million quarter ended March 31, 2004. The remaining loss in 2004 relates to cash settlements of $2.7 million. We entered into new arrangements to limit our interest rate risk under the terms of our existing credit facility in March 2005 as further described under “Item 3: Quantitative and Qualitative Disclosures About Market Risk.” The amount recorded in the three months ended March 31, 2005,

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represents the instruments that are not accounted for utilizing hedge accounting.

Earnings from Unconsolidated Cellular Partnerships, Loss on Debt Extinguishment and Other Income and Expense

The following table provides the detail of other income and expense for the quarter ended March 31:

Earnings from unconsolidated cellular partnerships represent our share of the earnings in the equity interest of the two cellular partnerships. In 2004, a wireless competitor began constructing facilities in areas serviced by our unconsolidated cellular partnerships. This has resulted in a significant decrease in roaming revenue further decreasing our earnings from the unconsolidated cellular partnerships.

In connection with our Offering and amendment of our credit facility, we recorded a $29.3 million loss on extinguishment of debt. The loss on extinguishment of debt relates to prepayment fees and premiums and write-off of debt issuance costs related to our existing indebtedness and transaction fees and costs related to our new facility that were included in the calculation of the loss on extinguishment of debt under the provisions of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments.”

Other income and (expense), net includes various miscellaneous income and expense items, including interest income on our cash balances held at financial institutions.

Income Taxes

The following table sets forth income taxes for the quarter ended March 31:

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The income taxes for the quarter ended March 31, 2004 only represent those of Valor Telecommunications Southwest II, LLC, which has elected to be taxed as a corporation for federal income tax purposes.

In February 2005, we completed a reorganization concurrent with our Offering. Prior to our reorganization, substantially all of the operations of Valor elected partnership treatment for income tax purposes. Following the completion of our Offering and the related reorganization, the operations of the company and all wholly owned subsidiaries became reportable in a consolidated corporate federal tax return. As such for the period from January 1, 2005 through the Offering date, we recorded income tax expense directly attributable to the operations of Valor Telecommunications Southwest II, LLC. Following the Offering date, we recorded an income tax benefit due to our net loss for the period for the operations of Valor Communications Group, Inc. Additionally, we recorded deferred tax positions related to differences between financial reporting and the tax basis of our assets and liabilities and net operating losses incurred prior to becoming a taxable entity.

The principal reason for the difference between our effective income tax rate and the U.S. federal statutory income tax rate is income (loss) from consolidated subsidiaries that are treated, for federal income tax purposes, as partnerships for the first quarter of 2004 and for the period from January 1, 2005 through the Offering date. We expect our overall effective income tax rate will approximate 30% for fiscal year 2005. The primary difference between the expected effective income tax rate and the statutory rate represents income from consolidated subsidiaries that were treated, for federal income tax purposes, as partnerships for the period from January 1, 2005 through the Offering date and a permanent difference related to the step-up in tax basis of assets related to our reorganization that is amortized for tax, but not book purposes.

Minority Interest

The following table sets forth the minority interest for the quarter ended March 31:

Minority interest reflects the share of income of minority shareholders who hold common interests in Valor Telecommunications Southwest, LLC and Valor Telecommunications Southwest II, LLC. In connection with the Offering, we completed a reorganization, whereby we redeemed all outstanding minority interests. For the quarter ended March 31, 2005, minority interest reflects the share of income of minority shareholders from January 1, 2005 through the Offering date.

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Financial Condition and Liquidity

Financial Condition. As of March 31, 2005, we had total debt, net of cash and cash equivalents, of $1.2 billion and $572.5 million of stockholders’ equity, compared to net debt of $1.6 billion and $6.5 million of common owners’ equity at December 31, 2004. Historically, we have used excess cash generated through operations to pay down long-term debt. In April 2005, we utilized a portion of our excess cash to repay $10.0 million of our senior credit facility indebtedness. At March 31, 2005 and December 31, 2004, we had a positive working capital balance of $28.1 million and $15.1 million, respectively.

As discussed in more detail below, our management believes that our operating cash flows, cash and cash equivalents, and borrowing capacity under our new credit facility will be sufficient to fund our capital and liquidity needs for the foreseeable future.

In accordance with our dividend policy, we intend to distribute, as dividends, a substantial portion of cash generated by our business in excess of operating needs, interest and principal payments on indebtedness and capital expenditures.

In connection with our reorganization, our previous owners contributed approximately $308.2 million of Net Operating Losses (“NOL’s”) in our reorganization that we will be able to use, subject to certain limitations, to reduce our future taxable income. Furthermore, we have cumulative differences of approximately $519.4 million resulting from items such as goodwill amortization and accelerated tax depreciation that we have deducted faster for tax purposes under the tax code than we have for financial reporting purposes. The tax effect of the NOL’s and the cumulative differences were recorded on our balance sheet at the reorganization and resulted in a net deferred tax liability of approximately $79.3 million.

We also have other items totaling $760.7 million, the most significant being goodwill, that we will deduct from our future taxable income.

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Cash Flows

Operating Activities. Net cash provided by continuing operations of $40.5 million in 2005, was generated primarily by adjustments to our loss from continuing operations of $12.6 million to exclude non-cash and loss on debt extinguishment items of $54.9 million. The most significant non-cash item in 2005 was depreciation and amortization expense of $22.2 million and loss on debt extinguishment of $29.3 million. Net cash provided by continuing operations of $50.1 million in 2004 was generated primarily by $15.6 million of income from continuing operations, adjusted to exclude non-cash items of $23.6 million. The most significant non-cash items in 2004 were depreciation and amortization expense of $20.8 million.

Investing Activities. Cash provided by investing activities was $7.4 million for the first quarter of 2005 compared to cash used in investing activities $16.7 million in 2004. Our investing activities consist primarily of capital expenditures for property, plant and equipment. We fund capital expenditures to deploy new network services, modernize our property, plant and equipment, position our network infrastructure for future growth, and to meet regulatory obligations. Capital expenditures for the quarter ended March 31, 2005 and 2004 were $17.4 million and $16.7 million, respectively. We anticipate that capital spending for fiscal year 2005 will be approximately $58.8 million.

The investing activities during 2005 include proceeds from the redemption of our RTFC capital certificate of $24.4 million that occurred in connection with amendment of our credit facility.

Financing Activities. Cash used by financing activities was $25.8 million in 2005 and $31.0 million in 2004. These changes are principally due to the net incremental payments of long-term debt of $400.2 million and $33.8 million in 2005 and 2004, respectively. Cash used by financing activities in 2005 also includes $412.7 million of net proceeds from the issuance of common stock in connection with our Offering and payment of prepayment fees and transaction costs of $19.4 million and $16.2 million, respectively.

Historically, we have managed our cash on hand through the use of revolving credit facilities to maximize the amount of debt repayment.

Outstanding Debt and Existing Financing Arrangements

As of March 31, 2005 we had various financing arrangements outstanding with a total borrowing capacity of $1.3 billion. Of this total borrowing capacity, $100.0 million was available under a revolving credit facility and $1.2 billion was outstanding as debt.

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Amended Credit Facility and Issuance of Senior Notes

In connection with our Offering, we issued $400.0 million principal amount 7 3/4% senior notes due in 2015 for net proceeds of approximately $390.0 million. The proceeds from the issuance of the senior notes were used to repay certain existing indebtedness.

Also, in connection with our Offering we amended our senior credit facility. The amended senior credit facility resulted in the reduction of the commitment amount of Tranche B Term Loan to $750.0 million, Tranche C Term Loan to $50.0 million and Tranche D Term Loan to $5.6 million. The reduction of the amended credit facility was primarily funded from the net proceeds of the Offering. Under the amended credit facility, the entire principal balances on Tranches B, C and D are due at maturity, February 2012.

Recently Issued Accounting Pronouncements

In January 2004, FASB Staff Position (FSP) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued. FSP No. 106-1 permits the deferral of recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the accounting for post-retirement health care plans under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and in providing disclosures related to the plan required by SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” In May 2004, FSP 106-2, “Accounting and Disclosure Requirement Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” was issued. FSP 106-2 provides guidance that measures the accumulated post-retirement benefit obligation (“APBO”) and net periodic postretirement benefit cost on or after the date of enactment shall reflect the effects of the Act. FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004. Upon the effective date FSP 106-2 will supersede FSP 106-1. The deferral of the accounting for the Act will continue until FSP 106-2 is effective. We have elected the deferral provided by FSP 106-1 and are evaluating the magnitude of the potential favorable impact on our results of operations and financial position. The effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 have not been reflected for interim disclosure purposes. We are currently evaluating the options available under the Act and have yet to determine if the plan is actuarially equivalent to the standard Medicare Part D benefit. Therefore, any measures of APBO or Net Periodic Postretirement Benefit Cost do not reflect the effects of the Act on the plan.

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143”, which clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” The term conditional asset retirement obligation refers to an obligation to perform an asset

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retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An obligation exists when a law, regulation or contract requires an entity to perform an asset retirement activity. The interpretation requires an entity to recognize a liability–– generally upon acquisition, construction or development–– for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. In circumstances where sufficient information is not available, the liability should be recognized in the period in which sufficient information becomes available to estimate its fair value. The interpretation is effective no later than the end of fiscal years ending after December 15, 2005. We are currently evaluating the effect that adoption of this interpretation will have on the company’s financial position and results of operations.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

We are exposed to market risk from changes in interest rates on our long-term debt obligations. We estimate our market risk using sensitivity analysis. Market risk is defined as the potential change in the fair value of a fixed-rate debt obligation due to a hypothetical adverse change in interest rates and the potential change in interest expense on variable rate long-term debt obligations due to changes in market interest rates. Fair value on long-term debt obligations is determined based on a discounted cash flow analysis, using the rates and maturities of these obligations compared to terms and rates currently available in the long-term markets. The potential change in interest expense is determined by calculating the effect of the hypothetical rate increase on our variable rate debt for the year and does not assume changes in our financial structure.

The results of the sensitivity analysis used to estimate market risk are presented below, although the actual results may differ from these estimates.

At December 31, 2004, we had total debt of $1.6 billion consisting of both fixed and variable debt with weighted average interest rate of 7.3%. Substantially all of our debt balance was scheduled to mature 2011 through 2012. As a result of the debt recapitalization that occurred November 10, 2004, the fair value of our debt approximates carrying value.

At March 31, 2005, we had total debt of $1.2 billion consisting of both fixed and variable debt with weighted average interest rates ranging from 4.9% to 7.8%. Approximately $800.0 million of our debt matures in 2012 and $400.0 million matures in 2015. In February 2005, we completed our initial public offering and issuance of 7 3/4% senior notes for net proceeds of approximately $801.5 million. We used the proceeds from the initial public offering and the issuance of senior notes to repay certain indebtedness that was outstanding at December 31, 2004 and related transaction costs. As a result of the amendment of our credit facility, our initial public offering and issuance of senior notes that occurred in February 2005, the fair value of our debt approximates carrying value.

At March 31, 2005, we had approximately $745.0 million of variable rate debt. If market interest rates increase 100 basis points within the next year over the rates in effect at March 31, 2005, interest expense would increase $7.5 million. We are charged interest on our variable rate debt, as defined in the Senior Credit Agreement, based on LIBOR plus 2% or an applicable base rate plus 1%. As of March 31, 2005, we have an interest rate cap of 5% on our three-month floating rate LIBOR option related to a principal balance of $450.0 million. The three-month LIBOR rate for the quarter ended March 31, 2005 ranged from 2.6% to 3.1%.

As a result of the amended credit facility in February 2005, we are required to reduce the risk of interest rate volatility with at least 50% of our indebtedness. To manage our interest rate risk exposure and fulfill our requirement under our credit facility, we entered into seven agreements, three interest rate caps and four interest rate swaps, with investment grade financial institutions in March 2005 (collectively, “Agreements”). In connection with entering the interest rate cap agreements, we paid $0.9 million.

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The following represents a summary of the Agreements as of March 31 (dollars in thousands):

Our interest rate caps are not treated as hedges as prescribed by the accounting literature; therefore, the fair value of the instruments is recorded each reporting period in “Other assets” on the Consolidated Balance Sheets with the change in fair value recorded in the Consolidated Statements of Operations in “Loss on interest rate hedging arrangements.” The interest rate swaps effectively convert our variable rate debt to fixed rate debt. Our interest rate swap agreements qualify for hedge accounting under SFAS No. 133; therefore, they are carried at fair market value and are included in “Other assets” on the Consolidated Balance Sheets with changes in fair value recorded as “Other comprehensive income” in the accompanying Consolidated Statements of Operations. We do not hold or issue derivative financial instruments for trading or speculative purposes.

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ITEM 4: CONTROLS AND PROCEDURES

     The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005 to ensure that information relating to the Company and the Company’s consolidated subsidiaries required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely discussions regarding required disclosure. It should be noted, however, that the design of any system of controls is limited in its ability to detect errors, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

For the quarter ended March 31, 2005, we completed our initial public offering (“Offering”) registering 29,375,000 shares of common stock at an offering price of $15 per share on Form S-1, originally filed April 8, 2004 (Reg. No 333-114298) for aggregate gross proceeds of $440.6 million. The effective date of the Offering was February 9, 2005. In connection with the Offering, certain of our stockholders granted an option to the underwriters to purchase up to 4,406,250 additional shares at the Offering price less the underwriting discount. On March 16, 2005, the underwriters exercised their over-allotment option in full resulting in aggregate gross proceeds of $66.1 million. We received no proceeds from the over-allotment exercise. The managing underwriters for our Offering were Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and J.P. Morgan Securities Inc.

From February 9, 2005, the effective date, through March 31, 2005, we had incurred the following expenses that are recorded as a reduction of paid-in capital:

Of the $29.1 million expenses noted above, $1.2 million represent accruals of expenses incurred in connection with the Offering. We expect the remaining expenses will be paid in the second quarter of fiscal 2005.

Net proceeds to Valor from the Offering were $411.5 million, net of above expenses. Net proceeds for the period from February 9, 2005 to March 31, 2005 were used as follows:

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Item 6. Exhibits

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SIGNATURES

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

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