<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                         -------------------------------

                                    FORM 10-K

                         -------------------------------


    (Mark one)
       [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 2000

                                      OR

       [ ]     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 2-33059


                              VERIZON HAWAII INC.


 A Hawaii Corporation           I.R.S. Employer Identification No. 99-0049500


              1255 Corporate Drive, SVC04C08, Irving, Texas 75038


                        Telephone Number (972) 507-5000

                         -----------------------------

Securities registered pursuant to Section 12(b) of the Act:  None.

Securities registered pursuant to Section 12(g) of the Act:  None.


THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).


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 X   No
                                       ---    ---
<PAGE>

                               Verizon Hawaii Inc.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

Item No.                                                                                                      Page
--------                                                                                                      ----
                                                    PART I
<S>                                                                                                           <C>
1.     Business
       (Abbreviated pursuant to General Instruction I(2).) ............................................       1
2.     Properties .....................................................................................       6
3.     Legal Proceedings ..............................................................................       6
4.     Submission of Matters to a Vote of Security Holders
       (Omitted pursuant to General Instruction I(2).).................................................       6

                                                   PART II

5.     Market for Registrant's Common Equity and Related Stockholder Matters ..........................       7
6.     Selected Financial Data
       (Omitted pursuant to General Instruction I(2).).................................................       7
7.     Management's Discussion and Analysis of Results of Operations
       (Abbreviated pursuant to General Instruction I(2).) ............................................       8
7A.    Quantitative and Qualitative Disclosures About Market Risk......................................      13
8.     Financial Statements and Supplementary Data ....................................................      13
9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...........      13


                                                  PART III

       (Omitted pursuant to General Instruction I(2).):
10.    Directors and Executive Officers of the Registrant .............................................      13
11.    Executive Compensation .........................................................................      13
12.    Security Ownership of Certain Beneficial Owners and Management .................................      13
13.    Certain Relationships and Related Transactions .................................................      13


                                                  PART IV

14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K ...............................      13
</TABLE>


      UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF MARCH 27, 2001.
<PAGE>

                              Verizon Hawaii Inc.

                                     PART I

Item 1.  Business
                                     GENERAL

        Verizon Hawaii Inc. was incorporated under the laws of the Kingdom of
Hawaii in 1883. We are a wholly owned subsidiary of GTE Corporation (GTE), which
is a wholly owned subsidiary of Verizon Communications Inc. (Verizon).

       During 2000, we owned three wholly owned subsidiaries: GTE Hawaiian Tel
Insurance Company Incorporated, Verizon Hawaii International Inc. and The
Micronesian Telecommunications Corporation (MTC). GTE Hawaiian Tel Insurance
Company Incorporated provides auto liability, general liability and workers'
compensation insurance to the Company on a direct basis. Verizon Hawaii
International Inc. provides interstate and international telecommunications
services in Hawaii and telecommunication services in Guam. GTE Far East
(Services) Limited, which is a wholly owned subsidiary of Verizon Hawaii
International Inc., provides international telecommunications services in Japan.
MTC, which is headquartered in Saipan in the Commonwealth of the Northern
Mariana Islands (CNMI), provides local telecommunications services on the
islands of Saipan, Tinian and Rota. In addition, GTE Pacifica Incorporated
(Pacifica), which is a wholly owned subsidiary of MTC, provides interstate and
international telecommunications services in the CNMI and Guam.

      On December 19, 2000, we exchanged 100% of our share ownership in MTC for
4.03065 shares of GTE International Telecommunications Incorporated (GITI), an
affiliate. Our minority interest in GITI is valued at cost which is the net book
value of the MTC shares exchanged. On the same date, our wholly owned
subsidiary, Verizon Hawaii International Inc., sold 100% of its shares, or
1,215,930 shares, of GTE Far East (Services) Limited to GITI for one dollar. No
gains or losses were realized on these transactions.

      Our principal line of business is providing communications services
ranging from local telephone service for the home and office to voice and data
services for various industries. We provide local telephone service on each
island in Hawaii and provide intraLATA (Local Access Transport Area) toll
service among the islands. InterLATA toll services between Hawaii and domestic
points within the United States are provided by long-distance carriers, which
connect to our local facilities for call origination and termination. The
long-distance carriers are charged fees (access charges) for interconnection to
our local facilities. Business and residential customers also pay access charges
to connect to the local network to obtain long-distance service. We also provide
toll service between Hawaii and international termination points in competition
with international carriers. We settle these international revenues with other
international carriers through revenue sharing arrangements. We earn other
revenues by providing such services as billing and collection and operator
services to long-distance carriers.

                            BELL ATLANTIC-GTE MERGER

      On June 30, 2000, Bell Atlantic Corporation (Bell Atlantic) and GTE
completed a merger under a definitive merger agreement dated as of July 27, 1998
and began doing business as Verizon. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling-of-interests business
combination.

                                   OPERATIONS

      We are one of 16 public operating telephone companies owned by Verizon.
Verizon has organized certain telecommunications group functions into marketing
units operating across its operating telephone subsidiaries. The units focus on
specific market segments. Each of the operating telephone subsidiaries,
including us, remains responsible within its respective service area for the
provision of telephone services, financial performance and regulatory matters.
Verizon's five strategic marketing units are comprised of the following:

      The Enterprise unit markets communications and information technology and
services to large businesses and to departments, agencies and offices of the
executive, judicial and legislative branches of the federal and state
government. These services include voice switching/processing services (e.g.,
dedicated private lines, custom Centrex, call management, and voice messaging),
end-user networking (e.g., credit and debit card transactions and personal
computer-based conferencing, including data and video), internetworking
(establishing links between the geographically disparate networks of two or more
companies or within the same company), network optimization (disaster avoidance,
911 service, and intelligent vehicle highway systems) and other communications
services such as distance learning, telemedicine, videoconferencing and
interactive multimedia applications. The Enterprise unit also includes Verizon's
Data Solutions

                                       1
<PAGE>

                              Verizon Hawaii Inc.

Group which provides data transmission and network integration services
(integrating multiple geographically disparate networks into one system) and
Verizon's Strategic Markets unit which operates as a provider of network
monitoring services and telecommunications equipment sales to medium and large
businesses.

      The Retail unit markets communications and information services to
residential customers and to small and medium-sized businesses within our
territory. This unit also provides operator and pay telephone services. The
Retail unit includes Verizon Avenue, a subsidiary of Verizon that markets to
customers located in multi-tenant buildings and Teleproducts, a subsidiary of
Verizon that markets customer premises equipment to the end-user.

      The Wholesale unit markets (i) switched and special access to the
telephone subsidiaries' local exchange networks, and (ii) billing and collection
services, including recording, rating, bill processing, bill rendering, CLEC
services and wireless interconnection. This unit also includes various technical
planning groups that provide strategic technology and network planning, new
service creation, and emerging business management.

      The Advanced Services unit markets Verizon's long distance, data and
Internet access services. In certain states, Verizon's long distance
subsidiaries operate as a reseller of national and international long-distance
services and provide service in all 50 states to residential and business
customers, including long distance services, calling cards, 800 services and
operator services to its customers. Verizon's Global Networks unit is building a
next generation long distance network using ATM (asynchronous transfer mode)
technology.

      The National Operations unit markets Verizon's Communications and
Construction services that supply installation and repair labor and manages
Verizon's Supply unit that is responsible for the procurement and management of
inventory and supplies for the operating telephone companies, as well as other
subsidiaries. The Supply unit also sells material and logistic services to third
parties.

Telecommunications Act of 1996

       The Telecommunications Act of 1996 (1996 Act) became effective on
February 8, 1996. In general, the 1996 Act includes provisions that open local
exchange markets to competition. We are unable to predict definitively the
impact that the 1996 Act 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 regulatory proceedings and any appeals, and
the timing, extent and success of our pursuit of new opportunities resulting
from the 1996 Act.

FCC Regulation and Interstate Rates

       We are subject to the jurisdiction of the Federal Communications
Commission (FCC) with respect to interstate services and related matters. In
2000, the FCC continued to implement reforms to the interstate access charge
system and to implement the "universal service" and other requirements of the
1996 Act.

Access Charges

       Interstate access charges are the rates long distance carriers pay for
use and availability of our facilities for the origination and termination of
interstate service. The FCC required a phased restructuring of access charges,
from January 1998 until January 2000, pursuant to which we recover
non-usage-sensitive costs from long distance carriers and end-users through flat
rate charges, and usage-sensitive costs from long distance carriers through
usage-based rates.

       On May 31, 2000, the FCC adopted a plan advanced by members of the
industry (The Coalition for Affordable Local and Long Distance Service, or
"CALLS") as a comprehensive five-year plan for regulation of interstate access
charges. The CALLS plan has three main components. First, it establishes a
portable interstate access universal service support of $650 million for the
industry. Of that amount, Verizon expects approximately $340 million to be used
to support interstate access services in the operating telephone subsidiaries'
service territory. This explicit support replaces implicit support 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 in a manner that will not undermine
comparable and affordable universal service. Third, the plan sets 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 of September 14, 2000, Verizon formally elected to participate in the
full five-year term of the CALLS plan. As a result of this decision, price caps
on our interstate access charges will be set according to the conditions of the
FCC order

                                       2
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                              Verizon Hawaii Inc.

on the CALLS plan. Under the plan, direct end-user access charges are increased
while access charges to long distance carriers are reduced. While the plan
continues the 6.5% (less inflation) annual reductions for most interstate access
charges, it provides for a price freeze when switched access service prices
reach $0.0055 per-minute.

       The FCC has adopted rules for special access services that provide for
pricing flexibility and ultimately the removal of services from price regulation
when competitive thresholds are met. In order to use these rules, carriers must
forego the ability to take advantage of provisions in the current rules that
provide relief in the event earnings fall below prescribed thresholds. In
November and December 2000, Verizon made filings to obtain this added pricing
flexibility. On March 14, 2001, the FCC released an Order in which it approved
pricing flexibility for 46 Metropolitan Statistical Areas (MSAs) and three
states (Delaware, Vermont and Maryland) served by Verizon. In ten of the MSAs
and the state of Delaware, the services were awarded complete pricing
flexibility and were removed from price regulation. Partial pricing flexibility
was granted in the remaining MSAs and the two other states.

Universal Service

       As a result of a July 1999 decision of the U.S. Court of Appeals,
Verizon's contributions to the universal service fund were reduced by
approximately $107 million annually beginning on November 1, 1999, and
interstate access rates were reduced accordingly because we will no longer have
to recover these contributions in our rates. Last year, the petitions asking the
U.S. Supreme Court to review the court of appeals decision were either withdrawn
or rejected.

       In November 1999, the FCC adopted a new mechanism for providing universal
service support to high cost areas served by large local telephone companies.
This funding mechanism provides additional support for local telephone services
in several states served by Verizon. This system has been supplemented by the
new FCC access charge plan described above.

       On October 18, 2000, Verizon asked the U.S. Supreme Court to dismiss its
pending review of the FCC's use of a theoretical model as one factor to
determine the appropriate size of federal support for a fund for intrastate high
cost areas. The review was no longer necessary because, subsequent to Verizon's
petition to the U.S. Supreme Court, the FCC expressly disclaimed supervisory
authority over the states' universal service activities.

       The FCC is currently considering two modifications to its universal
service programs, both relating to support for rural carriers. The first, a
proposal by an appointed policy task force, would provide additional support for
intrastate services provided by rural carriers. The second, a proposal by a
coalition of rural carriers, would make explicit support for interstate access
services provided by rural carriers. The FCC is likely to address both these
proposals in 2001.

Unbundling of Network Elements

       In November 1999, the FCC announced its decision setting forth new
unbundling requirements, eliminating elements that it had previously required to
be unbundled, limiting the obligation to provide others and adding new elements.
Appeals from this decision are pending.

       In addition to the unbundling requirements released in November 1999, the
FCC released an order in a separate proceeding in December 1999, requiring
incumbent local exchange companies also to unbundle and provide to competitors
the higher frequency portion of their local loop. This provides competitors with
the ability to provision data services on top of incumbent carriers' voice
services. Appeals from this order are also pending.

       In July 2000, the U.S. Court of Appeals for the Eighth Circuit found that
some aspects of the FCC's requirements for pricing UNEs were inconsistent with
the 1996 Act. In particular, it found that the FCC was wrong to require
incumbent carriers to base these prices not on their real costs but on the
imaginary costs of the most efficient equipment and the most efficient network
configuration. The court upheld the FCC's decision that unbundled network
elements (UNEs) be priced based on a forward-looking cost model which ignores
actual historical costs. The U.S. Supreme Court has accepted this decision for
review in a case to be heard in the fall term of 2001. That portion of the court
of appeals' decision has been stayed pending that review.

Compensation for Internet Traffic

       In March 2000, the Washington, D.C. Circuit Court of Appeals reversed and
remanded the FCC's February 1999 order that concluded that calls to the Internet
through Internet service providers (ISPs) do not terminate at the ISP but are

                                       3
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                              Verizon Hawaii Inc.

single interstate calls. The court found that the FCC had inadequately explained
why these Internet calls were not two calls. Under the FCC's decision, it was
left to carrier agreements and state regulators to determine which traffic is
subject to reciprocal compensation. The FCC is currently considering a new order
to address the issue in light of the court remand.

State Regulation of Rates and Services

       Our telephone operations are subject to rate of return regulation.

Competition

       Legislative changes, including provisions of the 1996 Act discussed above
under the section "Telecommunications Act of 1996," regulatory changes and new
technology are continuing to expand the types of available communications
services and equipment and the number of competitors offering such services. We
anticipate that these industry changes, together with the rapid growth, enormous
size and global scope of these markets, will attract new entrants and encourage
existing competitors to broaden their offerings. Current and potential
competitors in telecommunication services include long distance companies, other
local telephone companies, cable companies, wireless service providers, foreign
telecommunications providers, electric utilities, Internet service providers and
other companies that offer network services. 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. In addition, a number of major industry participants have
announced mergers, acquisitions and joint ventures which could substantially
affect the development and nature of some or all of our markets.

Local Exchange Services

       The ability to offer local exchange services has historically been
subject to regulation by state regulatory commissions. Applications from
competitors to provide and resell local exchange services have been approved in
the jurisdiction in which we operate. The 1996 Act has significantly increased
the level of competition in our local exchange markets.

       One of the purposes of the 1996 Act was to ensure, and accelerate, the
emergence of competition in local exchange markets. Toward this end, the 1996
Act requires most existing local exchange carriers (incumbent local exchange
carriers, or ILECs), including our company, to permit potential competitors
(competitive local exchange carriers, or CLECs) to:

     .    purchase service from the ILEC for resale to CLEC customers

     .    purchase unbundled network elements from the ILEC, and/or

     .    interconnect the CLEC's network with the ILEC's network.

       The 1996 Act provides for arbitration by the state public utility
commission if an ILEC and a CLEC are unable to reach agreement on the terms of
the arrangement sought by the CLEC.

       Our negotiations with various CLECs, and arbitrations before our state
regulator, have continued. We expect that these agreements, and the 1996 Act,
will continue to lead to substantially increased competition in our local
exchange markets in 2001 and subsequent years. We believe that this competition
will be both on a facilities basis and in the form of resale by CLECs of our
service. Under the various agreements and arbitrations discussed above, we are
generally required to sell our services to CLECs at discounts from the prices we
charge our retail customers.

IntraLATA Toll Services

       IntraLATA toll calls originate and terminate within the same LATA, but
generally cover a greater distance than a local call. State regulatory
commissions rather than federal authorities generally regulate these services.
The state regulatory commission permits other carriers to offer intraLATA toll
services within the state.

       Until the implementation of "presubscription," we completed intraLATA
toll calls unless the customer dialed a code to access a competing carrier.
Presubscription changed this dialing method and enabled customers to make these
toll calls using another carrier without having to dial an access code. We have
implemented presubscription.

       Implementation of presubscription for intraLATA toll services has had a
material negative effect on intraLATA toll service revenues. However, the
negative effect has been partially mitigated by an increase in intraLATA network
access revenues.

                                       4
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                              Verizon Hawaii Inc.

Alternative Access

      A substantial portion of our revenues from business and government
customers is derived from a relatively small number of large, multiple-line
subscribers.

       We face competition from alternative communications systems, constructed
by large end-users, interexchange carriers and alternative access vendors, which
are capable of originating and/or terminating calls without the use of our
plant. The FCC's orders requiring us to offer collocated interconnection for
special and switched access services have enhanced the ability of such
alternative access providers to compete with us.

       Other potential sources of competition include cable television systems,
shared tenant services and other noncarrier systems which are capable of
bypassing our local plant, either partially or completely, through substitution
of special access for switched access or through concentration of
telecommunications traffic on fewer of our lines.

Wireless Services

       Wireless services also constitute potential sources of competition to our
wireline telecommunications services, especially as wireless carriers continue
to lower their prices to end-users. Wireless telephone services employ analog
and digital technology that allows customers to make and receive telephone calls
from any location using small handsets, and can also be used for data
transmission.

Public Telephone Services

       We face increasing competition in the provision of pay telephone services
from other providers. In addition, the growth of wireless communications
decreases usage of public telephones.

Operator Services

       Alternative operator services providers have entered into competition
with our operator services product line.


                                    EMPLOYEES

      As of December 31, 2000, we had approximately 2,400 employees.

                                       5
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                              Verizon Hawaii Inc.

Item 2.  Properties

                                     GENERAL

      Our principal properties do not lend themselves to simple description by
character and location. Our investment in plant, property and equipment
consisted of the following at December 31:

                                                           2000             1999
--------------------------------------------------------------------------------
Central office equipment                                    39%              38%
Outside communications plant                                42               43
Land and buildings                                          11               11
Furniture, vehicles and other work equipment                 6                6
Other                                                        2                2
                                                    ----------------------------
                                                           100%             100%
                                                    ============================

      "Central office equipment" consists of switching equipment, transmission
equipment and related facilities. "Outside communications plant" consists
primarily of aerial cable, underground cable, conduit and wiring, and telephone
poles. "Land and buildings" consists of land and land improvements, and
principally central office buildings. "Furniture, vehicles and other work
equipment" consists of public telephone instruments and telephone equipment,
furniture, office equipment, motor vehicles and other work equipment. "Other"
property consists primarily of plant under construction, capital leases,
capitalized computer software costs and leasehold improvements.

      All of our properties are located in the state of Hawaii and on the
islands of Guam, Saipan, Tinian and Rota during 2000, 1999 and 1998. These
properties were generally in good operating condition and are adequate to
satisfy the needs of our business. Substantially all of our property is subject
to the lien of our mortgage bond indenture securing funded debt. See Note 1 to
the financial statements for additional information about our properties.

      Our customers are served by electronic switching systems that provide a
wide variety of services. Since December 31, 1998, our network has been fully
transitioned from an analog to a digital network, which provides the
capabilities to furnish advanced data transmission and information management
services.


                              CAPITAL EXPENDITURES

      We have been making and expect to continue to make significant capital
expenditures to meet the demand for communications services and to further
improve such services. Capital expenditures were approximately $73 million in
2000, $102 million in 1999 and $108 million in 1998. Capital expenditures
exclude additions under capital lease. Our total investment in plant, property
and equipment was approximately $2.0 billion at December 31, 2000, $2.0 billion
at December 31, 1999, and $2.0 billion at December 31, 1998, including the
effect of retirements, but before deducting accumulated depreciation.

Item 3.           Legal Proceedings

                  There were no proceedings reportable under Item 3.


Item 4.           Submission of Matters to a Vote of Security Holders

                  (Omitted pursuant to General Instruction I(2).)

                                       6
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                              Verizon Hawaii Inc.

                                     PART II

Item 5.           Market for Registrant's Common Equity and Related Stockholder
                  Matters

                  Not applicable.


Item 6.           Selected Financial Data

                  (Omitted pursuant to General Instruction I(2).)

                                       7
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                              Verizon Hawaii Inc.

Item 7.  Management's Discussion and Analysis of Results of Operations
         (Abbreviated pursuant to General Instruction I(2).)

      This discussion should be read in conjunction with the Financial
Statements and Notes to Financial Statements listed in the index set forth on
page F-1.

      The communications services we provided during the 1998-2000 timeframe
were subject to regulation by the Public Utilities Commission of the State of
Hawaii for its intrastate business operations, the Commonwealth Utilities
Corporation of the Commonwealth of the Northern Mariana Islands for the
Micronesian Telecommunications Corporation's local operations and the Federal
Communications Commission for Verizon Hawaii International Inc. and Pacifica,
which provided interstate and international telecommunications services. For a
further discussion of the company, see Item 1 - "Description of Business."


RESULTS OF OPERATIONS
---------------------

      We reported net income of $85.3 million in 2000, compared to net income of
$98.6 million in 1999.

      Our results for 2000 and 1999 were affected by special items. The special
items included our allocated share of charges from Verizon Services Corp.
(Verizon Services), an affiliate that provides centralized services on a
contract basis.

      The following table shows how special items are reflected in our condensed
consolidated statements of income for each period:

                                                           (Dollars in Millions)
Years Ended December 31,                               2000               1999
--------------------------------------------------------------------------------
Operating Revenues
   Other charges and special items                     $ 1.0            $   --
                                           -------------------------------------
Operations and Support Expenses
  Bell Atlantic-GTE merger direct
    incremental costs                                    7.2                --
  Bell Atlantic-GTE merger severance costs              10.6                --
  Bell Atlantic-GTE merger transition costs              1.9                --
  Other charges and special items                         .2                --
                                           -------------------------------------
                                                        19.9                --
                                           -------------------------------------
Depreciation and Amortization Expenses
   Bell Atlantic-GTE merger accounting
     conformity adjustments                             (1.4)             (2.9)
                                           -------------------------------------
Net impact on pre-tax income                          $ 19.5            $ (2.9)
                                           =====================================

      What follows is a further explanation of the nature of these special
items.

Bell Atlantic - GTE Merger

      On June 30, 2000, Bell Atlantic and GTE completed a merger under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications Inc. (Verizon Communications). The merger qualified as a tax-free
reorganization and has been accounted for as a pooling-of-interests business
combination. Under this method of accounting, Bell Atlantic and GTE are treated
as if they had always been combined for accounting and financial reporting
purposes.

Merger-Related Charges

Direct Incremental Costs

      Direct incremental costs related to the Bell Atlantic-GTE merger of $7.2
million (all of which was allocated from Verizon Services) include compensation,
professional services and other costs. Compensation includes retention payments
to employees that were contingent on the close of the merger. Professional
services include investment banking, legal, accounting, consulting and other
advisory fees incurred to obtain federal and state regulatory approvals and take
other actions necessary to complete the merger. Other includes costs incurred to
obtain shareholder approval of the merger, register securities and communicate
with shareholders, employees and regulatory authorities regarding merger issues.
Substantially all of the Bell Atlantic-GTE merger direct incremental costs have
been paid as of December 31, 2000.

                                       8
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                              Verizon Hawaii Inc.
Employee Severance Costs

      Employee severance costs related to the Bell Atlantic-GTE merger of $10.6
million (all of which was allocated from Verizon Services), as recorded under
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," represent the
benefit costs for the separation of management employees who are entitled to
benefits under pre-existing separation plans, as well as an accrual for ongoing
SFAS No. 112 obligations for former GTE employees. The separations either have
or are expected to occur as a result of consolidations and process enhancements
within our company. Accrued postemployment benefit liabilities for those
employees are included in our balance sheets as a component of Accounts Payable
and Accrued Liabilities-Other.

Transition Costs

      In addition to the direct merger-related and severance costs discussed
above, from the date of the Bell Atlantic-GTE merger, we expect to incur
transition costs over the next several years related to the Bell Atlantic-GTE
merger. These costs will be incurred to integrate systems, consolidate real
estate, relocate employees and meet certain regulatory conditions of the merger.
They also include costs for advertising and other costs to establish the Verizon
brand. Transition costs related to the Bell Atlantic-GTE merger were $1.9
million in 2000 (including $1.0 million allocated from Verizon Services).

Accounting Conformity Adjustments

Results of operations also included adjustments that were required to conform
our accounting methods and presentation to that of Verizon Communications. These
conforming adjustments are differences in capitalization policies. As a result
of these adjustments, operating income increased $1.4 million and $2.9 million
for the years ended 2000 and 1999, respectively.

Other Charges and Special Items

      In the second quarter of 2000, we recorded other charges and special items
totaling $1.2 million pre-tax.

      These and other items affecting the comparison of our results of
operations for the years ended December 31, 2000 and 1999 are discussed in the
following sections.

Results of Operations

      We have one reportable segment, which provides domestic and international
wireline telecommunications services.


OPERATING REVENUE STATISTICS
----------------------------

                                                2000       1999       % Change
--------------------------------------------------------------------------------
At Year-End
Access Lines in Service (in thousands)*
   Residence                                      476        474           0.4%
   Business                                       276        269           2.6
   Public                                           8          8          --
                                           ------------------------
                                                  760        751           1.2
                                           ========================
For the year,
Access Minutes of Use (in millions)             2,704      2,593           4.2%
                                           ========================

*1999 reflects a restatement of access lines in service.

                                       9
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                              Verizon Hawaii Inc.

OPERATING REVENUES
------------------
(Dollars in Millions)

Years Ended December 31,                              2000                1999
-------------------------------------------------------------------------------
Local services                                    $   311.3            $  299.0
Network access services                               168.3               179.3
Long distance services                                 56.9                52.1
Other services                                        102.2               148.7
                                                --------------------------------
Total                                              $  638.7            $  679.1
                                                ================================


LOCAL SERVICES

                                    Increase
-------------------------------------------------------------------------------
   2000 - 1999                 $12.3         4.1%
-------------------------------------------------------------------------------

      Local services revenues are earned from the provision of local exchange,
local private line, wire maintenance, voice messaging and value-added services.
Value-added services are a family of services that expand the utilization of the
network, including products such as Caller ID, Call Waiting and Return Call.
Local services also includes wholesale revenues from unbundled network element
(UNE) platforms, certain data transport revenues, and wireless interconnection
revenues.

      Growth in local service revenues in 2000 was primarily due to increased
demand for directory assistance services. Increased demand for our enhanced
customer calling services, such as SmartCall(R) services further contributed to
the increase. Furthermore, as a result of higher usage of our network, access
lines grew 1.2% in 2000, compared to 1999, generating additional revenues from
basic local services, CentraNet(R) services, Integrated Services Digital Network
and Digital Channel Services.


NETWORK ACCESS SERVICES

                                   (Decrease)
-------------------------------------------------------------------------------
   2000 - 1999               $(11.0)         (6.1)%
-------------------------------------------------------------------------------

      Network access revenues are earned from end-user subscribers and from long
distance and other competing carriers who use our local exchange facilities to
provide usage services to their customers. Switched access revenues are derived
from fixed and usage-based charges paid by carriers for access to our local
network. Special access revenues originate from carriers and end-users that buy
dedicated local exchange capacity to support their private networks. End-user
access revenues are earned from our customers and from resellers who purchase
dial-tone services.

      The overall decrease in network access services revenues in 2000 was
principally related to mandated interstate and intrastate access price
reductions and other regulatory decisions. The FCC regulates rates that we
charge long distance carriers and end-user subscribers for interstate access
services. We are required to file new access rates with the FCC each year. In
July 2000 we implemented the Coalition for Affordable Local and Long Distance
Service (CALLS) plan. Rates included in the July 2000 CALLS plan will be in
effect through June 2001. You can find additional information on FCC rulemakings
concerning federal access rates, universal service and unbundling network
elements in Item 1 - "Description of Business, Operations - FCC Regulation and
Interstate Rates."

      Partially offsetting the decrease were the effects of increased demand for
special access services, reflecting a greater utilization of our network. Growth
in access minutes of use of 4.2% in 2000 compared to 1999, resulting from
increased customer demand, further offset the decrease in revenues.

                                       10
<PAGE>

                              Verizon Hawaii Inc.

LONG DISTANCE SERVICES

                                    Increase
-------------------------------------------------------------------------------
   2000 - 1999                  $4.8         9.2%
-------------------------------------------------------------------------------

      Long distance revenues are earned primarily from calls made from
international calls and from calls made to points outside a customer's local
calling area, but within our service area (intraLATA toll). IntraLATA toll calls
originate and terminate within the same LATA, but generally cover a greater
distance than a local call. These services are regulated by state regulatory
commissions except where they cross state lines. Other long distance services
that we provide include 800 services and Wide Area Telephone Service (WATS).

      Growth in our international long distance services in 2000 was the primary
contributor to the increase in long distance revenues. Partially offsetting this
increase was a decline in revenue caused by the competitive effects of other
providers of intraLATA long distance services.

OTHER SERVICES

                                   (Decrease)
-------------------------------------------------------------------------------
   2000 - 1999               $(46.5)          (31.3)%
-------------------------------------------------------------------------------

      Our other services include such services as billing and collections for
long distance carriers and affiliates, facilities rentals to affiliates and
nonaffiliates, collocation for competitive local exchange carriers, usage of
separately priced (unbundled) components of our network by competitive local
exchange carriers, public (coin) telephone and customer premises equipment
(CPE). Other services revenues also include directory services revenues.

      The decrease in other services revenues in 2000 was principally due to the
impact of a change in the recognition of directory publishing revenues which
resulted in a decrease in revenues (for additional information see Note 1 -
Directory Publishing Revenues). Further contributing to the decrease was a
special charge recorded in 2000.


OPERATING EXPENSES
------------------
(Dollars in Millions)

OPERATIONS AND SUPPORT

                                   (Decrease)
-------------------------------------------------------------------------------
   2000 - 1999               $(26.6)          (7.2)%
-------------------------------------------------------------------------------

      Operations and support expenses consist of employee costs and other
operating expenses. Employee costs consist of salaries, wages and other employee
compensation, employee benefits and payroll taxes. Other operating expenses
consist of contract services including centralized services expenses allocated
from Verizon Services, rent, network software costs, operating taxes other than
income, the provision for uncollectible accounts receivable, and other costs.

      The decrease in operations and support expenses was primarily due to lower
benefit costs principally due to a gain associated with lump-sum settlements of
pension obligations for former GTE employees. Operations and support expenses
were further decreased by the effect of a charge in 1999 for an employee
reduction program. These decreases were partially offset by merger-related
costs.

DEPRECIATION AND AMORTIZATION

                                    Increase
-------------------------------------------------------------------------------
   2000 - 1999                  $3.3         2.7%
-------------------------------------------------------------------------------

      Depreciation and amortization expense increased primarily due to continued
investment in our network. Partially affecting the increase in depreciation and
amortization expense were adjustments made to conform the accounting policies of
Bell Atlantic and GTE as a result of the merger.

                                       11
<PAGE>

                              Verizon Hawaii Inc.

EFFECTIVE INCOME TAX RATES

      Years Ended December 31,
-------------------------------------------------------------------------------
      2000                              36.9%
-------------------------------------------------------------------------------
      1999                              35.1%
-------------------------------------------------------------------------------

      The effective income tax rate is the provision for income taxes as a
percentage of income before provision for income taxes, extraordinary items and
cumulative effect of change in accounting principle. Our effective income tax
rate was higher through the year ended December 31, 2000 compared to 1999 due to
a reduction in investment tax credit amortization, non-recurring income tax
expenses recorded in 2000, and a decrease in the portion of income from
non-taxable operations.

      You can find a reconciliation of the statutory federal income tax rate to
the effective income tax rate for each period in Note 8 to the consolidated
financial statements.

OTHER MATTERS
-------------

Recent Accounting Pronouncements - Derivatives and Hedging Activities

      In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities in our balance sheet. Changes in the fair values
of derivative instruments not used as hedges will be recognized in earnings
immediately. Changes in the fair values of derivative instruments used
effectively as hedges will be recognized either in earnings for hedges of
changes in fair value or in Other Comprehensive Income (Loss) for hedges of
changes in cash flows. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.

      In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives.

      Effective January 1, 2001, we will adopt SFAS No. 133 and SFAS No. 138.
The initial impact of adoption on our financial statements will not be material.
The ongoing effect of adoption on our financial statements will be determined
each quarter by several factors, including the specific hedging instruments in
place and their relationships to hedged items, as well as market conditions at
the end of each period.

                                       12
<PAGE>

                              Verizon Hawaii Inc.

Item  7A.  Quantitative and Qualitative Disclosures About Market Risk

      We are exposed to interest rate risk in the normal course of our business.
The majority of our debt is fixed rate debt and we did not have derivatives as
of December 31, 2000 and 1999. Our short-term borrowings from an affiliate
expose our earnings to changes in short-term interest rates since the interest
rate charged on such borrowings is typically fixed for less than one month.

      The following table summarizes the fair values of our long-term debt as of
December 31, 2000 and 1999. The table also provides a sensitivity analysis of
the estimated fair values of these financial instruments assuming
100-basis-point upward and downward parallel shifts in the yield curve. The
sensitivity analysis did not include the fair values of our short-term
borrowings from an affiliate since they are not significantly affected by
changes in market interest rates.

                                                             December 31
                                                      --------------------------
(Dollars in Millions)                                      2000           1999
--------------------------------------------------------------------------------
Fair value of long-term debt                             $433.9         $439.1
Fair value assuming a +100-basis-point shift              416.2          418.2
Fair value assuming a -100-basis-point shift              452.6          461.2


Item  8.   Financial Statements and Supplementary Data

           The information required by this Item is set forth on Pages F-1
           through F-20.

Item  9.   Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure

           The information required by this item regarding a change in
           accountants is included in a Current Report on Form 8-K dated
           September 7, 2000.

                                    PART III

Item 10.   Directors and Executive Officers of Registrant

           (Omitted pursuant to General Instruction I(2).)

Item 11.   Executive Compensation

           (Omitted pursuant to General Instruction I(2).)

Item 12.   Security Ownership of Certain Beneficial Owners and Management

           (Omitted pursuant to General Instruction I(2).)

Item 13.   Certain Relationships and Related Transactions

           (Omitted pursuant to General Instruction I(2).)



                                     PART IV


Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)    The following documents are filed as part of this report:

            (1)  Financial Statements

                     See Index to Financial Statements and Financial
                     Statement Schedule appearing on Page F-1.

            (2)  Financial Statement Schedules

                                       13
<PAGE>

                              Verizon Hawaii Inc.

                     See Index to Financial Statements and Financial
                     Statement Schedule appearing on Page F-1.


            (3)  Exhibits

                     Exhibits identified in parentheses below, on file
                     with the Securities and Exchange Commission (SEC),
                     are incorporated herein by reference as exhibits
                     hereto.

     3.1  Articles of Incorporation and Bylaws. (Exhibit 3.2 to the registrant's
          Annual Report on Form 10-K for the year ended December 31, 1987, File
          No. 2-33059.)

     3.2  Amended Bylaws. (Exhibit 3.2 to the registrant's Annual Report on Form
          10-K for the year ended December 31, 1994, File No. 2-33059.)

     3.3  Articles of Amendment to Change Corporate Name. (Exhibit 3.3 to the
          registrant's Quarterly Report on Form 10-Q for the quarter ended June
          30, 2000, File No. 2-33059.)

     4.1  Indenture dated as of February 1, 1995 between GTE Hawaiian Telephone
          Company Incorporated and Hawaiian Trust Company Limited, as Trustee.
          (Exhibit 4.1 of the Company's Registration Statement on Form S-3, File
          No. 33-57743, filed with the Securities and Exchange Commission on
          February 17, 1995.)

     4.2  First Supplemental Indenture dated as of July 1, 1996 between GTE
          Hawaiian Telephone Company Incorporated and Hawaiian Trust Company
          Limited, as Trustee. (Exhibit 4.3 of the registrant's Current Report
          on Form 8-K, dated July 1, 1996.)

     26   Revised Form of Invitation for Bids pertaining to Registration
          Statement on Form S-3 (File No. 33-57743).

     (b)    Reports on Form 8-K:

                There were no Current Reports on Form 8-K filed during the
                quarter ended December 31, 2000.

                                       14
<PAGE>

                              Verizon Hawaii Inc.

                                   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.



                                    Verizon Hawaii Inc.


Date:  March 30, 2001               By  /s/  Edwin F. Hall
                                       -------------------------------------
                                             Edwin F. Hall
                                             Controller



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.


<TABLE>
<CAPTION>
Signature                                   Title                               Date
---------                                   -----                               ----
<S>                                         <C>                                 <C>

/s/ Warren H. Haruki                        President and Director              March 30, 2001
----------------------------------          (Principal Executive Officer)
     Warren H. Haruki


/s/ Lawrence R. Whitman                     Vice President-Finance &
------------------------------              Planning                            March 30, 2001
    Lawrence R. Whitman                     (Principal Financial Officer)


/s/ Edwin F. Hall                           Controller                          March 30, 2001
--------------------------------------
     Edwin F. Hall


/s/ Elaine Marie Duncan                     Director                            March 30, 2001
---------------------------------
     Elaine Marie Duncan


/s/ Timothy J. McCallion                    Director                            March 30, 2001
----------------------------------
     Timothy J. McCallion
</TABLE>

                                       15
<PAGE>

                               Verizon Hawaii Inc.

         Index to Financial Statements and Financial Statement Schedule



                                                                           Page
                                                                           ----

Report of Independent Auditors - Ernst & Young LLP ....................     F-2

Report of Independent Public Accountants - Arthur Andersen LLP.........     F-3

Consolidated Statements of Income
     For the years ended December 31, 2000, 1999 and 1998 .............     F-4

Consolidated Balance Sheets - December 31, 2000 and 1999...............     F-5

Consolidated Statements of Changes in Shareowner's Investment
     For the years ended December 31, 2000, 1999 and 1998 .............     F-7

Consolidated Statements of Cash Flows
     For the years ended December 31, 2000, 1999 and 1998 .............     F-8

Notes to Consolidated Financial Statements ............................     F-9

Schedule II - Valuation and Qualifying Accounts
     For the years ended December 31, 2000, 1999 and 1998..............    F-20



Financial statement schedules other than that listed above have been omitted
because such schedules are not required or applicable.

                                      F-1
<PAGE>

                              Verizon Hawaii Inc.

                         REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Shareowner
Verizon Hawaii Inc.

We have audited the accompanying consolidated balance sheet of Verizon Hawaii
Inc. (the Company) as of December 31, 2000 and the related consolidated
statements of income, shareowner's investment, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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 significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides 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 Hawaii
Inc. at December 31, 2000, and the consolidated results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.



/s/  Ernst & Young LLP



New York, New York
February 1, 2001

                                      F-2
<PAGE>

                              Verizon Hawaii Inc.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and Shareowner of
Verizon Hawaii Inc.:

We have audited the accompanying consolidated balance sheet of Verizon Hawaii
Inc. (a Hawaii corporation and wholly owned subsidiary of Verizon Communications
Inc.) and subsidiaries as of December 31, 1999, and the related consolidated
statements of income, changes in shareowner's investment and cash flows for each
of the two years in the period then ended, as set forth under Item 14 of this
report. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated 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
significant 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 financial position of Verizon Hawaii Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for each of the two years in the period then ended in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for computer software costs in accordance with
AICPA Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," effective January 1, 1999.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The 1999 and 1998 supporting schedule
listed under Item 14 is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The 1999 and 1998 supporting schedule has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the related
financial statements taken as a whole.


/s/Arthur Andersen LLP


Dallas, Texas,
June 30, 2000

                                      F-3
<PAGE>

                               Verizon Hawaii Inc.


                        CONSOLIDATED STATEMENTS OF INCOME
                         For the Years Ended December 31
                              (Dollars in Millions)


<TABLE>
<CAPTION>
                                                                                         2000            1999           1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>             <C>            <C>
OPERATING REVENUES (including $.2,  $40.9, and $39.0 from affiliate)                   $638.7          $679.1         $671.3
                                                                                ---------------------------------------------
OPERATING EXPENSES
   Operations and support (including $103.0, $85.9 and $109.7 to affiliates)            343.7           370.3          417.4
   Depreciation and amortization                                                        125.1           121.8          114.1
                                                                                ---------------------------------------------
                                                                                        468.8           492.1          531.5
                                                                                ---------------------------------------------

OPERATING INCOME                                                                        169.9           187.0          139.8
OTHER INCOME, NET (including $2.3, $2.6 and $2.0 from affiliate)                          3.1             4.4            5.6
INTEREST EXPENSE (including $8.2, $7.8 and $6.6 to affiliate)                            37.9            39.6           44.1
                                                                                ---------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES                                                135.1           151.8          101.3
PROVISION FOR INCOME TAXES                                                               49.8            53.2           33.2
                                                                                ---------------------------------------------
NET INCOME                                                                              $85.3           $98.6          $68.1
                                                                                =============================================
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>

                              Verizon Hawaii Inc.

                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in Millions)

                                    ASSETS
                                    ------

<TABLE>
<CAPTION>
                                                                                                    December 31
                                                                                      --------------------------------------
                                                                                                 2000                1999
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                  <C>
CURRENT ASSETS
Cash                                                                                           $  1.5               $ 2.3
Short-term investments                                                                           19.9                 9.5
Accounts receivable:
  Trade and other, net of allowances for uncollectibles of $6.9 and $4.2                         82.1               156.1
  Affiliates                                                                                     10.6                14.5
Material and supplies                                                                             8.5                 5.5
Prepaid expenses                                                                                  1.6                 1.4
Deferred income taxes                                                                             8.8                 2.6
Other                                                                                             6.2                 2.6
                                                                                      --------------------------------------
                                                                                                139.2               194.5
                                                                                      --------------------------------------
PLANT, PROPERTY AND EQUIPMENT                                                                 1,996.9             2,045.3
Less accumulated depreciation                                                                 1,221.9             1,222.9
                                                                                      --------------------------------------
                                                                                                775.0               822.4
                                                                                      --------------------------------------
PREPAID PENSION ASSET                                                                           421.2               308.3
                                                                                      --------------------------------------
INVESTMENTS IN UNCONSOLIDATED BUSINESSES                                                         44.3                 7.0
                                                                                      --------------------------------------
OTHER ASSETS                                                                                     47.1                12.3
                                                                                      --------------------------------------
TOTAL ASSETS                                                                                $ 1,426.8           $ 1,344.5
                                                                                      ======================================
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-5
<PAGE>
                              Verizon Hawaii Inc.


                           CONSOLIDATED BALANCE SHEETS
                 (Dollars in Millions, Except Per Share Amount)

                     LIABILITIES AND SHAREOWNER'S INVESTMENT
                     ---------------------------------------

<TABLE>
<CAPTION>

                                                                                           December 31
                                                                         -----------------------------------------
                                                                                      2000                 1999
------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                 <C>
CURRENT LIABILITIES
Debt maturing within one year:
   Note payable to affiliate                                                      $   97.4             $  101.7
   Other                                                                               1.2                  3.0
Accounts payable and accrued liabilities:
   Affiliates                                                                         19.7                 43.1
   Other                                                                             122.6                 86.9
Other current liabilities                                                             33.6                 19.8
                                                                         -----------------------------------------
                                                                                     274.5                254.5
                                                                         -----------------------------------------
LONG-TERM DEBT                                                                       429.2                461.6
                                                                         -----------------------------------------
EMPLOYEE BENEFIT OBLIGATIONS                                                          17.2                 22.8
                                                                         -----------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes                                                                218.0                170.2
Unamortized investment tax credits                                                    33.3                 35.8
Other                                                                                 46.9                  6.3
                                                                         -----------------------------------------
                                                                                     298.2                212.3
                                                                         -----------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 11)                                          --                   --

SHAREOWNER'S INVESTMENT
Common stock - $25 par value per share                                               250.0                250.0
   Authorized shares:     18,000,000
   Outstanding shares:    10,000,000
Contributed capital                                                                  125.6                 93.3
Reinvested earnings                                                                   32.1                 50.0
                                                                         -----------------------------------------
                                                                                     407.7                393.3
                                                                         -----------------------------------------
TOTAL LIABILITIES AND SHAREOWNER'S INVESTMENT                                     $1,426.8             $1,344.5
                                                                         =========================================
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-6
<PAGE>

                              Verizon Hawaii Inc.

          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNER'S INVESTMENT
                         For the Years Ended December 31
                              (Dollars in Millions)


<TABLE>
<CAPTION>
                                                                                2000               1999               1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                <C>                <C>
COMMON STOCK
   Balance at beginning of year                                               $250.0             $250.0             $250.0
                                                                     --------------------------------------------------------
   Balance at end of year                                                      250.0              250.0              250.0
                                                                     --------------------------------------------------------
CONTRIBUTED CAPITAL
   Balance at beginning of year                                                 93.3               91.1               91.1
   Tax benefit from exercise of stock options                                     .3                2.1                 --
   Capital contribution in connection with merger                               32.0                 --                 --
   Other                                                                          --                 .1                 --
                                                                     --------------------------------------------------------
   Balance at end of year                                                      125.6               93.3               91.1
                                                                     --------------------------------------------------------
REINVESTED EARNINGS
   Balance at beginning of year                                                 50.0               41.8               19.6
   Net income                                                                   85.3               98.6               68.1
   Dividends declared                                                          (63.0)             (90.0)             (45.9)
   Dividend paid in connection with merger                                     (32.0)                --                 --
   Other                                                                        (8.2)               (.4)                --
                                                                     --------------------------------------------------------
   Balance at end of year                                                       32.1               50.0               41.8
                                                                     --------------------------------------------------------
TOTAL SHAREOWNER'S INVESTMENT                                                 $407.7             $393.3             $382.9
                                                                     ========================================================
</TABLE>


                 See Notes to Consolidated Financial Statements.

                                      F-7
<PAGE>

                              Verizon Hawaii Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         For the Years Ended December 31
                              (Dollars in Millions)

<TABLE>
<CAPTION>

                                                                                    2000             1999             1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                         $85.3            $98.6            $68.1
Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization                                                 125.1            121.8            114.1
     Equity income from affiliate                                                    (.8)            (1.1)            (3.5)
     Deferred income taxes and investment tax credits, net                          39.7             61.5             10.0
     Employee benefit obligations                                                 (121.4)           (79.8)           (43.4)
     Provision for uncollectibles                                                    8.1             16.5             10.3
     Other items, net                                                              (67.9)            (1.7)           (16.1)
     Changes in certain assets and liabilities:
       Accounts receivable                                                          51.0               .1             (1.8)
       Material and supplies                                                        (3.0)             5.5              4.0
       Other assets                                                                (18.4)             4.9             (8.0)
       Accounts payable and accrued liabilities                                     62.5            (19.5)            43.7
       Other current liabilities                                                    17.1            (20.4)            (4.1)
                                                                           --------------------------------------------------
Net cash provided by operating activities                                          177.3            186.4            173.3
                                                                           --------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments                                                (10.4)              --               --
Capital expenditures                                                               (72.6)          (102.0)          (108.1)
Proceeds from sales of assets                                                         --               --               .4
Other, net                                                                            --               .6               --
                                                                           --------------------------------------------------
Net cash used in investing activities                                              (83.0)          (101.4)          (107.7)
                                                                           --------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of borrowings and capital
    lease obligations                                                              (12.6)            (5.9)            (2.1)
Net change in note payable to affiliate                                             (5.2)            13.4            (24.7)
Dividends paid                                                                     (78.3)           (91.5)           (38.2)
Other, net financing                                                                 1.0               --               --
                                                                           --------------------------------------------------
Net cash used in financing activities                                              (95.1)           (84.0)           (65.0)
                                                                           --------------------------------------------------

NET CHANGE IN CASH                                                                   (.8)             1.0               .6

CASH, BEGINNING OF YEAR                                                              2.3              1.3               .7
                                                                           --------------------------------------------------
CASH, END OF YEAR                                                                   $1.5             $2.3             $1.3
                                                                           ==================================================
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-8
<PAGE>

                              Verizon Hawaii Inc.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

       Verizon Hawaii Inc. is a wholly owned subsidiary of GTE Corporation
(GTE), which is a wholly owned subsidiary of Verizon Communications Inc.
(Verizon Communications). During 2000, we owned three wholly owned subsidiaries:
GTE Hawaiian Tel Insurance Company Incorporated, Verizon Hawaii International
Inc. and The Micronesian Telecommunications Corporation (MTC). GTE Hawaiian Tel
Insurance Company Incorporated provides auto liability, general liability and
workers' compensation insurance to the Company on a direct basis. Verizon Hawaii
International Inc. provides interstate and international telecommunications
services in Hawaii and telecommunication services in Guam. GTE Far East
(Services) Limited, which is a wholly owned subsidiary of Verizon Hawaii
International Inc., provides international telecommunications services in Japan.
MTC, which is headquartered in Saipan in the Commonwealth of the Northern
Mariana Islands (CNMI), provides local telecommunications services on the
islands of Saipan, Tinian and Rota. In addition, GTE Pacifica Incorporated
(Pacifica), which is a wholly owned subsidiary of MTC, provides interstate and
international telecommunications services in the CNMI and Guam.

       On December 19, 2000, we exchanged 100% of our share ownership in MTC for
4.03065 shares of GTE International Telecommunications Incorporated (GITI), an
affiliate. Our minority interest in GITI is valued at cost, which is the net
book value of the MTC shares exchanged. On the same date, our wholly owned
subsidiary, Verizon Hawaii International Inc., sold 100% of its shares, or
1,215,930 shares, of GTE Far East (Services) Limited to GITI for one dollar. No
gains or losses were realized on these transactions.

      We have one reportable segment which provides domestic wireline
telecommunications services. Our principal line of business is providing
communications services ranging from local telephone service for the home and
office to voice and data services for various industries. We provide local
telephone service on each island in Hawaii and provide intraLATA (Local Access
Transport Area) toll service among the islands. InterLATA toll services between
Hawaii and domestic points within the United States are provided by long-
distance carriers, which connect to our local facilities for call origination
and termination. The long-distance carriers are charged fees (access charges)
for interconnection to our local facilities. Business and residential customers
also pay access charges to connect to the local network to obtain long-distance
service. We also provide toll service between Hawaii and international
termination points in competition with international carriers. We settle these
international revenues with other international carriers through revenue sharing
arrangements. We earn other revenues by providing such services as billing and
collection and operator services to long-distance carriers.

Basis of Presentation

      We prepare our financial statements using generally accepted accounting
principles which require management to make estimates and assumptions that
affect reported amounts and disclosures. Actual results could differ from those
estimates.

      The consolidated financial statements include the accounts of Verizon
Hawaii Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

      We have reclassified certain amounts from prior periods to conform with
our current presentation.

Revenue Recognition

      We recognize revenues when services are rendered based on usage of our
local exchange network and facilities. For other products and services, revenues
are generally recognized when services are rendered or products are delivered to
customers.

      We adopted the provisions of the Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," in the fourth quarter, retroactive to January 1, 2000, as required
by the SEC. As a result of the adoption of SAB No. 101, we now defer
nonrecurring service activation revenues and costs and amortize them over the
expected term of the customer relationship. Previously, these revenues and costs
were recognized when the activation service was performed. This change in
accounting did not have a material impact on our results of operations for 2000.
Our balance sheet at December 31, 2000 includes deferred activation costs as a
component of Current

                                      F-9
<PAGE>

                              Verizon Hawaii Inc.

assets - other ($5.4 million) and Other Assets ($21.7 million) and deferred
activation revenues as a component of Current liabilities - other ($5.4 million)
and Deferred credits and other liabilities - other ($21.7 million).

Maintenance and Repairs

      We charge the cost of maintenance and repairs, including the cost of
replacing minor items not constituting substantial betterments, to Operations
and Support Expenses.

Cash and Cash Equivalents

      We consider all highly liquid investments with a maturity of 90 days or
less when purchased to be cash equivalents, except cash equivalents held as
short-term investments. Cash equivalents are stated at cost, which approximates
market value.

Short-term Investments

      Our short-term investments consist of cash equivalents held in trust to
pay for certain employee benefits. Short-term investments are stated at cost,
which approximates market value.

Material and Supplies

      We include in inventory new and reusable materials which are stated
principally at average original cost, except that specific costs are used in the
case of large individual items.

Plant and Depreciation

      We state plant, property, and equipment at historical cost. 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 telephone plant, less anticipated net
salvage value, over the remaining asset lives. This method requires the periodic
revision of depreciation rates. We used the following asset lives:

     Average Lives (in years)
     ------------------------------------------------------------------------
     Buildings                                               30 - 35
     Central office equipment                                 8 - 10
     Outside communications plant                            15 - 40
     Furniture, vehicles and other                            3 - 10

      When we replace or retire depreciable telephone plant, we deduct the
carrying amount of such plant from the respective accounts and charge
accumulated depreciation.

      We capitalize interest associated with the acquisition or construction of
plant assets. Capitalized interest is reported as a cost of plant and a
reduction in interest expense.

Computer Software Costs

      We capitalize the cost of internal-use software which has a useful life in
excess of one year in accordance with Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications or upgrades to internal-use
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 software. Capitalized
computer software costs are amortized using the straight-line method over a
period of 3 to 5 years. The effect of adopting SOP No. 98-1 for Verizon
Communications was an increase in net income of approximately $560 million in
1999.

      Prior to adopting SOP No. 98-1, we capitalized initial right-to-use fees
for central office switching equipment, including initial operating system and
initial application software costs. For noncentral office equipment, only the
initial operating system software was capitalized. Subsequent additions,
modifications, or upgrades of initial software programs, whether operating or
application packages, were expensed as incurred.

                                      F-10
<PAGE>

                              Verizon Hawaii Inc.

Income Taxes

      Verizon Communications and its domestic subsidiaries, including us, file a
consolidated federal income tax return.

      Current and deferred tax expense is determined by applying the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes," to each subsidiary as if it were a separate taxpayer.

      We use the deferral method of accounting for investment tax credits earned
prior to the repeal of investment tax credits by the Tax Reform Act of 1986. We
also defer certain transitional credits earned after the repeal. We amortize
these credits over the estimated service lives of the related assets as a
reduction to the Provision for Income Taxes.

Advertising Costs

      We expense advertising costs as they are incurred.

Employee Benefit Plans

      We participate in the Verizon Communications benefit plans. Under these
plans, pension and postretirement health care and life insurance benefits earned
during the year as well as interest on projected benefit obligations are accrued
currently. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the
employees expected to receive benefits.

Directory Publishing Revenues

      Consistent with industry practice, effective January 1, 2000, we changed
our method of recognizing directory publishing revenues. Verizon Information
Services Inc. (Directories), a wholly owned subsidiary of GTE, publishes
telephone directories for which it receives advertising revenue. Under our
previous method of revenue recognition, approximately 60% of the advertising
revenue for directories published by Directories in our operating areas was
recognized as revenue. The remaining 40% was recognized as revenue by
Directories. Under the new method of revenue recognition, Directories now
recognizes 100% of the directory publishing revenues. We, in turn, bill
Directories for customer listing information and billing and collection
services. As a result, our others services revenues and operating income for the
year ended December 31, 2000 decreased $41.1 million and $35.6 million,
respectively, compared to 1999.

Recent Accounting Pronouncements - Derivatives and Hedging Activities

      In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement requires that all derivatives be measured at fair value and recognized
as either assets or liabilities in our balance sheet. Changes in the fair values
of derivative instruments not used as hedges will be recognized in earnings
immediately. Changes in the fair values of derivative instruments used
effectively as hedges will be recognized either in earnings for hedges of
changes in fair value or in Other Comprehensive Income (Loss) for hedges of
changes in cash flows. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.

      In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amended SFAS No.
133. The amendments in SFAS No. 138 address certain implementation issues and
relate to such matters as the normal purchases and normal sales exception, the
definition of interest rate risk, hedging recognized
foreign-currency-denominated assets and liabilities, and intercompany
derivatives.

      Effective January 1, 2001, we will adopt SFAS No. 133 and SFAS No. 138.
The initial impact of adoption on our financial statements will not be material.
The ongoing effect of adoption on our financial statements will be determined
each quarter by several factors, including the specific hedging instruments in
place and their relationships to hedged items, as well as market conditions at
the end of each period.

Comprehensive Income

      We had no comprehensive income components for the years ended December 31,
2000, 1999 and 1998. Therefore, comprehensive income is the same as net income
for all three years.

                                      F-11
<PAGE>

                              Verizon Hawaii Inc.

2.    COMPLETION OF MERGER

      On June 30, 2000, Bell Atlantic and GTE completed a merger under a
definitive merger agreement dated as of July 27, 1998. Under the terms of the
agreement, GTE became a wholly owned subsidiary of Bell Atlantic. With the
closing of the merger, the combined company began doing business as Verizon
Communications. The merger qualified as a tax-free reorganization and has been
accounted for as a pooling-of-interests business combination. Under this method
of accounting, Bell Atlantic and GTE are treated as if they had always been
combined for accounting and financial reporting purposes.

      The following table summarizes the one-time charges incurred for the
merger:

                                                           (Dollars in Millions)
  Year Ended December 31,                                                 2000
--------------------------------------------------------------------------------
  Direct incremental costs                                               $ 7.2
  Employee severance costs                                                10.6
  Transition costs                                                         1.9
                                                              ------------------
  Total Merger-Related Costs                                             $19.7
                                                              ==================

      The following table provides a reconciliation of the liabilities
associated with Bell Atlantic-GTE merger-related costs and other charges and
special items described below:

<TABLE>
<CAPTION>
                                                                            (Dollars in Millions)
                                                                                            2000
-------------------------------------------------------------------------------------------------
                                         Charged to                        Asset
                                         Expense or                   Write-offs         End of
                                            Revenue    Payments        and Other           Year
-------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>               <C>           <C>
  Merger-Related
  Direct incremental costs                  $  7.2        $ (6.9)          $ --          $  .3
  Employee severance costs                    10.6          (2.8)            .3            8.1
                                       ----------------------------------------------------------
                                            $ 17.8        $ (9.7)          $ .3          $ 8.4
                                       ==========================================================
</TABLE>

Merger-Related Charges

Direct Incremental Costs

      Direct incremental costs related to the Bell Atlantic-GTE merger of $7.2
million (all of which was allocated from Verizon Services) include compensation,
professional services and other costs. Compensation includes retention payments
to employees that were contingent on the close of the merger. Professional
services include investment banking, legal, accounting, consulting and other
advisory fees incurred to obtain federal and state regulatory approvals and take
other actions necessary to complete the merger. Other includes costs incurred to
obtain shareholder approval of the merger, register securities and communicate
with shareholders, employees and regulatory authorities regarding merger issues.
Substantially all of the Bell Atlantic-GTE merger direct incremental costs have
been paid as of December 31, 2000.

Employee Severance Costs

      Employee severance costs related to the Bell Atlantic-GTE merger of $10.6
million (all of which was allocated from Verizon Services), as recorded under
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," represent the
benefit costs for the separation of management employees who are entitled to
benefits under pre-existing separation plans, as well as an accrual for ongoing
SFAS No. 112 obligations for former GTE employees. The separations either have
or are expected to occur as a result of consolidations and process enhancements
within our company. Accrued postemployment benefit liabilities for those
employees are included in our balance sheets as a component of Accounts Payable
and Accrued Liabilities-Other.

Transition Costs

      In addition to the direct merger-related and severance costs discussed
above, from the date of the Bell Atlantic-GTE merger, we expect to incur
transition costs over the next several years related to the Bell Atlantic-GTE
merger. These costs will be incurred to integrate systems, consolidate real
estate, relocate employees and meet certain regulatory conditions of the merger.
They also include costs for advertising and other costs to establish the Verizon
brand. Transition costs related to the Bell Atlantic-GTE merger were $1.9
million in 2000 (including $1.0 million allocated from Verizon Services).

                                      F-12
<PAGE>

                              Verizon Hawaii Inc.

Accounting Conformity Adjustments

       Results of operations also included adjustments that were required to
conform our accounting methods and presentation to that of Verizon
Communications. These conforming adjustments are differences in capitalization
policies. As a result of these adjustments, operating income increased $1.4
million in 2000 and $2.9 million in 1999 and decreased $7.8 million in 1998.

3.    PLANT, PROPERTY AND EQUIPMENT

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


                                                               December 31
                                                 -------------------------------
(Dollars in Millions)                                    2000              1999
--------------------------------------------------------------------------------
Land                                                $    10.8         $    10.6
Buildings                                               205.6             205.6
Central office equipment                                775.6             785.2
Outside communications plant                            843.8             879.5
Furniture, vehicles and other work equipment            111.6             126.0
Other                                                    30.6              21.3
Construction-in-progress                                 18.9              17.1
                                                 -------------------------------
                                                      1,996.9           2,045.3
Accumulated depreciation                             (1,221.9)         (1,222.9)
                                                 -------------------------------
Total                                               $   775.0         $   822.4
                                                 ===============================

4.    LEASES

      We lease certain facilities and equipment for use in our operations under
both capital and operating leases. There were no significant capital lease
obligations in 2000, 1999 and 1998.

      Capital lease amounts included in plant, property and equipment are as
follows:

                                                              December 31
                                                  ------------------------------
(Dollars in Millions)                                   2000               1999
--------------------------------------------------------------------------------
Capital leases                                          $1.3               $1.3
Accumulated amortization                                 (.3)               (.1)
                                                  ------------------------------
Total                                                   $1.0               $1.2
                                                  ==============================

      Total rent expense amounted to $12.4 million in 2000, $10.4 million in
1999 and $13.0 million in 1998.

      This table displays the aggregate minimum rental commitments under
noncancelable leases for the periods shown at December 31, 2000:

(Dollars in Millions)
Years                                         Capital Leases    Operating Leases
--------------------------------------------------------------------------------
2001                                                   $ .6              $ 7.8
2002                                                     --                4.0
2003                                                     --                3.7
2004                                                     --                3.5
2005                                                     --                3.5
Thereafter                                               --               42.6
                                              ----------------------------------
Total minimum rental commitments                         .6              $65.1
                                                                ================
Less interest and executory costs                        --
                                              -----------------
Present value of minimum lease payments                  .6
Less current installments                                .6
                                              -----------------
Long-term obligation at December 31, 2000              $ --
                                              =================

                                      F-13
<PAGE>

                              Verizon Hawaii Inc.

5.    DEBT

Debt Maturing Within One Year

Debt maturing within one year consists of the following at December 31:


<TABLE>
<CAPTION>

(Dollars in Millions)                                                        2000         1999
------------------------------------------------------------------------------------------------
<S>                                                                          <C>          <C>
Note payable to affiliate (GTE)                                              $97.4        $101.7
Long-term debt maturing within one year                                        1.2           3.0
                                                                         -----------------------
Total debt maturing within one year                                          $98.6        $104.7
                                                                         =======================

Weighted average interest rate for note payable outstanding at year-end      6.53%         6.20%
                                                                         =======================
</TABLE>

      We participate with other affiliates in a $1.5 billion, 364-day syndicated
revolving line of credit and have access to an additional $2.0 billion in
short-term liquidity through GTE and GTE Funding's committed bi-lateral
revolving lines of credit. As of December 31, 2000, we had no outstanding debt
with GTE Funding. We also obtain short-term financing through advances from an
affiliated company, GTE.

Long-Term Debt

      Long-term debt consists principally of debentures that we have issued.
Interest rates and maturities of the amounts outstanding are as follows at
December 31:

<TABLE>
<CAPTION>

                                                                       Interest
Description                                                                Rate     Maturity         2000         1999
------------------------------------------------------------------------------------------------------------------------
                                                                                                (Dollars in Millions)
<S>                                                                        <C>         <C>         <C>          <C>
Ten year debenture                                                         7.0%        2006        $150.0       $150.0
Ten year debenture                                                       7.375         2006         150.0        150.0
Twelve year first mortgage bond                                           6.75         2005         125.0        125.0
Twenty-two year first mortgage bond                                       5.43         2012          ----         12.0
Twenty-two year first mortgage bond                                       5.43         2012          ----          6.9
Twenty year first mortgage bond                                           6.14         2010          ----          3.8
Thirty-five year first mortgage bond                                       5.0         2018          ----          8.6
Twenty year first mortgage bond                                           6.05         2012          ----           .2
Nineteen year first mortgage bond                                         6.05         2012          ----           .7
                                                                                              --------------------------
                                                                                                    425.0        457.2
Notes payable affiliate (GTE Leasing)                                 6.5-12.0         2001            .6          1.5
Unamortized premium and discount, net                                                                 4.2          4.8
Capital lease obligations - average rate 7.73% and 12.03%                                              .6          1.1
                                                                                              --------------------------
Total long-term debt, including current maturities                                                  430.4        464.6
Less maturing within one year                                                                         1.2          3.0
                                                                                              --------------------------
Total long-term debt                                                                               $429.2       $461.6
                                                                                              ==========================
</TABLE>

      The aggregate principal amount of bonds and debentures that may be issued
is subject to the restrictions and provisions of our indentures. None of the
securities shown above were held in sinking or other special funds or pledged by
us. Debt discounts and premiums on our outstanding long-term debt are amortized
over the lives of the respective issues. Substantially all of our telephone
plant is subject to the liens of the indentures under which the bonds listed
above were issued.

6.    FINANCIAL INSTRUMENTS

Concentrations of Credit Risk

      Financial instruments that subject us to concentrations of credit risk
consist primarily of short-term investments, trade receivables and interest rate
swap agreements. Concentrations of credit risk with respect to trade receivables
other than those from AT&T are limited due to the large number of customers. We
generated revenues from services provided to AT&T (primarily network access and
billing and collection) of $28.0 million in 2000, $30.8 million in 1999 and
$43.0 million in 1998.

                                      F-14
<PAGE>

                              Verizon Hawaii Inc.

Fair Values of Financial Instruments

      The table below provides additional information about our material
financial instruments at December 31:

Financial Instrument                         Valuation Method
--------------------------------------------------------------------------------
Note payable to affiliate (GTE)              Carrying amounts
  and short-term Investments
Debt (excluding capital leases)              Future cash flows
                                               discounted at current rates


                            2000                             1999
                  --------------------------------------------------------------
                      Carrying                         Carrying
                       Amount       Fair Value          Amount       Fair Value
--------------------------------------------------------------------------------
                                    (Dollars in Millions)
 Debt                  $527.2           $531.9          $565.2           $542.3


7.    EMPLOYEE BENEFITS

      We participate in the Verizon Communications benefit plans. Verizon
Communications maintains noncontributory defined benefit pension plans for
substantially all employees. The postretirement healthcare and life insurance
plans for our retirees and their dependents are both contributory and
noncontributory and include a limit on the company's share of cost for 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 and to encourage employees to acquire and maintain an equity
interest in Verizon Communications.

      The structure of Verizon Communications' benefit plans does not provide
for the separate determination of certain disclosures for our company. The
required information is provided on a consolidated basis in Verizon
Communications' Annual Report on Form 10-K for the year ended December 31, 2000.

Pension and Other Postretirement Benefits

      Pension and other postretirement benefits for the majority of our
employees are subject to collective bargaining agreements. Modifications in
benefits have been bargained from time to time, and Verizon Communications may
also periodically amend the benefits in the management plans.

Benefit Cost

<TABLE>
<CAPTION>
                                                                                                 Years ended December 31
                                                                                        ----------------------------------
                                                                  Pension                      Healthcare and Life
                                                     ---------------------------------------------------------------------
(Dollars in Millions)                                      2000       1999        1998        2000        1999       1998
--------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>        <C>         <C>           <C>         <C>        <C>
 Net periodic benefit (income) cost                     $ (58.6)    $(46.3)     $(32.3)       $3.9        $8.1       $3.8
                                                     ---------------------------------------------------------------------
 Termination benefits, curtailments and other, net        (37.9)       5.4          ---         ---         ---        ---
 Settlement gains                                         (16.2)     (32.6)         ---         ---         ---        ---
                                                     ---------------------------------------------------------------------
 Subtotal                                                 (54.1)     (27.2)         ---         ---         ---        ---
                                                     ---------------------------------------------------------------------
 Total (income) cost                                    $(112.7)    $(73.5)     $(32.3)       $3.9        $8.1       $3.8
                                                     =====================================================================
</TABLE>

      We recorded one-time costs for special termination benefits provided under
voluntary and involuntary separation programs, curtailment losses and settlement
gains. These curtailment losses and settlement gains are a result of the
separation programs, as well as the required settlement gain or loss
recognition, due to the fact that in 1999 and 2000, the Company's pension
distributions surpassed the settlement threshold equal to the sum of service
cost and interest cost requiring settlement gain or loss recognition for all
cash settlements for the year.

                                      F-15
<PAGE>

                              Verizon Hawaii Inc.

      Amounts recognized on the balance sheets consist of:
                                                                     December 31
                                              ----------------------------------
                                       Pension          Healthcare and Life
--------------------------------------------------------------------------------
(Dollars in Millions)                 2000        1999         2000        1999
--------------------------------------------------------------------------------
Prepaid pension asset               $421.2      $308.3          ---         ---
Employee benefit obligations           (.1)        (.2)      $(10.6)     $(20.6)

      The changes in benefit obligations from year to year were caused by a
number of factors, including changes in actuarial assumptions (see Assumptions)
and plan amendments.

Assumptions

      The actuarial assumptions used are based on market interest rates, past
experience, and management's best estimate of future economic conditions.
Changes in these assumptions may impact future benefit costs and obligations.
The weighted-average assumptions used in determining expense and benefit
obligations are as follows:

<TABLE>
<CAPTION>
                                                                     Pension                    Healthcare and Life
                                                          -----------------------------------------------------------------
                                                              2000        1999      1998       2000        1999       1998
---------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>         <C>       <C>        <C>         <C>        <C>
Discount rate at end of year                                 7.75%       8.00%     7.00%      7.75%       8.00%      7.00%
Long-term rate of return on plan assets for the year         9.25        9.00      9.00       8.00        8.00       8.00
Rate of future increases in compensation at end of year      5.00        5.50      4.75        ---         ---        ---
Medical cost trend rate at end of year                                                        5.00        6.50       6.75
   Ultimate (year 2001)                                                                       5.00        5.50       5.50
</TABLE>

Savings Plans and Employee Stock Ownership Plans

      Substantially all of our employees are eligible to participate in savings
plans maintained by Verizon Communications. Verizon Communications maintains a
leveraged employee stock ownership plan (ESOP) for its management employees of
the former GTE Companies. Under this plan, a certain percentage of eligible
employee contributions are matched with shares of Verizon Communications' common
stock. Verizon Communications recognizes leveraged ESOP cost based on the
modified shares allocated method for this leveraged ESOP that held shares before
December 31, 1989. We recognize savings plan cost based on our matching
obligation attributed to our participating management employees. In addition to
the ESOP, Verizon Communications also maintains a savings plan for non-
management employees. We recorded total savings plan costs of $3.9 million in
2000, $3.3 million in 1999 and $2.9 million in 1998.

8.    INCOME TAXES

      The components of income tax expense (benefit) are presented in the
following table:

                                                 Years ended December 31
                                          --------------------------------------
(Dollars in Millions)                         2000          1999         1998
--------------------------------------------------------------------------------
Current:
    Federal                                    $ 6.5        $(8.1)        $28.7
    State and local                              3.6          (.2)         (5.5)
                                          --------------------------------------
                                                10.1         (8.3)         23.2
                                          --------------------------------------
Deferred:
    Federal                                     37.5         57.0           2.5
    State and local                              2.7          5.2           8.2
                                          --------------------------------------
                                                40.2         62.2          10.7
                                          --------------------------------------

Investment tax credits                           (.5)         (.7)          (.7)
                                          --------------------------------------
Total income tax expense                       $49.8        $53.2         $33.2
                                          ======================================

                                      F-16
<PAGE>

                              Verizon Hawaii Inc.

      The following table shows the primary reasons for the difference between
the effective income tax rate and the statutory federal income tax rate:

                                                         Years ended December 31
                                                       -------------------------
                                                          2000     1999    1998
--------------------------------------------------------------------------------
Statutory federal income tax rate                        35.0%    35.0%   35.0%
Investment tax credits                                    (.4)     (.5)    (.7)
State income taxes, net of federal tax benefits           3.0      1.1     2.8
Undistributed earnings of foreign subsidiary             (1.3)    (1.8)   (3.3)
Other, net                                                 .6      1.3    (1.0)
                                                       -------------------------
Effective income tax rate                                36.9%    35.1%   32.8%
                                                       =========================

      Deferred taxes arise because of differences in the book and tax bases of
certain assets and liabilities. Significant components of deferred tax
liabilities (assets) are shown in the following table:

                                                                December 31
                                                        ------------------------
(Dollars in Millions)                                         2000         1999
--------------------------------------------------------------------------------
Deferred tax liabilities:
  Depreciation                                              $ 67.5       $ 56.3
  Pension                                                    165.6        127.4
  Other                                                       13.8         14.5
                                                        ------------------------
                                                             246.9        198.2
                                                        ------------------------
Deferred tax assets:
  Employee benefits                                          (16.2)       (13.8)
  Investment tax credits                                      (2.2)         (.4)
  Other                                                      (18.7)       (16.4)
                                                        ------------------------
                                                             (37.1)       (30.6)
                                                        ------------------------
Net deferred tax liability                                  $209.8       $167.6
                                                        ========================

      Deferred tax assets include approximately $10.5 million at December 31,
2000 and $10.4 million at December 31, 1999 related to postretirement benefit
costs recognized under SFAS No. 106. This deferred tax asset will gradually be
realized over the estimated lives of current retirees and employees.

9.   ADDITIONAL FINANCIAL INFORMATION

      The tables below provide additional financial information related to our
financial statements:


                                                               December 31
                                                        ------------------------
(Dollars in Millions)                                         2000         1999
--------------------------------------------------------------------------------
BALANCE SHEETS:
Accounts payable and accrued liabilities:
  Accounts payable                                          $ 70.0       $ 75.0
  Accrued vacation pay                                        13.2         12.4
  Accrued expenses                                            22.2         14.3
  Accrued taxes                                               25.4           .1
  Dividends payable                                             --         15.3
  Interest payable                                            11.5         12.9
                                                        ------------------------
                                                            $142.3       $130.0
                                                        ========================
Other current liabilities
  Advanced billings and customer deposits                   $ 21.8       $ 14.2
  Deferred income taxes                                         .6           --
  Other                                                       11.2          5.6
                                                        ------------------------
                                                            $ 33.6       $ 19.8
                                                        ========================

                                      F-17
<PAGE>

                              Verizon Hawaii Inc.

                                                       Years ended December 31
                                                      --------------------------
(Dollars in Millions)                                   2000     1999      1998
--------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS:
Cash paid (refunded) during the year for:
  Income taxes, net of amounts refunded               $(15.9)   $(3.1)    $(5.3)
  Interest, net of amounts capitalized                  36.6     42.3      41.4

STATEMENTS OF INCOME:
Interest expense incurred, net of amounts capitalized   37.9     39.6      44.1
Capitalized interest                                      .5       .3        .6
Advertising expense                                      5.4      3.3       1.9

      Advertising expense includes $4.7 million in 2001, $3.1 million in 1999
and $1.7 million in 1998 allocated to us by various affiliates.

10.   TRANSACTIONS WITH AFFILIATES

      Our financial statements include transactions with GTE Communication
Systems Corporation (GTE Communication Systems), Verizon Information
Services Inc., Verizon Data Services Inc., Verizon Services Corp. (Verizon
Services), GTE Funding, GTE and various other affiliates.

      GTE Communication Systems provides construction and maintenance equipment,
supplies and electronic repair services to the Company. We record these
purchases and services at the lower of cost, including a return realized by GTE
Communication Systems.

      We have an agreement to provide subscriber lists, billing and collection
and other services to Verizon Information Services Inc. (Directories). Effective
in 2000, the directory publishing agreement was revised (See Note 1 - Directory
Publishing Revenues). Directories bills us for printing and other costs
associated with regulatory requirements included in the telephone directories,
including the cost of any Extended Area Service sections in the directories.
Directories also bills us for any advertising we place in the telephone
directories.

      Verizon Data Services Inc. provides data processing services, software
application development and maintenance, which generally benefit Verizon
Communications' operating telephone subsidiaries, including us. We are charged
for these affiliated transactions based on proportional cost allocation
methodologies.

      The services provided by Verizon Services are divided into two broad
categories. The first category is comprised of network related services which
generally benefit only Verizon Communications' operating telephone subsidiaries.
These services include marketing, sales, legal, accounting, finance, data
processing, materials management, procurement, labor relations, and staff
support for various network operations. The second category is comprised of
overhead and support services which generally benefit all subsidiaries of
Verizon Communications. Such services include corporate governance, corporate
finance, external affairs, legal, media relations, employee communications,
corporate advertising, human resources, and treasury. Cost may be either
directly assigned to one subsidiary or allocated to more than one subsidiary
based on functional reviews of the work performed.

      We recognize interest expense/income in connection with contractual
arrangements with GTE and GTE Funding to provide short-term financing, investing
and cash management services to us (see Note 5).

      We also declared and paid dividends to our parent, GTE.

                                      F-18
<PAGE>

                              Verizon Hawaii Inc.

     Transactions with affiliates are summarized as follows:

<TABLE>
<CAPTION>

                                                                       Years ended December 31
                                                             ---------------------------------------
(Dollars in Millions)                                             2000           1999          1998
----------------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>           <C>
Operating revenues:
  Verizon Information Services Inc.                                $ .2          $40.9         $39.0
                                                             ----------------------------------------
Operating expenses:
  GTE Communication Systems                                        13.0           11.8          10.3
  Verizon Information Services Inc.                                 7.8           10.6          11.6
  Verizon Data Services Inc.                                       19.0           16.5          26.0
  Verizon Services                                                 63.2           47.0          61.8
                                                             ----------------------------------------
                                                                  103.0           85.9         109.7
                                                             ----------------------------------------
Other income:
     Interest income from parent, GTE                               2.3            2.6           2.0

Interest expense:
     Interest expense to parent, GTE                                8.2            7.8           6.6

Dividends to parent, GTE:
    Dividends declared                                             63.0           90.0          45.9
    Dividend declared in connection with merger                    32.0             --            --

Capital contribution from parent in connection with merger         32.0             --            --

Plant, property and equipment:
    Purchases from GTE Communication Systems                       20.8           14.2          12.5
</TABLE>

      Outstanding balances with affiliates are reported on the balance sheets at
December 31, 2000 and 1999 as Accounts Receivable - Affiliates, Note Payable to
Affiliate, and Accounts Payable and Accrued Liabilities - Affiliates.

      On February 1, 2001, we declared and paid a dividend in the amount of
$27.0 million to our parent, GTE.

11.   COMMITMENTS AND CONTINGENCIES

      Various legal actions and regulatory proceedings are pending to which we
are a party. We have established reserves for specific liabilities in connection
with regulatory and legal matters which 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 will have a material effect on our financial
condition, but could have a material effect on our results of operations.

          Several state and federal matters may require us to refund a portion
of the revenues collected in the current and prior periods. The outcome of each
pending matter, as well as the time frame within which each matter will be
resolved, is not presently determinable.

           Federal regulatory conditions to the Bell Atlantic - GTE merger
include certain commitments to, among other things, promote competition and the
widespread deployment of advanced services, while helping to ensure that
consumers continue to receive high-quality, low cost telephone services. In some
cases, there are significant penalties associated with not meeting these
commitments. The cost of satisfying these commitments could have a significant
impact on net income in future periods.

12.   SEGMENT INFORMATION

      We have one reportable segment which provides wireline telecommunications
services. Specifically, we provide local telephone services including voice and
data transport, enhanced and custom calling features, network access, directory
assistance, and private lines. In addition, we provide customer premises
equipment distribution, billing and collection and pay telephone services.

                                      F-19
<PAGE>

                              Verizon Hawaii Inc.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              For the Years Ended December 31, 2000, 1999 and 1998
                              (Dollars in Millions)


<TABLE>
<CAPTION>
                                                       Additions
                                            ----------------------------------
                                Balance at                       Charged to
                              Beginning of     Charged to    Other Accounts      Deductions    Balance at End
Description                         Period       Expenses           Note(a)        Note (b)         of Period
---------------------------------------------------------------------------------------------------------------
<S>                           <C>              <C>           <C>                 <C>           <C>
Allowance for Uncollectible
Accounts Receivable:

Year 2000                             $4.2          $ 8.1            $14.4           $19.8               $6.9

Year 1999                             $6.5          $16.5            $ (.8)          $18.0               $4.2

Year 1998                             $8.6          $10.3            $ 2.1           $14.5               $6.5

Merger-Related Costs:

Year 2000                             $ --          $17.8            $  --           $ 9.4               $8.4
</TABLE>

(a)      (1) Allowance for Uncollectible Accounts Receivable includes amounts
         previously written off which were credited directly to this account
         when recovered, and (2) accruals charged to accounts payable for
         anticipated uncollectible charges on purchases of accounts receivable
         from others which we billed.

(b)      Amounts written off as uncollectible, utilized or paid.

                                      F-20
<PAGE>

                                 EXHIBIT INDEX


                     Exhibits identified in parentheses below, on file
                     with the Securities and Exchange Commission (SEC),
                     are incorporated herein by reference as exhibits
                     hereto.

     3.1  Articles of Incorporation and Bylaws. (Exhibit 3.2 to the registrant's
          Annual Report on Form 10-K for the year ended December 31, 1987, File
          No. 2-33059.)

     3.2  Amended Bylaws. (Exhibit 3.2 to the registrant's Annual Report on Form
          10-K for the year ended December 31, 1994, File No. 2-33059.)

     3.3  Articles of Amendment to Change Corporate Name. (Exhibit 3.3 to the
          registrant's Quarterly Report on Form 10-Q for the quarter ended June
          30, 2000, File No. 2-33059.)

     4.1  Indenture dated as of February 1, 1995 between GTE Hawaiian Telephone
          Company Incorporated and Hawaiian Trust Company Limited, as Trustee.
          (Exhibit 4.1 of the Company's Registration Statement on Form S-3, File
          No. 33-57743, filed with the Securities and Exchange Commission on
          February 17, 1995.)

     4.2  First Supplemental Indenture dated as of July 1, 1996 between GTE
          Hawaiian Telephone Company Incorporated and Hawaiian Trust Company
          Limited, as Trustee. (Exhibit 4.3 of the registrant's Current Report
          on Form 8-K, dated July 1, 1996.)

     26   Revised Form of Invitation for Bids pertaining to Registration
          Statement on Form S-3 (File No. 33-57743).