Electric Lightwave, Inc.                    Form      10-K





















                                 Annual Report Pursuant To Section 13 or 15(d)
                                        of The Securities Exchange Act of 1934
                                          For The Year Ended December 31, 2001



<PAGE>



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

                                    FORM 10-K

|X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001
                                       OR

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

                         Commission file number 0-23393

                            ELECTRIC LIGHTWAVE, INC.
             (Exact name of registrant as specified in its charter)

                 Delaware                                 93-1035711
     (State or other jurisdiction of                   (I.R.S. Employer
      incorporation or organization)                  Identification No.)

                                3 High Ridge Park
                               Stamford, CT 06905
               (Address, zip code of principal executive offices)

       Registrant's telephone number, including area code: (203) 614-5600

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                 Common Stock Class A, par value $.01 per share
                              (Title of each class)

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 twelve 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 ninety days.

                                 Yes |X|       No | |

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as of  February  28,  2002,  was  $19,000,000.  The number of shares
outstanding of each of the  registrant's  classes of common stock as of February
28, 2002 were:

                        Common Stock Class A: 35,417,531
                        Common Stock Class B: 15,881,312


                       DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement for the registrant's  2001 Annual Meeting of Stockholders to
be held on May 16, 2002 which is to be filed at a later date is  incorporated by
reference into Part III of this Form 10-K.


<PAGE>




                                TABLE OF CONTENTS


Part I                                                                     Page
------
Item 1.  Business
           General Development of Business                                   2
           Industry Segments                                                 3
           Description of Business                                           3
              Products and Services                                          5
              Regulatory Environment                                         7
              Competition                                                    9
              Operations/Information Technology                             10
              Employees                                                     10

Item 2.  Description of Property                                            10

Item 3.  Legal Proceedings                                                  11

Item 4.  Submission of Matters to a Vote of Security Holders                11

Executive Officers of the Registrant                                        12

Part II
-------
Item 5.  Market for the Registrant's Common Stock and Related
           Stockholder Matters                                              14

Item 6.  Selected Financial and Operating Data                              15

Item 7.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations                                        16

Item 7A. Quantitative and Qualitative Disclosures About Market Risk         25

Item 8.  Financial Statements and Supplementary Data                        26

Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure                                             26

Part III
--------
Item 10. Directors and Executive Officers of the Registrant                 26

Item 11. Executive Compensation                                             26

Item 12. Security Ownership of Certain Beneficial Owners and Management     26

Item 13. Certain Relationships and Related Transactions                     26

Part IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K    27

Signatures                                                                  29

Index to Financial Statements                                               F

                                       1
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                                     PART I
                                     ------

   Item 1.   BUSINESS

This annual report on Form 10-K contains forward-looking statements that involve
risks and  uncertainties.  Our actual results could differ materially from those
expressed or implied in the financial  statements.  Further discussion regarding
forward-looking statements, including the factors which may cause actual results
to differ from such statements,  is located in Item 7, "Management's  Discussion
and Analysis of Financial Condition and Results of Operations," in this report.

a.  General development of business
    -------------------------------

Electric Lightwave,  Inc. is referred to as "we," "us," or "our" in this report.
We are a facilities-based  competitive local exchange carrier (CLEC) providing a
broad range of communications services to businesses. We provide a full range of
wireline telecommunications products and services,  including switched local and
long distance voice service, enhanced data communications services and dedicated
point-to-point services, in the western United States. We market our services to
retail   business   customers   and  to  wholesale   customers,   who  are  also
communications carriers.

Our  facilities-based  network  consists of optical  fiber,  plus voice and data
switches. We have a national internet and data network with switches and routers
in key cities, linked by leased transport  facilities.  At December 31, 2001, we
had 6,754 local and long-haul  route miles of fiber-optic  cable in service.  In
addition,  we have a long-haul,  fiber-optic network which utilizes an optically
self-healing  Synchronous  Optical  Network (SONET)  architecture.  This network
spans approximately 4,000 miles,  crosses seven states and is one of the largest
OC-192 SONET systems in the western United States.

During 2001,  the economy and the stock market began to highlight  the overbuilt
state of the telecommunications  markets,  especially for long-haul services. We
and other CLECs have incurred  substantial  debt to build our networks for which
demand now  appears to be limited.  As these  conditions  became  more  evident,
competitive  and financial  pressures on CLECs  increased.  As a result of these
pressures, we expect that a restructuring of the telecommunications  industry is
occurring.  The nature of the restructuring of the  telecommunications  industry
that will take place is uncertain.

Our primary  focuses in 2002 are increasing  new and existing  customer usage of
our installed asset base,  focusing more on enterprise  businesses,  company end
users and government  entities and  diversifying  our customer mix to place less
reliance on Internet Service Providers (ISPs), application service providers and
competitive  local exchange  companies.  We expect a substantial  portion of our
growth to come from increased penetration of existing on-net buildings,  a focus
on sales to  customers  that are  connected  to the  network  and an increase in
market  share in our eight major cities and  surrounding  areas.  We  anticipate
continued growth in our sales to other carriers, and will continue to market our
available dark fiber.

Citizens  Communications Company (Citizens) owns approximately 85% of our common
stock. Our relationship with Citizens is governed by an Administrative  Services
Agreement,  a Tax Sharing Agreement,  an Indemnification  Agreement, a Customers
and Service  Agreement  and a  Registration  Rights  Agreement  entered  into in
connection  with our initial public offering in 1997 (IPO). We have entered into
a revolving credit facility with Citizens for $450 million with an interest rate
of 15% and a final maturity of October 30, 2005 (Citizens Credit Facility) under
which $194.5 had been borrowed at December 31, 2001.  Citizens is also currently
guaranteeing  our $400  million  revolving  bank credit  facility,  $325 million
five-year  senior  unsecured  notes,  $75 million capital lease and $110 million
construction  agency  and  operating  lease  agreements.  In  January  2002,  we
exercised  our option to purchase  the  facilities  at the end of the lease term
(April 2002) for the lessor's  average  investments in the facilities.  Citizens
provides  certain  management  and  administrative  services  to us and  certain
officers of Citizens  also serve as our  officers.  Citizens  has  committed  to
continue to finance our operations and cash requirements through March 31, 2003.
Absent the Citizens commitment, we do not believe there is currently a market to
further  finance  or  refinance  our  indebtedness.  Consequently,  without  the
financial support of Citizens, we could not fund our future capital requirements
or service our debt and most likely would not remain a going concern.

                                       2
<PAGE>

As a result of the  financial  conditions  within the CLEC industry and with our
operations  and the current price of our Class A Common  Stock,  we believe that
our Class A Common  Stock  that is  currently  listed for  trading  on  Nasdaq's
National  Market may be subject to  delisting  from Nasdaq in 2002.  On April 2,
2001,  we received a notice from the Nasdaq Stock  Market,  Inc.  that our stock
would be  subject  to  delisting  from the  National  Market  after July 2, 2001
because our Class A Common Stock failed to maintain a minimum bid price. On June
29,  2001,  we filed an  application  for our listing to be  transferred  to the
Nasdaq Small Cap Market. As part of the application process,  Citizens converted
approximately  25.3 million  shares of Class B Common Stock into the same number
of shares of Class A Common  Stock on August 27, 2001.  On August 31,  2001,  we
received a notice from Nasdaq  indicating  that we had failed to comply with the
shareholders'  equity,  market  capitalization,  market  value/total  assets and
revenue and minimum bid price requirements for continued  listing,  and that our
stock was,  therefore,  subject to delisting from the Nasdaq National Market. We
were granted a hearing  before a Nasdaq Listing  Qualifications  Panel to review
the  delisting.  On September 27, 2001,  Nasdaq  implemented a moratorium on the
minimum bid price and market value of public float  requirements  for  continued
listing on the Nasdaq Stock Market until  January 2, 2002.  We received a notice
from  Nasdaq on that date  stating  that as a result of that  action the hearing
scheduled regarding the delisting of our stock had been canceled and its hearing
file closed.  On January 2, 2002,  compliance with the minimum  requirements for
listing on the Nasdaq  National and Small Cap Markets started anew. If we do not
meet  these  requirements  for 30  consecutive  days,  and are  unable to regain
compliance  within 90 days, our stock could be subject to delisting again. It is
uncertain whether we will be able to meet the applicable  listing  requirements.
If the  requirements  are not met,  our Class A Common Stock may not be eligible
for  trading  on Nasdaq  and we expect  it would  trade in the  over-the-counter
market.

b.  Industry segments
    -----------------

We operate in a single industry  segment,  communications  services.  We provide
services   utilizing   our   centrally    planned,    monitored   and   operated
telecommunications  network. Operations are managed and financial performance is
evaluated  based on the  delivery of multiple  services  to  customers  over our
single  fiber-optic  network.  As a  result,  there  are  many  shared  expenses
generated by the various  revenue streams and geographic  locations.  Management
believes  that any  allocation of the expenses  incurred on a single  network to
multiple revenue streams would be impractical,  arbitrary and inconsistent  with
the way the business is currently  evaluated by management.  As a result,  we do
not  presently  have systems or  procedures in place to derive all the operating
costs and expenses relating to a particular product group or service area.

c.   Description of business
     -----------------------

We have  built a  fiber-optic  network  in the  western  United  States and have
created an infrastructure  and the systems needed to support an expanded product
portfolio and the capacity to serve a larger customer base.

We  currently  provide the full range of our  services in eight major cities and
their surrounding areas, including:

             Boise, Idaho                   Phoenix, Arizona
             Portland, Oregon               Sacramento, California
             Salt Lake City, Utah           Seattle, Washington
             Spokane, Washington            Las Vegas, Nevada

                                       3
<PAGE>

The major  cities  include a  network  of  approximately  2,376  route  miles of
fiber-optic  cable installed to create a series of SONET rings,  which provide a
higher degree of stability and dependability.  Switched service, including local
dial tone,  is provided  from 8 Nortel DMS 500  switches  in the  primary  major
cities.  We also have  transmission  equipment  collocated  with switches of the
Incumbent Local Exchange Carrier (ILEC) at 56 locations.

We have  broadband  data points of presence in our major cities as well as other
strategic cities across the United States, including:


             Atlanta, Georgia                  Austin, Texas
             Chicago, Illinois                 Cleveland, Ohio
             Dallas, Texas                     Denver, Colorado
             Houston, Texas                    New York, New York
             Los Angeles, California           San Diego, California
             Philadelphia, Pennsylvania        Washington, D.C.
             San Francisco, California

In the first half of 2002,  we intend to redeploy  the internet  routers,  frame
relay   switches  and  ATM  switches  from  the  Atlanta,   Cleveland,   Denver,
Philadelphia  and New York markets to other locations in our network.  We intend
to cease  leasing  the  collocation  facilities  and  off-net  circuits  for the
backbone and local loops  supporting the service  delivery in these markets (see
further  discussion in Management's  Discussion and Analysis and Note 4 of Notes
to Financial Statements.

We have developed an Internet backbone network providing  Internet  connectivity
in each of our markets,  including  presence at all major network  access points
and  including  "peering  arrangements"  with other  Internet  backbone  service
providers. A peering arrangement is an agreement where Internet backbone service
providers  agree to allow each other direct access to Internet data contained on
their  networks.  In addition,  our  broadband  network  consists of frame relay
switches,  Asynchronous  Transfer  Mode (ATM)  switches  and  network-to-network
interfaces.  National and  international  coverage is provided through strategic
relationships with other communications providers.

We own or lease broadband long-haul  fiber-optic network connections between our
major cities in the west and our  strategic  markets  across the nation.  To the
extent that we carry traffic on our own facilities,  we are able to maximize the
utilization of our network  facilities and minimize network access costs as well
as other  interconnection  costs. Our optically  self-healing  SONET ring in the
western United States connects Portland, Seattle, Sacramento, San Francisco, Los
Angeles,  Las Vegas,  Phoenix,  Salt Lake City and Boise.  The network  includes
Dense Wave Division  Multiplexing  (DWDM)  equipment and supports voice and data
traffic at speeds up to OC-192.  DWDM is a technique for transmitting 16 or more
different  light-wave  frequencies  at speeds up to OC-192 on a single  fiber to
increase transmission capacity.

In the development of our long-haul facilities, we have formed strategic
relationships with utility companies that enabled us to do the following:

*    utilize existing rights-of-way and fiber-optic facilities,
*    utilize their construction expertise and local permitting experience and
*    minimize  our  near-term  cash  requirements  in order for us to extend our
     network infrastructure more quickly and economically.

We entered into a fiber-swap  agreement  during 1999 which will exchange  unused
fiber on our  network  for  unused  fiber on  another  carrier's  network.  This
exchange  provides  us with a fiber  route  from Salt  Lake  City to Denver  and
continuing on to Dallas.  Multiple disputes regarding the agreement have arisen.
During 2001,  both ELI and the other  carrier  notified  each other of potential
breaches of the  agreement.  If the breaches are  determined to be valid and not
cured, the agreement could terminate by its terms.

                                       4
<PAGE>

Significant Customer

For the years ended  December  31,  2001,  2000 and 1999,  Qwest  Communications
(Qwest) accounted for 10%, 19% and 19%,  respectively,  of our total revenue. As
of December 31, 2001 and 2000, Qwest accounted for 12% and 28%, respectively, of
our net trade accounts  receivable.  In 2001, a significant portion of the Qwest
revenue was generated from reciprocal compensation agreements. No other customer
accounted for 10% or more of our total revenue for the years ended  December 31,
2001, 2000 and 1999.

Additionally,  we are currently  providing  service to customers that have filed
for  protection  under  Chapter  11 of  the  bankruptcy  code.  Of  our  largest
twenty-five  customers,  two customers are under  Chapter 11  protection.  These
customers contributed approximately $0.3 million of revenue monthly.

    PRODUCTS AND SERVICES

We provide  facilities-based  products and services over our switched  broadband
digital network  platform.  This network  platform  enables us to integrate high
revenue generating products into our existing  portfolio.  Our product offerings
include:

*    Network  services - includes  dedicated  service  between  two points for a
     customer's  exclusive  use.  We  offer  this in both  local  and  long-haul
     applications and collocation facilities to meet us directly in our hub.
*    Local telephone  services - consists of the delivery of local dial tone and
     related services,  and related carrier and local access revenue, as well as
     Integrated Services Digital Network Primary Rate Interface (ISDN PRI). ISDN
     PRI provides  customers with a high-speed  access  connection to the public
     switched telephone network for voice, video, and data applications.
*    Long distance  services - includes retail and wholesale long distance phone
     services.
*    Data  services  -  includes  a wide  range of  products  to  deliver  large
     quantities  of data from one location to another  through ATM,  Frame Relay
     and Internet Protocol (IP) packet  technologies.  These  technologies group
     data (voice,  video, images and character-based data) into small packets of
     information and transmit the packets over a network.

We also provide a "Custom T" product which is an integrated  T-1 product,  which
bundles  certain of the voice and data  products  above over the same T-1. It is
designed  to  provide   pricing   advantages  and   efficiencies   of  converged
communications  in a flexible  and  reliable  offering.  Custom T is designed to
assist customers in optimizing the efficiency of their  communications  needs by
allowing  multiple  services to ride on the same T-1.  These  services  include:
Local Telephone Services,  Switched 1+ Long Distance,  Frame Relay, and Internet
Access.

The revenues for each of these four product categories over the last three years
are  presented  in Item 7,  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations",  in this report. The following  discussion
summarizes the components of our product and services categories.

Network Services

The Network Services product consists of point-to-point  dedicated services that
provide a private  transmission channel for our customer's exclusive use between
two or more locations.  This product line is offered in both local and long-haul
applications.

Local  services are provided over the SONET  networks that we have built in each
of our major  cities.  Dedicated  point-to-point  and  multiplexed  services are
provided from DS-1 to OC-192  transmission  levels over protected  routes to our
on-net locations.  We also provide point-to-point  Ethernet services in 10 Mbps,
100  Mbps,  and 600 Mbps  increments.  Additionally,  an  extensive  use of ILEC
collocations and leased facilities from other  communications  carriers allow us
to extend the reach of our  products to more than just on-net  locations.  ILECs
are the local exchange  carriers that are the dominant local  telecommunications
companies  that  typically  provide the "last mile" of service in the applicable
markets, for example Qwest is the ILEC in many of our markets.

                                       5
<PAGE>

Long-haul services are provided over owned or leased broadband  long-haul fiber.
As an added value,  we provide an  end-to-end  solution by providing  local loop
connectivity  in local markets.  Long-haul  services are offered in transmission
speeds  ranging  from DS-1 up to OC-192 and gigabit  Ethernet.

Local Telephone Services

Our Local Telephone Services product line consists of the delivery of local dial
tone and related products to various business, ISPs, and wholesale customers.

Integrated  Service  Digital  Network Primary Rate Interface (ISDN PRI) provides
customers with a high-speed,  flexible  digital access  connection to the public
switched  telephone  network for voice,  video and data  applications.  ISDN PRI
products  are  provided  in Data  Only,  and Data and  Voice,  according  to the
customer's  need. For Voice and Data  applications,  calling features and Direct
Inward Dialing functions are provided.

We offer a selection of trunk products to medium and large businesses with their
own private branch  exchange (PBX) or key system  equipment.  Trunk products are
provided as incoming,  outgoing,  or 2-way call paths to our central  office and
the public switched  telephone  network.  The primary  offering in this category
provides trunks to customers in full DS-1 increments,  providing for maximum use
of our transport network.

Business Lines are offered in the form of simple Basic, and PBX Interface. Basic
business lines provide an incoming,  outgoing,  or 2-way call path to the public
switched telephone network. Calling features are available to provide additional
user functions.

Local  Number  Portability  (LNP) is  provided  in Salt Lake  City,  Sacramento,
Portland,  Phoenix,  Boise,  Spokane,  and Seattle for line,  trunk and ISDN PRI
products.  LNP  provides our  customers  with a seamless  transition  from their
current  provider to us by allowing  customers to migrate all of their telephone
numbers  from their  current  dial tone  provider to us when we become their new
service provider, as long as they remain within the same rate center.

We offer  additional  calling  features with our core Local Telephone  Services.
These include Foreign Exchange Service to provide local service from an exchange
other than the customer's  normal  location;  voice messaging and voice menuing;
and Custom T bundling of a range of services over a T-1 line to a customer.

Long Distance Services

Our Long Distance  Services  include  retail and wholesale  long distance  phone
services.

Retail Switched 1+ and toll-free service is offered to business  customers.  The
customer chooses us as its long distance/toll-free  carrier and calls are routed
through  our  switch  from  the  public  switched  network.  Customers  can call
intrastate, interstate or internationally.

Retail  Dedicated 1+ and  toll-free  service is offered to high volume  business
customers.  The customer  establishes a  point-to-point  circuit (i.e.,  DS-1 or
DS-3) from their switch/PBX to our switch.  Outbound long distance and toll-free
calls are routed directly to our switch via this dedicated  path.  Customers can
call intrastate, interstate or internationally.

Wholesale  Termination  encompasses an array of services providing carriers with
LATA-wide  termination  services,  enabling  lower cost access to, or  diversity
from, the ILEC's facilities.  This product aggregates the termination traffic of
many  carriers at our switch and  terminates it at a lower cost than each of the
carriers could obtain individually.

Data Services

We offer a wide range of products to deliver  large  quantities of data from one
location  to  another.  These  products  are  marketed  through  both retail and
wholesale channels.

                                       6
<PAGE>

Dedicated   Internet   Services   are   provided  in  various   bandwidths   and
configurations  to serve both ISPs and  business  customers.  We offer  internet
access through Frame Relay,  dedicated  DS-1,  dedicated  DS-3,  dedicated OC-3,
dedicated Ethernet,  Fast Ethernet and gigabit Ethernet. The capped DS-3 product
allows  customers to scale their internet access from 3 Mbps to 45 Mbps over the
same facility.  With Managed Router Service,  we provide  customers with premise
equipment and a fully supported hardware and access solution. Network monitoring
and performance  management enhanced feature packages provide a turnkey solution
that  addresses  performance  management  at multiple  levels of the  customer's
network.  The result is a correlated,  end-to-end view of the customer's network
infrastructure,  enabling them to understand  and measure the  effectiveness  of
their IT investment.

Remote Systems  Virtual  Portal (RSVP) is a bundled  product for ISPs looking to
outsource  their dial-up  access needs by purchasing  dial-up ports bundled with
internet  access.  This product allows the ISP to expand their offering or enter
new  markets,  whether  locally  or  nationally,  without  the costs of  capital
expenditures,  site selection,  hardware purchase and system  integration.  With
RSVP,  we enable the ISP to focus their  efforts on  increasing  their  customer
base.

Frame Relay is a data communications  alternative to traditional  point-to-point
networks  for  wide  area  network  (WAN)  connectivity.  The  service  provides
multi-point,  wide-area  connectivity  using Frame Relay packet  technology that
reduces the connection costs of distributed data networks.  The service offers a
choice of interface speeds with multiple virtual circuits possible at each site.

Asynchronous Transfer Mode (ATM) is a fast packet service that formats, switches
and multiplexes various types of information, including voice, video and data at
speeds  ranging from T-1 to OC-3.  ATM provides  Quality of Services  parameters
based on the type of information  being carried in a  statistically  multiplexed
architecture  to reduce network  costs.  Our ATM service  provides  interworking
between Frame Relay, transparent LAN, and native ATM locations.

Transparent LAN Services (TLS) are managed ATM solutions  providing the customer
with LAN  performances  and  bandwidths  over wide area network  locations.  TLS
products  provide  native LAN protocols  including  Ethernet,  Fast Ethernet and
Fiber Distributed Data Interface (FDDI).  High-speed  services are provided from
10 Mbps to 100 Mbps.  Included in the transparent LAN service are point-to-point
connectivity,  installed  customer  premise  equipment,  and  monitoring  of the
customer's network to insure connectivity.

       REGULATORY ENVIRONMENT

As a common carrier, we are subject to federal, state and local regulation.  The
Federal   Communications   Commission  (FCC)  exercises  jurisdiction  over  all
interstate  communications  services. State commissions retain jurisdiction over
all intrastate  communications  services.  Local  governments  may require us to
obtain  licenses  or  franchises  regulating  the  use of  public  rights-of-way
necessary to install and operate our network.

Federal Regulation

The FCC exercises  regulatory  jurisdiction over all facilities of, and services
offered by,  communications  common carriers to the extent those  facilities are
used to provide, originate, or terminate interstate communications.  The FCC has
established   different  levels  of  regulation  for  "dominant"   carriers  and
"nondominant"  carriers. For domestic interstate  communications  services, only
the ILECs are classified as dominant carriers. All other carriers are classified
as nondominant carriers.  Additionally,  to the extent a Regional Bell Operating
Company  (RBOC) is engaged in  out-of-region  long distance  services it is also
classified as nondominant as to those services.  Non-RBOC,  ILEC-affiliated long
distance services are classified as nondominant  regardless of whether conducted
inside or outside the ILEC service area.  The FCC  regulates  many of the rates,
charges,  and  services of dominant  carriers to a greater  degree than those of
nondominant carriers.

As a nondominant  carrier,  we may install and operate  facilities  for domestic
interstate  communications  without  prior FCC  authorization.  We are no longer
required to maintain tariffs for domestic interstate long distance services.  As
a provider of international  long distance  services,  we obtained FCC operating
authority  and maintain an  international  tariff.  The FCC is  eliminating  the
requirement for  international  tariffs.  We are also required to submit certain
periodic reports to the FCC and pay regulatory fees.

                                       7
<PAGE>

Telecommunications Act of 1996

The  Telecommunications Act of 1996 (1996 Act) dramatically changed the national
public  policy  framework for  communications.  A central focus of this sweeping
policy  reform was to open local  communications  markets  to  competition.  One
result of the 1996 Act has been the  development of new companies known as CLECs
which compete for business with the existing carriers,  known as ILECs. While we
provide more than just local exchange service, we are generally considered to be
a CLEC.

The 1996 Act  preempts  state and local  laws to the  extent  that they  prevent
competitive entry into the provision of any  communications  service.  Under the
1996 Act,  however,  states retain authority to impose  requirements on carriers
necessary to preserve universal  communications  service,  protect public safety
and welfare,  ensure quality of service, and protect consumers.  States are also
responsible for mediating and  arbitrating  interconnection  agreements  between
CLECs and ILECs if voluntary negotiations fail.

In order to create an  environment  in which  local  competition  is a practical
possibility,  the 1996  Act  imposes  a number  of  access  and  interconnection
requirements  on all local  communications  providers.  All local  carriers must
interconnect with other carriers, permit resale of their services, provide local
telephone number portability and dialing parity, provide access to poles, ducts,
conduits, and rights-of-way, and complete calls originated by competing carriers
under reciprocal compensation or mutual termination arrangements.

RBOCs had been  barred from  participating  in the market for  interLATA  (Local
Access and Transport Area) services (which is primarily  long-distance  traffic)
in their service  territories since the break up of the Bell System in 1984. The
1996 Act  provides  a  mechanism  for an RBOC  and/or  any  successors  to enter
in-region interLATA markets. Full entry by such companies into interLATA markets
will increase the level of competition faced by our long distance services.

Before an RBOC or its successor can enter an interLATA market it must first meet
specific  criteria  set out by section 271 of the 1996 Act.  These  criteria are
commonly  referred to as the "14 point  checklist."  The  checklist  is meant to
ensure that these  companies  have opened up their local markets to  competition
before they compete in the long distance  markets in their regions.  Verizon and
SBC Communications have both successfully filed interLATA  applications with the
FCC for many of the states in which  they  operate.  Applications  for the other
states are pending at the FCC; additional applications are expected in 2002.

Interconnection

On August 8, 1996, the FCC issued rules providing guidance to the ILECs,  CLECs,
long distance companies,  and state public utility commissions (PUCs) on several
provisions of the 1996 Act. The rules include,  among other things, FCC guidance
on:

*    discounts for end-to-end resale of ILEC local exchange services;
*    availability  of  unbundled  local loops and other  unbundled  ILEC network
     elements;
*    the use of Total Element Long Run Incremental Costs in the pricing of these
     unbundled  network  elements;   and
*    the  ability of CLECs and other  interconnecters  to opt into  portions  of
     interconnection  agreements  negotiated  by the ILECs with other parties on
     the basis of the ability to "pick and choose"  among the  provisions  of an
     existing agreement.  Some of these rules are under review by the FCC, state
     commissions, and various courts including the United States Supreme Court.

                                       8
<PAGE>

State Regulation

We have various  interconnection  agreements  in the states in which we operate.
These agreements  govern reciprocal  compensation  relating to the transport and
termination of traffic  between the ILEC's and our networks.  On April 17, 2001,
the FCC  issued  an order  that will  significantly  reduce,  over a  three-year
period,  intercarrier  compensation for ISP traffic. This order became effective
June 14, 2001 and is expected to impact our future interconnection agreements.

Most state PUCs require communications  providers,  like us, to obtain operating
authority prior to initiating intrastate services.  Most states also require the
filing of tariffs or price  lists  and/or  customer-specific  contracts.  In the
states in which we currently  operate,  we are not subject to  rate-of-return or
price regulation. We are subject, however, to state-specific quality of service,
universal  service,   periodic  reporting  and  other  regulatory  requirements,
although, the extent of such requirements is generally less than that applicable
to ILECs.

Local Government Authorizations

We are generally required to obtain street opening and construction permits from
city and county  authorities  prior to installing  or expanding our  fiber-optic
network  facilities.  In most states in which we currently operate as a CLEC, we
must first obtain a franchise or license from each  incorporated  city and town,
and  sometimes   from  each  county,   in  which  we  wish  to  utilize   public
rights-of-way.   The  franchise  or  license   establishes  the  overall  terms,
conditions, and fees for use of the rights-of-way in the particular jurisdiction
although most fees are based on a percentage of revenue.

The 1996 Act now provides  that while local  governments  may continue to manage
the public  rights-of-way,  they may not impose  conditions on companies like us
which constitute barriers to entry in the communications  market.  Further,  the
1996 Act requires that  municipal  right-of-way  authorizations  be granted on a
nondiscriminatory basis and that any fees be reasonable.

       COMPETITION

We believe we provide retail business and wholesale customers with an attractive
offering of communications  services.  Our broad range of communication services
enables our customers to purchase their  telecommunications  needs from a single
provider allowing the added convenience of a single monthly bill.

As a facilities-based  telecommunications  carrier, we can deliver a substantial
portion of our services on our own network resulting in higher gross margins and
quality of services than competitors who are resellers of services.

ILEC Competition

We are a competitor to the ILECs in each of our  facilities-based  markets.  The
ILECs currently  dominate the local exchange market and historically have been a
de facto monopoly  provider of local switched voice  services.  Our primary ILEC
competitors are Qwest, SBC (PacBell) and Verizon.

The 1996 Act imposes interconnection obligations on ILECs and generally requires
that interconnection charges be cost-based and nondiscriminatory.  To the extent
we interconnect with and use an ILEC's network to service our customers,  we are
dependent  upon the  technology  and  capabilities  of the ILEC to meet  certain
communications needs of our customers and to maintain its service standards.

CLEC Competition

Facility and  non-facility  based  operational  CLEC  competitors in our markets
include,  among others: AT&T Local Services,  Sprint Local, Time Warner Telecom,
MCI WorldCom and XO Communications.  In each of the markets in which we operate,
at least one other CLEC,  and in some cases several  other CLECs,  offer many of
the same local communications services we provide, generally at similar prices.

                                       9
<PAGE>

Competition From Others

Potential and actual new market  entrants in the local  communications  services
business include RBOCs entering new geographic markets,  Inter-Exchange Carriers
(IXCs), cable television companies, electric utilities,  international carriers,
satellite carriers,  teleports,  microwave  carriers,  wireless telephone system
operators,  and private  networks  built by large end users.  In  addition,  the
current  trend of business  combinations  and  alliances  in the  communications
industry, including mergers between RBOCs, may increase competition for us. With
the  passage  of the 1996 Act and the  entry  of  RBOCs  into the long  distance
market, competitors constructed their own local facilities or otherwise acquired
the right to use local  facilities  and/or  resell  the  local  services  of our
competitors.   Construction   of   facilities   and  networks   contributed   to
overcapacity.

Network Services

Competition  for  network   services  is  based  on  price,   quality,   network
reliability,  customer  service,  service  features,  and  responsiveness to the
customer's needs. As a point of differentiation  from the ILECs, our fiber-optic
networks provide both diverse access routing and redundant  electronics,  design
features not widely deployed within the ILECs' networks.

High-Speed Data Service

Our competitors for high-speed  data services  include major IXCs,  other CLECs,
and various  providers of niche  services  (such as Internet  access  providers,
router management services and systems  integrators).  The  interconnectivity of
our markets may create additional competitive advantages over other data service
providers  that must obtain  local  access from the ILEC or another CLEC in each
market or that cannot obtain intercity  transport rates on terms as favorable as
those available to us.

Internet Services

The market for  Internet  access and related  services  in the United  States is
extremely competitive with barriers to entry related to capital costs, bandwidth
capacity,  and internal  provisioning and operations  processes.  We expect that
competition  will intensify as existing  services and network  providers and new
entrants compete for customers. In addition, new enhanced Internet services such
as managed router service and web hosting are  constantly  under  development in
the  market and we expect  additional  innovation  in this  market by a range of
competitors.   Our  current  and  future  competitors   include   communications
companies,  including the RBOCs, IXCs, CLECs and Cable Television  (CATVs),  and
other Internet access providers.

Many of these  competitors  have greater market presence and greater  financial,
technical,  marketing and human resources,  more extensive  infrastructure,  and
stronger customer and strategic relationships than are available to us.

       OPERATIONS/INFORMATION TECHNOLOGY

We  utilize  an  integrated  customer  care  system  that  automates  our  order
placement,  circuit  design,  provisioning  and billing  systems.  We anticipate
adding additional  functionality  through system  enhancements as necessary.  We
continue to identify opportunities for productivity improvements.

       EMPLOYEES

As of December 31,  2001,  we employed  823  persons.  None of our  employees is
represented by a union. We consider our employee relations to be good.

       Item 2.    DESCRIPTION OF PROPERTY

Our  administrative  headquarters is located at 4400 NE 77th Avenue,  Vancouver,
Washington,  in an office building of approximately  98,000 square feet which we
own.  In  addition,  we have  leased  local  office  space  in  various  markets
throughout  the United  States,  and we also  maintain a  warehouse  facility in
Portland,  Oregon. We also lease network hub and network equipment  installation
sites in various locations throughout the areas in which we provide services. We
have a  purchase  option on  certain  leased  property  located  throughout  our
network.  We expect to exercise the purchase option.  The leases for the office,
warehouse and other facilities  expire on various dates through October 2008. We
believe  that our  properties  are  adequate  and  suitable  for their  intended
purposes.  Our 6,754  miles of  fiber-optic  cable is  installed  under  various
rights-of-way and leases held by us.

                                       10
<PAGE>

       Item 3.    LEGAL PROCEEDINGS

We are party to routine litigation arising in the normal course of business.  We
do not  expect  these  matters,  individually  or in the  aggregate,  to  have a
material adverse effect on our financial position, results of operations or cash
flows.  We are also  party to  various  proceedings  before  state  PUCs.  These
proceedings  typically  relate to authority to operate in a state and regulatory
arbitration proceedings concerning our interconnection  agreements.  See Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations  - Liquidity  and  Capital  Resources  - Other  Matters -  Reciprocal
Compensation".

       Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

                                       11
<PAGE>


Executive Officers of the Registrant

Our executive officers,  their respective ages and positions as of March 1, 2002
are listed below.

<TABLE>
<CAPTION>

Name                       Age    Title
----                       ---    -----
<S>                        <C>    <C>
*   Leonard Tow            73     Chairman of the Board and Director
*   Robert Braden          56     Chief Executive Officer and Director
*   Daniel J. McCarthy     37     President, Chief Operating Officer
*   Scott N. Schneider     44     Executive Vice President and Director
*   Jerry Elliott          42     Vice President and Chief Financial Officer
*   Robert J. Larson       42     Vice President and Chief Accounting Officer
*   Steven E. Adkins       50     Vice President - Information Technology and
                                    Billing Operations
*   Donald Armour          54     Vice President and Treasurer
*   Charles Best           48     Vice President - Administration and Legal
                                    Affairs
*   Michael L. Daniel      37     Vice President - Sales
*   Michael Golob          47     Vice President - Engineering and Operations
*   Kerry D. Rea           43     Vice President - Revenue Assurance and Budget

</TABLE>

There is no family relationship between any of our officers.  The term of office
of each of our officers will continue until the next annual meeting of the Board
of Directors and until a successor has been elected and qualified.

*    Leonard Tow, a Director  and  Chairman of our Board since August 1994,  has
     been a Director of Citizens  since April 1989.  He was elected  Chairman of
     the Board and Chief  Executive  Officer  of  Citizens  in June 1990 and was
     Chief  Financial  Officer of Citizens  from October  1991 through  November
     1997. He is also a Director of Hungarian  Telephone  and Cable  Corporation
     and is a Director of the United States Telephone Association.

*    Robert Braden joined us as President,  Chief Operating Officer and Director
     in January 2001 and became Chief Executive Officer and Director in December
     2001. Prior to joining us, he was Vice President of Business Development at
     Citizens from February 2000. Prior to joining Citizens,  he was Senior Vice
     President   of  Business   Development   and  Senior  Vice   President   of
     International  Operations  at Centennial  Communications.  He also held the
     positions   of  Vice   President   of  Business   Development   at  Century
     Communications   and  various  positions  with  Metromedia   Paging,   Omni
     Communications, VMX, Inc., and Hoffman-LaRoche Inc.

*    Daniel  J.  McCarthy  joined  us  as  President,  Chief  Operating  Officer
     effective  January  2002.  Mr.  McCarthy  joined  us from  Citizens  Public
     Services  sector where he was  President and Chief  Operating  Officer from
     March 2001 to January 2002,  Vice President,  Citizens  Arizona Energy from
     April  1998 to March 2001 and Vice  President,  Citizens  Arizona  Gas from
     February 1997 to April 1998. Mr. McCarthy has been associated with Citizens
     since 1990.

*    Scott N. Schneider,  a Director and Executive Vice President since December
     1999, has been  associated  with Citizens since October 1999. In July 2000,
     he was elected  Director of Citizens.  He is currently Vice Chairman of the
     Board and  Executive  Vice  President of Citizens and  President,  Citizens
     Capital Ventures, a wholly-owned  subsidiary of Citizens.  Prior to joining
     us, he was Director  (from October 1994 to October 1999),  Chief  Financial
     Officer (from  December 1996 to October  1999),  Senior Vice  President and
     Treasurer (from June 1991 to October 1999) of Century  Communications Corp.
     He also served as Director,  Chief Financial Officer, Senior Vice President
     and Treasurer of Centennial Cellular from August 1991 to October 1999.

*    Jerry Elliott  joined us as Vice President and Chief  Financial  Officer in
     March 2002. Mr. Elliott is also Vice President and Chief Financial  Officer
     of  Citizens.  Prior to joining us, Mr.  Elliott was  Managing  Director of
     Morgan Stanley's  Communications  Investment  Banking Group from July 1998.
     Prior to joining  Morgan  Stanley,  Mr.  Elliott was a partner with the law
     firm of Shearman & Sterling.

*    Robert J. Larson,  our Chief  Accounting  Officer and Vice President  since
     July 2000, has been Chief Accounting Officer and Vice President of Citizens
     since July 2000.  Prior to joining  Electric  Lightwave,  Inc., he was Vice
     President,  Accounting  and  Administration  of  Centennial  Cellular  from
     October 1994 to October  1999.  He was also Vice  President,  Controller of
     Century Communications Corp. from October 1994 to October 1999.

                                       12
<PAGE>

*    Steven E. Adkins joined us as Vice  President -  Information  Technology in
     1995 and was  appointed  as Vice  President -  Information  Technology  and
     Billing Operations in November 2000.

*    Donald  Armour,  our Vice  President and Treasurer  since October 2000, has
     been Vice President,  Finance and Treasurer of Citizens since October 2000.
     Prior to joining us, he was the Treasurer of the cable television  division
     of Time Warner Inc. from January 1994 to September 2000.

*    Charles Best joined us as Vice  President  and General  Counsel in May 2000
     and was  appointed  Vice  President -  Administration  and Legal Affairs in
     November 2000.  Prior to joining us, he was an attorney in private practice
     from  1995 to May 2000 and Chief  Counsel  for U S West  Communications  in
     Oregon from 1990 to 1995.

*    Michael L. Daniel became Vice  President - Retail Sales in October 1996 and
     Vice President - Sales in June 2000. Mr. Daniel joined us as Portland Sales
     Manager  in  March  1994  and he was a  national  account  manager  for MCI
     Telecommunications new business development organization from 1987 to 1994.

*    Michael  P.  Golob  became  Vice  President  -  Engineering  &  Operations,
     effective  January  2002.  Mr.  Golob  joined  ELI  as  Manager  -  Project
     Management in April 2000.  He was promoted to Director with  responsibility
     for project  management  and long-haul  operations in April 2001.  Prior to
     joining  us,  Mr.  Golob was a Project  Manager  for TMT  Development  from
     October  1996 to August  1997 and  Director  of  Academic  Affairs  for the
     University of Phoenix from October 1997 to March 2000.

*    Kerry D. Rea became Vice President - Revenue  Assurance and Budget in March
     2001.  Mr. Rea joined us as Vice  President and Controller in October 1997.
     Mr. Rea served as a Controller for Mattel,  Inc. from March 1997 to October
     1997 and its predecessor Tyco Toys, Inc. from November 1989 to March 1997.

                                       13
<PAGE>



                                     PART II

       Item 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
                 STOCKHOLDER MATTERS

Price Range of Common Stock

Our Class A Common Stock is publicly  traded on the NASDAQ National Market under
the ticker  symbol  ELIX.  The table below  shows high and low sales  prices per
share of Class A Common Stock as reported by the NASDAQ National Market:

                                2001                     2000
                          -----------------       ------------------
                           High      Low            High       Low
                           ----      ---            ----       ---

     First Quarter        $6.75     $2.00          $27.00     $16.63

     Second Quarter        3.07      1.20           25.00      15.88

     Third Quarter         1.65       .40           19.75       7.00

     Fourth Quarter         .84       .23            8.88       2.88

As of February 28, 2002, the approximate  number of record  security  holders of
our Class A Common Stock was 162.

Our Class B Common Stock is not publicly traded and is 100% owned by Citizens.

Dividends

We have not paid dividends and we do not anticipate  paying any dividends on our
common stock in the foreseeable future.

Recent Sales Of Unregistered Securities

None.



                                       14
<PAGE>



       ITEM 6.    SELECTED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>

($ in thousands, except per share and
non-dollar denominated operating data)                   2001           2000           1999           1998           1997
----------------------------------------------------------------------------------------------------------------------------
Statements of Operations Data (years ended December 31)
<S>                                                   <C>            <C>            <C>            <C>             <C>
Revenues                                             $  226,640     $  243,977      $ 187,008      $ 100,880      $  61,084
Loss from operations                                    (73,193)       (59,876)       (94,066)       (73,783)       (34,095)
Net loss before cumulative effect (1)                  (171,692)      (136,462)      (133,547)       (67,200)       (33,945)
Net loss                                               (171,692)      (136,462)      (133,547)       (70,017)       (33,945)
Net loss per share before cumulative effect (1)           (3.37)         (2.71)         (2.69)         (1.35)         (0.80)
Net loss per share                                        (3.37)         (2.71)         (2.69)         (1.41)         (0.80)
----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (as at December 31)
Total assets                                         $  902,348     $  949,774      $ 775,234      $ 532,309      $ 359,962
Long-term debt and capital leases                       649,478        866,404        624,997        302,256         70,511
Shareholders' equity (deficiency)                      (241,609)       (70,502)        19,501        148,493        213,314
----------------------------------------------------------------------------------------------------------------------------
Operating Data
Adjusted EBITDA (2)                                  $    5,829        $ 1,787      $ (57,561)     $ (56,781)     $ (22,928)

Cash flows used for operating activities             $  (79,747)    $  (55,095)     $ (98,678)     $ (36,776)     $ (17,189)
Cash flows used for investing activities                (53,523)      (108,909)      (180,342)      (200,791)      (103,984)
Cash flows from financing activities                    128,237        152,944        287,278        224,156        147,093

Gross property, plant & equipment
      - owned or under capital lease                 $1,037,349     $  978,327      $ 771,947      $ 528,582      $ 328,664
      - under operating lease (3)                       108,541        108,541        108,541        108,541         87,426
                                                    ------------  -------------  -------------  -------------  -------------
Total property, plant & equipment                    $1,145,890     $1,086,868      $ 880,488      $ 637,123      $ 416,090
                                                    ============  =============  =============  =============  =============

Route miles (4)                                           6,754          5,924          4,052          3,091          2,494
Fiber miles (4)                                         354,083        297,284        214,864        181,368        140,812
Buildings connected                                         859            851            824            766            610
Access line equivalents (5)                             148,787        200,231        161,555         74,924         34,328
Switches and routers installed:
      Voice                                                   8              8              8              7              5
      Frame Relay                                            33             32             32             23             20
      Internet                                               80             65             42             24             17
      ATM                                                    23             23             23             14              8
Employees                                                   823          1,161          1,167          1,090            573
Customers                                                 2,243          2,246          2,147          1,644          1,165

</TABLE>
Information  presented  above should be read in  conjunction  with our Financial
Statements and accompanying Notes.

(1)  We  adopted  SOP 98-5,  "Reporting  on the Costs of  Start-Up  Activities",
     effective January 1, 1998 (See Note 5 of Notes to Financial Statements).

(2)  Adjusted  EBITDA is  operating  loss plus  depreciation  and  amortization.
     EBITDA is a measure commonly used in the communications industry to analyze
     companies  on the basis of  operating  performance.  It is not a measure of
     financial performance under generally accepted accounting  principles,  and
     may not be comparable to similarly titled measures of other companies.

(3)  Facilities  under an  operating  lease  agreement  under  which we have the
     option to purchase the  facilities at the end of the lease term.  (See Note
     13 of Notes to Financial Statements).

(4)  Route and fiber miles also  include  those to which we have  exclusive  use
     pursuant to license and lease arrangements.

(5)  Access line equivalents is a measure used to quantify the bandwidth of Dial
     tone,  ISDN PRI and  RSVP  capacity  sold  defined  in terms of a  standard
     telephone line.

                                       15
<PAGE>



       Item 7.    Management's Discussion and Analysis of Financial
                  Condition and Results of Operations

Statements  contained in this annual report on Form 10-K that are not historical
facts are forward-looking statements made pursuant to the safe harbor provisions
of the  Private  Securities  Reform  Act of 1995.  In  addition,  words  such as
"believes,"  "anticipates,"  "expects" and similar  expressions  are intended to
identify  forward-looking  statements.  These  forward  looking  statements  are
subject to the following possibilities:

     *    if there are changes in the nature and pace of technological  advances
          in our industry;

     *    if a restructuring occurs in the telecommunications industry generally
          and its nature and effect;

     *    if competitive pressure in the  telecommunications  industry increases
          in any of our markets because of the entrance of new competitors,  the
          combination  of  existing   competitors   and/or  the  more  effective
          provision  of products and services  from our  competitors,  including
          ILECs, or other public utilities;

     *    if  our  business  strategy  or  its  execution,  including  financial
          performance goals, is not as successful as we anticipate;

     *    if state or federal regulatory changes are implemented that assist our
          competitors,  impair our competitive  position,  threaten our costs or
          impact our rate structures,  including the ability to bill and collect
          reciprocal compensation for calls terminated to ISPs;

     *    if we do not receive the  services  and support  which we require from
          the regional  ILECs  operating  in our markets or cannot  maintain our
          current relationships with ILECs;

     *    if a significant number or volume of our customers, particularly ISPs,
          experience  financial  difficulty and are unable to continue operating
          in the  manner  which  they have in the past,  are unable to pay their
          bills  when  they  become  due,  cease  operating  or seek  bankruptcy
          protection;

     *    if we are not able to effectively manage our growth;

     *    if  we  are  not  able  to  correctly   identify   future  markets  or
          successfully expand existing ones;

     *    if the mix of products and services we are able to offer in our target
          markets is not appropriate to the demands of our customers;

     *    if we are not able to obtain  additional  financing  from  Citizens or
          third-parties on favorable terms;

     *    if the market price for telecommunications industry stocks, generally,
          and our common stock specifically, remains depressed;

     *    the effects of more  general  factors  including,  but not limited to,
          changes in economic  conditions,  changes in industry  conditions  and
          changes in accounting policies and practices adopted voluntarily or as
          required by generally accepted accounting principles.

You  should  consider  these  important  factors  in  evaluating  any  statement
contained  in  this  report   and/or  made  by  us  or  on  our  behalf.   These
forward-looking  statements  are made as of the date of this  report  based upon
current expectations, and we undertake no obligation to update this information.
The  following  information  should be read in  conjunction  with the  financial
statements and related footnotes included in this report.

                                       16
<PAGE>
Liquidity and Capital Resources

We drew $156.5 million from the Citizens  credit  facility to fund operating and
capital  expenditures  in the year ended December 31, 2001. The Citizens  Credit
Facility  provides up to $450 million  with an interest  rate of 15% and a final
maturity of October 30, 2005. Funds of $350 million were originally provided for
general  corporate  purposes are available to be drawn until  December 31, 2002.
The remaining balance may be drawn to pay interest due under the Citizens Credit
Facility  until  maturity.  As of December  31, 2001,  there was $194.5  million
outstanding under the Citizens Credit Facility, of which $14.6 million was drawn
to pay  interest  expense and $179.9  million  was drawn for  general  corporate
purposes. Under this facility,  $255.5 million remains available to be drawn, of
which $85.4 million is available to pay interest  expense and $170.1  million is
available for general corporate purposes.

We also have a $400 million bank credit facility which matures in November 2002.
Additionally,  we have $325 million of five-year  6.05% senior  unsecured  notes
outstanding  that mature on May 14, 2004.  Citizens has guaranteed both the Bank
Credit  Facility  and our  senior  unsecured  notes  for fees of 3.25% and 4.0%,
respectively,  based on the respective outstanding balances. The current portion
of our  long-term  obligations  of $407.4  million  consists  of  capital  lease
obligations of $7.4 million and the Bank Credit Facility of $400 million.

During  2001 the  economy and the stock  market  began to reflect the  overbuilt
state of the telecommunications  markets,  especially for long-haul services. We
and other CLECs have incurred  substantial  debt to build our networks for which
demand now  appears to be limited.  As these  conditions  became  more  evident,
competitive  and  financial  pressures  on CLECs  increased.  The  nature of the
restructuring  of the  telecommunications  industry  that  will  take  place  is
uncertain.  We test for  impairment of goodwill and plant on a quarterly  basis.
The test  requires  that we develop a  business  plan that  considers  operating
results,  capital  investment  and financing  requirements  necessary to achieve
these results.  Our performance  objectives  assume that the Company will not be
adversely  impacted  by  unknown  external  forces  such as  changes in the U.S.
economy,  rapid and unanticipated  technological  changes,  regulatory,  tax and
other changes.  We believe that the  assumptions  used in developing our overall
business plan are reasonable but we caution that they are subjective.

In the first half of 2002,  we intend to redeploy  the internet  routers,  frame
relay   switches  and  ATM  switches  from  the  Atlanta,   Cleveland,   Denver,
Philadelphia  and New York markets to other locations in our network.  We intend
to cease  leasing  the  collocation  facilities  and  off-net  circuits  for the
backbone and local loops supporting the service delivery in these markets. It is
anticipated  that this will lead to $4.2 million of termination  fees which have
been accrued for and included in our Network  Access  expense for the year ended
December 31, 2001.

We  anticipate  that our existing  cash  balances and cash to be generated  from
operations  will not be  adequate  to fund  operating  leases,  working  capital
deficiencies,  capital expenditures, capital lease obligations, and debt service
through  2002.  The Citizens  Credit  Facility  provides the funds  necessary to
support  these  cash  requirements  through  December  31,  2002.  Citizens  has
committed to continue to finance our cash  requirements,  at market terms, until
the completion of a public or private  financing or March 31, 2003,  which would
provide  the funds  necessary  to  support  our cash  requirements.  Absent  the
Citizens  commitment,  we do not believe  there is currently a market to further
finance or  refinance  our  existing  indebtedness.  Consequently,  without  the
financial   support  of  Citizens,   ELI  could  not  fund  its  future  capital
requirements  or  service  its debt and most  likely  would  not  remain a going
concern.

In order to grow our  customer  base and  revenue  stream,  we must  continue to
invest  in  the   installation,   development  and  expansion  of  our  existing
communications networks. A significant portion of these expenditures is incurred
before any revenue is realized.  Our cash capital  additions were  approximately
$54.6  million in the year ended  December 31, 2001.  We also had  approximately
$34.0 million in capital lease additions. These expenditures,  combined with our
operating  expenses,  have resulted in operating losses and negative cash flows.
We expect to continue  incurring  operating losses and negative cash flows until
we can  establish  an adequate  customer  base  necessary  to generate a revenue
stream  sufficient  to support our  operations,  capital  requirements  and debt
service. We cannot be sure that we will achieve or sustain profitability or that
we will generate  sufficient  positive cash flow to fund our operating,  capital
expenditure and debt service requirements.

                                       17
<PAGE>

Our  capital  additions  for 2002 are  estimated  to be  $71.6  million  of cash
expenditures.  We continue to evaluate  opportunities to generate revenue growth
through  making  substantial  investments  in the continued  development  of our
existing networks.  These  opportunities may include  acquisitions  and/or joint
ventures that are consistent with our business plan of generating revenue growth
through  expansion  of our network and  customer  base.  Any such  acquisitions,
investments  and/or  strategic   arrangements,   if  available,   could  require
additional financial resources and/or reallocation of our financial resources.

We  have  the  following  commitments  in the  forms  of  capital  leases  and a
construction agency agreement:

*    We have entered into certain  long-term capital leases to obtain dark fiber
     to expand our network.  Total future minimum cash payment commitments under
     these leases amounted to $331.1 million as of December 31, 2001,  including
     principal and interest of $22.9 million due in 2002.

*    During 1995, we entered into a $110 million  construction  agency agreement
     and an operating  lease  agreement in connection  with the  construction of
     certain  network  facilities.  In January  2002, we exercised our option to
     purchase the  facilities at the end of the lease term.  Payments  under the
     lease depend on current  interest rates.  Assuming  continuation of current
     interest rates,  payments would  approximate  $872,000 from January 1, 2002
     through April 30, 2002 and, a final payment of  approximately  $110 million
     in April 2002.  Citizens has guaranteed all of our  obligations  under this
     operating  lease.  We have agreed to pay to Citizens a guarantee fee at the
     rate of 3.25% per annum based on the amount of the lessor's  investment  in
     the leased assets.

A summary  of our  contractual  obligations  and  commercial  commitments  as of
December 31, 2001 is as follows:

<TABLE>
<CAPTION>
                                                            Less
                                                           than 1            2-3            3-4
(in thousands)                             Total            year            years          years     Thereafter
----------------------------------- --------------- ---------------- -------------- -------------- --------------

<S>                                     <C>               <C>            <C>             <C>           <C>
Long-term debt                          $  919,500        $ 400,000      $ 519,500       $      -      $       -

Capital lease obligations                  331,084           22,893         35,667         35,687        236,837

Operating leases                            30,982            8,626         10,566          4,352          7,438

Minimum purchase obligations                 4,900            2,500          2,400              -              -

Purchase obligation                        110,000          110,000              -              -              -
                                    --------------- ---------------- -------------- -------------- --------------
Total commercial commitments            $1,396,466        $ 544,019      $ 568,133       $ 40,039      $ 244,275
                                    =============== ================ ============== ============== ==============

</TABLE>

New Accounting Pronouncements

In July 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting Standard (SFAS) No. 141, "Business  Combinations." This
statement  requires  that all business  combinations  be accounted for under the
purchase method of accounting. SFAS No. 141 requires that the purchase method of
accounting be used for business  combinations  initiated after June 30, 2001 and
prohibits the use of the pooling-of-interests  method of accounting.  We adopted
SFAS No. 141 on January 1, 2002.  The  adoption of SFAS No. 141 did not have any
impact on our financial position or results of operations.

                                       18
<PAGE>

In July 2001,  the FASB  issued  SFAS No. 142,  "Goodwill  and Other  Intangible
Assets." SFAS 142 is effective  January 1, 2002. We will be required to test for
impairment  of  goodwill  as of January  1, 2002 and  annually  thereafter.  Any
transitional  impairment  loss at  January  1,  2002 will be  recognized  as the
cumulative  effect of a change  in  accounting  principle  in our  statement  of
operations  in the first  quarter of 2002.  As of the date of adoption,  we have
unamortized  goodwill  in the  amount  of $39.8  million.  Amortization  expense
related to goodwill was $2.8  million,  $0.2  million,  and $0.2 million for the
years ended  December  31,  2001,  2000 and 1999,  respectively.  Because of the
extensive  effort needed to comply with adopting SFAS 142, it is not practicable
to reasonably  estimate the impact of adopting  this  statement on our financial
statements at the date of this report,  including whether we will be required to
recognize  any  transitional  impairment  losses as the  cumulative  effect of a
change in accounting principle. We are required to make such assessment no later
than June 30, 2002, but such assessment is "as of" January 1, 2002.

In August 2001, the FASB issued SFAS No. 143,  "Accounting for Asset  Retirement
Obligations."  This statement  addresses the financial  accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred  if a  reasonable  estimate of fair value can be made.  The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset and reported as a liability. This statement is effective
for fiscal years  beginning after June 15, 2002. The adoption of SFAS No. 143 is
not anticipated to have a material  impact on our financial  position or results
of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived  Assets." This statement  establishes a single accounting
model, based on the framework established in SFAS No. 121, for long-lived assets
to be disposed of by sale,  whether  previously held and used or newly acquired,
and  broadens  the  presentation  of  discontinued  operations  to include  more
disposal  transactions.  This statement is effective for fiscal years  beginning
after December 15, 2001. We are currently  evaluating the impact of the adoption
of SFAS No. 144.  We test for  impairment  of goodwill  and plant on a quarterly
basis.  The test  requires  that we  develop  a  business  plan  that  considers
operating results,  capital investment and financing  requirements  necessary to
achieve these results.  Our performance  objectives assume that the Company will
not be adversely impacted by unknown external forces such as changes in the U.S.
economy,  rapid and unanticipated  technological  changes,  regulatory,  tax and
other changes.  We believe that the  assumptions  used in developing our overall
business plan are reasonable but we caution that they are subjective.  We do not
anticipate, at this time, that the adoption of SFAS 144 will impact the carrying
value of our long lived assets.

Reciprocal Compensation

We have  various  interconnection  agreements  with Qwest  (formerly  U S WEST),
Verizon (formerly GTE) and SBC (PacBell) and Sprint,  the ILECs in the states in
which we operate.  These agreements govern reciprocal  compensation  relating to
the transport and  termination  of traffic  between the ILEC's  networks and our
network.  The FCC adopted new rules  concerning  intercarrier  compensation  for
ISP-bound  traffic  effective June 14, 2001. The FCC set transitional  rates for
reciprocal compensation that exceeds a 3:1 ratio of inbound to outbound traffic.
The rate for above ratio traffic is capped at .15 cents per minute for the first
six months  after the  effective  date of the  commission  order,  .10 cents per
minute for the next 18 months and .07 cents per minute after that,  through June
2004.  Below ratio traffic remains at the state  established rate level which is
generally higher.  Implementation of the FCC's  transitional rates for ISP-bound
traffic is taking place via amendments to existing  interconnection  agreements.
The effect of implementing the FCC transitional rates resulted in a reduction of
the composite rate of .088 cents per minute,  or 43%, from .203 cents per minute
for the six months ended June 30, 2001 to .115 cents per minute.

                                       19
<PAGE>

We recognize reciprocal  compensation  revenues as earned, based on the terms of
the interconnection  agreements.  We recognized reciprocal compensation revenues
of $21.3 million,  $38.8 million and $34.7 million  during 2001,  2000 and 1999,
respectively.  Net trade accounts receivable relating to reciprocal compensation
totaled   $2.2  million  and  $7.7  million  at  December  31,  2001  and  2000,
respectively.  The Verizon  interconnection  agreements  expired in May and June
2001 for  Washington  and Oregon,  respectively.  We are  currently  negotiating
agreements with PacBell and Verizon.  The existing terms of the  interconnection
agreements  remain in place during the  negotiations.  As a result of recent FCC
mandates we do not  anticipate  that renewal of the  interconnection  agreements
will be at terms as favorable to us as in the past.

Currently pending before the 9th Circuit Court of Appeals is Verizon's appeal of
the US District  Court decision  upholding the Oregon Public Utility  Commission
decision requiring Verizon to pay reciprocal  compensation for ISP bound traffic
terminating to ELI and that  reciprocal  compensation  payments to ELI should be
made at the tandem  rate as opposed to the end office  rate.  The tandem rate is
higher  than an end office  rate  because  the  traffic is  serviced by a tandem
switch. A tandem switch is an intermediate  switch;  an end office switch is one
which carries the traffic to the end user.  Verizon has paid ELI's  invoices per
the  terms of the  approved  interconnection  agreement  since  the  agreement's
effective date in June 1999.

Results of Operations

CLEC revenue is generated  through the provision of local,  long distance,  data
and long-haul  services.  These services are primarily  provided under a monthly
recovery  fee or based on usage at agreed upon rates and is not  dependent  upon
significant  judgements by management with the exception of a determination of a
provision for uncollected  accounts.  CLEC usage based revenue  includes amounts
determined  under  reciprocal  compensation  agreements.  While this  revenue is
governed by specific  contracts with the  counterparty,  management has deferred
recognition  of portions  of such  revenue  until  realizability  was  obtained.
Revenue earned from long-haul contracts,  included the fiber swap are recognized
ratably over the term of the related agreement.

Revenue decreased $17.3 million, or 7% in 2001 and increased $57.0 million, or
30% in 2000. The decline in revenue for 2001 is primarily due to a downturn in
economic conditions that affected internet service providers and related
businesses; a decline in data services due to the expiration of a material
contract; and a decrease in reciprocal compensation.

<TABLE>
<CAPTION>

                                     Revenue

                                         2001                         2000                 1999
                             ---------------------------  ---------------------------  ------------
($ In thousands)                Amount       % Change        Amount       % Change       Amount
                             ------------- -------------  ------------- -------------  ------------
<S>                            <C>               <C>       <C>               <C>        <C>
Network services               $ 101,338         31%       $  77,437         45%        $  53,249
Local telephone services          73,291        (26%)         98,643         27%           77,591
Long distance services            12,294        (25%)         16,318        (39%)          26,698
Data services                     39,717        (23%)         51,579         75%           29,470
                             -------------                -------------                ------------
     Total                     $ 226,640         (7%)      $ 243,977         30%        $ 187,008
                             =============                =============                ============

</TABLE>

Major Customers

For the years ended  December  31,  2001,  2000 and 1999,  Qwest  Communications
(Qwest) accounted for 10%, 19% and 19%,  respectively,  of our total revenue. As
of December 31, 2001 and 2000, Qwest accounted for 12% and 28%, respectively, of
our net trade accounts  receivable.  In 2001, a significant portion of the Qwest
revenue was generated from reciprocal compensation agreements. No other customer
accounted for 10% or more of our total revenue for the years ended  December 31,
2001, 2000 and 1999.

Included in revenue for the year ended December 31, 2001 is  approximately  $4.0
million of revenue  representing  a "net  settlement"  of past billing  disputes
between  ELI and Qwest.  Additionally,  we are  currently  providing  service to
customers  that have filed for  protection  under  Chapter 11 of the  bankruptcy
code. Of our largest twenty-five  customers,  two customers are under Chapter 11
protection.  These customers  contributed  approximately $0.3 million of revenue
monthly.

                                       20
<PAGE>

Network Services

Network  services  revenue  increased  $23.9 million,  or 31%, in 2001 and $24.2
million, or 45%, in 2000. Network services include Private Line Interstate (Long
Haul) and Private  Line  Intrastate  (MAN).  The  increase is  primarily  due to
continued  growth  in our  network  and  sales of  additional  circuits  for MAN
services.

     Revenue  for 2001 and 2000  from our  Long  Haul  services  increased  $3.9
     million, 10%, and $12.0 million, or 43%, respectively.

     Revenue for 2001 and 2000 from our MAN services  increased  $20.0  million,
     54%, and $12.2 million, or 48%, respectively.

Local Telephone Services

Local telephone  services  revenue  decreased $25.4 million,  or 26% in 2001 and
increased $21.1 million,  or 27% in 2000. Local telephone  services include dial
tone, ISDN PRI, carrier access billings and reciprocal compensation.

<TABLE>
<CAPTION>
                                      2001                         2000                  1999
                           ---------------------------  ---------------------------  ------------
 ($ In thousands)              Amount       % Change        Amount       % Change       Amount
                           ------------- -------------  ------------- -------------  ------------
<S>                          <C>             <C>           <C>              <C>        <C>
ISDN PRI                     $ 27,299        (19%)         $ 33,846         53%        $ 22,160
Dial tone                      16,730        (13%)           19,208         40%          13,746
Carrier access billings         7,934         18%             6,714         (4%)          7,020
Reciprocal compensation        21,328        (45%)           38,875         12%          34,665
                           -------------                -------------                ------------
     Total                   $ 73,291        (26%)         $ 98,643         27%        $ 77,591
                           =============                =============                ============

</TABLE>
     ISDN PRI revenue decreased $6.5 million, or 19% in 2001 and increased $11.7
     million, or 53% in 2000. The 2001 decrease in ISDN PRI revenue is primarily
     due to the bankruptcy of two customers and decreased revenue resulting from
     less demand for ISDN PRI trunks servicing  internet  routers.  In addition,
     average access line equivalents  decreased  19,245, or 10% in 2001 compared
     to 2000.  The 2000  increase in ISDN PRI revenue is a result of an increase
     in the average access line equivalents of 64,206, or 46% in 2000 over 1999.

     Dial tone revenue decreased $2.5 million, or 13% in 2001 and increased $5.4
     million,  or 40%  in  2000.  The  2001  decrease  is  primarily  due to the
     bankruptcy of two customers and decreased  installation fees resulting from
     fewer new customers. In addition, average access line equivalents decreased
     19,245,  or 10% in 2001  compared to 2000.  The 2000  increase in dial tone
     revenue is the result of an increase in the average access line equivalents
     of 64,206, or 46% in 2000 over 1999.

     Carrier access billings revenue increased $1.2 million,  or 18% in 2001 and
     decreased  $0.3 million,  or 4% in 2000.  The increase in 2001 is primarily
     due to the settlement of disputes with two major customers partially offset
     by the effects of a 12% decrease in average rates per minute.  The decrease
     in 2000 compared to 1999 is due to an increase in average  monthly  minutes
     processed  of 15  million,  or 77% offset by the  effects of lower  average
     rates per minute  primarily due to competitive  pressures in the markets in
     which we operate.

     Reciprocal compensation revenue decreased $17.5 million, or 45% in 2001 and
     increased  $4.2 million,  or 12% in 2000. The decrease in 2001 is primarily
     due to a 19%  decrease  in average  rates per minute and a 14%  decrease in
     average monthly minutes  processed of 158 million.  The decrease in average
     minutes  is  primarily  due  to  less  termination-generated  minutes  from
     ISDN-PRI.  The  increase  for  2000  over  1999  is due to  interconnection
     agreements  being in place with Verizon and PacBell during all of 2000 that
     were not in place  for all 12 months  in 1999.  See "Part I.,  Management's
     Discussion and Analysis of Financial  Condition and Results of Operations -
     Liquidity and Capital Resources - Other Matters - Reciprocal  Compensation"
     for further discussion of reciprocal compensation.

                                       21

<PAGE>

Long Distance Services

Long distance services revenue decreased $4.0 million,  or 25% in 2001 and $10.4
million,  or 39% in 2000. Long distance  services  include retail long distance,
wholesale long distance and prepaid services.

     Retail long distance  decreased  $0.6 million,  or 7% in 2001 and increased
     $2.3  million,  or 35% in 2000.  The 2001  decrease is  primarily  due to a
     decrease  in  average  rates  per  minute of 6%,  partially  offset by a 1%
     increase in average  monthly minutes  processed.  The increase in 2000 over
     1999 is due to an  increase of average  monthly  minutes  processed  of 3.1
     million, or 47% partially offset by lower average rates per minute.

     Wholesale  long  distance  decreased  $2.4  million,  or  39% in  2001  and
     increased  $0.1 million,  or 2% in 2000.  The decrease in 2001 is primarily
     due to a decrease in average monthly minutes  processed of 4.8 million,  or
     28% as a result of fewer wholesale  long-distance  customers.  We intend to
     focus on higher-margin retail long-distance customers. A decrease of 16% in
     the average rate per minute also  contributed  to the decrease in 2001. The
     increase in 2000 is due to an increase of average monthly minutes processed
     of 0.9 million, or 6% partially offset by lower average rates per minute.

Prepaid  services  revenue  decreased  $1.0  million,  or 99% in 2001 and  $12.8
million,  or 93% in 2000. The decreases are attributable to our decision to exit
the prepaid services market in the third quarter of 1999.

Data Services

Data services include Internet,  RSVP and other services.  Data services revenue
decreased $11.9 million, or 23% in 2001 primarily due to loss of a contract with
a significant customer. Data services revenue increased $22.1 million, or 75% in
2000 primarily due to revenue from the 18-month contract.

                               Operating Expenses

Operating  expenses  decreased $4.0 million,  or 1%, in 2001 and increased $22.8
million, or 8% in 2000.

<TABLE>
<CAPTION>
                                                2001                         2000                  1999
                                      ---------------------------  ---------------------------  ------------
($ In thousands)                         Amount       % Change        Amount       % Change        Amount
                                      ------------- -------------  ------------- -------------  ------------
<S>                                     <C>             <C>         <C>              <C>          <C>
Network access                          $ 71,789        (3%)        $  74,105        (7%)         $ 79,948
Operations                                51,598        (2%)           52,740        28%            41,071
Selling, general and administrative       94,221       (18%)          115,139        (6%)          122,756
Severance expense                          3,203     1,455%               206       (74%)              794
Depreciation and amortization             79,022        28%            61,663        69%            36,505
                                      -------------                -------------                ------------
     Total                              $299,833        (1%)        $ 303,853         8%          $ 281,074
                                      =============                =============                ============

</TABLE>
Network Access

Network access expenses include circuit and usage-based charges for carrying and
terminating traffic on another carrier's network.

     Network access  expenses  decreased  $2.3 million,  or 3%, in 2001 and $5.8
     million,  or 7%, in 2000  primarily  due to the  completion  of our coastal
     long-haul  network  in 2000,  which  has  allowed  us to  provide a greater
     portion of our services on-net resulting in lower  long-distance  and local
     revenues and network access  expense.  In 2001, this decrease was partially
     offset by an increase of $4.2 million due to the anticipated termination of
     certain collocation and off-net circuit agreements.

                                       22
<PAGE>

Operations

Operations  expense  consists of costs  related to  providing  facilities  based
network and enhanced  communications  services  other than network access costs.
The primary components of these expenses are right-of-way and telecommunications
equipment leases as well as operations and engineering personnel costs.

     In 2001, operations expense decreased $1.1 million, or 2%, primarily due to
     staffing  reductions and decreased  operating  rents.  These decreases were
     partially offset by increases in maintenance costs and related expenses, as
     well as a reduction in capitalized overheads.

     In 2000,  operations expense increased $11.7 million, or 28%, primarily due
     to increases in payroll and related  expenses,  operating rents and related
     expenses to support the expanded delivery of services.

Selling, General and Administrative

Selling,  general and  administrative  expenses  include all direct and indirect
sales   channel   expenses  and   commissions,   as  well  as  all  general  and
administrative expenses.

     Selling,  general and administrative  expenses decreased $20.9 million,  or
     18%, in 2001  primarily due to a reduction in personnel and related  costs,
     reduced  advertising  and  property  tax  expenses.  These  decreases  were
     partially  offset by an increase in bad debt  expense  related to wholesale
     communications carrier customers.

     Selling, general and administrative expenses decreased $7.6 million, or 6%,
     in 2000  primarily due to decreases in payroll and related  expenses,  rent
     and costs related to the decision to exit our prepaid calling card services
     and the  consolidation  of our national retail sales efforts which resulted
     in closing nine retail sales  offices in the eastern  United  States in the
     third quarter of 1999.

Severance Expense

Severance costs in 2001 represent the impact of headcount reductions, which were
made as part of our on-going effort to reduce costs throughout the business, and
resulted in a reduction of 288 employees throughout 2001.

Depreciation and Amortization

Depreciation    and    amortization    expenses    include    depreciation    of
telecommunications   network  assets  including   fiber-optic   cable,   network
electronics,  network  switching and network data equipment and  amortization of
goodwill.

     Depreciation  expense  increased  $14.8 million,  or 24%, in 2001 and $25.1
     million,  or 70%, in 2000. The increases were primarily due to higher plant
     in service balances for newly completed  communications  network facilities
     and electronics.

     Amortization  expense  increased  $2.6  million,  or 317%, in 2001 and $0.1
     million,  or 9% in 2000. The increase in 2001 is due to the amortization of
     goodwill  resulting from the Citizens purchase of our Common Stock in 2000.
     The  increase  in  2000  over  1999 is  primarily  due to  amortization  of
     goodwill.

                                       23
<PAGE>

                              Interest Expense, Net
<TABLE>
<CAPTION>

                                      2001                         2000                   1999
                            ---------------------------  ---------------------------  ------------
($ In thousands)               Amount       % Change        Amount       % Change       Amount
                            ------------- -------------  ------------- -------------  ------------
<S>                            <C>             <C>          <C>             <C>        <C>
Gross interest expense         $101,728        22%          $ 83,044        68%        $ 49,547
Capitalized interest             (4,072)      (44%)           (7,260)      (36%)        (11,304)
                            -------------                -------------                ------------
Interest expense, net          $ 97,656        29%          $ 75,784        98%        $ 38,243
                            =============                =============                ============

</TABLE>
Gross  interest  expense  increased  $18.7  million,  or 22%,  in 2001 and $33.5
million, or 68%, in 2000 primarily due to higher levels of outstanding long-term
debt and capital leases.  We had outstanding debt and capital leases of $1,056.9
million,  $895.2 million and $650.1 million at December 31, 2001, 2000 and 1999,
respectively.  The higher  balances at higher  interest  rates led to  increased
interest expense and guarantee fees.

Capitalized  interest decreased $3.2 million,  or 44%, in 2001 and $4.0 million,
or 36%, in 2000.  The  decreases  are a result of our efforts to reduce  capital
expenditures.  Our  average  Construction  Work In Process  was reduced by $38.6
million,  or 59%,  and $58.2  million,  or 47%, in 2001 and 2000,  respectively,
partially offset by higher interest rates.

                                       24

<PAGE>

    Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosure Of Primary Market Risk And How It Is Managed

We are exposed to market risk in the normal  course of our  business  operations
due to ongoing funding activities. Market risk refers to the potential change in
fair value of a financial  instrument  as a result of  fluctuations  in interest
rates and equity and  commodity  prices.  Our primary  market  risk  exposure is
interest rate risk,  which relates  primarily to our long-term  debt and capital
and operating lease obligations.  We do not hold or issue derivative instruments
or other financial instruments for trading purposes.  Financial instruments that
are held for other than trading  purposes do not impose a material  market risk.
As a result,  we do not undertake any specific  actions to cover our exposure to
interest  rate risk and we are not party to any  interest  rate risk  management
agreement.

We are exposed to interest rate risk since debt  financing is needed to fund the
operating  losses and capital  expenditures  associated  with  establishing  and
expanding our  telecommunications  network.  The interest  rates that we will be
able to obtain on debt financing will depend on market  conditions at that time,
and may differ from the rates we have secured on our current debt.  Citizens has
committed to continue to finance our cash  requirements,  at market terms, until
the earlier of March 31, 2003 or the completion of a public or private financing
which would satisfy such needs through that date.

We have no material  future  earnings  or cash flow  exposures  from  changes in
interest  rates  on our  long-term  debt and  capital  lease  obligations,  as a
majority of our obligations are fixed and most of our obligations are guaranteed
by Citizens.  A hypothetical 10% adverse change in interest rates would increase
the  amount  that  we  pay on our  variable  obligations  and  could  result  in
fluctuations in the fair value of our fixed rate obligations.

Based upon our overall  interest rate exposure at December 31, 2001, a near-term
change in interest rates would not materially affect our consolidated  financial
position, results of operations or cash flows.

Sensitivity Analysis

At December 31, 2001,  the fair value of our  long-term  debt and capital  lease
obligations  was  estimated  to be $636.0  million  compared  to $649.5  million
carrying  value,  based on our overall  weighted  average rate of 7.3% excluding
guarantee fees and our overall weighted  maturity of 6 years.  There has been no
material change in the weighted average  maturity  applicable to our obligations
since December 31, 2000. However, the overall weighted average interest rate has
decreased  by  approximately  14 basis points  during the year.  A  hypothetical
increase of 73 basis points (10% of our overall weighted average borrowing rate)
would result in an approximate  $15.6 million  decrease in the fair value of our
fixed rate obligations.

Disclosure Of Limitations Of Sensitivity Analysis

Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation  of fair value of financial  instruments.  Actual  values may differ
from those presented should market  conditions vary from assumptions used in the
calculation of the fair value.  This analysis  incorporates only those exposures
that exist as of December 30,  2001.  It does not  consider  those  exposures or
positions that could arise after that date. As a result,  our ultimate  exposure
with respect to our interest rate risk will depend on the  exposures  that arise
during the  period,  the ratio of  variable  to fixed debt  outstanding  and the
fluctuation of interest rates.

                                       25

<PAGE>

       Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following documents are filed as part of this Report:

         1.   Financial Statements:
              See Index on page F.

         2.   Supplementary Data:
              Quarterly Financial Data is included in Note 16 to the Financial
              Statements (See 1. above).

       Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE

None.

                                    PART III
                                    --------

       ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

We intend to file a definitive  proxy  statement for the 2002 Annual  Meeting of
Stockholders  (proxy  statement)  pursuant to Regulation  14A not later than 120
days after  December 31, 2002. The  information  which relates to our Directors,
and  disclosure  required  by Items 401 and 405 of  Regulation  S-K is under the
captions  "Election of Directors" in our proxy  statement,  and is  incorporated
herein by  reference.  The  information  required  by this item  relating to our
executive  officers and key employees is set forth under the caption  "Executive
Officers of the Registrant" in Part I of this report.

       ITEM 11.  EXECUTIVE COMPENSATION

The  information  required by item 402 of Regulation  S-K is included  under the
caption  "Executive  Compensation"  in our proxy  statement and is  incorporated
herein by reference.

       ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required by item 403 of Regulation  S-K is included  under the
caption "Stock Ownership of Certain Beneficial  Owners,  Directors and Executive
Officers" in our proxy statement and is incorporated herein by reference.

       ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by item 404 of Regulation  S-K is included  under the
caption  "Agreements  with Citizens" in our proxy  statement and is incorporated
herein by reference.


                                       26
<PAGE>

                                     PART IV
                                     -------

         ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                   FORM 8-K

a.       The exhibits listed below are filed as part of this Report:
         -----------------------------------------------------------
<TABLE>
<CAPTION>

  No.     Description
-------   -----------
<S>       <C>
3.1       Amended and Restated Certificate of Incorporation.
3.2       Amended By-laws.
10.4*     Optical Fiber License Agreement between the Salt River Project Agricultural Improvement and Power
          District and us dated September 11, 1996.
10.5      Participation Agreement between Shawmut Bank Connecticut,
          National Association, the Certificate Purchasers named therein,
          the Lenders named therein, BA Leasing & Capital Corporation,
          Citizens Utilities Company and us dated as of April 28, 1995,
          and the related operating documents.
10.6      Agreement for Lease of Dark Fiber between Citizens Utilities Company and us dated March 24, 1995.
10.7      Administrative Services Agreement between Citizens Utilities Company and us dated as of December 1,
          1997.
10.8      Tax Sharing Agreement between Citizens Utilities Company and us dated as of December 1, 1997.
10.9      Indemnification Agreement between Citizens Utilities Company and us dated as of December 1, 1997.
10.10     Registration Rights Agreement between Citizens Utilities Company and us dated as of December 1,
          1997.
10.11     Customers and Service Agreement between Citizens Utilities Company and us dated as of December 1,
          1997.
10.12     Guaranty Fee Agreement between Citizens Utilities Company and us dated as of December 1, 1997.
10.13     Equity Incentive Plan of Electric Lightwave, Inc.
10.13.1   Second Amendment to the Equity Incentive Plan of Electric Lightwave, Inc.
10.14*    Pre-Construction IRU Agreement between FTV Communications, LLC and us  dated October 16, 1997.
10.14.1   Amendment Number One to the Pre-Construction IRU agreement between FTV Communications, LLC and us
          dated November 14, 1997.
10.15     Bank Credit Agreement dated November 21, 1997.
10.18*    Optical Fiber Installation and IRU Agreement between Pacific Gas and Electric Company and us dated
          December 31, 1997.
10.18.1*  First Amendment to Optical Fiber Installation and IRU Agreement
          between Pacific Gas and Electric Company and us dated March 9,
          1998.
10.19*    Initial Optical Fiber Design and Installation Agreement between FOCAS, Inc. and us dated as of May
          7, 1998.
10.20*    Post-Completion Agreement between FOCAS, Inc. and us dated as of May 7, 1998.
10.22     Electric Lightwave, Inc. Employee Stock Purchase Plan.
10.23*    IRU Fiber Construction and Lease Agreement between IXC Communication Services, Inc. and us dated as
          of February 28, 1999.
10.24.1   Indenture from us to Citibank, N.A., dated April 15, 1999, with respect to the 6.05% Senior
          Unsecured Notes due 2004.
10.24.2   First Supplemental Indenture from us, Citizens Utilities Company and Citizens Newco Company to
          Citibank, N.A. dated April 15, 1999, with respect to the 6.05% Senior Unsecured Notes due 2004.
10.24.3   Form of our 6.05% Senior Unsecured Notes due 2004.


                                       27
<PAGE>

   No.    Description
   ---    -----------

10.24.4   Letter of Representations to the Depository Trust Company dated April 28, 1999, with respect
          to the 6.05% Senior Unsecured Notes due 2004.
10.25*    Settlement Agreement between the United States of America Department of Energy acting by
          and through the Bonneville Power Administration and us dated May 15, 2000.
10.26*    License Agreement between the United States of America Department of Energy acting by and
          through the Bonneville Power Administration and us dated May 15, 2000.
10.27     Guaranty Agreement between the United States of America Department of Energy acting by and through
          the Bonneville Power Administration and Citizens Utilities Company dated May 15, 2000.
10.28     Intercompany Agreement between Citizens Communications Company and us dated September 11, 2000.
10.29     Loan Agreement between Citizens Communications Company and us dated October 30, 2000.
23.1      Auditors' Consent.
</TABLE>

Exhibits  10.13 and 10.22 are  management  contracts  or  compensatory  plans or
arrangements.

Exhibits 3.1, 10.4,  10.5,  10.6 and 10.13 are  incorporated by reference to the
same exhibit  designations in our Registration  Statement on Form S-1, (File No.
333-35227).  Exhibit 10.14 is  incorporated by reference to Exhibit No. 10.17 in
our  Registration  Statement on Form S-1 (File No.  333-35227).  Exhibits  10.7,
10.8, 10.9, 10.10,  10.11,  10.12 and 10.15 are incorporated by reference to our
Current  Report on Form 8-K  filed on  February  19,  1998  (File No.  0-23393).
Exhibits  10.14.1,  10.18 and 10.18.1 are  incorporated by reference to the same
exhibit  designations in our Form 10-Q for the three months ended March 31, 1998
(File No.  0-23393).  Exhibits 10.19 and 10.20 are  incorporated by reference to
the same exhibit designations in our Form 10-Q for the six months ended June 30,
1998 (File No. 0-23393). Exhibit 10.22 is incorporated by reference to our Proxy
Statement on Schedule 14A filed on April 28, 1998. Exhibit 10.23 is incorporated
by  reference to the same  exhibit  designations  in our Form 10-Q for the three
months  ended  March 31, 1999 (File No.  0-23393).  Exhibits  10.24.1,  10.24.2,
10.24.3  and  10.24.4  are   incorporated  by  reference  to  the  same  exhibit
designations  in our Form 10-Q for the six months  ended June 30, 1999 (File No.
0-23393).  Exhibit  10.13.1 is  incorporated  by  reference  to the same exhibit
designation in our Form 10-Q for the three months ended March 31, 2000 (File No.
0-23393).  Exhibits 10.25,  10.26 and 10.27 are incorporated by reference to the
same  exhibit  designations  in our Form 10-Q for the six months  ended June 30,
2000 (File No.  0-23393).  Exhibit 3.2 is  incorporated by reference to the same
exhibit  designation  in our Form 10-Q for the three months ended  September 30,
2000 (File No. 0-23393).

Exhibits  10.28 and 10.29 are  incorporated  by  reference  to the same  exhibit
designation in our Form 10-K for the year ended December 31, 2000.

* Material  has been  omitted  pursuant to a previous  request for  confidential
treatment.

b.        Reports on Form 8-K
          -------------------

We filed the following reports on Form 8-K in the last quarter of 2001:

     *    November 13, 2001,  under Item 5, "Other Events",  to make available a
          press  release  dated  November  13,  2001,  regarding  our 2001 third
          quarter financial results.

                                       28
<PAGE>


                                   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.

                                          ELECTRIC LIGHTWAVE, INC.
                                          (Registrant)


                                          By:  /s/ Robert Braden
                                          ---------------------------
                                          Robert Braden
                                          Chief Executive Officer and Director

March 7, 2002

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 indicated on the 7th day of March 2002.


                Signature                        Title
                ---------                        -----

           /s/ Leonard Tow              Chairman of the Board, Member, Executive
    --------------------------------    Committee and Director
            (Leonard Tow)

       /s/ Scott N. Schneider           Executive Vice President and Director
    --------------------------------
        (Scott N. Schneider)

       /s/ Daniel J. McCarthy           President, Chief Operating Officer
    --------------------------------
        [Daniel J. McCarthy)

        /s/ Robert J. Larson            Vice President and Chief Accounting
    --------------------------------    Officer
         (Robert J. Larson)

            /s/ Rudy Graf               Director
    --------------------------------
              (Rudy Graf)

       /s/ Guenther E. Greiner          Director
    --------------------------------
        (Guenther E. Greiner)

        /s/ Stanley Harfenist           Director
    --------------------------------
         (Stanley Harfenist)

          /s/ William Kraus             Director
    --------------------------------
           (William Kraus)

        /s/ Robert A. Stanger           Director
    --------------------------------
         (Robert A. Stanger)

       /s/ Maggie Wilderotter           Director
    --------------------------------
         (Maggie Wilderotter)




                                       29
<PAGE>
                            ELECTRIC LIGHTWAVE, INC.

                          INDEX TO FINANCIAL STATEMENTS

                                                                      Page


Independent Auditors' Report                                           F-1
Balance Sheets at December 31, 2001 and 2000                           F-2
Statements of Operations for the Years Ended December 31, 2001,
    2000 and 1999                                                      F-3
Statements of Cash Flows for the Years Ended December 31, 2001,
    2000 and 1999                                                      F-4
Statements of Changes in Shareholders' Equity (Deficiency) for the
Years Ended December 31, 2001, 2000 and 1999                           F-5
Notes to Financial Statements                                          F-6
Financial Statement Schedule:
   Independent Auditors' report on Schedules                          F-24
   Schedule II - Valuation and Qualifying Accounts                    F-25

    All other schedules are omitted as not applicable under the
      rules of Regulation S-X.

                                       F
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Electric Lightwave, Inc.

We have audited the accompanying  balance sheets of Electric Lightwave,  Inc. as
of  December  31,  2001 and 2000,  and the  related  statements  of  operations,
shareholders'  equity  (deficiency)  and cash flows for each of the years in the
three-year  period ended December 31, 2001.  These financial  statements 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 of  America.  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  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 Electric Lightwave,  Inc. as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the years in the  three-year  period ended  December  31,  2001,  in
conformity with accounting principles generally accepted in the United States of
America.




                                                 KPMG LLP



New York, New York
March 6, 2002










                                       F-1


<PAGE>


Electric Lightwave, Inc.
<TABLE>
<CAPTION>

Balance Sheets
(In thousands, except share data)
                                                                                        December 31,
                                                                            -----------------------------------
                                                                                 2001                2000
                                                                            ---------------    ----------------
Assets
Current assets:
<S>                                                                                <C>                <C>
    Cash                                                                          $  5,285            $ 10,318
    Trade receivables, net                                                          13,152              35,491
    Other receivables                                                                5,353               6,001
    Other current assets                                                             3,603               5,080
                                                                            ---------------    ----------------
       Total current assets                                                         27,393              56,890
                                                                            ---------------    ----------------
Property, plant and equipment, net                                                  832,704             846,716
Goodwill, net                                                                        39,812              42,601
Other assets                                                                          2,439               3,567
                                                                            ---------------    ----------------
       Total assets                                                               $ 902,348           $ 949,774
                                                                            ===============    ================
Liabilities and Shareholders' Deficiency
Current liabilities:
    Current portion of Bank Credit Facility                                       $ 400,000           $       -
    Accounts payable and accrued liabilities                                         24,153              60,851
    Current portion of capital lease obligations                                      7,404              28,798
    Due to Citizens Communications Company                                            9,586               7,684
    Accrued taxes, other than income taxes                                           15,129              16,377
    Interest payable                                                                 13,769              13,244
    Other current liabilities                                                         4,288               5,718
                                                                            ---------------    ----------------
       Total current liabilities                                                    474,329             132,672

Deferred revenue                                                                     15,427              14,847
Deferred income taxes payable                                                         4,212               3,058
Other long-term liabilities                                                             511               3,295
Capital lease obligations                                                           129,978             103,404
Long-term debt                                                                      325,000             725,000
Due to Citizens Communications Company                                              194,500              38,000
                                                                            ---------------    ----------------
       Total liabilities                                                          1,143,957           1,020,276
                                                                            ---------------    ----------------

Shareholders' deficiency
    Common stock issued, $.01 par value
       Class A, authorized 110,000,000 shares, 35,423,440 and 9,658,437
           outstanding and 35,517,235 and 9,754,587 shares issued at
           December 31, 2001 and 2000, respectively                                    354                  96
       Class B, authorized 60,000,000 shares, 15,881,312 shares
          and 41,165,000 shares issued and outstanding at
          December 31, 2001 and 2000, respectively                                     159                 412
    Additional paid-in-capital                                                     373,510             372,930
    Accumulated Deficiency                                                        (615,632)           (443,940)
                                                                            ---------------    ----------------
       Total shareholders' deficiency                                             (241,609)            (70,502)
                                                                            ---------------    ----------------

       Total liabilities and shareholders' deficiency                            $ 902,348           $ 949,774
                                                                            ===============    ================

</TABLE>


The accompanying Notes are an integral part of these Financial Statements.

                                       F-2


<PAGE>


Electric Lightwave, Inc.

Statements of Operations
<TABLE>
<CAPTION>

(In thousands, except per-share amounts)                    For the years ended December 31,
                                                -------------------------------------------------------
                                                     2001                2000               1999
                                                ----------------    ----------------   ----------------

<S>                                                   <C>                 <C>              <C>
Revenue                                               $ 226,640           $ 243,977        $  187,008

Operating expenses:
     Network access                                      71,789              74,105            79,948
     Operations                                          51,598              52,740            41,071
     Selling, general and administrative                 94,221             115,139           122,756
     Severance expense                                    3,203                 206               794
     Depreciation and amortization                       79,022              61,663            36,505
                                                ----------------    ----------------   ----------------
        Total operating expenses                        299,833             303,853           281,074
                                                ----------------    ----------------   ----------------

     Loss from operations                               (73,193)            (59,876)          (94,066)

Interest expense, net                                    97,656              75,784            38,243
Loss on disposal of assets                                   26               1,402             1,438
Interest income and other                                  (337)             (1,000)           (1,098)
                                                ----------------    ----------------   ----------------
     Net loss before income taxes                      (170,538)           (136,062)         (132,649)

Income tax expense                                        1,154                 400               898
                                                ----------------    ----------------   ----------------
        Net loss                                      $(171,692)          $(136,462)       $ (133,547)
                                                ================    ================   ================
Net loss per common share:
        Basic                                         $   (3.37)          $   (2.71)           $ (2.69)
        Diluted                                       $   (3.37)          $   (2.71)           $ (2.69)

Weighted average shares outstanding                      50,978              50,274             49,570


</TABLE>

The accompanying Notes are an integral part of these Financial Statements.

                                       F-3


<PAGE>


Electric Lightwave, Inc.

<TABLE>
<CAPTION>

Statements of Cash Flows

(In thousands)
                                                                              For the years ended December 31,
                                                                  -----------------------------------------------
                                                                       2001            2000            1999
                                                                  ---------------  --------------  --------------
Cash flows used for operating activities:
<S>                                                                   <C>             <C>             <C>
     Net loss                                                         $ (171,692)     $ (136,462)     $ (133,547)
     Adjustment to reconcile net loss to net cash used for
        operating activities:
           Depreciation and amortization                                  79,022          61,663          36,505
           Deferred income taxes                                           1,154             400             898
           Non-cash stock compensation                                        67           1,402           2,605
           Loss on disposal of property, plant and equipment                  26           1,402           1,438
     Changes in operating assets and liabilities:
        Receivables                                                       22,987           5,261         (23,200)
        Accounts payable and other accrued liabilities                   (16,073)            709          (1,994)
        Other accrued taxes                                               (1,248)          5,224           5,576
        Due to Citizens Communications Company                             1,902          (6,966)          9,396
        Other                                                              4,108          12,272           3,645
                                                                  ---------------  --------------  --------------
           Net cash used for operating activities                        (79,747)        (55,095)        (98,678)
                                                                  ---------------  --------------  --------------
Cash flows used for investing activities:
     Capital expenditures                                                (54,589)       (108,909)       (180,342)
     Cash proceeds from sale of fixed assets                               1,066               -               -
                                                                  ---------------  --------------  --------------
           Net cash used for investing activities                        (53,523)       (108,909)       (180,342)

Cash flows from financing activities:
     Long Term Funding from Citizens                                     156,500          38,000               -
     Revolving bank credit facility proceeds (repayments)                      -         140,000         (24,000)
     Note issuance                                                             -               -         325,000
     Payments of capital lease obligation                                (28,804)        (32,071)        (13,826)
     Debt issuance costs                                                       -               -          (2,552)
     Issuance of common stock, net of issuance costs                         541           7,015           2,656
                                                                  ---------------  --------------  --------------
           Net cash provided by financing activities                     128,237         152,944         287,278
                                                                  ---------------  --------------  --------------
Net increase (decrease) in cash                                           (5,033)        (11,060)          8,258

Cash at January 1,                                                        10,318          21,378          13,120
                                                                  ---------------  --------------  --------------
Cash at December 31,                                                  $    5,285      $   10,318      $   21,378
                                                                  ===============  ==============  ==============
Supplemental cash flow information:
     Cash paid for interest, net of capitalized portion               $  101,204      $   74,749      $   46,429
     Acquisition of assets under capital lease                        $   33,985      $  102,192      $   60,321


</TABLE>
The accompanying Notes are an integral part of these Financial Statements.

                                       F-4
<PAGE>


Electric Lightwave, Inc.

Statements of Shareholders' Equity (Deficiency)

(Amounts in thousands, except share data)

<TABLE>
<CAPTION>
                                          Class A                  Class B
                                        Common Stock,            Common Stock,
                                   ------------------------ -----------------------  Additional               Shareholders'
                                       $.01 per share           $.01 per share       Paid-in-   Accumulated      Equity
                                      Shares      Amount       Shares       Amount    Capital    Deficiency   (Deficiency)
                                   ----------------------------------------------------------------------------------------
<S>                                    <C>            <C>      <C>             <C>    <C>          <C>           <C>
Balance, December 31, 1998             8,641,816      $ 86     41,165,000      $ 412  $ 321,926    $ (173,931)   $ 148,493
   Issuance of common stock              328,804         4              -          -      2,652             -        2,656
   Issuance of restricted stock           75,000         1              -          -         (1)            -            -
   Forfeiture of restricted stock        (13,999)        -              -          -          -             -            -
   Common stock returned for taxes       (65,345)       (1)             -          -       (705)            -         (706)
   Amortization of restricted stock            -         -              -          -      2,559             -        2,559
   Stock units payable to non-
     employee director                         -         -              -          -         46             -           46
   Net loss                                    -         -              -          -          -      (133,547)    (133,547)
                                   ----------------------------------------------------------------------------------------
Balance, December 31, 1999             8,966,276      $ 90     41,165,000      $ 412  $ 326,477    $ (307,478)   $  19,501
   Issuance of common stock              715,873         7              -          -      7,008             -        7,015
   Issuance of restricted stock          115,000         1              -          -         (1)            -            -
   Forfeiture of restricted stock        (89,666)       (1)             -          -        (75)            -          (76)
   Common stock returned for taxes       (49,046)       (1)             -          -       (704)            -         (705)
   Amortization of restricted stock            -         -              -          -      1,422             -        1,422
   Stock units payable to non-
     employee director                         -         -              -          -         56             -           56
   Acquisition by Citizens
     of minority interest                      -         -              -          -     38,747             -       38,747
   Net loss                                    -         -              -          -          -      (136,462)    (136,462)
                                   ----------------------------------------------------------------------------------------
Balance, December 31, 2000             9,658,437      $ 96     41,165,000      $ 412  $ 372,930    $ (443,940)   $ (70,502)
   Issuance of common stock              505,628         5              -          -        536             -          541
   Conversion of common stock         25,283,688       253    (25,283,688)      (253)         -             -            -
   Issuance of restricted stock           50,000         1              -          -         (1)            -            -
   Forfeiture of restricted stock        (26,667)        -              -          -       (259)            -         (259)
   Common stock returned for taxes       (47,646)       (1)             -          -        (22)            -          (23)
   Amortization of restricted stock            -         -              -          -        281             -          281
   Stock units payable to non-
     employee director                         -         -              -          -         45             -           45
   Net loss                                    -         -              -          -          -      (171,692)    (171,692)
                                   ----------------------------------------------------------------------------------------
Balance, December 31, 2001            35,423,440      $354     15,881,312      $ 159  $ 373,510    $ (615,632)   $(241,609)
                                   ========================================================================================

</TABLE>

The accompanying Notes are an integral part of these Financial Statements.

                                       F-5
<PAGE>


(1)  Organization and Description of Business
     ----------------------------------------

     Electric  Lightwave,  Inc. is  referred  to as "we",  "us" or "our" in this
     report. We are a facilities-based competitive local exchange carrier (CLEC)
     providing a broad range of communications services. We provide a full range
     of wireline  telecommunications products and services in the western United
     States.  These include  switched  local and long distance voice services as
     well as enhanced data communications services and dedicated  point-to-point
     services.  Enhanced  broadband  data  services are also offered in selected
     cities  throughout  the  country.  We market to  retail  customers  who are
     primarily  communications-intensive  businesses, and to wholesale customers
     who are primarily communications providers themselves.

     We incorporated in 1990.  Citizens  Communications  Company (Citizens) owns
     approximately  85% of our common stock and has provided  guarantees for our
     $400 million revolving bank credit facility,  $325 million five-year senior
     unsecured  notes,  $75 million capital lease and $110 million  construction
     agency and operating lease agreements. The $400 million credit facility and
     the commitment to fund the $110 million lease are due in 2002.

     We anticipate that our existing cash balances and cash to be generated from
     operations will not be adequate to fund operating  leases,  working capital
     deficiencies,  capital  expenditures,  capital lease  obligations  and debt
     service  through  2002.  Citizens has  committed to continue to finance our
     cash requirements,  at market terms and conditions, until the completion of
     a public or private  financing or March 31, 2003,  which would  provide the
     funds  necessary  to support  our cash  requirements.  Absent the  Citizens
     commitment,  we do not  believe  there is  currently  a market  to  further
     finance or refinance our indebtedness.  Consequently, without the financial
     support of Citizens,  we could not fund our future capital  requirements or
     service our debt and most likely would not remain a going concern.

     We have entered into a revolving  credit  facility  with  Citizens for $450
     million  with an interest  rate of 15% and a final  maturity of October 30,
     2005  (Citizens  Credit  Facility).  Funds  of  $350  million  for  general
     corporate  purposes are available to be drawn until  December 31, 2002. The
     remaining  balance  may be drawn to pay  interest  due under  the  Citizens
     Credit Facility until maturity.  As of December 31, 2001,  there was $194.5
     million  outstanding  under the Citizens  Credit  Facility,  of which $14.6
     million was drawn to pay interest  expense and $179.9 million was drawn for
     general  corporate  purposes.  Under this facility,  $255.5 million remains
     available to be drawn,  of which $85.4 million is available to pay interest
     expense and $170.1 million is available for general corporate purposes.

     As a result of the financial  conditions  within the CLEC industry and with
     our  operations,  and the  current  price of our Class A Common  Stock,  we
     believe that our Class A Common Stock that is currently  listed for trading
     on  Nasdaq's  National  Market may be subject to  delisting  from Nasdaq in
     2002.  If we do  not  meet  these  requirements  for  30  consecutive  days
     beginning  January 2, 2002, and are unable to regain  compliance  within 90
     days,  our stock  could be  subject to  delisting  again.  It is  uncertain
     whether we will be able to meet the applicable listing requirements. If the
     requirements  are not met, our Class A Common Stock may not be eligible for
     trading  on Nasdaq  and we expect  it would  trade in the  over-the-counter
     market.


                                      F-6
<PAGE>



(2)  Summary of Significant Accounting Policies
     ------------------------------------------

     (a)  Basis of Presentation and Use of Estimates

          We  have  prepared  these  financial  statements  in  accordance  with
          accounting  principles generally accepted in the United States (GAAP).
          Preparing financial  statements in conformity with GAAP requires us to
          make  estimates and  assumptions  that affect the reported  amounts of
          assets and  liabilities  at the dates of the financial  statements and
          the reported  amounts of revenues and  expenses  during the  reporting
          periods.  Actual  results could differ from those  estimates.  We have
          made  certain  reclassifications  of balances  previously  reported to
          conform to the current financial statement presentation.

     (b)  Revenue Recognition

          We recognize revenues from  communications  services when the services
          are  provided.   Prepaid  network  services  revenue  under  long-term
          agreements  including  Indefeasible  Right to Use (IRU) and Fiber Swap
          agreements are deferred and recognized on a  straight-line  basis over
          the terms of the  related  agreements.  Installation  fees and related
          costs (up to the amount of  installation  revenue)  are  deferred  and
          recognized over the average customer life.  Installation related costs
          in excess of installation fees are expensed when incurred.

          We recognize reciprocal  compensation revenues as earned, based on the
          terms  of  the   interconnection   agreements   and  make   subsequent
          adjustments  to  revenue  based  upon   management   judgments  as  to
          realizability.

     (c)  Trade and Other Receivables

          Our trade customers are primarily communications-intensive  businesses
          and  communications  service  providers that require  state-of-the-art
          communications and data services.  Trade accounts  receivables are net
          of an allowance for doubtful accounts of approximately  $6,129,000 and
          $2,359,000  at December 31, 2001 and 2000,  respectively.  See Note 13
          for a discussion of significant customers.

     (d)  Property, Plant and Equipment

          Property,  plant and  equipment  are stated at cost and include  costs
          which are  capitalized  during the  installation  and expansion of our
          communications   networks.   Costs  capitalized   during  the  network
          development  stage  include  expenses   associated  with  engineering,
          construction,  overhead and interest.  We  capitalized  interest costs
          related to construction of approximately $4,072,000,  $7,260,000,  and
          $11,304,000  for the years ending  December  31, 2001,  2000 and 1999,
          respectively.

          We use the straight-line method to compute the following:

          *    Depreciation of property and equipment over the estimated  useful
               lives of the assets
          *    Amortization  of leasehold  improvements  over the shorter of the
               estimated  useful lives of the assets or the  remaining  terms of
               the related leases
          *    Amortization  of  capital  leases   included  in   communications
               networks over the lives of the capital leases

                                      F-7

<PAGE>


          The estimated useful lives of owned assets are as follows:

              Building                                    40 years
              Communications networks                  20-25 years
              Electronics and related equipment        7 - 8 years
              Office equipment and other               3 - 7 years

          Technological  risks, rapid market changes,  new products and services
          and  the  changing  demands  of  our  customers  directly  affect  our
          communications  networks.  We may have to adjust the estimated  useful
          lives of these assets in response to these factors.

     (e)  Goodwill

          Goodwill has been amortized  utilizing the  straight-line  method over
          periods ranging from 15 to 25 years.

          In July  2001,  the FASB  issued  SFAS No.  142,  "Goodwill  and Other
          Intangible  Assets." SFAS 142 is effective January 1, 2002. We will be
          required to test for  impairment of goodwill as of January 1, 2002 and
          annually  thereafter.  Any transitional  impairment loss at January 1,
          2001  will be  recognized  as the  cumulative  effect  of a change  in
          accounting  principle  in our  statement  of  operations  in the first
          quarter  of 2002.  As of the  date of  adoption,  we have  unamortized
          goodwill in the amount of $39.8 million.  Amortization expense related
          to goodwill was $2.8 million,  $0.2 million,  and $0.2 million for the
          years ended December 31, 2001, 2000 and 1999, respectively.

     (f)  Other Assets

          Other  assets  consist   primarily  of  note  origination  fees.  Note
          origination  fees were  capitalized as a result of the issuance of our
          senior  unsecured  notes  in  April  1999,  and  are  being  amortized
          utilizing the effective interest method over a 5-year period.

     (g)  Income Taxes

          We are  included  in the  consolidated  federal  income  tax return of
          Citizens.  We utilize the asset and liability method of accounting for
          income taxes.  Under the asset and liability  method,  deferred income
          taxes are recorded for the tax effect of temporary differences between
          the financial  statements and the tax bases of assets and  liabilities
          using  tax  rates   expected  to  be  in  effect  when  the  temporary
          differences are expected to turn around.  Citizens' policy has been to
          record tax provisions,  assets and liabilities at the subsidiary level
          on a stand-alone basis. Citizens will reimburse us for tax benefits of
          net-operating losses generated after our Initial Public Offering (IPO)
          in 1997, but only to the extent that we could utilize such benefits on
          a stand-alone basis.

     (h)  Impairment

          We  review  for  the  impairment  of  long-lived  assets  and  certain
          identifiable  intangibles  in accordance  with  Statement of Financial
          Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
          Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed  of." We
          review for the  impairment of these assets and  intangibles to be held
          and used whenever events or changes in circumstances  indicate that we
          may not be able to recover the carrying amount of the asset.

          We assess the  recoverability  of an asset by determining  whether the
          amortization  of the  asset  balance  over its  remaining  life can be
          recovered as demonstrated  by projections of undiscounted  future cash
          flows of the related asset.

                                      F-8
<PAGE>

     (i)  Employee Stock Plans

          We participated in Citizens Management Equity Incentive Plan (Citizens
          MEIP) and Citizens  Equity  Incentive Plan (Citizens EIP) prior to our
          IPO.  The plans  allow  awards of  Citizens  Common  Stock to eligible
          officers,  management employees and non-management exempt employees of
          Citizens  and  its  subsidiaries.  The  awards  may be in the  form of
          incentive   stock  options,   non-qualified   stock   options,   stock
          appreciation rights, restricted stock or other stock-based awards.

          In  October  1997,  our Board of  Directors  adopted  our 1997  Equity
          Incentive Plan (EIP). The plan authorizes the grant of incentive stock
          options,  non-qualified  stock  options,  stock  appreciation  rights,
          restricted stock or other stock-based  awards.  Shareholders  approved
          the Employee Stock  Purchase Plan (ESPP) in May 1998. As a result,  we
          no longer participate in Citizens' Plans.

          We account for all stock option plans in accordance with SFAS No. 123,
          "Accounting  for  Stock-Based  Compensation."  This allows entities to
          continue to apply the provisions of Accounting  Principles Board (APB)
          Opinion  No.  25 and its  interpretations  and  provide  pro forma net
          income and pro forma earnings per share disclosures for employee stock
          option grants made in 1995 and  thereafter as if the  fair-value-based
          method, as defined in SFAS No. 123, had been applied.  We have elected
          to apply the  provisions  of APB  Opinion  No. 25 and  provide the pro
          forma disclosure required by SFAS No. 123 (See Note 11).

     (j)  Net Loss Per Share

          We follow the  provisions of SFAS No. 128,  "Earnings Per Share" which
          requires  presentation  of both basic and diluted  earnings  per share
          (EPS) on the face of the statements of operations.  Basic EPS excludes
          dilution and is computed  using the weighted  average number of common
          shares  outstanding  during the period.  The  diluted EPS  calculation
          assumes that all dilutive  stock  options or contracts to issue common
          stock were  exercised or converted  into common stock at the beginning
          of the period.  We exclude certain common stock  equivalents  from our
          diluted EPS  calculation  when their  effect would reduce our net loss
          per share.  For 2001 and 2000,  we had no  dilutive  shares.  Dilutive
          shares of 1,338,953  were  excluded from our EPS  calculation  for the
          year ended December 31, 1999.

     (k)  New Accounting Pronouncements

          In June 1998, the Financial  Accounting  Standards Board (FASB) issued
          SFAS No.  133,  "Accounting  for  Derivative  Instruments  and Hedging
          Activities."  This  statement  establishes  accounting  and  reporting
          standards for derivative  instruments  and hedging  activities and, as
          amended,  is  effective  for  all  fiscal  quarters  of  fiscal  years
          beginning  after  June 15,  2000.  SFAS  133  requires  balance  sheet
          recognition of  derivatives as assets or liabilities  measured at fair
          value.  Accounting for gains and losses  resulting from changes in the
          values of  derivatives  is dependent on the use of the  derivative and
          whether it qualifies  for hedge  accounting.  The adoption of SFAS 133
          could increase the volatility of operating  results in the future.  In
          general,  the  amount  of  volatility  will  vary  with  the  level of
          derivative  activities  during  any  period.  We  adopted  SFAS 133 on
          January 2, 2001.  Based on our analysis of the statement,  we have not
          identified  any derivative  instruments  subject to its provisions and
          therefore,  SFAS  133  did  not  have  any  impact  on  our  financial
          statements.

                                      F-9
<PAGE>

(3) Reciprocal Compensation
    -----------------------

     We have various interconnection  agreements with Qwest (formerly U S WEST),
     Verizon  (formerly GTE) and SBC (PacBell) and Sprint,  the Incumbent  Local
     Exchange  Carriers  (ILECs)  in the  states  in  which  we  operate.  These
     agreements  govern  reciprocal  compensation  relating to the transport and
     termination of traffic between the ILECs' networks and our network. The FCC
     adopted  new  rules  concerning  intercarrier  compensation  for  ISP-bound
     traffic  effective  June  14,  2001.  The FCC set  transitional  rates  for
     reciprocal  compensation  that  exceeds a 3:1 ratio of inbound to  outbound
     traffic. The rate for above ratio traffic is capped at .15 cents per minute
     for the first six months after the effective date of the commission  order,
     .10 cents per minute for the next 18 months and .07 cents per minute  after
     that,  through  June  2004.  Below  ratio  traffic  remains  at  the  state
     established  rate level which is generally  higher.  Implementation  of the
     FCC's  transitional  rates  for  ISP-bound  traffic  is  taking  place  via
     amendments   to  existing   interconnection   agreements.   The  effect  of
     implementing  the FCC  transitional  rates  resulted in a reduction  of the
     composite rate of .088 cents per minute, or 43%, from .203 cents per minute
     for the six months ended June 30, 2001 to .115 cents per minute.

     We recognized  reciprocal  compensation  revenues of $21.3  million,  $38.8
     million and $34.7 million  during 2001,  2000 and 1999,  respectively.  Net
     trade accounts receivable relating to reciprocal  compensation totaled $2.2
     million and $7.7 million at December 31, 2001 and 2000,  respectively.  The
     Verizon  interconnection  agreements  expired  in May  and  June  2001  for
     Washington  and  Oregon,   respectively.   We  are  currently   negotiating
     agreements   with   PacBell  and  Verizon;   the  existing   terms  of  the
     interconnection  agreements remain in place during the  negotiations.  As a
     result of recent FCC  mandates  we do not  anticipate  that  renewal of the
     interconnection  agreements  will be at terms as  favorable to us as in the
     past.

     Currently  pending  before the 9th  Circuit  Court of Appeals is  Verizon's
     appeal of the US  District  Court  decision  upholding  the  Oregon  Public
     Utility   Commission   decision   requiring   Verizon  to  pay   reciprocal
     compensation  for ISP bound traffic  terminating to ELI and that reciprocal
     compensation  payments  to ELI should be made at the tandem rate as opposed
     to the end office rate.  The tandem rate is higher than the end office rate
     because the traffic is serviced by a tandem  switch.  A tandem switch is an
     intermediate  switch; an end office switch is one which carries the traffic
     to the end  user.  Verizon  has paid  ELI's  invoices  per the terms of the
     approved interconnection  agreement since the agreement's effective date in
     June 1999.

(4)  Severance Expense and Exit Costs
     --------------------------------

     In the third  quarter 2001 and  throughout  the year in 2000,  we announced
     headcount  reductions  that  led to  approximately  $3.2  million  and $0.2
     million, respectively, in severance expense. These decisions were made as a
     part of our on-going effect to reduce cost throughout the business.

     In the third quarter 1999, we announced two strategic decisions that led to
     $1.5  million in exit  costs.  Of this  amount  $794,000  was  recorded  as
     employee severance,  and the remainder  represented facility shutdown costs
     that we  recorded in selling,  general  and  administrative  expense in our
     Statements of  Operations.  On August 24, 1999,  we announced  that we were
     eliminating  our  prepaid  calling  card  and  videoconferencing  products,
     effective  November 1, 1999.  This  initiative was taken as a result of our
     decision to focus on our core business strategy.  Prepaid calling cards are
     a  high-volume,  low-margin  product that we determined did not support our
     strategy of  accelerating  our  profitability.  On  September  1, 1999,  we
     announced that we were  consolidating  our national retail sales efforts in
     Dallas and closing six retail sales offices in the eastern United States by
     October 8, 1999.  The  retail  sales  offices  closed  included  Cleveland,
     Chicago,  Atlanta,  Washington  D.C.,  New York and  Philadelphia.  We have
     maintained all of our data points-of-presence and wholesale sales offices.

                                      F-10


<PAGE>

     As a result of both of these  decisions,  we  eliminated 63 sales and sales
     support positions,  and incurred charges relating to employee severance and
     facility shutdown costs. As of December 31, 2000, all costs associated with
     this decision were paid and no accrual remained.
<TABLE>
<CAPTION>

                                               Original          Amount
                                               Accrued            Paid         Additional        Remaining
($ In thousands)                                Amount          to Date          Expense          Accrual
                                            ---------------  ---------------  --------------   --------------

1999 Restructuring
For the year ended December 31, 1999
<S>                                            <C>                 <C>              <C>          <C>
     Severance related costs                   $   681             733              52           $    -
     Network and facilities costs              $   799             665              -            $   134
For the year ended December 31, 2000
     Severance related costs                   $    -              133             133           $    -
     Network and facilities costs              $   134             360             226           $    -

2001 Restructuring                             $ 4,179              -               -            $ 4,179

</TABLE>

     In the first half of 2002,  we intend to  redeploy  the  internet  routers,
     frame relay switches and ATM switches from the Atlanta, Cleveland,  Denver,
     Philadelphia  and New York markets to other  locations  in our network.  We
     intend to cease leasing the collocation facilities and off-net circuits for
     the  backbone  and local loops  supporting  the  service  delivery in these
     markets.  It is  anticipated  that  this  will  lead  to  $4.2  million  of
     termination  fees which have been  accrued for but not paid and included in
     our Network Access expense for the year ended December 31, 2001.

(5)  Property, Plant and Equipment
     -----------------------------

     The  components  of  property,  plant and  equipment  at December 31 are as
     follows:

($ In thousands)                                2001              2000
                                          -----------------  ----------------
Communications networks                         $  632,222         $ 584,219
Electronics and related equipment                  262,581           220,621
Facility and leasehold improvements                 57,974            50,705
Office equipment and furniture                      74,967            66,895
Construction work in progress                        9,093            52,228
Materials and supplies                                 512             3,659
                                          -----------------  ----------------
Property, plant and equipment                    1,037,349           978,327
Accumulated depreciation                          (204,645)         (131,611)
                                          -----------------  ----------------
     Property, plant and equipment, net         $  832,704         $ 846,716
                                          =================  ================


     Depreciation expense was $75,698,000,  $60,867,000, and $35,776,000 for the
     years ended December 31, 2001, 2000 and 1999, respectively.

     Communications  networks  include  assets  acquired under capital leases at
     December 31, 2001 and 2000  amounting  to  $235,570,000  and  $201,585,000,
     respectively.

                                      F-11
<PAGE>

     Materials  and supplies  consists  primarily  of new and reusable  parts to
     maintain and build fiber-optic networks.

(6)  Accounts Payable and Accrued Liabilities
     ----------------------------------------

     The components of accounts  payable and accrued  liabilities at December 31
     are as follows:

($ In thousands)                                      2001             2000
                                               ---------------   ---------------
Accounts payable - trade                             $ 10,243          $ 10,987
Accrued network service                                 4,798            11,820
Accrued termination fees                                4,179                 -
Accrued construction work in progress                     171            25,171
Accrued compensation                                    2,237             5,508
Cash overdraft                                          1,887             6,965
Other accrued liabilities                                 638               400
                                              ----------------  ----------------
  Accounts payable and accrued liabilities           $ 24,153          $ 60,851
                                              ================  ================

(7)  Long-term Debt
     --------------

     The components of long-term debt on December 31 are as follows:

($ In thousands)                          2001              2000
                                   -----------------  ----------------
Revolving bank credit facility            $ 400,000         $ 400,000
Senior unsecured notes                      325,000           325,000
Citizens Credit Facility                    194,500            38,000
                                   -----------------  ----------------
     Total Debt                             919,500           763,000
Less current portion                       (400,000)                -
                                   -----------------  ----------------
     Long-term debt                       $ 519,500         $ 763,000
                                   =================  ================

     We entered into a $400 million, 5-year revolving bank credit facility (Bank
     Credit Facility),  guaranteed by Citizens in November 1997 which expires in
     November  2002  and has  annual  associated  facility  fees of  0.08%.  The
     weighted  average interest rate at December 31, 2001 and 2000 was 2.85% and
     6.94%, respectively.  In addition, we have agreed to pay Citizens an annual
     guarantee  fee of 3.25% on the  outstanding  balance  under the Bank Credit
     Facility (See Note 10). Interest rates are based on the Euro dollar rate at
     the  time the  funds  are  drawn  and  reset  periodically  thereafter.  No
     principal  payment  is due until  the  expiration  date of the Bank  Credit
     Facility.

     We issued $325 million of five-year  senior  unsecured notes in April 1999.
     The notes have an interest  rate of 6.05% and will mature on May 15,  2004.
     Citizens  has  guaranteed  the  notes  for an  annual  fee of  4.0%  of the
     outstanding balance for a total interest rate of 10.05%.

     We have entered into a revolving  credit  facility  with  Citizens for $450
     million  with an interest  rate of 15% and a final  maturity of October 30,
     2005  (Citizens  Credit  Facility).  Funds  of  $350  million  for  general
     corporate  purposes are available to be drawn until  December 31, 2002. The
     remaining  balance  may be drawn to pay  interest  due under  the  Citizens
     Credit Facility until maturity.  As of December 31, 2001,  there was $194.5
     million  outstanding  under the Citizens  Credit  Facility,  of which $14.6
     million was drawn to pay interest  expense and $179.9 million was drawn for
     general  corporate  purposes.  Under this facility,  $255.5 million remains
     available to be drawn,  of which $85.4 million is available to pay interest
     expense and $170.1 million is available for general corporate purposes.

                                      F-12
<PAGE>

     Without the  financial  support of Citizens,  ELI could not fund its future
     capital requirements or service its debt and most likely would not remain a
     going concern.

(8)  Income Taxes
     ------------

     The components of deferred income taxes at December 31 are as follows:


($ In thousands)                                      2001             2000
                                                 --------------   --------------
Benefit of operating loss carryforwards            $ (239,791)      $ (160,821)
Less valuation allowance                              170,302          110,364
                                                 --------------   --------------
   Net deferred tax asset                             (69,489)         (50,457)
Deferred income tax liability, primarily
 relating to property, plant and equipment             73,701           53,515
                                                 --------------   --------------
    Balance end of period                          $    4,212       $    3,058
                                                 ==============   ==============

     Citizens includes us in their consolidated  federal income tax return which
     uses a  calendar  year  reporting  period.  The  income  taxes  payable  by
     Citizens'  consolidated  group have been  reduced as a  consequence  of our
     losses for tax purposes in past years. If we had been a stand-alone company
     for tax purposes we would be able to carry forward our tax losses to future
     periods  to offset  taxable  income.  In  accordance  with our tax  sharing
     agreement,  Citizens  has agreed to  reimburse us for the taxes we would be
     required to pay in the future,  if we have  taxable  income,  to the extent
     that these loss carryforwards  would have otherwise remained available on a
     stand-alone basis.

     The  following is a  reconciliation  of the  provision  for income taxes at
     federal statutory rates to the effective rates:

<TABLE>
<CAPTION>
                                                 2001             2000            1999
                                             --------------   --------------  --------------
<S>                                                  <C>              <C>             <C>
Tax benefit at federal statutory rate                35.0%            35.0%           35.0%
Non-deductible goodwill                              (0.5%)               -               -
Valuation allowance                                 (35.2%)          (35.3%)         (35.7%)
                                             --------------   --------------  --------------
    Effective tax benefit (provision) rate           (0.7%)           (0.3%)          (0.7%)
                                             ==============   ==============  ==============
</TABLE>

     The  provision for income taxes  consisted of deferred  federal tax expense
     (benefit) of approximately  $1,154,000,  $400,000, and $898,000 and current
     tax benefits of $0 for the years ended December 31, 2001, 2000 and 1999.

     In assessing the realizability of deferred tax assets, management considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized.  The ultimate  realization of deferred tax
     assets is dependent upon the generation of future taxable income during the
     periods in which those temporary differences become deductible.  Management
     considers the  scheduled  reversal of deferred tax  liabilities,  projected
     future  taxable  income,  and  tax  planning   strategies  in  making  this
     assessment.

(9)  Capital Stock
     -------------

     Capital Stock authorized  consists of 110,000,000 Class A Common Stock $.01
     par value per  share,  60,000,000  Class B Common  Stock $.01 par value per
     share, and 10,000,000 shares of preferred stock $.01 par value per share.

                                      F-13
<PAGE>


     We have granted  775,000  restricted  stock awards to key  employees in the
     form of Class A Common Stock since our IPO in 1997.  The  restricted  stock
     awards may not be sold,  assigned,  pledged or otherwise  transferred until
     the restrictions lapse. For 650,000 shares, the restrictions lapse over one
     through  three-year periods from the date of grant. For 125,000 shares, the
     restrictions  lapsed  in  January  2001.  A total of  145,332  shares  were
     returned and canceled due to  terminations  of employment.  At December 31,
     2001,  58,333 shares of this stock were still  restricted  and  outstanding
     while 571,335 shares are no longer restricted.

     On August 27,  2001  Citizens  converted  25,283,688  shares of its Class B
     Common Stock into the same number of shares of Class A Common Stock.

     At December 31, 2001, there were 35,423,440 shares of Class A Common Stock,
     15,881,312  shares  of  Class  B  Common  Stock,  and no  preferred  shares
     outstanding.  Citizens owns all of the Class B Common Stock and  27,571,332
     shares of the Class A Common Stock,  in total  representing an 85% economic
     interest and a 96% voting  interest in us. The table below  summarizes  the
     activity in Class A Common Stock.

<TABLE>
<CAPTION>
                                                          Class A Common Stock
                                              -----------------------------------------------
                                               Restricted      Unrestricted        Total
                                              --------------   --------------  --------------
<S>                                                <C>            <C>             <C>
Balance at January 1, 1999                          520,000        8,121,816       8,641,816
    Common Stock issued under stock plans                 -          324,813         324,813
    Common Stock issued to directors                      -            3,991           3,991
    Restricted Common Stock issued                   75,000                -          75,000
    Restricted Common Stock canceled                (13,999)               -         (13,999)
    Common Stock purchased                                -          (65,345)        (65,345)
    Lapse of Restrictions                          (258,671)         258,671               -
                                              --------------   --------------  --------------
Balance at December 31, 1999                        322,330        8,643,946       8,966,276
    Common Stock issued under stock plans                 -          712,997         712,997
    Common Stock issued to directors                      -            2,876           2,876
    Restricted Common Stock issued                  115,000                -         115,000
    Restricted Common Stock canceled                (89,666)               -         (89,666)
    Common Stock purchased                                -          (49,046)        (49,046)
    Lapse of Restrictions                          (137,664)         137,664               -
                                              --------------   --------------  --------------
Balance at December 31, 2000                        210,000        9,448,437       9,658,437
    Common Stock issued under stock plans                            495,375         495,375
    Conversion of Common Stock                                    25,283,688      25,283,688
    Common Stock issued to directors                                  10,253          10,253
    Restricted Common Stock issued                   50,000                           50,000
    Restricted Common Stock canceled                (26,667)                         (26,667)
    Common Stock purchased                                -          (47,646)        (47,646)
    Lapse of Restrictions                          (175,000)         175,000               -
                                              --------------   --------------  --------------
Balance at December 31, 2001                         58,333       35,365,107      35,423,440
                                              ==============   ==============  ==============
</TABLE>

     Holders of Common Stock vote on certain issues. The holder of each share of
     Class A Common Stock has one vote per share and the holder of each share of
     Class B  Common  Stock  has 10  votes  per  share.  All  other  rights  and
     privileges  of Class A and  Class B Common  Stock  are  identical.  Class B
     Common  Stock is  convertible  into Class A Common  Stock on a  one-for-one
     basis. Class A Common Stock does not have exchange rights.

                                      F-14
<PAGE>

     In order to  continue  to  include  us as part of  their  consolidated  tax
     return,  Citizens must maintain an ownership and voting  interest in excess
     of 80%. During 2000, as a result of the exercise of employee stock options,
     Citizens'  ownership interest had dropped. In order to bring their economic
     ownership  interest back to 85%, during 2000,  Citizens acquired  2,288,000
     shares of our Common Stock in open market  transactions  for  approximately
     $38,748,000.  Such amount has been recorded in our accounts as Goodwill and
     Additional paid-in-capital and is being amortized over a 15-year period.

(10) Related Party Transactions
     --------------------------

     Transactions  with  Citizens
     On December 1, 1997, we entered into an Administrative  Services  Agreement
     (Agreement)  under which Citizens  provides us with certain  administrative
     services  including,  but not limited to,  financial  management  services,
     information  services,  legal and  contract  services,  planning  and human
     resources services. Under the terms of the Agreement, Citizens bills us for
     direct costs and an allocation of indirect  costs,  plus an  administrative
     charge. The current practice of allocating  indirect costs is based on four
     factors:  our plant  assets,  operating  expenses,  number of customers and
     payroll expenses.  We believe that this allocation method and the resultant
     amounts are reasonable as  contemplated by the Agreement.  In addition,  we
     reimburse third party costs incurred by Citizens on our behalf.  We believe
     that the amounts charged by Citizens do not exceed comparable  amounts that
     would be charged by an unaffiliated  third party. Also, we believe that the
     accompanying  financial  statements  include  all of  our  costs  of  doing
     business.

     In 1999, we entered an agreement to lease  certain  capacity on our network
     to Citizens over 20 years at prevailing market prices.  Services under this
     agreement  began in June 2000.  Citizens  has paid us $6.5 million for this
     agreement and we recognize revenue following the straight-line  method over
     the term of the agreement. In 1996, we agreed to lease fiber-optic cable to
     Citizens for 10 years, at a monthly rental rate of $30,000.

     We have  transactions  in the  normal  course of  business  with  Citizens'
     communications sector (Citizens Communications). Citizens Communications is
     an ILEC in certain markets in which we provide  services.  Prior to the IPO
     in November 1997,  Citizens and the Company combined their purchasing power
     with several long distance  carriers in order to receive a lower unit cost.
     We  purchase  access  from  Citizens  Communications  in order  to  provide
     services in those markets.  Citizens  charges us the  full-tariff  rate for
     those  services.  We  recorded  approximately  $1,193,000,  $1,750,000  and
     $1,891,000 as an expense in 2001, 2000 and 1999, respectively, representing
     usage-based charges for the services provided by Citizens Communications.

     Citizens Communications  purchases certain services and products from us at
     prevailing   market  rates.   We   recognized   related  party  revenue  of
     approximately $2,924,000, $2,995,000 and $2,517,000 in 2001, 2000 and 1999,
     respectively.  Outstanding  trade accounts  receivables  from Citizens were
     $385,000 and $751,000 at December 31, 2001 and 2000, respectively.

     We have entered into a revolving  credit  facility  with  Citizens for $450
     million  with an interest  rate of 15% and a final  maturity of October 30,
     2005  (Citizens  Credit  Facility).  Funds  of  $350  million  for  general
     corporate  purposes are available to be drawn until  December 31, 2002. The
     remaining  available balance may be drawn to pay interest expense due under
     the Citizens Credit Facility until maturity (See Note 7).

     During 2000, Citizens acquired shares of our Common Stock in open market or
     negotiated transactions (See Note 9).

                                      F-15
<PAGE>

     A summary of the  activity  in the amount due to Citizens at December 31 is
     as follows:
<TABLE>
<CAPTION>

($ In thousands)                            2001             2000            1999
                                        --------------   --------------  --------------
<S>                                           <C>             <C>             <C>
Balance beginning of period                   $ 7,684         $ 14,650        $  5,254
Guarantee fees                                 29,575           27,790          19,792
Interest expense on Credit Facility            16,442              663               -
Deferred income taxes                               -                -             (61)
Administrative services:
    Services provided by Citizens               7,985            7,413           6,689
    ELI expenses paid by Citizens               6,478            6,759          18,976
Payments to Citizens                          (58,578)         (49,591)        (36,000)
                                        --------------   --------------  --------------
Balance end of period                         $ 9,586         $  7,684        $ 14,650
                                        ==============   ==============  ==============
</TABLE>

     The above excludes $194.5 million borrowed from Citizens (See Note 7).

     See  Note 8 for  information  regarding  our  tax  sharing  agreement  with
     Citizens and Note 11 for information  regarding  participation in Citizens'
     stock plans.

(11) Stock Plans
     -----------

     At  December  31,  2001  we had two  stock-based  compensation  plans,  the
     Employee  Stock  Purchase Plan (ESPP) and the Equity  Incentive Plan (EIP).
     Prior to our IPO and approval of our own plans,  employees  participated in
     three Citizens stock-based  compensation plans,  Citizens Management Equity
     Incentive Plan (Citizens  MEIP),  Citizens Equity  Incentive Plan (Citizens
     EIP) and Citizens Employee Stock Purchase Plan (Citizens ESPP). We recorded
     $387,000  as  compensation  expense in our 1999  financial  statements  for
     options  issued  under the stock plans.  We have not recorded  compensation
     expense in our 2001 or 2000  financial  statements for options issued under
     the stock plans since the exercise price of the options  granted equaled or
     exceeded  the  market  price  of the  stock  on the  date of  grant  and no
     transactions  or  modifications  which would require a compensation  charge
     have occurred  subsequent to the grant. The table below shows our pro forma
     loss and loss per share had we determined compensation expense based on the
     fair value of the grant at the grant date for these stock plans.
<TABLE>
<CAPTION>

     ($ In thousands, except per share)                2001             2000            1999
                                                  ---------------  ---------------  --------------
<S>                                                 <C>              <C>             <C>
     Net loss                As reported:           $ (171,692)      $ (136,462)     $ (133,547)
                             Pro forma:               (188,907)        (151,034)       (142,421)

     Net loss per share      As reported:
                                 Basic              $    (3.37)      $    (2.71)     $    (2.69)
                                 Diluted                 (3.37)           (2.71)          (2.69)

                             Pro forma:
                                 Basic              $    (3.71)      $    (2.99)     $    (2.85)
                                 Diluted                 (3.71)           (2.99)          (2.85)

</TABLE>

     Employee Stock Purchase Plan
     ----------------------------

     The shareholders approved the ESPP on May 21, 1998 with an amendment solely
     to increase the number of shares under the plan on May 20, 1999.

                                      F-16
<PAGE>

     Eligible  employees  can subscribe to purchase  shares,  subject to certain
     limitations,  of Class A Common Stock at 85% of the average of the high and
     low  prices  on the  first  day or the  last  day of the  purchase  period,
     whichever  is lower.  In June 2001,  the plan was amended to state that the
     purchase price is based on the fair market value at the end of the purchase
     period and stock purchased must be held for a minimum of three years before
     it can be sold. An employee may cancel all or part of their subscription to
     purchase at any time prior to the end of the purchase  period and receive a
     full cash credit.

     The ESPP reserves  1,950,000 shares of Class A Common Stock for issuance to
     employees.  The  shareholders  approved  200,000 shares May 21, 1998 and an
     additional  1,750,000 shares May 20, 1999. These shares may be adjusted for
     any future stock  dividends or stock splits.  The ESPP will  terminate when
     all  shares  reserved  have  been  subscribed  for  and  purchased,  unless
     terminated earlier or extended by the Board of Directors.  The Compensation
     Committee of the Board of Directors  administers  the ESPP.  As of December
     31, 2001, 1,081,187 shares of Class A Common Stock had been purchased under
     the plan.

     As of December 1, 2001, the ESPP was temporarily suspended for the December
     1, 2001 through May 31, 2002 purchase  period.  Our employees  were instead
     allowed  to  participate  in the  Citizens  Employee  Stock  Purchase  Plan
     (Citizens  ESPP)  for that  period.  Citizens  ESPP has the same  terms and
     conditions as our ESPP.  As of December 31, 2001, 42 of our employees  were
     enrolled and participating in the Citizens' ESPP.

     For purposes of the pro forma calculation,  compensation cost is recognized
     for the fair value of the employees'  purchase rights,  which was estimated
     using the Black-Scholes option-pricing model with the following assumptions
     for subscription periods beginning in 2001, 2000 and 1999:

                                       2001            2000            1999
                                  ---------------  --------------  -------------
        Dividend yield                  -                -             -
        Expected volatility             98%              87%           66%
        Risk-free interest rate       2.70%            6.29%         5.25%
        Expected life                6 months         6 months      6 months

     The weighted  average fair value of those purchase  rights granted in 2001,
     2000 and 1999 was $0.42, $4.59 and $4.97 per right, respectively.

     Equity Incentive Plan
     ---------------------

     The Board of Directors  approved our EIP in October 1997. The  shareholders
     approved  the EIP May 21, 1998 with an  amendment  solely to  increase  the
     number of shares that may be issued on May 20,  1999.  As of  December  31,
     2001,  there were 6,670,600 shares reserved for issuance under the terms of
     this plan.

     Under the EIP,  awards of Class A Common  Stock may be granted to  eligible
     directors,  officers,  management employees,  non-management  employees and
     consultants  in the form of incentive  stock options,  non-qualified  stock
     options,  Stock  Appreciation  Rights  (SARs),  restricted  stock  or other
     stock-based  awards.  The Compensation  Committee of the Board of Directors
     administers the EIP.

     The exercise  price for awards shall not be less than 85% or more than 110%
     of the average of the high and low stock  prices on the date of grant.  The
     exercise period is generally 10 years from the date of grant.

                                      F-17
<PAGE>

     The summary below shows share activity subject to option under the EIP:

                                                                   Weighted
                                                   Shares          Average
                                                 Subject to      Option Price
                                                   Option         Per Share
                                              --------------    --------------
Balance at January 1, 1999                           2,330,784      $ 12.14
     Options granted                                 1,989,120         9.51
     Options exercised                                (115,961)        9.73
     Options canceled, forfeited or lapsed            (680,372)       10.12
                                                ---------------
Balance at December 31, 1999                         3,523,571        10.96
     Options granted                                 2,720,092        19.08
     Options exercised                                (455,848)       11.00
     Options canceled, forfeited or lapsed          (1,016,760)       13.63
                                                ---------------
Balance at December 31, 2000                         4,771,055        15.05
     Options granted                                    86,250         4.36
     Options canceled, forfeited or lapsed          (1,086,865)       15.38
                                                ---------------
Balance at December 31, 2001                         3,770,440        14.73
                                                ===============

     The table below  summarizes  information as of December 31, 2001 for shares
     subject to options under the EIP:
<TABLE>
<CAPTION>

                              Options Outstanding                 Options Exercisable
                  -------------------------------------------- ----------------------------
                                    Weighted      Weighted                       Weighted
                                     Average       Average                        Average
      Number         Range of       Exercise    Remaining Life      Number       Exercise
    Outstanding    Exercise Price     Price        in Years       Exercisable      Price
    -----------    --------------   --------    ---------------   -----------    --------
<S>     <C>        <C>      <C>       <C>            <C>            <C>           <C>
        93,133     $ 2.86 - 7.44      $ 3.66         8.84           88,135        $ 3.55
     1,313,269       8.19 - 8.88        8.81         6.76        1,103,534          8.80
       622,402      13.13 - 18.34      15.80         6.29          599,971         15.78
     1,741,636      19.25 - 22.81      19.40         8.53          640,532         19.40
   -------------                                               ------------
     3,770,440       2.86 - 22.81      14.73         7.55        2,432,172         13.13
   =============                                               ============
</TABLE>


     For purposes of the pro forma calculation,  compensation cost is recognized
     for  the  fair  value  of  each  option  on the  date of  grant  using  the
     Black-Scholes  option-pricing  model with the  following  weighted  average
     assumptions:

                                     2001             2000              1999
                                 -------------    -------------     ------------
        Dividend yield                -                -                 -
        Expected volatility           98%              87%               66%
        Risk-free interest rate     5.82%            7.23%             5.34%
        Expected life              6 years          6 years           6 years


     The weighted  average fair value of those options granted in 2001, 2000 and
     1999 was $2.48, $14.75 and $6.16, respectively.

     We have granted  775,000  restricted  stock awards to key  employees in the
     form of Class A Common Stock since our IPO in 1997.  The  restricted  stock
     awards may not be sold,  assigned,  pledged or otherwise  transferred until
     the  restrictions  lapse.  A total of  145,332  shares  were  returned  and
     canceled due to  terminations of employment.  At December 31, 2001,  58,333
     shares of this stock were still restricted and outstanding.  As of December
     31,  2001,  571,335  of these  shares  are  outstanding  but are no  longer
     restricted.  Compensation  expense was  recorded in  connection  with these
     grants in the amounts of $281,000,  $1,422,000 and $2,559,000 for the years
     ended 2001, 2000 and 1999, respectively.

                                      F-18


<PAGE>

     Citizens Plans
     --------------

     The following  information  reflects our  employees'  participation  in the
     Citizens MEIP and Citizens EIP.

     Under the Citizens MEIP and Citizens EIP, awards of Citizens Class A Common
     Stock  may be  granted  to  eligible  officers,  management  employees  and
     non-management  exempt  employees of Citizens and its  subsidiaries  in the
     form  of  incentive  stock  options,  non-qualified  stock  options,  SARs,
     restricted stock or other stock-based awards. The Compensation Committee of
     Citizens Board of Directors administers the Citizens MEIP and Citizens EIP.

     The  exercise  price of the  stock  options  and SARs  shall be equal to or
     greater than the fair market value of the underlying  Citizens common stock
     on the date of grant.  Stock options are generally not  exercisable  on the
     date of grant but vest over a period of time.

     Under the terms of the Citizens  MEIP and Citizens  EIP,  subsequent  stock
     dividends and stock splits of Citizens  have the effect of  increasing  the
     option  shares  outstanding  which  correspondingly  decreases  the average
     exercise price of outstanding options.

     The summary below shows share activity for our employees  subject to option
     under the Citizens MEIP and Citizens EIP.
<TABLE>
<CAPTION>

                                                    Citizens MEIP                    Citizens EIP
                                            -------------------------------  -------------------------------
                                                                Weighted                       Weighted
                                                Shares           Average         Shares         Average
                                              Subject to      Option Price     Subject to     Option Price
                                                Option          Per Share        Option         Per Share
                                            -------------    --------------    ----------      -----------

<S>                                               <C>            <C>             <C>              <C>
Balance at January 1, 1999                        176,429        $ 9.75          301,681          $ 8.53
     Options exercised                             (6,689)         7.75          (18,654)           8.53
     Options canceled, forfeited or lapsed        (44,550)        11.28           (7,965)           8.53
                                            --------------                   ---------------
Balance at December 31, 1999                      125,190          9.31          275,062            8.53
     Options exercised                            (78,708)         9.47         (118,285)           8.53
     Options canceled, forfeited or lapsed         (2,296)         7.75          (16,552)           8.53
                                            --------------                   ---------------
Balance at December 31, 2000                       44,186          8.92          140,225            8.53
     Options granted                                    -             -          243,500           13.72
     Options exercised                            (28,632)         9.55          (76,421)           8.53
     Options canceled, forfeited or lapsed              -             -          (24,097)          11.97
     Options transferred in                        22,450          7.91          144,597           12.19
                                            --------------                   ---------------
Balance at December 31, 2001                       38,004          8.08          427,804           12.53
                                            ==============                   ===============
</TABLE>

     The table below  summarizes  information as of December 31, 2001 for shares
     subject to options for our  employees  under the Citizens MEIP and Citizens
     EIP:
<TABLE>
<CAPTION>
                                            Options Outstanding                       Options Exercisable
                                 -----------------------------------------------   --------------------------

                                                     Weighted       Weighted                      Weighted
                                                     Average        Average                       Average
                     Number          Range of        Exercise    Remaining Life       Number      Exercise
                   Outstanding    Exercise Price      Price         in Years        Exercisable    Price
                   -----------    --------------    ----------   --------------     -----------   --------
<S>                  <C>          <C>     <C>           <C>           <C>            <C>           <C>
Citizens MEIP        38,004       $7.50 - 10.54         $ 8.08        5.57           33,504        $ 8.15
Citizens EIP        427,804       $7.75 - 13.75          12.53        8.60          124,639         10.31

</TABLE>
                                      F-19
<PAGE>

(12) Commitments and Contingency
     ---------------------------

     In 1995, we entered into a $110 million  construction  agency agreement and
     an operating lease agreement in connection with the construction of certain
     network  facilities.  We  served  as agent  for the  construction  of these
     projects and upon  completion of each project  leased the  facilities for a
     three year term, with one year renewals  available  through April 30, 2002.
     At December 31, 2001 and 2000, we were leasing assets with an original cost
     of  approximately  $108,541,000  under this agreement.  In January 2002, we
     exercised  our option to purchase  the  facilities  at the end of the lease
     terms for the amount of the lessor's average  investment in the facilities.
     Payments  under the lease depend on current  interest  rates,  and assuming
     continuation of current interest rates, payments would approximate $872,000
     from  January  1,  2002  through  April  30,  2002 and a final  payment  of
     approximately  $110  million in April 2002.  Citizens  has  guaranteed  our
     obligations  under  this  operating  lease  and we  have  agreed  to pay to
     Citizens a guarantee fee of 3.25% per annum of the $110 million.

     We have entered into various  capital and operating  leases for fiber-optic
     cable to interconnect our local networks with long-haul fiber-optic routes.
     The terms of the various  agreements  covering the routes  described  above
     range from 20 to 25 years,  with  varying  optional  renewal  periods.  For
     certain contracts,  rental payments are based on a percentage of our leased
     traffic,  and  are  exclusive,  subject  to  certain  minimums.  For  other
     contracts,  certain minimum  payments are required,  which are reflected in
     the commitment table below.

     We have also entered into certain  operating and capital leases in order to
     develop our local networks, including an operating lease to develop a local
     network in Phoenix  and a capital  lease in San  Francisco.  The  operating
     lease in Phoenix  provides for rental payments based on a percentage of the
     network's  operating  income for a period of 15 years. The capital lease in
     San  Francisco  is a  30-year  indefeasible  and  exclusive  right  to  use
     agreement for optical fibers in the San Francisco Bay Area. We are required
     to make quarterly minimum payments under the agreement, which are reflected
     in the commitment table below.

     Future minimum rental commitments for all long-term  non-cancelable  leases
     as of December 31, 2001 are:

($ In thousands)                                        Lease Type
                                              --------------------------------
Year                                             Capital         Operating
                                              ---------------  ---------------
2002                                               $  22,893      $     8,626
2003                                                  17,831            6,258
2004                                                  17,836            4,308
2005                                                  17,841            2,469
2006                                                  17,846            1,883
Thereafter                                           236,837            7,438
                                              ---------------  ---------------
    Total                                            331,084      $    30,982
                                                               ===============
Less amounts representing interest                  (193,702)
                                              ---------------
Present value of capital lease obligations           137,382
Less current portion                                  (7,404)
                                              ---------------
                                                   $ 129,978
                                              ===============

     Total operating lease rental expense  included in the Company's  results of
     operations  for the  years  ended  December  31,  2001,  2000  and 1999 was
     $20,306,000, $19,178,000 and $17,057,000, respectively.

                                      F-20
<PAGE>

     We are also a party to  contracts  with  several  unrelated  long  distance
     carriers.  The contracts  provide for fees based on leased traffic.  Annual
     minimum commitments are as follows:

        ($ In thousands)                 Minimum
        Year                            Commitment
        ----                          ---------------
        2002                              $ 2,500
        2003                                2,400
                                      ---------------
          Total                           $ 4,900
                                      ===============

     Our capital  additions  for 2002 are estimated to be  $71,600,000.  Certain
     commitments have been entered into in connection with this budget.

     We are involved in various claims and legal actions arising in the ordinary
     course of business. In the opinion of management,  the ultimate disposition
     of these matters will not have a material  adverse effect on our results of
     operations, financial position or liquidity.

(13) Segment Disclosures
     -------------------

     We  operate  in a single  industry  segment,  communications  services.  We
     provide services  utilizing our centrally  planned,  monitored and operated
     telecommunications   network.   Operations   are  managed   and   financial
     performance  is  evaluated  based on the  delivery of multiple  services to
     customers over our single fiber-optic  network. As a result, there are many
     shared  expenses  generated by the various  revenue  streams and geographic
     locations. Management believes that any allocation of the expenses incurred
     on a single  network to  multiple  revenue  streams  would be  impractical,
     arbitrary and inconsistent with the way the business is currently evaluated
     by management.  As a result, we do not presently have systems or procedures
     in place to derive  all the  operating  costs and  expenses  relating  to a
     particular product group or service area.

     Products and Services

     We group our products and services into the following categories:

     *    Network Services - includes  point-to-point  dedicated service between
          two or more locations for our customers'  exclusive use. We offer this
          product in both local and long-haul applications.

     *    Local  Telephone  Services  -  includes  local  dial tone and  related
          services  that provide  incoming  and  outgoing  calls over the public
          switched  network.  This  category  includes  reciprocal  compensation
          revenues.

     *    Long Distance  Services - includes  retail and wholesale long distance
          phone services.

     *    Data  Services - includes a wide range of  products  to deliver  large
          quantities of data from one location to another  through  Asynchronous
          Transfer  Mode  (ATM),   Frame  Relay  and  Internet  Protocol  packet
          technologies.  These technologies group data (voice, video, images and
          character-based  data) into small packets of information  and transmit
          the packets over a network.

     The revenues  generated by these  products and services for the years ended
     December 31 were:

                                      F-21
<PAGE>

($ In thousands)                  2001              2000             1999
                             ---------------   ---------------  ---------------
Network services                  $ 101,338       $  77,437        $  53,249
Local telephone services             73,291          98,643           77,591
Long distance services               12,294          16,318           26,698
Data services                        39,717          51,579           29,470
                             ---------------   ---------------  ---------------
    Total                         $ 226,640       $ 243,977        $ 187,008
                             ===============   ===============  ===============

     We do not currently provide services outside the United States.

     Major Customers

     For the years ended December 31, 2001, 2000 and 1999, Qwest  Communications
     (Qwest) accounted for 10%, 19% and 19%, respectively, of our total revenue.
     As of  December  31,  2001  and  2000,  Qwest  accounted  for 12% and  28%,
     respectively,  of our net trade accounts  receivable.  In 2001, most of the
     Qwest revenue was generated from  reciprocal  compensation  agreements.  No
     other customer accounted for 10% or more of our total revenue for the years
     ended December 31, 2001, 2000 and 1999.

     Included in revenue for the year ended  December 31, 2001 is  approximately
     $4.0 million of revenue  representing  a "net  settlement"  of past billing
     disputes between ELI and Qwest.  Additionally,  we are currently  providing
     service to customers that have filed for protection under Chapter 11 of the
     bankruptcy  code.  Of our  largest  twenty-five  customers,  two are  under
     Chapter 11  protection.  These  customers  contributed  approximately  $0.3
     million of revenue monthly.

(14) Fair Value of Financial Instruments
     -----------------------------------

     The following  table  summarizes  the carrying  amounts and estimated  fair
     values for certain of our  financial  instruments  at December 31, 2001 and
     2000.  For the  other  financial  instruments,  representing  cash and cash
     equivalents,  receivables,  accounts  payable and other accrued and current
     liabilities,  the  carrying  amounts  approximate  fair  value  due  to the
     relatively short maturities of those instruments.

<TABLE>
<CAPTION>
                                               2001                               2000
                                  ---------------------------------  --------------------------------
                                     Carrying            Fair           Carrying           Fair
($ In thousands)                      Amount            Value            Amount           Value
                                  ---------------   ---------------  ---------------  ---------------
<S>                                  <C>               <C>              <C>              <C>
Senior unsecured notes               $ 325,000         $ 322,511        $ 325,000        $ 276,000
Revolving bank credit facility         400,000           400,000          400,000          400,000

</TABLE>

     The fair  value of the above  financial  instruments  is based on prices of
     comparable facilities that we could obtain at December 31, 2001 and 2000.

                                      F-22

<PAGE>


(15) Quarterly Financial Information (Unaudited)
     -------------------------------------------

     Selected unaudited  financial  information for each of the quarters in 2001
     and 2000 is as follows:
<TABLE>
<CAPTION>

($ In thousands, except per share data)
---------------------------------------
                                 March 31,          June 30,      September 30,     December 31,
                              ---------------   ---------------  ---------------  ---------------
2001:
<S>                               <C>               <C>              <C>              <C>
    Revenue                       $ 62,562          $ 60,429         $ 53,330         $ 50,319
    Network access expenses         16,731            17,051           17,232           20,775
    Net loss                       (37,694)          (40,275)         (47,295)         (46,428)
    Net loss per share               (0.74)            (0.79)           (0.93)           (0.91)

2000:
    Revenue                       $ 56,778          $ 60,620         $ 63,610         $ 62,969
    Network access expenses         20,696            18,294           17,821           17,294
    Net loss                       (35,139)          (34,958)         (32,592)         (33,773)
    Net loss per share               (0.70)            (0.69)           (0.65)           (0.67)

</TABLE>


                                      F-23


<PAGE>


The Board of Directors and Shareholders
Electric Lightwave, Inc.

We have audited and reported separately herein on the balance sheets of Electric
Lightwave,  Inc. as of December 31, 2001 and 2000 and the related  statements of
operations,  shareholders'  equity  (deficiency)  and cash flows for each of the
years in the three-year period ended December 31, 2001.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  of  Electric  Lightwave,  Inc.  taken  as  a  whole.  The
supplementary  information  included in Schedule II is presented for purposes of
additional  analysis  and  is  not  a  required  part  of  the  basic  financial
statements.  Such  information  has been  subjected to the  auditing  procedures
applied in the audit of the basic financial  statements and, in our opinion,  is
fairly  stated in all  material  respects  in  relation  to the basic  financial
statements taken as a whole.




                                                          KPMG LLP

New York, New York
March 6, 2002

                                      F-24
<PAGE>



Schedule II

                            Electric Lightwave, Inc.
                        Valuation and Qualifying Accounts
                                ($ In thousands)
                                ----------------

<TABLE>
<CAPTION>
                                                 Balance at       Charged to       Charge to                      Balance at
                                                Beginning of       Cost and          Other                          End of
                                                   Period           Expense         Accounts     Deductions         Period
                                                -------------     -----------      ---------     ----------       ----------
Allowance for doubtful accounts
<S>                                                 <C>              <C>                <C>         <C>              <C>
        1999                                       $ 2,092          $ 4,651            $ 55        $ (3,070)        $ 3,728
        2000                                         3,728            6,159              71          (7,599)          2,359
        2001                                         2,359            8,140               -          (4,370)          6,129

Deferred income taxes valuation allowance
        1999                                      $ 15,137         $ 47,325             $ -             $ -        $ 62,462
        2000                                        62,462           47,902               -               -         110,364
        2001                                       110,364           59,938               -               -         170,302

</TABLE>


                                      F-25