CITIZENS COMMUNICATIONS COMPANY
                         -------------------------------



                                    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, 2002
                      ------------------------------------



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                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
<S>                                                                             <C>

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

For the fiscal year ended December 31, 2002
                          ------------------
                                       OR

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

For the transition period from _________ to ___________

                        Commission file number 001-11001
                                               ---------

                         CITIZENS COMMUNICATIONS COMPANY
                         -------------------------------
             (Exact name of registrant as specified in its charter)

                Delaware                              06-0619596
  -------------------------------------    ---------------------------------
    (State or other jurisdiction of       (I.R.S. Employer Identification No.)
     Incorporation or organization)


                    3 High Ridge Park
                   Stamford, Connecticut                     06905
                   --------------------                      -----
          (Address of principal executive offices)         (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
   (Title of each class)                                                    (Name of each exchange on which registered)
-----------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.25 per share                                              New York Stock Exchange
Guarantee of Convertible Preferred Securities of Citizens Utilities Trust           New York Stock Exchange
Equity Units                                                                        New York Stock Exchange
Citizens Convertible Debentures                                                                N/A
Guarantee of Partnership Preferred Securities of Citizens Utilities Capital L.P.               N/A

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

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

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. [ ]

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

The  aggregate  market  value of  common  stock  held by  non-affiliates  of the
registrant  on June 30,  2002  was  approximately  $2,282,096,740,  based on the
closing price of $8.36.

The number of shares outstanding of the registrant's Common Stock as of February
28, 2003 was 282,913,758.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  for the  registrant's  2003 Annual  Meeting of
Stockholders to be held on May 13, 2003 are  incorporated by reference into Part
III of this Form 10-K.

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                                   TABLE OF CONTENTS
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                                                                                  Page
                                                                                  ----
PART I
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<S>                                                                                <C>
Item 1.    Business                                                                  2

Item 2.    Properties                                                                9

Item 3.    Legal Proceedings                                                        10

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

Executive Officers                                                                  11

PART II
-------

Item 5.    Market for Registrant's Common Equity
               and Related Stockholder Matters                                      14

Item 6.    Selected Financial Data                                                  14

Item 7.    Management's Discussion and Analysis of
               Financial Condition and Results of Operations                        15

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk               30

Item 8.    Financial Statements and Supplementary Data                              32

Item 9.    Changes in and Disagreements with Accountants on Accounting              32
               and Financial Disclosure

PART III
--------

Item 10.   Directors and Executive Officers of the Registrant                       32

Item 11.   Executive Compensation                                                   32

Item 12.   Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholders Matters                         32

Item 13.   Certain Relationships and Related Transactions                           33

Item 14.    Controls and Procedures                                                 33

PART IV
-------

Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K          34

Signatures                                                                          38

Certifications                                                                      40

Index to Consolidated Financial Statements                                         F-1

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                                     PART I
                                     ------

This annual report on Form 10-K  contains  forward-looking  statements  that are
subject to risks and  uncertainties  that could cause  actual  results to differ
materially from those expressed or implied in the 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. Citizens Communications Company and its subsidiaries
(Citizens) will be referred to as the "Company",  "we", "us" or "our" throughout
this report.

Item 1.  Business Overview
         -----------------

We are a  telecommunications-focused  company providing wireline  communications
services to rural areas and small and medium-sized  towns and cities,  including
the  Rochester,  New  York  metropolitan  area as an  incumbent  local  exchange
carrier,  or ILEC.  We offer our ILEC  services  under the  "Frontier"  name. In
addition,  we provide  competitive local exchange carrier,  or CLEC, services to
business customers and to other communications  carriers in certain metropolitan
areas in the western United States through Electric Lightwave, Inc., or ELI, our
wholly-owned  subsidiary.  We also provide  public  utility  services  including
natural  gas  transmission  and  distribution  and  electric   transmission  and
distribution  services to  primarily  rural and  suburban  customers in Vermont,
Hawaii  and  Arizona.  We  currently  have  contracts  to sell all of our public
utility  operations  in Hawaii and  Arizona.  These sales are  expected to close
during the second half of 2003.

Revenue from our ILEC, CLEC and public utility  operations was $2,062.9 million,
$175.1 million, and $431.3 million, respectively, in 2002.

Our ILEC segment has grown substantially over the last three years, primarily as
a result of  acquisitions.  During 2001, we purchased from Global  Crossing Ltd.
(Global) the 1.1 million access lines of the Frontier  local  exchange  business
for   approximately   $3,373.0  million  in  cash.   During  2000,  we  acquired
approximately 334,500 telephone access lines for approximately $986.2 million in
cash.

In June  2002,  we  acquired  all of the  common  stock  of ELI  that we did not
previously  own for $0.70  per share in cash.  Total  cost  (including  fees and
expenses) of the acquisition was approximately $6.8 million.

In 1999, we announced plans to divest our public utilities services segments. As
a  result,  in  2001  we sold  two of our  four  natural  gas  transmission  and
distribution  businesses  and during 2002 we sold our entire water  distribution
and wastewater treatment business and one of our three electric businesses.

In October 2002, we entered into  definitive  agreements to sell our Arizona gas
and electric divisions for $230.0 million in cash ($220.0 million if we close by
July 28, 2003) subject to adjustments  specified in the agreements.  In December
2002,  we entered into a definitive  agreement to sell our Hawaiian gas division
for $115.0 million in cash,  subject to adjustments  specified in the agreement.
These transactions,  which are subject to regulatory approvals,  are expected to
close during the second half of 2003. Currently,  we do not have an agreement to
sell our Vermont electric division,  but we continue to actively pursue a buyer.
All of our public  utility assets have been written down to our best estimate of
the net  realizable  value  upon  sale  (see  Note 4 to  Consolidated  Financial
Statements). Pending these divestitures, we continue to provide gas and electric
utility services.

Telecommunications Services

Our  telecommunications  services are principally ILEC services and also include
CLEC services  delivered through ELI. As of December 31, 2002, we operated ILECs
in 24 states,  serving approximately 2.4 million access lines and 71,000 digital
subscriber  line (DSL)  customers.  Our CLEC  services  are  marketed  under the
Electric   Lightwave   name   and   consist   of   a   variety   of   integrated
telecommunications products.

As an ILEC, we are typically  the dominant  incumbent  carrier in the markets we
serve and provide the "last mile" of telecommunications  services to residential
and business customers in these markets.  As an ILEC, we compete with CLECs that
may operate in our markets. As a CLEC, we provide telecommunications services to
businesses and other carriers in competition with the incumbent ILEC. As a CLEC,
we frequently  obtain the "last mile" access to customers  through  arrangements
with the applicable  ILEC.  ILECs and CLECs are subject to different  regulatory
frameworks of the Federal Communications  Commission (FCC). ELI does not compete
with our ILEC business.

                                       2
<PAGE>

The  telecommunications  industry in general, and the CLEC sector in particular,
are undergoing significant changes and difficulties. Demand and pricing for CLEC
services have decreased substantially,  particularly for long haul services, and
economic and competitive pressures are likely to cause these trends to continue.
These factors result in a challenging  environment  with respect to revenues for
our CLEC business and to a lesser extent our ILEC business.  These factors could
also result in more  bankruptcies in the sector and therefore affect our ability
to collect  money owed to us by bankrupt  carriers.  We  reserved  approximately
$10.9 million and $21.2 million of receivables  owed to us from bankrupt telecom
companies in 2002 and 2001, respectively.

ILEC Services
-------------

Our ILEC services segment accounted for $2,062.9  million,  or 77%, of our total
Company  revenues  in  2002.  Approximately  25% of our  ILEC  services  segment
revenues came from federal and state subsidies and regulated access charges.

Our ILEC services  business is primarily  with  residential  customers and, to a
lesser extent, non-residential customers. Our ILEC services segment provides:

         *        local network services,

         *        enhanced services,

         *        network access services,

         *        long distance and data services, and

         *        directory services.

Local  network  services.  We provide  telephone  wireline  access  services  to
residential  and  non-residential  customers in our service  areas.  Our service
areas are largely residential and are generally less densely populated than what
we believe to be the primary service areas of the five largest ILECs.

Enhanced  services.  We provide our ILEC customers a number of calling  features
including call forwarding, conference calling, caller identification,  voicemail
and call  waiting.  We offer  packages  of  telecommunications  services.  These
packages permit customers to bundle their basic telephone line with their choice
of enhanced  services,  or to customize a set of selected enhanced features that
fit their specific needs.

We intend to increase the penetration of existing enhanced services.  We believe
that increased  sales of such services in our ILEC markets will produce  revenue
with higher operating margins due to the relatively low marginal operating costs
necessary to offer such services. We believe that our ability to integrate these
services  with our core ILEC services  will provide us with the  opportunity  to
capture  an   increased   percentage   of  our   customers'   telecommunications
expenditures.

Network access  services.  We provide  network access  services to long distance
carriers and other  carriers in  connection  with the use of our  facilities  to
originate and terminate interstate and intrastate telephone calls. Such services
are generally  offered on a month-to-month  basis and the service is billed on a
minutes-of-use  basis.  Access  charges  to long  distance  carriers  and  other
customers are based on access rates filed with the FCC for  interstate  services
and with the respective state regulatory agency for intrastate services.

Long  distance and data  services.  Long  distance  network  service to and from
points  outside of a telephone  company's  operating  territories is provided by
interconnection with the facilities of interexchange carriers, or IXCs. We offer
long distance services in our territories to our ILEC customers. We believe that
many customers  prefer the convenience of obtaining their long distance  service
through their local telephone company and receiving a single bill.

We also offer data services including Internet access via dial up or DSL access,
frame relay and  asynchronous  transfer mode (ATM)  switching in portions of our
system.

Directory  services.  Directory  services  involves  the  provision of white and
yellow page listings of residential  and business  directories.  We provide this
service  through a third party  contractor  who pays us a percentage of revenues
realized  from  the sale of  advertising  in these  directories.  Our  directory
service also includes  "Frontier  Pages",  an  internet-based  directory service
which generates advertising revenue.


                                       3
<PAGE>

We  have  grown  from   approximately  1.0  million  access  lines  in  1999  to
approximately 2.4 million access lines primarily through acquisitions. From time
to time we are offered the  opportunity to evaluate the possibility of acquiring
additional telecommunications assets.

The following table sets forth certain information with respect to our telephone
access lines as of December 31, 2002. With the exception of 547,900 access lines
in the  greater  Rochester,  New York  area,  our  access  lines are  located in
primarily rural areas.

                 State                                ILEC Access
                 -----                             ------------------
                                                    Lines at 12/31/02
                                                   ------------------

                 New York............                  1,009,700
                 Minnesota...........                    272,800
                 Arizona.............                    167,100
                 West Virginia.......                    158,600
                 California..........                    153,400
                 Illinois............                    131,600
                 Tennessee...........                     97,600
                 Wisconsin...........                     73,800
                 Iowa................                     62,800
                 All other states (15)...                317,000
                                                      ----------
                    Total                              2,444,400
                                                      ==========

CLEC Services
-------------

ELI provides a broad range of wireline  communications  products and services to
businesses and other  carriers in the western  United States.  ELI accounted for
$175.1 million, or 7%, of our total Company revenue in 2002.

ELI's  facilities-based  network  consists  of optical  fiber and voice and data
switches. ELI has a national Internet and data network with switches and routers
in key cities,  linked by leased transport  facilities.  In addition,  ELI has a
long-haul,  fiber-optic  network  connecting the cities it serves in the Western
United  States which  utilizes an  optically  self-healing  Synchronous  Optical
Network  (SONET)  architecture.  ELI  currently  provides  the full range of its
services in the following  cities and their  surrounding  areas:  Boise,  Idaho;
Portland,   Oregon;  Salt  Lake  City,  Utah;  Seattle,   Washington;   Spokane,
Washington; Phoenix, Arizona; and Sacramento, California.

ELI's  primary  focus in 2003 is obtaining new  customers,  increasing  customer
usage of ELI's  existing  products and  services,  focusing  more on company end
users and government  entities and  diversifying  the customer mix to place less
reliance on Internet Service Providers (ISPs), application service providers and
other carriers.  ELI expects to continue to emphasize  increased  penetration of
existing on-net  buildings,  a focus on sales to customers that are connected to
its network  and an increase in market  share in the cities in which it operates
and  surrounding  areas.  ELI will also  continue to market its  available  dark
fiber.

Regulatory Environment

ILEC Services Regulation
------------------------

The  Telecommunications  Act of 1996, or the 1996 Act,  dramatically changed the
telecommunications  industry.  The main thrust of the 1996 Act was to open local
telecommunications   marketplaces  to  competition  while  enhancing   universal
service.  The majority of our  operations  are regulated  extensively by various
state regulatory agencies, often called public service commissions, and the FCC.


                                       4
<PAGE>

The 1996 Act  preempts  state and local  laws to the  extent  that they  prevent
competitive  entry into the  provision of any switched  communications  service.
Under the 1996 Act, however,  states retain authority to impose  requirements on
carriers  necessary to preserve  universal  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  to  network   facilities   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 termination arrangements.

We are subject to  incentive  regulation  plans under which prices are capped in
return for the elimination or relaxation of earnings oversight. Some states also
allow  us  flexibility  in price  changes  for  optional  services  and  relaxed
reporting  requirements.  The goal of these  plans is to provide  incentives  to
improve  efficiencies and increased pricing flexibility for competitive services
while ensuring that customers  receive  reasonable rates for basic services that
continue  to be deemed  part of a monopoly  while  allowing  us to  continue  to
recover our costs.

Our ILEC  services  segment  revenue  is subject  to  regulation  by the FCC and
various state  regulatory  agencies.  We expect  federal and state  lawmakers to
continue to review the statutes  governing the level and type of regulation  for
telecommunications services.

For  interstate  services  regulated  by the  FCC,  we  have  elected  a form of
incentive regulation known as price caps for most of our operations. Under price
caps, interstate access rates are capped and adjusted annually by the difference
between the level of inflation  and a  productivity  factor.  Most  recently the
productivity  factor was set at 6.5%. Given the relatively low inflation rate in
recent years,  interstate access rates have been adjusted downward annually.  In
May 2000,  the FCC adopted a revised  methodology  for regulating the interstate
access rates of price cap companies through May 2005. The program,  known as the
Coalition  for  Affordable  Local and Long  Distance  Services,  or CALLS  plan,
establishes a price floor for interstate-switched access services and phases out
many of the subsidies in interstate  access rates. We believe we will be able to
offset some of the reduction in interstate access rates through end-user charges
and an expanded  universal service program that benefits rural service providers
such as our ILEC services  segment.  Annual  adjustments based on the difference
between  inflation and the  productivity  factor will continue for several years
until the price floor for interstate switched access services is reached.

Another  goal of the 1996 Act was to remove  implicit  subsidies  from the rates
charged by local  telecommunications  companies.  The CALLS plan  addressed this
requirement for interstate services.  State legislatures and regulatory agencies
are  beginning to reduce the implicit  subsidies in intrastate  rates.  The most
common  subsidies are in access rates that  historically  have been priced above
their costs to allow basic local rates to be priced below cost.  Legislation has
been  considered  in several  states to require  regulators  to eliminate  these
subsidies and implement  state  universal  service  programs where  necessary to
maintain reasonable basic local rates. However, not all the reductions in access
charges  are  fully  offset.  In  Tennessee  for  example,  as a result  of such
legislation,  we are reducing  intrastate  access rates by $1.0 million per year
through 2003. We anticipate additional state legislative and regulatory pressure
to lower  intrastate  access rates in the near future.  However,  regulators are
cognizant  of  the  potential  impact  on  basic  local  rates  and  are  moving
cautiously. Many states are embracing the need for state universal service funds
to ensure protection for customers while ensuring that local  telecommunications
companies continue to have the incentive to recover in rates their investment in
their networks and new services.

State   legislatures   and  regulators  are  also  examining  the  provision  of
telecommunications  services to previously  unserved areas.  Since many unserved
areas are  located in rural  markets,  we may be  required to expand our service
territory  into some of these areas.  Given the  start-up  costs  involved  with
territory  expansion,  we expect legislatures and regulators to continue to move
cautiously  and provide  some means of recovery  for the costs  associated  with
serving these new areas.

ILEC Unbundling Obligations
---------------------------

The FCC recently  completed its triennial  review of the 1996 Act.  Although the
FCC's order  describing its decisions in detail has not yet been published,  the
FCC has provided a summary of its findings  and order.  The summary  essentially
keeps in place the existing  regulatory regime with respect to Unbundled Network
Elements Platform (UNEP) competition,  provides  significant  authority to state
regulators to implement UNEP competition and pricing,  and eliminated a previous
requirement  of ILECs to share their DSL lines with  competitors.  Because we do
not currently have UNEP  competition or competitors  providing DSL service,  the
FCC's order is not expected to have a material affect on us in the near term. We
will continue to evaluate the affect on us when the final order is published and
as litigation with respect to the order occurs.


                                       5
<PAGE>

Some state regulators (including New York and Illinois) have recently considered
imposing on regulated  companies  (including us) cash management  practices that
could limit the ability of companies to transfer cash between subsidiaries or to
the parent company.  None of the existing state  requirements  materially affect
our cash  management  but future  changes by state  regulators  could affect our
ability to freely transfer cash within our consolidated companies.

CLEC Services Regulation
------------------------

A central focus of the sweeping  federal policy reform under the 1996 Act was to
open local communications  markets to competition including the encouragement of
the development of CLECs, which compete for business with the existing carriers.
As a CLEC, ELI is subject to federal,  state and local regulation.  However, the
level of regulation is typically less than that  experienced by an ILEC. The FCC
exercises  jurisdiction  over  all  interstate  communications  services.  State
commissions  retain  jurisdiction over all intrastate  communications  services.
Local  governments may require ELI to obtain  licenses or franchises  regulating
the use of public rights-of-way necessary to install and operate its networks.

ELI has various  interconnection  agreements in the states in which it operates.
These agreements  govern reciprocal  compensation  relating to the transport and
termination  of  traffic  between  the  ILEC's  and ELI's  networks.  The FCC is
significantly  reducing intercarrier  compensation for ISP traffic also known as
"reciprocal compensation."

Most  state  public  service  commissions  require  competitive   communications
providers,  such as ELI,  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.  ELI is not  currently  subject  to
rate-of-return  or price regulation.  However,  ELI is subject to state-specific
quality of service,  universal service,  periodic reporting and other regulatory
requirements,  although the extent of these  requirements is generally less than
those applicable to ILECs.

Competition

ILEC Services Competition
-------------------------

Competition in the telecommunications  industry is increasing.  Although we have
not faced as much  competition as larger,  more urban telecom  companies,  we do
experience  competition  from other wireline local  carriers  through  Unbundled
Network  Elements (UNE) and  potentially in the future through UNEP,  from other
long distance carriers (including Regional Bell Operating Companies), from cable
companies and internet  service  providers  with respect to internet  access and
potentially  in  the  future  cable  telephony,   and  from  wireless  carriers.
Competition  may result in a greater loss of access lines and minutes of use and
the  conversion of retail lines to wholesale  lines,  which  negatively  affects
revenues  and margins from those lines.  Competition  also puts  pressure on the
prices  we  are  able  to  charge  for  some  services,  particularly  for  some
non-residential  services.  Most of the wireline  competition  we face is in our
Rochester  market,  with limited  competition in a few other areas.  Competition
from cable  companies with respect to high-speed  Internet  access is intense in
Rochester and a few of our more suburban  markets such as Elk Grove,  California
(which is near  Sacramento).  Competition  from wireless  companies,  other long
distance  companies and Internet service providers is present in varying degrees
in all of our markets.

The 1996 Act and subsequent FCC  interconnection  decisions have established the
relationships  between ILECs and CLECs and the mechanisms for competitive market
entry. Though carriers like us, who serve rural markets, did receive a qualified
exemption  from some of the  technical  requirements  imposed upon all ILECs for
interconnection   arrangements,   we  did  not   receive   an   exemption   from
interconnection or local exchange competition in general.  The exemption,  known
as the rural telephone  company  exemption,  continues until a bona fide request
for  interconnection  is  received  from  a CLEC  and a  state  public  services
commission with jurisdiction  determines that discontinuance of the exemption is
warranted.  The state commission must determine that discontinuing the exemption
will not adversely impact the availability of universal service in the state nor
impose an undue economic  hardship on us and that the requested  interconnection
is technically feasible.

As of December 31, 2002, we had entered into 334 interconnection agreements with
CLECs.  These  agreements  allow CLECs to connect with some of our ILEC networks
and compete in our ILEC markets. In addition, in some markets, our ILEC services
provide reciprocal  compensation  payments and local number  portability.  These
competitors  are  mainly  serving   business   customers  and  Internet  service
providers.

                                       6
<PAGE>


CLEC Services Competition
-------------------------

ELI faces significant  competition from ILECs in each of its markets.  Principal
ILEC competitors  include Qwest, SBC and Verizon.  ELI also competes with all of
the major  Interexchange  Carriers  (IXCs),  Internet access providers and other
CLECs. CLEC service  providers have generally  encountered  intense  competitive
pressures,  the  result  of  which is the  failure  of a  number  of  CLECs  and
substantial financial pressures on others.

Competitors in ELI's markets  include,  in addition to the incumbent  providers:
AT&T,  Sprint,  Time Warner  Telecom,  MCI WorldCom,  Broadwing,  Integra and XO
Communications. In each of the markets in which ELI operates, at least one other
CLEC,  and in some  cases  several  other  CLECs,  offer  many of the same local
communications services that ELI provides, generally at similar prices.

Competition is based on price, quality,  network reliability,  customer service,
service features and responsiveness to the customer's needs.

The market for Internet  access,  long-haul  and related  services in the United
States is extremely competitive, with substantial overcapacity in the market. We
expect that  competition  will  intensify.  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.  Several  IXC's have filed for  bankruptcy  protection,
which will allow them to  substantially  reduce their cost  structure  and debt.
This  could  enable  such  companies  to  further  reduce  prices  and  increase
competition.

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.

Public Utilities Services

We have historically  provided public utilities  services  including natural gas
transmission and distribution,  electric  transmission and  distribution,  water
distribution and wastewater  treatment  services to primarily rural and suburban
customers  throughout  the  United  States.  In  1999,  we  announced  a plan of
divestiture for our public utilities  services  properties.  Since then, we have
divested or entered into  contracts to divest  almost all of our public  utility
operations for an aggregate of $1.9 billion. In 1999, we initially accounted for
the  planned   divestiture  of  our  public  utilities   services   segments  as
discontinued operations.  Because we had not yet entered into agreements to sell
our entire gas and electric  segments,  we reclassified all our gas and electric
assets and their related  liabilities  in the second half of 2000 as "net assets
held for sale." As a result,  our  discontinued  operations  only  reflected the
assets and related liabilities of the water and wastewater businesses.

In 2001, we sold our Louisiana gas operations for $363.4 million in cash and our
Colorado gas division for $8.9 million in cash.  In 2002,  we sold our water and
wastewater  services operations for $859.1 million in cash and $122.5 million in
assumed debt and other  liabilities,  and our Kauai electric division for $215.0
million in cash.  These  transactions  are  subject to  routine  purchase  price
adjustments.

In October 2002, we entered into  definitive  agreements to sell our Arizona gas
and electric  operations for $230.0 million in cash ($220.0  million if we close
by July 28, 2003) and in December  2002, we entered into a definitive  agreement
to sell our  Hawaiian  gas  division  for $115.0  million in cash,  in each case
subject to adjustments specified in the agreement. These transactions, which are
subject to regulatory approvals, are expected to close during the second half of
2003.

We intend to sell our one remaining  public utility asset,  which is an electric
utility operation in Vermont.

Natural Gas
-----------

Our natural gas segment  provides  natural  gas  transmission  and  distribution
services in Arizona,  as well as synthetic  natural gas  production  and propane
service in Hawaii to primarily  residential  customers.  Our natural gas segment
accounted for $216.5 million,  or 8%, of our total Company  revenues in 2002. At
December 31, 2002, the number of customers by state is as follows:

                                       7
<PAGE>

                  State                        Customers
                  -----                        ---------
                  Arizona.........               126,925
                  Hawaii...........               66,494
                                               ---------
                    Total                        193,419
                                               =========

Natural gas services  and/or rates  charged are subject to the  jurisdiction  of
federal and state  regulatory  agencies,  except for the  non-regulated  propane
rates charged to customers in Hawaii. We purchase the gas supply we need, except
for our  production of synthetic  natural gas in Hawaii.  We entered into a firm
supply  contract  with BP Energy for our  Arizona gas  division.  We believe our
natural  gas supply is  adequate  to meet  current  demands  and to provide  for
additional  sales to new  customers.  The  natural  gas  industry  is subject to
seasonal  demand,  except in Hawaii,  with the peak demand  occurring during the
heating  season  of  November  1 through  March  31.  Our  natural  gas  segment
experiences  third-party  competition  from  fuel  oil,  propane  and  other gas
suppliers for most of our large consumption  customers,  of which there are few,
and from  electric  suppliers  for our entire  customer  base.  The  competitive
position of gas at any given time depends  primarily  on the relative  prices of
gas and these other energy sources.

Electric
--------

Our electric segment provides electric transmission and distribution services in
Arizona and Vermont to primarily  residential  customers.  Our electric  segment
accounted for $214.8 million,  or 8%, of our total Company  revenues in 2002. At
December 31, 2002, the number of customers per state is as follows:

                       State                  Customers
                       -----                  ---------
                       Arizona .........        77,818
                       Vermont..........        20,603
                                              --------
                         Total                  98,421
                                              ========

Electric  services  and/or  rates  charged  are subject to the  jurisdiction  of
federal and state regulatory  agencies.  We purchased  approximately  99% of the
electric  energy  needed to provide  service  to our  customers  in Vermont  and
Arizona.  We believe  our supply is  adequate  to meet  current  demands  and to
provide for additional sales to new customers.  We have generating facilities in
Arizona and Vermont, which are used mainly for back-up power supply.  Generally,
our electric segment does not experience material seasonal fluctuations.

The electric  utility  industry in the United States is  undergoing  fundamental
changes.  For many years  electric  utilities  have been  vertically  integrated
entities  with  the   responsibility   for  the  generation,   transmission  and
distribution of electric power in a franchise territory.  In return for monopoly
status, electric utilities have been subject to comprehensive  regulation at the
state and federal  level.  The  industry  continues  its shift  toward  electric
customers  being  able to choose  their  energy  provider  much  like  telephone
customers  are able to choose  their long  distance  provider.  Generally,  this
involves  separating the generation and transmission of power from the remainder
of the business,  and having generators  compete with one another in the sale of
power directly to retail customers.  The  interconnected  regional  transmission
grids  will be  operated  independently,  continuing  as a  federally  regulated
monopoly.  Local  transmission  and  distribution  facilities  would continue as
state-regulated  monopolies. This change in the industry is in various stages of
development  around the United  States.  The pace and degree of regulation  vary
from state to state. The bankruptcies in 2001 and financial difficulties in 2002
of major  providers of electricity  may alter the nature and level of regulation
of electric utilities.

Our  Vermont  Electric  Division  is a member of the  Vermont  Joint  Owners,  a
consortium  of 14 Vermont  utilities  that has  entered  into a  purchase  power
agreement with a Canadian power generation facility.  The agreement provides for
up to 395 MW of power  per  annum  and  associated  energy  to be  delivered  to
Vermont,  in  varying  amounts,  between  1990 and  2020.  If any  member of the
consortium  defaults on its share of power under the  agreement,  the  remaining
members of the consortium are required by "step-up"  provisions of the agreement
to assume responsibility for a defaulting member's share on a pro-rata basis.

In July 2002,  the Vermont  Public  Service  Board  approved a rate  increase of
17.45% for services rendered on or after July 15, 2002.

On November 1, 2002,  we completed  the sale of our Kauai  electric  division to
Kauai Island  Utility  Cooperative  (KIUC) for $215.0  million in cash.

                                       8
<PAGE>

Segment Information

Note 23 to Consolidated  Financial  Statements  provides  financial  information
about our industry segments for the last three fiscal years.

Financial Information about Foreign and Domestic Operations and Export Sales

We have no foreign  operations,  although we have a 19%  interest  in  Hungarian
Telephone and Cable Company (See Note 8 to Consolidated Financial Statements), a
company that provides wireline telephone service in Hungary.

General

Order backlog is not a significant  consideration in our businesses.  We have no
contracts or subcontracts  that may be subject to  renegotiations  of profits or
termination at the election of the Federal government. We also hold certificates
granted  by  various  state  commissions,  which  are  generally  of  indefinite
duration.  We have no special  working capital  practices,  and our research and
development  activities  are not  significant.  We hold no patents,  licenses or
concessions  that are material.  As of December 31, 2002,  we had  approximately
7,684 employees,  of whom 6,206 were associated with ILEC  operations,  565 were
associated  with ELI and 750 were  associated  with  public  utilities  services
operations. We consider our relations with our employees to be good.

Available Information

We make available  free of charge on or through our Internet  website our annual
reports on Form 10-K,  quarterly  reports on Form 10-Q,  current reports on Form
8-K and all amendments to those reports as soon as reasonably  practicable after
such material is  electronically  filed with or furnished to the  Securities and
Exchange Commission. Our Internet address is http://www.czn.net.

Item 2.   Properties
          ----------

Our principal  corporate  offices are located in leased premises at 3 High Ridge
Park, Stamford, Connecticut.

The  operations  support  office for our ILEC  segment is  currently  located in
leased premises at 180 South Clinton Avenue, Rochester, New York. In conjunction
with the Frontier acquisition,  we evaluated our facilities to take advantage of
operational  and  functional  synergies  between  the  two  companies  with  the
objective  of  concentrating  our  resources in the areas where we have the most
customers,  to better serve those customers.  In connection with that objective,
we closed our operations  support center in Plano,  Texas in April 2002 and sold
the building at that location in 2003. In addition,  our ILEC segment leases and
owns office space in various markets throughout the United States.

The operations support office for ELI is located in a building we own at 4400 NE
77th Avenue,  Vancouver,  Washington. In addition, our CLEC segment leases local
office space in various markets throughout the United States, and also maintains
a warehouse  facility in Portland,  Oregon. Our CLEC segment also leases network
hub and network equipment installation sites in various locations throughout the
areas in which it provides services.

Our ILEC and CLEC services  segments own  telephone  properties  which  include:
connecting lines between  customers'  premises and the central offices;  central
office  switching   equipment;   fiber-optic  and  microwave  radio  facilities;
buildings  and land;  and customer  premise  equipment.  The  connecting  lines,
including  aerial and underground  cable,  conduit,  poles,  wires and microwave
equipment,  are located on public  streets and  highways or on  privately  owned
land.  We have  permission  to use these lands  pursuant  to local  governmental
consent or lease, permit, franchise, easement or other agreement.

Our public utilities services segments are administered locally in the states in
which they operate.  Pending the sale of our public utilities services segments,
we own gas production,  transmission and distribution  facilities in Arizona and
Hawaii and electric  transmission  and  distribution  facilities  in Arizona and
Vermont.


                                       9
<PAGE>
Item 3.  Legal Proceedings
         -----------------

On July 20, 2001, we notified Qwest Corporation (Qwest) that we were terminating
eight  acquisition  agreements.  On July 23, 2001, Qwest filed a notice of claim
for arbitration  with respect to the terminated  acquisition  agreements.  Qwest
asserts  that  we  wrongfully   terminated  theses  agreements  and  is  seeking
approximately  $64.0  million in damages,  which is the  aggregate of liquidated
damages  under  letters  of credit  established  in the  terminated  acquisition
agreements.  On September 7, 2001, we filed a response and  counterclaims in the
same arbitration  proceedings,  contesting Qwest's asserted claims and asserting
substantial  claims  against  Qwest for  material  breaches of  representations,
warranties,  and covenants in the terminated  acquisition  agreements and in the
acquisition  agreement  relating to North Dakota  assets that we purchased  from
Qwest. The parties are currently  engaged in discovery.  An arbitration  hearing
has been scheduled to commence in the third quarter of 2003.

On December 21,  2001,  we entered into a  settlement  agreement  resolving  all
claims in a class  action  lawsuit  pending  against  the  Company in Santa Cruz
County, Arizona (Chilcote, et al. v. Citizens Utilities Company, No. CV 98-471).
The lawsuit arose from claims by a class of plaintiffs  that included all of our
electric customers in Santa Cruz County for damages resulting from several power
outages that occurred  during the period  January 1, 1997,  through  January 31,
1999. Under the terms of the settlement agreement,  and without any admission of
guilt or  wrongdoing  by us, we have  paid the class  members  $5.5  million  in
satisfaction of all claims. The court approved the settlement agreement on March
29, 2002, and the lawsuit  against us was dismissed with  prejudice.  We accrued
the full settlement amount,  plus an additional amount sufficient to cover legal
fees and other  related  expenses,  during  the  fourth  quarter  of 2001 and no
accrual remains at December 31, 2002.

As part of the Frontier acquisition,  Global and we agreed to Global's transfer,
effective as of July 1, 2001, of certain liabilities and assets under the Global
pension plan for Frontier employees. Such transfer and assumption of liabilities
was to be to a trustee of a trust  established under our pension plan, and would
exclude (1) those  liabilities  relating to certain  current and former Frontier
employees who were not considered part of the Frontier  acquisition  (calculated
using the "safe harbor" methodology of the Pension Benefit Guaranty Corporation)
and (2) those assets attributable to such excluded liabilities. After filing for
bankruptcy on January 28, 2002,  Global  claimed that its obligation to transfer
the  Global  pension  plan's   transferred   assets  and  liabilities   remained
"executory"  under the  Bankruptcy  Code,  and refused to execute and deliver an
authorization  letter to the Frontier plan trustee (who was also the Global plan
trustee)  directing the trustee to transfer to our pension plan record ownership
of such assets and  liabilities.  We initiated an adversary  proceeding with the
Bankruptcy Court  supervising  Global's  bankruptcy  proceeding to determine and
declare that Global's  obligation was not  "executory,"  and to compel Global to
execute and deliver such  authorization  letter. On December 18, 2002 we entered
into a  stipulation  with Global and other  parties,  which was  approved by the
Bankruptcy Court, fully and finally settling the adversary proceeding.  Pursuant
to the stipulation and order,  on February 3, 2003,  among other things,  Global
instructed  the  Frontier  plan  trustee to  transfer  record  ownership  of the
transferred assets and liabilities to our pension plan, and the transfer in fact
took place on that date.

The City of Bangor,  Maine,  filed suit against us on November 22, 2002,  in the
U.S.  District  Court for the  District  of Maine  (City of  Bangor v.  Citizens
Communications Company, Civ. Action No. 02-183-B-S). The City has alleged, among
other things, that we are responsible for the costs of cleaning up environmental
contamination  alleged to have resulted from the operation of a manufactured gas
plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the
existence  of extensive  contamination  of the  Penobscot  River and nearby land
areas and has  asserted  that  money  damages  and other  relief at issue in the
lawsuit  could exceed  $50.0  million.  The City also  requested  that  punitive
damages be assessed against us. We have filed an answer denying liability to the
City,  and have asserted a number of counter  claims against the City. We intend
to defend ourselves vigorously against the City's lawsuit. In addition,  we have
identified  a  number  of  other  potentially  responsible  parties  that may be
responsible  for the damages  alleged by the City.  We expect to initiate  legal
action within the next few weeks to bring those parties into the lawsuit.

We also  have  demanded  that  various  of our  insurance  carriers  defend  and
indemnify us with respect to the City's lawsuit.  On or about December 26, 2002,
we filed a declaratory  judgment action against those insurance  carriers in the
Superior Court of Penobscot County, Maine, for the purpose of establishing their
obligations  to us with respect to the City's  lawsuit.  We intend to vigorously
pursue insurance coverage for the City's lawsuit.

On February 7, 2003, we received a letter from counsel  representing Enron North
America  Corporation  (formerly  known as Enron Gas Marketing,  Inc.)  demanding
payment of an "early termination  liability" of approximately $12.5 million that
Enron claims it is owed under a gas supply agreement that we lawfully terminated
in  November  2001.  The  demand was made in  connection  with  Enron's  ongoing
bankruptcy  proceeding  in the United States  Bankruptcy  Court for the Southern
District  of New York.  We  believe  Enron's  claim  lacks any merit and have so
advised that  company's  counsel.  Enron has threatened to initiate an adversary
proceeding  in the  bankruptcy  court to recover  the amount of its demand  plus
applicable  interest and  attorney's  fees. If that occurs,  we will  vigorously
defend against any such action.

                                       10
<PAGE>

During the fourth  quarter of 2002 we became aware of  irregularities  involving
payments  made by certain of our public  utilities  operations  for  services or
benefits  that we did not  receive.  The  payments  do not  involve  our current
operations  in Arizona,  Vermont,  or Hawaii.  With the  assistance  of forensic
specialists, outside auditors, and counsel, we investigated these irregularities
and identified a total of $7.8 million that had been embezzled from the Company.
These payments were reflected in our financial statements as charges to earnings
(primarily during 2002). The U.S.  Government has recovered  approximately  $6.0
million (which we believe will be turned over to us) and we believe that most of
the remaining funds outstanding will be reimbursed by insurance.

We have provided detailed information regarding the results of our investigation
to federal prosecutors and the Securities and Exchange Commission, including the
names of two of our former officers (Kenneth Cohen and Livingston Ross, who were
the President and Chief Operating  Officer of the Public Services Sector and the
Vice President of Reporting and Audit,  respectively) who approved the payments.
We have been advised by federal prosecutors that these individuals have admitted
their  involvement  in these schemes and we have  terminated  the  employment of
these individuals.

In  connection  with an  inquiry  that we  believe  has  arisen  as a result  of
allegations  made to  federal  authorities  during  their  investigation  of the
embezzlement,  we and our employees are cooperating fully with the Office of the
U.S. Attorney for the Southern District of New York and with the New York office
of the Securities and Exchange Commission.  We have provided requested documents
to the SEC and we have agreed to comply with an SEC request  that, in connection
with the informal inquiry that it has initiated,  we preserve financial,  audit,
and accounting records.

We are party to  proceedings  arising in the normal course of our business.  The
outcome of individual matters is not predictable.  However,  we believe that the
ultimate resolution of all such matters,  after considering  insurance coverage,
will not have a material  adverse effect on our financial  position,  results of
operations, or our cash flows.

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

None in fourth quarter 2002.

Executive Officers of the Registrant
------------------------------------

Information as to Executive Officers of the Company as of March 1, 2003 follows:
<TABLE>
<CAPTION>

          Name               Age      Current Position and Office
          ----               ---      ---------------------------
<S>                          <C>      <C>
Leonard Tow                  74      Chairman of the Board and Chief Executive Officer
Scott N. Schneider           45      Vice Chairman of the Board, President and Chief Operating Officer
Donald B. Armour             55      Senior Vice President, Finance and Treasurer
Robert Braden                57      Executive Vice President, ILEC Sector
John H. Casey, III           46      President and Chief Operating Officer of the ILEC Sector and
                                     Executive Vice President
Jean M. DiSturco             39      Senior Vice President, Human Resources
Jerry Elliott                43      Senior Vice President and Chief Financial Officer
Michael G. Harris            56      Senior Vice President, Engineering and New Technology
Edward O. Kipperman          51      Vice President, Tax
Robert J. Larson             43      Senior Vice President and Chief Accounting Officer
Daniel J. McCarthy           38      President and Chief Operating Officer, Public Services Sector and
                                     Vice President
L. Russell Mitten            51      Senior Vice President, General Counsel and Secretary
Michael A. Zarrella          43      Vice President, Strategic Planning and Development
</TABLE>

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


                                       11
<PAGE>

LEONARD TOW has been associated with Citizens since April 1989 as a Director. In
June 1990, he was elected Chairman of the Board and Chief Executive Officer.  He
was also Chief Financial  Officer from October 1991 through November 1997. He is
a Director of  Hungarian  Telephone  and Cable  Corp.,  and is a Director of the
United States Telephone Association.

SCOTT N.  SCHNEIDER has been  associated  with Citizens  since November 1999. In
January 2001,  he was elected Vice  Chairman of the Board.  In July 2000, he was
elected a Director  of  Citizens.  He has served as Vice  Chairman of the Board,
President and Chief Operating Officer of Citizens since July 2002. Previously he
was Vice  Chairman,  Executive  Vice  President  from May 2001 to July  2002 and
Executive Vice President Strategic Planning and Development from May 2000 to May
2001 and Executive Vice President of Electric Lightwave,  Inc. from October 1999
to May 2000.  Prior to joining  Citizens,  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.

DONALD B. ARMOUR has been  associated  with Citizens  since October 2000. He was
elected  Senior  Vice  President,   Finance  and  Treasurer  in  December  2002.
Previously,  he was Vice  President,  Finance and Treasurer from October 2000 to
December  2002.  Prior to joining  Citizens,  he was the  Treasurer of the cable
television division of Time Warner Inc. from January 1994 to September 2000.

ROBERT BRADEN has been  associated with Citizens since December 1999. In January
2002, he became Executive Vice President,  ILEC Sector.  Previously he was Chief
Executive Officer from January 2002 to November 2002,  Director from May 2001 to
November 2002, Vice President and Chief Operating  Officer from February 2001 to
January 2002 and Vice  President,  Business  Development  from  February 2000 to
February 2001 of Electric Lightwave, Inc. Prior to joining Citizens, he was Vice
President,  Business  Development at Century  Communications  Corp. from January
1999 to October  1999. He was Senior Vice  President,  Business  Development  at
Centennial  Cellular Corp. from June 1996 to January 1999 and held other officer
positions with Centennial since November 1993.

JOHN H. CASEY,  III has been associated with Citizens since November 1999. He is
currently Executive Vice President of Citizens and President and Chief Operating
Officer  of our ILEC  Sector.  Previously  he was Vice  President  of  Citizens,
President and Chief  Operating  Officer,  ILEC Sector January 2002 to July 2002,
Vice President and Chief Operating Officer, ILEC Sector February 2000 to January
2002 and Vice President,  ILEC Sector  December 1999 to February 2000.  Prior to
joining Citizens, he was Vice President, Operations from January 1995 to January
1997 and then Senior Vice President, Administration of Centennial Cellular until
November 1999.

JEAN M. DISTURCO has been  associated  with Citizens since 1987. She was elected
Senior Vice  President,  Human Resources in December 2002.  Previously,  she was
Vice President, Human Resources since October 2001, Vice President, Compensation
and Benefits  since March 2001 and Director of  Compensation  from 1996 to March
2001.

JERRY ELLIOTT has been associated with Citizens since March 2002. He was elected
Senior Vice President and Chief Financial Officer in December 2002.  Previously,
he was Vice  President and Chief  Financial  Officer from March 2002 to December
2002. Prior to joining  Citizens,  he was Managing  Director of Morgan Stanley's
Communications  Investment  Banking Group from July 1998 to March 2002. Prior to
joining  Morgan  Stanley,  he was a  partner  with  the law firm of  Shearman  &
Sterling.

MICHAEL G. HARRIS has been  associated with Citizens since December 1999. He was
elected Senior Vice President,  Engineering and New Technology in December 2002.
Previously, he was Vice President,  Engineering and New Technology from December
1999 to December 2002. Prior to joining Citizens,  he was Senior Vice President,
Engineering  of Centennial  Cellular  from August 1991 to December  1999. He was
also Senior Vice  President,  Engineering of Century  Communications  Corp. from
June 1991 to October 1999.

EDWARD O.  KIPPERMAN has been  associated  with Citizens since February 1985. He
has served as Vice President, Tax since October 1991.

ROBERT J.  LARSON has been  associated  with  Citizens  since July 2000.  He was
elected  Senior  Vice  President  and Chief  Accounting  Officer of  Citizens in
December 2002.  Previously,  he was Vice President and Chief Accounting  Officer
from  July  2000 to  December  2002.  Prior  to  joining  Citizens,  he was Vice
President and Controller of Century  Communications  Corp.  from October 1994 to
October 1999.  He was also Vice  President,  Accounting  and  Administration  of
Centennial Cellular from March 1995 to October 1999.


                                       12
<PAGE>

DANIEL  McCARTHY has been  associated  with Citizens since December 1990. He was
elected  President and Chief Operating  Officer,  Electric  Lightwave in January
2002. Previously,  he was President and Chief Operating Officer, Public Services
Sector from November 2001 to January 2002,  Vice  President and Chief  Operating
Officer,  Public  Services  Sector  from  March  2001  to  November  2001,  Vice
President,  Citizens  Arizona  Energy  from  April  1998 to March  2001 and Vice
President, Citizens Arizona Gas from February 1997 to April 1998.

L. RUSSELL  MITTEN has been  associated  with  Citizens  since June 1990. He was
elected Senior Vice  President,  General Counsel and Secretary in December 2002.
Previously, he was Vice President,  General Counsel and Secretary from September
2000 to December 2002. He was also Vice President, General Counsel and Assistant
Secretary  from June 1991 to September  2000.  He was General  Counsel from June
1990 to June 1991.

MICHAEL  ZARRELLA has been  associated with Citizens since December 1999. He was
elected Vice  President,  Strategic  Planning and  Development  in October 2000.
Previously he was Director,  Strategic  Planning and  Development  from December
1999 to October 2000. Prior to joining Citizens,  he was Group Vice President of
Finance for Century  Communications  Corp.  from June 1996 to December  1999 and
Director, Financial Analysis from October 1990 to June 1996.


                                       13
<PAGE>
                                     PART II

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

                           PRICE RANGE OF COMMON STOCK
Our Common Stock is traded on the New York Stock  Exchange under the symbol CZN.
The  following  table  indicates  the high and low prices  per share  during the
periods indicated.

                                        2002                    2001
                                  ------------------    -----------------
                                   High        Low        High        Low
                                   ----        ---        ----        ---
           First Quarter          $11.30      $8.91      $15.88     $12.05
           Second Quarter         $11.52      $8.22      $15.00     $11.28
           Third Quarter          $ 8.80      $2.51      $13.10     $ 8.95
           Fourth Quarter         $10.99      $5.44      $11.53     $ 8.20

As of February 28, 2003, the approximate number of security holders of record of
our Common Stock was 31,752.  This  information  was obtained  from our transfer
agent.

                                    DIVIDENDS
The amount and timing of  dividends  payable on Common Stock are within the sole
discretion of our Board of Directors.  Our Board of Directors  discontinued  the
payment of dividends after the payment of the December 1998 stock dividend.

 RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED
 SECURITIES

None

Item 6.  Selected Financial Data
         -----------------------
<TABLE>
<CAPTION>
($ in thousands, except per share amounts)                                  Year Ended December 31,
 ----------------------------------------               ---------------------------------------------------------------
                                                           2002           2001         2000          1999        1998
                                                        ------------- ------------ -----------   ----------- ------------
<S>                                                     <C>          <C>           <C>          <C>          <C>
Revenue (1)                                              $2,669,332   $ 2,456,993   $1,802,358   $ 1,598,236  $ 1,448,588
Income (loss) from continuing operations before
  extraordinary expense and cumulative effect of         $ (822,976)  $   (63,926)  $  (40,071)  $   136,599  $    46,444
  changes in accounting principle (2)
Net income (loss)                                        $ (682,897)  $   (89,682)  $  (28,394)  $   144,486  $    57,060
Basic income (loss) per share of Common Stock
  from continuing operations before extraordinary expense
  and cumulative effect of changes in accounting
  principle (2)                                          $    (2.93)  $     (0.28)  $    (0.15)  $      0.53  $      0.18
Available for common shareholders per basic share        $    (2.43)  $     (0.38)  $    (0.11)  $      0.56  $      0.22
Available for common shareholders per diluted share      $    (2.43)  $     (0.38)  $    (0.11)  $      0.55  $      0.22
Stock dividends declared on Common Stock (3)                      -             -            -             -         3.03%

                                                                               As of December 31,
                                                        ---------------------------------------------------------------
                                                            2002         2001         2000        1999        1998
                                                        ------------- ------------ ----------- ----------- ------------
Total assets                                             $8,146,742  $ 10,553,600   $6,955,006   $ 5,771,745  $ 5,292,932
Long-term debt                                           $4,957,361  $  5,534,906   $3,062,289   $ 2,107,460  $ 1,775,338
Equity units                                             $  460,000  $    460,000   $        -   $         -  $         -
Shareholders' equity                                     $1,172,139  $  1,946,142   $1,720,001   $ 1,919,935  $ 1,792,771
</TABLE>
(1)  Represents  revenue from continuing  operations.  Revenue from acquisitions
     contributed  $569.8  million and $49.5 million for the years ended December
     31,  2001  and  2000,  respectively.   Revenue  from  gas  operations  sold
     represented  $218.8  million,  $232.3  million,  $175.4  million and $173.1
     million  in  2001,  2000,  1999 and  1998,  respectively.  Revenue  from an
     electric  operation sold represented  $76.6 million,  $94.3 million,  $95.1
     million,  $78.7 million and $72.6  million in 2002,  2001,  2000,  1999 and
     1998, respectively.
(2)  Extraordinary  expense  represents  an  extraordinary  after tax expense of
     $43.6 million related to the discontinuance of the application of Statement
     of Financial  Accounting  Standards No. 71 to our local exchange  telephone
     operations  in  2001.  The  cumulative  effect  of  changes  in  accounting
     principle represents write-off of ELI's goodwill of $39.8 million resulting
     from the adoption of Statement of Financial Accounting Standards No. 142 in
     2002 and an after tax charge of $2.3 million at ELI in 1998  resulting from
     the adoption of Statement of Position 98-5.
(3)  Compounded annual rate of quarterly stock dividends.


                                       14
<PAGE>
Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         -----------------------------------------------------------------------
         of Operations
         -------------

This annual report on Form 10-K  contains  forward-looking  statements  that are
subject to risks and  uncertainties  that could cause  actual  results to differ
materially from those  expressed or implied in the  statements.  Statements that
are not historical  facts are  forward-looking  statements  made pursuant to the
Safe Harbor Provisions of the Litigation Reform Act of 1995. In addition,  words
such  as  "believes",  "anticipates",  "expects"  and  similar  expressions  are
intended  to identify  forward-looking  statements.  Forward-looking  statements
(including oral  representations)  are only predictions or statements of current
plans, which we review continuously.  Forward-looking statements may differ from
actual  future  results  due  to,  but  not  limited  to,  any of the  following
possibilities:

     *    Changes in the number of our access lines;

     *    The effects of  competition  from wireless,  other  wireline  carriers
          (through Unbundled Network Elements (UNE),  Unbundled Network Elements
          Platform  (UNEP) or  otherwise),  high  speed  cable  modems and cable
          telephony;

     *    The effects of general and local economic conditions on our revenues;

     *    Our  ability  to   effectively   manage  and  otherwise   monitor  our
          operations, costs, regulatory compliance and service quality;

     *    Our  ability  to  divest  our  remaining  public  utilities   services
          businesses  and the  effect of the timing of the  divestitures  on the
          capital expenditures we make with respect to such businesses;

     *    Our ability to successfully  introduce new product offerings including
          our ability to offer bundled service  packages on terms  attractive to
          our customers, and our ability to sell enhanced and data services;

     *    Our ability to manage our operating expenses, capital expenditures and
          reduce our debt;

     *    The effects of greater  than  anticipated  competition  requiring  new
          pricing,  marketing  strategies or new product  offerings and the risk
          that we will not respond on a timely or profitable basis;

     *    The effects of bankruptcies in the  telecommunications  industry which
          could result in higher network access costs and potential bad debts;

     *    The effects of technological changes,  including the lack of assurance
          that our ongoing  network  improvements  will be sufficient to meet or
          exceed the capabilities and quality of competing networks;

     *    The effects of  increased  pension and retiree  medical  expenses  and
          related funding  requirements;

     *    The  effects  of  changes  in  regulation  in  the  telecommunications
          industry as a result of the  Telecommunications  Act of 1996 and other
          federal and state  legislation  and regulation,  including  changes in
          access charges and subsidy payments;

     *    The effect of  restructuring  of  portions  of the  telecommunications
          market;

     *    The effects of possible state  regulatory cash management  policies on
          our ability to transfer cash among our  subsidiaries and to the parent
          company;

     *    Our ability to  successfully  renegotiate  expiring  union  contracts,
          including the contract covering the Communications  Workers of America
          members in Rochester that is scheduled to expire in January 2004; and


                                       15
<PAGE>
     *    The effects of more  general  factors,  including  changes in economic
          conditions;  changes  in the  capital  markets;  changes  in  industry
          conditions;  changes in our credit ratings;  and changes in accounting
          policies or practices adopted  voluntarily or as required by generally
          accepted accounting principles or regulators.

You should consider these important  factors in evaluating any statement in this
Form 10-K or otherwise  made by us or on our behalf.  The following  information
should be read in conjunction  with the  consolidated  financial  statements and
related notes included in this report. We have no obligation to update or revise
these forward-looking statements.

(a)   Liquidity and Capital Resources
      -------------------------------

For the year  ended  December  31,  2002,  we used cash  flows  from  continuing
operations,  the  proceeds  from the sale of utility  properties,  cash and cash
equivalents  and  investment  balances to fund  capital  expenditures,  interest
payments and debt repayments.  On January 15, 2002, we completed the sale of our
water and  wastewater  operations for $859.1 million in cash plus the assumption
by the buyer of $122.5 million of our debt and other liabilities. On November 1,
2002 we completed  the sale of Kauai  Electric  division  for $215.0  million in
cash.  The proceeds  were used for general  corporate  purposes,  including  the
repayment of outstanding indebtedness.  As of December 31, 2002, we had cash and
cash equivalents aggregating $393.2 million.

For the year ended  December  31, 2002,  our actual  capital  expenditures  were
$468.7 million, including $288.8 million for the ILEC segment, $12.0 million for
the ELI segment (excluding the purchase of equipment  previously under lease for
$110.0  million  in cash),  $39.7  million  for the  public  utilities  services
segments and $18.2 million for general capital expenditures.

We have budgeted  approximately  $333.6  million for our 2003 capital  projects;
including $275.0 million for the ILEC segment, $13.4 million for the ELI segment
and $45.2 million for the public  utilities  segment.  In the ordinary course of
business,  capital  expenditures for the public utilities segment would increase
the amount of assets that would be reflected on the balance sheet. However, most
of the capital  expenditures with respect to our public utilities segment during
2003  will be  expensed  as  incurred  instead  of  capitalized  (see  "Loss  on
Impairment" below and Note 28).

During 1995, ELI entered into a construction  agency  agreement and an operating
lease  agreement  in  connection  with  the   construction  of  certain  network
facilities.  On April  30,  2002,  ELI  purchased  the  facilities  at the lease
termination  for $110.0  million in cash.  Citizens had  guaranteed all of ELI's
obligations under this operating lease and provided the funds for the purchase.

We have an available shelf  registration of $825.6 million and we have available
lines of credit with financial  institutions  in the aggregate  amount of $805.0
million. Associated facility fees vary, depending on our credit ratings, and are
0.25% per annum as of December 31, 2002. The expiration  date for the facilities
is October 24, 2006. During the term of the facilities we may borrow,  repay and
reborrow  funds.  As of December 31, 2002,  there were no  outstanding  advances
under these facilities.

Tender Offer
------------
On May 16, 2002, we commenced a tender offer, at $0.70 per share, for all of the
publicly  held Class A common  shares of ELI that we did not  already  own.  The
tender  offer  expired on June 17,  2002,  at which  time the  shares  tendered,
combined  with the ELI shares  already  owned by us,  represented  approximately
95.5% of total  outstanding ELI Class A shares. On June 20, 2002, we completed a
short-form merger in which ELI became our wholly owned subsidiary and each share
of common stock not tendered was converted into a right to receive $0.70 in cash
without interest. The total cost (including fees and expenses) of the tender was
approximately $6.8 million.

Debt Reduction
--------------
For the year ended December 31, 2002, we retired an aggregate  principal  amount
of $1.06 billion of debt. We intend to continue to reduce debt balances from the
proceeds  from the sale of our  public  service  utilities  and cash  flows from
continuing  operations and may use current cash and cash equivalent balances. If
the sale of our Arizona utility  businesses to UniSource is completed,  the sale
agreement  requires us to promptly  redeem $111.8  million  principal  amount of
industrial revenue bonds.

On January 7, 2002,  we  redeemed at par two of our  outstanding  1991 series of
industrial  development revenue bonds, the $20.0 million 7.15% Mohave series and
the $10.1 million 7.15% Santa Cruz series.


                                       16
<PAGE>

On January 31, 2002, we repaid  approximately  $76.9 million principal amount of
debt from the Rural  Utilities  Service,  Rural  Telephone  Bank and the Federal
Financing Bank. We paid a premium of $0.5 million on these redemptions.

On March 27, 2002, we repaid $40.0  million of Frontier  7.51% Medium Term Notes
at maturity.

On May 1,  2002,  we  redeemed  at par  six  of our  outstanding  variable  rate
industrial  development  revenue  bond series  aggregating  approximately  $20.3
million in principal amount.

On June 27, 2002, we redeemed at par $24.8 million principal amount of our 7.05%
Mohave Industrial Development Revenue Refunding Bonds due August 1, 2020.

On July 15, 2002, we redeemed at par three of our outstanding fixed and variable
rate industrial development revenue bond series aggregating  approximately $14.9
million in principal amount.

On August 7, 2002,  we  redeemed  at par one of our  outstanding  variable  rate
industrial  development  revenue bond series  totaling $5.5 million in principal
amount.

Following the  completion of the merger with ELI, we repaid and  terminated  the
entire $400.0 million outstanding under ELI's committed revolving line of credit
with a syndicate of commercial banks.

During the last three quarters of 2002, we executed a series of purchases in the
open market of a number of our outstanding  notes and debentures.  The aggregate
principal  amount of notes and  debentures  purchased was $106.9 million and the
purchases  generated a pre-tax gain from the early  extinguishment  of debt at a
discount of approximately $6.0 million.  We may from time to time repurchase our
debt in the open market.

During  December  2002,  we  completed a tender  offer with respect to our 6.80%
Debentures due 2026 (puttable at par in 2003) and ELI's 6.05%  Guaranteed  Notes
due  2004.  As a  result  of the  tender,  $82.3  million  and  $259.4  million,
respectively,  of these  securities  were  purchased and retired at a premium of
$12.8 million in excess of the principal amount of the securities purchased.

Interest Rate Management
------------------------
In order to  manage  our  interest  rate risk  exposure,  we  entered  into five
interest  swap  agreements  in 2001 and 2002  with  investment  grade  financial
institutions.  Each agreement covered a notional amount of $50.0 million.  Under
the  terms  of the  agreements,  we make  semi-annual,  floating  interest  rate
interest  payments  based on six  month  LIBOR and  receive a fixed  rate on the
notional amount.  There are two interest rate swap agreements that were executed
in 2001 that  receive a 6.375% fixed rate until the swaps'  termination  date of
August 15,  2004,  and there are three swaps  executed  in 2002 that  receive an
8.500% fixed rate until their  termination  date of May 15, 2006. The underlying
variable  rate on the swaps is set either in  advance,  in arrears or, as in the
case of one agreement,  based on each period's daily average six-month LIBOR. In
connection  with these swaps,  the Company entered into a series of supplemental
rate agreements which had the effect of setting the floating rate portion of the
swaps in advance of the contractually agreed upon rate determination date.

The net  effect  of the two 2001  interest  rate  swaps  and  supplemental  rate
agreements was to reduce the effective  interest rate on $100.0 million of fixed
rate debt from 6.375% to 3.665%  during  2002.  The net effect of the three 2002
swaps and supplemental rate agreements was to reduce the effective interest rate
on $150.0 million of fixed rate debt from 8.500% to 6.864% through  November 15,
2002,  the latest rate reset date. All swaps and  associated  supplemental  rate
agreements are accounted for under SFAS 133 as fair value hedges.


                                       17
<PAGE>
Future Commitments
------------------
A summary of our future contractual obligations and commercial commitments as of
December 31, 2002 is as follows:
<TABLE>
<CAPTION>
                                                          Less than                                After
($ in thousands)                              Total       1 year(2)   2-3 years    4-5 years      5 years
 --------------                            ----------    ----------   ---------    ---------    ----------
<S>                                        <C>              <C>        <C>          <C>          <C>
Long-term debt (See Note 10) (1)           $5,476,272    $ 58,911     $392,390     $885,023     $4,139,948

Operating leases (See Note 28)                157,975      26,790       41,152       34,578         55,455

Long-term contracts (See Note 28)             388,752     100,812      117,591       44,599        125,750

Equity Providing Preferred
   Income Convertible Securities
     (EPPICS)(See Note 16)                    201,250           -            -            -        201,250
                                          -----------    ---------    --------     --------     ----------

Total contractual cash obligations         $6,224,249    $186,513     $551,133     $964,200     $4,522,403
                                          ===========    =========    ========     ========     ==========
</TABLE>
(1)  Includes the debt portion of the equity units ($460.0  million) and the net
     present value of payments under capital leases ($135.2 million).
(2)  If the sale of our Arizona utility  business to UniSource is completed,  we
     will redeem $111.8 million principal amount of long-term debt.

Covenants
---------
The terms  and  conditions  contained  in our  indentures  and  credit  facility
agreements  are of a general  nature,  and do not currently  impose  significant
financial performance criteria on us. These general covenants include the timely
and punctual  payment of principal and interest when due, the maintenance of our
corporate  existence,  keeping  proper  books and  records  in  accordance  with
Generally Accepted Accounting  Principles (GAAP),  restrictions on the allowance
of liens on our assets,  and restrictions on asset sales and transfers,  mergers
and other changes in corporate control. We currently have no restrictions on the
payment of dividends by us either by contract, rule or regulation.

The principal  financial  performance  covenant  under our $805.0 million credit
facilities  and our $200.0  million term loan facility with the Rural  Telephone
Finance  Cooperative  (RTFC)  requires the maintenance of a minimum net worth of
$1.5 billion.  These facilities define "net worth" as shareholders'  equity plus
equity units plus mandatorily redeemable convertible preferred securities. Under
the RTFC loan, in the event that our credit rating from either Moody's Investors
Service  or  Standard  & Poor's  declines  below  investment  grade  (Baa3/BBB-,
respectively),  we would also be required to maintain an interest coverage ratio
of 2.00 to 1 or greater  and a leverage  ratio of 6.00 to 1 or lower.  We are in
compliance with all of our debt covenants.

At December 31, 2002 the amount of our net worth as  calculated  pursuant to the
credit  facilities  and the RTFC  loan  facility  was $1.83  billion.  In future
periods, we may incur a reduction in shareholders' equity as a result of certain
pension matters described under "Critical  Accounting Policies and Estimates" or
for other reasons.  Although the potential  amount of future  reductions  cannot
currently be determined with certainty and assessments of the potential  amounts
require considerable  assumptions,  we believe that we will remain in compliance
with all of our debt covenants.

Acquisitions
------------
In 1999 and 2000 we entered into several  agreements to acquire telephone access
lines.  These  transactions have been accounted for using the purchase method of
accounting.  The results of  operations  of the  acquired  properties  have been
included in our consolidated  financial statements from the dates of acquisition
of each property.

In 2000,  we acquired from Verizon  Communications  Inc.  approximately  317,500
telephone  access lines for $948.2  million in cash,  and we acquired from Qwest
approximately  17,000 telephone  access lines in North Dakota for  approximately
$38.0 million in cash.

On June 29, 2001, we purchased  Frontier for  approximately  $3,373.0 million in
cash.

Divestitures
------------
On August 24, 1999, our Board of Directors  approved a plan of  divestiture  for
our public utilities services businesses, which included gas, electric and water
and wastewater businesses. During 2001 we sold two of our natural gas operations
and in 2002 we sold all of our water and wastewater treatment operations and one
electric business (see Note 7 to Consolidated Financial Statements).

                                       18
<PAGE>

On January 15, 2002, we sold our water and  wastewater  services  operations for
$859.1 million in cash and $122.5 million in assumed debt and other liabilities.

On October 29, 2002, we entered into  definitive  agreements to sell our Arizona
gas and electric divisions to UniSource Energy Corporation for $230.0 million in
cash  ($220.0  million  if we close by July 28,  2003)  subject  to  adjustments
specified in the agreements (see Note 7 to Consolidated  Financial  Statements).
The transaction,  which is subject to regulatory and other customary  approvals,
is expected to close during the second half of 2003.

On October 31, 2002,  we completed  the sale of  approximately  4,000  telephone
access lines in North Dakota for approximately $9.7 million in cash.

On November 1, 2002,  we completed the sale of our Kauai  electric  division for
$215.0 million in cash.

On  December  19,  2002,  we entered  into a  definitive  agreement  to sell our
Hawaiian gas  division to K-1 USA  Ventures,  Inc.  for $115.0  million in cash,
subject to adjustments under the terms of the agreement. The transaction,  which
is subject to regulatory  and other  customary  approvals,  is expected to close
during the fourth quarter of 2003.

Currently,  we do not have an agreement to sell our Vermont  electric  division,
but we continue  to actively  pursue a buyer.  All our gas and  electric  assets
(including   Arizona  gas  and  electric  and  Hawaii  gas)  and  their  related
liabilities are classified as "assets held for sale" and "liabilities related to
assets held for sale," respectively.  These assets have been written down to our
best estimate of the net realizable  value upon sale (see Note 4 to Consolidated
Financial  Statements).  During  the third  quarter  of 2002,  we  recognized  a
non-cash pre-tax impairment loss on these assets of $417.4 million. As discussed
below under "Loss on Impairment"  we will record  additional  impairment  losses
during 2003.

Discontinued operations in the consolidated statements of operations reflect the
results of operations  and the gain on sale of the  water/wastewater  properties
sold in January  2002  including  allocated  interest  expense  for the  periods
presented.  Interest expense was allocated to the discontinued  operations based
on the outstanding debt specifically identified with this business.

Discontinuation of SFAS 71
--------------------------
Prior to the 2000 and 2001 acquisitions,  our incumbent local exchange telephone
properties had been predominantly  regulated following a cost of service/rate of
return  approach.  Accordingly,  we  applied  the  provisions  of  Statement  of
Financial  Accounting  Standards  (SFAS)  No.  71  in  the  preparation  of  our
consolidated financial statements.

Currently,  pricing for a majority of our  revenues in our  previously  existing
incumbent local exchange telephone properties is based upon price cap plans that
limit prices to changes in general  inflation and estimates of productivity  for
the industry at large or upon market  pricing  rather than on the specific costs
of operating our business,  a requirement  for the application of SFAS 71. These
trends in the  deregulation  of pricing and the  introduction of competition are
expected to continue.  We intend to operate all of our properties as competitive
enterprises, to meet competitive entry and maximize revenue by providing a broad
range of products  and  services,  such as data  services.  Many of these future
services will not be regulated, further increasing the percentage of our revenue
provided by our networks that is not based upon  historical  cost/rate of return
regulation.

In the third quarter of 2001, we concluded based on the factors mentioned above,
that the provisions of SFAS 71 were no longer  applicable to our incumbent local
exchange telephone properties  (properties we owned prior to the acquisitions in
2000 and 2001).

As discussed further in Note 24 to Consolidated Financial Statements, in 2001 we
recorded  a non-cash  extraordinary  charge of $43.6  million  net of tax in our
statement of operations, to write-off regulatory assets and liabilities recorded
on our  balance  sheet in the past.  Based  upon our  evaluation  of the pace of
technological  change that is  estimated to occur in certain  components  of our
rural telephone  networks,  we concluded that minor  modifications  in our asset
lives were required for the major network  technology assets. In accordance with
the  provisions of SFAS 101 and SFAS 121, we performed a test of the  impairment
of the property,  plant and equipment accounts for our properties  discontinuing
SFAS 71 and based upon our  expectations  of future changes in sales volumes and
prices and the  anticipated  rate of entry of  additional  competition  into our
markets,  we concluded  that an asset  impairment  was not  warranted.


                                       19
<PAGE>
Critical Accounting Policies and Estimates
------------------------------------------
We  review  all  significant  estimates  affecting  our  consolidated  financial
statements  on a  recurring  basis  and  record  the  effect  of  any  necessary
adjustment  prior to  their  publication.  Uncertainties  with  respect  to such
estimates  and   assumptions  are  inherent  in  the  preparation  of  financial
statements;  accordingly,  it is possible that actual  results could differ from
those  estimates  and changes to  estimates  could  occur in the near term.  The
preparation of our financial  statements  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.  Estimates  and  judgments  are used when  accounting  for allowance for
doubtful  accounts,   impairment  of  long-lived   assets,   intangible  assets,
depreciation  and  amortization,   employee  benefit  plans,  income  taxes  and
contingencies, among others.

Our estimate of anticipated losses related to telecommunications bankruptcies is
a "critical  accounting  estimate." We have  significant  on-going normal course
business relationships with many telecom providers, some of which have filed for
bankruptcy.  We  generally  reserve  approximately  95% of the  net  outstanding
pre-bankruptcy  balances  owed to us and  believe  that our  estimate of the net
realizable value of the amounts owed to us by bankrupt entities is appropriate.

We  believe  that the  accounting  estimate  related  to asset  impairment  is a
"critical  accounting  estimate".  With  respect to ELI,  the estimate is highly
susceptible  to change from period to period  because it requires  management to
make significant judgments and assumptions about future revenue, operating costs
and capital  expenditures  over the life of the  property,  plant and  equipment
(generally  5 to 15  years)  as well as the  probability  of  occurrence  of the
various scenarios and appropriate discount rates. Management's assumptions about
ELI's future revenue,  operating  costs and capital  expenditures as well as the
probability  of  occurrence  of  these  various  scenarios  require  significant
judgment  because  the CLEC  industry is changing  and because  actual  revenue,
operating costs and capital  expenditures  have  fluctuated  dramatically in the
past and may continue to do so in the future.  The  calculation of  depreciation
and amortization  expense is based on the estimated economic useful lives of the
underlying  property,  plant and equipment and identifiable  intangible  assets.
Although we believe it is unlikely  that any  significant  changes to the useful
lives of our tangible or  intangible  assets will occur in the near term,  rapid
changes in technology or changes in market  conditions could result in revisions
to such  estimates  that could affect the carrying value of these assets and our
future  consolidated  operating  results.  Our  depreciation  expense of the ELI
segment  will  decrease  substantially  in  future  periods  as a result  of the
impairment   write  down.  With  respect  to  our  remaining  gas  and  electric
properties,  our  estimate is based upon  expected  future sales prices of these
properties. (See Notes 4 and 7 to Consolidated Financial Statements).

In the third quarter  2002, we recognized a non-cash  pre-tax loss on impairment
of $656.7 million for the impairment of long-lived  assets in the ELI sector and
a total of $417.4  million of non-cash  pre-tax  losses on impairment in the gas
and  electric  sectors.  We  determined  that we may not be able to recover  the
previously  recorded carrying value of ELI's property,  plant, and equipment and
therefore  recorded  the  impairment  charge  accordingly.  The gas and electric
impairment is associated with the proposed sales of our Arizona gas and electric
and  Hawaiian  gas  properties  at a price that was less than the book  carrying
value.  We have also  written  down the value of our  remaining  utility  to our
estimate of net realizable sale price.

Our  indefinite  lived  intangibles  consist of goodwill  and trade name,  which
resulted from the purchase of ILEC  properties.  We test for impairment of these
assets annually, or more frequently,  as circumstances  warrant. All of our ILEC
properties share similar economic characteristics and as a result, our reporting
unit is the ILEC segment.  In determining fair value during 2002 we utilized two
tests.  One test utilized recent trading prices for completed ILEC  acquisitions
of similarly situated properties.  A second test utilized current trading values
for the Company's  publicly traded common stock. We reviewed the results of both
tests  for  consistency  to  insure  that  our  conclusions  were   appropriate.
Additionally,  we  utilized  a range of prices to gauge  sensitivity.  Our tests
determined  that fair values  exceeded book value.  Unless  economic  conditions
change significantly (i.e. we experience  unanticipated declines in revenue, and
or declines in both our stock price and ILEC property  values) we do not believe
that a charge for impairment is reasonably likely to occur in the near future.

Our  estimates of pension  expense,  other post  retirement  benefits  including
retiree  medical  benefits  and related  liabilities  are  "critical  accounting
estimates".  Our pension and other post retirement  benefits  expenses are based
upon a set of assumptions that include  projections of future interest rates and
asset returns.  Actual results may vary from these  estimates.  If future market
conditions  cause  either a decline in interest  rates used to value our pension
plan  liabilities  or  reductions  to the value of our  pension  plan  assets we
potentially could incur additional  charges to our  shareholder's  equity at the
end of 2003. Based upon market conditions  existing at the end of February 2003,
an additional charge of approximately $30 - $35 million would be required at the
end of 2003 should market conditions remain unchanged.


                                       20
<PAGE>

Management  has  discussed  the  development  and  selection  of these  critical
accounting  estimates with the audit committee of our board of directors and our
audit committee has reviewed our disclosure relating to them.

New Accounting Pronouncements
-----------------------------
In July 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets."  This  statement  requires  that  goodwill and other  intangibles  with
indefinite  useful  lives no longer be  amortized  to  earnings,  but instead be
reviewed for impairment.  We have no intangibles  with  indefinite  useful lives
other than goodwill and trade name. The  amortization of goodwill and trade name
ceased upon  adoption of the  statement on January 1, 2002.  We were required to
test for impairment of goodwill and other  intangibles  with  indefinite  useful
lives as of January 1, 2002 and at least annually  thereafter.  Any transitional
impairment  loss at January 1, 2002 is recognized as the cumulative  effect of a
change in accounting  principle in our statement of  operations.  As a result of
our adoption of SFAS 142, we recognized a transitional  impairment  loss related
to ELI of  $39.8  million  as a  cumulative  effect  of a change  in  accounting
principle  in our  statement  of  operations  in the first  quarter of 2002.  We
annually  examine the carrying value of our goodwill and other  intangibles with
estimated useful lives to determine  whether there are any impairment losses and
have  determined  for the  year  ended  December  31,  2002  that  there  was no
impairment.

SFAS No. 142 also requires that intangible assets with estimated useful lives be
amortized  over those lives and be reviewed for  impairment in  accordance  with
SFAS No. 144,  "Accounting  for  Impairment or Disposal or  Long-Lived  Assets."
During  the  first  quarter  of  2002,  we  reassessed  the  useful  life of our
intangible  assets with estimated useful lives and determined that no change was
required.  The impact of the  adoption of SFAS No. 142 is discussed in Note 6 to
Consolidated Financial Statements.

In August  2001,  the FASB issued  SFAS 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 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. We are currently  evaluating the
impact of adoption of SFAS 143.

In October 2001,  the FASB issued SFAS 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  121,  for  impairment  of
long-lived  assets held and used and 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.
We adopted this statement on January 1, 2002.

In April 2002, the FASB issued SFAS 145,  "Rescission of FASB  Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement  eliminates the requirement that gains and losses from  extinguishment
of debt be aggregated and, if material, classified as an extraordinary item, net
of related  income tax  effect.  The  statement  requires  gains and losses from
extinguishment of debt to be classified as extraordinary items only if they meet
the criteria in  Accounting  Principles  Board  Opinion No. 30,  "Reporting  the
Results of  Operations  -  Reporting  the  Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions"  which provides guidance for distinguishing  transactions that are
part of an  entity's  recurring  operations  from  those  that  are  unusual  or
infrequent  or that meet the criteria  for  classification  as an  extraordinary
item. We adopted SFAS 145 in the second  quarter of 2002.  During the year ended
December  31,  2002,  we  recognized  $32.3  million  of gains  from  early debt
retirement as other income. There were no similar types of retirements in 2001.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities,"  which nullified  Emerging Issues Task Force
(EITF) Issue No. 94-3,  "Liability  Recognition for Certain Employee Termination
Benefits  and Other Costs to Exit an  Activity."  SFAS No. 146  requires  that a
liability for a cost associated with an exit or disposal  activity be recognized
when the liability is incurred, rather than on the date of commitment to an exit
plan.  This  Statement is  effective  for exit or disposal  activities  that are
initiated after December 31, 2002. We are currently evaluating the impact of the
adoption of SFAS 146.


                                       21
<PAGE>
In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation - Transition and Disclosure for Stock-Based Compensation." SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair value based method of accounting for  stock-based  compensation  and amends
the  disclosure  requirements  of SFAS No. 123. This  statement is effective for
fiscal  years  ending  after  December  15,  2002.  We have adopted the expanded
disclosure requirements of SFAS No. 148.

(b) Results of Operations
    ---------------------
                                     REVENUE

ILEC  revenue is generated  primarily  through the  provision of local,  network
access, long distance and data services. Such services are provided under either
a  monthly  recurring  fee or  based  on  usage  at a  tariffed  rate and is not
dependent  upon  significant  judgments by  management,  with the exception of a
determination of a provision for uncollectible amounts.

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

Revenue from the provision of public utility  services are  recognized  based on
usage without  significant  judgments made by management with the exception of a
provision for uncollectible accounts.

Consolidated  revenue  increased  $212.3  million,  or 9%,  in 2002  and  $654.6
million,  or 36%,  in 2001.  The  increase in 2002 was  primarily  due to $420.5
million of increased  telecommunications  revenue,  largely due to the impact of
the Frontier acquisition on June 29, 2001, partially offset by $195.0 million of
decreased  gas  revenue  largely due to the  disposition  of the  Louisiana  and
Colorado gas operations and the disposition of the Kauai electric division.  The
increase in 2001 was  primarily  due to the impact of  acquisitions  in the ILEC
sector as well as the  pass-through  to customers of the  increased  cost of gas
offset by the disposition of the Louisiana and Colorado gas operations.
<TABLE>
<CAPTION>
                TELECOMMUNICATIONS REVENUE

      ($ in thousands)                        2002                         2001                  2000
       --------------             ---------------------------    ----------------------------- ----------
                                   Amount    $ Change  % Change    Amount   $ Change  % Change  Amount
                                  ---------  ------------------- ---------  ------------------ ----------
<S>                              <C>         <C>           <C>   <C>         <C>           <C> <C>
    Access services              $  673,456  $ 108,786     19%   $  564,670  $ 182,136     48% $  382,534
    Local services                  869,907    196,587     29%      673,320    277,574     70%    395,746
    Long distance and data service  305,455     97,181     47%      208,274    101,612     95%    106,662
    Directory services              104,383     32,008     44%       72,375     34,951     93%     37,424
    Other                           109,704     34,290     45%       75,414     34,037     82%     41,377
                                   ---------  ---------          ----------  ----------        ----------
     ILEC revenue                 2,062,905    468,852     29%    1,594,053    630,310     65%    963,743
    ELI                             175,079    (48,312)   -22%      223,391    (17,401)    -7%    240,792
                                  ---------   ---------          ----------  ----------        ----------
                                 $2,237,984  $ 420,540     23%   $1,817,444  $ 612,909     51% $1,204,535
                                  =========   =========          ==========  ==========        ==========
</TABLE>
Changes  in the  number of our access  lines is the most  fundamental  driver of
changes in our telecommunications revenue.  Historically,  rural local telephone
companies  experienced  steady  growth  in  access  lines  because  of  positive
demographic  trends,  steady rural local  economies and little  competition.  In
recent  quarters  many  rural  local  telephone  companies  (including  us) have
experienced  a loss of access  lines  primarily  because of  difficult  economic
conditions, increased competition from competitive wireline providers (including
from  Unbundled  Network  Elements),  from  wireless  providers  and from  cable
companies  (currently  with  respect  to  broadband  but which may in the future
expand to cable  telephony),  and by some customers  disconnecting  second lines
when they add DSL or cable modem service.  We lost  approximately  37,000 access
lines during 2002 but added  approximately  41,100 DSL  subscribers  during this
period.  The loss of lines during 2002 was equally weighted between  residential
and non-residential  customers. The non-residential line losses were principally
in Rochester,  while the  residential  losses were  throughout  our markets.  We
expect to continue to lose access lines  during  2003.  A continued  decrease in
access  lines,  combined  with  continuing  difficult  economic  conditions  and
increased competition, may cause our revenues to decrease in 2003.


                                       22
<PAGE>

Prior to 2002, we reported  subscriber line charges (SLC) in both the access and
local revenue categories.  Beginning in the second quarter 2002, all SLC revenue
is  reported  in the  local  services  category.  All  prior  periods  have been
conformed to this  presentation.  The average  amount of SLC that was previously
reported in access services is $22.9 million per quarter.

Access  services  revenue for the year ended December 31, 2002 increased  $108.8
million,  or 19%, as compared  with the prior year period  primarily  due to the
full year impact of Frontier of $92.4  million.  Increases in subsidies of $20.3
million and  non-switched  access revenue of $12.5 million due to higher circuit
sales were  partially  offset by a decrease in switched  access revenue of $16.5
million primarily from the effect of tariff rate reductions effective as of July
1, 2002.  Our subsidy  revenues in 2003 are  expected to be slightly  lower than
2002.

Access  services  revenue for the year ended December 31, 2001 increased  $182.1
million,  or 48%,  as  compared  with the prior  year  period  primarily  due to
additional  revenues of $159.1 million  resulting from  acquisitions.  Growth in
minutes of use, special access and subsidies  revenue  contributed $3.1 million,
$17.9 million and $20.0  million,  respectively.  The increases  were  partially
offset by $6.5 million from the effect of the FCC's CALLS  mandate which reduced
access  charges  paid  by long  distance  companies  and  $7.3  million  in rate
decreases  in effect as of July 1, 2001.  Access  services  revenue in 2001 also
includes a  reclassification  of $13.9 million in revenue that was classified as
local services revenue in 2000.

Local services  revenue for the year ended  December 31, 2002  increased  $196.6
million,  or 29%, as compared  with the prior year period  primarily  due to the
full year impact of Frontier of $184.8  million.  Increases  of $8.0  million in
enhanced services for feature packages and $12.5 million from SLC were partially
offset by an $8.6 million decrease  resulting from rate changes and line losses.
Although we  continue  to increase  our  penetration  of enhanced  services,  in
current economic conditions the rate of increase in sales is lower than in prior
periods and we expect this trend to  continue.  Local  services  revenue for the
year ended December 31, 2001 increased $277.6 million,  or 70%, as compared with
the prior year period primarily due to acquisitions,  which  contributed  $260.9
million and growth in enhanced services of $8.1 million.  Local services revenue
in 2001 also reflects a reduction for the  reclassification  of $13.9 million in
revenue that was classified as access revenue in 2000.

Long  distance and data  services  revenue for the year ended  December 31, 2002
increased  $97.2  million,  or 47%,  as  compared  with the  prior  year  period
primarily  due to the full  year  impact of  Frontier  of $72.4  million,  $13.7
million  growth  related  to data and  dedicated  circuits  and  growth  in long
distance  services of $11.0 million.  The rate of increases in our data and long
distance  revenues has been slowing recently because of economic  conditions and
intense  competition  in some of our  markets.  We  expect  these  factors  will
continue to affect our long  distance and data  services  revenues  during 2003.
Long  distance and data  services  revenue for the year ended  December 31, 2001
increased  $101.6  million,  or 95%,  as  compared  with the prior  year  period
primarily due to the impact of  acquisitions  of $78.2 million,  principally the
long-distance and data revenue associated with Frontier, which contributed $74.1
million.  Growth in data and  dedicated  circuits of $14.9 million and growth in
long distance services of $7.7 million also contributed to the increase.

Directory  services revenue for the year ended December 31, 2002 increased $32.0
million,  or 44%, as compared  with the prior year period  primarily  due to the
full  year  impact of  Frontier  of $30.0  million  and  growth in yellow  pages
advertising  revenue of $2.0 million.  Directory  services  revenue for the year
ended  December 31, 2001 increased  $35.0 million,  or 93%, as compared with the
prior year period primarily due to the impact of acquisitions, which contributed
$33.2 million, and growth of $1.8 million.

Other revenue for the year ended December 31, 2002 increased  $34.3 million,  or
45%,  as  compared  with the prior year  period  primarily  due to the full year
impact of Frontier of $32.8  million.  Other revenue for the year ended December
31, 2001 increased $34.0 million, or 82%, as compared with the prior year period
primarily due to the impact of acquisitions of $38.4 million,  partially  offset
by a decrease in miscellaneous revenue categories.

ELI revenue  for the years ended  December  31,  2002 and 2001  decreased  $48.3
million, or 22% and $17.4 million, or 7%,  respectively,  primarily due to lower
reciprocal  compensation  minutes and prices,  a decline in  Integrated  Service
Digital  Network  (ISDN)  services  due to less  demand  from  internet  service
providers  and lower demand and prices for long haul  services.  The decrease in
2001 was  also  attributable  to the  expiration  of a  material  data  services
contract in February 2001. ELI has  experienced  eight  consecutive  quarters of
declining revenue.


                                       23
<PAGE>
<TABLE>
<CAPTION>
                            GAS AND ELECTRIC REVENUE

   ($ in thousands)
    --------------                     2002                         2001                 2000
                         -----------------------------  ------------------------------- ----------
                          Amount    $ Change  % Change   Amount    $ Change  % Change    Amount
                         --------- -------------------  ---------- -------------------- ----------
<S>                      <C>        <C>           <C>   <C>         <C>          <C>    <C>
    Gas revenue          $ 216,517  $ (195,017)  -47%   $ 411,534   $ 36,783     10%    $ 374,751
    Electric revene      $ 214,831  $  (13,184)   -6%   $ 228,015   $  4,943      2%    $ 223,072
</TABLE>

Gas revenue for the year ended December 31, 2002 decreased  $195.0  million,  or
47%, as compared  with the prior year  period  primarily  due to the sale of our
Louisiana and Colorado gas operations  partially  offset by higher purchased gas
costs passed on to consumers.  Gas revenue for the year ended  December 31, 2001
increased  $36.8  million,  or 10%,  as  compared  with the  prior  year  period
primarily due to higher purchased gas costs passed on to customers and increased
consumption  partially  offset  by  decreased  revenue  due to the  sale  of our
Louisiana and Colorado gas operations. Included in gas revenue for 2001 and 2000
is  approximately  $218.8 million and $232.3 million,  respectively,  of revenue
from our  Louisiana  and  Colorado gas  operations  that ceased upon the sale of
those  operations  on July 2, 2001 and November 30,  2001,  respectively.  Under
tariff  provisions,  the cost of our gas purchases  are  primarily  passed on to
customers.

Electric  revenue for the year ended December 31, 2002 decreased  $13.2 million,
or 6%, as compared  with the prior year period  primarily due to the sale of our
Kauai electric division  partially offset by increased unit sales and the effect
of a rate increase  approved in Vermont on July 15, 2002.  Electric  revenue for
the year ended December 31, 2001 increased $4.9 million, or 2%, as compared with
the prior year period primarily due to customer growth and increased consumption
due to warmer weather  conditions.  Included in electric  revenue for 2002, 2001
and 2000 is  approximately  $76.2  million,  $94.3  million  and $95.1  million,
respectively,  of revenue for our Kauai electric  operation that ceased upon its
sale on November 1, 2002.  Under  tariff  provisions,  the cost of our  electric
energy and fuel oil purchases are primarily passed on to customers.
<TABLE>
<CAPTION>
                                COST OF SERVICES

      ($ in thousands)                        2002                           2001                2000
       --------------             -----------------------------  ----------------------------- ---------
                                   Amount   $ Change   % Change   Amount    $ Change  % Change  Amount
                                  --------- -------------------  ---------- ------------------ ---------
<S>                               <C>        <C>           <C>   <C>         <C>          <C>  <C>
      Network access              $ 235,462  $  41,368     21%   $ 194,094   $ 55,924     40%  $ 138,170
      Gas purchased                 122,915   (159,146)   -56%     282,061     52,523     23%    229,538
      Electric energy and fuel
        oil purchased               118,543     (4,680)    -4%     123,223      9,258      8%    113,965
                                  ---------  ---------          ----------  ----------         ---------
                                  $ 476,920  $(122,458)   -20%   $ 599,378   $117,705     24%  $ 481,673
                                  =========  =========          ==========  ==========         =========
</TABLE>
Network access  expenses for the year ended  December 31, 2002  increased  $41.4
million,  or 21%, as compared  with the prior year period  primarily  due to the
full year  impact of  Frontier of $41.3  million  and  increased  costs of $16.6
million in the ILEC sector, partially offset by decreased costs of $16.5 million
in ELI as a result of decreases in demand.

Network access  expenses for the year ended  December 31, 2001  increased  $55.9
million,  or 40%, as compared  with the prior year period  primarily  due to the
impact of acquisitions and increased circuit expense  associated with additional
data product  introductions  partially  offset by a reduction  in long  distance
access  expense  related to rate changes in the ILEC sector and reduced  network
access expenses at ELI.

Gas purchased for the year ended December 31, 2002 decreased $159.1 million,  or
56%, as compared  with the prior year  period  primarily  due to the sale of our
Louisiana  and Colorado gas  operations  partially  offset by an increase in the
cost of gas due to higher  commodity  pricing.  Gas purchased for the year ended
December 31, 2001 increased  $52.5  million,  or 23%, as compared with the prior
year period  primarily  due to higher  purchased gas costs  partially  offset by
decreased  gas  purchased  due to the sale of our  Louisiana  and  Colorado  gas
operations.  Included in gas purchased for 2001 and 2000 is approximately $173.3
million and $151.4 million,  respectively, of gas purchased by our Louisiana and
Colorado gas operations that ceased upon the sale of those operations on July 2,
2001 and November 30, 2001, respectively.

Electric  energy and fuel oil  purchased  for the year ended  December  31, 2002
decreased $4.7 million,  or 4%, as compared with the prior year period primarily
due to the sale on  November  1,  2002 of Kauai  electric  partially  offset  by
increased  purchased  power  costs.  Included  in  electric  energy and fuel oil
purchased for 2002, 2001 and 2000 is approximately $27.5 million,  $37.9 million
and $37.9 million,  respectively, of electricity purchased by our Kauai electric
operation that ceased upon its sale on November 1, 2002.


                                       24
<PAGE>

Electric  energy and fuel oil  purchased  for the year ended  December  31, 2001
increased $9.3 million,  or 8%, as compared with prior year period primarily due
to higher purchased power prices,  customer growth and increased consumption due
to warmer  weather  conditions.  Gas,  electric  energy  and fuel oil  purchased
excludes amounts deferred for future recovery in rates.

In Arizona,  power costs  charged by our supplier were in excess of the rates we
charged our customers by approximately $123.6 million through December 31, 2002.
We believe that we are allowed to recover these charges from ratepayers  through
the  Purchase  Power Fuel  Adjustment  clause  that was  approved by the Arizona
Corporation  Commission and has been in place for several years.  However, in an
attempt to limit "rate shock" to our  customers,  we requested in September 2001
that our unrecovered power costs, plus interest,  be recovered over a seven-year
period.  As  a  result,  we  deferred  these  costs  on  the  balance  sheet  in
anticipation  of  recovery  through the  regulatory  process.  This  balance was
effectively  reduced by the public service impairment charge recorded during the
third quarter of 2002 which reduced the net assets of these  businesses to their
estimated  sale  value (See Note 4 to  Consolidated  Financial  Statements).  In
January  2003,  the  Commission  agreed  to  consolidate  this  matter  with the
application for approval of the sale of our Arizona  electric  property.
<TABLE>
<CAPTION>
                            OTHER OPERATING EXPENSES

    ($ in thousands)                              2002                          2001                 2000
     --------------                  ------------------------------  ----------------------------- ---------
                                      Amount    $ Change   % Change   Amount    $ Change  % Change  Amount
                                     ---------  -------------------  ---------- ------------------ ----------
<S>                                  <C>          <C>           <C>  <C>        <C>           <C>  <C>
    Operating expenses               $  762,053   $ 22,931      3%   $ 739,122  $ 101,919     16%  $ 637,203
    Taxes other than income taxes       131,258     15,448     13%     115,810     15,709     16%    100,101
    Sales and marketing                 109,044     12,266     13%      96,778     22,156     30%     74,622
                                     ----------   ---------          ---------- ----------         ---------
                                     $1,002,355   $ 50,645      5%   $ 951,710  $ 139,784     17%  $ 811,926
                                     ==========   =========          ========== ==========         =========
</TABLE>
Operating expenses for the year ended December 31, 2002 increased $22.9 million,
or 3%, as compared with prior year period  primarily due to increased  operating
expenses related to the full year impact of Frontier of $149.9 million partially
offset by increased  operating  efficiencies and a reduction of personnel in the
ILEC and ELI sectors,  and decreased operating expenses in the gas sector due to
the sale of our  Louisiana  and  Colorado  gas  operations  on July 2,  2001 and
November 30, 2001,  respectively.  The increase was also offset by the fact that
there were no acquisition  assimilation  costs in 2002 compared to $21.4 million
of such  costs in 2001.  We  routinely  review  our  operations,  personnel  and
facilities  to  achieve  greater  efficiencies.  These  reviews  may  result  in
reductions in personnel and an increase in severance costs.

Included in operating  expenses is pension  expense.  In future periods,  if the
value of our pension assets decline and/or projected benefit costs increase,  we
may have increased pension expenses. Based on current assumptions and plan asset
values,  we estimate that our pension expense will increase from $4.3 million in
2002 to  approximately  $13.0 - $15.0 million in 2003 and that a contribution to
our pension plans will be required in 2003 in an amount  currently  estimated at
$16.0 - $18.0 million.  In addition,  as medical costs increase the costs of our
retiree medical  obligations  also increase.  Our retiree medical costs for 2002
were $15.1 million and our current estimate for 2003 is approximately  $15 - $16
million.

Operating  expenses  for the year  ended  December  31,  2001  increased  $101.9
million,  or 16%, as compared  with the prior year period  primarily  due to the
impact of acquisitions. The increase was partially offset by decreased operating
expenses at ELI primarily due to a reduction in personnel,  decreased  operating
expenses  in the gas  sector  primarily  due to the  sale of the  Louisiana  and
Colorado  gas  operations  and a decrease  in  compensation  expense  related to
variable stock plans.

In future periods,  compensation  expense related to variable stock plans may be
materially  affected  by our stock  price.  A $1.00  change  in our stock  price
impacts  compensation  expense  by  approximately  $1.0  million.  There  was no
material impact for the year ended December 31, 2002.

Taxes other than income  taxes for the year ended  December  31, 2002  increased
$15.4  million,  or 13%, as compared to prior year period  primarily  due to the
full year impact of  Frontier of $25.6  million  partially  offset by  decreased
payroll taxes in the ILEC sector  related to workforce  reductions and decreased
taxes  in the gas  sector  due to the sale of our  Louisiana  and  Colorado  gas
operations on July 2, 2001 and November 30, 2001, respectively. Taxes other than
income for the year ended December 31, 2001 increased $15.7 million,  or 16%, as
compared to prior year period primarily due to the impact of acquisitions.


                                       25
<PAGE>

Sales and  marketing  expenses for the year ended  December  31, 2002  increased
$12.3  million,  or 13%, as compared to prior year period  primarily  due to the
full year impact of Frontier of $22.2  million,  partially  offset by  decreased
sales and  marketing  in the ELI  sector of $10.0  million,  primarily  due to a
reduction in personnel and related costs.  Sales and marketing expenses for year
ended  December 31, 2001 increased  $22.2 million,  or 30%, as compared to prior
year  period   primarily  due  to  the  impact  of  acquisitions  and  increased
telemarketing costs in the telecommunications sector.
<TABLE>
<CAPTION>
                       DEPRECIATION AND AMORTIZATION EXPENSE

      ($ in thousands)                2002                         2001                  2000
       --------------       ---------------------------  ----------------------------- ---------
                             Amount   $ Change % Change   Amount    $ Change  % Change  Amount
                            --------- -----------------  ---------- ------------------ ---------
<S>                         <C>       <C>          <C>   <C>        <C>           <C>  <C>
      Depreciation expense  $ 630,113 $ 141,156    29%   $ 488,957  $ 118,838     32%  $ 370,119
      Amortization expense    125,409   (17,970)  -13%     143,379    125,891    720%     17,488
                            --------- ---------          ---------- ----------         ---------
                            $ 755,522 $ 123,186    19%   $ 632,336  $ 244,729     63%  $ 387,607
                            ========= =========          ========== ==========         =========
</TABLE>
Depreciation  expense  for the year ended  December  31, 2002  increased  $141.2
million, or 29%, as compared to prior year period primarily due to the full year
impact of Frontier of $82.6 million and increased  depreciation of $35.6 million
at ELI. The increase at ELI was primarily due to the purchase of $110.0  million
of  previously  leased  facilities in April 2002 and changes in our estimates of
the  depreciable  lives as of June 2002 offset by a decrease  related to the ELI
impairment  charge  recognized  during the third quarter of 2002. As a result of
the ELI impairment,  we expect 2003  depreciation  and  amortization  expense to
decline 10% - 15%.

Depreciation  expense  for the year ended  December  31, 2001  increased  $118.8
million, or 32%, as compared to prior year period primarily due to the impact of
acquisitions  of $119.1  million and $22.0 million of  accelerated  depreciation
related  to the  change in useful  lives of our  accounting  and human  resource
systems and our Plano,  Texas office  building,  furniture and fixtures.  Higher
property, plant and equipment balances in the telecommunications and ELI sectors
also  contributed  to the  increase.  The  increases  were  partially  offset by
decreased  depreciation  expense related to our classifying our gas and electric
sectors as "assets held for sale" which requires us to cease  depreciating these
assets.  Such  depreciation  expense would have been an additional $50.8 million
for the year ended  December  31,  2001.  The  increase  is also offset by $17.4
million  in the prior year  period of  accelerated  depreciation  related to the
change in useful life of an operating system in the telecommunications sector.

Amortization  expense  for the year ended  December  31,  2002  decreased  $18.0
million,  or 13%, as compared to the prior year period primarily due to the fact
that we ceased  amortization  of goodwill and trade name related to our previous
acquisitions  as of January 1, 2002 in accordance  with SFAS No. 142,  "Goodwill
and Other  Intangible  Assets."  As a result of ELI's  adoption  of SFAS 142, we
recognized  a  transitional  impairment  loss of $39.8  million as a  cumulative
effect of a change in accounting principle in our statement of operations in the
first quarter of 2002. For the year ended December 31, 2001 amortization expense
included  $91.2 million of goodwill and trade name  amortization.  This decrease
was offset by the impact of additional amortization of customer base of Frontier
of $47.6 million and $24.1 million in 2002 and 2001, respectively.  Amortization
expense  for the year  ended  December  31,  2001  increased  $125.9  million as
compared to prior year  period  primarily  due to  amortization  of  intangibles
related to acquisitions.
<TABLE>
<CAPTION>
           RESERVE FOR TELECOMMUNICATIONS BANKRUPTCIES / RESTRUCTURING AND OTHER EXPENSES


($ in thousands)                                   2002                         2001              2000
 --------------                      ---------------------------  ----------------------------- ---------
                                      Amount   $ Change % Change   Amount    $ Change  % Change  Amount
                                     --------- -----------------  ---------- ------------------ ---------
<S>                                  <C>       <C>           <C>   <C>        <C>         <C>     <C>
Reserve for telecommunications
  bankruptcies                       $ 10,880  $ (10,320)   -49%   $ 21,200   $ 21,200    100%    $    -
Restructuring and other expenses     $ 37,186  $  17,859     92%   $ 19,327   $ 19,976   3078%    $ (649)
</TABLE>

                                       26
<PAGE>
During the second quarter 2002, we reserved approximately $21.6 million of trade
receivables with WorldCom as a result of WorldCom's filing for bankruptcy. These
receivables   were   generated  as  a  result  of  providing   ordinary   course
telecommunications  services.  The $21.6 million charge was partially  offset by
reversals in our Global reserve as discussed below.

Concurrent with the acquisition of Frontier,  we entered into several  operating
agreements with Global.  We have ongoing  commercial  relationships  with Global
affiliates.  We  reserved  a total of $29.0  million  of Global  receivables  to
reflect our best estimate of the net realizable  value of  receivables  incurred
from these commercial relationships during 2001 and 2002 as a result of Global's
filing for  bankruptcy.  We recorded a  write-down  of such  receivables  in the
amount of $7.8 million in the first quarter 2002 and $21.2 million in the fourth
quarter of 2001. In 2002, as the result of a settlement  agreement  with Global,
we reversed $17.9 million of our previous reserve of the net realizable value of
these receivables.  Prior to the date of Global's bankruptcy filing, we provided
ordinary course telecommunications  services as well as transitional services to
Global. Global has provided us certain customer billing and collection functions
as well as other transitional services. Although some of these arrangements have
continued  after the bankruptcy  filing,  we are in the process of changing some
services and  functions  to provide them  ourselves.  The  Bankruptcy  Court has
granted relief to us and other telecommunications companies that provide service
to Global by,  among other  things,  directing a shortened  payment  period with
respect to post-petition  invoices, an expedited court process for post-petition
defaults in payments by Global,  and a priority for post-petition  expense items
over other unsecured debt. These procedures should minimize future economic loss
to us although we cannot guarantee that additional losses will not occur.

Restructuring  and other expenses for the year ended December 31, 2002 primarily
consist  of  $33.0   million   related  to   reductions   in  personnel  at  our
telecommunications  operations,  costs that were spent at both our Plano,  Texas
facility and at other locations as a result of transitioning functions and jobs,
and $6.8  million  related to our  tender  offer in June 2002 for all of the ELI
common shares that we did not already own. These costs were partially  offset by
a $2.8 million reversal of a 2001 ELI accrual discussed below.

     Plano Restructuring
     Pursuant  to a plan  adopted in  the third  quarter of 2001,  we closed our
     operations  support  center in Plano,  Texas in August 2002.  In connection
     with this plan, we recorded a pre-tax charge of $14.6 million in the second
     half of 2001, $0.8 million in the first quarter of 2002 and we adjusted our
     accrual  down by $0.1  million  and $0.6  million  in the  second and third
     quarter  of  2002,  respectively.  Our  objective  is  to  concentrate  our
     resources in areas where we have the most customers,  to better serve those
     customers.  We sold our Plano office  building in 2003.  The  restructuring
     resulted in the  termination of 750  employees.  We  communicated  with all
     affected  employees  during July 2001.  Certain  employees  were  relocated
     whereas others were offered  severance,  job training  and/or  outplacement
     counseling.  As of December 31, 2002,  approximately $14.7 million had been
     paid and all affected  employees  had been  terminated.  The  restructuring
     expenses primarily consist of severance benefits, retention payments earned
     through December 31, 2002, and other planning and communication costs.

     Sacramento Call Center Restructuring
     In April 2002, we closed our Sacramento Customer Care Center. In connection
     with this  closing,  we  recorded a pre-tax  charge of $0.7  million in the
     fourth quarter of 2001, and $0.1 million and $9,000 in the first and second
     quarters of 2002,  respectively.  We redirected  the call traffic and other
     work  activities to our Kingman,  Arizona call center.  This  restructuring
     resulted in the  elimination  of 98  employees.  We  communicated  with all
     affected   employees  during  November  2001.  As  of  December  31,  2002,
     approximately $0.8 million was paid, all affected employees were terminated
     and no accrual remained.

     ELI Restructuring
     In the first half of 2002, ELI redeployed the internet routers, frame relay
     switches and ATM switches from the Atlanta, Cleveland, Denver, Philadelphia
     and New York  markets  to other  locations  in ELI's  network.  ELI  ceased
     leasing the  collocation  facilities and off-net  circuits for the backbone
     and local loops  supporting the service  delivery in these markets.  It was
     anticipated  that this would lead to $4.2 million of termination fees which
     were  accrued for but not paid at  December  31,  2001.  During  2002,  ELI
     adjusted  its original  accrual  down by $2.8 million due to the  favorable
     settlements of termination  charges for off-net circuit  agreements.  As of
     December 31, 2002, $1.4 million has been paid and no accrual remained.


                                       27
<PAGE>
                  LOSS ON IMPAIRMENT

            ($ in thousands)         2002      2001     2000
             --------------      ----------  -------  --------
                                    Amount    Amount   Amount
                                 ----------  -------  --------
            Loss on impairment   $1,074,058   $  -     $  -

In the third quarter 2002, we recognized  non-cash pre-tax  impairment losses of
$656.7  million  related to property,  plant and equipment in the ELI sector and
$417.4 million  related to the gas and electric sector assets held for sale. Our
assessment  of  impairment  for ELI was a result of continued  losses at ELI and
continued actual revenue declines in excess of projected revenue  declines.  The
gas and electric sector impairments are associated with the proposed sale of our
Arizona and Hawaiian gas and  electric  properties  at prices that are less than
the previous  carrying values and the write down of our remaining utility to our
estimate of net  realizable  sales price.  Previously,  we believed that the net
realizable  value of these  properties  was  equal  to or above  their  carrying
values.  However,  as a result of market conditions,  and the desire to complete
the divestiture process quickly in order to focus on our core telecommunications
operations  and raise money to further reduce debt, in the third quarter of 2002
we made a strategic decision to accept proceeds less than carrying values rather
than  continue  to market  these  properties  for higher  prices  (See  Critical
Accounting Policies and Estimates above).

We expect to incur additional  impairment losses during 2003 with respect to our
public utility properties.  These properties are carried at our estimates of net
realizable values. Under the terms of the definitive  agreements relating to the
sale of our Arizona and Hawaiian properties, most of the capital expenditures we
will make during 2003 for these  properties will not be recovered.  As a result,
the amount of these expenditures (currently estimated at $28 million through the
expected closing dates) will be expensed as incurred and not capitalized.  These
expenditures are of a normal recurring nature and are necessary to provide safe,
reliable  utility  service to  customers.  We  generally do not enter into firm,
committed  contracts for such activities.  If the closing dates for the sales of
our Arizona and  Hawaiian  properties  actually  occur later than the  currently
expected dates, the actual amount of capital  expenditures  expensed will exceed
this estimate.
<TABLE>
<CAPTION>
       INVESTMENT AND OTHER INCOME (LOSS), NET / GAIN ON SALE OF ASSETS /
            MINORITY INTEREST / INTEREST EXPENSE / INCOME TAX BENEFIT

     ($ in thousands)                               2002                             2001               2000
      --------------                  ------------------------------  -------------------------------- ---------
                                        Amount   $ Change  % Change    Amount      $ Change  % Change  Amount
                                      ---------  ------------------   ----------- ------------------- ---------
<S>                                   <C>         <C>           <C>   <C>          <C>         <C>    <C>
     Investment income (loss), net    $ (98,359)  $ (35,951)    58%   $ (62,408)   $ (67,144) -1418%  $  4,736
     Other income (loss), net         $  15,806   $  18,939    605%   $  (3,133)   $  (1,747)   126%  $ (1,386)
     Gain on sale of assets           $   9,798   $(129,506)   -93%   $ 139,304    $ 139,304    100%  $      -
     Minority interest                $       -   $       -      0%   $       -    $ (12,222)  -100%  $ 12,222
     Interest expense                 $ 471,296   $  91,970     24%   $ 379,326    $ 191,960    102%  $187,366
     Income tax benefit               $(414,874)  $(400,069)  2702%   $ (14,805)   $   1,327     -8%  $(16,132)
</TABLE>
Investment loss for the year ended December 31, 2002 increased $36.0 million, or
58%,  as compared to prior year period  primarily  due to the  recognition  of a
$95.3 million loss,  resulting from an other than temporary decline in the value
of our investment in Adelphia  Communications Corp.  (Adelphia),  an increase of
$16.3  million  compared to the loss of $79.0  million  recorded on our Adelphia
investment in 2001. As of June 30, 2002, we had written this  investment down to
zero, and therefore we have no additional  exposure  related to the market value
of  Adelphia  stock.  We also  recognized  during  2002 a loss of $16.4  million
resulting from an other than temporary decline in the value of our investment in
D & E Communications, Inc.

Investment  income for the year ended December 31, 2001 decreased  $67.1 million
as compared to the prior year period primarily due to the recognition of a $79.0
million loss resulting from a decline in value of our Adelphia  investment.  The
decrease  was  partially  offset by  increased  income from higher  money market
balances  resulting  from  the  temporary   investment  of  proceeds  from  debt
issuances.


                                       28
<PAGE>
Other income,  net for the year ended December 31, 2002 increased  $18.9 million
as compared to prior year period  primarily  due to $26.3 million of income from
the settlement of certain  retained  liabilities at less than face value,  which
are associated with customer  advances for construction  from our disposed water
properties. During 2002, we executed a series of purchases in the open market of
our  outstanding  notes and  debentures  that  generated a pre-tax gain from the
early  extinguishment  of  debt  of  approximately  $6.0  million,   which  also
contributed  to the  increase.  The increase was  partially  offset by the $12.8
million cost for a tender offer  completed in December  2002 with respect to our
6.80%  Debentures due 2026 (puttable at par in 2003) and ELI's 6.05%  Guaranteed
Notes due 2004.  Other loss, net increased $1.7 million in 2001 primarily due to
a decrease in miscellaneous income and capitalized interest.

Gain on sale of assets for the year ended December 31, 2002  represents the gain
recognized  from the sale of our Kauai electric  division on November 1, 2002 as
well  as an  adjustment  of the  gain on the  2001  sale  of our  Louisiana  gas
operation.  Gain  on  sale of  assets  for the  year  ended  December  31,  2001
represents  the initial gain on the sale of the Louisiana gas operation to Atmos
Energy  Corporation  on July 2, 2001.  The gain  recognized on our water sale is
classified in discontinued operations.

Minority interest  represents the former minority  shareholders'  share of ELI's
net loss.  Subsequent to ELI's public offering, we recorded minority interest on
our income statement and reduced  minority  interest on our balance sheet by the
amount of the former minority  interests' share of ELI's losses.  As of June 30,
2000,  the  minority  interest  on the balance  sheet had been  reduced to zero,
therefore,  from that point going forward,  we discontinued  recording  minority
interest income on our statement of operations.

Interest  expense for 2002 increased  compared to 2001 primarily  because of the
full year impact of $3.5  billion of notes,  $460.0  million of equity units and
$200.0 million of Rural Telephone  Finance  Cooperative notes issued during 2001
to refinance  debt  incurred in  connection  with our  acquisitions,  and higher
amortization  of debt issuance costs.  These increases were partially  offset by
the repayment of bank debt and  repurchases of debt described  under  "Liquidity
and Capital  Resources - Debt  Reduction."  During the year ended  December  31,
2002, we had average  long-term debt  outstanding  excluding our equity units of
$5.2 billion  compared to $4.3 billion  during the year ended December 31, 2001.
Our composite  average  borrowing  rate for the year ended  December 31, 2002 as
compared  with the year ended  December  31,  2001 was 53 basis  points  higher,
increasing  from 7.34% to 7.87% due to the impact of higher  interest rates as a
result of our refinancing our variable rate debt with fixed rate long-term debt.

Interest  expense  increased for 2001 compared to 2000 primarily  because of the
issuance of the  securities  described in the  preceding  paragraph,  borrowings
under bank facilities and higher amortization of debt issuance costs. During the
year  ended  December  31,  2001,  we had  average  long-term  debt  outstanding
excluding our equity units of $4.3 billion  compared to $2.6 billion  during the
year ended December 31, 2000. Our composite  average borrowing rate paid for the
year ended  December 31, 2001 as compared with the year ended  December 31, 2000
was 49 basis points higher, increasing from 6.85% to 7.34%, due to the impact of
higher interest rates on our new borrowings.

Income tax benefit for the year ended December 31, 2002 increased $400.1 million
as compared with prior year period  primarily  due to changes in taxable  income
(loss).  Income tax benefit for the year ended  December 31, 2001 decreased $1.3
million,  or 8%, as compared with prior year period  primarily due to changes in
taxable income (loss) and the write-off of regulatory assets related to our sale
of our Louisiana gas  operations.  The estimated  annual  effective tax rate for
2002 is 33.7% as compared with an effective tax rate of 20.4% for 2001.
<TABLE>
<CAPTION>
                             DISCONTINUED OPERATIONS

($ in thousands)                                 2002                         2001                  2000
 --------------                     -----------------------------  ------------------------------  ---------
                                     Amount   $ Change   % Change   Amount     $ Change  % Change   Amount
                                    --------- -------------------  ---------- -------------------  ---------
<S>                                 <C>       <C>            <C>   <C>         <C>          <C>   <C>
Revenue                             $  4,650  $ (112,218)   -96%   $ 116,868   $ 11,666     11%   $ 105,202
Operating income (loss)             $   (415) $  (37,626)  -101%   $  37,211   $  9,796     36%   $  27,415
Income (loss) from discontinued
  operations, net of tax            $ (1,478) $  (19,353)  -108%   $  17,875   $  6,198     53%   $  11,677
Gain on disposal of water segment,
  net of tax                        $181,369  $  181,369    100%   $       -   $      -      0%   $       -
</TABLE>

                                       29
<PAGE>

Revenue, operating income (loss) and income (loss) from discontinued operations,
net of tax, for the year ended  December 31, 2002 decreased as compared with the
prior year  period  due to the sale of our water and  wastewater  businesses  in
January  2002.  On January  15,  2002,  we  completed  the sale of our water and
wastewater  operations to American Water Works,  Inc. for $859.1 million in cash
and  $122.5  million  of  assumed  debt and other  liabilities.  The gain on the
disposal of the water segment, net of tax was $181.4 million.

                              EXTRAORDINARY EXPENSE

($ in thousands)                                   2002      2001     2000
 --------------                                  ----------------------------
                                                  Amount    Amount    Amount
                                                 --------- --------  ---------
Extraordinary expense - discontinuation of
  Statement of Financial Accounting Standards
  No. 71, net of tax                              $   -     $ 43,631   $  -

Extraordinary  expense -  discontinuation  of Statement of Financial  Accounting
Standards No. 71, net of tax, of $43.6  million for the year ended  December 31,
2001,  relates to the write off of regulatory assets and liabilities  previously
recognized under SFAS 71.  Deregulation of most of our local exchange  telephone
properties  required us to cease  application  of SFAS 71 in the third  quarter,
resulting in a non-cash  extraordinary  charge of $43.6 million,  net of tax, in
our statement of operations. See discussion in Note 24 of Consolidated Financial
Statements.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
          ----------------------------------------------------------

Disclosure of primary market risks and how they are managed
We are exposed to market risk in the normal  course of our  business  operations
due to ongoing  investing  and  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.  We do not hold
or issue  derivative  instruments,  derivative  commodity  instruments  or other
financial instruments for trading purposes. As a result, we do not undertake any
specific  actions to cover our  exposure to market risks and we are not party to
any  market  risk  management  agreements  other  than in the  normal  course of
business or to hedge  long-term  interest  rate risk.  Our  primary  market risk
exposures are interest rate risk and equity and commodity price risk as follows:

Interest Rate Exposure

Our exposure to market risk for changes in interest  rates relates  primarily to
the  interest-bearing  portion of our  investment  portfolio and interest on our
long term debt and  capital  lease  obligations.  The long-term debt and capital
lease  obligations  include  various  instruments  with various  maturities  and
weighted average interest rates.

Our  objectives  in managing our  interest  rate risk are to limit the impact of
interest  rate  changes  on  earnings  and cash  flows and to lower our  overall
borrowing costs. To achieve these objectives,  a majority of our borrowings have
fixed  interest  rates;  variable  rate debt is  refinanced  when  advantageous.
Consequently,  we have limited  material  future earnings or cash flow exposures
from  changes  in  interest  rates  on our  long-term  debt  and  capital  lease
obligations.  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,  2002,  a near-term  change in
interest rates would not materially affect our consolidated  financial position,
results of operations or cash flows.

In order to  manage  our  interest  rate risk  exposure,  we  entered  into five
interest  swap  agreements  in 2001 and 2002  with  investment  grade  financial
institutions.  Each agreement covered a notional amount of $50.0 million.  Under
the  terms  of the  agreements,  we make  semi-annual,  floating  interest  rate
interest  payments  based on six  month  LIBOR and  receive a fixed  rate on the
notional amount.  There are two interest rate swap agreements that were executed
in 2001 that  receive a 6.375% fixed rate until the swaps'  termination  date of
August 15,  2004,  and there are three swaps  executed  in 2002 that  receive an
8.500% fixed rate until their  termination  date of May 15, 2006. The underlying
variable  rate on the swaps is set either in  advance,  in arrears or, as in the
case of one agreement,  based on each period's daily average six-month LIBOR. In
connection  with these swaps,  the Company entered into a series of supplemental
rate agreements which had the effect of setting the floating rate portion of the
swaps in advance of the contractually agreed upon rate determination date.

The net  effect  of the two 2001  interest  rate  swaps  and  supplemental  rate
agreements was to reduce the effective  interest rate on $100.0 million of fixed
rate debt from 6.375% to 3.665%  during  2002.  The net effect of the three 2002
swaps and supplemental rate agreements was to reduce the effective interest rate
on $150.0 million of fixed rate debt from 8.500% to 6.864% through  November 15,
2002,  the latest rate reset date. All swaps and  associated  supplemental  rate
agreements are accounted for under SFAS 133 as fair value hedges.


                                       30
<PAGE>
Sensitivity analysis of interest rate exposure
At December 31, 2002,  the fair value of our  long-term  debt and capital  lease
obligations  excluding our equity units was estimated to be  approximately  $5.4
billion,  based on our overall weighted  average  borrowing rate of 8.0% and our
overall weighted maturity of 13 years.  There has been no material change in the
weighted  average maturity since December 31, 2001. The overall weighted average
interest rate has increased by  approximately  37 basis points.  A  hypothetical
increase of 80 basis points in our weighted  average  interest  rate (10% of our
overall weighted average  borrowing rate) would result in an approximate  $272.3
million decrease in the fair value of our fixed rate obligations.

Equity Price Exposure

Our exposure to market risk for changes in equity  prices is minimal and relates
primarily to the equity portion of our investment portfolio.  The equity portion
of our investment  portfolio consists of equity securities  (principally  common
stock) of D&E Communications, Inc. and Hungarian Telephone and Cable Corp.

As of December 31, 2002, we owned 3,059,000  shares of Adelphia common stock. As
a result of Adelphia's  price declines and filing for bankruptcy,  we recognized
losses of $95.3 million and $79.0 million on our  investment for the years ended
December 31, 2002 and 2001, respectively,  as the declines were determined to be
other than  temporary.  As of June 30, 2002, we had written this investment down
to zero,  and  therefore we have no  additional  exposure  related to the market
value of Adelphia stock.

As of December  31,  2002,  we owned  1,333,500  shares of D & E  Communications
common stock. As the result of an other than temporary  decline in D & E's stock
price,  we  recognized a loss of $16.4  million on our  investment  for the year
ended December 31, 2002.

Sensitivity analysis of equity price exposure
At December 31,  2002,  the fair value of the equity  portion of our  investment
portfolio  was estimated to be $29.8  million.  A  hypothetical  10% decrease in
quoted market prices would result in an approximate $3.0 million decrease in the
fair value of the equity portion of our investment portfolio.

Commodity Price Exposure

We  purchase  monthly  gas  future  contracts,  from  time to  time,  to  manage
well-defined   commodity  price  fluctuations,   caused  by  weather  and  other
unpredictable factors, associated with our commitments to deliver natural gas to
customers at fixed prices.  Customers pay for gas service based upon prices that
are defined by a tariff.  A tariff is an  agreement  between the public  utility
commission  and us,  which  determines  the price  that will be  charged  to the
customer.  Fluctuations  in gas prices are routinely  handled  through a pricing
mechanism  called the purchase gas adjustor (PGA).  The PGA allows for a process
whereby  any price  change from the agreed upon tariff will be settled as a pass
through  to the  customer.  As a result,  if gas prices  increase,  the PGA will
increase and pass more costs on to the customer. If gas prices decrease, the PGA
will  decrease  and refunds  will be provided to the  customer.  This  commodity
activity  relates to our gas businesses and is not material to our  consolidated
financial  position or results of operations.  In all instances we take physical
delivery  of the gas  supply  purchased  or  contracted  for.  These gas  future
contracts and gas supply  contracts are  considered  derivative  instruments  as
defined by SFAS 133. However, such contracts are excluded from the provisions of
SFAS 133 since they are purchases  made in the normal course of business and not
for  speculative  purposes.  Based upon our overall  commodity price exposure at
December 31, 2002, a material near-term change in the quoted market price of gas
would not materially  affect our consolidated  financial  position or results of
operations.

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 31,  2002.  It does not  consider  those  exposures or
positions, which could arise after that date. As a result, our ultimate exposure
with respect to our market risks will depend on the exposures  that arise during
the period and the fluctuation of interest rates and quoted market prices.


                                       31
<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-1.

          2.   Supplementary  Data,  Quarterly Financial Data is included in 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
          --------------------------------------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2003 Annual Meeting of  Stockholders  to be
held May 13, 2003 to be filed with the  Commission  pursuant to  Regulation  14A
within  120  days  after  December  31,  2002.  See  "Executive  Officer  of the
Registrant" in Part I of this Report  following Item 4 for information  relating
to executive officers.

Item 11.  Executive Compensation
          ----------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2003 Annual Meeting of  Stockholders  to be
held May 13, 2003.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and
          ------------------------------------------------------------------
          Related Stockholder Matters
          ---------------------------

The  following  table  provides  information  as of December 31, 2002  regarding
compensation plans (including individual compensation  arrangements) under which
equity  securities  of  Citizens   Communications  Company  are  authorized  for
issuance.
<TABLE>
<CAPTION>
<S>                        <C>                         <C>                      <C>
                                     (a)                       (b)                            (c)
                                                                                 Number of securities remaining
                           Number of securities to       Weighted-average        available for future issuance
                           be issued upon exercise      exercise price of       under equity compensation plans
                           of outstanding options,     outstanding options,    (excluding securities reflected in
     Plan category           warrants and rights       warrants and rights                column (a))
------------------------- --------------------------  ----------------------- -------------------------------------

Equity compensation
plans approved by
security holders                      23,051,350                  $ 11.80                             7,515,751

Equity compensation
plans not approved
by security holders                            -                        -                                     -

                          --------------------------  ----------------------- -------------------------------------
         Total                        23,051,350                  $ 11.80                             7,515,751
                          ==========================  ======================= =====================================
</TABLE>

See Note 18 to Consolidated  Financial Statements for information  regarding the
material features of the above plans.

The other  information  required by this Item is  incorporated by reference from
our definitive proxy statement for the 2003 Annual Meeting of Stockholders to be
held May 13, 2003.


                                       32
<PAGE>

Item 13.  Certain Relationships and Related Transactions
          ----------------------------------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2003 Annual Meeting of  Stockholders  to be
held May 13, 2003.

Item 14.  Controls and Procedures
          -----------------------

Within 90 days prior to the date of this report,  we carried out an  evaluation,
under the  supervision  and with the  participation  of our  management,  of the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures.  Based on this  evaluation,  our  principal  executive  officer  and
principal   financial  officer  concluded  that  our  disclosure   controls  and
procedures  are  effective  in  timely  alerting  them to  material  information
required to be included in our periodic SEC reports. It should be noted that the
design of any system of controls is based in part upon certain assumptions,  and
there can be no assurance  that any design will succeed in achieving  its stated
goals.

In  addition,  we  reviewed  our  internal  controls,  and  there  have  been no
significant  changes in our  internal  controls or in other  factors  that could
significantly  affect  those  controls  subsequent  to the  date of  their  last
evaluation.

During the fourth  quarter of 2002 we became aware of  irregularities  involving
payments  made by certain of our public  utilities  operations  for  services or
benefits  that we did not  receive.  The  payments  do not  involve  our current
operations  in Arizona,  Vermont,  or Hawaii.  With the  assistance  of forensic
specialists, outside auditors, and counsel, we investigated these irregularities
and identified a total of $7.8 million that had been embezzled from the Company.
These payments were reflected in our financial statements as charges to earnings
(primarily during 2002). The U.S.  Government has recovered  approximately  $6.0
million (which we believe will be turned over to us) and we believe that most of
the remaining funds outstanding will be reimbursed by insurance.

We  presented  the  results of our most  recent  evaluation  to our  independent
auditors, KPMG LLP, and the Audit Committee of the Board of Directors.  Based on
such evaluation,  our management,  including the principal executive officer and
principal  financial  officer,   concluded  that  our  disclosure  controls  and
procedures are adequate to insure the clarity and material  completeness  of our
disclosure in our periodic  reports  required to be filed with the SEC and there
are no significant deficiencies in the design or operation of internal controls,
which could significantly affect our ability to record,  process,  summarize and
report  financial  data.  As a result of the matters  described in the preceding
paragraph, during 2002 we made changes to our internal controls,  procedures and
policies relating to our public services sector.


                                       33

<PAGE>
                                     PART IV
                                     -------

Item 15.  Exhibits, Financial Statement Schedule and Reports on Form 8-K
          --------------------------------------------------------------

          (a)  List of Documents Filed as a Part of This Report:

               (1)  Index to Consolidated Financial Statements:

                    Independent Auditors' Report

                    Consolidated balance sheets as of December 31, 2002 and 2001

                    Consolidated statements of operations for the years ended
                      December 31, 2002, 2001 and 2000

                    Consolidated statements of shareholders' equity for the
                      years ended December 31, 2002, 2001 and 2000

                    Consolidated statements of comprehensive income (loss) for
                      the years ended December 31, 2002, 2001 and 2000

                    Consolidated statements of cash flows for the years ended
                      December 31, 2002, 2001 and 2000

                    Notes to consolidated financial statements

               (2)  Index to Financial Statement Schedules:

                    Schedule II - Valuation and Qualifying Accounts

All other  schedules  have been  omitted  because the  required  information  is
included in the consolidated  financial  statements or the notes thereto,  or is
not applicable or required.

               (3)  Index to Exhibits:

Exhibit
  No.          Description
-------        -----------
3.200.1        Restated Certificate of Incorporation of Citizens  Communications
               Company,  as restated May 19, 2000  (incorporated by reference to
               Exhibit 3.200.1 to the Registrant's Quarterly Report on Form 10-Q
               for the six months ended June 30, 2000, File No. 001-11001).
3.200.2        By-laws of Citizens  Communications  Company, with all amendments
               to March 22, 2002  (incorporated by reference to Exhibits 3.1 and
               3.2 to the  Registrants  Form 8-K filed March 22, 2002,  File No.
               001-11001).
3.200.3        Amendment  to the  By-laws  of  Citizens  Communications  Company
               (effective July 30, 2002).
4.100.1        Certificate of Trust of Citizens Communications Trust dated as of
               April 27, 2001  (incorporated  by reference to Exhibit 4.5 of the
               Registrant's  Amendment  No.1  to  Form  S-3  filed  May 7,  2001
               (Registration No. 333-58044).
4.100.2        Trust  Agreement of Citizens  Capital  Trust I, dated as of April
               27,  2001  (incorporated  by  reference  to  Exhibit  4.6  of the
               Registrant's  Amendment  No.1  to  Form  S-3  filed  May 7,  2001
               (Registration No. 333-58044).
4.100.3        Form of 2006 Note  (incorporated  by  reference to Exhibit 4.3 of
               the  Registrant's  Current  Report  on Form 8-K  filed on May 24,
               2001, File No. 001-11001).
4.100.4        Form of 2011 Note  (incorporated  by  reference to Exhibit 4.4 of
               the  Registrant's  Current  Report  on Form 8-K  filed on May 24,
               2001, File No. 001-11001).
4.100.5        Warrant  Agreement,  dated as of June 19, 2001,  between Citizens
               Communications  Company and The Chase  Manhattan Bank, as Warrant
               Agent   (incorporated   by   reference  to  Exhibit  4.1  of  the
               Registrant's  Current  Report on Form 8-K filed on May 24,  2001,
               File No. 001-11001).
4.100.6        Form of  Senior  Note  due 2006  (incorporated  by  reference  to
               Exhibit 4.5 of the Registrant's  Current Report on Form 8-K filed
               on June 21, 2001, File No. 001-11001).

                                       34
<PAGE>
4.100.7        Form  of  Equity  Unit   (included   in  the  Warrant   Agreement
               incorporated  by  reference  to Exhibit  4.1 of the  Registrant's
               Current  Report  on Form 8-K  filed on June  21,  2001,  File No.
               001-11001).
4.100.8        Form of Treasury  Equity Unit (included in the Warrant  Agreement
               incorporated  by  reference  to Exhibit  4.1 of the  Registrant's
               Current  Report  on Form 8-K  filed on June  21,  2001,  File No.
               001-11001).
4.100.9        Form  of  Senior   Notes   due  2004,   due  2008  and  due  2031
               (incorporated  by  reference  to Exhibit 4.1 of the  Registrant's
               Current  Report on Form 8-K filed on August  22,  2001,  File No.
               001-11001).
4.200.1        First  Supplemental  Indenture  dated  as of  January  15,  1996,
               between  Citizens   Utilities   Company  and  Chemical  Bank,  as
               indenture  trustee  (incorporated by reference to Exhibit 4.200.2
               to the  Registrant's  Form 8-K Current Report filed May 28, 1996,
               File No. 001-11001).
4.200.2        5%  Convertible  Subordinated  Debenture  due 2036  (contained as
               Exhibit A to Exhibit  4.200.2),  (incorporated  by  reference  to
               Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed
               May 28, 1996, File No. 001-11001).
4.200.3        Amended and Restated Declaration of Trust dated as of January 15,
               1996, of Citizens  Utilities Trust (incorporated by reference  to
               Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed
               May 28, 1996, File No. 001-11001).
4.200.4        Convertible Preferred Security Certificate  (contained as Exhibit
               A-1 to Exhibit  4.200.4),  (incorporated  by reference to Exhibit
               4.200.4 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.5        Amended and Restated  Limited  Partnership  Agreement dated as of
               January 15, 1996 of Citizens Utilities Capital L.P. (incorporated
               by  reference  to Exhibit  4.200.6 to the  Registrant's  Form 8-K
               Current Report filed May 28, 1996, File No. 001-11001).
4.200.6        Partnership Preferred Security  Certificate (contained as Annex A
               to  Exhibit 4.200.6),  (incorporated  by  reference  to   Exhibit
               4.200.6 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.7        Convertible  Preferred Securities Guarantee Agreement dated as of
               January 15, 1996 between Citizens Utilities  Company and Chemical
               Bank, as guarantee trustee (incorporated by reference  to Exhibit
               4.200.8 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.8        Partnership Preferred Securities Guarantee Agreement  dated as of
               January 15, 1996 between Citizens Utilities  Company and Chemical
               Bank, as guarantee  trustee (incorporated by reference to Exhibit
               4.200.9 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.9        Letter of  Representations  dated January 18, 1996, from Citizens
               Utilities  Company and  Chemical  Bank,  as trustee,  to DTC, for
               deposit   of   Convertible    Preferred   Securities   with   DTC
               (incorporated   by   reference   to  Exhibit   4.200.10   to  the
               Registrant's Form 8-K Current Report filed May 28, 1996, File No.
               001-11001).
4.300          Indenture of Securities, dated as of August 15, 1991, to Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.1 to
               the  Registrant's  Quarterly  Report  on Form  10-Q  for the nine
               months ended September 30, 1991, File No. 001-11001).
4.300.1        Second  Supplemental  Indenture,   dated  January  15,  1992,  to
               Chemical Bank, as Trustee (incorporated by  reference to  Exhibit
               4.100.4 to the Registrant's Annual  Report on  Form 10-K for  the
               year ended December 31, 1991, File No. 001-11001).
4.300.2        Third Supplemental  Indenture,  dated April 15, 1994, to Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.6 to
               the Registrant's Form 8-K Current Report filed July 5, 1994, File
               No. 001-11001).
4.300.3        Fourth Supplemental Indenture, dated October 1, 1994, to Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.7 to
               Registrant's Form 8-K Current Report filed January 3, 1995,  File
               No. 001-11001).
4.300.4        Fifth  Supplemental  Indenture,  dated  as of June 15,  1995,  to
               Chemical Bank, as Trustee  (incorporated  by reference to Exhibit
               4.100.8 to  Registrant's  Form 8-K Current Report filed March 29,
               1996, File No. 001-11001).
4.300.5        Sixth  Supplemental  Indenture,  dated as of October 15, 1995, to
               Chemical Bank, as Trustee  (incorporated  by reference to Exhibit
               4.100.9 to  Registrant's  Form 8-K Current Report filed March 29,
               1996, File No. 001-11001).
4.300.6        Seventh  Supplemental  Indenture,   dated  as  of  June  1,  1996
               (incorporated   by   reference   to  Exhibit   4.100.11   to  the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 1996, File No. 001-11001).
4.300.7        Eighth  Supplemental  Indenture,  dated as of  December  1,  1996
               (incorporated   by   reference   to  Exhibit   4.100.12   to  the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 1996, File No. 001-11001).

                                       35
<PAGE>
4.400          Senior  Indenture,  dated as of May 23,  2001,  between  Citizens
               Communications  Company and The Chase  Manhattan Bank, as trustee
               (incorporated  by  reference  to Exhibit 4.1 of the  Registrant's
               Current  Report  on Form  8-K  filed  on May 24,  2001,  File No.
               001-11001).
4.400.1        First Supplemental Indenture to Senior Indenture, dated as of May
               23,  2001  (incorporated  by  reference  to  Exhibit  4.2  of the
               Registrant's  Current  Report on Form 8-K filed on May 24,  2001,
               File No. 001-11001).
4.400.2        Second  Supplemental  Indenture,  dated as of June 19,  2001,  to
               Senior  Indenture,  dated  as of May 23,  2001  (incorporated  by
               reference to Exhibit 4.3 of the  Registrant's  Current  Report on
               Form 8-K filed on June 21, 2001, File No. 001-11001).
4.400.3        Pledge  Agreement,  dated as of June  19,  2001,  among  Citizens
               Communications  Company and The Bank of New York,  as  Collateral
               Agent,  Securities Intermediary and Custodial Agent and The Chase
               Manhattan  Bank, as Warrant Agent  (incorporated  by reference to
               Exhibit 4.2 of the Registrant's  Current Report on Form 8-K filed
               on June 21, 2001, File No. 001-11001).
4.400.4        Remarketing   Agreement  dated  June  19,  2001,  among  Citizens
               Communications  Company,  Morgan Stanley & Co.  Incorporated,  as
               Remarketing Agent, and The Chase Manhattan Bank, as Warrant Agent
               and   attorney-in-fact  for  the  Holders  of  the  Equity  Units
               (incorporated  by  reference  to Exhibit 4.4 of the  Registrant's
               Current  Report  on Form 8-K  filed on June  21,  2001,  File No.
               001-11001).
4.400.5        Indenture,   dated  as  of  August  16,  2001,  between  Citizens
               Communications  Company and The Chase  Manhattan Bank, as Trustee
               (incorporated  by  reference  to Exhibit 4.1 of the  Registrant's
               Current  Report on Form 8-K filed on August  22,  2001,  File No.
               001-11001).
10.1           Non-Employee Directors' Deferred Fee Equity Plan dated as of June
               28, 1994,  with all  amendments to May 5, 1997  (incorporated  by
               reference to Exhibit A to the Registrant's  Proxy Statement dated
               April 4, 1995 and Exhibit A to the  Registrant's  Proxy Statement
               dated March 28, 1997, respectively, File No.001-11001).
10.2           Employment  Agreement  between  Citizens  Utilities  Company  and
               Leonard Tow,  effective July 11, 1996  (incorporated by reference
               to Exhibit 10.16.1 to the  Registrant's  Quarterly Report on Form
               10-Q for the nine  months  ended  September  30,  1996,  File No.
               001-11001).
10.2.1         Employment Agreement between Citizens  Communications Company and
               Leonard Tow, effective October 1, 2000 (incorporated by reference
               to Exhibit 10.16.2 of the Registrants  Annual Report on Form 10-K
               for the year ended December 31, 2000, File No. 001-11001).
10.2.2         Letter  agreement,  dated  as  of  April 10, 2001,  amending  the
               employment agreement, effective October 1, 2000, between Citizens
               Communications Company and Leonard Tow (incorporated by reference
               to Exhibit 10 of the  Registrants'  Forms S-4/A filed February 4,
               2002, Registration No. 333-69740).
10.2.3         Letter  agreement,  dated  as  of  May  16,  2002,  amending  the
               employment agreement, effective October 1, 2000, between Citizens
               Communications Company and Leonard Tow (incorporated by reference
               to Exhibit 10.16.4 of the  Registrants'  Quarterly Report on Form
               10-Q for the nine  months  ended  September  30,  2002,  File No.
               001-11001).
10.4           Citizens  Executive  Deferred  Savings Plan dated January 1, 1996
               (incorporated  by reference to Exhibit 10.19 to the  Registrant's
               Annual Report on Form 10-K for the year ended  December 31, 1999,
               File No. 001-11001).
10.5           Citizens   Incentive   Plan   restated   as  of  March  21,  2000
               (incorporated  by reference to Exhibit 10.19 to the  Registrant's
               Annual Report on Form 10-K for the year ended  December 31, 1999,
               File No. 001-11001).
10.6           Indenture from ELI to Citibank,  N.A., dated April 15, 1999, with
               respect  to  ELI's  6.05%   Senior   Unsecured   Notes  due  2004
               (incorporated  by  reference  to Exhibit  10.24.1 of ELI's Annual
               Report on Form 10-K for the year ended  December 31,  1999,  File
               No. 0-23393).
10.6.1         First Supplemental Indenture from ELI, 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
               (incorporated  by  reference  to Exhibit  10.24.2 of ELI's Annual
               Report on Form 10-K for the year ended  December 31,  1999,  File
               No. 0-23393).
10.6.2         Form of ELI's 6.05% Senior Unsecured Notes due 2004 (incorporated
               by  reference to Exhibit  10.24.3 of ELI's Annual  Report on Form
               10-K for the year ended December 31, 1999, File No. 0-23393).
10.7           2000 Equity  Incentive Plan dated May 18, 2000  (incorporated  by
               reference to Exhibit 10.33 to the  Registrant's  Annual Report on
               Form  10-K  for the  year  ended  December  31,  2000,  File  No.
               001-11001).


                                       36
<PAGE>
10.8           Citizens  401(K)  Savings  Plan  effective  as of January 1, 1997
               reflecting  amendments made through April 2001  (incorporated  by
               reference to Exhibit 10.37 to the  Registrant's  Quarterly Report
               on Form 10-Q for the six  months  ended June 30,  2001,  File No.
               001-11001).
10.9           Competitive  Advance and Revolving Credit Facility  Agreement for
               $705,000,000 dated October 24, 2001 (incorporated by reference to
               Exhibit 10.38 to the  Registrant's  Quarterly Report on Form 10-Q
               for  the  nine  months  ended   September  30,  2001,   File  No.
               001-11001).
10.10          Loan Agreement between Citizens  Communications Company and Rural
               Telephone Finance  Cooperative for $200,000,000 dated October 24,
               2001   (incorporated   by  reference  to  Exhibit  10.39  to  the
               Registrant's  Quarterly  Report on Form 10-Q for the nine  months
               ended September 30, 2001, File No. 001-11001).
10.11          Asset Purchase Agreement between Citizens  Communications Company
               and Kauai Island Utility CO-OP dated March 5, 2002.
10.12          Asset Purchase Agreement between Citizens  Communications Company
               and K-1 USA Ventures, Inc., dated December 19, 2002.
10.13          Asset Purchase Agreement between Citizens  Communications Company
               and UniSource Energy Corporation dated October 29, 2002, relating
               to the sale of a gas utility business.
10.14          Asset Purchase Agreement between Citizens  Communications Company
               and UniSource Energy Corporation dated October 29, 2002, relating
               to the sale of an electric utility buiness.
10.15          Sale agreement between Citizens Telecom Services Company  LLC and
               Pepsico, Inc., dated January 31, 2003.
12             Computation  of ratio  of  earnings to fixed  charges  (this item
               is  included  herein  for  the sole purpose  of incorporation  by
               reference).
21             Subsidiaries of the Registrant
23             Auditors' Consent
99             Certifications  pursuant  to 18  U.S.C  Section  1350 as  adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibits 10.1,  10.2,  10.2.1,  10.2.2,  10.2.3,  10.4,  10.5, 10.7 and 10.8 are
management contracts or compensatory plans or arrangements.

We agree to  furnish to the  Commission  upon  request  copies of the Realty and
Chattel  Mortgage,  dated as of March 1, 1965, made by Citizens  Utilities Rural
Company, Inc., to the United States of America (the Rural Utilities Services and
Rural  Telephone Bank) and the Mortgage Notes which that mortgage  secures;  and
the several  subsequent  supplemental  Mortgages and Mortgage  Notes;  copies of
separate loan agreements and indentures governing various Industrial Development
Revenue Bonds;  copies of documents  relating to  indebtedness  of  subsidiaries
acquired  during 1996, 1997 and 1998. We agree to furnish to the Commission upon
request copies of schedules and exhibits to items 10.11, 10.12, 10.13, 10.14 and
10.15.


(b)  Reports on Form 8-K:

     We filed on Form 8-K on October  30,  2002 under Item 5 "Other  Events",  a
     press release announcing the definitive  agreements to sell the Arizona Gas
     and Arizona  Electric  divisions to UniSource  Energy  Corporation for $230
     million in cash, subject to adjustments under the term of the agreements.

     We filed on Form 8-K on  November  6, 2002 under Item 5 "Other  Events",  a
     press release  announcing  the completion of the sale of the Kauai Electric
     division to the Kauai Island Utility Cooperative.

     We filed on Form 8-K on  November  12,  2002  under Item 9  "Regulation  FD
     Disclosure",  information  relating to the furnishing of  certifications to
     the SEC pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section
     906 of the Sarbanes-Oxley Act of 2002.

     We filed on Form 8-K on  November  25,  2002 under  Item 5 "Other  Events",
     information   regarding  the   investigation  of  possible   irregularities
     involving  payments made by the  Company's  public  utilities  division for
     services or benefits that the Company did not receive.

     We filed on Form 8-K on December  20, 2002 under Item 5 "Other  Events" and
     Item 7 "Financial Statements and Exhibits",  a press release announcing the
     definitive agreement to sell the Hawaiian Gas division to K-1 USA Ventures,
     Inc. for $115 million in cash,  subject to  adjustments  under the terms of
     the agreement and the conclusion of the internal  investigation  of a theft
     of $7.8 million by two former officers of the Company.


                                       37
<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.

                         CITIZENS COMMUNICATIONS COMPANY
                         -------------------------------
                                  (Registrant)

                             By: /s/ Leonard Tow
                                -----------------
                                     Leonard Tow
                 Chairman of the Board; Chief Executive Officer;
                  Chairman of Executive Committee and Director

                                 March 24, 2003


                                       38
<PAGE>


     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 24th day of March 2003.
<TABLE>
<CAPTION>

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

<S>                                           <C>
     /s/ Robert J. Larson                     Senior Vice President and Chief Accounting Officer
-----------------------------------------
        (Robert J. Larson)

     /s/ Jerry Elliott                        Senior Vice President and Chief Financial Officer
-----------------------------------------
        (Jerry Elliott)

     /s/ Norman I. Botwinik                   Director
-----------------------------------------
        (Norman I. Botwinik)

     /s/ Aaron I. Fleischman                  Member, Executive Committee and Director
-----------------------------------------
        (Aaron I. Fleischman)

     /s/ Rudy J. Graf                         Member, Executive Committee and Director
-----------------------------------------
        (Rudy J. Graf)

     /s/ Stanley Harfenist                    Member, Executive Committee and Director
-----------------------------------------
        (Stanley Harfenist)

     /s/ Andrew N. Heine                      Director
-----------------------------------------
        (Andrew N. Heine)

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

     /s/ Scott N. Schneider                   Vice Chairman of the Board, President and
-----------------------------------------     Chief Operating Officer, and Director
        (Scott N. Schneider)

     /s/ John L. Schroeder                    Director
-----------------------------------------
        (John L. Schroeder)

     /s/ Robert A. Stanger                    Member, Executive Committee and Director
-----------------------------------------
        (Robert A. Stanger)

     /s/ Edwin Tornberg                       Director
-----------------------------------------
        (Edwin Tornberg)

     /s/ Claire L. Tow                        Director
-----------------------------------------
        (Claire L. Tow)

</TABLE>


                                       39
<PAGE>


                                 CERTIFICATIONS
                                 --------------

I, Leonard Tow, certify that:

1. I have reviewed  this annual  report on Form 10-K of Citizens  Communications
Company;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     a) all  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 24, 2003
                                    By: /s/ Leonard Tow
                                       -------------------
                                        Leonard Tow
                                        Chief Executive Officer and
                                        Chairman of the Board of Directors
                                        (Principal Executive Officer)


                                       40
<PAGE>


                           CERTIFICATIONS (continued)
                           --------------------------

I, Jerry Elliott, certify that:

1. I have reviewed  this annual  report on Form 10-K of Citizens  Communications
Company;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     a) all  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 24, 2003
                                  By: /s/ Jerry Elliott
                                     ---------------------
                                      Jerry Elliott
                                      Chief Financial Officer
                                      (Principal Financial Officer)



                                       41


<PAGE>
<TABLE>
<CAPTION>

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                   Index to Consolidated Financial Statements


Item                                                                                   Page
----                                                                                   ----

<S>                                                                                    <C>
Independent Auditors' Report                                                            F-2

Consolidated balance sheets as of December 31, 2002 and 2001                            F-3

Consolidated statements of operations for the years ended
   December 31, 2002, 2001 and 2000                                                     F-4

Consolidated statements of shareholders' equity for the years ended
   December 31, 2002, 2001 and 2000                                                     F-5

Consolidated statements of comprehensive income (loss) for the years ended
   December 31, 2002, 2001 and 2000                                                     F-5

Consolidated statements of cash flows for the years ended
   December 31, 2002, 2001 and 2000                                                     F-6

Notes to consolidated financial statements                                              F-7
</TABLE>

                                      F-1

<PAGE>


                          Independent Auditors' Report


The Board of Directors and Shareholders
Citizens Communications Company:


We have  audited  the  accompanying  consolidated  balance  sheets  of  Citizens
Communications Company and subsidiaries as of December 31, 2002 and 2001 and the
related   consolidated   statements   of   operations,   shareholders'   equity,
comprehensive  income  (loss)  and  cash  flows  for  each of the  years  in the
three-year  period  ended  December  31,  2002.  These  consolidated   financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  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 consolidated  financial statements referred to above present
fairly,  in  all  material   respects,   the  financial   position  of  Citizens
Communications Company and subsidiaries as of December 31, 2002 and 2001 and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2002,  in  conformity  with  accounting
principles  generally accepted in the United States of America.  As discussed in
Note 13 to the consolidated financial statements,  the Company adopted Statement
of  Financial  Accounting  Standards  No. 142,  "Goodwill  and Other  Intangible
Assets" as of January 1, 2002.



                                                           KPMG LLP




New York, New York
March 4, 2003


                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001
                                ($ in thousands)

                                                                                                  2002           2001
                                                                                             -------------- --------------
ASSETS
------
Current assets:
<S>                                                                                            <C>           <C>
   Cash and cash equivalents                                                                   $   393,177   $    215,869
   Accounts receivable, net                                                                        310,929        311,878
   Other current assets                                                                             49,114        150,573
   Assets held for sale                                                                            447,764      1,107,937
   Assets of discontinued operations                                                                     -        746,791
                                                                                             -------------- --------------
     Total current assets                                                                        1,200,984      2,533,048

Property, plant and equipment, net                                                               3,690,056      4,512,038

Goodwill, net                                                                                    1,869,348      1,957,600
Other intangibles, net                                                                             942,970      1,021,342
Investments                                                                                         29,846        141,208
Other assets                                                                                       413,538        388,364
                                                                                             -------------- --------------
        Total assets                                                                           $ 8,146,742   $ 10,553,600
                                                                                             ============== ==============

LIABILITIES AND EQUITY
----------------------
Current liabilities:
   Long-term debt due within one year                                                          $    58,911   $    483,906
   Accounts payable                                                                                195,278        239,676
   Income taxes accrued                                                                             83,065         96,901
   Other taxes accrued                                                                              41,068         33,637
   Interest accrued                                                                                105,668        112,282
   Customer deposits                                                                                 2,632         18,246
   Other current liabilities                                                                       134,191        124,833
   Liabilities related to assets held for sale                                                     150,053        218,775
   Liabilities of discontinued operations                                                                -        228,337
                                                                                             -------------- --------------
     Total current liabilities                                                                     770,866      1,556,593

Deferred income taxes                                                                              137,116        429,544
Customer advances for construction and contributions in aid of construction                        146,661        183,319
Other liabilities                                                                                  301,349        241,846
Equity units                                                                                       460,000        460,000
Long-term debt                                                                                   4,957,361      5,534,906
Company Obligated Mandatorily Redeemable Convertible Preferred Securities*                         201,250        201,250

Shareholders' equity:
   Common stock, $0.25 par value (600,000,000 authorized shares; 282,482,000 and 281,289,000
     outstanding and 294,080,000 and 292,840,000 issued at December 31, 2002 and 2001,
     respectively)                                                                                  73,520         73,210
   Additional paid-in capital                                                                    1,943,406      1,927,518
   Retained earnings (accumulated deficit)                                                        (553,033)       129,864
   Accumulated other comprehensive income (loss)                                                  (102,169)         4,907
   Treasury stock                                                                                 (189,585)      (189,357)
                                                                                             -------------- --------------
     Total shareholders' equity                                                                  1,172,139      1,946,142
                                                                                             -------------- --------------
        Total liabilities and equity                                                           $ 8,146,742   $ 10,553,600
                                                                                             ============== ==============

</TABLE>

*  Represents  securities  of a subsidiary  trust,  the sole assets of which are
securities of a subsidiary  partnership,  substantially  all the assets of which
are convertible debentures of the Company.


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


                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                 ($ in thousands, except for per-share amounts)
                                                                         2002           2001            2000
                                                                    --------------- --------------  --------------
<S>                                                                    <C>            <C>             <C>
Revenue                                                                $ 2,669,332    $ 2,456,993     $ 1,802,358

Operating expenses:
    Cost of services                                                       476,920        599,378         481,673
    Other operating expenses                                             1,002,355        951,710         811,926
    Depreciation and amortization                                          755,522        632,336         387,607
    Reserve for telecommunications bankruptcies                             10,880         21,200               -
    Restructuring and other expenses                                        37,186         19,327            (649)
    Loss on impairment                                                   1,074,058              -               -
                                                                    --------------- --------------  --------------
Total operating expenses                                                 3,356,921      2,223,951       1,680,557
                                                                    --------------- --------------  --------------
Operating income (loss)                                                   (687,589)       233,042         121,801

Investment income (loss), net                                              (98,359)       (62,408)          4,736
Gain on sale of assets                                                       9,798        139,304               -
Minority interest                                                                -              -          12,222
Other income (loss), net                                                    15,806         (3,133)         (1,386)
Interest expense                                                           471,296        379,326         187,366
                                                                    --------------- --------------  --------------
    Loss from continuing operations before income taxes, dividends on
      convertible preferred securities, extraordinary expense and
      cumulative effect of change in accounting principle               (1,231,640)       (72,521)        (49,993)

Income tax benefit                                                        (414,874)       (14,805)        (16,132)
                                                                    --------------- --------------  --------------
    Loss from continuing operations before dividends on convertible
      preferred securities, extraordinary expense and cumulative
      effect of change in accounting principle                            (816,766)       (57,716)        (33,861)

Dividends on convertible preferred securities, net of income tax
  benefit of  $(3,853)                                                       6,210          6,210           6,210
                                                                    --------------- --------------  --------------
Loss from continuing operations before extraordinary expense and
    cumulative effect of change in accounting principle                   (822,976)       (63,926)        (40,071)

Income (loss) from discontinued operations, net of income tax
    (benefit) of $(554), $8,947 and $5,721, respectively                    (1,478)        17,875          11,677
Gain on disposal of water segment, net of income taxes of $135,303         181,369              -               -
                                                                    --------------- --------------  --------------
    Total income from discontinued operations, net of income taxes
     of $134,749, $8,947 and $5,721, respectively                          179,891         17,875          11,677
                                                                    --------------- --------------  --------------
    Loss before extraordinary expense and cumulative effect of
      change in accounting principle                                      (643,085)       (46,051)        (28,394)

Extraordinary expense - discontinuation of Statement of Financial
    Accounting Standards No. 71, net of tax                                      -         43,631               -
Cumulative effect of change in accounting principle                         39,812              -               -
                                                                    --------------- --------------  --------------
     Net loss                                                          $  (682,897)   $   (89,682)    $   (28,394)
                                                                    =============== ==============  ==============

Carrying cost of equity forward contracts                                        -         13,650               -
                                                                    --------------- --------------  --------------
    Available for common shareholders                                  $  (682,897)   $  (103,332)    $   (28,394)
                                                                    =============== ==============  ==============
Basic income (loss) per common share:
    Loss from continuing operations before extraordinary expense
      and cumulative effect of change in accounting principle          $     (2.93)   $     (0.28)    $     (0.15)
    Income from discontinued operations                                $      0.64    $      0.06     $      0.04
    Loss before extraordinary expense and cumulative effect of
      change in accounting principle                                   $     (2.29)   $     (0.22)    $     (0.11)
    Extraordinary expense                                              $         -    $     (0.16)    $         -
    Loss from cumulative effect of change in accounting principle      $     (0.14)   $         -     $         -
    Available for common shareholders                                  $     (2.43)   $     (0.38)    $     (0.11)

Diluted income (loss) per common share:
    Loss from continuing operations before extraordinary expense
      and cumulative effect of change in accounting principle          $     (2.93)   $     (0.28)    $     (0.15)
    Income from discontinued operations                                $      0.64    $      0.06     $      0.04
    Loss before extraordinary expense and cumulative effect of
      change in accounting principle                                   $     (2.29)   $     (0.22)    $     (0.11)
    Extraordinary expense                                              $         -    $     (0.16)    $         -
    Loss from cumulative effect of change in accounting principle      $     (0.14)   $         -     $         -
    Available for common shareholders                                  $     (2.43)   $     (0.38)    $     (0.11)
</TABLE>
                  The accompanying Notes are an integral part of these
                       Consolidated Financial Statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                 ($ in thousands, except for per-share amounts)


                                                                                    Accumulated
                                       Common Stock     Additional  Retained           Other       Treasury Stock       Total
                                     -----------------   Paid-In    Earnings       Comprehensive   --------------    Shareholders'
                                     Shares    Amount    Capital    (Deficit)      Income (Loss)   Shares  Amount       Equity
                                     -------- -------- ----------- -------------  ---------------  ---------------    ----------

<S>             <C>                  <C>      <C>      <C>            <C>           <C>                     <C>       <C>
Balance January 1, 2000              262,076  $65,519  $1,577,903    $  261,590   $   14,923            -  $       -   $1,919,935
                                     -------- -------- ----------- -------------  ------------   -------- ----------   ----------
   Acquisitions                          112       28       1,770             -            -          114      1,861        3,659
   Treasury stock acquisitions             -        -           -             -            -       (2,952)   (49,209)     (49,209)
   Stock plans                         3,580      895      42,156             -            -         (269)    (4,523)      38,528
   Equity forward contracts                -        -    (150,013)            -            -            -          -     (150,013)
   Net loss                                -        -           -       (28,394)           -            -          -      (28,394)
   Other comprehensive loss, net
     of tax and reclassifications
     adjustments                           -        -           -             -      (14,505)           -          -     (14,505)
                                     -------- -------- ----------- -------------  ------------   -------- ----------   ----------
Balance December 31, 2000            265,768   66,442   1,471,816       233,196          418       (3,107)   (51,871)   1,720,001
                                     -------- -------- ----------- -------------  ------------   -------- ----------   ----------
   Stock plans                         1,916      479      17,449             -            -          696     12,527       30,455
   Common stock offering              25,156    6,289     283,272             -            -            -          -      289,561
   Equity units offering                   -        -       4,968             -            -            -          -        4,968
   Settlement of equity forward
     contracts                             -        -     150,013       (13,650)           -       (9,140)  (150,013)     (13,650)
   Net loss                                -        -           -       (89,682)           -            -          -      (89,682)
   Other comprehensive income,
     net of tax and reclassifications
     adjustments                           -        -           -             -        4,489            -          -        4,489
                                     -------- -------- ----------- ------------- ------------    -------- ----------   ----------
Balance December 31, 2001            292,840   73,210   1,927,518       129,864        4,907      (11,551)  (189,357)   1,946,142
                                     -------- -------- ----------- ------------- ------------    -------- ----------   ----------
   Stock plans                         1,240      310      15,888             -            -          (47)      (228)      15,970
   Net loss                                -        -           -      (682,897)           -            -          -     (682,897)
   Other comprehensive loss, net
     of tax and reclassifications
     adjustments                           -        -           -             -     (107,076)           -          -     (107,076)
                                     -------- -------- ----------- ------------- ------------    -------- ----------   ----------
Balance December 31, 2002            294,080  $73,520  $1,943,406    $ (553,033)  $ (102,169)     (11,598) $(189,585)  $1,172,139
                                     ======== ======== =========== ============= ============    ======== ==========   ==========


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                 ($ in thousands, except for per-share amounts)


                                                                 2002            2001           2000
                                                             --------------  -------------  -------------

Net loss                                                        $ (682,897)     $ (89,682)     $ (28,394)
Other comprehensive income (loss), net of tax
  and reclassifications adjustments*                              (107,076)         4,489        (14,505)
                                                             --------------  -------------  -------------
  Total comprehensive loss                                      $ (789,973)     $ (85,193)     $ (42,899)
                                                             ==============  =============  =============
</TABLE>

* Consists of unrealized  holding  (losses)/gains  of marketable  securities and
minimum pension liability (see Note 22).



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


                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                                ($ in thousands)


                                                                      2002            2001            2000
                                                                 --------------  --------------  --------------

<S>                                                                  <C>             <C>             <C>
Net cash provided by continuing operating activities                 $ 636,867       $ 476,936       $ 307,693

Cash flows from investing activities:
      Acquisitions                                                           -      (3,373,214)       (986,029)
      Proceeds from sale of assets                                     224,678         372,335               -
      Capital expenditures                                            (468,742)       (487,271)       (544,829)
      Securities purchased                                              (1,175)         (1,391)        (71,122)
      Securities sold                                                    8,212           1,434         381,698
      Securities matured                                                 2,014               -          16,072
      ELI share purchases                                               (6,800)              -         (38,748)
      Other                                                                727             639             104
                                                                 --------------  --------------  --------------
Net cash used by investing activities                                 (241,086)     (3,487,468)     (1,242,854)

Cash flows from financing activities:
      Long-term debt borrowings                                              -       3,703,483       1,063,158
      Long-term debt principal payments                             (1,062,169)     (1,077,931)        (46,972)
      Issuance of equity units                                               -         460,000               -
      Debt issuance cost                                                     -         (67,657)              -
      Common stock offering                                                  -         289,561               -
      Issuance of common stock for employee plans                       14,943          25,411          19,773
      Settlement of equity forward contracts                                 -        (163,662)              -
      Common stock buybacks                                                  -               -         (49,209)
      Repayment of customer advances for construction
        and contributions in aid of construction                        (4,895)        (27,816)         30,684
                                                                 --------------  --------------  --------------
Net cash (used) provided by financing activities                    (1,052,121)      3,141,389       1,017,434

Cash provided (used) by discontinued operations
      Proceeds from the sale of discontinued operations                859,064               -               -
      Net cash provided (used) by discontinued operations              (25,416)         14,926         (49,328)

Increase in cash and cash equivalents                                  177,308         145,783          32,945
Cash and cash equivalents at January 1,                                215,869          70,086          37,141
                                                                 --------------  --------------  --------------

Cash and cash equivalents at December 31,                            $ 393,177       $ 215,869       $  70,086
                                                                 ==============  ==============  ==============

Supplemental cash flow information:

Cash paid during the year for:
      Interest                                                       $ 470,175       $ 302,510       $ 188,955
      Income taxes (refunds)                                           (17,621)        (41,126)         37,935

Non-cash investing and financing activities:
      Assets acquired under capital lease                            $  38,000       $  33,985       $ 102,192
      Change in fair value of interest rate swaps                       16,229             430               -
      Investment writedown                                             117,455          79,114               -
      Equity forward contracts                                               -               -         150,013
      Issuance of shares for acquisitions                                    -               -           3,659
      Debt assumed from acquisitions                                         -         117,630               -

</TABLE>

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



                                      F-6
<PAGE>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

(1) Description of Business and Summary of Significant Accounting Policies:
    -----------------------------------------------------------------------

     (a)  Description of Business:
          ------------------------
          Citizens  Communications  Company and its subsidiaries are referred to
          as  "we",  "us",  the  "Company"  or "our"  in this  report.  We are a
          telecommunications-focused  company providing wireline  communications
          services to rural areas and small and  medium-sized  towns and cities,
          including the Rochester,  New York metropolitan  area, as an incumbent
          local exchange carrier,  or ILEC. In addition,  we provide competitive
          local exchange carrier, or CLEC, services to business customers and to
          other  communications  carriers in certain  metropolitan  areas in the
          western United States through  Electric  Lightwave,  Inc., or ELI, our
          wholly-owned  subsidiary.  We also  provide  public  utility  services
          including  natural gas  transmission  and  distribution  and  electric
          transmission and distribution services to primarily rural and suburban
          customers in Vermont, Hawaii and Arizona.

          Our ILEC  segment has grown  substantially  over the last three years,
          primarily as a result of acquisitions.  During 2001, we purchased from
          Global  Crossing  Ltd.  (Global)  the 1.1 million  access lines of the
          Frontier  local  exchange  carrier  business  for  approximately  $3.4
          billion in cash (see Note 5). During 2000,  we acquired  approximately
          334,500 telephone access lines for approximately $986,200,000 in cash.
          Of our 2.4 million  telephone  access  lines as of December  31, 2002,
          approximately 41% are located in New York State, including the greater
          Rochester metropolitan area, another 11% are located in Minnesota.

          In 1999 we  announced  plans to divest our public  utilities  services
          segments. During 2001 we sold two of our four natural gas transmission
          and  distribution  businesses and during 2002 we sold our entire water
          distribution  and wastewater  treatment  business and one of our three
          electric  businesses.  We have  contracts  to sell  three  of our four
          remaining  properties.  We are  seeking a buyer for our one  remaining
          utility property,  which provides  electricity to approximately 21,000
          customers  in  Vermont.  Pending  these  divestitures,  we continue to
          provide gas and electric utility services (see Note 7).

          In June 2002,  we acquired all the common stock of ELI that we did not
          previously own and as a result ELI became our wholly-owned subsidiary.

     (b)  Principles of Consolidation and Use of Estimates:
          -------------------------------------------------
          Our consolidated financial statements have been prepared in accordance
          with accounting  principles generally accepted in the United States of
          America  (GAAP).  Certain  reclassifications  of  balances  previously
          reported have been made to conform to the current presentation.

          The  preparation  of  financial  statements  in  conformity  with GAAP
          requires management to make estimates and assumptions which affect the
          amounts of assets, liabilities,  revenue and expenses we have reported
          and our disclosure of contingent assets and liabilities at the date of
          the  financial  statements.  Actual  results  may  differ  from  those
          estimates.  We believe that our critical  estimates  are  depreciation
          rates,  pension  assumptions,  calculations of impairment  amounts and
          reserves established for telecommunication bankruptcies.

     (c)  Cash Equivalents:
          -----------------
          We consider all highly liquid investments with an original maturity of
          three months or less to be cash equivalents.

     (d)  Revenue Recognition:
          --------------------
          Incumbent  Local Exchange  Carrier (ILEC) - Revenue is recognized when
          services are provided or when  products  are  delivered to  customers.
          Revenue that is billed in advance includes:  monthly recurring network
          access services,  special access services and monthly  recurring local
          line  charges.  The  unearned  portion of this  revenue  is  initially
          deferred as a component of other  current  liabilities  on our balance
          sheet and  recognized in revenue over the period that the services are
          provided.  Revenue that is billed in arrears  includes:  non-recurring
          network access services, switched access services, non-recurring local
          services and long-distance  services.  The earned but unbilled portion
          of  this  revenue  is  recognized  in  revenue  in  our  statement  of
          operations  and accrued in accounts  receivable in the period that the
          services are provided. Excise taxes are recognized as a liability when
          billed.  Installation  fees and their related  direct and  incremental
          costs are  initially  deferred and  recognized  as revenue and expense
          over the average  term of a customer  relationship.  We  recognize  as
          current period expense the portion of installation  costs that exceeds
          installation fee revenue.


                                      F-7
<PAGE>
          ELI - Revenue is recognized  when the services are  provided.  Revenue
          from  long-term   prepaid  network   services   agreements   including
          Indefeasible  Rights to Use (IRU),  are deferred and  recognized  on a
          straight-line   basis  over  the  terms  of  the  related  agreements.
          Installation  fees and their related direct and incremental  costs are
          initially  deferred  and  recognized  as revenue and expense  over the
          average  term of a  customer  relationship.  We  recognize  as current
          period  expense  the  portion  of  installation   costs  that  exceeds
          installation fee revenue.

          Public  Utilities  Services - Revenue is recognized  when services are
          provided for public utilities services.  Certain revenue is based upon
          consumption  while other revenue is based upon a flat fee.  Earned but
          unbilled public  services  revenue is accrued and included in accounts
          receivable and revenue.

     (e)  Construction Costs and Maintenance Expense:
          -------------------------------------------
          Property, plant and equipment are stated at original cost, including a
          portion of related  overhead  and an  allowance  for funds used during
          construction (AFUDC) for regulated businesses and capitalized interest
          for unregulated telecommunications businesses. Maintenance and repairs
          are charged to operating expenses as incurred.  The book value, net of
          salvage,  of routine  property,  plant and equipment  dispositions  is
          charged against accumulated depreciation for regulated operations.

          Capitalized interest for unregulated  construction activities amounted
          to $7,390,000,  $5,675,000  and  $4,766,000  for 2002,  2001 and 2000,
          respectively.

     (f)  Intangibles:
          ------------
          Intangibles represent the excess of purchase price over the fair value
          of identifiable  tangible  assets  acquired.  We undertake  studies to
          determine  the fair values of assets  acquired and  allocate  purchase
          prices  to  property,   plant  and   equipment,   goodwill  and  other
          identifiable  intangibles.  On January 1, 2002,  we adopted  SFAS 142,
          "Goodwill and Other Intangible  Assets," which applies to all goodwill
          and other intangible  assets  recognized in the statement of financial
          position at that date,  regardless  of when the assets were  initially
          recognized.   This   statement   requires   that  goodwill  and  other
          intangibles  with  indefinite  useful  lives no longer be amortized to
          earnings,  but instead be reviewed for impairment,  at least annually.
          The  amortization  of goodwill and other  intangibles  with indefinite
          useful lives ceased upon adoption of the statement on January 1, 2002.
          We  annually  examine the  carrying  value of our  goodwill  and other
          intangibles  with indefinite  useful lives to determine  whether there
          are any  impairment  losses  and have  determined  for the year  ended
          December  31,  2002 that there was no  impairment  except for ELI (see
          Notes 6, 13 and 19).

     (g)  Impairment of Long-Lived  Assets and  Long-Lived  Assets to Be
          --------------------------------------------------------------
          Disposed Of:
          ------------
          We adopted Statement of Financial  Accounting Standard (SFAS) No. 144,
          "Accounting for the Impairment or Disposal of Long-Lived Assets" as of
          January 1, 2002. In accordance with SFAS No. 144, we review long-lived
          assets to be held and used and  long-lived  assets to be disposed  of,
          including   intangible   assets  with  estimated   useful  lives,  for
          impairment  whenever events or changes in circumstances  indicate that
          the   carrying   amount  of  such  assets  may  not  be   recoverable.
          Recoverability  of assets to be held and used is measured by comparing
          the carrying amount of the asset to the future  undiscounted  net cash
          flows expected to be generated by the asset.  Recoverability of assets
          held for sale is  measured by  comparing  the  carrying  amount of the
          assets  to their  estimated  fair  market  value.  If any  assets  are
          considered to be impaired, the impairment is measured by the amount by
          which the carrying  amount of the assets  exceeds the  estimated  fair
          value (see Note 4).

     (h)  Derivative Instruments and Hedging Activities:
          ----------------------------------------------
          Effective  January 1, 2001, we adopted SFAS No. 133,  "Accounting  for
          Derivative  Instruments and Hedging Activities",  as amended. SFAS No.
          133, as amended,  requires that all  derivative  instruments,  such as
          interest rate swaps,  be recognized  in the financial  statements  and
          measured at fair value  regardless of the purpose or intent of holding
          them.

          On the date the derivative  contract is entered into, we designate the
          derivative  as either a fair value or cash flow hedge.  A hedge of the
          fair value of a recognized  asset or  liability or of an  unrecognized
          firm  commitment  is a fair  value  hedge.  A  hedge  of a  forecasted
          transaction  or the  variability  of cash flows to be received or paid
          related to a recognized  asset or  liability is a cash flow hedge.  We
          formally  document all relationships  between hedging  instruments and
          hedged  items, as  well as its risk-management objective and  strategy

                                      F-8
<PAGE>
          for undertaking the hedge  transaction.  This process includes linking
          all derivatives  that are designated as fair-value or cash flow hedges
          to specific assets and liabilities on the balance sheet or to specific
          firm commitments or forecasted transactions.

          We also  formally  assess,  both at the  hedge's  inception  and on an
          ongoing  basis,  whether  the  derivatives  that are  used in  hedging
          transactions are highly effective in offsetting changes in fair values
          or cash flows of hedged items.  If it is determined  that a derivative
          is not  highly  effective  as a hedge  or that it has  ceased  to be a
          highly  effective  hedge,  we  would   discontinue   hedge  accounting
          prospectively.

          All  derivatives  are  recognized  on the balance  sheet at their fair
          value. Changes in the fair value of derivative  financial  instruments
          are either recognized in income or stockholders equity (as a component
          of other comprehensive income), depending on whether the derivative is
          being used to hedge changes in fair value or cash flows.

          We entered into interest rate swap  arrangements  during 2001 and 2002
          related to a portion of our fixed rate debt.  These  hedge  strategies
          satisfy the fair value hedging  requirements of SFAS 133. As a result,
          the fair value of the hedges is carried on the balance  sheet in other
          current  assets  and  the  related  underlying  liabilities  are  also
          adjusted to fair value by the same amount.

     (i)  Investments:
          ------------
          We classify our investments at purchase as  available-for-sale.  We do
          not maintain a trading portfolio or held to maturity securities.

          Securities classified as  available-for-sale  are carried at estimated
          fair market value.  These securities are held for an indefinite period
          of  time,  but  might  be sold in the  future  as  changes  in  market
          conditions or economic factors occur.  Net aggregate  unrealized gains
          and losses related to such securities, net of taxes, are included as a
          separate component of shareholders'  equity.  Interest,  dividends and
          gains and losses  realized  on sales of  securities  are  reported  in
          Investment income.

          We evaluate our  investments  periodically  to  determine  whether any
          decline in fair value,  below the cost basis, is other than temporary.
          If we determine that a decline in fair value is other than  temporary,
          the cost basis of the  individual  investment  is written down to fair
          value which  becomes the new cost basis.  The amount of the write down
          is transferred from other comprehensive  income (loss) and included in
          the statement of operations as a loss.

     (j)  Income Taxes, Deferred Income Taxes and Investment Tax Credits:
          ---------------------------------------------------------------
          We file a consolidated federal income tax return. 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 statement basis
          and the tax basis of assets and  liabilities  using tax rates expected
          to be in  effect  when  the  temporary  differences  are  expected  to
          reverse. The investment tax credits relating to regulated  operations,
          as defined by applicable  regulatory  authorities,  have been deferred
          and are  being  amortized  to  income  over the  lives of the  related
          properties.

     (k)  Employee Stock Plans:
          ---------------------
          We have various employee stock-based  compensation plans. Awards under
          these plans are granted to eligible officers, management employees and
          non-management employees.  Awards may be made in the form of incentive
          stock options, non-qualified stock options, stock appreciation rights,
          restricted stock or other stock based awards.  As permitted by current
          accounting rules, we recognize  compensation  expense in the financial
          statements  only if the market price of the  underlying  stock exceeds
          the  exercise  price on the date of grant.  We  provide  pro forma net
          income  (loss)  and pro forma  net  income  (loss)  per  common  share
          disclosures  for  employee  stock  option  grants  made  in  1995  and
          thereafter based on the fair value of the options at the date of grant
          (see Note 18).  Fair value of options  granted is  computed  using the
          Black Scholes option-pricing model.

     (l)  Minority Interest and Minority Interest in Subsidiary:
          ------------------------------------------------------
          Minority interest  represents the former minority's share of ELI's net
          loss. Subsequent to ELI's initial public offering in 1997, we recorded
          minority  interest on our statement of operations and reduced minority
          interest  on our  balance  sheet by the amount of the former  minority
          interests'  share of ELI's  losses.  As of June 30,  2000,  the former
          minority  interest  on the  balance  sheet had been  reduced  to zero,
          therefore,  from that date forward, we discontinued recording minority
          interest income on our statement of operations.

                                      F-9
<PAGE>

     (m)  Net Income (loss) Per Common Share:
          -----------------------------------
          Basic net income  per  common  share is  computed  using the  weighted
          average  number of common shares  outstanding  during the period being
          reported  on.  Diluted  net  income  per  common  share  reflects  the
          potential  dilution that could occur if securities or other  contracts
          to  issue  common  stock  that  are in the  money  were  exercised  or
          converted  into  common  stock at the  beginning  of the period  being
          reported on.

(2)  Accounts Receivable:
     --------------------
     The  components of accounts  receivable,  net at December 31, 2002 and 2001
     are as follows:

($ in thousands)                                 2002             2001
 --------------                             --------------  ---------------

Customers                                       $ 258,165        $ 292,345
Other                                              91,710           87,134
Less:  Allowance for doubtful accounts            (38,946)         (67,601)
                                            --------------  ---------------
   Accounts receivable, net                     $ 310,929        $ 311,878
                                            ==============  ===============

(3)  Property, Plant and Equipment:
     ------------------------------
     The  components  of property,  plant and equipment at December 31, 2002 and
     2001 are as follows:
<TABLE>
<CAPTION>

                                                            Estimated
($ in thousands)                                           Useful Lives           2002              2001
 --------------                                         ------------------- ----------------- -----------------

<S>                                                       <C>                    <C>               <C>
Telephone outside plant                                   6 to 55 years          $ 3,199,676       $ 3,280,542
Telephone central office equipment                        7 to 11 years            1,893,169         2,135,992
Information systems and other administrative assets       5 to 17 years              762,709           777,351
Other                                                                                 67,073            55,065
Construction work in progress                                                        217,145           450,978
                                                                            ----------------- -----------------
                                                                                   6,139,772         6,699,928
Less: accumulated depreciation                                                    (2,449,716)       (2,187,890)
                                                                            ----------------- -----------------
Property, plant and equipment, net                                               $ 3,690,056       $ 4,512,038
                                                                            ================= =================

</TABLE>
     Depreciation  expense,  calculated using the straight-line method, is based
     upon the estimated  service lives of various  classifications  of property,
     plant and equipment.  Depreciation  expense was $630,113,000,  $488,957,000
     and  $370,119,000  for the years ended  December 31,  2002,  2001 and 2000,
     respectively.  We ceased to record  depreciation  expense on the gas assets
     effective  October 1, 2000 and on the electric assets effective  January 1,
     2001,  both of which are  included  in  assets  held for sale (see Note 7).
     During 2002 and 2001, we recognized accelerated depreciation of $23,379,000
     and $22,000,000 related to the change in useful lives of our accounting and
     human resource systems and our Plano, Texas office building,  furniture and
     fixtures as a result of our  restructuring  (see Note 19).  During 2000, we
     recognized $17,400,000 in accelerated depreciation related to the change in
     useful life of an operating system in the ILEC segment.

(4)  Losses on Impairment:
     ---------------------
     In the third quarter 2002, we recognized non-cash pre-tax impairment losses
     of $656,658,000 related to property,  plant and equipment in the ELI sector
     and  $417,400,000  related to the gas and electric  sector  assets held for
     sale, in each case in accordance with the provisions of SFAS 144.

     ELI
     ---
     Prior to the third  quarter of 2002,  we tested for  impairment  of ELI and
     determined that,  based on our assumptions,  the sum of the expected future
     cash  flows,  undiscounted  and  without  interest  charges,  exceeded  the
     carrying value of its long-lived  assets and therefore we did not recognize
     an impairment.  Because sales for the nine months ended  September 30, 2002
     were  lower than those in 2001 and were  significantly  below our  original
     2002 budget  (which was used in the test for  impairment  at  December  31,
     2001), we evaluated the long-lived  assets of ELI as of September 30, 2002.
     At that date,  we estimated  that our  undiscounted  future cash flows were
     less  than the  carrying  value of our  long-lived  assets.  As a result we
     recognized a non-cash pre-tax impairment loss of $656,658,000, equal to the
     difference  between  the  estimated  fair  value of the  assets  (which  we
     determined by calculating the discounted value of the estimated future cash

                                      F-10
<PAGE>

     flows weighting various possible  scenarios for management's  assessment of
     probability of occurrence and  discounting  the  probability-weighted  cash
     flows at an appropriate rate) and the carrying amount of the assets. Making
     the  determinations  of  impairment  and the amount of  impairment  require
     significant  judgment by  management  and  assumptions  with respect to the
     future cash flows of the ELI  sector.  The  telecommunications  industry in
     general and the CLEC sector in particular is undergoing  significant change
     and disruption,  which makes judgments and assumptions  with respect to the
     future cash flows highly subjective.

     Gas and Electric Assets Held for Sale
     -------------------------------------
     On October 29,  2002,  our board  approved  the sale of our Arizona gas and
     electric utility  properties for  $230,000,000 in cash  ($220,000,000 if we
     close by July 28,  2003),  subject  to  adjustments  under the terms of the
     agreements. On December 19, 2002, our board approved the sale of our Hawaii
     gas property for  $115,000,000  in cash,  subject to adjustments  under the
     terms of the agreement.  The board also approved, in principle, the sale of
     Vermont Electric,  our only remaining utility property at currently offered
     prices,  which were below their then book carrying value.  This property is
     the only utility  property that does not have a definitive  sales contract.
     Previously,  we believed that the net realizable  value of these properties
     was equal to or above their carrying values. However, as a result of market
     conditions,  and the desire to complete the divestiture  process quickly in
     order to focus on our core telecommunications operations and raise money to
     further reduce debt, we made a strategic  decision to accept  proceeds less
     than carrying values.  Our estimate of net realizable value with respect to
     Vermont  is based on  current  negotiations  and may be  revised  in future
     periods.  As a result,  for the four  properties  noted above we recorded a
     non-cash  pre-tax  charge of  $417,400,000  in the third quarter of 2002 to
     reduce the carrying  value of our assets held for sale to our best estimate
     of net realizable value upon sale (see Note 7).

(5)  Acquisitions:
     -------------
     In  2000,  we  acquired   from  Verizon   Communications   Inc.   (Verizon)
     approximately  317,500 telephone access lines for $948,200,000 in cash, and
     we  acquired  from  Qwest  Communications   (Qwest)   approximately  17,000
     telephone access lines for  approximately  $38,000,000 in cash. On June 29,
     2001, we purchased Frontier for approximately $3,373,000,000 in cash. These
     acquisitions   have  been  accounted  for  using  the  purchase  method  of
     accounting.  The results of operations of the acquired properties have been
     included in our financial statements from the date of acquisition.


                                      F-11
<PAGE>

     The following summarizes the allocation of purchase prices for our 2001 and
     2000 acquisitions:
<TABLE>
<CAPTION>
                                                                                                                          Total
      ($ in thousands)                                     Qwest        Verizon                          2001         Acquisitions
       --------------         Verizon       Verizon        North       Illinois/     Total 2000      Acquisition         since
                             Nebraska      Minnesota       Dakota      Wisconsin    Acquisitions     of Frontier      January 2000
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Acquisition date             6/30/2000     8/31/2000     10/31/2000    11/30/2000                     6/29/2001

Assets acquired:
  Property, plant and
<S>                            <C>           <C>            <C>          <C>            <C>            <C>              <C>
    equipment                  $ 51,903      $ 137,391      $ 13,910     $ 105,446      $ 308,650      $ 1,108,514      $ 1,417,164
  Current assets                      -          4,960             -             -          4,960          119,016          123,976
  Goodwill                      108,175        174,247        16,619       163,906        462,947        1,506,647        1,969,594
  Customer base                  46,060        120,742         7,466        34,565        208,833          791,983        1,000,816
  Trade name                          -              -             -             -              -          122,058          122,058
  Other assets                        -          1,557             -             -          1,557          151,172          152,729
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Total assets acquired           206,138        438,897        37,995       303,917        986,947        3,799,390        4,786,337
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Liabilities assumed:
  Debt                                -              -             -             -              -          146,920          146,920
  Other liabilities                 734              -             -             -            734          279,536          280,270
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Total liabilities assumed           734              -             -             -            734          426,456          427,190
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Cash paid                      $205,404      $ 438,897      $ 37,995     $ 303,917      $ 986,213      $ 3,372,934      $ 4,359,147
                            ============  ============= ============= ============= ==============  ===============  ===============

Status of appraisal
    valuation                  Final         Final         Final         Final          Final           Final            Final

</TABLE>

     The following pro forma financial  information for the years ended December
     31, 2001 and 2000  represents  the combined  results of our  operations and
     acquisitions  as if the  acquisition  had occurred at the  beginning of the
     year of its  acquisition.  The pro  forma  financial  information  does not
     necessarily  reflect the results of operations that would have occurred had
     we constituted a single entity during such periods.

        ($ in thousands, except per share amounts)
         ----------------------------------------
                                                    2001             2000
                                               ---------------  ----------------
          Revenue                                $ 2,844,789       $ 2,693,824
          Net loss                               $  (161,619)      $  (148,754)
          Net loss per share                     $     (0.64)      $     (0.56)

     Included  in revenue  for the years  ended  December  31,  2001 and 2000 is
     approximately $313,070,000 and $327,300,000,  respectively, of revenue from
     our Louisiana and Colorado gas  operations  sold during 2001, and our Kauai
     electric division sold during 2002 (see Note 7).

(6)  Intangibles:
     ------------
     Intangibles at December 31, 2002 and 2001 are as follows:

($ in thousands)
 --------------                                2002             2001
                                         ---------------  ----------------

Customer base - amortizable                  $1,000,816       $   970,925
Trade name - non-amortizable                    122,058           106,473
                                         ---------------  ----------------
    Other intangibles                         1,122,874         1,077,398
Accumulated amortization                       (179,904)          (56,056)
                                         ---------------  ----------------
    Total other intangibles, net             $  942,970       $ 1,021,342
                                         ===============  ================

     Amortization expense was $125,409,000, $143,379,000 and $17,488,000 for the
     years ended December 31, 2002, 2001 and 2000, respectively.


                                      F-12
<PAGE>

     We have recorded  assets  acquired at estimates of fair market values as of
     the  acquisition   dates  in  accordance  with  SFAS  No.  141,   "Business
     Combinations".   Our   allocations  of  purchase   prices  are  based  upon
     independent appraisals of the respective properties acquired.

     Our  acquisitions  were made in order for us to execute  upon our  business
     strategy.   Our   strategy   is   to   focus   exclusively   on   providing
     telecommunications  services,  primarily in rural,  small and  medium-sized
     towns and cities where we believe we have a competitive  advantage  because
     of our relatively  larger size,  greater  resources,  local focus and lower
     levels of competition.

     Our ILEC  operations  are  typically the dominant  provider of  independent
     local exchange carrier services in each of the markets in which we operate.
     We believe that our  operations  in these areas will provide us with steady
     revenue and margin enhancement  opportunities.  To reach our objectives, we
     intend  to  continue  to  achieve  economies  of scale  through  increasing
     operational   efficiencies,   among  other  strategies.  In  following  our
     strategy,  we selectively pursue  acquisitions that we believe will enhance
     shareholder   value  through   increased  revenue  growth  and  operational
     efficiencies consistent with our corporate strategy and objectives.

     We have paid more than the net book  values (of the  seller) of each of the
     businesses  acquired  in 2001 and  2000.  We based our  purchase  prices on
     estimates  of future  earnings  and  future  cash  flows of the  businesses
     acquired.  The "premium" to book value paid,  including  the  allocation to
     goodwill for each respective property, reflects the value created by all of
     the tangible and intangible operating assets (existing and acquired) of our
     businesses   coming  together  to  produce   earnings,   including  without
     limitation,  the fact that we were able to immediately  commence operations
     as the dominant local exchange  carrier in the applicable  operating  area.
     Additionally, the premiums paid were impacted by the fact that our purchase
     price  was  accepted  by  the  sellers  after  a  competitive  bidding  and
     negotiation process.

     We were willing to pay a premium  (i.e.,  goodwill)  over the fair value of
     the tangible and identifiable  intangible  assets acquired less liabilities
     assumed in order to obtain product cross-selling  opportunities,  economies
     of scale  (e.g.,  cost savings  opportunities)  and the  potential  benefit
     resident in expected population/demographic trends.

     The following table presents a reconciliation between reported net loss and
     adjusted  net  loss.  Adjusted  net  loss  excludes   amortization  expense
     recognized in prior periods  related to goodwill and trade name that are no
     longer being amortized as required by SFAS No. 142.
<TABLE>
<CAPTION>
(In thousands, except per-share amounts)                               2002             2001              2000
 --------------------------------------                          ---------------  ----------------  ---------------

<S>                                                                  <C>               <C>               <C>
Reported attributable to common shareholders                         $ (682,897)       $ (103,332)       $ (28,394)
Add back: Goodwill and trade name amortization, net of tax                    -            61,938            9,202
                                                                 ---------------  ----------------  ---------------
Adjusted attributable to common shareholders                         $ (682,897)       $  (41,394)       $ (19,192)
                                                                 ===============  ================  ===============

Basic earnings per share:
-------------------------
Reported attributable to common shareholders                         $    (2.43)       $    (0.38)       $   (0.11)
Goodwill and trade name amortization, net of tax                              -              0.23             0.04
                                                                 ---------------  ----------------  ---------------
Adjusted attributable to common shareholders                         $    (2.43)       $    (0.15)       $   (0.07)
                                                                 ===============  ================  ===============

Diluted earnings per share:
---------------------------
Reported attributable to common shareholders                         $    (2.43)       $    (0.38)       $   (0.11)
Goodwill and trade name amortization, net of tax                              -              0.22             0.03
                                                                 ---------------  ----------------  ---------------
Adjusted attributable to common shareholders                         $    (2.43)       $    (0.16)       $   (0.08)
                                                                 ===============  ================  ===============
</TABLE>

(7)  Discontinued Operations and Net Assets Held for Sale:
     -----------------------------------------------------

     On August 24, 1999,  our Board of Directors  approved a plan of divestiture
     for our public utilities services businesses,  which included gas, electric
     and water and wastewater businesses.


                                      F-13
<PAGE>

          Water and Wastewater
          --------------------
          On January 15, 2002, we completed the sale of our water and wastewater
          operations to American Water Works,  Inc. for $859,100,000 in cash and
          $122,500,000 of assumed debt and other  liabilities.  The pre-tax gain
          on the sale recognized in 2002 was $316,672,000.

          Electric and Gas
          ----------------
          On October 29, 2002, we entered into definitive agreements to sell our
          Arizona gas and electric divisions to UniSource Energy Corporation for
          $230,000,000  in cash  ($220,000,000  if we close  by July 28,  2003),
          subject to adjustments  specified in the agreements  (see Note 4). The
          transactions,  which are  subject to  regulatory  and other  customary
          approvals, are expected to close during the second half of 2003.

          On  November  1, 2002,  we  completed  the sale of our Kauai  electric
          division to Kauai Island Utility  Cooperative  (KIUC) for $215,000,000
          in  cash.  The  pre-tax  gain  on the  sale  recognized  in  2002  was
          $8,273,000.

          On December 19, 2002,  we entered into a definitive  agreement to sell
          The Gas Company in Hawaii to K-1 USA Ventures, Inc for $115,000,000 in
          cash,  subject to adjustments  under the terms of the  agreement.  The
          transaction,  which is  subject  to  regulatory  and  other  customary
          approvals, is expected to close during the fourth quarter of 2003.

          On July 2, 2001, we completed the sale of our Louisiana Gas operations
          to Atmos Energy Corporation for $363,436,000 in cash. The pre-tax gain
          on the sale recognized in 2001 was $139,304,000.

          On November  30,  2001,  we sold our  Colorado  Gas division to Kinder
          Morgan  for  approximately  $8,900,000  in cash after  purchase  price
          adjustments.

     Currently,  we do not  have an  agreement  to sell our  remaining  electric
     property,  Vermont Electric. We continue to actively pursue a buyer for our
     remaining electric business.  All of our gas and electric assets (including
     Arizona gas and electric and Hawaii gas) and their related  liabilities are
     classified  as "assets  held for sale" and  "liabilities  related to assets
     held for sale,"  respectively.  These  assets have been written down to our
     best estimate of the net realizable value upon sale (see Note 4).

     Discontinued  operations  in  the  consolidated  statements  of  operations
     reflect the results of operations of the  water/wastewater  properties sold
     in January  2002  including  allocated  interest  expense  for the  periods
     presented.  Interest expense was allocated to the  discontinued  operations
     based  on  the  outstanding   debt   specifically   identified  with  these
     businesses.

     We  initially  accounted  for the  planned  divestiture  of all the  public
     utilities services properties as discontinued operations.  Subsequently, we
     reclassified  all of our gas (on  September  30,  2000)  and  electric  (on
     December 31, 2000) assets and their related liabilities to "assets held for
     sale" and "liabilities related to assets held for sale,"  respectively.  We
     also  reclassified  the  results  of  these  operations  from  discontinued
     operations  to  their  original  income  statement   captions  as  part  of
     continuing  operations.  Additionally,  we ceased  to  record  depreciation
     expense on the gas  assets  effective  October 1, 2000 and on the  electric
     assets effective January 1, 2001. Such depreciation expense would have been
     an additional  $41,340,000 and $50,830,000 for the years ended December 31,
     2002 and 2001, respectively.

     Summarized  financial  information  for  the  water/wastewater   operations
     (discontinued operations) is set forth below:


($ in thousands)                      For the years ended December 31,
 --------------                      ----------------------------------
                                       2002        2001        2000
                                     ----------  ----------  ----------
Revenue                                $ 4,650   $ 116,868   $ 105,202
Operating income (loss)                   (415)     37,211      27,415
Income taxes (benefit)                    (554)      8,947       5,721
Net income (loss)                       (1,478)     17,875      11,677
Gain on disposal of water segment,
  net of tax                           181,369           -           -



                                      F-14

<PAGE>
     Summarized  balance sheet  information for the gas and electric  operations
     (assets held for sale) is set forth below:
<TABLE>
<CAPTION>

($ in thousands)
 --------------                                        2002             2001
                                                   --------------  ---------------
<S>                                                     <C>              <C>
Current assets                                         $  49,549      $    66,511
Net property, plant and equipment                        358,135          805,653
Other assets                                              40,080          235,773
                                                   --------------  ---------------
Total assets held for sale                             $ 447,764      $ 1,107,937
                                                   ==============  ===============

Current liabilities                                    $  83,278      $    71,259
Long-term debt                                                 -           43,400
Other liabilities                                         66,775          104,116
                                                   --------------  ---------------
Total liabilities related to assets held for sale      $ 150,053      $   218,775
                                                   ==============  ===============

</TABLE>
(8)  Investments:
     ------------
     The components of investments at December 31, 2002 and 2001 are as follows:

($ in thousands)
 --------------                             2002             2001
                                     ---------------- ----------------
Marketable equity securities                $ 29,844        $ 139,188
Other fixed income securities                      2            2,020
                                     ---------------- ----------------
                                            $ 29,846        $ 141,208
                                     ================ ================

     As  of  December  31,  2002,   we  owned   3,059,000   shares  of  Adelphia
     Communications  Corp.  (Adelphia)  common stock.  As a result of Adelphia's
     price  declines  and  filing  for  bankruptcy,   we  recognized  losses  of
     $95,300,000  and $79,000,000 on our investment for the years ended December
     31, 2002 and 2001,  respectively,  as the declines  were  determined  to be
     other than  temporary.  As of June 30, 2002, we had written this investment
     down to zero, and therefore we have no additional  exposure  related to the
     market value of Adelphia stock.

     As of December 31, 2002, we owned 1,333,500  shares of D & E Communications
     common stock.  As the result of an other than temporary  decline in D & E's
     stock price,  we recognized a loss of $16,400,000 on our investment for the
     year ended December 31, 2002.

     The following  summarizes the adjusted cost, gross unrealized holding gains
     and losses and fair market value for investments.
<TABLE>
<CAPTION>
($ in thousands)
 --------------                  Adjusted             Unrealized Holding         Aggregate Fair
                                               ---------------------------------
Investment Classification          Cost            Gains          (Losses)       Market Value
                              ---------------- ---------------- ---------------- ----------------
As of December 31, 2002
-----------------------
<S>                              <C>               <C>              <C>             <C>
Available-for-Sale               $  14,452         $ 15,394         $     -         $  29,846

As of December 31, 2001
-----------------------
Available-for-Sale               $ 132,935         $ 11,896         $ (3,623)       $ 141,208

</TABLE>
     Marketable  equity  securities for 2002 and 2001 include  2,305,908  common
     shares  which  represent  an  ownership  of 19% of the equity in  Hungarian
     Telephone  and Cable  Corp.,  a company  of which  our  Chairman  and Chief
     Executive  Officer is a member of the Board of Directors.  In addition,  we
     hold 30,000 shares of non-voting  convertible  preferred stock,  each share
     having a  liquidation  value of $70 per  share  and is  convertible  at our
     option into 10 shares of common stock.

(9)  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, 2002 and
     2001. For the other  financial  instruments,  representing  cash,  accounts
     receivables, long-term debt due within one year, accounts payable and other
     accrued liabilities, the carrying amounts approximate fair value due to the
     relatively short maturities of those instruments.


                                      F-15
<PAGE>
<TABLE>
<CAPTION>

($ in thousands)
 --------------                                  2002                                2001
                                            ----------------------------------- ---------------------------------
                                               Carrying                            Carrying
                                                Amount          Fair Value          Amount         Fair Value
                                            ---------------- ------------------ ---------------- ----------------
<S>                                             <C>              <C>              <C>              <C>
Investments                                     $    29,846      $    29,846      $   141,208      $   141,208
Long-term debt (1)                              $ 4,957,361      $ 5,411,069      $ 5,534,906      $ 5,605,368
Equity Providing Preferred
   Income Convertible Securities (EPPICS)       $   201,250      $   191,188      $   201,250      $   179,113
</TABLE>

The fair value of the above  financial  instruments is based on quoted prices at
the reporting date for those financial instruments.

(1) Excludes the $460,000,000 debt portion of the equity units.

(10) Long-term Debt:
     ---------------
     The activity in our  long-term  debt from December 31, 2001 to December 31,
     2002 is summarized as follows:
<TABLE>
<CAPTION>
                                                              Twelve Months Ended
                                                   --------------------------------------------
                                                                                                                Interest Rate*
                                                                Interest                                              at
                                     December 31,               Rate Swap/                        December 31,   December 31,
($ in thousands)                        2001       Borrowings  Reclassification     Payments***      2002            2002
 --------------                      ------------  ----------  ----------------     -----------   ------------   -------------

FIXED RATE
<S>                                     <C>            <C>            <C>            <C>             <C>            <C>
  Rural Utilities Service Loan         $  110,860     $     -       $      -        $   (79,986)    $   30,874      6.210%
    Contracts

  Debentures                              850,778           -              -           (103,881)       746,897      7.538%

  2001 Notes                            3,700,430           -         16,229            (25,676)     3,690,983      8.267%

  Equity Units                            460,000           -              -                   -       460,000      7.480%

  Senior Unsecured Notes                  108,825           -              -            (37,825)        71,000      8.050%

  ELI Notes                               325,000           -              -           (319,025)         5,975      6.232%
  ELI Capital Leases                      137,382       1,512              -             (3,694)       135,200     11.798%
  Industrial Development Revenue
    Bonds                                 249,205           -              -            (62,815)       186,390      6.091%
  Other                                        54           -              -                (14)            40     12.985%
                                        ---------     -------         -------          ---------     ---------
TOTAL FIXED RATE                        5,942,534       1,512         16,229           (632,916)     5,327,359
                                        ---------     -------         -------          ---------     ---------

VARIABLE RATE

  ELI Bank Credit Facility                400,000           -              -           (400,000)             -      2.391%
  Industrial Development Revenue Bonds    136,278           -         43,400  **        (30,765)       148,913      3.563%
                                        ---------     -------         -------          ---------     ---------
TOTAL VARIABLE RATE                       536,278           -         43,400           (430,765)       148,913
                                        ---------     -------         -------          ---------     ---------

TOTAL LONG TERM DEBT                   $6,478,812     $ 1,512       $ 59,629        $(1,063,681)    $5,476,272
                                       ----------     =======       =========        ============    ----------

  Less:  Current Portion                (483,906)                                                     (58,911)
  Less:  Equity Units                   (460,000)                                                    (460,000)
                                        ---------                                                    ---------
                                       $5,534,906                                                   $4,957,361
                                       ==========                                                   ==========
</TABLE>
* Interest rate includes  amortization of debt issuance expenses,  debt premiums
or discounts.  The interest  rate for Rural  Utilities  Service Loan  Contracts,
Debentures,  ILEC Senior  Unsecured Notes,  and Industrial  Development  Revenue
Bonds represent a weighted average of multiple issuances.

**  Reclassification  from  liabilities  related  to  assets  held  for sale for
liabilities retained after sale of certain public utilities operations.

*** Includes purchases on the open market (see Note 13).

     Total future minimum cash payment  commitments over the next 25 years under
     ELI's long-term  capital leases amounted to $317,800,000 as of December 31,
     2002.


                                      F-16
<PAGE>

     The total outstanding  principal amounts of industrial  development revenue
     bonds were  $335,303,000  and  $385,483,000  at December 31, 2002 and 2001,
     respectively. The earliest maturity date for these bonds is in August 2015.

     We  have  an  available  shelf  registration  of  $825,600,000  and we have
     available  lines of credit with  financial  institutions  in the  aggregate
     amount of  $805,000,000.  Associated  facility fees vary,  depending on our
     credit  ratings,  and are 0.25%  per annum as of  December  31,  2002.  The
     expiration date for the facilities is October 24, 2006.  During the term of
     the facilities we may borrow,  repay and reborrow funds. As of December 31,
     2002, there were no outstanding advances under these facilities.

     During the last three  quarters of 2002,  we executed a series of purchases
     in the open market of a number of our outstanding notes and debentures. The
     aggregate   principal   amount  of  notes  and  debentures   purchased  was
     $106,906,000   and  they   generated   a   pre-tax   gain  from  the  early
     extinguishment of debt at a discount of approximately  $6,000,000  recorded
     in other income (loss), net.

     During December 2002, we completed a tender offer with respect to our 6.80%
     Debentures  due 2026  (puttable at par in 2003) and ELI's 6.05%  Guaranteed
     Notes due 2004. As a result of the tender,  $82,286,000  and  $259,389,000,
     respectively,  of these  securities  were purchased and retired at a pretax
     cost of  $12,800,000  in excess of the principal  amount of the  securities
     purchased.

     For the year ended  December  31, 2002,  we retired an aggregate  principal
     amount of $1,063,681,000 of debt.

     In May 2001, we issued an aggregate of $1.75 billion of notes consisting of
     $700,000,000  principal  amount of 8.50%  notes due May 15,  2006 and $1.05
     billion principal amount of 9.25% notes due May 15, 2011.

     On June 13, 2001, we issued 18,400,000 equity units at $25 per unit for net
     proceeds of $446,200,000 (after underwriting  discounts and commissions and
     before offering  expenses).  Each equity unit initially consists of a 6.75%
     senior  note due 2006 and a  purchase  contract  (warrant)  for our  common
     stock. The purchase  contract  obligates the holder to purchase from us, no
     later than  August  17,  2004 for a purchase  price of $25,  the  following
     number of shares of our common stock:

          *    1.7218 shares,  if the average  closing price of our common stock
               over the 20-day  trading  period  ending on the third trading day
               prior to August 17, 2004 equals or exceeds $14.52;

          *    A number of shares having a value,  based on the average  closing
               price over that  period,  equal to $25,  if the  average  closing
               price of our  common  stock  over the same  period  is less  than
               $14.25, but greater than $12.10; and

          *    2.0661 shares,  if the average  closing price of our common stock
               over the same period is less than or equal to $12.10.

     The  fair  market  value  of the  warrants  at the  date  of  issuance  was
     $4,968,000.  This  amount was  recorded  as debt  discount  and  additional
     paid-in  capital.  The equity  units  trade on The New York Stock  Exchange
     under the symbol "CZB."

     In August 2001, we issued an aggregate of $1.75 billion of notes consisting
     of $300,000,000 of 6.375% notes due 2004,  $750,000,000 principal amount of
     7.625% notes due 2008 and $700,000,000 principal amount of 9.000% notes due
     2031.

     In October 2001, we borrowed  $200,000,000  on an unsecured  basis from the
     Rural Telephone Finance Cooperative (RTFC). This note is due on October 24,
     2011 and has a fixed 6.27% rate of interest, payable quarterly.


                                      F-17
<PAGE>

     Our principal payments and capital lease payments  (principal only) for the
     next five years are as follows:

               ($ in thousands)
                --------------
                                    Principal        Capital
                                    ---------      --------------
                                    Payments       Lease Payments
                                    ---------      --------------
                2003                $ 50,939        $ 7,972
                2004                 385,005          3,061
                2005                     933          3,391
                2006                 875,992          3,772
                2007                   1,056          4,203

     Holders of certain industrial  development  revenue bonds may tender at par
     prior to maturity.  The next tender date is August 1, 2007 for  $30,350,000
     of  principal  amount of bonds.  We expect to remarket all such bonds which
     are  tendered.  If the  proposed  sale  of our  Arizona  electric  and  gas
     properties  to  UniSource  is  completed  we will  be  required  to  redeem
     $111,760,000  of industrial  development  revenue bonds  promptly after the
     sale is completed.

(11) Derivative Instruments and Hedging Activities:
     ----------------------------------------------
     Interest rate swap  agreements are used to hedge a portion of our debt that
     is  subject  to  fixed  interest  rates.   Under  our  interest  rate  swap
     agreements, we agree to pay an amount equal to a specified variable rate of
     interest  times a notional  principal  amount,  and to receive in return an
     amount equal to a specified  fixed rate of interest times the same notional
     principal amount.  The notional amounts of the contracts are not exchanged.
     No other cash payments are made unless the agreement is terminated prior to
     maturity,  in which case the  amount  paid or  received  in  settlement  is
     established  by agreement at the time of  termination  and  represents  the
     market  value,  at the then  current  rate of  interest,  of the  remaining
     obligations to exchange payments under the terms of the contracts.

     The  interest  rate  swap  contracts  are  reflected  at fair  value in our
     consolidated balance sheet and the related portion of fixed-rate debt being
     hedged is  reflected at an amount equal to the sum of its book value and an
     amount  representing  the  change  in fair  value of the  debt  obligations
     attributable  to the interest rate risk being  hedged.  Changes in the fair
     value of interest rate swap  contracts,  and the offsetting  changes in the
     adjusted carrying value of the related portion of the fixed-rate debt being
     hedged,  are  recognized  in the  consolidated  statements of operations in
     interest expense. The notional amounts of fixed-rate indebtedness hedged as
     of  December  31,  2002  and  December  31,  2001  was   $250,000,000   and
     $100,000,000, respectively. Such contracts require us to pay variable rates
     of interest  (average  pay rate of  approximately  4.85% as of December 31,
     2002) and receive fixed rates of interest (average receive rate of 7.65% as
     of December 31, 2002). The fair value of these  derivatives is reflected in
     other assets as of December 31, 2002, in the amount of $16,658,000  and the
     related  underlying  debt has been increased by a like amount.  The amounts
     received  during  the year  ended  December  31,  2002 as a result of these
     contracts  amounted  to  $3,820,000  and are  included  as a  reduction  of
     interest expense.

     We  do  not  anticipate  any  nonperformance  by  counter  parties  to  our
     derivative  contracts as all counter parties have  investment  grade credit
     ratings.

(12) Shareholder Rights Plan:
     ------------------------
     On March 6, 2002, our Board of Directors adopted a Shareholder Rights Plan.
     The purpose of the  Shareholder  Rights Plan is to deter coercive  takeover
     tactics and to  encourage  third  parties  interested  in  acquiring  us to
     negotiate  with our Board of Directors.  It is intended to  strengthen  the
     ability of our Board of Directors to fulfill its  fiduciary  duties to take
     actions which are in the best interest of our shareholders. The rights were
     distributed to shareholders as a dividend at the rate of one right for each
     share of our common stock held by shareholders of record as of the close of
     business  on  March  26,  2002.   Initially,   the  rights  generally  were
     exercisable only if a person or group acquired  beneficial  ownership of 15
     percent or more of our common stock (the "Acquiror") without the consent of
     our  independent  directors.  On January 21,  2003,  our Board of Directors
     amended  the terms of our Rights  agreement  increasing  the level at which
     these  rights will become  exercisable  to 20 percent of our common  stock.
     Each  right not owned by an  Acquiror  becomes  the right to  purchase  our
     common stock at a 50 percent discount.

                                      F-18
<PAGE>

(13) Changes in Accounting Principles:
     ---------------------------------
     In July 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
     141,  "Business  Combinations."  This statement  requires that all business
     combinations be accounted for under the purchase method of accounting. SFAS
     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 July
     1, 2001.  The adoption of SFAS 141 did not have any impact on our financial
     position or results of operations.

     In July 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets." This statement  requires that goodwill and other  intangibles with
     indefinite useful lives no longer be amortized to earnings,  but instead be
     reviewed for impairment. The amortization of goodwill and other intangibles
     with  indefinite  useful  lives  ceased upon  adoption of the  statement on
     January 1, 2002. We have no other  intangibles  with indefinite lives other
     than goodwill and trade name.  We were  required to test for  impairment of
     goodwill  and  trade  name as of  January  1,  2002 and at  least  annually
     thereafter.  Any  transitional  impairment  loss at  January  1,  2002  was
     recognized as the cumulative effect of a change in accounting  principle in
     our  statement  of  operations.  During  the  first  quarter  of  2002,  we
     reassessed the useful lives of our intangible  assets with estimated useful
     lives and  determined  no change was  required.  We  annually  examine  the
     carrying value of our goodwill and other identifiable intangibles (customer
     base and trade name) to determine  whether there are any impairment  losses
     and have  determined for the year ended December 31, 2002 that there was no
     impairment  except for goodwill  related to ELI. SFAS No. 142 also requires
     that intangible  assets with estimated useful lives be amortized over those
     lives and be  reviewed  for  impairment  in  accordance  with SFAS No. 144,
     "Accounting for Impairment or Disposal or Long-Lived Assets." The impact of
     the adoption of SFAS 142 is discussed in Note 6 to  Consolidated  Financial
     Statements.

     As a result of our  adoption  of SFAS 142,  we  recognized  a  transitional
     impairment loss of $39,800,000 on ELI as a cumulative effect of a change in
     accounting principle in our statement of operations in the first quarter of
     2002.

     In October 2001, the FASB issued SFAS 144,  "Accounting  for the Impairment
     or Disposal of Long-lived Assets" (see Notes 1(g) and 4).

     In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
     4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
     Corrections."  This  statement  eliminates the  requirement  that gains and
     losses from  extinguishment  of debt be required to be  aggregated  and, if
     material,  classified as an  extraordinary  item, net of related income tax
     effect. The statement requires gains and losses from extinguishment of debt
     to be classified as  extraordinary  items only if they meet the criteria in
     Accounting  Principles  Board  Opinion  No. 30,  "Reporting  the Results of
     Operations - Reporting  the Effects of Disposal of a Segment of a Business,
     and   Extraordinary,   Unusual  and   Infrequently   Occurring  Events  and
     Transactions" which provides guidance for distinguishing  transactions that
     are part of an entity's recurring operations from those that are unusual or
     infrequent or that meet the criteria for classification as an extraordinary
     item. We adopted SFAS 145 in the second quarter of 2002. For the year ended
     December  31,  2002,  we  recognized  $32,330,000  of gains from early debt
     retirement as well as a  $12,800,000  loss due to a tender offer related to
     certain debt  securities.  There were no similar  types of  retirements  in
     2001.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
     Compensation - Transition and  Disclosure  for  Stock-Based  Compensation."
     SFAS No. 148 provides  alternative  methods of  transition  for a voluntary
     change  to the fair  value  based  method  of  accounting  for  stock-based
     compensation  and amends the disclosure  requirements of SFAS No. 123. This
     statement is effective for fiscal years ending after  December 15, 2002. We
     adopted the expanded disclosure requirements of SFAS No. 148.

(14) Settlement of Retained Liabilities:
     -----------------------------------
     We were actively pursuing the settlement of certain retained liabilities at
     less than face value,  which are  associated  with  customer  advances  for
     construction  from  our  disposed  water  properties.  For the  year  ended
     December 31, 2002, we recognized  $26,330,000 in other income (loss),  net,
     as a result of these settlements.

(15) Global /WorldCom Receivables:
     -----------------------------
     During the second  quarter 2002, we reserved  approximately  $21,600,000 of
     trade  receivables  with  WorldCom  as a result of  WorldCom's  filing  for
     bankruptcy.  These  receivables  were  generated  as a result of  providing
     ordinary course  telecommunications  services.  The $21,600,000  charge was
     partially offset by reversals in our Global reserve as discussed below.


                                      F-19
<PAGE>
     Concurrent  with the  acquisition  of  Frontier,  we entered  into  several
     operating agreements with Global. We have ongoing commercial  relationships
     with  Global  affiliates.  We  reserved  a total of  $29,000,000  of Global
     receivables  to reflect our best  estimate of the net  realizable  value of
     receivables  incurred from these commercial  relationships  during 2001 and
     2002  as a  result  of  Global's  filing  for  bankruptcy.  We  recorded  a
     write-down  of such  receivables  in the amount of  $7,800,000 in the first
     quarter 2002 and $21,200,000 in the fourth quarter of 2001. In 2002, as the
     result of a settlement  agreement with Global,  we reversed  $17,900,000 of
     our  previous  reserve of the net  realizable  value of these  receivables.
     Prior to the date of  Global's  bankruptcy  filing,  we  provided  ordinary
     course  telecommunications  services  as well as  transitional  services to
     Global.  Global has  provided us certain  customer  billing and  collection
     functions as well as other  transitional  services.  Although some of these
     arrangements  have  continued  after the bankruptcy  filing,  we are in the
     process of changing some services and functions to provide them  ourselves.
     The Bankruptcy Court has granted relief to us and other  telecommunications
     companies that provide service to Global by, among other things,  directing
     a shortened  payment  period with  respect to  post-petition  invoices,  an
     expedited court process for  post-petition  defaults in payments by Global,
     and a priority for  post-petition  expense items over other unsecured debt.
     These  procedures  should  minimize  future economic loss to us although we
     cannot guarantee that additional losses will not occur.

(16) Company Obligated Mandatorily Redeemable Convertible Preferred
     --------------------------------------------------------------
     Securities:
     -----------
     In 1996, our consolidated wholly-owned subsidiary, Citizens Utilities Trust
     (the Trust),  issued, in an underwritten public offering,  4,025,000 shares
     of  5%  Company  Obligated  Mandatorily  Redeemable  Convertible  Preferred
     Securities  due 2036 (Trust  Convertible  Preferred  Securities or EPPICS),
     representing preferred undivided interests in the assets of the Trust, with
     a  liquidation  preference  of $50 per  security  (for a total  liquidation
     amount  of  $201,250,000).  The  proceeds  from the  issuance  of the Trust
     Convertible  Preferred  Securities and a Company capital  contribution were
     used  to  purchase   $207,475,000   aggregate   liquidation  amount  of  5%
     Partnership  Convertible  Preferred Securities due 2036 from another wholly
     owned  consolidated  subsidiary,   Citizens  Utilities  Capital  L.P.  (the
     Partnership). The proceeds from the issuance of the Partnership Convertible
     Preferred  Securities  and a  Company  capital  contribution  were  used to
     purchase from us $211,756,000  aggregate principal amount of 5% Convertible
     Subordinated  Debentures  due  2036.  The sole  assets of the Trust are the
     Partnership   Convertible   Preferred   Securities   and  our   Convertible
     Subordinated   Debentures   are   substantially   all  the  assets  of  the
     Partnership.  Our obligations under the agreements related to the issuances
     of such  securities,  taken together,  constitute a full and  unconditional
     guarantee  by  us  of  the  Trust's  obligations   relating  to  the  Trust
     Convertible Preferred Securities and the Partnership's obligations relating
     to the Partnership Convertible Preferred Securities.

     In accordance  with the terms of the issuances,  we paid the 5% interest on
     the Convertible Subordinated Debentures in 2002, 2001 and 2000. During 2002
     and 2001,  only cash was paid to the Partnership in payment of the interest
     on the Convertible Subordinated  Debentures.  The cash was then distributed
     by the Partnership to the Trust and then by the Trust to the holders of the
     EPPICS.

(17) Capital Stock:
     --------------
     We are  authorized to issue up to 600,000,000  shares of Common Stock.  The
     amount and timing of dividends  payable on Common Stock are within the sole
     discretion of our Board of Directors.

     Between December 1999 and April 2000, our Board of Directors authorized the
     purchase of up to  $200,000,000  worth of shares of our common stock.  This
     share  purchase  program  was  completed  in July 2000 and  resulted in the
     acquisition or contract to acquire  approximately  12,092,000 shares of our
     common  stock.  Of  those  shares,  2,952,000  shares  were  purchased  for
     approximately  $49,209,000  in cash and we entered  into an equity  forward
     contract for the acquisition of the remaining 9,140,000 shares.

     During  2000,  we entered  into a forward  contract to  purchase  9,140,000
     shares of our common stock with Citibank,  N.A. These  purchases and others
     made by us for cash during 2000 were made in open-market transactions.  The
     forward amount to be paid in the future included a carrying cost,  based on
     LIBOR plus a spread,  and the dollar amount paid for the shares  purchased.
     Our equity forward contract was a temporary financing arrangement that gave
     us the  flexibility  to purchase  our stock and pay for those  purchases in
     future  periods.   Pursuant  to  transition  accounting  rules,  commencing
     December  31, 2000  through  June 30,  2001 we were  required to report our
     equity  forward  contract as a reduction to  shareholders'  equity and as a
     component  of  temporary  equity  for the  gross  settlement  amount of the
     contract  ($150,013,000).  On June  28,  2001,  we  entered  into a  master
     confirmation  agreement  that  amended  the equity  forward  contract to no
     longer permit share  settlement  of the  contract.  In 2001, we settled the
     contract by paying the redemption  amount of $150,013,000  plus $13,650,000
     in associated carrying costs and took possession of our shares.

                                      F-20
<PAGE>

     In addition to our share purchase programs  described above, in April 2000,
     our Board of Directors authorized the purchase, from time to time, of up to
     $25,000,000  worth of  shares of Class A common  stock of ELI,  in the open
     market or in negotiated  transactions.  This ELI share purchase program was
     completed in August 2000 and resulted in the  acquisition of  approximately
     1,288,000 shares of ELI common stock for approximately $25,000,000 in cash.
     In August 2000, our Board of Directors  authorized the purchase,  from time
     to time, of up to an additional  1,000,000 shares of ELI on the open market
     or in negotiated  transactions.  The second ELI share purchase  program was
     completed  in  September   2000  and   resulted  in  the   acquisition   of
     approximately  1,000,000  shares  of ELI  common  stock  for  approximately
     $13,748,000 in cash.

(18) Stock Plans:
     ------------
     At December 31, 2002, we have four stock based compensation plans which are
     described below. We apply APB Opinion No. 25 and related interpretations in
     accounting  for  the  employee  stock  plans  resulting  in the  use of the
     intrinsic  value to  value  the  stock  option.  Compensation  cost has not
     generally  been  recognized in the financial  statements for options issued
     pursuant  to  the  Management  Equity  Incentive  Plan  (MEIP),  or  Equity
     Incentive  Plan (EIP),  as the exercise price for such options was equal to
     the market  price of the stock at the time of grant.  However,  during 2002
     the  expiration  date of  approximately  79,000  options was  extended  and
     compensation cost of approximately $219,700 was recognized. No compensation
     cost  has  been  recognized  in the  financial  statements  related  to the
     Employee  Stock  Purchase Plan (ESPP)  because the purchase price is 85% of
     the fair value. Compensation cost, recognized in operating expense, for our
     Directors' Deferred Fee Equity Plan was $607,151,  $741,438 and $691,956 in
     2002, 2001 and 2000, respectively.

     We have granted restricted stock awards to key employees in the form of our
     Common Stock. The number of shares issued as restricted stock awards during
     2002, 2001 and 2000 were 538,000, 100,000 and 3,120,000, respectively. None
     of the restricted stock awards may be sold, assigned,  pledged or otherwise
     transferred,  voluntarily  or  involuntarily,  by the  employees  until the
     restrictions  lapse. The restrictions are both time and performance  based.
     At  December  31,  2002,   3,171,000   shares  of  restricted   stock  were
     outstanding.  Compensation  expense,  recognized in operating  expense,  of
     $7,029,000,  $8,967,000  and  $9,084,000  for the years ended  December 31,
     2002,  2001 and 2000,  respectively,  has been recorded in connection  with
     these grants.

     Had we  determined  compensation  cost based on the fair value at the grant
     date for the MEIP,  EIP and  ESPP,  our pro forma net loss and net loss per
     common share would have been as follows:
<TABLE>
<CAPTION>
                                                                          2002            2001           2000
         ($ in thousands)                                            --------------- --------------- --------------
          --------------
<S>                                                                     <C>           <C>              <C>
         Net loss                                     As reported       $ (682,897)   $  (89,682)      $ (28,394)
         Add: Stock-based employee compensation
         expense included in reported net income,
         net of related tax effects                                          4,660         7,136           6,150
         Deduct: Total stock-based employee
         compensation expense determined under fair
         value based method for all awards, net of
         related tax effects                                               (16,665)      (35,971)        (29,026)
                                                                        -----------    ----------      ----------
                                                       Pro forma          (694,902)     (118,517)        (51,270)
                                                                        ===========    ==========      ==========

         Net loss per common share                    As reported:
                                                         Basic          $    (2.43)   $    (0.38)      $   (0.11)
                                                         Diluted             (2.43)        (0.38)          (0.11)

                                                       Pro forma:
                                                         Basic          $    (2.48)   $    (0.48)      $   (0.20)
                                                         Diluted             (2.48)        (0.48)          (0.20)

</TABLE>

                                      F-21
<PAGE>

     The full impact of calculating  compensation  cost for stock options is not
     reflected in the pro forma  amounts  above  because pro forma  compensation
     cost only  includes  costs  associated  with the vested  portion of options
     granted pursuant to the MEIP, EIP and ESPP on or after January 1, 1995.

                        Management Equity Incentive Plan
                        --------------------------------
     Under the MEIP,  awards of our  Common  Stock may be  granted  to  eligible
     officers,  management employees and non-management employees 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 MEIP.

     Since the expiration  date of the MEIP plan on June 21, 2000, no awards can
     be granted under the MEIP.  The exercise price of stock options issued were
     equal to or greater  than the fair market  value of the  underlying  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
     MEIP,  subsequent  stock  dividends  and stock  splits  have the  effect of
     increasing the option shares outstanding,  which correspondingly  decreases
     the average exercise price of outstanding options.


                                      F-22
<PAGE>
                              Equity Incentive Plan
                              ---------------------
     In May 1996,  our  shareholders  approved the 1996 EIP and in May 2001, our
     shareholders  approved  the 2001 EIP.  Under the EIP  plans,  awards of our
     Common Stock may be granted to eligible officers,  management employees and
     non-management   employees  in  the  form  of  incentive   stock   options,
     non-qualified  stock options,  SARs,  restricted stock or other stock-based
     awards.  The Compensation  Committee of the Board of Directors  administers
     the EIP.

     The maximum  number of shares of common stock which may be issued  pursuant
     to awards at any time for both plans is 25,358,000  shares,  which has been
     adjusted for  subsequent  stock  dividends.  No awards will be granted more
     than 10 years after the effective  dates (May 23, 1996 and May 17, 2001) of
     the EIP plans.  The exercise price of stock options and SARs shall be equal
     to or greater than the fair market value of the underlying  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 EIP,  subsequent  stock  dividends  and stock splits
     have  the  effect  of  increasing  the  option  shares  outstanding,  which
     correspondingly decrease the average exercise price of outstanding options.

     The  following is a summary of share  activity  subject to option under the
     MEIP and EIP.
<TABLE>
<CAPTION>
                                                                                         Weighted
                                                                        Shares            Average
                                                                      Subject to        Option Price
                                                                        Option           Per Share
     ------------------------------------------------------------ ------------------- -----------------
<S>                                                                                       <C>
      Balance at January 1, 2000                                      16,860,000          $  9.29

         Options granted                                               5,784,000            13.32
         Options exercised                                            (4,126,000)            9.53

         Options canceled, forfeited or lapsed                          (897,000)            9.49

     ------------------------------------------------------------ -------------------
     Balance at December 31, 2000                                     17,621,000            10.72
         Options granted                                               3,969,000            13.62
         Options exercised                                            (1,728,000)            8.25
         Options canceled, forfeited or lapsed                          (805,000)           11.45
     ------------------------------------------------------------ -------------------
     Balance at December 31, 2001                                     19,057,000            11.87
         Options granted                                               3,065,000             9.53
         Options exercised                                              (812,000)            7.90
         Options canceled, forfeited or lapsed                        (2,178,000)           11.94
     ------------------------------------------------------------ -------------------
     Balance at December 31, 2002                                     19,132,000          $ 11.66
     ============================================================ ===================
</TABLE>
<TABLE>
<CAPTION>

     The following table summarizes  information about shares subject to options
     under the MEIP and EIP at December 31, 2002.

                                  Options Outstanding                                          Options Exercisable
    ---------------------------------------------------------------------------------    ---------------------------------
                                                                  Weighted Average                            Weighted
         Number             Range of         Weighted Average         Remaining               Number          Average
       Outstanding       Exercise Prices      Exercise Price        Life in Years          Exercisable     Exercise price
    ------------------ -------------------- -------------------- --------------------    ----------------- ---------------
<S>         <C>          <C>       <C>              <C>                 <C>                     <C>           <C>
            14,000       $ 4.00 -  5.00             $  4.29             1.73                    14,000        $  4.29
         1,479,000         6.00 -  7.50                7.50             6.25                 1,464,000           7.50
         3,248,000         7.72 -  8.53                8.09             4.25                 3,227,000           8.09
           110,000         9.18 -  9.38                9.26             6.29                    70,000           9.31
         2,834,000         9.52 -  9.52                9.52             9.37                   503,000           9.52
         2,182,000        10.24 - 11.41               10.79             4.11                 2,182,000          10.79
         1,451,000        12.37 - 12.91               12.62             4.29                 1,138,000          12.61
         2,069,000        12.97 - 12.97               12.97             7.09                 1,514,000          12.97
           545,000        13.06 - 13.47               13.44             7.77                   524,000          13.45
         2,408,000        13.71 - 13.71               13.71             8.33                   621,000          13.71
         2,792,000        13.75 - 21.47               17.42             6.51                   941,000          14.92
    ------------------                                                                   -----------------
        19,132,000       $ 4.00 - 21.47             $ 11.66             6.00                12,198,000        $ 10.63
    ==================                                                                   =================

     The  number of  options  exercisable  at  December  31,  2001 and 2000 were
     10,676,342 and 8,839,000, respectively.
</TABLE>


                                      F-23
<PAGE>
     The weighted  average fair value of options  granted during 2002,  2001 and
     2000 were $4.98,  $6.00 and $6.31,  respectively.  For  purposes of the pro
     forma calculation,  the fair value of each option grant is estimated on the
     date of  grant  using  the  Black  Scholes  option-pricing  model  with the
     following  weighted  average  assumptions used for grants in 2002, 2001 and
     2000:

                                         2002           2001           2000
      --------------------------- --------------- -------------- --------------
      Dividend yield                          -              -               -
      Expected volatility                    44%            36%            30%
      Risk-free interest rate              4.94%          5.10%          5.82%
      Expected life                      7 years        6 years        6 years
      --------------------------- --------------- -------------- --------------

                          Employee Stock Purchase Plan
                          ----------------------------
     Our ESPP was approved by  shareholders  on June 12, 1992 and amended on May
     22, 1997. Under the ESPP, eligible employees have the right to subscribe to
     purchase  shares of our Common  Stock at 85% of the average of the high and
     low market prices on the last day of the purchase  period.  An employee may
     elect to have up to 50% of annual base pay  withheld in equal  installments
     throughout  the  designated  payroll-deduction  period for the  purchase of
     shares.  The value of an employee's  subscription may not exceed $25,000 in
     any one calendar year and the minimum  contribution each purchase period is
     $50.00.  Active employees are required to hold their shares for three years
     from the date of each purchase  period.  An employee may not participate in
     the ESPP if such  employee  owns stock  possessing  5% or more of the total
     combined  voting  power or value of our capital  stock.  As of December 31,
     2002,  there were  6,407,000  shares of Common Stock  reserved for issuance
     under the ESPP. 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.

     Effective   November  30,  2002,  the  employee  stock  purchase  plan  was
     temporarily  suspended for future purchase periods. In 2002, 146,406 shares
     were purchased under the ESPP and 4,072,647  shares were  outstanding as of
     date of suspension. 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 2002, 2001 and
     2000:

                                        2002          2001          2000
                                   ------------- ------------- -------------
      Dividend yield                         -             -             -
      Expected volatility                   44%           36%           30%
      Risk-free interest rate             1.93%         2.71%         6.23%
      Expected life                    6 months      6 months      6 months

     The weighted  average fair value of those purchase  rights granted in 2002,
     2001 and 2000 was $2.57, $2.39, and $3.26, respectively.

                       Directors' Deferred Fee Equity Plan
                       -----------------------------------
     Effective  June 30, 2000,  the annual cash  retainer  paid to  non-employee
     directors was eliminated.  Instead, each non-employee director was required
     to elect,  by August 1, 2000, to receive as an annual retainer either 2,500
     stock units or 10,000 stock  options.  Starting in July 2001,  the Board of
     Directors restored the ability of the non-employee directors to receive the
     annual  retainer in cash.  Each  non-employee  director must now elect,  by
     December 1 of the prior year, to receive either  $30,000 cash,  5,000 stock
     units or 20,000 stock  options as an annual  retainer.  Directors  making a
     stock unit election  must also elect to receive  payment in either stock or
     cash upon  retirement  from the Board of  Directors.  Stock options have an
     exercise  price  of the  fair  market  value  on the  date  of  grant,  are
     exercisable six months after the date of grant and have a 10-year term. The
     Formula Plan described below also remains in effect until its expiration in
     2012.

     For 2002, each non-employee director received fees of $2,000 for each Board
     of Directors and committee meeting attended. In addition,  committee chairs
     receive an additional fee of $5,000 per annum, paid quarterly.

     From  January 1, 2000 through June 30,  2000,  the  non-employee  directors
     could  choose to  receive  their fees in either  stock or stock  units or a
     combination  of  those  two  options.  Effective  July  2001,  non-employee
     directors  have the choice to receive  their fees paid in cash,  stock,  or
     stock units or a combination  of two of those three  options.  If stock was
     elected,  the stock was  granted at the  average of the high and low on the
     first trading date of the year (Initial Market Value).  If stock units were
     elected,  they were  purchased at 85% of the Initial  Market  Value.  Stock
     units (except in an event of hardship)  are held by us until  retirement or
     death. If Final Market Value (the average of the high and low prices of the
     stock on the last  trading day of  November)  is less than  Initial  Market
     Value,  the number of shares of stock or stock units will be adjusted based
     on Final Market Value.

                                      F-24
<PAGE>

     The Formula  Plan,  which  commenced in 1997 and  continues  through  2012,
     provides  each Director  options to purchase  5,000 shares of common stock.
     The exercise price of the options granted under the Formula Plan is 100% of
     the  average of the fair market  values on the third,  fourth,  fifth,  and
     sixth  trading  days of the year in which  the  options  are  granted.  The
     options  are  exercisable  six  months  after  the  grant  date and  remain
     exercisable  for ten years after the grant date. In addition,  on September
     1, 1996, each  non-employee  director was granted options to purchase 2,500
     shares of common stock.

     As of any date, the maximum number of shares of common stock which the Plan
     was obligated to deliver  pursuant to the Directors' Plan shall not be more
     than one percent (1%) of the total  outstanding  shares of our common stock
     as of such  date,  subject  to  adjustment  in the event of  changes in our
     corporate  structure  affecting  capital  stock.  There  were 11  directors
     participating  in the Directors'  Plan during all or part of 2002. In 2002,
     the total  options,  plan units and stock  earned were  99,583,  43,031 and
     1,514,  respectively.  In 2001,  the total  options,  plan  units and stock
     earned were  90,000,  55,285 and 1,321,  respectively.  In 2000,  the total
     Options,  Plan  Units and stock  earned  were  100,000,  42,017  and 2,860,
     respectively. At December 31, 2002, 1,538,868 options were exercisable at a
     weighted average exercise price of $10.70.

     We had also maintained a Non-Employee  Directors' Retirement Plan providing
     for the payment of specified sums annually to our  non-employee  directors,
     or their designated  beneficiaries,  starting at the director's retirement,
     death or termination of directorship. In 1999, we terminated this Plan. The
     vested  benefit of each  non-employee  director,  as of May 31,  1999,  was
     credited in the form of stock  units.  Such benefit will be payable to each
     director  upon  retirement,  death or  termination  of  directorship.  Each
     participant had until July 15, 1999 to elect whether the value of the stock
     units  awarded would be payable in our common stock  (convertible  on a one
     for one basis) or in cash. As of December 31, 2002,  the liability for such
     payments was $2,425,000 of which $1,294,000 will be payable in stock (based
     on the July 15, 1999 stock price) and  $1,131,000  will be payable in cash.
     While the number of shares of stock payable to those directors  electing to
     be paid in stock is fixed,  the amount of cash  payable to those  directors
     electing  to be paid in cash  will be based on the  number  of stock  units
     awarded multiplied by the stock price on the payment date.

(19) Restructuring and Other Expenses:
     ---------------------------------

     2002
     ----
     Restructuring  and other expenses  primarily consist of expenses related to
     our various restructurings,  $32,985,000 related to reductions in personnel
     at our telecommunications  operations,  costs that were spent at our Plano,
     Texas  facility  and  at  other  locations  as a  result  of  transitioning
     functions and jobs, and $6,800,000 related to our tender offer in June 2002
     for all of the publicly held ELI common shares that we did not already own.
     These costs were  partially  offset by a $2,825,000  reversal of a 2001 ELI
     accrual discussed below.

     2001
     ----
     During 2001,  we examined all aspects of our  business  operations  and our
     facilities  to take  advantage  of  operational  and  functional  synergies
     between  Frontier  and the  original  Citizens  businesses.  We continue to
     review  our  operations,   personnel  and  facilities  to  achieve  greater
     efficiency.

          Plano Restructuring
          Pursuant to a plan adopted in the third quarter of 2001, we closed our
          operations   support  center  in  Plano,  Texas  in  August  2002.  In
          connection with this plan, we recorded a pre-tax charge of $14,557,000
          in the second half of 2001,  $839,000 in the first quarter of 2002 and
          we adjusted our accrual down by $92,000 and $561,000 in the second and
          third quarter of 2002,  respectively.  Our objective is to concentrate
          our  resources  in areas where we have the most  customers,  to better
          serve those customers.  We sold our Plano office building in 2003. The
          restructuring  resulted  in  the  termination  of  750  employees.  We
          communicated  with all affected  employees  during July 2001.  Certain
          employees were relocated,  others were offered severance, job training
          and/or outplacement counseling. As of December 31, 2002, approximately
          $14,730,000 was paid and all affected  employees were terminated.  The
          restructuring   expenses  primarily  consist  of  severance  benefits,
          retention  earned  through  December 31, 2002,  and other planning and
          communication costs.


                                      F-25
<PAGE>

          Sacramento Call Center Restructuring
          In April 2002, we closed our Sacramento  Customer Care Center pursuant
          to a plan adopted in the fourth  quarter of 2001. In  connection  with
          this closing,  we recorded a pre-tax  charge of $731,000 in the fourth
          quarter of 2001, $62,000 and $9,000 in the first and second quarter of
          2002,  respectively.  We  redirected  the call  traffic and other work
          activities  to our Kingman,  Arizona call center.  This  restructuring
          resulted in the elimination of 98 employees.  We communicated with all
          affected  employees  during  November  2001.  As of December 31, 2002,
          approximately  $802,000  was  paid  and all  affected  employees  were
          terminated and no accrual remained.

          ELI Restructuring
          In the first half of 2002, ELI redeployed the Internet routers,  frame
          relay switches and ATM switches from the Atlanta,  Cleveland,  Denver,
          Philadelphia  and New York markets to other locations in ELI's network
          pursuant to a plan adopted in the fourth  quarter of 2001.  ELI ceased
          leasing  the  collocation  facilities  and  off-net  circuits  for the
          backbone  and local loops  supporting  the  service  delivery in these
          markets.  It was  anticipated  that this would lead to  $4,179,000  of
          termination  fees which were  accrued for but not paid at December 31,
          2001.   During  2002,  ELI  adjusted  its  original  accrual  down  by
          $2,825,000 due to the favorable settlements of termination charges for
          off-net circuit  agreements.  As of December 31, 2002,  $1,354,000 has
          been paid and no accrual remained.

          Tender Offer
          During May 2002,  we announced a tender offer for all of the shares of
          ELI that we did not  already  own for a price of $0.70 per  share.  We
          completed  the tender  offer in June 2002.  As a result,  ELI became a
          wholly-owned subsidiary, for total costs and expenses of approximately
          $6,800,000.  We  accounted  for this  transaction  as a  purchase  and
          allocated   the  entire   amount  to  goodwill.   We   evaluated   the
          recoverability  of this goodwill in  accordance  with SFAS No. 142 and
          determined  that a write-off was necessary  based on fair market value
          as   determined  by   discounted   cash  flows  and  other   valuation
          methodologies.  This  charge is included  in  restructuring  and other
          expenses.

     1999
     ----
     In the  fourth  quarter  of 1999,  we  adopted  a plan to  restructure  our
     corporate  office  activities.  In connection with this plan, we recorded a
     pre-tax   charge  of  $5,760,000  in  the  fourth   quarter  of  1999.  The
     restructuring  resulted in the  reduction  of 49 corporate  employees.  All
     affected  employees  were  communicated  with in the early part of November
     1999.  As of June 30,  2002,  approximately  $4,602,000  has been paid,  43
     employees  were  terminated  and  6  employees  who  were  expected  to  be
     terminated  took other  positions  within the  Company.  At June 30,  2002,
     December 31, 2001 and December 31, 2000,  we adjusted our original  accrual
     down by $11,000,  $139,000  and  $1,008,000,  respectively,  and no accrual
     remained as of June 30, 2002.


                                      F-26
<PAGE>

     The following tables display  rollforwards of the accruals  established for
     restructuring expenses by plan:
<TABLE>
<CAPTION>

($ in thousands)
 --------------      2001                       Severance       Benefits     Retention     Other        Total
                                           ----------------- ------------ ------------------------ -------------

2001 Plano Restructuring
<S>                                                 <C>          <C>          <C>         <C>          <C>
Original accrued amount                             $ 9,353      $ 1,535      $ 1,178     $   936      $ 13,002
Amount paid                                          (1,386)         (35)         (80)       (177)       (1,678)
Additional accrual                                      551            -        1,793          27         2,371
Adjustments                                            (325)        (104)         (64)       (323)         (816)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2001                                  8,193        1,396        2,827         463        12,879
                                           ----------------- ------------ ------------------------ -------------
Amount paid                                          (7,599)      (1,355)      (3,752)       (346)      (13,052)
Additional accrual                                       65            -        1,150           -         1,215
Adjustments                                            (659)         (28)        (225)       (117)       (1,029)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2002                                $     -      $    13      $    -      $     -      $     13
                                           ================= ============ ======================== =============


2001 Sacramento Call Center Restructuring
Accrued @ 12/31/2001                                $   552      $    94      $    85     $     -      $    731
Amount paid                                            (529)         (83)        (190)          -          (802)
Additional accrual                                       45            -          116           -           161
Adjustments                                             (68)         (11)         (11)          -           (90)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2002                                $     -      $     -      $     -     $     -      $      -
                                           ================= ============ ======================== =============


ELI 2001 Restructuring
Accrued @ 12/31/2001                                $     -      $     -      $     -     $ 4,179      $  4,179
Amount paid                                               -            -            -      (1,354)       (1,354)
Additional accrual                                        -            -            -           -             -
Adjustments                                               -            -            -      (2,825)       (2,825)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2002                                $     -      $     -      $     -     $     -      $      -
                                           ================= ============ ======================== =============


                                            Original Accrued    Amount       Accrual     Remaining
                   1999                         Amount        Paid to Date  Adjustments   Accrual
                                           ----------------- ------------- ------------ ------------

1999 Corporate Office Restructuring
For the year ended December 31, 2000               5,539       (3,993)      (1,008)        538
For the year ended December 31, 2001                 538         (199)        (139)        200
For the year ended December 31, 2002                 200         (189)         (11)          -
</TABLE>

(20) Income Taxes:
     -------------
     The  following is a  reconciliation  of the  provision for income taxes for
     continuing  operations computed at federal statutory rates to the effective
     rates:
<TABLE>
<CAPTION>
                                                                   2002         2001          2000
                                                              ------------- ------------  ------------
<S>                                                                  <C>          <C>           <C>
Consolidated tax provision at federal statutory rate                 35.0%        35.0%         35.0%
State income tax (provisions) benefit, net of federal
  income tax benefit                                                  1.3%       -10.8%         -6.4%
Write-off of regulatory assets                                       -2.6%       -11.7%          0.0%
Nontaxable investment income                                          0.0%         2.6%          5.4%
Flow through depreciation                                            -0.1%        -0.5%         -8.5%
Tax reserve adjustment                                                0.0%         1.0%         -5.6%
Minority interest                                                     0.0%         0.0%          8.7%
All other, net                                                        0.1%         4.8%          3.7%
                                                              ------------- ------------  ------------
                                                                     33.7%        20.4%         32.3%
                                                              ============= ============  ============
</TABLE>

     As of  December  31,  2002 and  2001,  accumulated  deferred  income  taxes
     amounted  to  $136,356,000   and   $423,486,000,   respectively,   and  the
     unamortized  deferred  investment  tax credits  amounted  to  $760,000  and
     $6,058,000, respectively.



                                      F-27
<PAGE>

     The components of the net deferred income tax liability (asset) at December
     31 are as follows:
<TABLE>
<CAPTION>

($ in thousands)                                               2002         2001
 --------------                                            ------------- ------------

Deferred income tax liabilities:
<S>                                                           <C>          <C>
   Property, plant and equipment basis differences            $ 229,135    $ 492,712
   Deferred energy commodity charges                             51,633       30,421
   Gain on subsidiary stock IPO                                       -       30,246
   Other, net                                                    50,055       97,087
                                                           ------------- ------------
                                                                330,823      650,466
                                                           ------------- ------------

Deferred income tax assets:
   Minimum pension liability                                     69,209            -
   Tax operating loss carryforward                              193,329      126,597
   Alternate minimum tax credit carryforward                     49,864       69,836
   Other, net                                                    57,242       82,167
                                                           ------------- ------------
                                                                369,644      278,600
                                                           ------------- ------------
    Net deferred income tax liability (asset)                 $ (38,821)   $ 371,866
                                                           ============= ============

Deferred tax assets and liabilities are reflected in the following
   captions on the balance sheet:
    Income taxes accrued                                      $  (8,708)   $  46,186
    Deferred income taxes                                       137,116      429,544
    Other current assets                                              -     (103,864)
    Other assets                                               (167,229)           -
                                                           ------------- ------------
      Net deferred income tax liability (asset)               $ (38,821)   $ 371,866
                                                           ============= ============
</TABLE>

     Our federal and state tax operating loss  carryforwards  as of December 31,
     2002 are  $477,798,000  and  $344,194,000,  respectively.  Our federal loss
     carryforward  will begin to expire in the year 2020. A portion of our state
     loss carryforward will begin to expire in 2006. Our alternative minimum tax
     credit as of  December  31,  2002 can be carried  forward  indefinitely  to
     reduce  future  regular  tax  liability.  This  benefit is  presented  as a
     reduction of accrued income taxes.


                                      F-28
<PAGE>

     The provision  (benefit) for federal and state income taxes, as well as the
     taxes charged or credited to  shareholders'  equity,  includes amounts both
     payable  currently and deferred for payment in future  periods as indicated
     below:
<TABLE>
<CAPTION>

($ in thousands)
 --------------                                                   2002         2001          2000
                                                              ------------- ------------  ------------

Income taxes charged (credited) to the income statement for
   continuing operations:
Current:
<S>                                                             <C>           <C>           <C>
   Federal                                                      $ (159,844)   $ (37,003)    $ (66,759)
   State                                                            (2,562)       5,168        (2,588)
                                                              ------------- ------------  ------------
    Total current                                                 (162,406)     (31,835)      (69,347)

Deferred:
   Federal                                                        (230,388)      10,791        46,647
   Investment tax credits                                             (352)        (649)         (931)
   State                                                           (21,728)       6,888         7,499
                                                              ------------- ------------  ------------
    Total deferred                                                (252,468)      17,030        53,215
                                                              ------------- ------------  ------------
    Subtotal                                                      (414,874)     (14,805)      (16,132)
Income taxes charged (credited) to the income statement for
   discontinued operations:
Current:
   Federal                                                         169,246        5,093         2,749
   State                                                            11,328          774           418
                                                              ------------- ------------  ------------
    Total current                                                  180,574        5,867         3,167

Deferred:
   Federal                                                         (39,904)       2,726         2,260
   Investment tax credits                                                -         (332)         (326)
   State                                                            (5,921)         686           620
                                                              ------------- ------------  ------------
    Total deferred                                                 (45,825)       3,080         2,554
                                                              ------------- ------------  ------------
    Subtotal                                                       134,749        8,947         5,721
Income tax benefit on dividends on convertible preferred
  securities:
Current:
   Federal                                                          (3,344)      (3,344)       (3,344)
   State                                                              (508)        (508)         (508)
                                                              ------------- ------------  ------------
    Subtotal                                                        (3,852)      (3,852)       (3,852)
Income taxes charged (credited) to the income statement for
   extraordinary expense - Discontinuation of Statement of
   Financial Accounting Standards No. 71:
Deferred:
   Federal                                                               -       15,500             -
   State                                                                 -        6,157             -
                                                              ------------- ------------  ------------
    Subtotal                                                             -       21,657             -
                                                              ------------- ------------  ------------
      Total income taxes charged to the income statement (a)      (283,977)      11,947       (14,263)

Income taxes charged (credited) to shareholders' equity:
Deferred income taxes (benefits) on unrealized gains or losses on
   securities classified as available-for-sale                       2,726        2,908        (8,997)
Current benefit arising from stock options exercised                  (720)      (3,001)       (7,392)
Deferred income taxes (benefits) arising from recognition of
   a minimum pension liability                                     (69,209)           -             -
                                                              ------------- ------------  ------------
      Income taxes charged (credited) to shareholders'
        equity (b)                                                 (67,203)         (93)      (16,389)

                                                              ------------- ------------  ------------
Total income taxes: (a) plus (b)                                $ (351,180)    $ 11,854     $ (30,652)
                                                              ============= ============  ============

</TABLE>



                                      F-29

<PAGE>

(21) Net Income (Loss) Per Common Share:
     -----------------------------------
     The  reconciliation  of the net income (loss) per common share  calculation
     for the years ended December 31, 2002, 2001 and 2000 is as follows:
<TABLE>
<CAPTION>

(In thousands, except per-share amounts)
 --------------------------------------
<S>                                                          <C>                                   <C>
                                                             2002                                  2001
                                             ------------------------------------- -------------------------------------
                                                            Weighted                              Weighted
                                                             Average                              Average
                                                 Loss        Shares    Per Share       Loss        Shares    Per Share
                                             ------------------------------------- ------------- ----------- -----------
Net loss per common share:
  Basic                                          $(682,897)    280,686                $ (89,682)    273,721
  Carrying cost of equity forward contracts              -           -                   13,650           -
                                             --------------------------            ------------- -----------
  Available for common shareholders              $(682,897)    280,686    $ (2.43)    $(103,332)    273,721     $ (0.38)
  Effect of dilutive shares                              -       3,887                        -       5,859
                                             --------------------------            ------------- -----------
  Diluted                                        $(682,897)    284,573    $ (2.43)    $(103,332)    279,580     $ (0.38)
                                             ==========================            ============= ===========


                                                              2000
                                                -----------------------------------
                                                             Weighted
                                                              Average
                                                   Loss       Shares    Per Share
                                                -----------------------------------
 Net loss per common share:
   Basic                                          $(28,394)    260,767
   Carrying cost of equity forward contracts             -           -
                                                 ----------------------
   Available for common shareholders              $(28,394)    260,767    $ (0.11)
   Effect of dilutive shares                             -      10,149
                                                 ----------------------
   Diluted                                        $(28,394)    270,916    $ (0.11)
                                                 ========================
</TABLE>

     All share amounts  represent  weighted average shares  outstanding for each
     respective   period.  The  diluted  net  income  (loss)  per  common  share
     calculation  excludes the effect of potentially  dilutive shares when their
     exercise  price exceeds the average  market price over the period.  We have
     4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible
     Preferred Securities which are convertible into common stock at a 3.76 to 1
     ratio at an exercise price of $13.30 per share and  14,391,000  potentially
     dilutive  stock  options at a range of $9.18 to $21.47  per share.  We also
     have  18,400,000  potentially  dilutive  equity  units.  Each  equity  unit
     initially  consists of a 6.75% senior note due 2006 and a purchase contract
     (warrant)  for our  common  stock.  These  items were not  included  in the
     diluted net income (loss) per common share calculation for any of the above
     periods  as their  effect  was  antidilutive.  Restricted  stock  awards of
     1,004,000, 1,232,000 and 829,000 shares at December 31, 2002, 2001 and 2000
     respectively,   are  excluded  from  our  basic  weighted   average  shares
     outstanding  and  included in our  dilutive  shares until the shares are no
     longer contingent upon the satisfaction of all specified conditions.

(22) Comprehensive Income (Loss):
     ----------------------------
     Comprehensive  income  consists  of net income  and other  gains and losses
     affecting shareowners' investment and minimum pension liability that, under
     GAAP, are excluded from net income.



                                      F-30
<PAGE>

     Our other  comprehensive  income  (loss) for the years ended  December  31,
     2002, 2001 and 2000 is as follows:
<TABLE>
<CAPTION>
                                                                             2002
                                                          --------------------------------------------
                                                           Before-Tax    Tax Expense/     Net-of-Tax
($ in thousands)                                             Amount        (Benefit)        Amount
 --------------                                           -------------  --------------  -------------

Net unrealized losses on securities:
<S>                                                          <C>             <C>            <C>
   Net unrealized holding losses arising during period       $(101,137)      $ (38,078)     $ (63,059)
   Minimum pension liability                                  (180,799)        (69,210)      (111,589)
   Add: Reclassification adjustments for net gain/
     losses realized in net loss                               108,376          40,804         67,572
                                                          -------------  --------------  -------------
Other comprehensive loss                                     $(173,560)      $ (66,484)     $(107,076)
                                                          =============  ==============  =============


                                                                             2001
                                                          --------------------------------------------
                                                           Before-Tax    Tax Expense/     Net-of-Tax
($ in thousands)                                             Amount        (Benefit)        Amount
 --------------                                           -------------  --------------  -------------

Net unrealized losses on securities:
   Net unrealized holding losses arising during period       $ (70,771)      $ (27,015)     $ (43,756)
   Add: Reclassification adjustments for net losses
     realized in net loss                                       78,168          29,923         48,245
                                                          -------------  --------------  -------------
Other comprehensive income                                   $   7,397       $   2,908      $   4,489
                                                          =============  ==============  =============


                                                                             2000
                                                          --------------------------------------------
                                                           Before-Tax    Tax Expense/     Net-of-Tax
($ in thousands)                                             Amount        (Benefit)        Amount
 --------------                                           -------------  --------------  -------------

Net unrealized gains on securities:
   Net unrealized holding gains arising during period        $ (40,377)      $ (15,457)     $ (24,920)
   Less: Reclassification adjustments for net gains
     realized in net income                                     16,875           6,460         10,415
                                                          -------------  --------------  -------------
Other comprehensive loss                                     $ (23,502)      $  (8,997)     $ (14,505)
                                                          =============  ==============  =============
</TABLE>

(23) Segment Information:
     --------------------
     We operate in four segments, ILEC, ELI (a CLEC), gas and electric. The ILEC
     segment provides both regulated and unregulated  communications services to
     residential,   business  and  wholesale  customers  and  is  typically  the
     incumbent  provider in its service areas. Our gas and electric segments are
     intended  to be sold and are  classified  as  "assets  held for  sale"  and
     "liabilities related to assets held for sale."

     As an ILEC,  we compete  with CLECs that may operate in our  markets.  As a
     CLEC, we provide telecommunications services, principally to businesses, in
     competition  with the incumbent  ILEC. As a CLEC, we frequently  obtain the
     "last mile" access to customers  through  arrangements  with the applicable
     ILEC. ILECs and CLECs are subject to different regulatory frameworks of the
     Federal Communications Commission (FCC). Our ILEC operations and ELI do not
     compete with each other in any individual market.



                                      F-31
<PAGE>
<TABLE>
<CAPTION>

($ in thousands)                         For the year ended December 31, 2002
 --------------                 --------------------------------------------------------
                                                                                Total
                                  ILEC         ELI         Gas      Electric   Segments
                                ---------   ---------   ---------  ---------   ---------
<S>                             <C>         <C>         <C>        <C>        <C>
Revenue                         $2,062,905  $ 175,079   $ 216,517  $ 214,831  $ 2,669,332
Depreciation and Amortization      643,123    112,035         148        216      755,522
Reserve for Telecommunications
  Bankruptcies                      10,446        434           -          -       10,880
Restructuring and Other Expenses    30,054      7,132           -          -       37,186
Loss on Impairment                       -    656,658     152,300    265,100    1,074,058
Operating Income (Loss)            413,241   (759,161)   (119,579)  (222,090)    (687,589)
Capital Expenditures, net          288,823    122,003 (1)  21,035     18,625 (3)  450,486
Assets                           6,675,928    214,252     389,737     58,027    7,337,944

($ in thousands)                       For the year ended December 31, 2001
 --------------                  --------------------------------------------------------
                                                                                  Total
                                  ILEC        ELI        Gas       Electric      Segments
                                 ---------  ---------  ---------  ----------   ----------
Revenue                         $1,594,053  $ 223,391   $ 411,534  $ 228,015  $ 2,456,993
Depreciation and Amortization      545,273     80,020         609      6,434      632,336
Reserve for Telecommunications
  Bankruptcies                      21,200         -           -          -        21,200
Restructuring and Other Expenses    15,148     4,179           -          -        19,327
Operating Income (Loss)            220,956   (71,165)     47,916     35,335       233,042
Capital Expenditures, net          391,377    28,233 (2)  34,138     32,706       486,454
Assets                           7,072,288   902,348     441,654    666,283     9,082,573


($ in thousands)                         For the year ended December 31, 2000
 --------------                  ---------------------------------------------------------
                                                                                  Total
                                  ILEC       ELI         Gas      Electric      Segments
                                 --------- ---------  ---------  ----------   ------------
Revenue                          $ 963,743 $ 240,792   $ 374,751  $ 223,072   $ 1,802,358
Depreciation and Amortization      276,250    63,500      19,228     28,629       387,607
Restructuring and Other Expenses      (649)        -           -          -          (649)
Operating Income (Loss)            157,896   (59,589)      8,268     15,226       121,801
Capital Expenditures, net          350,209   112,285 (2)  51,457     29,482       543,433
Assets                           3,558,562   949,774     692,351    589,801     5,790,488

</TABLE>
     (1) Includes  $110,000,000 of previously leased facilities purchased by ELI
     in April 2002.

     (2) Does not include approximately $33,985,000 and $102,192,000 of non-cash
     ELI capital lease additions in 2001 and 2000, respectively.

     (3) Does not include approximately  $38,000,000  of non-cash  capital lease
     additions.

                                      F-32
<PAGE>

     The following  tables are  reconciliations  of certain  sector items to the
     total consolidated amount.

($ in thousands)                               For the years ended December 31,
 --------------                                  2002       2001      2000
                                              ---------  ---------  ---------
Capital expenditures

Total segment capital expenditures            $ 450,486  $ 486,454  $ 543,433
General capital expenditures                     18,256        817      1,396
                                              ---------  ---------  ---------
Consolidated reported capital expenditures    $ 468,742  $ 487,271  $ 544,829
                                              =========  =========  =========

Assets                               2002            2001
                                  -----------    -----------
Total segment assets              $ 7,337,944    $ 9,082,573
General assets                        808,798        724,236
Discontinued operations assets              -        746,791
                                  -----------    ------------
Consolidated reported assets      $ 8,146,742    $10,553,600
                                  ===========    ============

(24) Discontinuation of SFAS 71:
     ---------------------------
     We  historically  applied  SFAS  71 in the  preparation  of  our  financial
     statements  because  our  incumbent  local  exchange  telephone  properties
     (properties  we  owned  prior to the  2000  and  2001  acquisitions  of the
     Verizon, Qwest and Frontier properties) were predominantly regulated in the
     past following a cost of service/rate of return approach.  Beginning in the
     third  quarter of 2001,  these  properties  no longer met the  criteria for
     application of SFAS 71 due to the continuing  process of  deregulation  and
     the  introduction  of  competition  to our  existing  rural local  exchange
     telephone  properties,  and our expectation that these trends will continue
     for all our properties.


                                      F-33
<PAGE>

     Currently,  pricing for a majority of our  revenues is based upon price cap
     plans that limit prices to changes in general  inflation  and  estimates of
     productivity for the industry at large, or upon market pricing, rather than
     on the specific  costs of operating  our business,  a  requirement  for the
     application of SFAS 71. These trends in the deregulation of pricing and the
     introduction  of competition are expected to continue in the near future as
     additional states adopt price cap forms of regulation.

     Discontinued  application  of SFAS 71  required  us to write off all of the
     regulatory assets and liabilities of our incumbent local exchange telephone
     operations.  As a result we recognized a non-cash  extraordinary  charge in
     our financial statements in the third quarter of 2001 as follows:

          ($ in thousands)
           --------------

          Assets:
            Deferred income tax assets                          $31,480
            Deferred cost of extraordinary plant retirements     25,348
            Deferred charges                                      6,885

          Liabilities:
            Plant related                                       (10,259)

            Deferred income tax liabilities                      (2,531)
                                                              -----------

          Pre-tax charge                                         50,923

            Income tax benefit                                    7,292
                                                              -----------
          Extraordinary expense                                 $43,631
                                                              ===========

     Under SFAS 71, we depreciated our telephone  plant for financial  reporting
     purposes  over asset lives  approved  by the  regulatory  agencies  setting
     regulated rates. As part of the  discontinuance  of SFAS 71, we revised the
     depreciation lives of our core technology assets to reflect their estimated
     economic useful lives.  Based upon our evaluation of the pace of technology
     change  that is  estimated  to occur in  certain  components  of our  rural
     telephone networks, we concluded that minor modifications as of the date of
     discontinuance  were  required  in our asset  lives  for the major  network
     technology assets as follows:

                                      Average Remaining Life in Years
                                      -------------------------------
                                      Regulated              Economic
                                       Life                   Life
                                       ----                   ----
             Switching Equipment        6.4                   5.6
             Circuit Equipment          4.3                   4.9
             Copper Cable               8.5                   7.7

     Upon discontinuation of SFAS 71, we tested the balances of property,  plant
     and  equipment  associated  with the  incumbent  local  exchange  telephone
     properties  for  impairment  under SFAS 121 (as  required by SFAS 101).  No
     impairment charge was required.

     To reflect the expectation that competitive  entry will occur over time for
     certain of our properties acquired in prior purchase business combinations,
     we have shortened the amortization life for previously  acquired  franchise
     rights  related to these  properties to 20 years.  This action was taken to
     reflect the fact that our  dominant  position in the market  related to the
     existence  of the prior  monopoly in  incumbent  local  exchange  telephone
     service may be reduced over time as competitors enter our markets.


                                      F-34
<PAGE>

(25) Quarterly Financial Data (unaudited):
     -------------------------------------
<TABLE>
<CAPTION>

($ in thousands, except per share amounts)
 ----------------------------------------
                                                               First quarter  Second quarter  Third quarter  Fourth quarter
2002                                                           -------------  --------------  -------------  --------------
<S>                                                              <C>          <C>             <C>             <C>
Revenue                                                          $ 679,334    $  662,439      $ 668,831       $ 658,728
Income (loss) before cumulative effect of changes in
  accounting principle                                             123,038       (41,559)      (700,104)        (24,460)
Net income (loss)                                                   83,226       (41,559)      (700,104)        (24,460)
Income (loss) before cumulative effect of changes in
  accounting principle available for common shareholders per
  basic share                                                    $    0.44    $    (0.15)     $   (2.49)      $   (0.09)
Income (loss) before cumulative effect of changes in accounting
  principle available for common shareholders per diluted share  $    0.43    $    (0.15)     $   (2.49)      $   (0.09)
Net income (loss) available for common shareholders per basic
  share                                                          $    0.30    $    (0.15)     $   (2.49)      $   (0.09)
Net income (loss) available for common shareholders per diluted
  share                                                          $    0.29    $    (0.15)     $   (2.49)      $   (0.09)

2001
Revenue                                                          $ 624,281    $  505,741      $ 661,121       $ 665,850
Net income (loss)                                                   19,723          (649)          (441)       (108,315)
Net income (loss) per basic share                                $    0.08    $    (0.05)     $   (0.01)      $   (0.39)
Net income (loss) per diluted share                              $    0.07    $    (0.05)     $   (0.01)      $   (0.39)

</TABLE>

     The quarterly net income (loss) per common share amounts are rounded to the
     nearest cent.  Annual net income (loss) per common share may vary depending
     on the effect of such rounding.  Quarterly  revenue has been  retroactively
     revised   from  their   original   presentations   to  conform  to  current
     presentation.

     On January 15,  2002,  we  completed  the sale of our water and  wastewater
     operations  to American  Water  Works,  Inc. for  $859,100,000  in cash and
     $122,500,000 of assumed debt and other liabilities. The pre-tax gain on the
     sale recognized in 2002 was $316,672,000.

     In the third quarter 2002, we recognized non-cash pre-tax impairment losses
     of $656,658,000 related to property,  plant and equipment in the ELI sector
     and  $417,400,000  related to the gas and electric  sector  assets held for
     sale, in each case in accordance with the provisions of SFAS 144.

     In the third  quarter  of 2002,  we  recognized  an  additional  $1,525,000
     pre-tax  gain on the 2001  sale of our  Louisiana  gas  operation  to Atmos
     Energy  Corporation.  The initial gain was  recognized  at the close of the
     sale in the third quarter of 2001.

     On October 31, 2002, we completed the sale of approximately 4,000 telephone
     access lines in North Dakota for  $9,700,000  in cash.  The pre-tax loss on
     the sale recognized in the fourth quarter of 2002 was $2,803,000.

     On November 1, 2002, we completed the sale of our Kauai  electric  division
     to KIUC for  $215,000,000  in cash. The pre-tax gain on the sale recognized
     in the fourth quarter of 2002 was $8,273,000.

     Restructuring   and  other  expenses  are  primarily   related  to  various
     restructurings,  $32,985,000 of pre-tax  expenses  related to reductions in
     personnel at our telecommunications operations, cost that were spent at our
     Plano,  Texas facility and at other locations as a result of  transitioning
     functions and jobs and $6,800,000 of pre-tax costs and expenses  related to
     our tender  offer in the  second  quarter of 2002 for all of the ELI common
     shares that we did not already own. These costs were partially  offset by a
     $2,825,000 pre-tax reversal of an ELI accrual.

     As a result of  Adelphia's  price  declines and filing for  bankruptcy,  we
     recognized pre-tax losses of $95,300,000 to be other than temporary.  As of
     June 30, 2002, we had written this  investment  down to zero, and therefore
     we have no  additional  exposure  related to the market  value of  Adelphia
     stock.

     As of December 31, 2002, we owned 1,333,500  shares of D & E Communications
     common stock.  As the result of an other than temporary  decline in D & E's
     stock price,  we recognized a pre-tax loss of $16,400,000 on our investment
     during the quarter ended December 31, 2002.


                                      F-35
<PAGE>

     Concurrent  with the  acquisition  of  Frontier,  we entered  into  several
     operating agreements with Global. We have ongoing commercial  relationships
     with  Global  affiliates.  We  reserved  a total of  $29,000,000  of Global
     receivables  to reflect our best  estimate of the net  realizable  value of
     receivables  incurred from these commercial  relationships  during 2001 and
     2002 as a result of Global's filing for  bankruptcy.  We recorded a pre-tax
     write-down  of such  receivables  in the amount of  $7,800,000 in the first
     quarter 2002 and $21,200,000 in the fourth quarter of 2001. In 2002, as the
     result of a settlement  agreement with Global,  we reversed  $17,900,000 of
     our  previous  reserve of the net  realizable  value of these  receivables.
     Prior to the date of  Global's  bankruptcy  filing,  we  provided  ordinary
     course  telecommunications  services  as well as  transitional  services to
     Global.  Global has  provided us certain  customer  billing and  collection
     functions as well as other  transitional  services.  Although some of these
     arrangements  have  continued  after the bankruptcy  filing,  we are in the
     process of changing some services and functions to provide them  ourselves.
     The Bankruptcy Court has granted relief to us and other  telecommunications
     companies that provide service to Global by, among other things,  directing
     a shortened  payment  period with  respect to  post-petition  invoices,  an
     expedited court process for  post-petition  defaults in payments by Global,
     and a priority for  post-petition  expense items over other unsecured debt.
     These  procedures  should  minimize  future economic loss to us although we
     cannot guarantee that additional losses will not occur.

     On July 2, 2001, we completed  the sale of our Louisiana Gas  operations to
     Atmos Energy  Corporation for $363,400,000 in cash. The pre-tax gain on the
     sale recognized in the third quarter was $139,300,000.

     Pre-tax  restructuring  expenses of  $13,000,000  for the third quarter and
     $6,300,000  for the  fourth  quarter of 2001 are  primarily  related to the
     closing  of  our  operations   support  center  in  Plano,  Texas  and  our
     Sacramento,  California call center and ELI's decision to exit certain long
     haul markets.  These  restructurings  are a result of our evaluation of our
     facilities to take advantage of operational and functional synergies.

     We recognized a pre-tax loss of $79,000,000 in the Adelphia investment as a
     reduction to investment income in the fourth quarter of 2001.

     Deregulation of most of our local exchange telephone properties required us
     to cease application of SFAS 71 in the third quarter of 2001,  resulting in
     a  non-cash  extraordinary  charge  of  $43,600,000,  net  of  tax,  in our
     statement of operations.

(26) Supplemental Cash Flow Information:
     -----------------------------------
     The  following is a schedule of net cash  provided by operating  activities
     for the years ended December 31, 2002, 2001 and 2000:
<TABLE>
<CAPTION>

($ in thousands)                                                       2002           2001           2000
 --------------                                                   --------------- -------------- -------------

Loss from continuing operations before extraordinary expense
<S>                                                                  <C>             <C>           <C>
    and cumulative effect of change in accounting principle          $ (822,976)     $ (63,926)    $ (40,071)
Adjustments to reconcile net loss to net cash
  provided by operating activities:
    Depreciation and amortization expense                               755,522        632,336       387,607
    Investment write-down                                               117,455         79,114             -
    Gain on extinguishment of debt                                      (26,330)             -             -
    Investment (gains)/losses                                            (3,363)           660        18,314
    Gain on sale of assets                                               (9,798)      (139,304)            -
    Loss on impairment                                                1,074,058              -             -
    Allowance for equity funds used during construction                  (1,346)        (2,811)       (3,257)
    Deferred income tax and investment tax credit                      (387,771)        17,030        53,215
    Change in operating accounts receivable                               1,373         57,145       (11,685)
    Change in accounts payable and other                               (152,358)      (198,848)      (24,261)
    Change in accrued taxes and interest                                 (8,975)       166,815       (28,944)
    Change in other current assets                                      101,376        (71,275)      (43,225)
                                                                 --------------- -------------- -------------
        Net cash provided by continuing operating activities          $ 636,867      $ 476,936     $ 307,693
                                                                 =============== ============== =============
</TABLE>



                                      F-36
<PAGE>

(27) Retirement Plans:
     -----------------
                                  Pension Plan
                                  ------------
     We have a noncontributory  pension plan covering all employees who have met
     certain  service and age  requirements.  The benefits are based on years of
     service and final average pay or career average pay. Contributions are made
     in amounts sufficient to meet ERISA funding  requirements while considering
     tax deductibility.  Plan assets are invested in a diversified  portfolio of
     equity and fixed-income securities.

     Effective  February 1, 2003,  the pension plan was frozen for all non-union
     plan participants. The vested benefit earned through that date is protected
     by law  and  will be  available  upon  retirement.  No  additional  benefit
     accruals  for  service  will  occur  after   February  1,  2003  for  those
     participants.

     The  following  tables set forth the plan's  benefit  obligations  and fair
     values of plan  assets as of December  31,  2002 and 2001 and net  periodic
     benefit cost for the years ended December 31, 2002, 2001 and 2000.



                                      F-37
<PAGE>
<TABLE>
<CAPTION>

($ in thousands)                                                   2002          2001
 --------------                                               ------------- --------------

Change in benefit obligation
----------------------------
<S>                                                              <C>            <C>
Benefit obligation at beginning of year                          $ 759,927      $ 282,024
Service cost                                                        12,159         14,065
Interest cost                                                       53,320         37,680
Amendments                                                               -         (3,679)
Actuarial loss                                                      28,948         16,771
Acquisitions/Divestitures                                           (6,239)       447,279
Plant closings/Reduction in force                                   (5,609)             -
Benefits paid                                                      (62,269)       (34,213)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 780,237      $ 759,927
                                                              ============= ==============

Change in plan assets
---------------------
Fair value of plan assets at beginning of year                   $ 798,293      $ 249,400
Actual return on plan assets                                       (60,026)       (13,337)
Acquisitions                                                             -        583,190
Employer contribution                                               16,363         13,253
Benefits paid                                                      (62,269)       (34,213)
                                                              ------------- --------------
Fair value of plan assets at end of year                         $ 692,361      $ 798,293
                                                              ============= ==============

(Accrued)/Prepaid benefit cost
------------------------------
Funded status                                                    $ (87,876)     $  38,366
Unrecognized net liability                                              17             60
Unrecognized prior service cost                                     (1,450)        (1,599)
Unrecognized net actuarial loss                                    235,107         96,860
                                                              ------------- --------------
Prepaid benefit cost                                             $ 145,798      $ 133,687
                                                              ============= ==============

Amounts recognized in the statement of financial position
---------------------------------------------------------
Prepaid benefit cost                                             $   6,874      $ 133,687
Accrued benefit liability                                          (41,874)             -
Other comprehesive income                                          180,798              -
                                                              ------------- --------------
 Net amount recognized                                           $ 145,798      $ 133,687
                                                              ============= ==============


                                                                  2002          2001            2000
                                                              ------------- -------------- ---------------
Components of net periodic benefit cost
---------------------------------------
Service cost                                                      $ 12,159      $  14,065        $ 12,286
Interest cost on projected benefit obligation                       53,320         37,680          18,772
Return on plan assets                                              (63,258)       (44,852)        (19,743)
Amortization of prior service cost and unrecognized
       net obligation                                                 (106)          (242)            196
Amortization of unrecognized loss                                    2,137              -               -
                                                              ------------- -------------- ---------------
Net periodic benefit cost                                         $  4,252      $   6,651        $ 11,511
                                                              ============= ============== ===============
</TABLE>


                                      F-38
<PAGE>

     Assumptions  used in the  computation  of  pension  costs/year-end  benefit
     obligations were as follows:

                                                         2002          2001
                                                         ----          ----
Discount rate                                        7.25%/6.75%    7.5%/7.25%
Expected long-term rate of return on plan assets      8.25%/N/A     8.25%/N/A
Rate of increase in compensation levels               4.0%/4.0%     4.0%/4.0%

     In June 2001,  we  acquired  Frontier,  including  substantially  all their
     pension  assets and benefit  obligation.  This  acquisition  increased  the
     pension  benefit  obligation  by  $447,279,000  and the fair  value of plan
     assets by $583,190,000 as of June 29, 2001.

     As part of the Frontier  acquisition,  Global and we agreed to the transfer
     of pension  liabilities  and assets related to  substantially  all Frontier
     employees.  The liabilities associated with the Frontier employees retained
     by Global were valued following the Pension Benefit Guaranty  Corporation's
     "safe harbor" rules.  Prior to Global's  bankruptcy  filing,  Global and we
     reached  agreement on the value of the pension assets and liabilities to be
     retained  by Global as well as the time frame and  procedures  by which the
     remainder  of the  assets  were to  transfer  to a  pension  trust  held by
     Citizens.  Global failed to execute and deliver an authorization  letter to
     the Frontier plan trustee  directing the trustee to transfer to our pension
     plan record ownership of the transferred  assets. We initiated an adversary
     proceeding  with  the  Bankruptcy  Court  supervising  Global's  bankruptcy
     proceeding,  to determine  and declare  that  Global's  obligation  was not
     "executory", and to compel Global to execute and deliver such authorization
     letter.  On December 18, 2002 we entered into a stipulation with Global and
     other  parties,  "so ordered" by the  bankruptcy  court,  fully and finally
     settling the adversary  proceeding.  Pursuant to the stipulation and order,
     on February 3, 2003 Global instructed the Frontier Plan Trustee to transfer
     record  ownership  of  the  transferred  assets  with  a  market  value  of
     $447,800,000  to our pension  plan,  and the transfer in fact took place on
     that date.

The  assets  of the  Global  pension  plan  are  invested  primarily  in  equity
securities.  Due to the general decline in the equity  markets,  the assets have
declined in value. We recorded an adjustment to our minimum pension liability as
of  December  31,  2002 in the amount of  $180,798,000.  The  pension  liability
resulted from the declining  market value of the pension plan assets during 2002
combined with a lower market interest rate used to value the plan's liabilities.
As of December 31, 2002, the minimum pension liability is measured as the amount
of the plan's  accumulated  benefit  obligation  that is in excess of the plan's
market  value of assets at  December  31,  2002 plus any  balance  remaining  in
deferred or "prepaid"  benefit costs that was recorded  during  periods when our
pension plan assets exceeded our accumulated  benefit  obligation.  A charge was
recorded to shareholder's  equity, net of income tax benefits, as a component of
comprehensive  loss in the amount of  $111,589,000.  The adjustment was computed
separately  for each plan that we  maintain  but is mainly  attributable  to the
actual results of asset performance with respect to the Global pension plan (see
Note 28). This adjustment does not impact current year earnings,  or the funding
requirements of the plan.  However,  pension expense for 2003 will increase as a
result of these  market  declines and lower  interest  rates.  If future  market
conditions  cause  either a decline in interest  rates used to value our pension
plan  liabilities  or  reductions  to the value of our  pension  plan  assets we
potentially could incur additional  charges to our  shareholder's  equity at the
end of 2003. Based upon market conditions  existing at the end of February 2003,
an  additional  charge  of  approximately  $30,000,000  -  $35,000,000  would be
required at the end of 2003 should market conditions remain unchanged.



                                      F-39
<PAGE>
<TABLE>
<CAPTION>
                   Postretirement Benefits Other Than Pensions
                   -------------------------------------------
     We provide certain medical, dental, life insurance and telephone concession
     benefits  for  retired  employees  and  their   beneficiaries  and  covered
     dependents.  The following table sets forth the plan's benefit  obligations
     and the postretirement  benefit liability  recognized on our balance sheets
     at December 31, 2002 and 2001 and net periodic postretirement benefit costs
     for the years ended December 31, 2002, 2001 and 2000:

<C>                                                               <C>           <C>
($ in thousands)                                                  2002          2001
 --------------                                                ------------- --------------

Change in benefit obligation
----------------------------
Benefit obligation at beginning of year                          $ 190,342      $  59,191
Service cost                                                         1,350            937
Interest cost                                                       13,753          8,812
Plan participants' contributions                                     3,771          1,023
Curtailments/settlements                                                 -        (14,223)
Actuarial loss                                                      21,406         20,321
Acquisitions/Divestitures                                           (4,348)       119,611
Plant closings/Reduction in force                                   (1,950)             -
Amendments                                                               -             20
Benefits paid                                                      (13,641)        (5,350)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 210,683      $ 190,342
                                                              ============= ==============

Change in plan assets
---------------------
Fair value of plan assets at beginning of year                   $  29,090      $  25,412
Actual return on plan assets                                        (1,711)           310
Benefits paid                                                       (9,870)        (1,464)
Employer contribution                                                9,541          1,498
Acquisitions                                                             -          3,334
                                                              ------------- --------------
Fair value of plan assets at end of year                         $  27,050      $  29,090
                                                              ============= ==============

Accrued benefit cost
--------------------
Funded status                                                    $(183,633)     $(161,252)
Unrecognized transition obligation                                     234            258
Unrecognized prior service cost                                         16             18
Unrecognized loss                                                   35,048         18,174
                                                              ------------- --------------
Accrued benefit cost                                             $(148,335)     $(142,802)
                                                              ============= ==============

                                                                  2002          2001            2000
                                                              ------------- -------------- ---------------
Components of net periodic postretirement benefit cost
------------------------------------------------------
Service cost                                                      $  1,350        $   937         $   652
Interest cost on projected benefit obligation                       13,753          8,812           3,943
Return on plan assets                                               (2,438)        (2,227)         (1,688)
Amortization of prior service cost and transition obligation            26             25              23
Amortization of unrecognized (gain)/loss                             2,383            204            (793)
Curtailment gain                                                         -              -            (757)
Settlement loss                                                          -            491               -
Acquisition loss                                                         -              -             581
                                                              ------------- -------------- ---------------
Net periodic postretirement benefit cost                          $ 15,074        $ 8,242         $ 1,961
                                                              ============= ============== ===============
</TABLE>

     For purposes of measuring  year end benefit  obligations,  we used the same
     discount rates as were used for the pension plan and,  depending on medical
     plan  coverage  for  different  retiree  groups,  an 8 - 12% annual rate of
     increase in the  per-capita  cost of covered  medical  benefits,  gradually
     decreasing to 5% in the year 2010 and  remaining at that level  thereafter.
     The effect of a 1%  increase in the  assumed  medical  cost trend rates for
     each  future  year  on the  aggregate  of the  service  and  interest  cost
     components of the total postretirement benefit cost would be $2,134,000 and
     the effect on the accumulated  postretirement benefit obligation for health
     benefits would be  $27,361,000.  The effect of a 1% decrease in the assumed
     medical  cost trend  rates for each  future  year on the  aggregate  of the
     service and interest cost  components of the total  postretirement  benefit
     cost would be $(1,759,000) and the effect on the accumulated postretirement
     benefit obligation for health benefits would be $(22,882,000).


                                      F-40
<PAGE>

     In August 1999, our Board of Directors  approved a plan of divestiture  for
     the public services properties.  Any pension and/or  postretirement gain or
     loss associated with the divestiture of these properties will be recognized
     when  realized.  During  2002,  we sold our entire water  distribution  and
     wastewater treatment business and one of our three electric businesses. The
     pension  plan has been  frozen  from the date of sale and we have  retained
     those  liabilities.  In both  transactions,  the buyer  assumed the retiree
     medical liabilities for those properties.

     In June 2001, we acquired  Frontier Corp.,  including their  postretirement
     benefit plans.  This acquisition  increased the accumulated  postretirement
     benefit  obligation  by  $118,819,000  and the fair value of plan assets by
     $3,334,000 as of June 29, 2001.

                              401(k) Savings Plans
                              --------------------

     We sponsor an employee  retirement savings plan under section 401(k) of the
     Internal  Revenue  Code.  The  Plan  covers   substantially  all  full-time
     employees.  Under the Plan, we provide matching and certain  profit-sharing
     contributions.  Effective May 1, 2002,  the Plan was amended to provide for
     employer  contributions  to be made  in cash  rather  than  Company  stock,
     impacting  all  non-union  employees  and most  union  employees.  Employer
     contributions  were  $10,331,000,  $6,878,000 and $5,973,000 for 2002, 2001
     and 2000, respectively.

(28) Commitments and Contingencies:
     ------------------------------
     We  have   budgeted   capital   expenditures   in  2003  of   approximately
     $333,600,000,  including  $288,400,000 for ILEC and ELI and $45,200,000 for
     gas and electric.  Certain commitments have been entered into in connection
     therewith. We expect to incur additional impairment losses during 2003 with
     respect to our public utility  properties.  These properties are carried at
     our estimates of net realizable  values.  Under the terms of the definitive
     agreements  relating to the sale of our Arizona  and  Hawaiian  properties,
     most of the  capital  expenditures  we will  make  during  2003  for  these
     properties  will  not be  recovered.  As a  result,  the  amount  of  these
     expenditures  (currently  estimated  at  $28,000,000  through the  expected
     closing  dates) will be expensed as  incurred  and not  capitalized.  These
     expenditures  are of a normal recurring nature and are necessary to provide
     safe, reliable utility service to customers. We generally do not enter into
     firm, committed contracts for such activities. If the closing dates for the
     sales of our Arizona and Hawaiian  properties actually occur later than the
     currently  expected  dates,  the  actual  amount  of  capital  expenditures
     expensed will exceed these  estimates.  If the sale of our Arizona  utility
     businesses to UniSource is  completed,  the sale  agreement  requires us to
     promptly redeem $111,760,000 principal amount of industrial revenue bonds.

     We conduct  certain of our  operations  in leased  premises  and also lease
     certain  equipment and other assets  pursuant to operating  leases.  Future
     minimum rental commitments for all long-term noncancelable operating leases
     for continuing operations are as follows:

    ($ in thousands)          Year             Amount
     --------------       --------------   --------------
                              2003              $ 26,790
                              2004                22,234
                              2005                18,918
                              2006                17,385
                              2007                17,193
                           thereafter             55,455
                                           --------------
                              Total            $ 157,975
                                           ==============

     Total rental  expense  included in our results of operations  for the years
     ended December 31, 2002,  2001 and 2000 was  $36,550,000,  $38,829,000  and
     $33,042,000  respectively.  We sublease, on a month-to-month basis, certain
     office space in our corporate office to a charitable  foundation  formed by
     our Chairman.

     Minimum  payments on operating  leases are included in the table above. For
     payments on capital leases, see Note 9.


                                      F-41
<PAGE>

     We are a party to contracts with several unrelated long distance  carriers.
     The  contracts  provide  fees  based on leased  traffic  subject to minimum
     monthly fees. We also purchase  capacity and associated energy from various
     electric energy and natural gas suppliers. Some of these contracts obligate
     us to pay certain  capacity costs whether or not energy purchases are made.
     These  contracts  are intended to  complement  the other  components in our
     power supply to achieve the most  economic  mix  reasonably  available.  At
     December  31,  2002,  the  estimated  future  payments  for  long  distance
     contracts,  and  capacity  and  energy  that  we are  obligated  for are as
     follows:
<TABLE>
<CAPTION>
                                                               Public
($ in thousands)              Year          ILEC / ELI        Services            Total
 --------------          --------------   --------------   --------------    --------------
<S>                           <C>               <C>              <C>               <C>
                              2003              $ 72,317        $  28,495         $ 100,812
                              2004                49,578           28,147            77,725
                              2005                16,781           23,085            39,866
                              2006                     -           23,236            23,236
                              2007                     -           21,363            21,363
                           thereafter                  -          125,750           125,750
                                           --------------   --------------    --------------
                              Total             $138,676        $ 250,076         $ 388,752
                                           ==============   ==============    ==============
</TABLE>
     The Vermont  Joint  Owners  (VJO),  a consortium  of 14 Vermont  utilities,
     including  us,  have  entered  into  a  purchase   power   agreement   with
     Hydro-Quebec.  The agreement contains "step-up"  provisions that state that
     if any VJO member defaults on its purchase obligation under the contract to
     purchase power from  Hydro-Quebec  the other VJO  participants  will assume
     responsibility  for the defaulting party's share on a pro-rata basis. As of
     December 31, 2002,  2001 and 2000,  our  obligation  under the agreement is
     approximately 10% of the total contract.  If any member of the VJO defaults
     on its obligations under the Hydro-Quebec agreement,  the remaining members
     of the VJO, including us, may be required to pay for a substantially larger
     share of the VJO's total power purchase obligation for the remainder of the
     agreement.  Such a result  could have a  materially  adverse  effect on our
     financial results.

     At December 31, 2002, we have outstanding  performance letters of credit as
     follows:

     ($ in thousands)
      --------------
                       Qwest                                $  64,280
                       Pinnacle West Capital Corporation       40,000
                       CNA                                     20,027
                       Water projects                           1,809
                       ELI projects                                50
                                                            ----------
                          Total                             $ 126,166
                                                            ==========

     None of the above letters of credit restrict our cash balances.

On July 20, 2001, we notified Qwest that we were terminating  eight  acquisition
agreements. On July 23, 2001, Qwest filed a notice of claim for arbitration with
respect  to  the  terminated  acquisition  agreements.  Qwest  asserts  that  we
wrongfully terminated theses agreements and is seeking approximately $64,000,000
in damages, which is the aggregate of liquidated damages under letters of credit
established in the terminated acquisition  agreements.  On September 7, 2001, we
filed  a  response  and  counterclaims  in  the  same  arbitration  proceedings,
contesting  Qwest's  asserted  claims and asserting  substantial  claims against
Qwest for material breaches of representations, warranties, and covenants in the
terminated  acquisition  agreements and in the acquisition agreement relating to
North Dakota  assets that we  purchased  from Qwest.  The parties are  currently
engaged in discovery.  An arbitration  hearing has been scheduled to commence in
the third quarter of 2003.

On December 21,  2001,  we entered into a  settlement  agreement  resolving  all
claims in a class  action  lawsuit  pending  against  the  Company in Santa Cruz
County, Arizona (Chilcote, et al. v. Citizens Utilities Company, No. CV 98-471).
The lawsuit arose from claims by a class of plaintiffs  that included all of our
electric customers in Santa Cruz County for damages resulting from several power
outages that occurred  during the period  January 1, 1997,  through  January 31,
1999. Under the terms of the settlement agreement,  and without any admission of
guilt  or  wrongdoing  by us,  we have  paid the  class  members  $5,500,000  in
satisfaction of all claims. The court approved the settlement agreement on March
29, 2002, and the lawsuit  against us was dismissed with  prejudice.  We accrued
the full settlement amount,  plus an additional amount sufficient to cover legal
fees and other  related  expenses,  during  the  fourth  quarter  of 2001 and no
accrual remains at December 31, 2002.


                                      F-42
<PAGE>

As part of the Frontier acquisition,  Global and we agreed to Global's transfer,
effective as of July 1, 2001, of certain liabilities and assets under the Global
pension plan for Frontier employees. Such transfer and assumption of liabilities
was to be to a trustee of a trust  established under our pension plan, and would
exclude (1) those  liabilities  relating to certain  current and former Frontier
employees who were not considered part of the Frontier  acquisition  (calculated
using the "safe Harbor" methodology of the Pension Benefit Guaranty Corporation)
and (2) those assets attributable to such excluded liabilities. After filing for
bankruptcy on January 28, 2002,  Global  claimed that its obligation to transfer
the  Global  pension  plan's   transferred   assets  and  liabilities   remained
"executory"  under the  Bankruptcy  Code,  and refused to execute and deliver an
authorization  letter to the Frontier plan trustee (who was also the Global plan
trustee)  directing the trustee to transfer to our pension plan record ownership
of such assets and  liabilities.  We initiated an adversary  proceeding with the
Bankruptcy Court  supervising  Global's  bankruptcy  proceeding to determine and
declare that Global's  obligation was not  "executory,"  and to compel Global to
execute and deliver such  authorization  letter. On December 18, 2002 we entered
into a stipulation with Global and other parties, "so ordered" by the Bankruptcy
Court,  fully and finally  setting  the  adversary  proceeding.  Pursuant to the
stipulation  and  order,  on  February  3,  2003,  among  other  things,  Global
instructed  the  Frontier  plan  trustee to  transfer  record  ownership  of the
transferred assets and liabilities to our pension plan, and the transfer in fact
took place on that date.

The City of Bangor,  Maine,  filed suit against us on November 22, 2002,  in the
U.S.  District  Court for the  District  of Maine  (City of  Bangor v.  Citizens
Communications Company, Civ. Action No. 02-183-B-S). The City has alleged, among
other things, that we are responsible for the costs of cleaning up environmental
contamination  alleged to have resulted from the operation of a manufactured gas
plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the
existence  of extensive  contamination  of the  Penobscot  River and nearby land
areas and has  asserted  that  money  damages  and other  relief at issue in the
lawsuit could exceed $50,000,000.  The City also requested that punitive damages
be assessed  against us. We have filed an answer denying  liability to the City,
and have  asserted a number of counter  claims  against  the City.  We intend to
defend ourselves vigorously against the City's lawsuit.

We also  have  demanded  that  various  of our  insurance  carriers  defend  and
indemnify us with respect to the City's lawsuit.  On or about December 26, 2002,
we  filed  suit  against  those  insurance  carriers  in the  Superior  Court of
Penobscot County, Maine, for the purpose of establishing their obligations to us
with respect to the City's  lawsuit.  We intend to vigorously  pursue  insurance
coverage for the City's  lawsuit.  In addition,  we have  identified a number of
other  potentially  responsible  parties that may be responsible for the damages
alleged by the City.  We expect to  initiate  legal  action  within the next few
weeks to bring those parties into the lawsuit.

On February 7, 2003, we received a letter from counsel  representing Enron North
America  Corporation  (formerly  known as Enron Gas Marketing,  Inc.)  demanding
payment of an "early  termination  liability" of approximately  $12,500,000 that
Enron claims it is owed under a gas supply agreement that we lawfully terminated
in  November  2001.  The  demand was made in  connection  with  Enron's  ongoing
bankruptcy  proceeding  in the United States  Bankruptcy  Court for the Southern
District  of New York.  We  believe  Enron's  claim  lacks any merit and have so
advised that  company's  counsel.  Enron has threatened to initiate an adversary
proceeding  in the  bankruptcy  court to recover  the amount of its demand  plus
applicable  interest and  attorney's  fees. If that occurs,  we will  vigorously
defend against any such action.

During the fourth  quarter of 2002 we became aware of  irregularities  involving
payments  made by certain of our public  utilities  operations  for  services or
benefits  that we did not  receive.  The  payments  do not  involve  our current
operations  in Arizona,  Vermont,  or Hawaii.  With the  assistance  of forensic
specialists, outside auditors, and counsel, we investigated these irregularities
and  identified a total of $7,800,000  that had been embezzled from the Company.
These payments were reflected in our financial statements as charges to earnings
(primarily  during  2002).  The  U.S.  Government  has  recovered  approximately
$6,000,000 (which we believe will be turned over to us) and we believe that most
of the remaining funds outstanding will be reimbursed by insurance.

We have provided detailed information regarding the results of our investigation
to federal prosecutors and the Securities and Exchange Commission, including the
names of two of our former officers (Ken Cohen and Livingston Ross, who were the
President and Chief Operating Officer of the Public Services Sector and the Vice
President of Reporting and Audit,  respectively)  who approved the payments.  We
have been  advised  by  federal  prosecutors  that  these two  individuals  have
admitted  their  involvement  in  these  schemes  and  we  have  terminated  the
employment of these individuals.


                                      F-43
<PAGE>

In  connection  with an  inquiry  that we  believe  has  arisen  as a result  of
allegations  made to  federal  authorities  during  their  investigation  of the
embezzlement,  we and our employees are cooperating fully with the Office of the
U.S. Attorney for the Southern District of New York and with the New York office
of the Securities and Exchange Commission.  We have provided requested documents
to the SEC and we have agreed to comply with an SEC request  that, in connection
with the informal inquiry that it has initiated,  we preserve financial,  audit,
and accounting records.

We are party to  proceedings  arising in the normal course of our business.  The
outcome of individual matters is not predictable.  However,  we believe that the
ultimate resolution of all such matters,  after considering  insurance coverage,
will not have a material  adverse effect on our financial  position,  results of
operations, or our cash flows.


                                      F-44
<PAGE>

The Board of Directors and Shareholders
Citizens Communications Company:

We have audited and reported separately herein on the balance sheets of Citizens
Communications Company and subsidiaries as of December 31, 2002 and 2001 and the
related   consolidated   statements   of   operations,   shareholders'   equity,
comprehensive  income  (loss)  and  cash  flows  for  each of the  years  in the
three-year  period ended December 31, 2002. Our report refers to the adoption of
Statement  of  Financial  Accounting  Standards  No.  142,  "Goodwill  and Other
Intangibles Assets" as of January 1, 2002.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial statements of Citizens  Communications  Company and subsidiaries 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 4, 2003



                                      F-45
<PAGE>
<TABLE>
<CAPTION>

     Schedule II

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                        Valuation and Qualifying Accounts
                                ($ In thousands)

                                                 Balance at       Charged to                                       Balance at
                                               Beginning of       Revenue or        Frontier                         End of
Accounts                                          Period           Expense        Acquisition     Deductions         Period
----------------------------------------   ----------------   -----------------  -------------   --------------    ------------

<S>                                             <C>                 <C>              <C>            <C>               <C>
Allowance for doubtful accounts
                     2000                         28,278           16,719                 -         (21,084)          23,913
                     2001                         23,913           41,233  (1)       10,709          (8,254)          67,601
                     2002                         67,601           66,935  (2)            -         (95,590) (3)      38,946


        (1) Includes the reserve for Global receivables (See Note 15 to Consolidated Financial Statements).
        (2) Net of recoveries of amounts previously written off.
        (3) Includes the sale of WorldCom receivables.

</TABLE>

                                      F-46