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, 2001


<PAGE>


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 2001     Commission file number 001-11001
                          ------------------                           ---------

                                       OR

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

                         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, zip code of principal executive offices)

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

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

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. [ ]

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant as of February 28, 2002 was $2,484,211,184.

The number of shares outstanding of the registrant's Common Stock as of February
28, 2002 was 281,500,477.


                       DOCUMENTS INCORPORATED BY REFERENCE

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

<PAGE>

<TABLE>
<CAPTION>
                                   TABLE OF CONTENTS
                                   -----------------

                                                                                   Page
                                                                                   ----

PART I
------

<S>                                                                                 <C>
Item 1.    Business                                                                   2

Item 2.    Properties                                                                14

Item 3.    Legal Proceedings                                                         14

Item 4.    Submission of Matters to Vote of Security Holders                         15

Executive Officers                                                                   16

PART II
-------

Item 5.    Market for the Registrant's Common Equity
               and Related Stockholder Matters                                       18

Item 6.    Selected Financial Data                                                   18

Item 7.    Management's Discussion and Analysis of
               Financial Condition and Results of Operations                         19

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk                37

Item 8.    Financial Statements and Supplementary Data                               39

Item 9.    Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure                                              39

PART III   Incorporation by Reference to the 2002 Proxy Statement                    39
--------

PART IV
-------

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K           39

Signatures                                                                           44

Index to Consolidated Financial Statements                                          F-1

</TABLE>

<PAGE>


                                     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 "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. 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  85%-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.

On June 29, 2001, we purchased  from Global  Crossing Ltd.  (Global) 100% of the
stock of Frontier Corp.'s (Frontier) local exchange carrier subsidiaries,  which
owned  approximately 1.1 million telephone access lines (as of June 29, 2001) in
Alabama,  Florida,  Georgia,  Illinois,  Indiana,  Iowa,  Michigan,   Minnesota,
Mississippi,  New York,  Pennsylvania and Wisconsin,  for approximately $3,373.0
million in cash,  subject to final  purchase  price  adjustment.  On January 28,
2002, Global, including many of its affiliates,  filed for bankruptcy protection
with  the  Bankruptcy  Court  for the  Southern  District  of New  York.  We are
monitoring  these  bankruptcy  proceedings to determine the bankruptcy  filings'
effect on our operations and financial position. We are integrating the Frontier
telephone business with Citizens' other  telecommunications  operations and have
ongoing  commercial  relationships  with Global  affiliates.  We have recorded a
write  down of the net  realizable  value of  receivables  incurred  from  these
commercial relationships in the amount of $21.2 million in the fourth quarter of
2001,  with an  anticipated  $8.8 million to be recorded in the first quarter of
2002 for  receivables  generated after December 31, 2001 and prior to the Global
bankruptcy filing on January 28, 2002.

With  approximately  2.5 million telephone access lines in 24 states we were the
seventh largest local access wireline telephone provider in the United States as
of December  31,  2001.  Revenue  from our ILEC and CLEC  services  segments was
$1,594.1 million and $226.6 million, respectively in fiscal year 2001.

In 1999 we announced  plans to divest our public  utilities  services  segments.
Consistent  with  this  effort,  during  2001 we  sold  two of our  natural  gas
transmission  businesses and in January 2002 we sold our water  distribution and
wastewater  treatment business.  We are presently engaged in the sale of, or are
seeking buyers for, our remaining gas and electric  utility  services  segments.
Pending  these  divestitures,  we continue to provide gas and  electric  utility
services.  Our revenues from the provision of gas and electric  utility services
were $411.5  million and $228.0  million,  respectively,  in 2001. Our water and
wastewater treatment operations were reported as "discontinued operations."

We own all of the Class B Common Stock and  27,571,332  shares of Class A Common
Stock of ELI, a facilities-based  integrated  communications provider offering a
broad  range of  communications  services  in the western  United  States.  This
ownership  interest  represents  85% of the  economic  interest and a 96% voting
interest.  ELI's Class B Common  Stock votes on a 10 to 1 basis with the Class A
Common Stock, which is publicly traded. We also guarantee all of ELI's long-term
debt,  one of its  capital  leases  and one of its  operating  leases,  and have
committed to continue to support its cash  requirements  through March 31, 2003.
Absent our commitment,  we do not believe there is currently a market to further
finance or refinance  ELI's  indebtedness.  Consequently,  without the financial
support of  Citizens,  ELI could not fund its  future  capital  requirements  or
service its debt and most likely would not remain a going concern.  The net loss
of ELI was $171.7 million in fiscal year 2001.

Telecommunications Services

Our  telecommunications  services are principally ILEC services and also include
CLEC services  delivered through ELI. As of December 31, 2001, we operated ILECs
in 24 states,  serving approximately 2.5 million access lines. Our CLEC services
segment is marketed under the Electric  Lightwave name and provides a variety of
integrated telecommunications products in the western United States.

                                       2
<PAGE>

As an ILEC,  we are 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,
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).  We do not provide
both ILEC and CLEC  services in  competition  with each other in any  individual
market.

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

Our ILEC  services  segment  accounted  for  $1,594.1  million,  or 65%,  of our
revenues  in fiscal  year 2001.  Included  in ILEC  services  revenue was $421.5
million of revenue for Frontier which represents revenue for six months from the
date of acquisition in fiscal year 2001.  Approximately 33% of our ILEC services
segment  revenues came from federal and state universal  service charges through
the federal and local  governments  and  regulated  access  charges paid by long
distance operators and CLECs.

Our ILEC services  business is primarily with retail  customers and, to a lesser
extent, business 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 all
residential  and business  customers in our service areas.  We are the incumbent
provider  of basic  telephone  services  in our  service  areas.  Except for the
Rochester,  New York  metropolitan  area, our present  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. We offer our ILEC services
under the  "Citizens"  and  "Frontier"  names,  but intend to  convert  our ILEC
services to operate under the "Frontier" name.

Enhanced services.  We provide our ILEC customers the following enhanced service
features: call forwarding, conference calling, caller identification,  voicemail
and call waiting.  We offer Citizens  Select and Citizens Select Plus as well as
Frontier Choices as branded bundles of  telecommunications  services directed at
our retail  customer  base in a majority  of our  markets.  These  plans  permit
customers  to bundle  their basic  telephone  line with their choice of enhanced
services,  or simply to customize a set of selected  enhanced  features that fit
their specific needs. We intend to rebrand the Citizens' services to reflect the
Frontier name.

We intend to increase the penetration of existing value-added services,  such as
second lines, and enhanced  services to our ILEC services  segment.  At present,
the penetration rates for enhanced services in our ILEC services segment in many
of our rural areas and small and medium-sized towns are below industry averages.
We believe that increased sales of value-added and enhanced services in our ILEC
markets will produce revenue with higher operating margins due to the relatively
low  marginal  operating  costs  necessary  to offer  value-added  and  enhanced
services in markets we already  serve.  We believe that our ability to integrate
value-added  and enhanced  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  customers in  connection  with the use of our  facilities to
originate and terminate interstate and intrastate long distance telephone calls.
We provide  originating  and  switched  terminating  services  to long  distance
carriers through switched services networks. 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.

                                       3
<PAGE>

Long  distance  and  data  services.  We  sell  long  distance  services  in our
territories to our ILEC  customers.  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
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 digital
subscriber line access (DSL),  frame relay and asynchronous  transfer mode (ATM)
switching in portions of our system where it is economically  feasible.  As part
of our integration  strategy, we offer a solution whereby other companies resell
our  integrated  services.  We offer  this  integrated  solution  to most of our
customers.

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.

ILEC Asset Acquisitions
-----------------------

We have grown from approximately 1 million access lines in 1999 to approximately
2.5 million access lines in 2001 primarily through acquisitions.  We continually
evaluate the possibility of acquiring additional telecommunications assets. Over
the past few years,  we have  observed  that the  number  and size of  available
telecommunications  assets has  increased  substantially.  Although  our primary
focus will continue to be the acquisition of telephone  access lines,  exchanges
and  operations  that are  proximate  to our  existing  systems  or that serve a
customer  base large enough for us to operate  efficiently,  we may also acquire
other telecommunications interests.

We expect to have fully  integrated  our recent  acquisitions  with our existing
core telephone access line holdings by June 2002.

The following table sets forth certain information with respect to our telephone
access lines as of December 31, 2001, following the Frontier acquisition on June
29, 2001. With the exception of 566,700 access lines in metropolitan  Rochester,
New York, our access lines are located in primarily rural areas.

             State                              ILEC Access Lines
             -----                              -----------------
                                                   at 12/31/01
                                                   ----------

             New York............                  1,029,300
             Minnesota...........                    280,100
             Arizona.............                    185,000
             West Virginia.......                    156,700
             California..........                    149,700
             Illinois............                    130,800
             Tennessee...........                    101,900
             Wisconsin...........                     73,500
             Iowa................                     59,200
             All other states (15)...                315,200
                                                   ---------
                Total                              2,481,400
                                                   =========

On June 29, 2001, we purchased from Global 100% of the stock of Frontier Corp.'s
local  exchange  carrier  subsidiaries,  which owned  approximately  1.1 million
telephone  access  lines (as of June 29,  2001) in  Alabama,  Florida,  Georgia,
Illinois,   Indiana,   Iowa,  Michigan,   Minnesota,   Mississippi,   New  York,
Pennsylvania and Wisconsin.

Between May and December 1999, we announced  agreements to purchase from Verizon
approximately  381,200  telephone  access  lines (as of December  31,  2000) for
approximately  $1,171.0  million in cash. By November 30, 2000, we had closed on
the purchase of  approximately  317,500  telephone access lines. On December 17,
2001,  the  agreements  to  acquire  the  remaining   lines  from  Verizon  were
terminated.

In June 1999,  we  announced  agreements  to purchase  from Qwest  approximately
556,800  telephone  access  lines (as of December  31,  2000) in nine states for
approximately   $1,650.0   million  in  cash  and  the   assumption  of  certain
liabilities.  On October 31, 2000,  we closed on the  purchase of  approximately
17,000 telephone access lines in North Dakota for approximately $38.0 million in
cash. On July 20, 2001, we notified Qwest that we were terminating the remaining
eight acquisition  agreements.  We have commenced  arbitration  proceedings with
Qwest  concerning  the damages,  if any,  relating to the  termination  of these
agreements.

                                       4
<PAGE>

ILEC Support

We currently  receive  support  services for our ILEC  companies from Global and
several of its subsidiaries,  all of which have filed for bankruptcy protection.
These services are primarily  carried out between certain Frontier  subsidiaries
that we  acquired  from  Global and  certain  subsidiaries  of Global.  Services
include  transitory   administrative  and  support  services  for  our  Frontier
operations   and   network   transport,   internet   and  other  long   distance
telecommunication  services to our ILEC operations from Global for resale to our
customers on an exclusive basis, as more fully described below.

Global agreed to provide transition support services to our Frontier  operations
through  June 2003,  including  the  following:  (i) billing and  collection  of
revenues for Frontier  long distance  services  that remain on Global's  billing
platform,   and  other  support  for  those  services   including  the  uCommand
application;  (ii) a sublease and license of office and  information  technology
space at  Frontier's  regional  headquarters  building  at 180  Clinton  Avenue,
Rochester,  New York, of which Global is the prime tenant,  until Global vacates
the  building,   at  which  time  Frontier  takes  over  the  lease;  and  (iii)
administrative  services  which  include  some  security  services and access to
certain data and records  maintained  by Global (iv) and certain  long  distance
rating services.

Global also agreed to provide our Frontier  long  distance  subsidiary  with the
following  service on an exclusive basis: (i) interstate and intrastate  carrier
domestic termination,  (ii) international carrier termination,  (iii) interstate
and intrastate  toll-free  transportation,  (iv) national  origination  services
(NOS),  (v) domestic and  international  toll-free pin, (vi) dedicated  internet
access service,  and (vii) domestic and international  Link Card. This agreement
expires  on June  29,  2004,  and we  may,  at our  option,  renew  it for  four
consecutive two-year terms.

These  agreements with Global may be treated as executory  contracts that may be
rejected by Global in the bankruptcy  cases.  Such rejection  would require that
Global  file a motion  seeking  such relief  with the  Bankruptcy  Court for the
Southern  District of New York, or other court with  jurisdiction.  If the court
were to approve such  motion,  we would need to develop our own  resources  more
quickly  than we have  planned or find other  providers  of all or some of these
support functions.  The rejection of the agreements would give rise to a damages
claim by us against Global,  which would be treated as a general unsecured claim
in Global's  bankruptcy cases,  along with other unsecured claims by us and many
other creditors.

In any event, at the termination of any of these agreements we will either enter
into agreements for all or part of the services with other service  providers or
Global or perform such services ourselves.

CLEC Services

ELI provides a broad range of wireline  communications  products and services to
businesses in the western United States.  ELI accounted for $226.6  million,  or
9%, of our revenue in fiscal year 2001.

ELI's  facilities-based  network consists of optical fiber,  plus voice and data
switches. ELI has a national internet and data network with switches and routers
in key cities, linked by leased transport facilities.  At December 31, 2001, ELI
had 6,754 local and long-haul  route miles of fiber-optic  cable in service.  In
addition,  ELI has a long-haul,  fiber-optic network which utilizes an optically
self-healing Synchronous Optical Network (SONET) architecture.  ELI provides the
full range of its services in the following  eight cities and their  surrounding
areas:  Boise,  Idaho;   Portland,   Oregon;  Salt  Lake  City,  Utah;  Seattle,
Washington;  Spokane,  Washington;  Phoenix,  Arizona;  Las  Vegas,  Nevada  and
Sacramento,  California.  This network spans approximately  4,000 miles, crosses
seven states and is one of the largest OC-192 (Optical  Carrier Level 192) SONET
systems in the western United States.

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

                                       5
<PAGE>

Our primary  focuses in 2002 are increasing  new and existing  customer usage of
ELI's installed asset base, focusing more on enterprise businesses,  company end
users and government  entities and  diversifying  the customer mix to place less
reliance on Internet Service Providers (ISPs) application  service providers and
competitive local exchange  companies.  ELI expects a substantial portion of its
growth to come from 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 eight  major  cities in which it operates  and  surrounding
areas.  ELI  anticipates  continued  growth in sales to other  carriers and will
continue to market its available dark fiber.

We own all of the Class B Common Stock and  27,571,332  shares of Class A Common
Stock  (constituting  approximately  77% of the  outstanding  shares  of Class A
Common Stock) of ELI. This  ownership  interest  represents  85% of the economic
interest and a 96% voting interest in ELI. ELI's Class B Common Stock votes on a
10 to 1 basis with the Class A Common Stock,  which is publicly traded.  We also
guarantee all of ELI's  long-term debt, one of its capital leases and one of its
operating   leases,   and  have  committed  to  continue  to  support  its  cash
requirements through March 31, 2003. ELI is included in our consolidated federal
income tax return. In order to maintain that consolidation,  we must maintain an
ownership and voting interest in excess of 80%.

As a result of the financial  conditions within the CLEC industry and with ELI's
operations, and the current price of ELI's Class A Common Stock, we believe that
ELI's  Class A Common  Stock that is  currently  listed for  trading on Nasdaq's
National  Market may be subject to  delisting  from Nasdaq in 2002.  On April 2,
2001,  ELI received a notice from the Nasdaq Stock  Market,  Inc. that its stock
would be  subject  to  delisting  from the  National  Market  after July 2, 2001
because its Class A Common Stock failed to maintain a minimum bid price. On June
29, 2001,  ELI filed an  application  for its listing to be  transferred  to the
Nasdaq  Small Cap  Market.  As part of the  application  process,  we  converted
approximately  25.3 million  shares of Class B Common Stock into the same number
of shares of Class A Common  Stock on August 24, 2001.  On August 31, 2001,  ELI
received a notice from Nasdaq  indicating  that it had failed to comply with the
shareholders'  equity,  market  capitalization,  market  value/total  assets and
revenue and minimum bid price requirements for continued  listing,  and that its
stock was, therefore,  subject to delisting from the Nasdaq National Market. ELI
was granted a hearing before a Nasdaq Listing Qualifications Panel to review the
delisting. On September 27, 2001, Nasdaq implemented a moratorium on the minimum
bid price and market value of public float requirements for continued listing on
the Nasdaq Stock Market until January 2, 2002. ELI received a notice from Nasdaq
on that date  stating  that as a result of that  action  the  hearing  scheduled
regarding  the  delisting  on its stock had been  canceled  and its hearing file
closed. On January 2, 2002, compliance with the minimum requirements for listing
on the Nasdaq  National and Small Cap Markets started anew. If ELI does not meet
these  requirements for 30 consecutive  days, and is unable to regain compliance
within 90 days, its stock could be subject to delisting  again.  It is uncertain
whether ELI will be able to meet the  applicable  listing  requirements.  If the
requirements  are not met,  its  Class A Common  Stock may not be  eligible  for
trading on Nasdaq and ELI expects  that it would  trade in the  over-the-counter
market.

Description of CLEC Services Business
-------------------------------------

ELI offers  switched  service,  including  local dial  tone,  from eight  Nortel
Digital Multiplex System (DMS) 500 switches in the eight metropolitan areas that
ELI  serves.  This  permits  ELI to offer both voice and data  services in these
areas.  ELI also has  transmission  equipment  collocated  with  switches of the
relevant ILEC operators at 56 locations.

ELI has  broadband  data points of presence in the  following  cities:  Atlanta,
Georgia;  Austin,  Texas;  Chicago,  Illinois;  Cleveland,  Ohio; Dallas, Texas;
Denver, Colorado;  Houston, Texas; Los Angeles,  California; New York, New York;
Philadelphia,  Pennsylvania;  San Diego, California; San Francisco,  California;
and  Washington,  D.C. In the first half of 2002,  ELI  intends to redeploy  the
internet  routers,  frame relay  switches  and ATM  switches  from the  Atlanta,
Cleveland,  Denver,  Philadelphia and New York markets to other locations in its
network.  ELI intends to cease leasing the  collocation  facilities  and off-net
circuits  for the backbone and local loops  supporting  the service  delivery in
these markets (see Note 14).

ELI  has  developed  an  internet   backbone  network  that  provides   internet
connectivity  in each of its markets,  including  presence at all major  network
access points, and including "peering arrangements" with other internet backbone
service providers. A peering arrangement is an agreement where internet backbone
service  providers  agree to allow each other  direct  access to  internet  data
contained on their  networks.  ELI's broadband  network  consists of frame relay
switches, ATM switches and network-to-network  interfaces. ELI provides national
and international coverage to its customers through strategic relationships with
other communications providers.

                                       6
<PAGE>

ELI owns or leases broadband,  long-haul fiber-optic network connections between
its major  cities in the  western  United  States and within  strategic  markets
across the nation. To the extent that ELI carries traffic on its own facilities,
ELI is able to maximize the  utilization of its network  facilities and minimize
network access costs as well as other interconnection costs. It aims to increase
new and existing  customer usage of its  high-capacity,  installed,  fiber-optic
infrastructure in its eight major cities and surrounding areas by increasing the
penetration  of  existing  on-net  buildings  and  sales to  customers  that are
connected to the network.

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

Regulatory Environment

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

The  Telecommunications  Act of 1996 or the 1996 Act,  dramatically  changed the
landscape of the  telecommunications  industry.  The main thrust of the 1996 Act
was to open local telecommunications marketplaces to competition while enhancing
universal  service.  We  expect  the 1996  Act,  subsequent  state  and  federal
regulatory rulings and technological  changes to lead to an overall reduction in
the  level of  regulation  for the  telecommunications  industry.  Although  the
majority of our  operations  continues  to be regulated  extensively  by various
state regulatory agencies, often called public service commissions, and the FCC,
we may  experience  reductions in the level of  regulation  for some of our ILEC
operations in the future. In any event, we are currently unable to determine the
ultimate  degree  of  reduction  or  increase  in  regulation  in our  operating
territories.

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

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

As a result of recent  legislation  enabling  regulators  to reduce the level of
regulation in certain states and at the federal level, we have elected 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  incentive   regulation   plans  is  to  provide   incentives  to  improve
efficiencies  and increase  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  including  incentive
regulation by the FCC and various  state  regulatory  agencies.  We expect state
lawmakers  to continue to review the  statutes  governing  the level and type of
regulation for telecommunications services. Over the next few years, legislative
and  regulatory  actions are expected to provide  opportunities  to  restructure
rates, introduce more flexible incentive regulation programs and possibly reduce
the overall level of regulation.  We expect the election of incentive regulation
plans and the expected  reduction in the overall level of regulation to allow us
to introduce new services more expeditiously than in the past. In addition,  the
FCC has reviewed its regulations  implementing  the 1996 Act and this review has
been appealed to the Federal  courts.  The U.S.  Supreme Court is also reviewing
the FCC's current  wholesale pricing rules, but has not yet issued its decision.
The ultimate outcome cannot be predicted.

                                       7
<PAGE>

For  interstate  services  regulated  by the  FCC,  we  have  elected  a form of
incentive  regulation  known as price caps for most of our  subsidiaries.  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 new 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 6.5% productivity
factor  will  continue  for several  years until the price floor for  interstate
switched access services is reached.

We believe that the CALLs plan has  potential  benefits for us in the long term.
Although some of the required rate reductions are front loaded,  the price floor
provides a degree of  certainty  that rate  reductions  will be curtailed in the
future.  We were  successful in  negotiating a price floor that  recognized  the
unique cost characteristics of rural telecommunications providers in contrast to
a one size fits all program designed for larger companies. Under the CALLs plan,
for many of our  properties,  the price floor is higher than the rate level that
would  have  been  required  over time  under the  previous  rate  programs.  In
addition, shifting revenue from interstate access services to end user customers
and universal  service programs  provides us more control over future revenue as
access customers seek alternatives to switched access services.

In  2001,  the  FCC  accepted  most  of the  recommendations  put  forth  by the
Federal-State  Joint Board on Universal Service.  In this Order the FCC modified
its rules for providing  high-cost  universal service support to rural telephone
companies  over the next five  years;  and as  proposed  by the Rural Task Force
(RTF),  the FCC  modified  the current  embedded  cost  mechanism  as an interim
solution.  The purpose of this  five-year  plan is to insure that rural carriers
receive   predictable  levels  of  support  so  they  can  continue  to  provide
affordable,  quality  telecommunications  services  to  rural  America.  In  the
meantime,  the  Federal-State  Joint Board will continue to work on developing a
long-term  solution  for  funding  universal  service  programs  that is  better
coordinated  with  the  non-rural  carrier  mechanism,  and  which  relies  upon
forward-looking economic cost.

In addition,  the FCC established a "safety valve"  mechanism to provide support
for additional investment made in acquired exchanges.  Provided certain criteria
are met this will allow additional  support to the acquired exchanges where none
may have been received prior to the RTF order.

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 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.

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  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.

                                       8
<PAGE>

The FCC exercises  regulatory  jurisdiction over all facilities of, and services
offered by,  communications  common carriers to the extent those  facilities are
used to provide, originate or terminate interstate  communications.  The FCC has
established   different  levels  of  regulation  for  "dominant"   carriers  and
"nondominant"  carriers. For domestic interstate  communications  services, only
the  ILEC's  are  classified  as  dominant  carriers.  All  other  carriers  are
classified  as  non-dominant.  Additionally,  to  the  extent  a  Regional  Bell
Operating  Company (RBOC) is engaged in out-of-region  long distance services it
is also classified as nondominant as to those  services.  The FCC regulates many
of the rates, charges and services of dominant carriers to a greater degree than
those of nondominant  carriers.  As a nondominant  carrier,  ELI may install and
operate  facilities  for domestic  interstate  communications  without prior FCC
authorization.  ELI is no longer  required  to  maintain  tariffs  for  domestic
interstate long distance services.  As a provider of international long distance
services,  ELI obtained FCC operating  authority and maintains an  international
tariff.  However,  the FCC is also eliminating the requirement for international
tariffs.  ELI is also required to submit certain periodic reports to the FCC and
to pay regulatory fees.

RBOCs had been  barred from  participating  in the market for  interLATA  (Local
Access and Transport Area) services,  which is primarily  long-distance traffic,
in their service  territories since the break up of the Bell System in 1984. The
1996 Act  provides  a  mechanism  for an RBOC  and/or  any  successors  to enter
in-region interLATA markets. Full entry by such companies into interLATA markets
will  increase the level of  competition  faced by our long  distance  services.
Before an RBOC or its  successors  can enter an  interLATA  market it must first
meet specific  criteria set out by section 271 of the 1996 Act.  These  criteria
are commonly  referred to as the "14 point checklist." The checklist is meant to
ensure that these  companies  have opened up their local markets to  competition
before they compete in the long-distance  markets in their regions.  Verizon and
SBC Communications have both successfully filed interLATA  applications with the
FCC in many of the states in which they operate.  Applications  for other states
are pending at the FCC; additional applications are expected in 2002.

Local Government Authorizations
-------------------------------

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. On April 17, 2001,
the FCC  issued  an order  that will  significantly  reduce,  over a  three-year
period,  intercarrier  compensation  for ISP traffic  also known as  "reciprocal
compensation."  This order  became  effective  June 14,  2001 and is expected to
impact our future interconnection agreements.

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

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.

Though much of the initial competition in local  telecommunications  has been in
more densely  populated urban areas, we have begun to experience  competition in
some of our suburban and rural markets.  These competitors mainly serve ISPs and
a few large business  customers,  but competition  for residential  customers is
present in isolated  areas.  We are subject to greater  levels of competition in
our Rochester, New York market than in the other markets that we serve.

                                       9
<PAGE>


Under the 1996 Act and subsequent  FCC and state rules,  CLECs can compete using
one or more of three mechanisms:

     *    Construction of its own local exchange  facilities,  in which case the
          ILEC's sole  obligation  is  interconnection  for  purposes of traffic
          interchange.

     *    Purchase  unbundled network  elements,  or UNEs, at cost from the ILEC
          and assemble them into local exchange  services and/or  supplement the
          facilities it already owns.

     *    Resale of the ILEC's retail services purchased at wholesale rates from
          the ILEC.

Some competitors  have taken advantage of an ILEC's  requirement to pay the CLEC
reciprocal  compensation  for traffic  delivered  to the CLEC.  The  increase of
traffic  over the Internet  has  provided  CLECs with an immediate  mechanism to
build traffic and reciprocal compensation revenues. In 2001, our ILECs paid $6.8
million in reciprocal compensation.  While our ILECs are reciprocal compensation
payors, ELI is a reciprocal compensation receiver. ELI received $21.3 million in
reciprocal  compensation  in 2001.  We expect  the  spread of DSL and other high
speed network services that give customers a dedicated link to the Internet,  as
well as the rural nature of our markets and expected  actions by the FCC and the
United States Congress to limit the future growth of reciprocal compensation.

Beginning in late 1999, the FCC expanded the  availability  of UNEs by requiring
ILECs to offer subloop  unbundling,  expanded  extended loops, or EELs, and line
sharing.  Pursuant  to this FCC  decision,  CLECs can  purchase a portion of the
ILECs' loop  facilities at cost-based  rates as opposed to the entire loop. EELs
allow CLECs to purchase links to customer  premises located outside the exchange
where the CLEC is physically  located at cost-based  rates.  Line sharing allows
ILECs to purchase just the high  frequency  portion of the loop that permits the
CLEC to offer  high-speed  data  services more  profitably,  but leave the lower
margin  voice  services  for the same  customer  with the ILEC.  In  addition to
expanding the availability of UNEs, in August 2000 the FCC expanded  collocation
requirements  to include  cageless  collocation  in ILEC  facilities.  These FCC
decisions  increase the CLECs'  opportunities  to reach  customers  economically
thereby increasing their ability to compete.

Under the 1996 Act, the RBOCs and their successors were precluded from competing
in  most  long-distance  markets  until  they  satisfied  the  state  regulatory
authority and the FCC that their markets had been  sufficiently  opened to local
exchange  competition.  Beginning in 1999, state regulators and the FCC began to
allow the RBOCs and their successors to enter the  long-distance  market in some
states. By the end of January 2002, RBOC long-distance entry was allowed in nine
states, New York, Texas, Oklahoma, Kansas,  Massachusetts,  Missouri,  Arkansas,
Pennsylvania and Connecticut.  We expect additional states to follow suit in the
near future.  Because we currently offer  long-distance  service in New York and
other states,  it is possible  that the entry of the RBOCs and their  successors
into this market could adversely impact our long distance operations.

As of December 31, 2001, we had entered into 415 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 large business  customers and internet  service
providers.

In  Rochester,  New York,  there are several  active  CLECs  targeting  small to
medium-size commercial customers. We also experience competition for dial up and
high speed internet  services in the Rochester market in addition to competition
from long distance providers for both residential and business customers.

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

ELI's broad range of communication  services enables customers to purchase their
telecommunications  needs from a single provider  allowing the added convenience
of a single monthly bill. As a facilities-based  telecommunications carrier, ELI
can deliver a substantial  portion of its services on its own network  resulting
in higher  gross  margins  and  quality of  services  than  competitors  who are
resellers of services.

ELI faces  significant  competition  from ILECs in each of its  facilities-based
markets. Principal ILEC competitors include Qwest, SBC and Verizon. CLEC service
providers  have  generally  encountered  competitive  pressures from a number of
sources, including other CLECs, with the result being the failure of a number of
CLECs and substantial financial pressures on others, including ELI.

                                       10
<PAGE>

Facility and non-facility based CLEC competitors in ELI's markets include, among
others: AT&T Local Services, Sprint Local, Time Warner Telecom, MCI WorldCom and
XO  Communications.  In each of the markets in which 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.

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

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

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

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

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

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 May 1998 we  announced  a plan of
divestiture  for our public  utilities  services  properties.  We have  divested
approximately  two-thirds of our public  utility  operations for an aggregate of
$1.352 billion.  In 1999 we initially  accounted for the planned  divestiture of
our public utilities  services segments as discontinued  operations.  Because we
have 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  reflect  the  assets  and  related
liabilities of the water and wastewater businesses.

Through our public  utilities  services  segments,  we provide gas and  electric
utility  services.  In 2001 we sold our  Louisiana  gas  operations  for  $363.4
million in cash,  our Colorado  gas  division for $8.9 million in cash,  and our
water and  wastewater  services  operations  in January  2002 for  approximately
$855.7 million in cash and $123.8 million in assumed debt and other liabilities.
These transactions are subject to routine purchase price adjustments.

We intend  to sell our  remaining  public  utility  assets,  which  include  gas
operations  in Arizona and Hawaii and electric  utility  operations  in Arizona,
Hawaii and Vermont.

                                       11
<PAGE>
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 188,800 primarily  residential  customers.  Our natural gas
segment  accounted  for $411.5  million,  or 17%, of our revenues in fiscal year
2001. The number of customers by state is as follows:

                  State                       Customers
                  -----                       ---------
                  Arizona.........              122,300
                  Hawaii...........              66,500
                                              ---------
                    Total                       188,800
                                              =========

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 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.

One of our gas suppliers in Arizona was Enron Corporation  (Enron).  In November
2001,  as a result of the  bankruptcy  filing of Enron,  we entered  into a firm
supply  contract with BP Energy for our Arizona gas division  through April 2005
on terms more favorable than the Enron arrangement.

In October 2001 we received a temporary  rate increase from the Hawaiian  Public
Utilities Commission (HPUC) of approximately $5.5 million, in the aggregate, for
our  Hawaiian  gas  company  representing  a 9.87% rate  increase  beginning  in
November 2001. We expect a final order during the first quarter of 2002.

In September 2001 we received regulatory  approval to recover  approximately $39
million of deferred gas costs  beginning  October 1, 2001 over a 24 month period
for our Arizona gas division.

Electric
--------

Our electric segment provides electric transmission and distribution services in
Arizona,  Hawaii and  Vermont to 128,400  primarily  residential  customers.  We
produce  the vast  majority  of the power that we sell in Hawaii.  Our  electric
segment  accounted  for $228.0  million,  or 9%, of our  revenues in fiscal year
2001. The breakdown per state is as follows:

                       State                  Customers
                       ------                ----------
                       Arizona..........         76,500
                       Hawaii...........         31,200
                       Vermont..........         20,700
                                                -------
                         Total                  128,400
                                                =======

Electric  services  and/or  rates  charged  are subject to the  jurisdiction  of
federal and state  regulatory  agencies.  We purchase  approximately  81% of the
electric energy needed to provide services to our customers.  Of this amount, we
purchase  approximately  98% of the electric energy needed to provide service to
our  customers  in Vermont and Arizona and 9% for our  customers  in Hawaii.  We
believe  our supply is  adequate  to meet  current  demands  and to provide  for
additional  sales to new  customers.  Our primary  generating  facilities are on
Kauai, Hawaii. We also 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 is now shifting 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 splitting
apart  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.

                                       12
<PAGE>

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 of major providers of electricity may alter the
nature and level of regulation of electric utilities.

During the past two years,  power  supply  costs have  fluctuated  substantially
forcing  companies in some cases to pay higher  operating costs to operate their
electric  businesses.  In Arizona,  excessive  power costs  charged by our power
supplier in the amount of  approximately  $100 million through December 31, 2001
have been  incurred.  We are allowed to recover  these  charges from  ratepayers
through a purchase power fuel adjustment. In an attempt to limit "rate shock" to
our customers,  we requested in September 2001 that this amount,  plus interest,
be recovered over a seven-year period. As a result, we have deferred these costs
on the balance sheet in anticipation of recovery through the regulatory process.
We anticipate that a determination regarding recovery will be made in 2002.

On July 16, 2001,  we  terminated  our  existing  contract  with Arizona  Public
Service  and  entered  into a new  seven-year  purchase  power  agreement.  This
agreement  allows us to purchase all power  required for  operations  at a fixed
rate per kilowatt  hour.  This agreement is retroactive to June 1, 2001 and will
mitigate further increases in the deferred power cost account.

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.

On February  15,  2000,  we  announced  that we had agreed to sell our  electric
services segment. Our Arizona and Vermont electric divisions were under contract
to be sold, but the parties terminated the agreement on March 7, 2001 due to the
failure of the proposed purchaser to raise the required financing and obtain the
required  regulatory  approval  necessary  to meet  its  obligations  under  the
contract  for sale.  We intend to pursue  the  disposition  of the  Vermont  and
Arizona electric divisions with alternative buyers.

In March 2002, we entered into a definitive agreement to sell our Kauai electric
division  to Kauai  Island  Utility  Cooperative  (KIUC) for $215  million.  The
transaction,  which is subject to  regulatory  approvals,  is  expected to close
within twelve months.

Our Kauai electric division has, historically, received approximately 13% of its
power  from  a  third-party   provider,   but  in  2001,  this  was  reduced  to
approximately   4%.  As  of  January   2001  this   third-party   provider   was
restructuring.  In February our Kauai electric division was granted an amendment
to the purchase  power  agreement.  The amendment  requires power to be provided
until  December  31, 2002 unless  terminated  earlier by us.  Current  forecasts
report that our  service  area will  require  additional  electrical  generating
capacity in 2002.  As a result,  we have entered into a 25-year  purchase  power
agreement with another  independent power producer to provide firm power by July
2002. The HPUC has approved this agreement.

In October 2001 the Company  filed a rate case in Vermont  requesting a 40% rate
increase to produce a total revenue increase of approximately  $11 million.  The
rate case is expected to be finalized during the third quarter of 2002.

Water and Wastewater
--------------------

Through   subsidiaries,   we  provided  water   distribution,   wholesale  water
transmission,  wastewater  treatment,  public works consulting and marketing and
billing services to approximately  322,200  primarily  residential  customers in
Arizona, Illinois, California,  Pennsylvania,  Ohio, and Indiana. On January 15,
2002, we sold our water and wastewater  treatment  segment for $855.7 million in
cash and $123.8  million  in assumed  debt.  We no longer  provide  any water or
wastewater treatment services.

Segment Information

Note 18 of the Notes to Consolidated  Financial  Statements included herein sets
forth  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 7), a company  that  provides  wireline
telephone service in Hungary.

                                       13
<PAGE>

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,  trademarks,
licenses or  concessions  that are  material.  As of December 31,  2001,  we had
approximately  10,121  employees,  of  whom  7,920  were  associated  with  ILEC
operations   including   approximately  3,773  employees   associated  with  the
acquisition of Frontier,  1,210 were associated with public  utilities  services
operations  including 381  associated  with the water and  wastewater  treatment
operations sold in January 2002. We consider our relations with our employees to
be good.

Item 2 - Properties

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

The operations  support office for our ILEC segment is currently  located at 180
South Clinton  Avenue  Rochester,  New York in a facility that we sub-lease from
Global and which lease we will take over upon Global's vacating the premises. 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.  We intend to close our operations
support  center in Plano,  Texas by April 2002 and sell our office space at that
location. In addition,  our ILEC segment leases and owns office space in various
markets throughout the United States.

The operations  support office for our CLEC segment,  ELI, is located at 4400 NE
77th  Avenue,  Vancouver,  Washington.  This  building,  which we own,  is fully
occupied.  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 principal
states in which they operate.  Pending the sale of our public utilities services
segments,  we own gas production,  transmission and distribution  facilities and
electric  transmission  and  distribution  facilities  in Arizona,  Hawaii,  and
Vermont.

Item 3 - Legal Proceedings

On July 20, 2001, we notified Qwest  Corporation that we were terminating  eight
acquisition  agreements  with Qwest relating to telephone  exchanges in Arizona,
Colorado,  Idaho/Washington,  Iowa, Minnesota, Montana, Nebraska and Wyoming. 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
these agreements and is seeking  approximately $64 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  proceeding,  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  tentatively  scheduled  to commence in the fourth
quarter of 2002.

On December 21, 2001, we entered into a settlement  agreement  that, if approved
by the court,  will resolve 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 includes 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 the company,  we
will pay the class  members $5.5  million in  satisfaction  of all claims.  This
settlement  must be approved by the court,  which is expected to occur  sometime
during the first half of 2002.  The  company  has  accrued  the full  settlement
amount,  plus an  additional  amount  sufficient  to cover  legal fees and other
related expenses, during the fourth quarter of 2001.

                                       14
<PAGE>

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 2001.


                                       15
<PAGE>


Executive Officers
------------------

Information as to Executive Officers of the Company as of March 1, 2002 follows:
<TABLE>
<CAPTION>

          Name               Age      Current Position and Office
        -------              ---      ---------------------------
<S>                          <C>     <C>
Leonard Tow                  73      Chairman of the Board and Chief Executive Officer
Rudy J. Graf                 53      Vice Chairman of the Board, President and Chief Operating Officer
Scott N. Schneider           44      Vice Chairman of the Board, Executive Vice President and Chairman of Citizens Capital
                                     Ventures
Donald B. Armour             54      Vice President, Finance and Treasurer
Robert Braden                56      Executive Vice President, ILEC Sector and Chief Executive Officer, Electric Lightwave
                                     Sector
John H. Casey, III           45      Vice President; President and Chief Operating Officer, ILEC Sector
Kenneth L. Cohen             36      President and Chief Operating Officer, Public Services Sector
Jean M. DiSturco             38      Vice President, Human Resources
Jerry Elliott                42      Vice President, Chief Financial Officer
Michael G. Harris            55      Vice President, Engineering and New Technology
Edward O. Kipperman          50      Vice President, Tax
Robert J. Larson             42      Vice President and Chief Accounting Officer
Daniel McCarthy              37      President and Chief Operating Officer, Electric Lightwave Sector
L. Russell Mitten            50      Vice President, General Counsel and Secretary
Livingston E. Ross           53      Vice President, Reporting and Audit
Steven D. Ward               35      Vice President, Information Technology
Michael  Zarrella            42      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.

LEONARD TOW has been associated  with Citizens since April 1989 as 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
Director  of  Hungarian  Telephone  and Cable  Corp.,  Chairman  of the Board of
Electric  Lightwave,  Inc.  and is a  Director  of the United  States  Telephone
Association.

RUDY J. GRAF has been associated with Citizens since September 1999. In February
2001,  he was elected Vice  Chairman of the Board.  In July 2000, he was elected
Director of Citizens. He is currently Vice Chairman of the Board,  President and
Chief  Operating  Officer  of  Citizens.  He is  also  a  Director  of  Electric
Lightwave, Inc. Prior to joining Citizens, he was Director,  President and Chief
Operating  Officer of Centennial  Cellular Corp. and Chief Executive  Officer of
Centennial DE Puerto Rico from November 1990 to August 1999.

SCOTT N.  SCHNEIDER has been  associated  with  Citizens  since October 1999. In
February  2001, he was elected Vice Chairman of the Board.  In July 2000, he was
elected  Director  of  Citizens.  He is  currently  Vice  Chairman of the Board,
Executive Vice President of Citizens and Chairman of Citizens Capital  Ventures,
a wholly owned  subsidiary of Citizens.  He is currently  Director and Executive
Vice President of Electric  Lightwave,  Inc. 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  ARMOUR has been  associated  with  Citizens  since  October  2000. He is
currently Vice  President,  Finance and Treasurer.  He also currently  serves as
Vice  President  and  Treasurer  of Electric  Lightwave,  Inc.  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 November 1999 and has been
Vice President,  Business  Development  since February 2000. In January 2001, he
also  became  President,  Chief  Operating  Officer  and  Director  of  Electric
Lightwave,  Inc. and in December  2001,  he became Chief  Executive  Officer and
Director of Electric  Lightwave,  Inc. In January 2002, he became Executive Vice
President,  ILEC  Sector.  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.

                                       16
<PAGE>

JOHN H. CASEY,  III has been associated with Citizens since November 1999. He is
currently Vice President of Citizens and President and Chief  Operating  Officer
of our ILEC Sector. 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.

KENNETH L. COHEN has been  associated  with Citizens  since 1996 and was elected
President and Chief Operating  Officer,  Public Services Sector in January 2002.
He was Vice President and Controller of our Public  Services Sector from 1996 to
January 2002.  Prior to joining  Citizens,  he was a senior  manager at KPMG LLP
from March 1986 to August 1996.

JEAN M. DISTURCO has been  associated  with Citizens  since 1987 and was elected
Vice  President,  Human  Resources  in  October  2001.  She was 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 is
currently Vice President and Chief Financial Officer.  He is also Vice President
and Chief  Financial  Officer  of  Electric  Lightwave,  Inc.  Prior to  joining
Citizens, he was Managing Director of Morgan Stanley's Communications Investment
Banking Group from July 1998. 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 is
currently  Vice  President,  Engineering  and New  Technology.  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 is
currently  Vice  President,  Tax. He was Assistant  Treasurer  from June 1989 to
September 1991.

ROBERT J.  LARSON has been  associated  with  Citizens  since  July 2000.  He is
currently  Vice  President  and Chief  Accounting  Officer  of  Citizens  and of
Electric  Lightwave,  Inc. 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.

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

L. RUSSELL  MITTEN has been  associated  with  Citizens  since June 1990.  He is
currently Vice President,  General Counsel and Secretary. He was Vice President,
General Counsel and Assistant Secretary from June 1991 to September 2000. He was
General Counsel until June 1991.

LIVINGSTON E. ROSS has been  associated  with Citizens  since August 1977. He is
currently Vice  President,  Reporting and Audit. He was Vice President and Chief
Accounting  Officer  from  December  1999 to July  2000 and Vice  President  and
Controller from December 1991 to December 1999.

STEVEN D. WARD has been  associated  with  Citizens  since  January 2000 and was
elected  Vice  President,  Information  Technology  in February  2000.  Prior to
joining  Citizens,  he was  Vice  President,  Information  Systems  for  Century
Communications  Corp. from June 1996 to December 1999 and Director,  Information
Services from March 1991 to June 1996.

MICHAEL  ZARRELLA has been  associated with Citizens since December 1999. He was
elected Vice  President,  Strategic  Planning and  Development  in 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.

                                       17
<PAGE>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES


                                     PART II
                                     -------

Item 5.   Market for the 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.

                                     2001                   2000
                              -------------------    ------------------
                                High        Low        High        Low
                                ----        ---        ----        ---
       First Quarter           $15.88     $12.05      $17.06     $13.75
       Second Quarter          $15.00     $11.28      $18.00     $14.31
       Third Quarter           $13.10      $8.95      $19.00     $13.00
       Fourth Quarter          $11.53      $8.20      $15.31     $12.50

As of February 28, 2002, the approximate number of security holders of record of
our Common Stock was 34,264.  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,
                                                          ------------------------------------------------------------------------
                                                              2001          2000            1999           1998          1997
                                                          -------------  ------------  --------------- ------------- -------------
<S>     <C>                                                <C>           <C>              <C>           <C>           <C>
Revenue (1)                                                $ 2,456,993   $ 1,802,358      $ 1,598,236   $ 1,448,588   $ 1,303,901
Income (loss) from continuing operations before
  cumulative effect of changes in accounting principles    $   (63,926)  $   (40,071)     $   136,599   $    46,444   $     2,066
  and extraordinary expense (2)
Net income (loss)                                          $   (89,682)  $   (28,394)     $   144,486   $    57,060   $    10,100
Basic income (loss) per share of Common Stock
  from continuing operations before cumulative
  effect of changes in accounting principles and
  extraordinary expense (2)(3)                             $     (0.28)  $     (0.15)     $      0.53   $      0.18   $      0.01
Available to common shareholders per basic share (2)(3)    $     (0.38)  $     (0.11)     $      0.56   $      0.22   $      0.04
Available to common shareholders per diluted share (2)(3)  $     (0.38)  $     (0.11)     $      0.55   $      0.22   $      0.04
Stock dividends declared on Common Stock (4)                         -             -                -         3.03%         5.30%

                                                                                 As of December 31,
                                                          ------------------------------------------------------------------------
                                                              2001           2000            1999           1998          1997
                                                          -------------  ------------  --------------- ------------- -------------
Total assets                                               $10,553,600   $ 6,955,006      $ 5,771,745   $ 5,292,932   $ 4,872,852
Long-term debt                                             $ 5,994,906   $ 3,062,289      $ 2,107,460   $ 1,819,555   $ 1,627,388
Shareholders' equity                                       $ 1,946,142   $ 1,720,001      $ 1,919,935   $ 1,792,771   $ 1,679,211

</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, $173.1 million
     and $184.1 million in 2001, 2000, 1999, 1998 and 1997, respectively.
(2)  Extraordinary  expense  represents  an  extraordinary  after tax expense of
     $43.6 million  related to our decision to  discontinue  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 an after tax change of $2.3 million at ELI
     in 1998.
(3)  1997 is adjusted for subsequent stock dividends.
(4)  Compounded annual rate of quarterly stock dividends.

                                       18
<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:

     *    Our ability to obtain new financing on favorable terms;

     *    Our  ability  to   effectively   manage  our  growth,   including  the
          integration  of newly acquired  operations  into our  operations,  and
          otherwise  monitor our operations,  costs,  regulatory  compliance and
          service quality;
     *    Our ability to divest the remainder of our public  utilities  services
          businesses;
     *    Our  ability to  successfully  introduce  new product  offerings  on a
          timely  and cost  effective  basis,  including  our  ability  to offer
          bundled service packages on terms attractive to our customers, and our
          ability  to offer  second  lines  and  enhanced  services  to  markets
          currently under-penetrated;
     *    Our ability to expand through attractively priced acquisitions;
     *    Our  ability  to  identify  future  markets  and  successfully  expand
          existing ones;
     *    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;
     *    Electric  Lightwave,  Inc.'s  (ELI's)  ability to complete a public or
          private  financing  that would provide the funds  necessary to finance
          its cash requirements;
     *    The  effects of rapid  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  changes  in  regulation  in  the  telecommunications
          industry as a result of the  Telecommunications  Act of 1996 and other
          similar federal and state legislation and regulation;
     *    The effect of  restructuring  of  portions  of the  telecommunications
          market; and
     *    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 and practices adopted voluntarily or as required by generally
          accepted accounting principles.

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, 2001 we completed the  Acquisition  of Frontier
and the permanent  financings for our Frontier,  Verizon and Qwest acquisitions.
We also completed the sale of two of our public  utilities  services  properties
and repaid certain  indebtedness and our equity forward  contract.  A summary of
our primary sources and uses of cash is as follows:

                                       19
<PAGE>

($ in thousands)                               For the year
                                                  ended
                                             December 31, 2001
                                            ------------------
Primary Sources of Cash
-------------------------------------
Generated by operating activities                 $   520,379
Sale of public utility services properties            372,335
Net proceeds from debt financings                   3,650,191
Net proceeds from equity units                        445,635
Common stock offering                                 289,561
                                            ------------------
                                                  $ 5,278,101
                                            ==================

Primary Uses of Cash
-------------------------------------
Purchase of telephone properties                  $(3,373,214)
Capital improvements                                 (530,714)
Repay indebtedness                                 (1,077,931)
Repay equity forward contracts                       (163,662)
                                            ------------------
                                                  $(5,145,521)
                                            ==================

During  January  2002,  we sold another of our  operations  and received  $855.7
million in cash proceeds and repaid $107.0 million in indebtedness.  The details
of these 2001 and 2002 transactions follow.

In May 2001,  we filed a $3.8  billion  shelf  registration  statement  with the
Securities  and Exchange  Commission  (SEC) on Form S-3 that permits us to offer
from  time to time  common  stock,  preferred  stock,  depositary  shares,  debt
securities,  warrants to purchase  these  types of  securities  and units of the
foregoing.  The net proceeds from the sale of these securities have been and are
expected to be used to refinance  our bank  borrowings  and other  extensions of
credit,  to expand our networks,  services and related  infrastructure,  to fund
working capital and pending and future acquisitions, to make further investments
in  related  telecommunications  businesses,  as well as for  general  corporate
purposes.  After the offerings discussed below, we have a remaining availability
on this shelf registration statement allowing us to offer $825.6 million.

In May 2001, we issued an aggregate of $1.75 billion of notes consisting of $700
million  principal  amount of 8.50% notes due May 15, 2006 and $1.05  billion of
9.25% notes due May 15,  2011.  This  offering  was made under the $3.8  billion
shelf registration statement. Net proceeds of $1.726 billion (after underwriting
discounts and commissions and before offering  expenses) were used to repay bank
borrowings  and the  remainder  was used for general  corporate  purposes and to
finance acquisitions.

In June 2001, we issued equity  securities in two concurrent  public  offerings.
The first consisted of 25,156,250  shares of our common stock.  The net proceeds
of $289.6  million  (after  underwriting  discounts and  commissions  and before
offering  expenses) were used to fund a portion of the  acquisition of Frontier.
The second offering  consisted of $460 million of equity units. The net proceeds
of $446.2  million  (after  underwriting  discounts and  commissions  and before
offering  expenses)  were  also  used to fund a portion  of the  acquisition  of
Frontier.  Each equity unit  initially  consists of a senior note and a purchase
contract  for our  common  stock.  The price for the  common  stock  under  this
purchase  contract will be based upon the average  trading price of our stock at
the time the contract is exercised  and is expected to be paid with the proceeds
of a remarketing of the senior notes.  These  offerings were also made under the
$3.8 billion shelf registration statement.

In August  2001,  we issued an aggregate of $1.75  billion  principal  amount of
senior notes  consisting of $300 million of 6.375% notes due 2004,  $750 million
principal  amount of 7.625% notes due 2008 and $700 million  principal amount of
9.000%  notes due 2031.  These  notes  were  issued in a private  offering.  The
proceeds  were  used  to  repay  our  forward  equity  contract,   to  refinance
outstanding  indebtedness and for general corporate purposes. In September 2001,
we filed a $1.75 billion  registration  statement  with the SEC on Form S-4 that
consists  of an exchange  offer  entitling  the  holders of the notes  issued in
August  2001 to  exchange  the  initial  notes for new notes with  substantially
identical  terms as the initial  notes,  except for  transfer  restrictions  and
registration  rights relating to the initial notes. The  registration  statement
was declared  effective on February 6, 2002, and we commenced our exchange offer
at that time. The exchange offer is expected to terminate on March 11, 2002.

                                       20
<PAGE>

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

We have committed to continue to finance ELI's cash requirements until March 31,
2003.  We extended a revolving  credit  facility to ELI for $450 million with an
interest rate of 15% and a final maturity of October 30, 2005. Funds for general
corporate  purposes of $350 million are available to be drawn until December 31,
2002.  The  remaining  balance may be drawn by ELI to pay  interest  expense due
under the facility.  As of December 31, 2001, we have advanced $194.5 million to
ELI under this facility.

In April  2001,  we  converted  and  remarketed  $14.4  million  of 1991  series
industrial  development  revenue  bonds as money  market  bonds  with an initial
interest rate of 5.25% and a maturity date of April 1, 2026.

In May 2001, we converted and  remarketed  $23.3 million of Illinois 1997 series
of environmental facilities revenue bonds due May 1, 2032 at an initial interest
rate of 5.85%.  We also  converted and  remarketed  $18.3 million of Northampton
County,  Pennsylvania  1998 series of industrial  development  revenue bonds due
September  1, 2018 at an  initial  interest  rate of  5.75%.  Both  series  were
remarketed as money market bonds and were associated with our discontinued water
and wastewater treatment operations.

On June 29, 2001, we completed the acquisition of Frontier Corp. from Global for
$3.37 billion in cash. The  acquisition  was financed on an interim basis by the
draw down of a bank credit facility of $1.78 billion, with the remainder derived
from the proceeds of our registered  securities  offerings  discussed above. The
bank credit  facility was repaid in August 2001 with the proceeds of our private
offering of senior notes discussed above.

On July 2, 2001, we completed the sale of our Louisiana gas  operations to Atmos
Energy  Corp for  $363.4  million  in cash.  The  proceeds  were used to repay a
portion of our borrowings under our bank credit facility.

During 2000, we entered into an equity forward  contract with Citibank,  N.A. to
purchase  9,140,000 shares of our common stock.  These purchases and others made
by us for cash during 2000 were made in open market transactions.  The amount to
be paid under the forward contract included a LIBOR-based carrying cost plus the
dollar  amount  paid  for the  shares  acquired.  This  forward  contract  was a
temporary financing  arrangement that provided us the flexibility to effectively
purchase  our stock in the current  period and to pay for those  purchases  in a
future period.  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 in shareholders'  equity and as a component of temporary
equity for the gross settlement amount of the contract ($150.0 million). On June
28,  2001,  we entered  into a master  confirmation  agreement  that amended the
equity  forward  contract  to  eliminate  the share  settlement  feature  of the
original contract.  During 2001, we settled the contract for $150.0 million plus
$13.6 million in associated carrying costs, and took possession of our shares.

On  September  4, 2001,  $50 million  principal  amount of our 8.45%  debentures
matured  and were  repaid at par with cash.  On October 1, 2001,  $99.2  million
principal  amount of our $100  million  debentures  due 2034 were  tendered  for
redemption at par in accordance with the put option granted to debenture holders
at the time of issuance. These tendered debentures were also repaid with cash.

On November 30, 2001,  we completed  the sale of our Colorado gas  operations to
Kinder Morgan, Inc. for $8.9 million in cash. The proceeds were used for general
corporate purposes.

In December  2001,  two of our ILEC  subsidiaries,  Citizens  Telecommunications
Company of West Virginia and Rhinelander  Telephone Company,  made cash payments
of $12.9 million and $6.7 million,  respectively,  representing repayment of all
of their  outstanding  obligations to the Rural Utilities  Service and the Rural
Telephone Bank.

On January 7, 2002, we called for redemption 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.  Both  redemptions  were
funded with cash.

On  January  15,  2002,  we  completed  the  sale of our  water  and  wastewater
operations  to  American  Water  Works  for  $855.7  million  in cash  plus  the
assumption of $123.8 million of debt. The proceeds are being used to continue to
expand our  networks,  services  and  related  infrastructure,  to fund  working
capital and pending and future  acquisitions,  to make  further  investments  in
related telecommunications businesses, as well as for general corporate purposes
(including the repayment of outstanding indebtedness.)

                                       21
<PAGE>

On January 31, 2002, we repaid  approximately  $76.9 million principal amount of
loans  outstanding to our subsidiaries from the Rural Utilities  Service,  Rural
Telephone Bank and the Federal Financing Bank.

For the year ended  December  31, 2001,  our actual  capital  expenditures  were
$409.3 million for the ILEC segment, $54.5 million for the ELI segment and $89.9
million for the public utilities  services segments which includes $23.0 million
for the water and wastewater  segment.  For 2002, we anticipate that our capital
expenditures  will  approximate  $525.6  million;  $412.0  million  for the ILEC
segment, $71.6 million for ELI and $42.0 million for the public utility services
segment.

We anticipate  that the primary sources of funds in 2002 will come from our ILEC
operations. We have a remaining shelf registration of $825.6 million and we have
available  lines of credit  with  financial  institutions  in the amount of $705
million  and  $100  million.  The  credit  facilities  have  similar  terms  and
conditions.  Associated facility fees vary, depending on our credit ratings, and
are  0.25% per annum as of  December  31,  2001.  The  expiration  date for both
facilities is October 24, 2006. During the term of the facilities we may borrow,
repay and reborrow  funds.  As of December 31, 2001,  there were no  outstanding
advances under these facilities.

ELI has a $400 million  committed  revolving  line of credit with a syndicate of
commercial  banks that expires on November 21, 2002. The ELI credit facility has
an associated  facility fee of 0.08% per annum.  We have guaranteed all of ELI's
obligations  under this revolving line of credit.  As of December 31, 2001, $400
million was outstanding under this credit facility.

During 1995, ELI entered into a $110 million  construction  agency agreement and
an operating  lease  agreement in connection  with the  construction  of certain
network  facilities.  In January 2002,  ELI exercised its option to purchase the
facilities  at the end of the lease  term.  Payments  under the lease  depend on
current  interest  rates.  Assuming  continuation  of  current  interest  rates,
payments would approximate  $872,000 from January 1, 2002 through April 30, 2002
and a final payment of  approximately  $110 million in April 2002.  Citizens has
guaranteed all of ELI's obligations under this operating lease.

On December 17, 2001, we entered into two interest rate swap  agreements  with a
subsidiary of Morgan  Stanley Dean Witter,  each  agreement  covering a notional
amount of $50 million. Under the terms of both agreements,  we make semi-annual,
floating rate  interest  payments  based on six-month  LIBOR and receive a fixed
6.375% rate on the notional amount.  Under the terms of one swap, the underlying
LIBOR rate is set in advance, while the second agreement utilizes LIBOR reset in
arrears.  Both swaps  terminate on August 15, 2004 and are being  accounted  for
under SFAS 133 as fair value hedges.

A summary of our future contractual obligations and commercial commitments as of
December 31, 2001 is as follows:
<TABLE>
<CAPTION>

                                                            Less than                                      After
(in thousands)                                 Total         1 year       2-3 years      4-5 years        5 years
--------------                                 -----         ------       ---------      ---------        -------
<S>                                        <C>              <C>           <C>          <C>              <C>
Long-term debt                             $ 6,341,430      $ 476,488     $ 772,250    $ 1,348,043      $ 3,744,649
Capital lease obligations                      137,382          7,418         5,804          6,855          157,459
Operating leases                               161,817         25,777        43,068         32,123           60,849
Purchase obligation                            110,000        110,000             -              -                -
Other long-term obligations                    925,024        115,416       147,425         78,948          583,235
                                           -----------      ---------     ---------    -----------      -----------

Total contractual cash obligations         $ 7,675,653      $ 735,099     $ 968,547    $ 1,465,969      $ 4,546,192
                                           ===========      =========     =========    ===========      ===========
</TABLE>

Covenants
---------
The terms  and  conditions  contained  in our  indentures  and  credit  facility
agreements  are of a general  nature,  and do not 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 similar  transactions.  We currently have no  restrictions on the payment of
dividends by us or our subsidiaries either by contract, rule or regulation.

                                       22
<PAGE>

The  principal  financial  performance  covenant  under our $805 million  credit
facilities  and our $200 million  term loan  facility  with the Rural  Telephone
Finance  Cooperative  (RTFC)  requires the maintenance of a minimum net worth of
$1.5  billion.  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 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.

Acquisitions
------------
From May 27, 1999 through July 12, 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  financial  statements  from the dates of
acquisition  of  each  property.   These  agreements  and  the  status  of  each
transaction are described as follows:

          Verizon Acquisition
          -------------------
          Between May and December  1999,  we announced  agreements  to purchase
          from  Verizon  Communications  Inc.,  formerly  GTE  Corp.  (Verizon),
          approximately 381,200 telephone access lines (as of December 31, 2000)
          for  approximately  $1,171.0 million in cash. By November 30, 2000, we
          had closed on the purchase of approximately  317,500  telephone access
          lines.  On December 17, 2001,  the agreements to acquire the remaining
          telephone access lines were terminated.

          Qwest Acquisition - termination
          -------------------------------
          In  June  1999,  we  announced   agreements  to  purchase  from  Qwest
          approximately 556,800 telephone access lines (as of December 31, 2000)
          in nine  states  for  approximately  $1,650.0  million in cash and the
          assumption of certain  liabilities.  On October 31, 2000, we closed on
          the purchase of  approximately  17,000 telephone access lines in North
          Dakota for  approximately  $38.0 million in cash. On July 20, 2001, we
          notified  Qwest  that  we  were   terminating   the  remaining   eight
          acquisition agreements. Qwest subsequently filed a notice of claim for
          arbitration  in  Denver,  Colorado  under  the  rules of the  American
          Arbitration  Association  with respect to the  terminated  acquisition
          agreements.   Qwest  asserts  that  we  wrongfully   terminated  these
          agreements and is seeking  approximately  $64.0 million,  which is the
          aggregate of liquidation damages under letters of credit,  established
          in the terminated  acquisition  agreements.  We have filed a notice of
          claim in the same arbitration proceeding,  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.

          Frontier Acquisition
          --------------------
          On June 29,  2001,  we  purchased  from  Global  100% of the  stock of
          Frontier Corp.'s (Frontier) local exchange carrier subsidiaries, which
          owns  approximately  1.1 million  telephone  access  lines in Alabama,
          Florida,  Georgia,  Illinois,  Indiana,  Iowa,  Michigan,   Minnesota,
          Mississippi,  New York, Pennsylvania and Wisconsin,  for approximately
          $3,373.0   million  in  cash,   subject  to  routine   purchase  price
          adjustment.

Divestitures
------------
On August 24, 1999, our Board of Directors  approved a plan of  divestiture  for
our public utilities services businesses,  which include gas, electric and water
and wastewater businesses. During 2001 we sold two of our natural gas operations
and in  January  2002  we  sold  all  of  our  water  and  wastewater  treatment
operations.

The Arizona and Vermont electric divisions were under contract to be sold to Cap
Rock Energy Corp.  (Cap Rock).  The  agreement  with Cap Rock was  terminated on
March 7, 2001.  We intend to pursue the  disposition  of the Vermont and Arizona
electric  divisions with  alternative  buyers.  In March 2002, we entered into a
definitive agreement to sell our Kauai electric division to Kauai Island Utility
Cooperative  (KIUC)  for $215  million.  The  transaction,  which is  subject to
regulatory approvals, is expected to close within twelve months.

Currently,  we do not  have  agreements  to sell  our  entire  gas and  electric
segments. Consequently, we have reflected all of our gas and electric assets and
their related liabilities as "assets held for sale" and "liabilities  related to
assets  held for  sale,"  respectively.  We also  reflect  the  results of these
operations 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  $50.8 million for the gas  operations  and $6.8 million for
electric  operations  for the year ended  December  31,  2001.  We  continue  to
actively pursue buyers for our remaining gas and electric business.

                                       23
<PAGE>

Discontinued  operations in the  consolidated  statements of income  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 this business.

Discontinuation of SFAS 71:
--------------------------
Prior to the 2000 and 2001  acquisitions  of the  Verizon,  Qwest  and  Frontier
Properties,   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 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 as additional  states adopt price cap forms of  regulation.
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 2000 and 2001
acquisitions  of the  Verizon,  Qwest and Frontier  properties).  As part of the
discontinuation  of SFAS  71,  we  will no  longer  recognize  in our  financial
statements certain activities of regulators.

As  discussed  further in Note 19 of the  financial  statements,  we  recorded a
non-cash  extraordinary  charge  of  $43.6  million  net of  tax  in our  income
statement,  to  write-off  regulatory  assets and  liabilities  recorded  on our
balance sheet in the past.  Based upon our  evaluation of the pace of technology
change that is estimated to occur in certain  components of our rural  telephone
networks,  we have  concluded  that minor  modifications  in our asset lives are
required for the major network  technology  assets and expect that  depreciation
and  amortization  expense  will not differ  significantly  from that  currently
recorded.

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
is not warranted under SFAS 121 at this time.

New Accounting  Pronouncements
-----------------------------
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 142, "Goodwill and Other Intangible  Assets."
This  statement  requires that goodwill no longer be amortized to earnings,  but
instead be reviewed for  impairment.  SFAS 142 is effective  January 1, 2002. We
will be  required to test for  impairment  of goodwill as of January 1, 2002 and
annually thereafter. Any transitional impairment loss at January 1, 2002 will be
recognized as the cumulative  effect of a change in accounting  principle in our
statement of operations.  The  amortization  of goodwill ceases upon adoption of
the statement.  As of the date of adoption,  we have unamortized goodwill in the
amount of $1,939.3 million and unamortized identifiable intangible assets in the
amount of $1,039.7 million.  Amortization expense related to goodwill was $108.1
million,  $13.6 million and $2.7 million for the years ended  December 31, 2001,
2000 and 1999,  respectively.  Because of the extensive  effort needed to comply
with adopting SFAS 142, it is not practicable to reasonably  estimate the impact
of adopting  this  Statement  on our  financial  statements  at the date of this
report,  including  whether we will be required to  recognize  any  transitional
impairment losses as the cumulative effect of a change in accounting  principle.
We are  required  to make such  assessment  no later than June 30, 2002 but such
assessment is "as of" January 1, 2002.

                                       24
<PAGE>

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 the 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 long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired,  and
broadens the  presentation of  discontinued  operations to include more disposal
transactions.  This  statement is effective  for fiscal  years  beginning  after
December 15, 2001.  We are  currently  evaluating  the impact of the adoption of
SFAS 144.

                                       25
<PAGE>


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

ILEC  revenue is  generated  primarily  through the  provision of local and long
distance  telephone  service.  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. CLEC usage based revenue includes amounts determined
under  reciprocal  compensation  agreements.  While this  revenue is governed by
specific contracts with the counterparty, management has deferred recognition of
portions of such revenue until  realizability was obtained.  Revenue earned from
long-haul  contracts,  including the fiber swap, 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
amounts determined for uncollectible accounts.

Consolidated  revenue  increased  $654.6  million,  or 36%,  in 2001 and  $204.1
million,  or 13%, in 2000.  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.  The  increase  in 2000  was  primarily  due to the
pass-through to customers of the increased cost of gas, electric energy and fuel
oil purchased as well as ILEC acquisitions and increased ELI revenue.
<TABLE>
<CAPTION>

                                  ILEC REVENUE

($ in thousands)                              2001                    2000              1999
                                     ----------------------  ----------------------  ----------
                                       Amount      % Change    Amount      % Change   Amount
                                     ------------ ---------  -----------  ---------  ----------
<S>                                  <C>               <C>    <C>               <C>  <C>
Network access services              $   654,641       45%    $ 451,402         2%   $ 444,409
Local network services                   582,662       78%      326,878        14%     286,271
Long distance and data services          208,274       95%      106,662        17%      90,978
Directory services                        72,375       93%       37,424        11%      33,636
Other                                     76,101       84%       41,377       -14%      47,943
                                     ------------            -----------             ----------
                                     $ 1,594,053       65%    $ 963,743         7%   $ 903,237
                                     ============            ===========             ==========
</TABLE>

We acquired the Verizon  Nebraska  access  lines on June 30,  2000,  the Verizon
Minnesota  access lines on August 31, 2000,  the Qwest North Dakota access lines
on October 31, 2000 and the Verizon  Illinois/Wisconsin access lines on November
30,  2000  and  Frontier  on June  29,  2001  (collectively  referred  to as the
Acquisitions).  The 2001  impact of the  Acquisitions  of $569.8  million in the
following revenue and expense  discussion  represents six months of activity for
Frontier which was acquired on June 29, 2001 and the  difference  between a full
year in 2001 versus a partial year in 2000 for the Verizon  Nebraska,  Minnesota
and Illinois/Wisconsin  and Qwest North Dakota acquisitions.  The 2000 impact of
the  Acquisitions  of  $49.5  million  in  the  following  revenue  and  expense
discussion represents the activity for each acquisition from its respective date
of acquisition.

Network  access  services  revenue  increased  $203.2  million,  or 45%, in 2001
primarily  due to the  $159.1  million  impact  of the  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.  Network  access  also  includes  a
reclassification  of $13.9 million in revenue reported as local network services
revenue in the prior year.

Network  access  services  revenue  increased  $7.0  million,  or 2%,  in  2000,
primarily due to the $23.9 million impact of the  Acquisitions and $15.4 million
related to growth in minutes of use and special access revenue.  These increases
were partially  offset by a  non-recurring  $10.4 million  interstate  universal
service fund (USF) settlement  received in the first quarter of 1999, the effect
of CALLS of $14.8  million,  settlements  with long  distance  carriers  of $2.3
million in 1999,  and the price effect of a July 1999 FCC tariff  adjustment  of
$1.8 million.

                                       26
<PAGE>

Local  network  services  revenue  increased  $255.8  million,  or 78%, in 2001,
primarily due to the impact of the Acquisitions which contributed $260.9 million
and growth in enhanced  services of $8.1 million.  Local  network  services also
reflects  a  reduction  for the  reclassification  of $13.9  million  in revenue
reported as network access revenue in the prior year.

Local  network  services  revenue  increased  $40.6  million,  or 14%,  in 2000,
primarily due to the impact of the Acquisitions which contributed $23.8 million,
growth in enhanced  services of $6.3 million due to  increased  demand for these
services, access line growth of 26,000 contributed $5.0 million and frame relay,
data and ISDN increased $4.0 million.  These increases were partially  offset by
an Extended Area Service revenue phase-out in New York of $3.1 million.

Long distance and data services  revenue  increased  $101.6 million,  or 95%, in
2001  primarily  due to  the  impact  of  the  Acquisitions  of  $78.2  million,
principally the long-distance and data revenue  associated with Frontier,  which
contributed  $74.1 million to the increase.  Growth in Digital  Subscriber  Line
(DSL)  and  Internet  services  of $7.9  million,  growth  related  to data  and
dedicated  circuits of $7.0 million and growth in long distance services of $7.7
million also contributed to the increase.

Long distance and data services revenue increased $15.7 million, or 17%, in 2000
primarily  due to increased  Internet  revenue of $6.0 million,  increased  DSL,
frame  relay  and ISDN  services  of $5.5  million  and  increased  remote  call
forwarding of $2.7 million.

Directory  services revenue  increased $35.0 million,  or 93%, in 2001 primarily
due to the impact of the  Acquisitions  which  contributed  $33.2 million to the
increase and growth of $1.8 million.  Directory  services revenue increased $3.8
million,  or 11%, in 2000 primarily due to increased  directory  advertising and
listing  sales.  The  Acquisitions  contributed  $1.0 million to the increase in
2000.

Other revenue  increased  $34.7  million,  or 84%, in 2001  primarily due to the
impact of the  Acquisitions of $38.4 million,  partially offset by a decrease in
miscellaneous revenue categories.  Other revenue decreased $6.6 million, or 14%,
in 2000 primarily due to a decrease in billing and  collections  revenue of $6.4
million and an increase in the reserve for uncollectibles of $3.9 million. These
decreases were partially  offset by increased  revenue from the  Acquisitions of
$0.8  million,  an increase of $2.8  million in  conference  call revenue and an
increase of $0.3 million in cable revenue.
<TABLE>
<CAPTION>

                                   ELI REVENUE

($ in thousands)                        2001                    2000            1999
                               ----------------------  ----------------------  ----------
                                 Amount      % Change    Amount      % Change   Amount
                               ------------ ---------  -----------  ---------  ----------
<S>                              <C>             <C>    <C>              <C>   <C>
Network services                 $ 101,338       31%    $  77,437        45%   $  53,249
Local telephone services            73,291      -26%       98,643        27%      77,591
Long distance services              12,294      -25%       16,318       -39%      26,698
Data services                       39,717      -23%       51,579        75%      29,470
                               ------------            -----------             ----------
                                   226,640       -7%      243,977        30%     187,008
Intersegment revenue*               (3,249)       2%       (3,185)       13%      (2,817)
                               ------------            -----------             ----------
                                 $ 223,391       -7%    $ 240,792        31%   $ 184,191
                               ============            ===========             ==========
</TABLE>

*  Intersegment  revenue  represents  revenue  received  by ELI  from  our  ILEC
operations related to network services provided by ELI.

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

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

                                       27
<PAGE>
Network  services  revenue  increased  $23.9 million,  or 31%, in 2001 and $24.2
million, or 45%, in 2000. Network services include Private Line Interstate (Long
Haul) and Private  Line  Intrastate  (MAN).  The  increase is  primarily  due to
continued  growth  in our  network  and  sales of  additional  circuits  for MAN
services.

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

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

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

($ In thousands)                        2001                  2000              1999
                              ----------------------  ----------------------  ----------
                                Amount      % Change    Amount      % Change   Amount
                              ------------ ---------  ------------  --------  ----------
<S>                              <C>            <C>     <C>             <C>    <C>
ISDN PRI                         $ 27,299      -19%     $ 33,846        53%    $ 22,160
Dial tone                          16,730      -13%       19,208        40%      13,746
Carrier access billings             7,934       18%        6,714        -4%       7,020
Reciprocal compensation            21,328      -45%       38,875        12%      34,665
                              ------------            -----------             ----------
                                 $ 73,291      -26%     $ 98,643        27%    $ 77,591
                              ============            ===========             ==========
</TABLE>
     ISDN PRI revenue  decreased  $6.5  million,  or 19%, in 2001 and  increased
     $11.7  million,  or 53%, in 2000.  The 2001 decrease in ISDN PRI revenue is
     primarily due to the  bankruptcy  of two  customers  and decreased  revenue
     resulting from less demand for ISDN PRI trunks servicing  internet routers.
     In addition,  average access line equivalents  decreased 19,245, or 10%, in
     2001 compared to 2000. The 2000 increase in ISDN PRI revenue is a result of
     an increase in the average  access line  equivalents  of 64,206,  or 46% in
     2000 over 1999.

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

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

     Reciprocal  compensation  revenue decreased $17.5 million,  or 45%, in 2001
     and  increased  $4.2  million,  or 12%,  in 2000.  The  decrease in 2001 is
     primarily  due to a 19%  decrease  in  average  rates per  minute and a 14%
     decrease in average monthly minutes processed of 158 million.  The decrease
     in average minutes is primarily due to less  termination-generated  minutes
     from  ISDN-PRI.  The increase for 2000 over 1999 is due to  interconnection
     agreements  being in place with Verizon and PacBell during all of 2000 that
     were not in place for all 12 months in 1999.

     ELI has various interconnection  agreements with Qwest (formerly U S WEST),
     Verizon  (formerly  GTE) and SBC  (PacBell)  and  Sprint,  the ILECs in the
     states  in  which  it  operates.   These   agreements   govern   reciprocal
     compensation  relating to the transport and  termination of traffic between
     the ILEC's networks and ELI's network.  The FCC set transitional  rates for
     reciprocal  compensation  that  exceeds a 3:1 ratio of inbound to  outbound
     traffic. The rate for above ratio traffic is capped at .15 cents per minute
     for the first six months after the effective date of the commission  order,
     .10 cents per minute for the next 18 months and .07 cents per minute  after
     that,  through  June  2004.  Below  ratio  traffic  remains  at  the  state
     established  rate level which is generally  higher.  Implementation  of the
     FCC's  transitional  rates  for  ISP-bound  traffic  is  taking  place  via
     amendments   to  existing   interconnection   agreements.   The  effect  of
     implementing  the FCC  transitional  rates  resulted in a reduction  of the
     composite rate of .088 cents per minute, or 43%, from .203 cents per minute
     for the six  months  ended  June 30,  2001 to .115  cents per  minute.  The
     Verizon  interconnection  agreements  expired  in May  and  June  2001  for
     Washington  and  Oregon,   respectively.   We  are  currently   negotiating
     agreements   with   PacBell  and  Verizon.   The  existing   terms  of  the
     interconnection  agreements remain in place during the  negotiations.  As a
     result of recent FCC  mandates,  we do not  anticipate  that renewal of the
     interconnection  agreements  will be at terms as favorable to ELI as in the
     past.

                                       28
<PAGE>

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

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

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

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

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

                                   GAS REVENUE

($ in thousands)                  2001                    2000            1999
                         ----------------------  ----------------------  ----------
                           Amount      % Change    Amount      % Change   Amount
                         ------------ ---------  -----------  ---------  ----------
<S>                      <C>             <C>      <C>            <C>     <C>
 Gas revenue             $ 411,534       10%      $ 374,751      22%     $ 306,986
</TABLE>

Gas revenue  increased  $36.8  million,  or 10%, in 2001 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,  2000 and 1999 is  approximately
$218.8 million, $232.3 million and $175.4 million, respectively, of revenue from
our Louisiana and Colorado gas operations that will not continue since the sales
closed July 2, 2001 and November 30, 2001,  respectively.  Gas revenue increased
$67.8  million,  or 22%, in 2000  primarily  due to higher  purchased  gas costs
passed  on to  customers  partially  offset  by a $27  million  settlement  of a
proceeding  with the  Louisiana  Public  Service  Commission  during  the fourth
quarter  of  2000.  Under  tariff  provisions,  increases  in our  costs  of gas
purchased are largely passed on to customers.
<TABLE>
<CAPTION>

                                ELECTRIC REVENUE

($ in thousands)                  2001                  2000              1999
                        ----------------------  ----------------------  ----------
                          Amount      % Change    Amount      % Change   Amount
                        ------------ ---------  -------------  -------  ----------
<S>                      <C>             <C>    <C>               <C>   <C>
Electric revenue         $ 228,015       2%     $ 223,072         9%    $ 203,822

</TABLE>

Electric  revenue  increased  $4.9  million,  or 2%,  in 2001  primarily  due to
customer  growth and increased  consumption  due to warmer  weather  conditions.
Electric  revenue  increased  $19.3  million,  or 9%, in 2000,  primarily due to
higher supplier prices passed on to customers and increased  consumption.  Under
tariff  provisions,  increases  in our  costs of  electric  energy  and fuel oil
purchased are largely passed on to customers.

                                       29
<PAGE>
<TABLE>
<CAPTION>

                                COST OF SERVICES

($ in thousands)                               2001                 2000               1999
                                     ----------------------  ----------------------  ----------
                                       Amount      % Change    Amount      % Change   Amount
                                     ------------ ---------  -------------  -------  ----------
<S>                                    <C>             <C>    <C>              <C>   <C>
Gas purchased                          $ 282,061       23%    $ 229,538        50%   $ 152,667
Electric energy and fuel oil
   purchased                             123,223        8%      113,965        16%      98,533
Network access                           197,018       40%      141,165        -5%     148,798
Intersegment expense*                     (2,924)      -2%       (2,995)        6%      (2,817)
                                     ------------            -----------             ----------
                                       $ 599,378       24%    $ 481,673        21%   $ 397,181
                                     ============            ===========             ==========
</TABLE>

* Intersegment  expenses  represented  expenses  incurred by our ILEC operations
related to network services provided by ELI.

Gas purchased  increased $52.5 million,  or 23%, in 2001 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, 2000 and 1999 is  approximately  $173.3 million,  $151.4 million and $94.3
million,  respectively,  of gas  purchased  by our  Louisiana  and  Colorado gas
operations  that  will not  continue  since the  sales  closed  July 2, 2001 and
November 30, 2001, respectively.  Gas purchased increased $76.9 million, or 50%,
in 2000 primarily due to higher  purchased gas costs.  Under tariff  provisions,
increases in our costs of gas purchased are largely passed on to customers.

Electric  energy and fuel oil purchased  increased $9.3 million,  or 8%, in 2001
primarily due to higher  purchased  power prices,  customer growth and increased
consumption  due to warmer  weather  conditions.  Electric  energy  and fuel oil
purchased  increased  $15.4  million,  or 16%, in 2000  primarily  due to higher
supplier prices and increased consumption. Under tariff provisions, increases in
our costs of electric  energy and fuel oil  purchased  are largely  passed on to
customers. Gas, electric energy and fuel oil purchased excludes amounts deferred
for future recovery in rates.

During the past two years, the power supply costs have fluctuated  substantially
forcing  companies in some cases to pay higher  operating costs to operate their
electric  businesses.  In Arizona,  excessive  power costs  charged by our power
supplier in the amount of  approximately  $100 million through December 31, 2001
have been  incurred.  We are allowed to recover  these  charges from  ratepayers
through the Purchase Power Fuel  Adjustment  clause.  However,  in an attempt to
limit "rate shock" to our  customers,  we requested in September  2001 that this
amount,  plus interest,  be recovered over a seven-year  period. As a result, we
have  deferred  these costs on the  balance  sheet in  anticipation  of recovery
through the regulatory process. We anticipate a determination regarding recovery
to be made in 2002.

On July 16, 2001,  we  terminated  our  existing  contract  with Arizona  Public
Service  and  entered  into a new  seven-year  purchase  power  agreement.  This
agreement  allows us to purchase all power  required for  operations  at a fixed
rate per kilowatt  hour.  This agreement is retroactive to June 1, 2001 and will
mitigate further increases in the deferred power cost account.

Network access expenses  increased $55.9 million,  or 40%, in 2001 primarily due
to the impact of the  Acquisitions,  increased  circuit expense  associated with
additional  data product  introductions  and an Internet  remote call forwarding
adjustment  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. Network access expense decreased $7.6 million,  or 5%, in 2000 primarily
due to a reduction in costs related to the 2000 exit of ELI's  prepaid  services
business,  partially  offset by increased  costs  related to  increased  revenue
growth and network expansion at ELI.
<TABLE>
<CAPTION>

                      DEPRECIATION AND AMORTIZATION EXPENSE

($ in thousands)                     2001                  2000               1999
                            ----------------------  ----------------------  ----------
                              Amount      % Change    Amount      % Change   Amount
                            ------------ ---------  -------------  -------  ----------
<S>                           <C>             <C>    <C>              <C>   <C>
Depreciation expense          $ 488,424       32%    $ 369,930        20%   $ 307,428
Amortization expense            143,912      714%       17,677       541%       2,757
                            ------------            -----------             ----------
                              $ 632,336       63%    $ 387,607        25%   $ 310,185
                            ============            ===========             ==========
</TABLE>


                                       30
<PAGE>

Depreciation  expense increased $118.5 million, or 32%, in 2001 primarily due to
the  impact  of  the  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 as a result of our  restructuring.  The accelerated  depreciation  will
continue over the next six months.  The incremental  increase to depreciation is
estimated to be $11.9  million and $.9 million for the first quarter of 2002 and
second  quarter of 2002,  respectively.  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.

Depreciation  expense increased $62.5 million,  or 20%, in 2000 primarily due to
higher plant in service  balances  for newly  completed  communications  network
facilities and electronics at ELI, increased property,  plant and equipment, the
impact of the  Acquisitions of $14.6 million and an increase of $12.6 million in
accelerated  depreciation  related to the change in useful life of an  operating
system in the ILEC sector.  Depreciation  expense was  partially  offset by $6.8
million of decreased  depreciation  expense resulting from the classification of
our gas sector as "assets held for sale."  Depreciation  on gross gas  property,
plant and equipment was discontinued effective October 1, 2000.

Amortization  expense  increased  $126.2  million,  or 714%,  in 2001 and  $14.9
million,  or 541%, in 2000 primarily due to amortization of intangibles  related
to the Acquisitions of $125.6 million and $13.6 million, respectively.
<TABLE>
<CAPTION>

                            OTHER OPERATING EXPENSES

($ in thousands)                              2001                  2000               1999
                                     ----------------------  ----------------------  ----------
                                       Amount      % Change    Amount      % Change   Amount
                                     ------------ ---------  -------------  -------  ----------
<S>                                    <C>             <C>    <C>               <C>  <C>
Operating expenses                     $ 724,074       21%    $ 597,274        -7%   $ 642,300
Taxes other than income taxes            109,478        9%      100,101        -2%     102,357
Sales and marketing                       96,778       30%       74,622        15%      64,645
                                     ------------            -----------             ----------
                                       $ 930,330       21%    $ 771,997        -5%   $ 809,302
                                     ============            ===========             ==========
</TABLE>

Operating  expenses  increased $126.8 million,  or 21%, in 2001 primarily due to
the impact of the  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. A $1.00 change in our stock price can impact  compensation
expense by $1.0 million annually.

Operating expenses decreased $45.0 million,  or 7%, in 2000 primarily due to the
following items which were incurred in 1999: asset  impairment  charges of $36.1
million related to the discontinuation of the development of certain operational
systems and certain  regulatory assets deemed to be no longer  recoverable,  Y2K
expenses of $17.3 million, restructuring charges related to our corporate office
of $5.2 million, costs associated with an executive retirement agreement of $6.0
million and separation costs of $4.6 million. The 2000 amount also decreased due
to $5.1 million of various expense  reductions in the ILEC sector resulting from
outsourcing and productivity  enhancements.  The decreases were partially offset
by  $15.1  million  of  increased  operating  expenses  in 2000  related  to the
Acquisitions,  increased  operating costs of $11.0 million at ELI to support the
expanded  delivery of services  and legal fees in the gas sector of $2.7 million
associated with the settlement of a proceeding with the Louisiana Public Service
Commission during the fourth quarter of 2000.

Taxes other than income increased $9.4 million,  or 9%, in 2001 primarily due to
the impact of the  Acquisitions.  Taxes other than income taxes  decreased  $2.3
million,  or 2%, in 2000 primarily due to decreased payroll taxes resulting from
a  reduction  in  headcount  in the gas and  electric  sectors,  a  payroll  tax
adjustment in the gas sector in 2000 and a reduction in property taxes.

                                       31
<PAGE>

Sales and marketing expenses increased $22.2 million,  or 30%, in 2001 primarily
due to the impact of the Acquisitions and increased  telemarketing  costs in the
telecommunications sector. Sales and marketing expenses increased $10.0 million,
or 15%, in 2000  primarily due to the impact of the  Acquisitions  and increased
costs associated with new product  offerings in the ILEC sector partially offset
by headcount  reductions  resulting from exiting ELI's prepaid services business
in 1999.

      WRITE-DOWN OF GLOBAL CROSSING RECEIVABLES / RESTRUCTURING EXPENSES /
                        ACQUISITION ASSIMILATION EXPENSE

($ in thousands)                        2001        2000        1999
                                     ------------ ---------  -----------
                                       Amount      Amount      Amount
                                     ------------ ---------  -----------
Write-down of Global receivables       $ 21,200    $      -    $      -
Restructuring expenses                 $ 19,327    $   (649)   $  7,292
Acquisition assimilation expense       $ 21,380    $ 39,929    $  3,916

Concurrent with the acquisition of Frontier,  we entered into several  operating
agreements  with Global.  The write-down of the net  realizable  value of Global
Crossing  receivables of $21.2 million for the year ended December 31, 2001 is a
result of  Global's  filing for  bankruptcy.  We are  integrating  the  Frontier
acquisition from Global and have ongoing  commercial  relationships  with Global
affiliates.  We will  reserve a total of $30  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. We recorded a write
down of such receivables in the amount of $21.2 million in the fourth quarter of
2001,  with the remainder  recorded in the first quarter of 2002 for receivables
generated after December 31, 2001 and prior to the Global  bankruptcy  filing on
January  28,  2002.  Prior to the date of 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.  These  arrangements  have  continued  after  the
bankruptcy filing. The receivables that were outstanding at the date of Global's
bankruptcy filings are subject to potential setoff rights and will be treated as
any other general creditor through the bankruptcy  process,  including through a
potential  chapter 11 plan of  reorganization.  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 the
company although we cannot guarantee that such losses will not occur.

Restructuring expenses of $19.3 million for the year ended December 31, 2001 are
primarily  related to our plan to close our operations  support center in Plano,
Texas by April 2002 and our Sacramento, California call center by March 2002 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.

     Plano Restructuring
     In the second  quarter of 2001, we approved a plan to close our  operations
     support center in Plano, Texas by April 2002. In connection with this plan,
     we recorded a pre-tax charge of $14.5 million in other  operating  expenses
     in 2001.  Our objective is to  concentrate  our resources in areas where we
     have the most customers, to better serve those customers. We intend to sell
     our Plano office building.  The restructuring  resulted in the reduction of
     750 employees.  We  communicated  with all affected  employees  during July
     2001.  Certain  employees  will be  relocated,  others  have  been  offered
     severance, job training and/or outplacement counseling.  As of December 31,
     2001,   approximately   $1.7  million  was  paid  and  161  employees  were
     terminated.  The  restructuring  expenses  primarily  consist of  severance
     benefits,   retention   earned  through  December  31,  2001,  early  lease
     termination costs and other planning and communication  costs. We expect to
     incur  additional  costs of  approximately  $1.4 million through the second
     quarter of 2002.

     Sacramento Call Center Restructuring
     In the fourth  quarter of 2001, we approved a plan to close our  Sacramento
     Customer  Care Center by the end of March  2002.  In  connection  with this
     plan,  we  recorded  a pre-tax  charge of  approximately  $0.7  million  in
     restructuring  expenses in the fourth quarter of 2001. We will redirect the
     call traffic and other work activities to our Kingman, Arizona call center.
     This  restructuring   resulted  in  the  reduction  of  94  employees.   We
     communicated with all affected  employees during November 2001. These costs
     are expected to be paid in the first quarter 2002.

                                       32
<PAGE>

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

Restructuring expenses of $7.3 million for the year ended December 31, 1999 were
related to our plan to  restructure  our  corporate  office  activities  of $5.8
million and exit costs at ELI of $1.5 million.  In connection with the corporate
office  plan,  we  recorded a pre-tax  charge of $5.8  million in  restructuring
expenses  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 December 31, 2001,  approximately
$4.4 million has been paid,  42 employees  were  terminated  and 6 employees who
were  expected to be terminated  took other  positions  within the company.  The
remaining  employee was  terminated  in January  2002.  At December 31, 2001 and
2000,  we adjusted  our original  accrual down by $.1 million and $1.0  million,
respectively,  and the  remaining  accrual of $.2  million is  included in other
current  liabilities at December 31, 2001. These costs will be paid in the first
quarter 2002.

In the third quarter of 1999, ELI announced two strategic  decisions that led to
$1.5  million in exit  costs.  On August 24,  1999,  ELI  announced  that it was
eliminating its prepaid calling card and videoconferencing  products,  effective
November 1, 1999.  This  initiative  was taken as a result of ELI's  decision to
focus on its core business  strategy.  Prepaid  calling cards are a high-volume,
low-margin  product  that  ELI  determined  did  not  support  its  strategy  of
accelerating  profitability.  On September 1, 1999,  ELI  announced  that it was
consolidating its national retail sales efforts in Dallas and closing six retail
sales  offices  in the  eastern  United  States  by  October  8,  1999.  ELI has
maintained all of its data  points-of-presence  and wholesale sale offices. As a
result of both of these  decisions,  ELI  eliminated  63 sales and sales support
positions,  and incurred  charges  relating to employee  severance  and facility
shutdown costs. As of December 31, 2000, all costs associated with this decision
were paid and no accrual remained.

Acquisition assimilation expense of $21.4 million and $39.9 million, in 2001 and
2000,  respectively,  is related to the completed  acquisitions.  These expenses
represent  incremental  costs  incurred  by  us in  advance  of  the  respective
acquisitions  which are  solely  related to  preparation  for  businesses  to be
acquired  and have no  relationship  with  then  existing  operations,  and as a
result,  have no  revenue  offset.  Costs  incurred  during  2001 and 2000  were
significant due to the unprecedented level of acquisitions.  Material components
of acquisition  expenses  include  incremental  pre-staffing  and training costs
incurred in anticipation of acquisitions,  incremental costs associated with the
integration  of the acquired  networks  into our  existing  networks and network
operating  center,  and costs associated with the preparation for the conversion
of billing, accounting and plant records.
<TABLE>
<CAPTION>

                             INCOME FROM OPERATIONS

($ in thousands)                     2001                  2000              1999
                           ----------------------  ----------------------  ----------
                             Amount      % Change    Amount      % Change   Amount
                           ------------ ---------  -------------  -------  ----------
<S>                         <C>             <C>     <C>             <C>    <C>
Income from operations      $ 233,042       91%     $ 121,801       73%    $ 70,360

</TABLE>

Income from operations  increased $111.2 million,  or 91%, in 2001 primarily due
to the impact of the Acquisitions and 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  was  partially  offset  by  the  write-down  of  our  Global  Crossing
receivables,  restructuring  expenses  and  increased  ELI  losses.  Included in
operating income is  approximately  $10.4 million and $21.1 million of operating
income for the years ended  December 31, 2001 and 2000,  respectively,  from our
Louisiana  and Colorado gas  operations  that will not continue  since the sales
closed  on July 2,  2001  and  November  30,  2001,  respectively.  Income  from
operations  increased  $51.4  million,  or  73%,  in 2000  primarily  due to the
Acquisitions,  decreased ELI operating losses and decreased  operating expenses,
partially offset by increased  acquisition  assimilation expense, the settlement
of a proceeding  with the  Louisiana  Public  Service  Commission  and increased
depreciation  expense.  Income from operations for 1999 included a $10.4 million
USF settlement.

                                       33
<PAGE>
<TABLE>
<CAPTION>

     INVESTMENT INCOME (LOSS), NET/OTHER LOSS, NET/GAIN ON SALE OF ASSETS /
         MINORITY INTEREST/INTEREST EXPENSE/INCOME TAX EXPENSE (BENEFIT)

($ in thousands)                        2001                    2000                   1999
                                     ----------------------  ----------------------  ----------
                                       Amount      % Change    Amount      % Change   Amount
                                     ------------ ---------  -------------  -------  ----------
<S>                                    <C>           <C>      <C>              <C>    <C>
Investment income (loss), net          $ (62,408)   -1418%    $   4,736       -98%    $ 243,885
Other loss, net                        $  (3,133)     126%    $  (1,386)    -1475%    $     (88)
Gain on sale of assets                 $ 139,304      100%    $       -         -     $       -
Minority interest                      $       -     -100%    $  12,222       -47%    $  23,227
Interest expense                       $(379,326)     102%    $(187,366)       57%    $(119,675)
Income tax expense (benefit)           $ (14,805)      -8%    $ (16,132)     -122%    $  74,900
</TABLE>

Investment  income  decreased  $67.1  million  in  2001  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. Investment income decreased $239.1 million, or 98%, in 2000
primarily  due to the  $69.5  million  gain  on the  sale of our  investment  in
Centennial Cellular Corp. in January 1999, the $67.6 million gain on the sale of
our  investment  in Century  Communication  Corp.  in October 1999 and the $83.9
million gain on the sale of our investment in the cable joint venture in October
1999.  The  remaining  decrease is  primarily  due to  realized  losses of $18.3
million  on  sales  of  available  for  sale   securities   to  partially   fund
acquisitions.

Other loss,  net  increased  $1.7 million,  or 126%, in 2001  primarily due to a
decrease  in  miscellaneous  income  and the  allowance  for funds  used  during
construction (AFUDC). Other loss, net decreased $1.3 million, or 1,475%, in 2000
primarily due to a decrease in AFUDC  resulting from our conclusion in the third
quarter  of 2001 that SFAS 71 was no longer  applicable  to our ILEC  businesses
(see "Discontinuation of SFAS 71").

Gain on sale of assets for the year ended December 31, 2001  represents the gain
recognized  from the  sale of our  Louisiana  gas  operations  to  Atmos  Energy
Corporation on July 2, 2001.

Minority interest represents the minority's share of ELI's net loss. Since 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  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  income
statement  as there is no  obligation  for the  minority  interests  to  provide
additional  funding for ELI.  Therefore,  we are reflecting ELI's entire loss in
our consolidated results.

Interest  expense  increased  $192.0 million,  or 102%, in 2001 primarily due to
$94.4  million of interest  expense on our $1.75  billion of notes issued in May
2001,  $52.3 million of interest expense on our $1.75 billion of notes issued in
August  2001,  $16.6  million of interest  expense on our equity units issued in
June, $15.9 million of increased  interest expense on our lines of credit,  $8.3
million of increased  amortization  of debt discount  expense and a $6.5 million
increase in  amortization  of costs  associated  with our committed  bank credit
facilities.  During the year ended  December 31, 2001, we had average  long-term
debt  outstanding of $4.5 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.

Interest  expense  increased  $67.7 million,  or 57%, in 2000 primarily due to a
$24.8 million increase in ELI's interest expense related to increased borrowings
and higher  interest  rates,  $17.8  million  increase due to an increase in our
commercial paper outstanding used to partially and temporarily fund acquisitions
and $14.9 million for  amortization of costs  associated with our committed bank
credit  facilities.  A reduction in capitalized  interest of $4.0 million due to
lower average  capital work in process  balances at ELI also  contributed to the
increase. During the year ended December 31, 2000, we had average long-term debt
outstanding  of $2.6  billion  compared  to $2.0  billion  during the year ended
December 31, 1999.

Income tax expense  (benefit)  decreased $1.3 million,  or 8%, in 2001 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 2001 is 20.4% as compared  with an effective tax rate of
32.3% for 2000. Income tax expense (benefit)  decreased $91.0 million,  or 122%,
in 2000 as compared to 1999 primarily due to changes in taxable income and taxes
on the gains on the  sales of our  investments  in 1999.  The  estimated  annual
effective  tax benefit rate for 2000 was 32.3% as compared with an effective tax
rate of 34.4% for 1999.

                                       34
<PAGE>

                             DISCONTINUED OPERATIONS

($ in thousands)         2001                    2000                   1999
                      ----------------------  ----------------------  ----------
                        Amount      % Change    Amount      % Change   Amount
                      ------------ ---------  -------------  -------  ----------
Revenue                 $ 116,868       11%    $ 105,202         3%   $ 102,408
Operating income        $  37,211       36%    $  27,415        38%   $  19,887
Net income              $  17,875       53%    $  11,677        48%   $   7,887

Discontinued  operations  represents  the  operations  of  our  water/wastewater
businesses sold in January 2002.

Revenue from discontinued  operations  increased $11.7 million,  or 11%, in 2001
and $2.8  million,  or 3%, in 2000  primarily due to increased  consumption  and
customer growth. The 2001 increase is also due to new water sales related to the
completion  of a multi-year  $50 million water  pipeline  project in Illinois in
March 2001. This increase of revenue was approximately $8 million.

Operating income from discontinued operations increased $9.8 million, or 36%, in
2001  primarily due to customer  growth and the  completion of a water  pipeline
project in Illinois in March 2001. Operating income from discontinued operations
increased  $7.5 million,  or 38%, in 2000  primarily  due to increased  revenue,
decreased Y2K expenses,  decreased  corporate overhead charges and lower payroll
costs due to a reduction in the staffing levels of support functions,  partially
offset by increased  depreciation  expense due to increased property,  plant and
equipment.

Net income from discontinued  operations increased $6.2 million, or 53%, in 2001
and $3.8 million,  or 48%, in 2000,  primarily due to the respective  changes in
operating income net of income taxes.
<TABLE>
<CAPTION>

                              EXTRAORDINARY EXPENSE

($ in thousands)                                 2001                    2000            1999
                                       ----------------------  ----------------------  ----------
                                         Amount      % Change    Amount      % Change   Amount
                                       ------------ ---------  -------------  -------  ----------
Extraordinary expense - discontinuation
of Statement of Financial Accounting
<S>           <C>                       <C>            <C>         <C>                    <C>
Standards No. 71, net of tax            $ 43,631       100%        $ -           -        $ -
</TABLE>

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 income statement. See discussion in Note 20 of the financial statements.
<TABLE>
<CAPTION>

               NET INCOME (LOSS) / AVAILABLE TO COMMON SHAREHOLDERS
                AVAILABLE TO COMMON SHAREHOLDERS PER COMMON SHARE

($ in thousands)                                       2001                    2000             1999
                                              ----------------------  ----------------------  ----------
                                                Amount      % Change    Amount      % Change   Amount
                                              ------------ ---------  -----------  ---------  ----------
<S>                                           <C>             <C>     <C>             <C>    <C>
Net income (loss)                             $  (89,682)     -216%   $ (28,394)     -120%   $ 144,486
Carrying cost of equity forward contracts         13,650       N/A            -        N/A           -
                                              ------------            -----------             ----------
Available to common shareholders              $ (103,332)     -264%   $ (28,394)     -120%   $ 144,486
                                              ============            ===========             ==========

Available to common shareholders per
  common share                                $ (0.38)        -245%   $   (0.11)     -120%   $    0.56

</TABLE>
                                       35
<PAGE>

Net  income and net income  per share for 2001 were  impacted  by the  following
after-tax items: the gain from the sale of our Louisiana gas operations of $86.0
million,  or 31(cent) per share,  the  recognition  of a loss resulting from the
decline in value of our Adelphia  investment of $48.8  million,  or 18(cent) per
share,  extraordinary  expense of $43.6  million,  or  16(cent)  per share,  the
write-down of our Global receivables of $13.1 million, or 5(cent) per share, and
restructuring charges of $11.9 million, or 4(cent) per share. Increased interest
expense also  contributed to the decrease in net income as compared to the prior
year.

Net loss and net loss per share for 2000 were  impacted by the  following  after
tax-items:  assimilation  expenses of $24.6 million,  or 9(cent) per share,  the
settlement of a proceeding with the Louisiana Public Service Commission of $18.4
million,  or 7(cent) per share,  accelerated  depreciation  to change the useful
life of an operating  system in the ILEC sector of $7.8 million,  or 3(cent) per
share, and the impact of the acquisitions of $6.9 million, or 3(cent) per share.

Net  income and net income  per share for 1999 were  impacted  by the  following
after-tax  items:  gains on the  sales of  investments  of  $136.4  million,  or
52(cent) per share,  asset impairment  charges of $22.3 million,  or 9(cent) per
share, an executive  retirement agreement of $4.1 million, or 2(cent) per share,
restructuring charges of $3.6 million, or 1(cent) per share, separation costs of
$3.1 million, or 1(cent) per share,  accelerated  depreciation of $3 million, or
1(cent) per share, and  pre-acquisition  integration  costs of $2.4 million,  or
1(cent) per share.  1999 net income and net income per share were also  impacted
by  after-tax  net losses from ELI of $54.1  million,  or 21(cent) per share and
after-tax Y2K costs of $12.2 million, or 5(cent) per share.

During 2000, we entered into an equity forward  contract for the  acquisition of
9,140,000  shares  as  part  of  our  share  repurchase  programs.  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  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.  We were required to report
the accrued  carrying  costs as a reduction  of net income  available  to common
shareholders. In 2001 we settled the contract by paying the redemption amount of
$150,013,000 plus $13,650,000 in associated carrying costs.


                                       36
<PAGE>

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.  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 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 and variable rate debt is refinanced  when  advantageous.
Consequently,  we have no 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, 2001,  a near-term  change in interest  rates would not
materially affect our consolidated financial position,  results of operations or
cash flows.

On December 17, 2001, we entered into two interest rate swap  agreements  with a
subsidiary of Morgan  Stanley Dean Witter,  each  agreement  covering a notional
amount of $50 million. Under the terms of both agreements,  we make semi-annual,
floating rate  interest  payments  based on six-month  LIBOR and receive a fixed
6.375% rate on the notional amount.  Under the terms of one swap, the underlying
LIBOR rate is set in advance, while the second agreement utilizes LIBOR reset in
arrears.  Both swaps  terminate on August 15, 2004 and are being  accounted  for
under  SFAS 133 as fair value  hedges  against  our 6.375%  notes due August 15,
2004.

Sensitivity analysis of interest rate exposure
At December 31, 2001,  the fair value of our  long-term  debt and capital  lease
obligations was estimated to be  approximately  $6,030.4  million,  based on our
overall  weighted  average  rate of 7.68% and our overall  weighted  maturity of
approximately  10  years.  The  weighted  average  maturity  applicable  to  our
obligations  has  decreased by two years since  December  31, 2000.  The overall
weighted  average  interest rate  applicable to our obligations has increased by
approximately  73 basis points since December 31, 2000. A hypothetical  increase
of 77 basis points (10% of our overall  weighted  average  borrowing rate) would
result in an approximate  $297.2 million decrease in the fair value of our fixed
rate obligations.

Equity Price Exposure

Our exposure to market risk for changes in equity prices relate primarily to the
equity portion of our investment portfolio. The equity portion of our investment
portfolio includes marketable equity securities of media and  telecommunications
companies.

Sensitivity analysis of equity price exposure

At December 31,  2001,  the fair value of the equity  portion of our  investment
portfolio was estimated to be $139.2  million.  A  hypothetical  10% decrease in
quoted market prices would result in an  approximate  $13.9 million  decrease in
the fair value of the equity portion of our investment portfolio.

                                       37
<PAGE>


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  with the  public  utility
commission  that  determines  the price  that we will  charge  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. At December 31, 2001, we do not have any gas future contracts.

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,  2001.  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.




                                       38

<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
                                    --------

We intend to file with the Commission a definitive  proxy statement for the 2002
Annual  Meeting of  Stockholders  pursuant to Regulation  14A not later than 120
days after  December 31, 2001.  The  information  called for by this Part III is
incorporated by reference to that proxy statement.

                                     PART IV
                                     -------

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

(a)      The exhibits listed below are filed as part of this Report:

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 July 18, 2000 (incorporated by reference to Exhibit 3.200.2 to
               the Registrant's Quarterly Report on Form 10-Q for the nine
               months ended September 30, 2000, File No. 001-11001).
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)
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 Note 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)
4.200.2        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).

                                       39
<PAGE>
4.200.3        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).
4.200.4        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).
4.200.5        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).
4.200.6        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).
4.200.7        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).
4.200.8        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).
4.200.9        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).
4.200.10       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        First Supplemental Indenture, dated August 15, 1991 (incorporated
               by reference to Exhibit 4.100.2 to the Registrant's Quarterly
               Report on Form 10-Q for the nine months ended September 30, 1991,
               File No. 001-11001).
4.300.2        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).
4.300.3        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).
4.300.4        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).
4.300.5        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).
4.300.6        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).
4.300.7        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).
4.300.8        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).
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)

                                       40
<PAGE>
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)
10.5           Participation Agreement between ELI, Shawmut Bank Connecticut,
               National Association, the Certificate Purchasers  named therein,
               the Lenders named therein,  BA Leasing & Capital  Corporation and
               Citizens Utilities Company dated as of April 28,  1995,  and the
               related  operating  documents  (incorporated  by  reference  to
               Exhibit  10.5 of ELI's Registration Statement on Form S-1
               effective on November 21, 1997, File No. 333-35227).
10.6           Deferred  Compensation Plans for Directors,  dated November 26,
               1984 and December 10, 1984 (incorporated by reference to Exhibit
               10.6 to the  Registrant's  Annual  Report on Form 10-K for the
               year ended  December  31,  1984,  File No. 001-11001).
10.6.2         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).
10.16.1        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).
10.16.2        Employment Agreement between Citizens Communications Company and
               Leonard Tow, effective October 1, 2000.
10.16.3        Letter agreement,  dated as of October 1, 2000, 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)
10.17          1992 Employee Stock Purchase Plan  (incorporated by reference to
               Exhibit 10.17 to the  Registrant's  Annual Report on Form 10-K
               for the year ended December 31, 1992, File No. 001-11001).
10.18          Amendments dated May 21, 1993 and May 5, 1997, to the 1992
               Employee Stock Purchase Plan (incorporated by reference to the
               Registrant's Proxy Statement dated March 31, 1993 and the
               Registrant's Proxy Statement dated March 28, 1997, respectively,
               File No. 001-11001).
10.19          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).
10.20          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).
10.23          Credit Facility Agreement between Citizens Communications Company
               and Chase Manhattan Bank dated October 27, 2000 (incorporated  by
               reference  to  Exhibit  10.23 to the  Registrant's  Annual Report
               on Form 10-K for the year ended  December 31, 2000, File No.
               001-11001).
10.24.1        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).
10.24.2        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).
10.24.3        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).
10.25          Asset Purchase  Agreements between Citizens Utilities Company and
               GTE Corporation dated May 27 and September 21, 1999 (incorporated
               by  reference  to  Exhibit  10.25 to the  Registrant's  Annual
               Report on Form 10-K for the year ended December 31, 1999, File
               No. 001-11001).

                                       41
<PAGE>
10.26          Asset Purchase  Agreements  between Citizens  Utilities Company
               and US West Communications, Inc. dated June 16, 1999
               (incorporated  by reference to Exhibit 10.26 to the Registrant's
               Annual Report on Form 10-K for the year ended December 31, 1999,
               File No. 001-11001).
10.27          Asset Purchase Agreements between Citizens Utilities Company and
               American Water Works dated October 15, 1999 (incorporated by
               reference to Exhibit 10.27 to the Registrant's Annual Report on
               Form 10-K for the year ended December 31, 1999, File No.
               001-11001).
10.28          Asset Purchase Agreement between Citizens Utilities Company and
               GTE Incorporated dated December 16, 1999 (incorporated by
               reference to Exhibit 10.28 to the Registrant's Quarterly Report
               on Form 10-Q for the three months ended March 31, 2000, File No.
               001-11001).
10.31          Asset  Purchase  Agreement  between  Citizens  Utilities  Company
               and Atmos Energy Corporation dated April 13, 2000(incorporated
               by reference to Exhibit  10.31 to the  Registrant's  Quarterly
               Report on Form 10-Q for the six months ended June 30, 2000, File
               No. 001-11001).
10.32          Stock Purchase  Agreement  among Citizens Communications Company,
               Global  Crossing Ltd. and Global  Crossing North  America,  Inc.
               dated July 11, 2000  (incorporated by reference to Exhibit 10.32
               to the Registrant's  Quarterly Report on Form 10-Q for the nine
               months ended September 30, 2000, File No. 001-11001).
10.33          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).
10.35          Intercompany Agreement between Citizens Communications Company
               and Electric Lightwave,  Inc. dated September 11, 2000
               (incorporated  by reference  to Exhibit  10.28 of ELI's  Annual
               Report on Form 10-K for the year ended  December 31,  2000, File
               No. 0-23393).
10.36          Loan  Agreement  between  Citizens  Communications  Company  and
               Electric  Lightwave,  Inc.  dated  October 30, 2000 (incorporated
               by reference  to Exhibit  10.29 of ELI's  Annual  Report on Form
               10-K for the year ended  December 31,  2000, File No. 0-23393).
10.37          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).
10.38          Competitive  Advance and Revolving Credit Facility Agreement for
               $680,000,000 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).
10.39          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).
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

Exhibits 10.6, 10.6.2,  10.16.1,  10.16.2,  10.16.3, 10.17, 10.18, 10.19, 10.20,
and 10.33 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, and copies of the credit agreement  between
Electric Lightwave,  Inc. and Citibank,  N. A. dated November 21, 1997. We agree
to furnish to the  Commission  upon request  copies of schedules and exhibits to
items 10.25, 10.26, 10.27, 10.28, 10.30, 10.31, and 10.32.


                                       42
<PAGE>

(b)       Reports on Form 8-K:

          We filed on Form 8-K on  November  13,  2001 under  Item 7  "Financial
          Statements,  Exhibits," a press  release  announcing  earnings for the
          quarter and nine months ended September 30, 2001 and certain financial
          and operating data.

          We filed on Form 8-K/A on December  12,  2001,  in respect of our Form
          8-K  filed on June  12,  2001,  under  Item 7  "Financial  Statements,
          Exhibits," certain agreements related to our offering of equity units.

          We filed on Form 8-K on December 13, 2001 under Item 5 "Other  Events"
          and Item 7 "Financial Statements,  Pro Forma Financial Information and
          Exhibits,"  pro forma  financial  information  related to the Frontier
          business acquired, the Verizon acquisitions, the Qwest acquisition and
          the  public  utilities  services  dispositions  for the  period  ended
          September 30, 2001 and the year ended December 31, 2000.

          We filed on Form 8-K/A on December  13,  2001,  in respect of our Form
          8-K filed  September 17, 2001,  under Item 5 "Other Events" and Item 7
          "Financial Statements,  Pro Forma Financial Information and Exhibits,"
          revised  pro  forma  financial  information  related  to the  Frontier
          business acquired, the Verizon acquisitions, the Qwest acquisition and
          the public utilities  services  dispositions for the period ended June
          30, 2001 and the year ended December 31, 2000.

          We filed on Form 8-K on December 18, 2001 under Item 5 "Other  Events"
          and  Item  7  "Financial   Statements,   Exhibits,"  a  press  release
          announcing  that pending  agreements  with Verizon  Communications  to
          acquire  approximately  63,000  telephone  access lines in Arizona and
          California had been terminated effective immediately.


                                       43




<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 6, 2002


                                       44
<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 6th day of March 2002.

               Signature                                           Title
               ---------                                           ------
<TABLE>
<CAPTION>

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

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

      /s/  Rudy J.  Graf                            Vice Chairman of the Board, President and Chief
-----------------------------------------           Operating Officer, and Director
           (Rudy J. Graf)

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

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

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

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

       /s/ Robert D. Siff                           Director
-----------------------------------------
           (Robert D. Siff)

       /s/ Scott N. Schneider                       Vice Chairman of the Board, Executive Vice President,
-----------------------------------------           Chairman of Citizens Capital Ventures and Director
         (Scott N. Schneider)

     /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>


                                       45

<PAGE>

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>

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

Consolidated balance sheets as of December 31, 2001 and 2000                         F-3

Consolidated statements of income (loss) for the years ended
   December 31, 2001, 2000 and 1999                                                  F-4

Consolidated statements of shareholders' equity for the years ended
   December 31, 2001, 2000 and 1999                                                  F-5

Consolidated statements of comprehensive income (loss) for the years ended
   December 31, 2001, 2000 and 1999                                                  F-5

Consolidated statements of cash flows for the years ended
   December 31, 2001, 2000 and 1999                                                  F-6

Notes to consolidated financial statements                                           F-7

Financial Statement Schedule:
    Independent Auditors' report on Schedule
    Schedule II - Valuation and Qualifying Accounts

</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, 2001 and 2000 and the
related  consolidated   statements  of  income  (loss),   shareholders'  equity,
comprehensive  income  (loss)  and  cash  flows  for  each of the  years  in the
three-year  period  ended  December  31,  2001.  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, 2001 and 2000 and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2001,  in  conformity  with  accounting
principles generally accepted in the United States of America.



                                                  /S/KPMG LLP




New York, New York
March 6, 2002

                                      F-2
<PAGE>


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2001 AND 2000
                                ($ in thousands)
<TABLE>
<CAPTION>


                                                                                                   2001          2000
                                                                                               -------------  ------------
ASSETS
Current assets:
<S>                                                                                             <C>           <C>
   Cash                                                                                         $    57,667   $    31,223
   Accounts receivable, net                                                                         311,878       243,304
   Short-term investments                                                                           158,202        38,863
   Other current assets                                                                             150,573        52,545
   Assets held for sale                                                                           1,107,937     1,282,152
   Assets of discontinued operations                                                                746,791       717,602
                                                                                               -------------  ------------
     Total current assets                                                                         2,533,048     2,365,689

Property, plant and equipment, net                                                                4,512,038     3,520,712

Intangibles, net                                                                                  2,978,942       633,268
Investments                                                                                         141,208       214,359
Regulatory assets                                                                                         -        62,017
Other assets                                                                                        388,364       158,961
                                                                                               -------------  ------------
        Total assets                                                                            $10,553,600   $ 6,955,006
                                                                                               =============  ============

LIABILITIES AND EQUITY
Current liabilities:
   Long-term debt due within one year                                                           $   483,906   $   181,014
   Accounts payable                                                                                 239,676       171,002
   Income taxes accrued                                                                              96,901         3,429
   Other taxes accrued                                                                               33,637        31,135
   Interest accrued                                                                                 112,282        36,583
   Customer deposits                                                                                 18,246        18,683
   Other current liabilities                                                                        124,833        69,551
   Liabilities related to assets held for sale                                                      218,775       320,166
   Liabilities of discontinued operations                                                           238,738       212,499
                                                                                               -------------  ------------
     Total current liabilities                                                                    1,566,994     1,044,062

Deferred income taxes                                                                               429,544       451,312
Customer advances for construction and contributions in aid of construction                         172,918       205,604
Other liabilities                                                                                   241,846       108,321
Regulatory liabilities                                                                                    -        12,154
Equity units                                                                                        460,000             -
Long-term debt                                                                                    5,534,906     3,062,289
Equity forward contracts                                                                                  -       150,013
Company Obligated Mandatorily Redeemable Convertible Preferred Securities*                          201,250       201,250

Shareholders' equity:
   Common stock, $.25 par value (600,000,000 authorized shares; 281,289,000 and 262,661,000
     outstanding and 292,840,000 and 265,768,000 issued at December 31, 2001 and 2000,
     respectively)                                                                                   73,210        66,442
   Additional paid-in capital                                                                     1,927,518     1,471,816
   Retained earnings                                                                                129,864       233,196
   Accumulated other comprehensive income                                                             4,907           418
   Treasury stock                                                                                  (189,357)      (51,871)
                                                                                               -------------  ------------
     Total shareholders' equity                                                                   1,946,142     1,720,001
                                                                                               -------------  ------------
        Total liabilities and shareholders' equity                                              $10,553,600   $ 6,955,006
                                                                                               =============  ============
</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>


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                 ($ in thousands, except for per-share amounts)

<TABLE>
<CAPTION>

                                                                                   2001            2000           1999
                                                                               --------------  -------------- --------------

<S>                                                                               <C>            <C>            <C>
Revenue                                                                           $2,456,993     $ 1,802,358    $ 1,598,236

Operating expenses:
     Cost of services                                                                599,378         481,673        397,181
     Depreciation and amortization                                                   632,336         387,607        310,185
     Other operating expenses                                                        930,330         771,997        809,302
     Write-down of Global Crossing receivables                                        21,200               -              -
     Restructuring expenses                                                           19,327            (649)         7,292
     Acquisition assimilation expense                                                 21,380          39,929          3,916
                                                                               --------------  -------------- --------------
Total operating expenses                                                           2,223,951       1,680,557      1,527,876
                                                                               --------------  -------------- --------------

Operating income                                                                     233,042         121,801         70,360

Investment income (loss), net                                                        (62,408)          4,736        243,885
Gain on sale of assets                                                               139,304               -              -
Minority interest                                                                          -          12,222         23,227
Other loss, net                                                                       (3,133)         (1,386)           (88)
Interest expense                                                                    (379,326)       (187,366)      (119,675)
                                                                               --------------  -------------- --------------
     Income (loss) from continuing operations before income taxes, dividends
       on convertible preferred securities and extraordinary expense                 (72,521)        (49,993)       217,709

Income tax expense (benefit)                                                         (14,805)        (16,132)        74,900
                                                                               --------------  -------------- --------------
     Income (loss) from continuing operations before dividends
       on convertible preferred securities and extraordinary expense                 (57,716)        (33,861)       142,809

Dividends on convertible preferred securities, net of income tax benefit               6,210           6,210          6,210
                                                                               --------------  -------------- --------------

     Income (loss) from continuing operations before extraordinary expense           (63,926)        (40,071)       136,599

Income from discontinued operations, net of tax                                       17,875          11,677          7,887
                                                                               --------------  -------------- --------------
     Income (loss) before extraordinary expense                                      (46,051)        (28,394)       144,486

Extraordinary expense - discontinuation of Statement of Financial
     Accounting Standards No. 71, net of tax                                          43,631               -              -
                                                                               --------------  -------------- --------------
     Net income (loss)                                                            $  (89,682)    $   (28,394)   $   144,486
                                                                               ==============  ============== ==============

Carrying cost of equity forward contracts                                             13,650               -              -
                                                                               --------------  -------------- --------------
     Available for common shareholders                                            $ (103,332)    $   (28,394)   $   144,486
                                                                               ==============  ============== ==============


Basic income (loss) per common share:
     Earnings (loss) from continuing operations                                   $    (0.28)    $     (0.15)   $      0.53
     Earnings from discontinued operations                                        $     0.07     $      0.04    $      0.03
     Extraordinary expense                                                        $    (0.16)    $         -    $         -
     Available for common shareholders                                            $    (0.38)    $     (0.11)   $      0.56

Diluted income (loss) per common share:
     Earnings (loss) from continuing operations                                   $    (0.28)    $     (0.15)   $      0.52
     Earnings from discontinued operations                                        $     0.06     $      0.04    $      0.03
     Extraordinary expense                                                        $    (0.16)    $         -    $         -
     Available for common shareholders                                            $    (0.38)    $     (0.11)   $      0.55

</TABLE>


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

                                      F-4

<PAGE>


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                 ($ in thousands, except for per-share amounts)

<TABLE>
<CAPTION>

                                                                                      Accumulated
                                                  Common    Additional                   Other                    Total
                                                   Stock      Paid-In     Retained   Comprehensive   Treasury  Shareholders'
                                                  ($0.25)     Capital     Earnings   Income (Loss)    Stock       Equity
                                                 ---------- ------------ ---------------------------------------------------

<S>                                              <C>       <C>            <C>            <C>              <C>  <C>
Balance January 1, 1999                           $ 64,787   $1,554,188    $ 117,104      $ 56,692  $        -   $1,792,771
                                                 ---------- ------------ -------------  ----------- -----------  -----------
   Common stock buybacks to fund EPPICS dividends     (157)      (6,468)           -             -           -       (6,625)
   Stock plans                                         638       20,475            -             -           -       21,113
   Stock issuances to fund EPPICS dividends            251        9,708            -             -           -        9,959
   Net income                                            -            -      144,486             -           -      144,486
   Other comprehensive loss, net
     of tax and reclassification adjustment              -            -            -       (41,769)          -      (41,769)
                                                 ---------- ------------ -------------  ----------- -----------  ----------
Balance December 31, 1999                           65,519    1,577,903      261,590        14,923           -    1,919,935
                                                 ---------- ------------ -------------  ----------- -----------  -----------
   Acquisitions                                         28        1,770            -             -       1,861        3,659
   Treasury stock acquisitions                           -            -            -             -     (49,209)     (49,209)
   Stock plans                                         895       42,156            -             -      (4,523)      38,528
   Equity forward contracts                              -     (150,013)           -             -           -     (150,013)
   Net loss                                              -            -      (28,394)            -           -      (28,394)
   Other comprehensive loss, net
     of tax and reclassification adjustment              -            -            -       (14,505)          -      (14,505)
                                                 ---------- ------------ -------------  ----------- ------------ -----------
Balance December 31, 2000                           66,442    1,471,816      233,196           418     (51,871)   1,720,001
                                                 ---------- ------------ -------------  ----------- ------------ -----------
   Stock plans                                         479       17,449                                 12,527       30,455
   Common stock offering                             6,289      283,272                                             289,561
   Equity units offering                                          4,968                                               4,968
   Settlement of equity forward contracts                       150,013      (13,650)                 (150,013)     (13,650)
   Net loss                                                                  (89,682)                               (89,682)
   Other comprehensive income, net of tax                                                    4,489                    4,489
                                                 ---------- ------------ -------------  ----------- ------------ -----------
Balance December 31, 2001                         $ 73,210   $1,927,518    $ 129,864      $  4,907  $ (189,357)  $1,946,142
                                                 ========== ============ =============  =========== ============ ===========
</TABLE>


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                 ($ in thousands, except for per-share amounts)

<TABLE>
<CAPTION>

                                                         2001         2000          1999
                                                      -----------  ------------  -----------

<S>                                                    <C>           <C>          <C>
Net income (loss)                                      $ (89,682)    $ (28,394)   $ 144,486
Other comprehensive income (loss), net of tax              4,489       (14,505)     (41,769)
                                                      -----------  ------------  -----------
  Total comprehensive income (loss)                    $ (85,193)    $ (42,899)   $ 102,717
                                                      ===========  ============  ===========
</TABLE>

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

                                      F-5

<PAGE>


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
                                ($ in thousands)

<TABLE>
<CAPTION>

                                                                     2001            2000            1999
                                                                 --------------  --------------  --------------

<S>                                                                <C>              <C>            <C>
Net cash provided by continuing operating activities               $   520,379      $  299,503     $   366,017

Cash flows from investing activities:
      Acquisitions                                                  (3,373,214)       (986,213)              -
      Proceeds from sale of assets                                     372,335               -               -
      Capital expenditures                                            (530,714)       (536,639)       (573,330)
      Securities purchased                                            (120,730)       (109,985)     (1,074,311)
      Securities sold                                                    1,434         381,698       1,084,239
      Securities matured                                                     -          16,072           7,435
      ELI share purchases                                                    -         (38,748)              -
      Other                                                                639             104           3,027
                                                                 --------------  --------------  --------------
Net cash used by investing activities                               (3,650,250)     (1,273,711)       (552,940)

Cash flows from financing activities:
      Short-term debt borrowings/repayments                                  -               -        (110,000)
      Long-term debt borrowings                                      3,703,483       1,063,158         340,503
      Long-term debt principal payments                             (1,077,931)        (46,972)        (46,619)
      Issuance of equity units                                         460,000               -               -
      Debt issuance cost                                               (67,657)              -               -
      Common stock offering                                            289,561               -               -
      Issuance of common stock for employee plans                       25,411          19,773          21,113
      Settlement of equity forward contracts                          (163,662)              -               -
      Common stock buybacks                                                  -         (49,209)         (6,625)
      Customer advances for construction and contributions
      in aid of construction                                           (27,816)         30,684          (6,363)
                                                                 --------------  --------------  --------------
Net cash provided by financing activities                            3,141,389       1,017,434         192,009

Cash used by discontinued operations                                    14,926         (49,328)            131

Increase (decrease) in cash                                             26,444          (6,102)          5,217
Cash at January 1,                                                      31,223          37,141          31,922
                                                                 --------------  --------------  --------------

Cash at December 31,                                               $    57,667      $   31,223     $    37,141
                                                                 ==============  ==============  ==============

Non-cash activities:
      Increase in capital lease asset                              $    33,985      $  102,192     $    60,321
      Equity forward contracts                                               -         150,013               -
      Issuance of shares for acquisitions                                    -           3,659               -
      Issuance of shares for dividends                                       -               -           9,959
      Debt assumed from acquisitions                                   117,630               -               -
      Adelphia investment writedown                                     79,114               -               -
      Non-cash restructuring charges                                         -               -          36,136

</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"   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
          85%-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.

          On June 29,  2001,  we purchased  from Global  Crossing  LTD.  (Global
          Crossing)  100% of the  stock of  Frontier  Corp.'s  (Frontier)  local
          exchange carrier  subsidiaries,  which owns  approximately 1.1 million
          telephone  access  lines (as of June 29,  2001) in  Alabama,  Florida,
          Georgia, Illinois,  Indiana, Iowa, Michigan,  Minnesota,  Mississippi,
          New York, Pennsylvania and Wisconsin (see Note 4).

          We have grown from  approximately  1 million  access  lines in 1999 to
          approximately  2.5  million  access  lines in 2001  primarily  through
          acquisitions.  We  continually  evaluate the  possibility of acquiring
          additional  telecommunications  assets.  Over the past few years,  the
          number and size of available  telecommunications  assets has increased
          substantially.  Although  our  primary  focus will  continue to be the
          acquisition of telephone  access lines,  exchanges and operations that
          are  proximate to our existing  systems or that serve a customer  base
          large enough for us to operate efficiently,  we may also acquire other
          telecommunications  interests.  We expect to have fully integrated our
          recent  acquisitions  with our  existing  core  telephone  access line
          holdings by the end of June 2002. Of our 2.5 million  telephone access
          lines,  approximately 41% are located in New York State, including the
          Rochester metropolitan area. Another 11% are located in Minnesota.

          In 1999 we  announced  plans to divest our public  utilities  services
          segments.  Consistent with this effort, during 2001 we sold two of our
          natural gas  transmission  businesses  and in January 2002 we sold our
          water distribution and wastewater treatment business. We are presently
          engaged in the sale of, or are seeking  buyers for, our  remaining gas
          and electric utility services segments. Pending these divestitures, we
          continue to provide gas and electric utility services (see Note 6).

          We own all of the Class B Common Stock and 27,571,332  shares of Class
          A Common Stock of ELI, a  facilities-based  integrated  communications
          provider  offering a broad  range of  communications  services  in the
          western United States.  This ownership interest  represents 85% of the
          economic  interest  and a 96% voting  interest.  ELI's  Class B Common
          Stock votes on a 10 to 1 basis with the Class A Common Stock, which is
          publicly traded. We also guarantee all of ELI's long-term debt, one of
          its capital leases and one of its operating leases, and have committed
          to continue to support its cash  requirements  through March 31, 2003.
          ELI is part of our  consolidated  federal  tax  return.  In  order  to
          maintain that consolidation,  we must maintain an ownership and voting
          interest in excess of 80%. During 2000, as a result of the exercise of
          employee  stock  options,  our  ownership  interest  decreased  and we
          purchased  2,288,000  shares in the open market to bring our  economic
          ownership interest back to 85%.

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

          The  preparation  of  financial  statements  in  conformity  with GAAP
          requires  management to make estimates and assumptions that affect the
          reported  amounts  of  assets  and  liabilities  at the  dates  of the
          financial  statements and the reported amounts of revenue and expenses
          during the reporting  periods.  Actual results could differ from those
          estimates.

                                      F-7
<PAGE>
     (c)  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 accrued  expenses 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 on our  statement of income
          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  exceed
          installation fee revenue.

          ELI - Revenue is recognized  when the services are  provided.  Revenue
          from  long-term   prepaid  network   services   agreements   including
          Indefeasible Right to Use (IRU) and Fiber swap agreements are deferred
          and recognized on a straight-line  basis over the terms of the related
          agreements.  Installation  fees and related costs (up to the amount of
          installation  revenue) are deferred  and  recognized  over the average
          customer term.  Installation  related costs in excess of  installation
          fees are expensed when incurred.

          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.

     (d)  Construction Costs and Maintenance Expense:
          ------------------------------------------
          Property,  plant and equipment are stated at original cost,  including
          general  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.

          AFUDC  represents the borrowing costs and a return on common equity of
          funds used to finance construction of regulated assets subject to SFAS
          71  accounting.  AFUDC is  capitalized  as a component of additions to
          property,  plant and equipment  and is credited to income.  AFUDC does
          not  represent  current  cash  earnings;  however,  under  established
          regulatory rate-making practices, after the related plant is placed in
          service,  we are  permitted  to  include  in  the  rates  charged  for
          regulated  services a fair  return on and  depreciation  of such AFUDC
          included in plant in service.  The amount of AFUDC  relating to equity
          is included in other loss, net ($2,811,000,  $3,257,000 and $4,586,000
          for 2001,  2000 and 1999,  respectively)  and the amount  relating  to
          borrowings is included as a reduction of interest  expense $3,493,000,
          $3,504,000  and  $4,206,000  for 2001,  2000 and 1999,  respectively).
          Capitalized interest for unregulated  construction activities amounted
          to $5,675,000,  $4,766,000  and  $8,681,000  for 2001,  2000 and 1999,
          respectively.

     (e)  Regulatory Assets and Liabilities:
          ---------------------------------
          Certain of our local exchange telephone operations were and all of our
          public utilities services  operations are subject to the provisions of
          Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
          for the Effects of Certain Types of  Regulation".  For these entities,
          regulators can establish  regulatory  assets and liabilities  that are
          required to be  reflected  on the  balance  sheet in  anticipation  of
          future recovery through the ratemaking  process.  In the third quarter
          of  2001,  due  to the  continued  process  of  deregulation  and  the
          introduction  of  competition  to our rural local  exchange  telephone
          properties and our  expectation  that these trends will  continue,  we
          concluded it was appropriate to discontinue the application of SFAS 71
          (see Note 20) for our local exchange telephone properties.  Regulatory
          assets and liabilities for our public utility services  operations are
          included  in assets  held for sale and  liabilities  related to assets
          held for sale and discontinued operations.

                                      F-8
<PAGE>
     (f)  Impairment of Long-Lived Assets and Long-Lived Assets to
          --------------------------------------------------------
          Be Disposed Of:
          --------------
          We review long-lived assets and certain  identifiable  intangibles for
          impairment  whenever events or changes in circumstances  indicate that
          the carrying amount of an asset 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.  If such assets are  considered  to be
          impaired,  the  impairment  is  measured  by the  amount  by which the
          carrying amount of the assets exceeds the fair value.

      (g)  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  and  included  in
          earnings as a loss.

     (h)  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 and
          the tax bases of assets and liabilities using tax rates expected to be
          in effect when the temporary  differences are expected to turn around.
          Regulatory  assets and liabilities (see Note 1(e)) included income tax
          benefits  previously  flowed  through to customers and from the AFUDC,
          the effects of tax law changes  and the tax  benefit  associated  with
          unamortized  deferred investment tax credits.  These regulatory assets
          and  liabilities  represent  the probable net increase in revenue that
          will  be  reflected   through  future  ratemaking   proceedings.   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.

     (i)  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 13).  Fair value of options  granted is  computed  using the
          Black Scholes option pricing model.

(j)       Minority Interest and Minority Interest in Subsidiary:
          -----------------------------------------------------
          Minority  interest  represents the minority's share of ELI's net loss.
          Since ELI's  initial  public  offering in 1997,  we recorded  minority
          interest on our income statement and reduced minority  interest on our
          balance sheet by the amount of the 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 date forward, we
          discontinued   recording   minority  interest  income  on  our  income
          statement  as there is no  obligation  for the  minority  interests to
          provide additional funding for ELI. Therefore,  we are recording ELI's
          entire loss in our consolidated results.

(k)       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 were exercised or converted into common stock at
          the beginning of the period being reported on.


                                      F-9
<PAGE>

(l)       Intangibles:
          -----------
          Intangibles represent the excess of purchase price over the fair value
          of identifiable 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.  We amortize goodwill and other identifiable  intangibles
          by use of the  straight-line  method (see Notes 4 and 5). We regularly
          examine the  carrying  value of our  goodwill  and other  identifiable
          intangibles to determine whether there are any impairment losses.  See
          Note 1(f) above related to our impairment policy.


     (m)  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
          for undertaking the hedge  transaction.  This process includes linking
          all  derivatives  that are  designated as fair-value or cash-flow,  to
          specific  assets and  liabilities  on the balance sheet or to specific
          firm commitments or forecasted transactions. Changes in the fair value
          of a derivative  that is highly  effective and that is designated  and
          qualifies  as a fair-value  hedge,  along with the loss or gain on the
          hedged asset or  liability  or  unrecognized  firm  commitment  of the
          hedged item that is  attributable  to the hedged risk are  recorded in
          earnings.

          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. When 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  in December  2001
          related  to a portion of our fixed  rate  debt.  This  hedge  strategy
          satisfies the fair value hedging requirements of SFAS 133.

(n)       Changes in Accounting Principles:
          --------------------------------
          In September  2000, the Emerging  Issues Task Force (EITF) issued EITF
          Issue 00-19,  "Determination of Whether Share Settlement Is within the
          Control  of the Issuer  for  Purposes  of  Applying  Issue No.  96-13,
          Accounting  for  Derivative  Financial  Instruments  Indexed  to,  and
          Potentially  Settled  in, a Company's  Own Stock." The EITF  clarifies
          when financial  instruments that are indexed to or potentially settled
          in a company's own stock are to be classified as an asset or liability
          and when they are to be classified  as equity.  The EITF allowed for a
          transition period for contracts  existing at the date of the consensus
          and remaining outstanding at June 30, 2001 to allow time for contracts
          to be  modified  in order for a company to  continue  to  account  for
          certain contracts as equity after June 30, 2001 (see Note 12).

                                      F-10
<PAGE>
          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.

(2)  Accounts Receivable:
     -------------------

     The  components of accounts  receivable,  net at December 31, 2001 and 2000
     are as follows:

($ in thousands)                                     2001             2000
                                                 --------------  ---------------
Customers                                            $ 343,356        $ 229,911
Other                                                   36,123           37,306
Less:  Allowance for doubtful accounts                 (67,601)         (23,913)
                                                 --------------  ---------------
   Accounts receivable, net                          $ 311,878        $ 243,304
                                                 ==============  ===============

(3)  Property, Plant and Equipment:
     -----------------------------

     The  components  of property,  plant and equipment at December 31, 2001 and
     2000 are as follows:

<TABLE>
<CAPTION>
                                                            Estimated
($ in thousands)                                           Useful Lives           2001              2000
                                                        ------------------- ----------------- -----------------

<S>                                                       <C>                   <C>               <C>
Telephone outside plant                                   4 to 59 years          $ 3,280,542       $ 2,721,425
Telephone central office equipment                        4 to 25 years            2,135,992         1,644,302
Information systems and other administrative assets       7 to 43 years              777,351           635,752
Other                                                                                 55,065            52,531
Construction work in progress                                                        450,978           253,417
                                                                            ----------------- -----------------
                                                                                   6,699,928         5,307,427
Less: accumulated depreciation                                                    (2,187,890)       (1,786,715)
                                                                            ----------------- -----------------
Property, plant and equipment, net                                               $ 4,512,038       $ 3,520,712
                                                                            ================= =================
</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 $488,424,000,  $369,930,000
     and  $307,428,000  for the years ended  December 31,  2001,  2000 and 1999,
     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 6).
     During 2001 we recognized accelerated depreciation of $22.0 million 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 14). During 2000 and 1999 we recognized $17.4
     million and $4.8 million, respectively, in accelerated depreciation related
     to the change in useful life of an operating system in the ILEC segment.

(4)  Acquisitions:
     ------------

     From May 27, 1999 through July 12, 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 financial statements from
     the dates of acquisition of each property.  These agreements and the status
     of each transaction are described as follows:

          Verizon Acquisition
          -------------------
          Between May and December  1999,  we announced  agreements  to purchase
          from  Verizon  Communications  Inc.,  formerly  GTE  Corp.  (Verizon),
          approximately 381,200 telephone access lines (as of December 31, 2000)
          for approximately $1,171,000,000 in cash. By November 30, 2000, we had
          closed on the  purchase  of  approximately  317,500  telephone  access
          lines.  On December 17, 2001 the  agreements  to acquire the remaining
          telephone access lines from Verizon were terminated.


                                      F-11
<PAGE>

          Qwest Acquisition - termination
          -------------------------------
          In  June  1999,  we  announced   agreements  to  purchase  from  Qwest
          approximately 556,800 telephone access lines (as of December 31, 2000)
          in nine  states  for  approximately  $1,650,000,000  in  cash  and the
          assumption of certain liabilities.  On October 31, 2000, we had closed
          on the  purchase of  approximately  17,000  telephone  access lines in
          North Dakota for approximately  $38,000,000 in cash. On July 20, 2001,
          we  notified  Qwest  that  we  were  terminating   eight   acquisition
          agreements  with  Qwest for the  remaining  539,800  telephone  access
          lines.  Qwest  subsequently filed a notice of claim for arbitration in
          Denver,   Colorado  under  the  rules  of  the  American   Arbitration
          Association  with respect to the  terminated  acquisition  agreements.
          Qwest asserts that we wrongfully  terminated  these  agreements and is
          seeking   approximately   $64,000,000,   which  is  the  aggregate  of
          liquidation  damages  under  letters  of  credit  established  in  the
          terminated acquisition agreements.  We have filed a notice of claim in
          the same arbitration  proceeding,  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.

          Frontier Acquisition
          --------------------
          On June 29, 2001, we purchased from Global Crossing Ltd. (Global) 100%
          of the stock of Frontier Corp.'s local exchange carrier  subsidiaries,
          which  owns  approximately  1,096,700  telephone  access  lines (as of
          December 31, 2000) in Alabama,  Florida, Georgia,  Illinois,  Indiana,
          Iowa, Michigan,  Minnesota,  Mississippi,  New York,  Pennsylvania and
          Wisconsin,  for  approximately  $3,373,000,000  in  cash,  subject  to
          routine purchase price adjustment.

     The following  summarizes the allocation of purchase prices and funding for
     our 2001 and 2000  acquisitions.  (there were no material  acquisitions  in
     1999):

<TABLE>
<CAPTION>
                                                              Verizon                     2001            Total
                          Verizon    Verizon       Qwest      Illinois/    Total 2000   Acquisition  Acquisitions from
                          Nebraska   Minnesota  North Dakota  Wisconsin   Acquisitions   Frontier     January 1, 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   $ 1,127,314    $ 1,435,964
 Current assets                 -        4,960          -            -         4,960       120,985        125,945
 Goodwill                 108,175      174,247     16,619      163,906       462,947     1,532,641      1,995,588
 Customer base             46,060      120,742      7,466       34,565       208,833       762,091        970,924
 Trade name                     -            -          -            -             -       106,473        106,473
 Other assets                   -        1,557          -            -         1,557         9,669         11,226
                        ---------    ---------   --------    ---------     ---------   -----------     ----------
 Total assets acquired    206,138      438,897     37,995      303,917       986,947     3,659,173      4,646,120
                        ---------    ---------   --------    ---------     ---------   -----------     -----------
 Liabilities assumed:
 Debt                           -            -          -            -             -       137,728        137,728
 Other liabilities            734            -          -            -           734       148,231        148,965
                        ---------    ---------   --------    ---------     ---------   -----------     ----------
 Total liabilities assumed    734            -          -            -           734       285,959        286,693
                        ---------    ---------   --------    ---------     ---------   -----------     ----------

 Cash paid              $ 205,404    $ 438,897   $ 37,995    $ 303,917     $ 986,213    $3,373,214    $ 4,359,427
                        =========    =========   ========    =========     =========   ============    ==========

 Status of appraisal
  valuation               Final         Final      Final        Final                    Preliminary

</TABLE>

     The  following  pro  forma  financial  information  for 2001  presents  the
     combined results of our operations and Frontier  acquired on June 29, 2001.
     The pro forma financial information for 2000 presents the Verizon Nebraska,
     Minnesota  and  Illinois/Wisconsin  properties  acquired on June 30,  2000,
     August 31, 2000 and November 30, 2000, respectively, the Qwest North Dakota
     property  acquired on October 31,  2000 and  Frontier  acquired on June 29,
     2001.  The pro forma  information  presents the combined  results as if the
     acquisitions  had  occurred  at the  beginning  of the  year  prior  to 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.  The sale of our Louisiana
     and Colorado gas  operations  (see Note 6) is not  presented on a pro forma
     basis.

                                      F-12
<PAGE>

($ in thousands, except per share amounts)
                                              2001              2000
                                         ----------------  ---------------
Revenue                                      $ 2,844,789      $ 2,693,824
Income before extraordinary expense           $ (117,988)      $ (148,754)
Net income (loss)                             $ (161,619)      $ (148,754)
Net income (loss) per share                      $ (0.64)         $ (0.56)

(5)  Intangibles:
    ------------
     Intangibles at December 31, 2001 and 2000 are as follows:

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

Goodwill                                        $ 2,068,032        $ 508,940
Customer base                                       970,925          147,437
Tradename                                           106,473                -
                                            ---------------- ----------------
    Total intangibles                             3,145,430          656,377
Accumulated amortization                           (166,488)         (23,109)
                                            ---------------- ----------------
    Intangibles, net                            $ 2,978,942        $ 633,268
                                            ================ ================

     We have reflected  assets acquired at fair market values in accordance with
     purchase   accounting   standards.   Our  allocations  are  based  upon  an
     independent appraisal 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  where we  believe  we have a  competitive  advantage  because of our
     relatively larger size, greater resources,  local focus and lower levels of
     competition.  For both  our  existing  ILEC  operations  and  those we have
     recently  acquired,  we are 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  growth  and  margin  enhancement   opportunities.   To  reach  our
     objectives,  we intend to continue to achieve  economies  of scale  through
     clustering and 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 2000 and  2001.  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),  entry into markets from which
     we could  expand  into new markets  (i.e.,  beachhead),  and the  potential
     benefit resident in expected population/demographic trends.

     In July 2001,  the FASB issued  SFAS 142,  "Goodwill  and Other  Intangible
     Assets."  This  statement  requires that goodwill no longer be amortized to
     earnings,  but instead be reviewed  for  impairment.  Impairment  tests are
     required to be performed at least  annually.  The  amortization of goodwill
     ceases upon  adoption of the  statement on January 1, 2002,  and 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.  The amount of any future impairment,  if any, cannot
     be estimated at this time.

                                      F-13
<PAGE>

(6)  Discontinued Operations and  Assets Held for Sale:
     -------------------------------------------------
     On August 24, 1999,  our Board of Directors  approved a plan of divestiture
     for our public utilities services  businesses,  which include gas, electric
     and water and wastewater businesses.

          Water and Wastewater
          --------------------
          On January 15, 2002, we completed the sale of our water and wastewater
          operations to American Water Works,  Inc. for $855,700,000  million in
          cash and $123,800,000  million of assumed debt and other  liabilities.
          The estimated  pre-tax gain on the sale is approximately  $303,600,000
          million and will be recognized in the first quarter 2002.

          Electric
          --------
          Our Arizona and Vermont  electric  divisions were under contract to be
          sold to Cap Rock Energy Corp. (Cap Rock).  The agreement with Cap Rock
          was  terminated on March 7, 2001. We intend to pursue the  disposition
          of the Vermont and Arizona electric divisions with alternative buyers.
          In March 2002,  we entered  into a  definitive  agreement  to sell our
          Kauai electric division to Kauai Island Utility Cooperative (KIUC) for
          $215,000,000.   The  transaction,   which  is  subject  to  regulatory
          approvals, is expected to close within twelve months.

          Gas
          ---
          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 the third quarter was $139,304,000.

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

     Discontinued  operations  in the  consolidated  statements of income (loss)
     reflect  the  results  of  operations  of the  water/wastewater  properties
     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.   The
     long-term  debt  presented  in  liabilities  of   discontinued   operations
     represents  the only  liability to be assumed by the buyer  pursuant to the
     water and wastewater asset sale agreements.

     We  initially  accounted  for the  planned  divestiture  of all the  public
     utilities services properties as discontinued operations.  Currently, we do
     not  have  agreements  to  sell  our  entire  gas  and  electric  segments.
     Consequently,  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  $50,830,000  and $6,770,000 for the years ended December 31,
     2001 and 2000, respectively.  We continue to actively pursue buyers for our
     remaining gas and electric businesses.

                                      F-14
<PAGE>

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

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

Current assets                      $  20,978      $  18,578
Net property, plant and equipment     671,079        639,994
Other assets                           54,734         59,030
                                  ------------  -------------
Total assets                        $ 746,791      $ 717,602
                                  ============  =============

Current liabilities                 $  11,827      $  21,062
Long-term debt                         90,448         90,546
Other liabilities                     136,463        100,891
                                  ------------  -------------
Total liabilities                   $ 238,738      $ 212,499
                                  ============  =============

                                      For the years ended December 31,
                                  -----------------------------------------
                                     2001           2000          1999
                                  ------------  ------------- -------------
Revenue                             $ 116,868      $ 105,202     $ 102,408
Operating income                       37,211         27,415        19,887
Income taxes                            8,947          5,721         3,917
Net income                             17,875         11,677         7,887


     Summarized  financial  information  for  the gas  and  electric  operations
     (assets held for sale) is set forth below:


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

Current assets                                      $    66,511     $   127,495
Net property, plant and equipment                       805,653         953,328
Other assets                                            235,773         201,329
                                                  --------------  --------------
Total assets held for sale                          $ 1,107,937     $ 1,282,152
                                                  ==============  ==============

Current liabilities                                    $ 71,259     $   169,066
Long-term debt                                           43,400          43,980
Other liabilities                                       104,116         107,120
                                                  --------------  --------------
Total liabilities related to assets held for sale   $   218,775     $   320,166
                                                  ==============  ==============

(7)  Investments:
     -----------

     The components of investments at December 31, 2001 and 2000 are as follows:


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

Marketable equity securities               $ 139,188        $ 211,086
Other fixed income securities                  2,020            3,273
                                     ---------------- ----------------
                                           $ 141,208        $ 214,359
                                     ================ ================

     On October 1, 1999, Adelphia Communication Corp. (Adelphia) was merged with
     Century  Communications  Corp.  (Century).  We owned  1,807,095  shares  of
     Century Class A Common Stock.  Pursuant to this merger  agreement,  Century
     Class A Common shares were exchanged for  $10,832,000 in cash and 1,206,705
     shares  of  Adelphia  Class A Common  Stock  (for a total  market  value of
     $79,600,000  based on Adelphia's  October 1, 1999 closing price of $57.00).
     As a result of the  merger,  we  realized  and  reported a pre-tax  gain of
     approximately  $67,600,000  in the  fourth  quarter  of 1999 in  Investment
     income.


                                      F-15
<PAGE>

     One of our  subsidiaries,  in a joint venture with a subsidiary of Century,
     owned and operated  four cable  television  systems in southern  California
     serving  over 90,000  basic  subscribers.  In July 1999,  we entered into a
     separate agreement with Adelphia to sell our interest in the joint venture.
     Pursuant to this  agreement on October 1, 1999,  we received  approximately
     $27,700,000  in cash and 1,852,302  shares of Adelphia Class A Common Stock
     (for a total market value of  $133,300,000  based on Adelphia's  October 1,
     1999 closing  price of $57.00).  As a result of the sales,  we realized and
     reported a pre-tax gain of approximately  $83,900,000 in the fourth quarter
     of 1999 in Investment income.

     We  recognized  a loss  of  $79,000,000  in the  Adelphia  investment  as a
     reduction to investment income in the fourth quarter of 2001. This non-cash
     charge does not impact the carrying  value of these  securities  which were
     stated at  current  market  values on prior  balance  sheets.  This  charge
     reflects  a decline in  current  trading  values  that have  persisted  for
     greater than a six month period.  We have previously  reported this decline
     as an item of  comprehensive  loss in the  equity  section  of our  balance
     sheets.  We continue to hold the  shares.  In  addition,  during  2001,  we
     realized  approximately  $1.6  million  of  gross  gains  from  the sale of
     securities and $.8 million of gross losses  associated  with the write down
     of securities  with a decline in value that was determined to be other than
     temporary.

     Our  Chairman  and Chief  Executive  Officer  was also  Chairman  and Chief
     Executive Officer of Century prior to its merger with Adelphia.  Centennial
     was a majority-owned  subsidiary of Century until it was sold. Our Chairman
     and Chief Executive Officer holds a significant amount of Adelphia shares.

     In  January  1999,  we  sold  our  interest  in  Centennial.   We  received
     approximately  $205,600,000  in cash for all of our  equity  interests  and
     approximately  $17,500,000 in accrued dividends. We realized and reported a
     pre-tax  gain of  approximately  $69,500,000  in the first  quarter 1999 in
     Investment income related to the disposition.

     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, 2001
<S>                                        <C>               <C>              <C>             <C>
Available-for-Sale                         $ 132,935         $ 11,896         $ (3,623)       $ 141,208

As of December 31, 2000
Available-for-Sale                         $ 213,681         $ 17,853        $ (17,175)       $ 214,359
</TABLE>

     Marketable  equity  securities for 2001 and 2000 include  2,305,908  common
     shares  which  represent  an  investment  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.

(8)  Fair Value of Financial Instruments:
     ------------------------------------

     The following  table  summarizes  the carrying  amounts and estimated  fair
     values for certain of our  financial  instruments  at December 31, 2001 and
     2000. For the other  financial  instruments,  representing  cash,  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.
<TABLE>
<CAPTION>


($ in thousands)                             2001                               2000
                              ---------------------------------  ---------------------------------
                                 Carrying                           Carrying
                                  Amount         Fair Value          Amount         Fair Value
                              ---------------- ----------------  ---------------- ----------------
<S>                               <C>              <C>               <C>              <C>
Investments                       $   141,208      $   141,208       $   214,359      $   214,359
Long-term debt                    $ 5,994,906      $ 6,030,408       $ 3,062,289      $ 2,815,850
EPPICS                            $   201,250      $   179,113       $   201,250      $   213,325
</TABLE>

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


                                      F-16
<PAGE>

(9)  Long-term Debt:
     --------------

     The activity in our  long-term  debt from December 31, 2000 to December 31,
     2001 is as followed:
<TABLE>
<CAPTION>


                                                              Twelve Months Ended
                                                   ------------------------------------------               Interest *
                                                                   Interest                                   Rate at
($ in thousands)                     December 31,   Borrowings/   Rate Swap/    Payments/    December 31,  December 31,
                                         2000      Acquisitions   Remarketing  Dispositions      2001          2001
                                     ------------- ------------------------------------------------------- -------------
FIXED RATE

   Rural Utilities Service Loan
<S>                                    <C>          <C>             <C>         <C>           <C>                <C>
     Contracts                         $   90,129   $    44,645     $       -   $   (23,914)  $   110,860        6.237%

   Debentures                           1,000,000             -             -      (149,222)      850,778        7.464%

   2001 Notes
          8.500% Due 2006                       -       700,000             -             -       700,000        8.740%
          9.250% Due 2011                       -     1,050,000             -             -     1,050,000        9.340%
          6.375% Due 2004                       -       300,000           430             -       300,430        6.649%
          7.625% Due 2008                       -       750,000             -             -       750,000        7.835%
          9.000% Due 2031                       -       700,000             -             -       700,000        9.148%
          6.27% RTFC Due 2011                   -       200,000             -             -       200,000        6.270%

                                     ------------- ------------- ------------- ------------- -------------
          Subtotal                              -     3,700,000           430             -     3,700,430

   Equity Units  6.750% Due 2006                -       460,000             -             -       460,000        7.480%

   Senior Unsecured Notes                  36,000        74,415             -        (1,590)      108,825        7.719%

   ELI Notes                              325,000             -             -             -       325,000        6.232%
   ELI Capital Leases                     132,202        33,985             -       (28,805)      137,382       11.774%
   Industrial Development Revenue Bonds   263,605             -       (14,400)            -       249,205        6.435%
   Other                                      344             -             -          (290)           54       12.986%

                                     ------------- ------------- ------------- ------------- -------------
TOTAL FIXED RATE                        1,847,280     4,313,045       (13,970)     (203,821)    5,942,534
                                     ------------- ------------- ------------- ------------- -------------


VARIABLE RATE

   Commercial Paper Notes Payable         109,145             -             -      (109,145)            -
   Bank Credit Facility                   765,000             -             -      (765,000)            -
   ELI Bank Credit Facility               400,000             -             -             -       400,000        2.892%
   Industrial Development Revenue Bonds   121,878             -        14,400             -       136,278        4.614%

                                     ------------- ------------- ------------- ------------- -------------
TOTAL VARIABLE RATE                     1,396,023             -        14,400      (874,145)      536,278
                                     ------------- ------------- ------------- ------------- -------------

TOTAL DEBT                             $3,243,303   $ 4,313,045     $     430   $(1,077,966)  $ 6,478,812
                                                   ============= ============= =============

   Less: Current Portion                 (181,014)                                               (483,906)
                                     -------------                                           -------------

TOTAL LONG TERM DEBT                   $3,062,289                                             $ 5,994,906
                                     =============                                           =============
</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.

          The total principal  amounts of industrial  development  revenue bonds
          were $389,535,000 in 2001 and 2000. Funds from industrial  development
          revenue  bond  issuances  are  held  by  a  trustee  until  qualifying
          construction  expenditures  are  made at  which  time  the  funds  are
          released.  The amounts  presented in the table above  represent  funds
          that have been used for  construction  through  December  31, 2001 and
          2000, respectively.

          At  December  31,  2000,  the  commercial  paper  notes  payable  were
          classified as long-term debt because the obligations  were expected to
          be and were refinanced with long-term debt securities.


                                      F-17
<PAGE>

     At December  31, 2001,  we have  available  revolving  lines of credit with
     financial  institutions  in the amount of $805 million.  As of December 31,
     2001, no borrowings  were  outstanding  under these credit  facilities.  On
     October 24,  2001,  we entered  into these  lines of credit with  financial
     institutions  in the  amounts  of $680  million  and  $100  million  having
     substantially  similar  terms.  An additional $25 million was provided by a
     lender who was added to the credit  facilities  after October 24, 2001, for
     total  available  commitments of $805 million.  The credit  facilities have
     similar terms and  conditions.  Associated  facility fees vary depending on
     our credit ratings and currently are 0.25% per annum.  The expiration dates
     are October 24, 2006. During the term of the facilities we may borrow repay
     and reborrow funds.

     In May 2001, we issued an aggregate of $1.75 billion of notes consisting of
     $700  million  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) of 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  warrant  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 principal amount of
     senior notes  consisting  of $300  million of 6.375%  notes due 2004,  $750
     million  principal  amount  of  7.625%  notes  due 2008  and  $700  million
     principal  amount of 9.000%  notes due 2031.  These  notes were issued in a
     private  offering.  The  proceeds  were  used to repay our  forward  equity
     contract, to refinance  outstanding  indebtedness and for general corporate
     purposes.  In  September  2001,  we  filed  a  $1.75  billion  registration
     statement  with the SEC on Form  S-4 that  consists  of an  exchange  offer
     entitling  the holders of the notes  issued in August 2001 to exchange  the
     initial  notes  for new notes  with  substantially  identical  terms as the
     initial notes,  except for transfer  restrictions and  registration  rights
     relating to the initial  notes.  The  registration  statement  was declared
     effective on February 6, 2002,  and we commenced our exchange offer at that
     time. The exchange offer is expected to terminate on March 11, 2002.

     In October 2001,  we borrowed  $200 million 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.

     On January 31, 2002, we repaid approximately $76.9 million principal amount
     of loans outstanding to our subsidiaries from the Rural Utilities  Service,
     Rural Telephone Bank and the Federal Financing Bank.

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

          ($ in thousands)
          ----------------
                                  Principal       Capital
                                  Payments     Lease Payments
                                  ---------    --------------
            2002                 $ 476,488         $7,418
            2003                    41,092          2,747
            2004                   731,158          3,057
            2005                     6,381          3,397
            2006                 1,341,662          3,458

     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.  In the years 2001,  2000,  and 1999,  interest  payments on
     short- and long-term debt were $302,510,000, $188,955,000 and $127,757,000,
     respectively.

                                      F-18
<PAGE>
 (10) 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  the  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 contract.

     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, 2001 and 2000 was $100,000,000 and $0,  respectively.  Such
     contracts  provided for us to pay variable  rates of interest  (average pay
     rate of  approximately  4% as of December 31, 2001) and receive fixed rates
     of interest  (average  receive rate of 6.375% as of December 31, 2001). The
     fair value of these derivatives is reflected in other assets as of December
     31, 2001, in the amount of $430,000.

     We do not anticipate any nonperformance by counterparties to its derivative
     contracts as all counterparties have investment grade credit ratings.

 (11)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 $211,756,050  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 2001, 2000 and 1999. During 2001
     and 2000,  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.  During 1999,  1,004,961  shares of Common Stock were issued to the
     Partnership in payment of interest of which 976,464 shares were sold by the
     Partnership  to satisfy cash dividend  payment  elections by the holders of
     the EPPICS.  The sales  proceeds and the remaining  28,497 shares of Common
     Stock  were  distributed  by  the  Partnership  to  the  Trust.  The  Trust
     distributed  the cash and shares as  dividends to the holders of the EPPICS
     in 1999.

(12) 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.

                                      F-19
<PAGE>

     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.

     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.

     We  also  purchased  631,000  shares  of our  common  stock  at a  cost  of
     $6,625,000 in 1999 to fund EPPICS dividends.

     The activity in shares of common stock,  including  treasury stock,  during
     2001, 2000 and 1999 is summarized as follows:

                                                        Number of Shares
                                                      --------------------
Balance at January 1, 1999                                    259,149,000
   Common stock buybacks                                         (631,000)
   Common stock issued to fund EPPICS dividends                 1,005,000
   Stock plans                                                  2,553,000
                                                      --------------------
Balance at December 31, 1999                                  262,076,000
   Acquisitions                                                   111,000
   Stock plans                                                  3,581,000
                                                      --------------------
Balance at December 31, 2000                                  265,768,000
   Stock issuances                                             25,156,000
   Stock plans                                                  1,916,000
                                                      --------------------
Balance at December 31, 2001                                  292,840,000
                                                      ====================

     As of December 31, 2001, we had 11,551,000  shares held as treasury  stock.
     We have 50,000,000  authorized but unissued shares of preferred stock ($.01
     par).


(13) Stock Plans:
     -----------
     At December 31, 2001, we have four stock based  compensation  plans and ELI
     has two stock based plans which are described  below.  We apply APB Opinion
     No. 25 and related  interpretations  in accounting  for the employee  stock
     plans. No compensation cost has been recognized in the financial statements
     for options issued pursuant to the Management Equity Incentive Plan (MEIP),
     Equity  Incentive Plan (EIP), or ELI Equity Incentive Plan (ELI EIP) as the
     exercise  price for such options was equal to the market price of the stock
     at the time of grant  and no  transactions  or  modifications  which  would
     require a  compensation  charge have occurred  subsequent to the grant.  No
     compensation cost has been recognized in the financial  statements  related
     to the Employee  Stock Purchase Plan (ESPP) and ELI Employee Stock Purchase
     Plan  (ELI  ESPP)  because  the  purchase  price is 85% of the fair  value.
     Compensation  cost  recognized for our Directors'  Deferred Fee Equity Plan
     was $741,438, $691,956 and $481,540 in 2001, 2000 and 1999, 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
     2001, 2000 and 1999 were 100,000, 3,120,000 and 901,200, 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,  2001,   3,149,000   shares  of  restricted   stock  were
     outstanding.  Compensation  expense of 8,967,000, 9,084,000 and $2,574,000
     for the years ended  December 31, 2001,  2000 and 1999,  respectively,  has
     been recorded in connection with these grants.


                                      F-20
<PAGE>

     Had we  determined  compensation  cost based on the fair value at the grant
     date for its  MEIP,  EIP,  ESPP,  ELI ESPP and ELI EIP,  our pro  forma Net
     income  (loss) and Net income  (loss) per common  share  would have been as
     follows:
<TABLE>
<CAPTION>

                                                                        2001           2000         1999
                                                                    -------------- ------------- ------------
          ($ in thousands)

<S>                                                                    <C>           <C>           <C>
          Net Income (loss)                          As reported       $ (89,682)    $(28,394)     $144,486
                                                     Pro forma          (118,520)     (51,270)      130,613


          Net Income (loss) per common share         As reported:
                                                        Basic          $    (.38)    $   (.11)     $    .56
                                                        Diluted             (.38)        (.11)          .55
                                                     Pro forma:
                                                        Basic          $    (.48)    $   (.20)     $    .50
                                                        Diluted             (.48)        (.20)          .50
</TABLE>

     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, ESPP, ELI ESPP and ELI EIP 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, 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-21
<PAGE>


     The  following is a summary of share  activity  subject to option under the
     MEIP.

                                                    Shares           Weighted
                                                  Subject to      Average Option
                                                    Option       Price Per Share
                                               --------------    ---------------
Balance at December 31, 1998                        9,435,000         $ 9.91
    Options granted                                 1,844,000           8.00
    Options exercised                                (602,000)          8.20
    Options canceled, forfeited or lapsed            (396,000)          8.08
                                               --------------
Balance at December 31, 1999                       10,281,000
                                                                        9.73
    Options granted                                    26,000          16.26
    Options exercised                              (3,103,000)          9.96
    Options canceled, forfeited or lapsed            (283,000)          7.79
                                               ---------------
Balance at December 31, 2000                        6,921,000           9.72
    Options exercised                              (1,035,000)          8.23
    Options canceled, forfeited or lapsed            (124,000)          9.81
                                               ---------------
Balance at December 31, 2001                        5,762,000         $ 9.99
                                               ================

     The following table summarizes  information about shares subject to options
     under the MEIP at December 31, 2001.
<TABLE>
<CAPTION>

                                     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>
           13,592       $ 4 -   5              $   4.29                2.73                 13,592          $   4.29
        1,793,571         7 -   8                  7.63                5.21              1,485,361              7.65
          823,623          8 - 10                  8.54                5.71                823,623              8.54
        1,739,515         10 - 11                 10.68                2.91              1,739,515             10.68
          868,436         11 - 14                 12.34                2.77                818,444             12.41
          497,877         14 - 15                 14.24                1.88                497,877             14.24
           25,000         15 - 17                 16.69                8.46                  8,334             16.69
  ----------------                                                                   --------------
        5,761,614       $  4 - 17               $  9.99                4.24              5,386,746          $  10.10
  ================                                                                   ==============
</TABLE>

     The  weighted  average fair value of options  granted  during 2000 and 1999
     were  $7.09  and  $3.17,  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 2000 and 1999:

                                     2000          1999
                                -------------- -------------
Dividend yield                          -             -
Expected volatility                   30%            29%
Risk-free interest rate             6.27%           5.32%
Expected life                     6 years         6 years

                              Equity Incentive Plan
                              ---------------------
     In May 1996, our  shareholders  approved the EIP. Under the EIP,  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 EIP.

     The maximum  number of shares of common stock which may be issued  pursuant
     to awards at any time is  12,858,000  shares,  which has been  adjusted for
     subsequent  stock  dividends.  No awards will be granted more than 10 years
     after the effective  date (May 23, 1996) of the EIP. 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.


                                      F-22
<PAGE>

     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
     EIP.

<TABLE>
<CAPTION>
                                                     Shares            Weighted Average
                                                   Subject to         Option Price Per
                                                     Option                 Share
                                                 ---------------     ------------------
<S>                                                 <C>                    <C>
Balance at December 31, 1998                         4,132,000              $ 8.51
    Options granted                                  3,487,000                8.64
    Options exercised                                 (361,000)               8.46
    Options canceled, forfeited or lapsed             (679,000)               8.40
                                                 ----------------
Balance at December 31, 1999                         6,579,000                8.59
    Options granted                                  5,758,000               13.31
    Options exercised                               (1,023,000)               8.21
    Options canceled, forfeited or lapsed             (614,000)              10.27
                                                 ----------------
Balance at December 31, 2000                        10,700,000               11.37
    Options granted                                  3,969,000               13.62
    Options exercised                                 (693,000)               8.27
    Options canceled, forfeited or lapsed             (680,000)              11.62
                                                 ----------------
Balance at December 31, 2001                        13,296,000              $12.69
                                                 ================
</TABLE>

     The following table summarizes  information about shares subject to options
     under the EIP at December 31, 2001.
<TABLE>
<CAPTION>

                           Options Outstanding                                         Options Exercisable
-------------------------------------------------------------------------      -------------------------------
                                                          Weighted Average
    Number           Range of        Weighted Average         Remaining           Number      Weighted Average
  Outstanding    Exercise Prices      Exercise Price        Life in Years      Exercisable     Exercise Price
                 ---------------      --------------        -------------      -----------     ---------------
----------------
<S>   <C>           <C>      <C>          <C>                    <C>              <C>              <C>
      2,302,143     $  7 -  8             $ 7.63                 6.87             1,866,834        $  7.65
        851,256        8 -  9               8.52                 5.78               851,256           8.52
         73,166        9 - 10               9.29                 6.01                73,166           9.29
        210,497       10 - 11              10.24                 6.26               210,497          10.24
      3,819,434       11 - 13              12.62                 8.62             1,634,507          12.48
      3,849,225       13 - 15              13.68                 9.26               556,668          13.50
      2,190,000       15 - 21              18.38                 8.74                96,668          17.17
----------------                                                               -------------
     13,295,721     $  7 - 21             $12.69                 7.36             5,289,596        $ 10.20
================                                                               =============
</TABLE>

     The weighted  average fair value of options  granted during 2001,  2000 and
     1999 was $6.00,  $6.31 and $3.46,  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 2001, 2000 and
     1999:

                                 2001          2000          1999
                             ------------- ------------- -------------
Dividend yield                          -             -             -
Expected volatility                   36%           30%           29%
Risk-free interest rate             5.10%         5.82%         5.47%
Expected life                     6 years       6 years       6 years


                                      F-23
<PAGE>

                          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 20% 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,
     2001,  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.  As of December  31,  2001,  the number of employees
     enrolled  and  participating  in the ESPP was 1,307 and the total number of
     shares purchased under the ESPP was 305,969.  For purposes of the pro forma
     calculation,  compensation  cost is  recognized  for the fair  value of the
     employees'  purchase  rights,  which was estimated  using the Black Scholes
     option  pricing  model  with the  following  assumptions  for  subscription
     periods beginning in 2001, 2000 and 1999:

                                 2001          2000          1999
                             ------------- ------------- -------------
Dividend yield                          -             -             -
Expected volatility                   36%           30%           29%
Risk-free interest rate             2.71%         6.23%         5.24%
Expected life                    6 months      6 months      6 months

     The weighted  average fair value of those purchase  rights granted in 2001,
     2000 and 1999 was $2.39, $3.26 and $2.47, respectively.

                        ELI Employee Stock Purchase Plan
                        --------------------------------
     The ELI ESPP was approved by  shareholders  on May 21, 1998.  Under the ELI
     ESPP,  eligible  employees of ELI may  subscribe to purchase  shares of ELI
     Class A Common  Stock at the  lesser of 85% of the  average of the high and
     low market  prices on the first day of the  purchase  period or on the last
     day of the  purchase  period.  An  employee  may elect to have up to 20% 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. An
     employee may not  participate  in the ELI ESPP if such  employee owns stock
     possessing  5% or more of the total  combined  voting power or value of all
     classes  of capital  stock of ELI.  As of  December  31,  2001,  there were
     1,950,000  shares of ELI Class A Common Stock  reserved for issuance  under
     the ELI ESPP.  These shares may be adjusted for any future stock  dividends
     or stock splits.  The ELI ESPP will terminate when all shares reserved have
     been subscribed for and purchased, unless terminated earlier or extended by
     the Board of Directors.  The ELI ESPP is administered  by the  Compensation
     Committee of ELI's Board of Directors.  As of December 31, 2001,  the total
     number of shares purchased under the ELI ESPP was 1,081,187.

     As of  December 1, 2001,  the ELI ESPP was  temporarily  suspended  for the
     December 1, 2001 through May 31, 2002 purchase  period.  ELI employees were
     instead allowed to participate in the Citizens ESPP for that period.  As of
     December 31, 2001, 42 of ELI's employees were enrolled and participating in
     the Citizens ESPP.

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

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

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


                                      F-24
<PAGE>

                            ELI Equity Incentive Plan
                            -------------------------
     In October 1997,  the Board of Directors of ELI approved the ELI EIP. Under
     the ELI  EIP,  awards  of ELI's  Class A Common  Stock  may be  granted  to
     eligible  directors,   officers,   management   employees,   non-management
     employees and  consultants  of ELI in the form of incentive  stock options,
     non-qualified  stock options,  SARs,  restricted stock or other stock-based
     awards.   The  Compensation   Committee  of  the  ELI  Board  of  Directors
     administers  the ELI EIP. The  exercise  price for such awards shall not be
     less than 85% or more than  110% of the  average  of the high and low stock
     prices  on the date of  grant.  The  exercise  period  for such  awards  is
     generally  10 years  from the date of  grant.  ELI has  reserved  6,670,600
     shares for issuance under the terms of this plan.

     The  following is a summary of share  activity  subject to option under the
     ELI EIP.
<TABLE>
<CAPTION>

                                                       Shares                 Weighted
                                                     Subject to             Average Option
                                                       Option              Price Per Share
                                                    ----------------    -------------------
<S>                                                  <C>                    <C>
Balance at January 1, 1999                            2,331,000              $ 12.14
    Options granted                                   1,989,000                 9.51
    Options exercised                                  (116,000)                9.73
    Options canceled, forfeited or lapsed              (680,000)               10.12
                                                   ----------------
Balance at December 31, 1999                          3,524,000                10.96
    Options granted                                   2,720,000                19.08
    Options exercised                                  (456,000)               11.00
    Options canceled, forfeited or lapsed            (1,017,000)               13.63
                                                   ----------------
Balance at December 31, 2000                          4,771,000                15.05
    Options granted                                      86,000                 4.36
    Options canceled, forfeited or lapsed            (1,087,000)               15.38
                                                   ----------------
Balance at December 31, 2001                          3,770,000              $ 14.73
                                                   ================

</TABLE>

     The following table summarizes  information about shares subject to options
     under the ELI EIP at December 31, 2001.
<TABLE>
<CAPTION>

                         Options Outstanding                                         Options Exercisable
-------------------------------------------------------------------------      ------------------------------
                                                          Weighted- Average
    Number           Range of        Weighted Average         Remaining           Number      Weighted Average
  Outstanding    Exercise Prices      Exercise Price        Life in Years      Exercisable     Exercise Price
-------------    ---------------      --------------        -------------      -----------     ---------------
<S>    <C>       <C>      <C>         <C>                        <C>                <C>         <C>
       93,133    $   2 -  8           $     3.66                 8.84               88,135      $    3.55
    1,313,269        8 -  9                 8.81                 6.76            1,103,534           8.80
      622,402       13 - 19                15.80                 6.29              599,971          15.78
    1,741,636       19 - 23                19.40                 8.53              640,532          19.40
--------------                                                               -------------
    3,770,440     $  2 - 23           $    14.73                 7.55            2,432,172      $   13.13
==============                                                               =============
</TABLE>

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

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

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


                                      F-25
<PAGE>
     ELI has granted  775,000  restricted  stock awards to key  employees in the
     form of Class A Common Stock since its IPO. These  restrictions lapse based
     on meeting  specific  performance  targets.  At December 31, 2001,  629,668
     shares of this  stock  were  outstanding,  of which  571,335  shares are no
     longer  restricted.  Compensation  expense was recorded in connection  with
     these grants in the amounts of $281,000,  $1,422,000 and $2,559,000 for the
     years ended December 31, 2001, 2000 and 1999, respectively.

                       Directors' Deferred Fee Equity Plan
                       -----------------------------------
     Effective June 30, 2000, the annual retainer paid to non-employee directors
     was eliminated.  In replacement,  each non-employee  director  elected,  by
     August 1,  2000,  to  receive  either  2,500  stock  units or 10,000  stock
     options.  Starting in 2001,  each  non-employee  director  will  elect,  by
     December 1 of the prior year, to receive either 5,000 stock units or 20,000
     stock  options.  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. Options granted pursuant to the June 30, 2000 plan are
     subject to shareholder  approval in 2001. The Formula Plan described  below
     also remains in effect until its expiration in 2002.

     From January 1, 2000 through June 30, 2000, the non-employee  directors had
     the  choice to receive  50% or 100% of their  fees paid in either  stock or
     stock units. 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.

     Our  original  Non-Employee   Directors'  Deferred  Fee  Equity  Plan  (the
     Directors'  Plan)  was  approved  by  shareholders  on  May  19,  1995  and
     subsequently  amended. The Directors' Plan included an Option Plan, a Stock
     Plan and a Formula  Plan.  On December  31,  1999,  the Option Plan and the
     Stock Plan expired in accordance with the Plan's terms.

     Through the Option Plan, an eligible director could have elected to receive
     up to $30,000 per annum of his or her director's fee retainer, for a period
     of up to five years,  in the form of options to purchase our common  stock.
     The number of options  granted was calculated by dividing the dollar amount
     elected  by 20% of the  fair  market  value  of  our  common  stock  on the
     effective  date of the options.  The options are  exercisable at 90% of the
     fair market value of our common stock on the effective date of the options.

     Through the Stock Plan,  an eligible  director  elected to receive all or a
     portion of his or her director's fees in the form of Plan Units, the number
     of such Plan Units  being  equal to such fees  divided  by the fair  market
     value of our  common  stock on  certain  specified  dates.  In the event of
     termination  of  Directorship,  a Stock Plan  participant  will receive the
     value of such Plan Units in either stock or cash or installments of cash as
     selected by the Participant at the time of the related Stock Plan election.

     The Formula Plan provides each Director options to purchase 5,000 shares of
     common stock on the first day of each year beginning in 1997 and continuing
     through 2002  regardless  of whether the Director is  participating  in the
     Option Plan or Stock Plan.  In addition,  on September 1, 1996,  options to
     purchase  2,500 shares of common stock were granted to each  Director.  The
     exercise price of the options are 100% of the fair market value on the date
     of grant and the options are  exercisable  six months  after the grant date
     and remain exercisable for ten years after the grant date.

     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 10  directors
     participating  in the Directors'  Plan in 2001. In 2001, the total options,
     plan units and stock earned were 90,000, 52,307 and 1,321, respectively. In
     2000, the total Options, Plan Units and stock earned were 203,969,  52,521,
     and 2,860,  respectively.  In 1999, the total Options and Plan Units earned
     were 153,969 and 15,027, respectively. At December 31, 2001 925,447 options
     were exercisable at a weighted average exercise price of $11.33.

     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 their retirement,  death or
     termination  of  directorship  of each  individual  director.  In 1999,  we
     terminated this Plan. In connection with the  termination,  the value as of
     May 31,  1999,  of the vested  benefit of each  non-employee  director  was
     credited  to  him/her  in the form of stock  units.  Such  benefit  will be
     payable upon  retirement,  death or termination of the  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

                                      F-26
<PAGE>

     for one basis) or in cash. As of December 31, 2001,  the liability for such
     payments  was $2.7  million of which $1.5  million will be payable in stock
     (based on the July 15, 1999 stock  price) and $1.2  million will be payable
     in cash.  While the number of shares of stock  payable  to those  directors
     electing to be paid in stock was 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 times the stock price at the payment date.

 (14) Restructuring Charges:
     ---------------------

     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  us.   Accordingly,   we  recorded  the   following
     restructuring expenses during 2001:

          Plano Restructuring
          In the  second  quarter  of 2001,  we  approved  a plan to  close  our
          operations support center in Plano, Texas by April 2002. In connection
          with this plan, we recorded a pre-tax  charge of  $14,557,000 in 2001.
          Our objective is to  concentrate  our resources in areas where we have
          the most customers, to better serve those customers. We intend to sell
          our Plano office building. The restructuring resulted in the reduction
          of 750 employees.  We communicated with all affected  employees during
          July 2001.  Certain  employees  will be  relocated,  others  have been
          offered severance, job training and/or outplacement counseling.  As of
          December 31, 2001, approximately $1,678,000 was paid and 161 employees
          were  terminated.  The  restructuring  expenses  primarily  consist of
          severance benefits,  retention earned through December 31, 2001, early
          lease termination costs and other planning and communication costs. We
          expect to incur additional costs of approximately  $1,426,000  through
          the second quarter of 2002.

          Sacramento Call Center Restructuring
          In the  fourth  quarter  of 2001,  we  approved  a plan to  close  our
          Sacramento  Customer  Care  Center  by  the  end  of  March  2002.  In
          connection with this plan, we recorded a pre-tax charge of $731,000 in
          the fourth  quarter of 2001.  We will  redirect  the call  traffic and
          other work  activities  to our  Kingman,  Arizona  call  center.  This
          restructuring   resulted  in  the  reduction  of  94   employees.   We
          communicated  with all affected  employees during November 2001. These
          costs are expected to be paid in the first quarter 2002.

          ELI Restructuring
          In the first  half of 2002,  ELI  intends  to  redeploy  the  internet
          routers,  frame relay  switches  and ATM  switches  from the  Atlanta,
          Cleveland,   Denver,  Philadelphia  and  New  York  markets  to  other
          locations  in  ELI's  network.   ELI  intends  to  cease  leasing  the
          collocation facilities and off-net circuits for the backbone and local
          loops  supporting  the  service  delivery  in  these  markets.  It  is
          anticipated  that this will lead to  $4,179,000  of  termination  fees
          which have been  accrued for but not paid for the year ended  December
          31, 2001.

     1999
     ----
     In the  fourth  quarter of 1999,  we  approved  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  December  31,  2001,  approximately  $4,413,000  has been  paid,  42
     employees  were  terminated  and six  employees  who  were  expected  to be
     terminated took other positions within the company.  The remaining employee
     was  terminated in January 2002. At December 31, 2001 and 2000, we adjusted
     our original accrual down by $139,000 and $1,008,000, respectively, and the
     remaining  accrual of $200,000 is included in other current  liabilities at
     December 31, 2001. These costs will be paid in the first quarter 2002.

     In the third quarter of 1999,  ELI announced two strategic  decisions  that
     led to $1,480,000 in exit costs.  On August 24, 1999, ELI announced that it
     was eliminating its prepaid  calling card and  videoconferencing  products,
     effective  November 1, 1999. This initiative was taken as a result of ELI's
     decision to focus on its core business strategy.  Prepaid calling cards are
     a high-volume,  low-margin  product that ELI determined did not support its
     strategy of accelerating profitability. On September 1, 1999, ELI announced
     that it was  consolidating  its national retail sales efforts in Dallas and
     closing six retail sales offices in the eastern United States by October 8,
     1999. ELI has maintained all of its data  points-of-presence  and wholesale
     sale offices.  As a result of both of these  decisions,  ELI  eliminated 63
     sales and  sales  support  positions,  and  incurred  charges  relating  to
     employee  severance and facility  shutdown  costs. As of December 31, 2000,
     all costs associated with this decision were paid and no accrual remained.


                                      F-27
<PAGE>
<TABLE>
<CAPTION>
                                              Original Accrued       Amount        Additional                      Remaining
                                                   Amount         Paid to Date      Accrual       Adjustments       Accrual
                                              ------------------  -------------- --------------- -------------- ----------------

2001 Plano Restructuring
<S>                                                <C>              <C>             <C>             <C>            <C>
Severance                                          $  9,352,532     $(1,385,577)    $   550,595     $ (324,833)    $  8,192,717
Benefits                                              1,535,322         (35,408)              -       (103,693)       1,396,221
Retention                                             1,178,210         (80,080)      1,792,531        (64,143)       2,826,518
Other                                                   936,032        (177,010)         26,937       (322,925)         463,034
                                              ------------------  -------------- ---------------                ----------------
Total                                              $ 13,002,096     $(1,678,075)    $ 2,370,063     $ (815,594)    $ 12,878,490
                                              ==================  ============== =============== ============== ================


2001 Sacramento Call Center Restructuring
Severance                                          $    551,805     $         -     $         -     $        -     $    551,805
Benefits                                                 93,829               -               -              -           93,829
Retention                                                85,243               -               -              -           85,243
                                              ------------------  -------------- --------------- -------------- ----------------
Total                                              $    730,877     $         -     $         -     $        -     $    730,877
                                              ==================  ============== =============== ============== ================

ELI 2001 Restructuring                             $  4,179,000     $         -     $         -     $        -     $  4,179,000

1999 Corporate Office Restructuring
For the year ended December 31, 1999               $  5,760,000     $  (221,000)    $         -     $        -     $  5,539,000
For the year ended December 31, 2000                  5,539,000      (3,993,000)     (1,008,000)             -          538,000
For the year ended December 31, 2001                    538,000        (199,000)       (139,000)             -          200,000

ELI 1999 Restructuring
For the year ended December 31, 1999               $  1,480,000     $(1,398,000)    $    52,000     $        -        $ 134,000
For the year ended December 31, 2000                    134,000        (493,000)        359,000              -                -

</TABLE>

(15) 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>
                                                                            2001           2000            1999
                                                                       --------------- --------------  --------------
<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               -10.8%          -6.4%            1.1%
Write-off of regulatory assets                                                 -11.7%           0.0%            0.0%
Nontaxable investment income                                                     2.6%           5.4%           -1.2%
Flow through depreciation                                                       -0.5%          -8.5%            2.8%
Tax reserve adjustment                                                           1.0%          -5.6%            0.6%
Minority interest                                                                0.0%           8.7%           -3.8%
All other, net                                                                   4.8%           3.7%           -0.1%
                                                                       --------------- --------------  --------------
                                                                                20.4%          32.3%           34.4%
                                                                       =============== ==============  ==============
</TABLE>

                                      F-28

<PAGE>


     As of  December  31,  2001 and  2000,  accumulated  deferred  income  taxes
     amounted  to  $423,486,000   and   $443,103,000,   respectively,   and  the
     unamortized  deferred  investment  tax credits  amounted to $6,058,000  and
     $8,209,000,  respectively. Net income taxes paid (refunded) during the year
     were  ($41,126,000),  $37,935,000  and  $885,000  for 2001,  2000 and 1999,
     respectively.

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

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

Deferred income tax liabilities:
<S>                                                            <C>            <C>
   Property, plant and equipment basis differences             $ 421,130      $ 424,378
   Regulatory assets                                                   -         21,135
   Other, net                                                     10,830         10,597
                                                          --------------- --------------
                                                                 431,960        456,110
                                                          --------------- --------------

Deferred income tax assets:
   Regulatory liabilities                                              -          1,641
   Deferred investment tax credits                                 2,416          3,157
                                                          --------------- --------------
                                                                   2,416          4,798
                                                          --------------- --------------
     Net deferred income tax liability                         $ 429,544      $ 451,312
                                                          =============== ==============
</TABLE>


                                      F-29

<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)                                                             2001           2000            1999
                                                                       --------------- --------------  --------------

Income taxes charged (credited) to the income statement for
   continuing operations:
Current:
<S>                                                                         <C>            <C>              <C>
   Federal                                                                  $ (37,003)     $ (66,759)       $ 45,922
   State                                                                        5,168         (2,588)          2,334
                                                                       --------------- --------------  --------------
     Total current                                                            (31,835)       (69,347)         48,256

Deferred:
   Federal                                                                     10,791         46,647          26,584
   Investment tax credits                                                        (649)          (931)         (1,366)
   State                                                                        6,888          7,499           1,426
                                                                       --------------- --------------  --------------
     Total deferred                                                            17,030         53,215          26,644
                                                                       --------------- --------------  --------------
     Subtotal                                                                 (14,805)       (16,132)         74,900
Income taxes charged (credited) to the income statement for
   discontinued operations:
Current:
   Federal                                                                      5,093          2,749             (17)
   State                                                                          774            418              (3)
                                                                       --------------- --------------  --------------
     Total current                                                              5,867          3,167             (20)

Deferred:
   Federal                                                                      2,726          2,260           3,595
   Investment tax credits                                                        (332)          (326)           (320)
   State                                                                          686            620             662
                                                                       --------------- --------------  --------------
     Total deferred                                                             3,080          2,554           3,937
                                                                       --------------- --------------  --------------
     Subtotal                                                                   8,947          5,721           3,917
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)                  11,947        (14,263)         74,965

Income taxes charged (credited) to shareholders' equity:
Deferred income taxes (benefits) on unrealized gains or losses on
   securities classified as available-for-sale                                  2,908         (8,997)        (25,906)
Current benefit arising from stock options exercised                           (3,001)        (7,392)         (1,262)
                                                                       --------------- --------------  --------------
       Income taxes charged (credited) to shareholders' equity (b)                (93)       (16,389)        (27,168)

                                                                       --------------- --------------  --------------
Total income taxes: (a) plus (b)                                             $ 11,854      $ (30,652)       $ 47,797
                                                                       =============== ==============  ==============
</TABLE>

     Our alternative  minimum tax credit as of December 31, 2001 is $69,836,000,
     which can be carried  forward  indefinitely  to reduce  future  regular tax
     liability.  This  benefit is  presented  as a reduction  of accrued  income
     taxes.

                                      F-30
<PAGE>


(16) Net Income (Loss) Per Common Share:
     ----------------------------------

     The  reconciliation  of the net income (loss) per common share  calculation
     for the years ended December 31, 2001, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>

(In thousands, except per-share amounts)
                                                   2001                          2000                         1999
                                      -------------------------------  ---------------------------  ----------------------------
                                                 Weighted                      Weighted                      Weighted
                                                 Average                       Average                       Average
                                        Loss      Shares   Per Share    Loss    Shares   Per Share   Income   Shares   Per Share
                                      ---------- --------- ----------  ---------------------------  --------- ------------------
Net income (loss) per common share:
<S>                                   <C>         <C>                 <C>        <C>                <C>        <C>
   Basic                              $ (89,682)  273,721             $ (28,394) 260,767            $ 144,486  259,335
   Carrying cost of equity forward
    contracts                            13,650         -                     -        -                    -        -
                                      ---------- ---------            ---------- --------           --------- ---------
   Available for common shareholders  $(103,332)  273,721   $ (0.38)  $ (28,394) 260,767  $ (0.11)  $ 144,486  259,335   $ 0.56
                                      ========== ========= ========== ========== ======== ========
   Effect of dilutive options                       5,831                         10,149                    -    2,925        -
                                                                                                    --------- ---------
   Diluted                                                                                          $ 144,486  262,260   $ 0.55
                                                                                                    ========= =========
</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  7,779,000  potentially
     dilutive  stock  options at a range of $12.37 to $21.47  per  share.  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 829,000 shares and 1,232,000 shares at December
     31,  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.

                                      F-31
<PAGE>


(17) Comprehensive Income (Loss):
     ---------------------------

     Our other  comprehensive  income  (loss) for the years ended  December  31,
     2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                                             2001
                                                          ------------------------------------------
                                                            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       $ (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 losses on securities:
   Net unrealized holding losses arising during period       $ (40,377)      $ (15,457)   $ (24,920)
   Add: Reclassification adjustments for net losses
     realized in net loss                                       16,875           6,460       10,415
                                                          ------------- --------------- ------------
Other comprehensive loss                                     $ (23,502)      $  (8,997)   $ (14,505)
                                                          ============= =============== ============


                                                                             1999
                                                          ------------------------------------------
                                                           Before-Tax    Tax Expense/   Net-of-Tax
($ in thousands)                                             Amount       (Benefit)       Amount
                                                          ------------- --------------- ------------

Net unrealized gains on securities:
   Net unrealized holding gains arising during period        $  56,746       $  21,722    $  35,024
   Less: Reclassification adjustments for net gains
     realized in net income                                    124,421          47,628       76,793
                                                          ------------- --------------- ------------
Other comprehensive loss                                     $ (67,675)      $ (25,906)   $ (41,769)
                                                          ============= =============== ============
</TABLE>

(18) Segment Information:
     -------------------

     We operate in four segments,  Incumbent Local Exchange Carrier (ILEC),  ELI
     (a competitive local exchange carrier, or CLEC), gas and electric. The ILEC
     segment provides both regulated and competitive  communications services to
     residential,  business and wholesale customers and is the incumbent carrier
     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."

     Adjusted  EBITDA  is  operating   income  (loss)  plus   depreciation   and
     amortization. EBITDA is a measure commonly used to analyze companies on the
     basis  of  operating  performance.  We use this  measure  to  evaluate  the
     operating  performance of and allocate resources to our operating segments.
     EBITDA  is a  simple  estimate  of  financial  performance  that is  easily
     calculated  by our  operating  managers.  It is not a measure of  financial
     performance under generally accepted  accounting  principles and should not
     be considered as an  alternative  to net income as a measure of performance
     nor as an alternative to cash flow as a measure of liquidity and may not be
     comparable to similarly  titled measures of other  companies.



                                      F-32

<PAGE>
<TABLE>
<CAPTION>


($ in thousands)                                         For the year ended December 31, 2001
                               ---------------------------------------------------------------------------------------------
                                                                                                                  Total
                                   ILEC            ELI              Gas          Electric    Eliminations       Segments
                               -------------- --------------   --------------  ------------- --------------   --------------
<S>                               <C>             <C>              <C>            <C>             <C>      <C>  <C>
Revenue                           $1,594,053      $ 226,640        $ 411,534      $ 228,015       $ (3,249)1    $ 2,456,993
Depreciation & Amortization          545,273         79,022              609          6,434            998 2        632,336
Operating Income (Loss)              220,956        (73,193)          47,916         35,335          2,028 2,3      233,042
Adjusted EBITDA                      766,229          5,829           48,525         41,769          3,026 3        865,378
Capital Expenditures, net            408,464         54,589  4        34,138         32,706              -          529,897
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    Eliminations       Segments
                               -------------- --------------   --------------  ------------- --------------   --------------
Revenue                           $  963,743      $ 243,977        $ 374,751      $ 223,072       $ (3,185)1    $ 1,802,358
Depreciation & Amortization          276,250         61,663           19,228         28,629          1,837 2        387,607
Operating Income (Loss)              157,896        (59,876)           8,268         15,226            287 2,3      121,801
Adjusted EBITDA                      434,146          1,787           27,496         43,855          2,124 3        509,408
Capital Expenditures, net            345,395        108,909  4        51,457         29,482              -          535,243
Assets                             3,558,562        949,774          692,351        589,801              -        5,790,488


($ in thousands)                                         For the year ended December 31, 1999
                               ---------------------------------------------------------------------------------------------
                                                                                                                  Total
                                   ILEC            ELI              Gas          Electric    Eliminations       Segments
                               -------------- --------------   --------------  ------------- --------------   --------------
Revenue                           $  903,237      $ 187,008        $ 306,986      $ 203,822       $ (2,817)1    $ 1,598,236
Depreciation & Amortization          226,141         36,505           22,203         25,552           (216)2        310,185
Operating Income (Loss)              100,910        (94,066)          32,024         30,268          1,224 2,3       70,360
Adjusted EBITDA                      327,051        (57,561)          54,227         55,820          1,008 3        380,545
Capital Expenditures, net            275,804        180,342           66,951         43,634              -          566,731

</TABLE>

1    Represents revenue received by ELI from our ILEC operations.
2    Represents amortization of the capitalized portion of intercompany interest
     related  to our  guarantees  of ELI debt and  leases  and  amortization  of
     goodwill related to our purchase of ELI stock (see Note 12).
3    Represents the  administrative  services fee charged to ELI pursuant to the
     management services agreement between ELI and us.
4    Does not include approximately,  $33,985,000,  $102,192,000 and $60,321,000
     of non-cash capital lease additions in 2001, 2000 and 1999, respectively.







                                      F-33
<PAGE>


     The reconciliation of income from continuing  operations to adjusted EBITDA
     for the years ended December 31, 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>

($ in thousands)                                     For the year ended December 31,
                                                   2001             2000            1999
                                              --------------   --------------  -------------
Income (loss) from continuing operations
<S>                                               <C>              <C>            <C>
  before extraordinary expense                    $ (63,926)       $ (40,071)     $ 136,599
Add back:
  Interest expense                                 (379,326)        (187,366)      (119,675)
  Dividends on convertible preferred
    securities, net of income tax benefit             6,210            6,210          6,210
  Income tax expense (benefit)                      (14,805)         (16,132)        74,900
  Other loss, net                                    (3,133)          (1,386)           (88)
Subtract:
  Gain on sale of assets                            139,304                -              -
  Investment income (loss), net                     (62,408)           4,736        243,885
  Minority interest                                       -           12,222         23,227
                                              --------------   --------------  -------------
Operating  income                                   233,042          121,801         70,360
Add back:
  Depreciation                                      632,336          387,607        310,185
                                              --------------   --------------  -------------
Adjusted EBITDA                                   $ 865,378        $ 509,408      $ 380,545
                                              ==============   ==============  =============

</TABLE>

     The following  tables are  reconciliations  of certain  sector items to the
     total consolidated amount.
<TABLE>
<CAPTION>

($ in thousands)                                     For the year ended December 31,
                                                  2001             2000            1999
                                              --------------   --------------  -------------

Capital Expenditures
<S>                                            <C>               <C>              <C>
Total segment capital expenditures             $    529,897      $   535,243      $ 566,731
General capital expenditures                            817            1,396          6,599
                                              --------------   --------------  -------------
Consolidated reported capital expenditures     $    530,714      $   536,639      $ 573,330
                                              ==============   ==============  =============

                                                       December 31,
Assets                                            2001             2000
                                              --------------   --------------
Total segment assets                           $  9,082,573      $ 5,790,488
General assets                                      724,236          446,916
Discontinued operations assets                      746,791          717,602
                                              --------------   --------------
Consolidated reported assets                   $ 10,553,600      $ 6,955,006
                                              ==============   ==============
</TABLE>



                                      F-34
<PAGE>



(19) Supplemental Segment Information:
     --------------------------------

     Supplemental  segment  income  statement  information  for the  year  ended
     December 31, 2001 is as follows:

<TABLE>
<CAPTION>

                                                    For the year ended December 31, 2001
                                               ------------------------------------------------------------------------------------
     ( $ in thousands)                                                                       Discontinued Corporate and Consolidated
                                                 ILEC           ELI         Gas    Electric   Operations   Eliminations    Total
                                               ------------------------- ---------------------- ----------- -----------------------
<S>                                            <C>           <C>          <C>         <C>         <C>        <C>        <C>
     Revenue                                   $ 1,594,053   $  226,640   $ 411,534   $228,015    $      -   $  (3,249) $ 2,456,993

     Operating expenses:
      Cost of services                             129,408       67,610     282,061    123,223           -      (2,924)    599,378
      Depreciation and amortization                545,273       79,022         609      6,434           -         998     632,336
      Other operating expenses                     640,688      149,022      80,948     63,023           -      (3,351)    930,330
      Write-down of Global receivables              21,200            -           -          -           -           -      21,200
      Restructuring expenses                        15,148        4,179           -          -           -           -      19,327
      Acquisition assimilation expense              21,380            -           -          -           -           -      21,380
                                               ------------------------- ---------------------- ----------- ----------- -----------
         Total operating expenses                1,373,097      299,833     363,618    192,680           -      (5,277)  2,223,951
                                               ------------------------- ---------------------- ----------- ----------- -----------

         Operating income (loss)                   220,956      (73,193)     47,916     35,335           -       2,028     233,042

     Investment income (loss), net                 (64,287)           -       1,625        254           -           -     (62,408)
     Other income (loss), net                       (3,052)         311          24       (416)          -           -      (3,133)
     Gain on sale of assets                              -            -           -          -           -     139,304     139,304
     Interest expense                             (302,516)     (97,656)     (8,902)   (16,276)          -      46,024    (379,326)
                                               ------------------------- ---------------------- ----------- ----------- -----------

      Income (loss) from continuing operations
        before income taxes, dividends on convertible
        preferred securities and extraordinary
        expense                                   (148,899)    (170,538)     40,663     18,897           -     187,356     (72,521)

     Income tax expense (benefit)                  (55,107)       1,154      15,616      7,007           -      16,525     (14,805)
                                               ------------------------- ---------------------- ----------- ----------- -----------

      Income (loss) from continuing operations
        before dividends on convertible preferred
        securities and extraordinary expense       (93,792)    (171,692)     25,047     11,890           -     170,831     (57,716)

     Dividends on convertible preferred
        securities, net of income tax benefit        6,210            -           -          -           -           -       6,210
                                               ------------------------- ---------------------- ----------- ----------- -----------

      Income (loss) from continuing operations
        before extraordinary expense              (100,002)    (171,692)     25,047     11,890           -     170,831     (63,926)

     Income from discontinued operations,
        net of tax                                       -            -           -          -      17,875           -      17,875
                                               ------------------------- ---------------------- ----------- ----------- -----------

      Net income (loss) before extraordinary
        expense                                   (100,002)    (171,692)     25,047     11,890      17,875     170,831     (46,051)

      Extraordinary expense - discontinuation
        of Statement of Financial Accounting
        Standards No. 71, net of tax                     -           -          -           -            -     43,631       43,631
                                               ------------------------- ---------------------- ----------- ----------- -----------

      Net income (loss)                        $  (100,002)  $ (171,692)  $  25,047   $ 11,890    $ 17,875   $ 127,200  $  (89,682)
                                               ========================= ====================== =========== =========== ===========
</TABLE>


                                      F-35

<PAGE>


(20) 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.

     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 have concluded that minor modifications are 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-36
<PAGE>

(21) Quarterly Financial Data (unaudited):
     ------------------------------------

<TABLE>
<CAPTION>
($ in thousands, except per share amounts)
                                                                  First quarter  Second quarter  Third quarter  Fourth quarter
2001
<S>                                                                 <C>             <C>            <C>           <C>
Revenue                                                             $ 624,281       $ 505,741      $ 661,121     $ 665,850
Income (loss) before extraordinary expense                             19,723            (649)        43,190      (108,315)
Net income (loss)                                                      19,723            (649)          (441)     (108,315)
Income (loss) before extraordinary expense available to
  common shareholders per basic share                               $    0.08       $   (0.05)     $    0.15     $   (0.39)
Income (loss) before extraordinary expense available to
  common shareholders per diluted share                             $    0.07       $   (0.05)     $    0.15     $   (0.39)
Net income (loss) available to common shareholders per basic share  $    0.08       $   (0.05)     $   (0.01)    $   (0.39)
Net income (loss) available to common shareholders per diluted
  share                                                             $    0.07       $   (0.05)     $   (0.01)    $   (0.39)

2000
Revenue                                                             $ 448,702       $ 418,607      $ 452,710     $ 482,339
Net income (loss)                                                       7,326           3,012          1,467       (40,199)
Net income (loss) per basic share                                   $    0.03       $    0.01      $    0.01     $   (0.15)
Net income (loss) per diluted share                                 $    0.03       $    0.01      $    0.01     $   (0.15)
</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 July 2, 2001, we completed on the sale of our  Louisiana Gas  operations
     to Atmos Energy Corporation for $363.4 million in cash. The pre-tax gain on
     the sale recognized in the third quarter was $139.3 million.

     Concurrent  with the  acquisition  of  Frontier,  we entered  into  several
     operating  agreements  with Global.  The  write-down of the net  realizable
     value of Global  receivables  of $21.2 million for the year ended  December
     31,  2001 is related to the  write-down  of  receivables  from  Global as a
     result of Global's filing for  bankruptcy.  We are integrating the Frontier
     acquisition  from Global and have  ongoing  commercial  relationships  with
     Global  affiliates.  We will  reserve  a total  of $30  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. We recorded a write down of such  receivables  in the amount of $21.2
     million in the fourth quarter of 2001,  with the remainder  recorded in the
     first quarter of 2002 for receivables generated after December 31, 2001 and
     prior to the Global bankruptcy filing on January 28, 2002.

     Restructuring  expenses  of $13.0  million  for the third  quarter and $6.3
     million for the fourth quarter of 2001 are primarily related to our plan to
     close our operations  support center in Plano,  Texas by April 2002 and our
     Sacramento, California call center by March 2002 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 loss of $79.0  million in the  Adelphia  investment  as a
     reduction to investment income in the fourth quarter of 2001. This non-cash
     charge does not impact the carrying  value of these  securities  which were
     stated at  current  market  values on prior  balance  sheets.  This  charge
     reflects  a decline in  current  trading  values  that have  persisted  for
     greater than a six month period.

     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 $43.6 million, net of tax, in our income
     statement.

     In the fourth  quarter of 2000, we settled a proceeding  with the Louisiana
     Public Service  Commission.  Louisiana Gas Service,  our former subsidiary,
     refunded  approximately  $27  million  to  ratepayers  during  the month of
     January 2001,  effected as a credit on customers'  bills.  As a result,  we
     recorded  approximately  $29.7 million of charges to earnings in the fourth
     quarter of 2000. This amount included a reduction to revenue for the refund
     to customers of  approximately  $27 million and legal fees of approximately
     $2.7 million.


                                      F-37
<PAGE>

(22) Supplemental Cash Flow Information:
     ----------------------------------

     The  following is a schedule of net cash  provided by operating  activities
     for the years ended December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>

($ in thousands)                                                   2001           2000           1999
                                                               -------------  -------------  -------------

<S>                                                               <C>            <C>            <C>
Income (loss) from continuing operations                          $(107,557)     $ (40,071)     $ 136,599
    Extraordinary item                                               43,631              -              -
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
    Depreciation and amortization expense                           632,336        387,607        310,185
    Non-cash restructuring charge                                         -              -         36,136
    Investment write down                                            79,114              -              -
    Investment (gains)/losses                                           660         18,314       (221,088)
    Gain on sale of gas operations, net                            (137,849)             -              -

    Allowance for equity funds used during construction              (2,811)        (3,257)        (4,586)
    Deferred income tax and investment tax credit                    17,030         53,215         26,644
    Change in operating accounts receivable                          57,145        (11,685)        (1,966)
    Change in accounts payable and other                           (156,860)       (32,451)        52,066
    Change in accrued taxes and interest                            166,815        (28,944)        29,867
    Change in other assets                                          (71,275)       (43,225)         2,160
                                                               -------------  -------------  -------------
        Net cash provided by continuing operating activities      $ 520,379      $ 299,503      $ 366,017
                                                               =============  =============  =============

</TABLE>


                                      F-38

<PAGE>



(23) 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 fund the plan's net periodic  pension cost while
     considering  tax  deductibility.  Plan assets are invested in a diversified
     portfolio of equity and fixed-income securities.

     The  following  tables set forth the plan's  benefit  obligations  and fair
     values of plan  assets as of December  31,  2001 and 2000 and net  periodic
     benefit cost for the years ended December 31, 2001, 2000 and 1999.
<TABLE>
<CAPTION>


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

Change in benefit obligation
<S>                                                              <C>            <C>
Benefit obligation at beginning of year                          $ 282,024      $ 227,602
Service cost                                                        14,065         12,286
Interest cost                                                       37,680         18,772
Amendments                                                          (3,679)           275
Actuarial (gain)/loss                                               16,771         23,223
Acquisitions                                                       447,279         11,300
Benefits paid                                                      (34,213)       (11,434)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 759,927      $ 282,024
                                                              ============= ==============

Change in plan assets
Fair value of plan assets at beginning of year                   $ 249,400      $ 238,886
Actual return on plan assets                                       (13,337)         7,155
Acquisitions                                                       583,190         12,622
Employer contribution                                               13,253          2,171
Benefits paid                                                      (34,213)       (11,434)
                                                              ------------- --------------
Fair value of plan assets at end of year                         $ 798,293      $ 249,400
                                                              ============= ==============

(Accrued)/Prepaid benefit cost
Funded status                                                    $  38,366      $ (32,624)
Unrecognized net liability                                              60            103
Unrecognized prior service cost                                     (1,599)         1,795
Unrecognized net actuarial (gain)/loss                              96,860         21,900
                                                              ------------- --------------
(Accrued)/Prepaid benefit cost                                   $ 133,687      $  (8,826)
                                                              ============= ==============

                                                                  For the years ended December 31,
                                                                  2001          2000           1999
                                                              ------------- -------------- -------------
Components of net periodic benefit cost
Service cost                                                      $ 14,065       $ 12,286      $ 13,234
Interest cost on projected benefit obligation                       37,680         18,772        17,200
Return on plan assets                                              (44,852)       (19,743)      (19,081)
Net amortization and deferral                                         (242)           196           175
                                                              ------------- -------------- -------------
 Net periodic benefit cost                                        $  6,651       $ 11,511      $ 11,528
                                                              ============= ============== =============
</TABLE>



                                      F-39
<PAGE>
     Assumptions  used in the  computation  of pension costs/  year-end  benefit
     obligations were as follows:

                                                         2001           2000
                                                         ----           ----
Discount rate                                         7.5%/7.25%     8.0%/7.5%
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 November 2000 and June 2001, we acquired  Verizon Illinois and Frontier,
     respectively,   including  their  pension   benefit  plans.   The  Illinois
     acquisition  increased the pension benefit obligation by $4,665,000 and the
     fair value of plan assets by $6,378,000 of December 31, 2001.

     Included in pension  benefit  obligation  is  $442,614,000  and in the fair
     value  of plan  assets  is  $576,812,000  as of  December  31,  2001,  each
     attributable  to  the  Frontier  acquisition.   As  part  of  the  Frontier
     acquisition,  Global and we agreed to the transfer, effective as of July 1,
     2001,  to a trust  established  under our pension plan of  liabilities  and
     assets,  other than  liabilities  relating  to certain  current  and former
     Frontier employees who were not considered part of the Frontier acquisition
     and assets  attributable to such  liabilities  (calculated  using the "safe
     harbor" methodology of the Pension Benefit Guaranty Corporation). While all
     amounts  and  procedures  had  been  agreed  to by  Global  and us prior to
     Global's  bankruptcy  filing,  Global has 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
     have  initiated  an  adversary   proceeding   with  the  Bankruptcy   Court
     supervising  Global's  bankruptcy  proceeding,  in which we believe we will
     prevail,  to require  Global to execute and  deliver  such letter if Global
     does not do so as required by the Frontier stock purchase agreement.


                   Postretirement Benefits Other Than Pensions
                   -------------------------------------------
     We provide certain medical,  dental and life insurance 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, 2001 and
     2000 and net  periodic  postretirement  benefit  costs for the years  ended
     December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>

($ in thousands)                                                  2001          2000
                                                              ------------- --------------
Change in benefit obligation
<S>                                                              <C>             <C>
Benefit obligation at beginning of year                          $  59,191       $ 45,528
Service cost                                                           937            652
Interest cost                                                        8,812          3,943
Plan participants' contributions                                     1,023            700
Curtailments/settlements                                           (14,223)          (812)
Actuarial (gain)/loss                                               20,321          8,733
Acquisitions                                                       119,611          3,441
Amendments                                                              20              -
Benefits paid                                                       (5,350)        (2,994)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 190,342       $ 59,191
                                                              ============= ==============

Change in plan assets
Fair value of plan assets at beginning of year                   $  25,412       $ 20,460
Actual return on plan assets                                           310          1,093
Benefits paid                                                       (1,464)             -
Employer contribution                                                1,498          1,498
Acquisitions                                                         3,334          2,361
                                                              ------------- --------------
Fair value of plan assets at end of year                         $  29,090       $ 25,412
                                                              ============= ==============
Accrued benefit cost
Funded status                                                    $(161,252)      $(33,779)
Unrecognized transition obligation                                     258            281
Unrecognized prior service cost                                         18              -
Unrecognized (gain)                                                 18,174         (4,832)
                                                              ------------- --------------
Accrued benefit cost                                             $(142,802)      $(38,330)
                                                              ============= ==============
</TABLE>

                                      F-40
<PAGE>
<TABLE>
<CAPTION>

                                                                   For the years ended December 31,
                                                                   2001          2000           1999
                                                              ------------- -------------- -------------
Components of net periodic postretirement benefit costs
<S>                                                                  <C>            <C>           <C>
Service cost                                                       $   937        $   652       $   781
Interest cost on projected benefit obligation                        8,812          3,943         3,431
Return on plan assets                                               (2,227)        (1,688)       (1,544)
Net amortization and deferral                                          229           (770)         (828)
Curtailment (gain)/loss                                                  -           (757)            -
Settlement (gain)/loss                                                 491              -             -
Acquisition (gain)/loss                                                  -            581             -
                                                              ------------- -------------- -------------
Net periodic postretirement benefit cost                           $ 8,242        $ 1,961       $ 1,840
                                                              ============= ============== =============
</TABLE>

     For purposes of measuring  year end benefit  obligations,  we used the same
     discount  rates as were used for the  pension  plan and a 9% annual rate of
     increase in the  per-capita  cost of covered  medical  benefits,  gradually
     decreasing to 5% in the year 2020 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 $835,000 and
     the effect on the accumulated  postretirement benefit obligation for health
     benefits would be  $17,188,000.  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 $(689,000) and the effect on the  accumulated  postretirement
     benefit obligation for health benefits would be $(14,821,000).

     In August 1999, our Board of Directors  approved a plan of divestiture  for
     the public services properties.  As such, any pension and/or postretirement
     gain or loss associated  with the  divestiture of these  properties will be
     recognized when realized.

     In November 2000 and June 2001, we acquired  Verizon  Illinois and Frontier
     Corp.,  respectively,  including their  postretirement  benefit plans.  The
     Illinois  acquisition  increased  the  accumulated  postretirement  benefit
     obligation  by  $792,000  as of  December  31,  2001.  The  Frontier  Corp.
     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  employee  savings  plans under  section  401(k) of the Internal
     Revenue Code. The plans cover substantially all full-time employees.  Under
     the  plans,  we  provide  matching  contributions  in our  stock  based  on
     qualified employee  contributions.  Matching contributions were $6,878,000,
     $5,973,000 and $5,850,000 for 2001, 2000 and 1999, respectively.

(24) Commitments and Contingencies:
     -----------------------------

     We have  budgeted  capital  expenditures  in 2002 of  approximately  $525.6
     million,  including  $483.6  million for ILEC and ELI and $42.0 million for
     gas and electric.  Certain commitments have been entered into in connection
     therewith.

     In December  1999,  we entered into a three-year  agreement  with Nortel to
     outsource  elements of DMS central office  engineering and commissioning of
     our network.  Our commitment  under this agreement is $35,000,000 for 2002.
     The 2002  capital  cost of this  contract is included in the 2002  budgeted
     capital expenditures, presented above.

                                      F-41
<PAGE>

     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
                          --------------   --------------
                              2002              $ 25,777
                              2003                23,933
                              2004                19,135
                              2005                16,602
                              2006                15,521
                           thereafter             60,849
                                           --------------
                              Total            $ 161,817
                                           ==============

     Total rental  expense  included in our results of operations  for the years
     ended December 31, 2001,  2000 and 1999 was  $38,829,000,  $33,042,000  and
     $30,855,000,  respectively. We sublease, on a month to month basis, certain
     office space in our corporate office to a charitable  foundation  formed by
     our Chairman.

     In 1995, ELI entered into a $110 million  construction agency agreement and
     an operating lease agreement in connection with the construction of certain
     communications  networks and fiber cable links. ELI served as agent for the
     construction of these projects and, upon completion of each project, leased
     the  facilities for a three-year  term,  with one-year  renewals  available
     through  April 30,  2002.  At December  31,  2001,  2000 and 1999,  ELI was
     leasing assets under this agreement with an original cost of  approximately
     $108,541,000.  In January  2002,  ELI  exercised its option to purchase the
     facilities  at the end of the lease  term for the  amount  of the  lessor's
     average  investment in the  facilities.  Payments under the lease depend on
     current  interest  rates,  and assuming  continuation  of current  interest
     rates,  payments would  approximate $6.7 million annually through April 30,
     2002 and, a final  payment of  approximately  $110 million in 2002. We have
     guaranteed all obligations of ELI under this operating lease.

     ELI has entered into various  capital and operating  leases for fiber optic
     cable to  interconnect  ELI's local  networks  with  long-haul  fiber optic
     routes.  The terms of the various  agreements  covering  these routes range
     from 20 to 25 years,  with varying optional  renewal  periods.  For certain
     contracts,  rental  payments  are  based on a  percentage  of ELI's  leased
     traffic,  and  are  exclusive,  subject  to  certain  minimums.  For  other
     contracts, certain minimum payments are required.

     ELI has also entered into certain  operating and capital leases in order to
     develop  ELI's local  networks,  including an operating  lease to develop a
     local  network  in  Phoenix  and a  capital  lease  in San  Francisco.  The
     operating  lease  in  Phoenix  provides  for  rental  payments  based  on a
     percentage of the network's  operating income for a period of 15 years. The
     capital  lease in San  Francisco is a 30-year  indefeasible  and  exclusive
     right to use agreement for optical fibers in the San Francisco Bay Area.


                                      F-42
<PAGE>

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

     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,  2001,  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>
                              2002              $ 68,627         $ 36,726         $ 105,353
                              2003                43,040           33,040            76,080
                              2004                17,678           33,541            51,219
                              2005                     -           29,116            29,116
                              2006                     -           29,706            29,706
                           thereafter                  -          281,345           281,345
                                           --------------   --------------    --------------
                              Total             $129,345         $443,474         $ 572,819
                                           ==============   ==============    ==============

</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, 2001,  2000 and 1999,  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, 2001, we have outstanding  performance letters of credit as
     follows:

     ($ in thousands)

          Qwest                                         $ 64,280
          Insurance Letters of credit to CNA              16,238
          Water/wastewater projects                        2,360
          ELI projects                                        60
                                                    ------------
             Total                                      $ 82,938
                                                        ========

     None of the  above  letters  of  credit  restrict  our  cash  balances.  In
     addition,  we have  issued  $281,680  of  letters  of  credit  where we are
     required to maintain  restricted  cash  balances in the same  amount.  This
     amount has been  segregated  from cash on our balance sheet and is included
     as a component of other current assets.

     On July 20, 2001, we notified Qwest  Corporation  that we were  terminating
     eight acquisition  agreements with Qwest relating to telephone exchanges in
     Arizona,  Colorado, Idaho/ Washington,  Iowa, Minnesota,  Montana, Nebraska
     and  Wyoming.  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  these  agreements  and is seeking
     approximately $64 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  proceeding,  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  tentatively  scheduled  to
     commence in the fourth quarter of 2002.



                                      F-43
<PAGE>

     On December 21,  2001,  we entered into a  settlement  agreement  that,  if
     approved by the court,  will resolve 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 includes 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 the company, we will pay the class members $5.5 million in
     satisfaction of all claims.  This settlement must be approved by the court,
     which is  expected  to occur  sometime  during the first half of 2002.  The
     company has accrued the full settlement  amount,  plus an additional amount
     sufficient  to cover  legal  fees and other  related  expenses,  during the
     fourth quarter of 2001.

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


                                      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, 2001 and 2000 and the
related statements of income (loss),  shareholders' equity, comprehensive income
(loss)  and cash  flows for each of the  years in the  three-year  period  ended
December 31, 2001.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial statements of 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.




                                                        /S/KPMG LLP

New York, New York
March 6, 2002


                                      F-45
<PAGE>



Schedule II

                             Citizens Communications
                        Valuation and Qualifying Accounts
                                ($ In thousands)

<TABLE>
<CAPTION>

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

    Allowance for doubtful accounts
<S> <C>                                         <C>              <C>               <C>         <C>               <C>
    1999                                        $18,348          $19,145           $   -       $ (9,215)         28,278
    2000                                         28,278           16,719               -        (21,084)         23,913
    2001                                         23,913           41,233          10,709         (8,254)         67,601

</TABLE>

                                      F-46
<PAGE>