CITIZENS COMMUNICATIONS COMPANY

                                    FORM 10-Q


                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


                     OF THE SECURITIES EXCHANGE ACT OF 1934


                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001


<PAGE>



                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 2001
                                               ------------------

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

              For the transition period from _________to__________

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


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

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


                                3 High Ridge Park
                                  P.O. Box 3801
                           Stamford, Connecticut 06905
                           ---------------------------
               (Address, zip code of principal executive offices)


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

                                   NO CHANGES
                                   ----------
     (Former name, former address and former fiscal year, if changed since
                                 last report.)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding  twelve months (or for such shorter period that the registrant was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past ninety days.

                               Yes  X       No
                                  -----       -----


The number of shares outstanding of the registrant's class of common stock as of
October 31, 2001 was 280,074,616.

<PAGE>


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES

                   Index to Consolidated Financial Statements


<TABLE>
<CAPTION>


                                                                                                       Page No.

Part I.  Financial Information (Unaudited)

<S>                                                                                                       <C>
    Consolidated Balance Sheets at September 30, 2001 and December 31, 2000                                2

    Consolidated Statements of Income for the three months ended September 30, 2001 and 2000               3

    Consolidated Statements of Income for the nine months ended September 30, 2001 and 2000                4

    Consolidated Statements Comprehensive Loss for the three and nine months ended
         September 30, 2001 and 2000                                                                       5

    Consolidated Statements of Shareholders' Equity for the year ended December 31, 2000 and the
       nine months ended September 30, 2001                                                                6

    Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000            7

    Notes to Consolidated Financial Statements                                                             8

    Management's Discussion and Analysis of Financial Condition and Results of Operations                 20

    Quantitative and Qualitative Disclosures about Market Risk                                            35

Part II.  Other Information

    Legal Proceedings                                                                                     37

    Changes in Securities and Use of Proceeds                                                             37

    Defaults upon Senior Securities                                                                       37

    Submission of Matters to a Vote of Security Holders                                                   37

    Other Information                                                                                     37

    Exhibits and Reports on Form 8-K                                                                      38

    Signature                                                                                             39

</TABLE>


<PAGE>


                          PART I. FINANCIAL INFORMATION

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    ($ in thousands except per-share amounts)
                                    Unaudited

<TABLE>
<CAPTION>


                                                                       September 30, 2001  December 31, 2000
ASSETS
------
Current assets:
<S>                                                                          <C>                 <C>
    Cash                                                                     $     38,922        $    31,223
    Accounts receivable, net                                                      339,382            243,304
    Short-term investments                                                        141,496             38,863
    Other current assets                                                           42,844             52,545
    Assets held for sale                                                        1,093,939          1,212,307
    Assets of discontinued operations                                             743,238            673,515
                                                                       ------------------- ------------------
      Total current assets                                                      2,399,821          2,251,757

Property, plant and equipment, net                                              4,537,291          3,520,712

Intangibles                                                                     2,864,454            633,268

Investments                                                                       117,124            214,359
Regulatory assets                                                                       -            175,949
Other assets                                                                      466,441            158,961
                                                                       ------------------- ------------------
          Total assets                                                       $ 10,385,131        $ 6,955,006
                                                                       =================== ==================

LIABILITIES AND EQUITY
----------------------
Current liabilities:
    Long-term debt due within one year                                       $    155,967        $   181,014
    Accounts payable and other current liabilities                                516,520            330,383
    Liabilities related to assets held for sale                                   214,090            290,575
    Liabilities of discontinued operations                                        219,568            190,496
                                                                       ------------------- ------------------
      Total current liabilities                                                 1,106,145            992,468

Deferred income taxes                                                             408,975            490,487
Customer advances for construction and contributions
  in aid of construction                                                          206,332            205,604
Other liabilities                                                                 232,702            108,321
Regulatory liabilities                                                                  -             24,573
Equity units                                                                      460,000                  -
Long-term debt                                                                  5,783,591          3,062,289
                                                                       ------------------- ------------------
      Total liabilities                                                         8,197,745          4,883,742

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;
      280,036,000 and 262,661,000 outstanding and 292,344,000 and
      265,768,000 issued at September 30, 2001 and December 31, 2000,
      respectively)                                                                73,086             66,442
    Additional paid-in capital                                                  1,936,607          1,471,816
    Retained earnings                                                             238,179            233,196
    Accumulated other comprehensive income (loss)                                 (59,147)               418
    Treasury stock                                                               (202,589)           (51,871)
                                                                       ------------------- ------------------
      Total shareholders' equity                                                1,986,136          1,720,001
                                                                       ------------------- ------------------
          Total liabilities and equity                                       $ 10,385,131        $ 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.

                                       2
<PAGE>


                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                    (In thousands, except per-share amounts)
                                    Unaudited

<TABLE>
<CAPTION>

                                                                                     2001             2000
                                                                                --------------   --------------

<S>                                                                                 <C>              <C>
Revenue                                                                             $ 661,121        $ 452,710
Operating expenses:
     Cost of services                                                                 123,214          114,497
     Depreciation and amortization                                                    193,662           95,859
     Other operating expenses                                                         267,892          187,373
     Restructuring expenses                                                            13,002                -
     Acquisition assimilation expense                                                   5,119           12,539
                                                                                --------------   --------------
Total operating expenses                                                              602,889          410,268
                                                                                --------------   --------------

Operating income                                                                       58,232           42,442

Investment and other income, net                                                        3,070            5,096
Gain on sale of assets                                                                139,304                -
Interest expense                                                                      123,452           49,559
                                                                                --------------   --------------
     Income (loss) from continuing operations before income taxes, dividends
       on convertible preferred securities and extraordinary expense                   77,154           (2,021)

Income tax expense (benefit)                                                           39,610             (202)
                                                                                --------------   --------------
     Income (loss) from continuing operations before dividends
       on convertible preferred securities and extraordinary expense                   37,544           (1,819)

Dividends on convertible preferred securities, net of income tax benefit                1,553            1,553
                                                                                --------------   --------------
     Income (loss) from continuing operations before extraordinary expense             35,991           (3,372)

Income from discontinued operations, net of tax                                         7,199            4,838
                                                                                --------------   --------------
      Income before extraordinary expense                                              43,190            1,466

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

     Net income (loss)                                                              $    (441)       $   1,466
                                                                                ==============   ==============

Carrying cost of equity forward contracts                                               1,003                -
                                                                                --------------   --------------

     Available for common shareholders                                              $  (1,444)       $   1,466
                                                                                ==============   ==============

Basic income (loss) per common share:
     Earnings from continuing operations                                            $    0.12        $   (0.01)
     Earnings from discontinued operations                                               0.03             0.02
     Extraordinary expense                                                              (0.15)               -
     Available for common shareholders                                                  (0.01)            0.01

Diluted income (loss) per common share:
     Earnings from continuing operations                                            $    0.12        $   (0.01)
     Earnings from discontinued operations                                               0.02             0.02
     Extraordinary expense                                                              (0.15)               -
     Available for common shareholders                                                  (0.01)            0.01

</TABLE>


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

                                       3
<PAGE>


                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                    (In thousands, except per-share amounts)
                                    Unaudited
<TABLE>
<CAPTION>


                                                                                     2001             2000
                                                                                --------------   --------------

<S>                                                                               <C>              <C>
Revenue                                                                           $ 1,791,144      $ 1,320,019
Operating expenses:
     Cost of services                                                                 477,107          338,839
     Depreciation and amortization                                                    413,734          278,483
     Other operating expenses                                                         662,972          563,427
     Restructuring expenses                                                            13,002                -
     Acquisition assimilation expense                                                  17,665           24,130
                                                                                --------------   --------------
Total operating expenses                                                            1,584,480        1,204,879
                                                                                --------------   --------------

Operating income                                                                      206,664          115,140

Investment and other income, net                                                       16,495           14,913
Gain on sale of assets                                                                139,304                -
Minority interest                                                                           -           12,222
Interest expense                                                                      258,033          128,899
                                                                                --------------   --------------
     Income from continuing operations before income taxes, dividends
       on convertible preferred securities and extraordinary expense                  104,430           13,376

Income tax expense                                                                     49,183            5,096
                                                                                --------------   --------------
     Income from continuing operations before dividends
       on convertible preferred securities and extraordinary expense                   55,247            8,280

Dividends on convertible preferred securities, net of income tax benefit                4,658            4,658
                                                                                --------------   --------------
      Income from continuing operations before extraordinary expense                   50,589            3,622

Income from discontinued operations, net of tax                                        11,675            8,182
                                                                                --------------   --------------
     Income before extraordinary expense                                               62,264           11,804

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

     Net income                                                                   $    18,633      $    11,804
                                                                                ==============   ==============

Carrying cost of equity forward contracts                                              13,650                -
                                                                                --------------   --------------

     Available for common shareholders                                            $     4,983      $    11,804
                                                                                ==============   ==============

Basic income per common share:
     Earnings from continuing operations                                          $      0.14      $      0.01
     Earnings from discontinued operations                                               0.04             0.03
     Extraordinary expense                                                              (0.16)               -
     Available for common shareholders                                                   0.02             0.05

Diluted income per common share:
     Earnings from continuing operations                                          $      0.13      $      0.01
     Earnings from discontinued operations                                               0.04             0.03
     Extraordinary expense                                                              (0.16)               -
     Available for common shareholders                                                   0.02             0.04

</TABLE>

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

                                       4
<PAGE>


                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                 (In thousands)
                                    Unaudited
<TABLE>
<CAPTION>

                                        For the three months ended September 30,    For the nine months ended September 30,
                                       -----------------------------------------    -----------------------------------------
                                             2001                   2000                   2001                  2000
                                       ------------------    -------------------    -------------------   -------------------

<S>                                            <C>                    <C>                    <C>                   <C>
Net income                                     $    (441)             $   1,466              $  18,633             $  11,804
Other comprehensive loss, net of tax             (34,696)               (28,704)               (59,565)              (69,097)
                                       ------------------    -------------------    -------------------   -------------------
  Total comprehensive income (loss)            $ (35,137)             $ (27,238)             $ (40,932)            $ (57,293)
                                       ==================    ===================    ===================   ===================
</TABLE>


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

                                       5
<PAGE>


                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                    FOR THE YEAR ENDED DECEMBER 31, 2000 AND
                    THE NINE MONTHS ENDED SEPTEMBER 30, 2001
                    (In thousands, except per-share amounts)
                                   Unaudited

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

<S>                                         <C>         <C>            <C>           <C>                <C>    <C>
Balances January 1, 2000                     $ 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             -             -             -      (14,505)            -        (14,505)
                                          ------------ ------------- ------------- ------------  ------------  -------------
Balances December 31, 2000                     66,442     1,471,816       233,196          418       (51,871)     1,720,001
   Stock plans                                    355        26,538             -            -          (705)        26,188
   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 income                                       -             -        18,633            -             -         18,633
   Other comprehensive loss, net of tax             -             -             -      (59,565)            -        (59,565)
                                          ------------ ------------- ------------- ------------  ------------  -------------
Balances September 30, 2001                  $ 73,086    $1,936,607     $ 238,179    $ (59,147)   $ (202,589)   $ 1,986,136
                                          ============ ============= ============= ============  ============  =============
</TABLE>


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

                                       6
<PAGE>


                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                         2001              2000
                                                                   ----------------  ----------------

<S>                                                                      <C>               <C>
Net cash provided by continuing operating activities                  $    403,443         $ 262,962

Cash flows from investing activities:
       Acquisitions                                                     (3,369,517)         (644,300)
       Proceeds from sale of assets                                        363,436                 -
       Capital expenditures                                               (350,480)         (409,342)
       Securities purchased                                               (104,018)          (52,589)
       Securities sold                                                       1,218           129,396
       Securities matured                                                        -            10,400
       ELI share purchases                                                       -           (38,748)
       Other                                                                   940                18
                                                                   ----------------  ----------------
Net cash used by investing activities                                   (3,458,421)       (1,005,165)

Cash flows from financing activities:
       Long-term debt borrowings                                         3,503,060           819,869
       Long-term debt principal payments                                  (956,821)          (35,183)
       Issuance of equity units                                            460,000                 -
       Debt issuance cost                                                  (67,499)                -
       Common stock offering                                               289,561                 -
       Issuance of common stock for employee plans                          23,490            22,176
       Settlement of equity forward contracts                             (163,663)                -
       Common stock buybacks                                                     -           (49,209)
       Customer advances for construction and contributions in
         aid of construction                                                 3,525            14,159
                                                                   ----------------  ----------------
Net cash provided by financing activities                                3,091,653           771,812

Cash used by discontinued operations                                       (28,976)          (20,787)
                                                                   ----------------  ----------------

Increase in cash                                                             7,699             8,822
Cash at January 1,                                                          31,223            37,141
                                                                   ----------------  ----------------

Cash at September 30,                                                 $     38,922         $  45,963
                                                                   ================  ================

Non-cash investing and financing activities:
       Increase in capital lease asset                                $     33,985         $  98,555

</TABLE>


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

                                       7
<PAGE>


                          PART I. FINANCIAL INFORMATION

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)   Summary of Significant Accounting Policies:
      ------------------------------------------
     (a)  Basis of Presentation:
          Citizens  Communications  Company and its subsidiaries are referred to
          as "we",  "us" or "our" in this  report.  The  unaudited  consolidated
          financial  statements  include our accounts and have been  prepared in
          conformity with generally accepted accounting principles and should be
          read in conjunction  with the  consolidated  financial  statements and
          notes included in our 2000 Annual Report on Form 10-K. These unaudited
          consolidated  financial  statements  include  all  adjustments,  which
          consist of normal recurring  accruals  necessary to present fairly the
          results  for  the  interim  periods  shown.  Certain  information  and
          footnote  disclosures  have been condensed  pursuant to Securities and
          Exchange Commission rules and regulations.  The results of the interim
          periods  are not  necessarily  indicative  of the results for the full
          year. Certain  reclassifications  of balances previously reported have
          been made to conform to current presentation.

     (b)  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 11) for our local exchange  telephone
          properties.

     (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.

          Electric  Lightwave,  Inc.  (ELI) -  Revenue  is  recognized  when the
          services are provided. Revenue from long-term prepaid network services
          agreements are deferred and recognized on a  straight-line  basis over
          the terms of the  related  agreements.  Installation  fees and related
          costs (up to the amount of  installation  revenue)  are  deferred  and
          recognized over the average customer life.  Installation related costs
          in excess of installation fees are expensed when incurred.

          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 utilities services revenue is accrued for and included
          in accounts receivable and revenue.

     (d)  Net Income 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 (see Note 8).


                                       8
<PAGE>

(2)  Property, Plant and Equipment, Net:
     -----------------------------------
     Property,  plant and equipment,  net at September 30, 2001 and December 31,
     2000 is as follows:
<TABLE>
<CAPTION>


($ in thousands)                            September 30, 2001      December 31, 2000
                                           --------------------   --------------------

<S>                                                <C>                    <C>
Property, plant and equipment                      $ 6,593,191            $ 5,307,427
Less accumulated depreciation                       (2,055,900)            (1,786,715)
                                           --------------------   --------------------
    Property, plant and equipment, net             $ 4,537,291            $ 3,520,712
                                           ====================   ====================
</TABLE>

     At September 30, 2001, approximately  $1,132,069,000 of net property, plant
     and equipment was related to our  acquisition of Frontier  Corp.  which was
     completed   on  June  29,  2001  (see  Note  3).  At  December   31,  2000,
     approximately $197,952,000 of net property, plant and equipment was related
     to our Louisiana gas operations which were disposed of on July 2, 2001 (see
     Note 5).

     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 $141,709,000 and $92,004,000
     for the three  months  ended  September  2001 and 2000,  respectively,  and
     $335,452,000  and $273,198,000 for the nine months ended September 30, 2001
     and 2000, respectively. We ceased to record depreciation expense on the gas
     assets held for sale effective  October 1, 2000 and on the electric  assets
     held for sale effective January 1, 2001 (see Note 5).

(3)  Acquisitions:
     -------------
     From May 27, 1999 through July 12, 2000, we entered into several agreements
     to acquire telephone access lines. These transactions have been and will be
     accounted  for using the  purchase  method of  accounting.  The  results of
     operations of the acquired properties have been and will be 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)
          in Arizona, California, Illinois/Wisconsin, Minnesota and Nebraska for
          approximately  $1,171,000,000  in cash.  To date,  we have  closed  on
          approximately  317,500  telephone  access lines.  We have received all
          necessary  regulatory approvals and expect that the acquisition of the
          remaining  access  lines in Arizona and  California  will close during
          2002.   Our  expected  cash   requirement   to  complete  the  Verizon
          acquisitions is $222,800,000.

          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 Arizona,  Colorado,  Idaho/Washington,  Iowa,  Minnesota,  Montana,
          Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in
          cash and the  assumption  of  certain  liabilities.  To date,  we have
          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  relating to  telephone  exchanges  in Arizona,
          Colorado,  Idaho/Washington,  Iowa, Minnesota,  Montana,  Nebraska and
          Wyoming  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.

                                       9
<PAGE>

          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 owned  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  $3,370,000,000  in  cash,  subject  to
          adjustment.  The  operations of Frontier are included in our financial
          statements from the date of acquisition.

          In conjunction  with the Frontier  acquisition,  we are evaluating 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.  Accordingly, we intend to close our operations
          support center in Plano, Texas by April 2002 (see note 7).

     The following  pro forma  financial  information  for the nine months ended
     September 30, 2001 and 2000 present the combined  results of our operations
     and the Frontier, Verizon and Qwest acquisitions as if the acquisitions had
     occurred at the beginning of the year prior to their acquisition. Pro Forma
     financial information for the nine months ended September 30, 2001 includes
     approximatley  $29 million of revenues for long distance  services provided
     to customers of Frontier  subsequent  to the date of  acquisition.  The pro
     forma financial information does not include long distance services revenue
     prior  to  such  date.  The  pro  forma  financial   information  does  not
     necessarily  reflect the results of operations that would have occurred had
     we  constituted  a  single  entity  during  such  periods.  The sale of our
     Louisiana  Gas  operations  (see  note 5) is not  presented  on a pro forma
     basis.
<TABLE>
<CAPTION>
($ in thousands, except per share amounts)

                                     For the nine months ended September 30,
                                   ------------------------------------------
                                          2001                   2000
                                   --------------------   -------------------
<S>                                    <C>                   <C>
Revenue                                $ 2,178,940           $ 2,015,403
Net income (loss)                      $   (53,522)          $   (44,711)
Net income (loss) available to
  common shareholders per share        $     (0.25)          $     (0.16)
</TABLE>


(4)  Intangibles:
     ------------
     Intangibles at September 30, 2001 and December 31, 2000 are as follows:

<TABLE>
<CAPTION>

($ in thousands)                            September 30, 2001     December 31, 2000
                                           --------------------   --------------------

<S>                                                <C>                      <C>
Goodwill                                           $   490,012              $ 488,435
Customer base and other                                195,243                144,833
Excess of cost over net assets acquired              2,179,199                      -
                                           -------------------   --------------------
    Total intangibles                              $ 2,864,454              $ 633,268
                                           ====================   ====================
</TABLE>

     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  property.  We have not received a
     valuation  of  our  Frontier  purchase  and  have  allocated,  temporarily,
     approximately  $2.2 billion of the  purchase  price to "excess of cost over
     net assets acquired". Upon receipt of a final valuation, the excess of cost
     over  historical net assets acquired for the Frontier  acquisition  will be
     allocated  to  property,   plant  and  equipment,   customer  base,   other
     identifiable intangibles and goodwill.

(5)  Discontinued Operations and Net Assets Held for Sale:
     -----------------------------------------------------
     On August 24, 1999,  our Board of Directors  approved a plan of divestiture
     for our public utilities services  businesses,  which include gas, electric
     and water and wastewater businesses.  Currently, we have agreements to sell
     all our water and wastewater operations, one of our electric operations and
     one of our natural gas  operations  and we have sold another of our natural
     gas  operations.  We  have  received  proceeds  on the  sale of  assets  of
     $363,400,000,  and have  agreements  to sell  assets  for an  aggregate  of
     $1,026,000,000  plus the  assumption of certain  liabilities  and debt. The
     purchase  price  under  one  of  these  agreements  may be  reduced.  These
     agreements and the status of each transaction are described as follows:

                                       10
<PAGE>

          Water and Wastewater
          --------------------
          On October 18, 1999,  we announced the agreement to sell our water and
          wastewater  operations to American Water Works,  Inc. for $745,000,000
          in cash and $90,000,000 of assumed debt. This  transaction is expected
          to close in the fourth quarter of 2001.

          Electric
          --------
          On February  15,  2000,  we  announced  that we had agreed to sell our
          electric  utility   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 August 2000, the Hawaii Public
          Utilities   Commission  denied  the  initial  application   requesting
          approval of the purchase of our Kauai  electric  division by the Kauai
          Island   Electric  Co-op  for   $270,000,000  in  cash  including  the
          assumption of certain  liabilities.  We are  discussing a reduction of
          the purchase  price and other  options.  Our agreement for the sale of
          this division may be terminated if regulatory approval is not received
          before February 2002.

          Gas
          ---
          On July 2,  2001,  we  completed  on 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.

          In July  2001,  an  agreement  was  signed  to sell the  Colorado  Gas
          division to Kinder Morgan for  $11,000,000 in cash.  This  transaction
          has received all  necessary  regulatory  approvals  and is expected to
          close in the fourth quarter of 2001.

     Discontinued  operations in the  consolidated  statements of income 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  $11,400,000  and  $39,500,000  for the three and nine months
     ended  September  30, 2001,  respectively.  We continue to actively  pursue
     buyers for our remaining gas and electric businesses.

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

    ($ in thousands)                     September 30, 2001   December 31, 2000
                                         ------------------  -------------------

    Current assets                               $  20,424            $  18,578
    Net property, plant and equipment              667,741              639,994
    Other assets                                    55,073               14,943
                                         ------------------   ------------------
    Total assets                                 $ 743,238            $ 673,515
                                         ==================   ==================

    Current liabilities                          $  25,547            $  21,062
    Long-term debt                                  90,448               90,546
    Other liabilities                              103,573               78,888
                                         ------------------   ------------------
    Total liabilities                            $ 219,568            $ 190,496
                                         ==================   ==================



                                       11
<PAGE>

    ($ in thousands)             For the three months ended September 30,
                                 ------------------------------------------
                                       2001                 2000
                                 ------------------   ------------------
    Revenue                            $ 34,451             $ 29,272
    Operating income                   $ 14,832             $  9,716
    Income tax expense                 $  4,571             $  2,413
    Net income                         $  7,199             $  4,838

    ($ in thousands)              For the nine months ended September 30,
                                 ------------------------------------------
                                      2001                 2000
                                 ------------------   ------------------
    Revenue                            $ 87,880             $ 79,913
    Operating income                   $ 26,777             $ 19,746
    Income tax expense                 $  6,730             $  3,924
    Net income                         $ 11,675             $  8,182



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

($ in thousands)                               September 30, 2001     December 31, 2000
                                               --------------------  --------------------

<S>                                                       <C>                  <C>
Current assets                                         $    76,832           $   127,495
Net property, plant and equipment                          794,456               953,328
Other assets                                               222,651               131,484
                                               --------------------  --------------------
Total assets held for sale                             $ 1,093,939           $ 1,212,307
                                               ====================  ====================

Current liabilities                                    $    69,975           $   169,066
Long-term debt                                              43,400                43,980
Other liabilities                                          100,715                77,529
                                               --------------------  --------------------
Total liabilities related to assets held
  for sale                                             $   214,090           $   290,575
                                               ====================  ====================

</TABLE>

(6)  Security Issuances:
     ------------------
     We issued the following  securities  during the nine months ended September
     30, 2001 under our  $3,800,000,000  shelf  registration  statement and in a
     private placement. The net proceeds from these issuances were used to repay
     bank borrowings,  fund the Frontier Acquisition (see note 3), to settle the
     equity forward contract (see note 12) and for general  corporate  purposes.
     We have  $825,600,000  remaining  on our  shelf  registration  after  these
     issuances.

     Long-Term Debt
     --------------
     On May 18,  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.
     The net proceeds of this issuance was  $1,726,000,000  (after  underwriting
     discounts and commissions and before offering expenses).

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

     o    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;
     o    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  $14.52,  but greater
          than $12.10; and
     o    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  equity  units  trade on The New York Stock  Exchange  under the symbol
     "CZB."

                                       12

<PAGE>
     Common Stock
     ------------
     On June 13,  2001,  we  issued  25,156,250  shares of our  common  stock at
     $12.10, for net proceeds of $289,561,000 (after underwriting  discounts and
     commissions).

     Private Placement
     -----------------
     In August 2001,  through a sale by private placement to Rule 144A qualified
     investors,  we issued an aggregate of $1.75 billion of notes  consisting of
     $300  million  principal  amount 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.  The  net  proceeds  of  this  issuance  were
     $1,728,900,000  (after placement agent discounts and commissions and before
     offering  expenses).  We  have  filed a  registration  statement  with  the
     Securities and Exchange  Commission  (SEC) on Form S-4 in September 2001 to
     register a public  exchange of  publicly  traded  notes with  substantially
     identical  terms to the notes  sold in the  private  placement,  except for
     transfer restriction and registration rights relating to the initial notes.
     The registration  statement has not yet been declared effective by the SEC.
<TABLE>
<CAPTION>
Following is the activity in our long-term debt from December 31, 2000 to September 30, 2001:

                                                               For the nine months ended
                                                          -----------------------------------------
                                                                        Remarketing/                              Interest Rate at
                                             December 31,  Borrowings/    Change in                 September 30,  September 30,
($ in thousands)                               2000       Acquisitions  Current Portion   Payments      2001           2001*
                                            --------------------------------------------------------------------------------------
Fixed Rate
     Rural Utilities Service Loan Contracts
<S>                                         <C>           <C>                           <C>         <C>                <C>
           ILEC                             $    90,129   $     1,430               -   $  (3,355)  $    88,204        6.378%
           Frontier                                   -        43,246               -           -        43,246        5.531%
                                            -----------   -----------     ------------  ---------   -----------
           Subtotal                              90,129        44,676               -      (3,355)      131,450
                                            -----------   -----------     ------------  ---------   -----------
     Debentures                               1,000,000             -               -     (50,000)      950,000        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               -           -       300,000        6.649%
            7.625% Due 2008                           -       750,000               -           -       750,000        7.835%
            9.000% Due 2031                           -       700,000               -           -       700,000        9.148%
                                            -----------   -----------      -----------  ----------   ----------
            Subtotal                                  -     3,500,000               -           -     3,500,000
                                            -----------   -----------      -----------  ----------   ----------
     Equity Units
            6.750% Due 2006                           -       460,000               -           -       460,000        7.480%
                                            -----------   -----------      -----------  ----------   ----------
            Subtotal                                  -       460,000               -           -       460,000
                                            -----------   -----------      -----------  ----------   ----------
     Senior Unsecured Notes
            ILEC                                 36,000             -               -           -        36,000        8.050%
            Frontier                                  -        74,415               -        (787)       73,628        7.610%
                                            -----------   -----------      -----------  ----------   ----------
            Subtotal                             36,000        74,415               -        (787)      109,628
                                            -----------   -----------      -----------  ----------   ----------
     ELI notes                                  325,000             -               -           -       325,000        6.232%
     ELI capital leases                         132,248        33,985               -     (28,283)      137,950       11.765%
     Industrial Development Revenue Bonds       263,595             -      $  (14,400)          -       249,195        6.435%
     Other                                          308             -               -        (251)           57       12.986%
                                            -----------   -----------      -----------  ----------   ----------
Total fixed rate                              1,847,280     4,113,076         (14,400)    (82,676)    5,863,280
                                            -----------   -----------      -----------  ----------   ----------
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        3.822%
     Industrial Development Revenue Bonds       121,878             -          14,400           -       136,278        5.221%
                                            -----------   -----------      -----------  ---------    ----------
Total variable rate                           1,396,023             -      $   14,400    (874,145)      536,278
                                            -----------   -----------      ----------   ---------    ----------
Total                                       $ 3,243,303   $ 4,113,076               -   $(956,821)  $ 6,399,558
                                            ===========   ===========      ==========   =========    ==========
</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 interest rates on
the commercial  paper notes payable and the bank credit facility at December 30,
2000 were 6.81% and 7.19%, respectively.

                                       13
<PAGE>
(7)  Restructuring Charges:
     ----------------------

     2001
     ----
     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 $13,002,000 in other operating  expenses in
     the third quarter of 2001. The  restructuring  resulted in the reduction of
     749 employees.  We  communicated  with all affected  employees  during July
     2001.  Certain  employees  will  be  relocated;   others  will  be  offered
     severance, job training and/or outplacement  counseling.  We intend to sell
     our Plano office building. As of September 30, 2001, approximately $453,000
     was paid and 30 employees were  terminated.  We expect to incur  additional
     costs of approximately $3,128,000 through the first quarter of 2002.

      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 other  operating  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  September  30,  2001,  approximately  $4,413,000  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
     will be  terminated  during 2001.  At December  31,  2000,  we adjusted our
     original  accrual down by $1,008,000 and the remaining  accrual of $339,000
     is included in other current liabilities at September 30, 2001. These costs
     are expected to be paid in the fourth quarter of 2001.
<TABLE>
<CAPTION>
                                 Original Accrued        Amount                          Remaining
                                      Amount          Paid to Date     Adjustments        Accrual
                                 ----------------     ------------    ------------     ------------

<S>                              <C>                 <C>             <C>              <C>
         2001 Restructuring       $ 13,002,000        $  453,000      $     -          $ 12,549,000
         1999 Restructuring          5,760,000         4,413,000      (1,008,000)           339,000
</TABLE>

 (8) Net Income Per Common Share:
     ----------------------------
     The  reconciliation  of the net income per common share calculation for the
     three and nine months ended September 30, 2001 and 2000,  respectively,  is
     as follows:
<TABLE>
<CAPTION>
(In thousands, except per-share amounts)                           For the three months ended September 30,
                                                 --------------------------------------------------------------------------
                                                                2001                                   2000
                                                 -------------------------------------  -----------------------------------
                                                               Weighted                              Weighted
                                                               Average                                Average
                                                  Net Income    Shares     Per Share    Net Income    Shares     Per Share
                                                 ------------------------  -----------  ------------------------ ----------
Net income per common share:
<S>                                                  <C>         <C>                       <C>          <C>
  Basic                                            $   (441)     285,615                  $  1,466      260,309
  Carrying cost of equity forward contracts           1,003            -                         -            -
                                                 -----------  -----------               ----------- ------------
  Available for common shareholders                $ (1,444)     285,615      $ (0.01)    $  1,466      260,309     $ 0.01
  Effect of dilutive options                              -        3,438            -            -        7,551          -
                                                 -----------  -----------               ----------- ------------
  Diluted                                          $ (1,444)     289,053      $ (0.01)    $  1,466      267,860     $ 0.01
                                                 ===========  ===========               =========== ============


(In thousands, except per-share amounts)                           For the nine months ended September 30,
                                                 --------------------------------------------------------------------------
                                                                2001                                   2000
                                                 -------------------------------------  -----------------------------------
                                                               Weighted                              Weighted
                                                               Average                                Average
                                                  Net Income    Shares     Per Share    Net Income    Shares     Per Share
                                                 ------------------------  -----------  ------------------------ ----------
Net income per common share:
  Basic                                            $ 18,633      271,346                  $ 11,804      260,046
  Carrying cost of equity forward contracts          13,650            -                         -            -
                                                 -----------  -----------               ----------- ------------
  Available for common shareholders                $  4,983      271,346      $  0.02     $ 11,804      260,046     $ 0.05
  Effect of dilutive options                              -        6,941            -            -        7,404          -
                                                 -----------  -----------               ----------- ------------
  Diluted                                          $  4,983      278,287      $  0.02     $ 11,804      267,450     $ 0.04
                                                 ===========  ===========                =========== ============
</TABLE>
                                       14

<PAGE>
     All share amounts  represent  weighted average shares  outstanding for each
     respective  period.  The  diluted net income per common  share  calculation
     excludes  the effect of  potentially  dilutive  shares when their effect is
     antidilutive.   At  September  30,  2001,  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 9,434,000  potentially  dilutive
     stock  options  at a range of  $12.91  to  $21.47  per  share  that are not
     included in the  calculation  as they are  antidilutive.  Restricted  stock
     awards of 1,150,000  shares and 1,672,000  shares at September 30, 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.  See
     Note 12 regarding carrying costs of equity forward contracts.

(9)  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."

     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.  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 dropped and we purchased
     2,288,000  shares  in the open  market  to  bring  our  economic  ownership
     interest back to 85%.

                                       15
<PAGE>

     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.   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.
<TABLE>
<CAPTION>


($ in thousands)                                       For the three months ended September 30, 2001
                                 -------------------------------------------------------------------------------------------
                                                                                                                  Total
                                      ILEC            ELI            Gas          Electric    Eliminations       Segments
                                 -------------- -------------- --------------- -------------  -------------    -------------
<S>                                  <C>             <C>             <C>           <C>           <C>      <C>     <C>
Revenue                              $ 507,202       $ 53,330        $ 37,717      $ 63,953      $ (1,081)(1)   $   661,121
Depreciation and Amortization          173,014         19,919             152           335           242 (2)       193,662
Operating Income (Loss)                 64,602        (22,042)          3,717        11,648           307 (2)(3)     58,232
Adjusted EBITDA                        237,616         (2,123)          3,869        11,983           549 (3)       251,894


($ in thousands)                                       For the three months ended September 30, 2000
                                 -------------------------------------------------------------------------------------------
                                                                                                                  Total
                                      ILEC            ELI            Gas          Electric    Eliminations       Segments
                                 -------------- -------------- --------------- -------------  -------------    -------------
Revenue                              $ 246,767       $ 63,610        $ 80,332      $ 62,770      $   (769)(1)    $  452,710
Depreciation and Amortization           65,857         16,306           6,707         6,729           260 (2)        95,859
Operating Income (Loss)                 45,106        (11,530)          1,210         7,685           (29)(2)(3)     42,442
Adjusted EBITDA                        110,963          4,776           7,917        14,414           231 (3)       138,301



($ in thousands)                                       For the nine months ended September 30, 2001
                                 -------------------------------------------------------------------------------------------
                                                                                                                  Total
                                      ILEC            ELI            Gas          Electric    Eliminations       Segments
                                 -------------- -------------- --------------- -------------  -------------    -------------
Revenue                             $1,083,335      $ 176,321       $ 360,387     $ 174,114     $  (3,013)(1)   $ 1,791,144
Depreciation and Amortization          347,703         58,647             457         6,135           792 (2)       413,734
Operating Income (Loss)                187,957        (53,413)         42,213        28,607         1,300 (2)(3)    206,664
Adjusted EBITDA                        535,660          5,234          42,670        34,742         2,092 (3)       620,398


($ in thousands)                                       For the nine months ended September 30, 2000
                                 -------------------------------------------------------------------------------------------
                                                                                                                  Total
                                      ILEC            ELI            Gas          Electric    Eliminations       Segments
                                 -------------- -------------- --------------- -------------  -------------    -------------
Revenue                              $ 700,475       $181,008        $270,753      $169,879      $ (2,096)(1)   $ 1,320,019
Depreciation and Amortization          195,628         43,782          19,076        19,806           191 (2)       278,483
Operating Income (Loss)                116,462        (47,106)         24,160        21,073           551 (2)(3)    115,140
Adjusted EBITDA                        312,090         (3,324)         43,236        40,879           742 (3)       393,623

</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.
3    Represents the  administrative  services fee charged to ELI pursuant to our
     management services agreement with ELI.

                                       16
<PAGE>


(10) Supplemental Segment Information:
     --------------------------------
     Supplemental segment income statement information for the nine months ended
     September 30, 2001 is as follows:
<TABLE>
<CAPTION>
( $ in thousands)                                                                            Discontinued Corporate and Consolidated
                                                   ILEC        ELI        Gas      Electric   Operations  Eliminations    Total
                                               ----------- ----------- ---------- ----------- ---------- ------------ -----------
<S>                                          <C>           <C>        <C>         <C>           <C>       <C>       <C>
Revenue                                       $ 1,083,335  $  176,321   $360,387    $174,114    $      -   $ (3,013) $1,791,144
Operating expenses:
   Cost of services                                80,994      51,014    252,065      95,804           -     (2,770)    477,107
   Depreciation and amortization                  347,703      58,647        457       6,135           -        792     413,734
   Other operating expenses                       436,014     120,073     65,652      43,568           -     (2,335)    662,972
   Restructuring expenses                          13,002           -          -           -           -          -      13,002
   Acquisition assimilation expense                17,665           -          -           -           -          -      17,665
                                              ----------- ----------- ---------- ----------- ------------- --------- -----------
      Total operating expenses                    895,378     229,734    318,174     145,507           -     (4,313)  1,584,480
                                              ----------- ----------- ---------- ----------- ------------- --------- -----------

      Operating income (loss)                     187,957     (53,413)    42,213      28,607           -      1,300     206,664

Investment and other income, net                   14,035         387      2,271        (198)          -          -      16,495
Gain on sale of assets                                  -           -          -           -           -    139,304     139,304
Interest expense                                  191,189      71,788     14,032      12,964           -    (31,940)    258,033
                                              ----------- ----------- ---------- ----------- ------------- --------- -----------
   Income (loss) from continuing operations
     before income taxes, dividends on
     convertible preferred securities and
     extraordinary expense                         10,803    (124,814)    30,452      15,445           -    172,544     104,430

Income tax expense                                  4,030         449     11,359       5,761           -     27,584      49,183
                                              ----------- ----------- ---------- ----------- ------------- --------- -----------
   Income (loss) from continuing operations
     before dividends on convertible preferred
     securities and extraordinary expense           6,773    (125,263)    19,093       9,684           -    144,960      55,247

Dividends on convertible preferred securities,
     net of income tax benefit                      4,658           -          -           -           -          -       4,658
                                              ----------- ----------- ---------- ----------- ------------- --------- -----------
   Income (loss) from continuing operations
     before extraordinary expense                   2,115    (125,263)    19,093       9,684           -    144,960      50,589

Income from discontinued operations, net
     of tax                                            -           -          -           -       11,675          -      11,675
                                              ----------- ----------- ---------- ----------- ------------- --------- -----------
    Net income (loss) before extraordinary
     item                                           2,115    (125,263)    19,093       9,684      11,675    144,960      62,264

Extraordinary expense - discontinuation of
     Statement of Financial Accounting
     Standards No. 71, net of tax                      -            -          -           -           -     43,631      43,631
                                              ----------- ----------- ---------- ----------- ---------------------- -----------
   Net income (loss)                          $     2,115  $ (125,263)  $ 19,093    $  9,684    $ 11,675   $101,329  $   18,633
                                              =========== =========== ========== =========== ====================== ===========
</TABLE>

(11) Discontinuation of SFAS 71:
     ---------------------------
     We have  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.


                                       17
<PAGE>


     Discontinued  application  of SFAS 71  required  us to write off all of the
     regulatory assets and liabilities of our incumbent local exchange telephone
     operations.  A non-cash  extraordinary charge is reflected 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 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 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.

(12) Equity Forward Contract:
     ------------------------
     During  2000,  we entered  into a forward  contract 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 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 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.  On June 29, 2001,  we accrued  $42,995,000  net cash to settle a
     portion of the contract,  plus $12,647,000 in associated carrying costs. In
     September 2001, we settled the contract by paying the redemption  amount of
     $107,018,000  plus  $1,003,000  in  associated   carrying  costs  and  took
     possession of our shares.

                                       18
<PAGE>

(13) Commitments and Contingencies:
     ------------------------------

     At September 30, 2001, we have outstanding performance letters of credit as
     follows:

         ($ in thousands)

        Qwest                                             $ 64,280
        Insurance letters of credit to CNA                  12,672
        Water/wastewater projects                            2,588
        ELI projects                                            60
                                                          --------
           Total                                          $ 79,600
                                                          ========

     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.

     During  the past two years the  decrease  in the  availability  of power in
     certain  areas of the country  has caused  power  supply  costs to increase
     substantially,  forcing  companies to pay higher operating costs to operate
     their electric businesses.  As a result, companies have attempted to offset
     these  increased  costs by either  renegotiating  prices  with their  power
     suppliers or passing these additional costs on to their customers through a
     rate  proceeding.  In Arizona,  excessive  power costs charged by our power
     supplier in the amount of approximately  $98 million through  September 30,
     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 deferred 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.

     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.

                                       19
<PAGE>


                          PART I. FINANCIAL INFORMATION

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

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

     o    Our ability to obtain new financing on favorable terms;

     o    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;

     o    Our ability to divest our public utilities services businesses;

     o    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;

     o    Our ability to expand through attractively priced acquisitions;

     o    Our  ability  to  identify  future  markets  and  successfully  expand
          existing ones;

     o    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;

     o    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;

     o    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;

     o    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;

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

You should consider these important  factors in evaluating any statement in this
Form  10-Q or  otherwise  made  by us or on our  behalf.  These  forward-looking
statements  are  made  as  of  the  date  of  this  report  based  upon  current
expectations,  and we undertake no  obligation to update this  information.  The
following  information is unaudited and should be read in  conjunction  with the
consolidated  financial statements and related notes included in this report and
as presented in our 2000 Annual Report on Form 10-K.

(a) Liquidity and Capital Resources
    -------------------------------
For the three and nine months ended  September  30, 2001, we used cash flow from
operations,  cash on hand  and  proceeds  from the  sale of  securities  to fund
capital expenditures and acquisitions of additional telephone access lines.

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  and fund
working  capital  and  pending  and  future   acquisitions,   and  make  further
investments  in  related  telecommunications   businesses  as  well  as  general
corporate  purposes.  After the offerings  discussed  below, we have a remaining
shelf registration of $825.6 million.

                                       20
<PAGE>


     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. This offering was
     made under the $3.8 billion shelf registration  statement.  Net proceeds of
     $1,726.0 million (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 offering 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 partially fund the
     acquisition of Frontier Corp. 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 used to
     partially fund the acquisition of Frontier Corp. Each equity unit initially
     consists of a senior note and a purchase contract for our common stock. The
     price for the common stock under the purchase  contract  will be based upon
     the  average  trading  price  of the  stock at the  time  the  contract  is
     exercised.   These  offerings  were  made  under  the  $3.8  billion  shelf
     registration statement.

In August 2001, we issued an aggregate of $1.75  billion of notes  consisting of
$300 million  principal amount 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. The notes were issued in a private  offering.  The proceeds were
used  to  repay  our  forward  equity  contract  and  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 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 has not yet been declared effective.

On  September  30,  2001,  we had  available  lines  of  credit  with  financial
institutions  in the amounts of $2.0 billion with  associated  facility  fees of
0.125% per annum and $450 million with no associated facility fees. These credit
facilities were in addition to credit  commitments  under which we may borrow up
to $200 million,  with associated  facility fees of 0.15% per annum, that expire
on December 16, 2003. As of September 30, 2001, no borrowings  were  outstanding
under these credit  facilities.  On October 24, 2001,  we replaced  these credit
facilities with available revolving lines of credit with financial  institutions
in the amounts of $680 million and $100 million.  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 addition, on October 24, 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.

ELI has $400  million of  committed  revolving  lines of credit with  commercial
banks,  which expire November 21, 2002. It has borrowed $400 million under these
lines at September 30, 2001. The ELI credit facility has an associated  facility
fee of 0.08% per annum. We have guaranteed all of ELI's  obligations under these
revolving lines of credit.

We have committed to continue to finance ELI's cash requirements  until December
31, 2002. 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 $260  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 September 30, 2001, we have advanced $150
million to ELI under this facility.

In January 2001, one of our subsidiaries,  Citizens Utilities Rural Company, was
advanced $1.0 million under its Rural  Utilities  Services  Loan  Contract.  The
initial interest rate on the advance was 5.4125% with an ultimate  maturity date
of November 1, 2016.

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  $23.325  million of the 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  $18.250 million of the
Northampton  (Pennsylvania) 1998 series of industrial  development revenue bonds
due September 1, 2018 at an initial interest rate of 5.75%.

                                       21
<PAGE>

On June 29, 2001, we completed the  acquisition  of Frontier  Corp.  from Global
Crossing for $3,370.0 million in cash (see Acquisitions  below). The acquisition
was financed on an interim basis by the draw down of our bank credit facility of
$1,780.0 million with the remainder  derived from the proceeds of our registered
securities offerings as 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 the borrowings under our bank credit facility.

During 2000, we entered into a forward contract 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  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  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. On June 29, 2001, we accrued $42,995,000 net cash to
settle a portion of the contract, plus $12,647,000 in associated carrying costs.
In September  2001, we settled the contract by paying the  redemption  amount of
$107,018,000 plus $1,003,000 in associated carrying costs and took possession of
our shares.

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

For the nine months ended  September 30, 2001, our actual  capital  expenditures
were $256.0 million for the ILEC segment,  $43.9 million for the ELI segment and
$71.3 million for the public  utilities  services  segments which includes $20.7
million  for the water and  wastewater  segment.  We  anticipate  that the funds
necessary for our 2001 capital expenditures will be provided from operations and
from  commercial  paper  notes  payable,  debt,  equity and other  financing  at
appropriate times and borrowings under credit facilities.

Capital  expenditures for discontinued  operations and assets held for sale will
be  funded  through   requisitions  of  Industrial   Development   Revenue  Bond
construction fund trust accounts and from parties desiring utility service. Upon
disposition,  we will  receive  reimbursement  of  certain  1999,  2000 and 2001
capital expenditures pursuant to the terms of each respective sales agreement.

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  record  in  accordance  with
Generally Accepted Accounting  Principles (GAAP),  restrictions on the allowance
of liens on our assets,  and restrictions on asset sales and transfers,  mergers
and other changes in corporate control. We currently have no restrictions on the
payment of dividends by us either by contract, rule or regulation.

The  principal  financial  performance  covenant  under our $805 million  credit
facility and our $200 million loan  facility  with the rural  telephone  finance
cooperative which were entered into on October 24, 2001 requires the maintenance
of a minimum  net worth of $1.5  billion.  Under  the  rural  telephone  finance
cooperative  loan  facility,  in the event that our credit  rating  from  either
Moody's  Investors  Service or Standard & Poor's declines below investment grade
(Baa3/BBB-,  respectively),  we would also be  required  to maintain an interest
coverage  ratio of 2.00 to 1 or  greater  and a  leverage  ratio of 6.00 to 1 or
lower.

                                       22
<PAGE>
Acquisitions
------------
From May 27, 1999 through July 12, 2000,  we entered into several  agreements to
acquire  telephone  access  lines.  These  transactions  have  been  and will be
accounted for using the purchase method of accounting. The results of operations
of the  acquired  properties  have been and will be  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) in  Arizona,
     California,  Illinois/Wisconsin,  Minnesota and Nebraska for  approximately
     $1,171.0 million in cash. To date, we have closed on approximately  317,500
     telephone access lines. We have received all necessary regulatory approvals
     and expect that the  acquisition  of the remaining  access lines in Arizona
     and  California  will close during 2002.  Our expected cash  requirement to
     complete the Verizon acquisitions is $222.8 million.

     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  Arizona,
     Colorado,  Idaho/Washington,  Iowa,  Minnesota,  Montana,  Nebraska,  North
     Dakota  and  Wyoming  for  approximately  $1,650.0  million in cash and the
     assumption of certain liabilities.  To date, we have 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 eight  acquisition  agreements with Qwest relating
     to  telephone  exchanges  in  Arizona,  Colorado,  Idaho/Washington,  Iowa,
     Minnesota,   Montana,  Nebraska  and  Wyoming  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 $64.0 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  Crossing Ltd.  (Global) 100% of
     the  stock  of  Frontier   Corp.'s   (Frontier)   local  exchange   carrier
     subsidiaries,  which owned  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   $3,370.0  million  in  cash,  subject  to
     adjustment.  The  operations  of Frontier  are  included  in our  financial
     statements from the date of acquisition.

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.  Currently,  we have agreements to sell all our water
and wastewater operations, one of our electric operations and one of our natural
gas operations and we have sold another of our natural gas  operations.  We have
received  proceeds on the sale of assets of $363.4 million,  and have agreements
to sell assets for an  aggregate  of $1,026.0  million  plus the  assumption  of
certain  liabilities and debt. The purchase price under one of these  agreements
may be  reduced.  These  agreements  and  the  status  of each  transaction  are
described as follows:

     Water and Wastewater
     --------------------
     On October 18,  1999,  we  announced  the  agreement  to sell our water and
     wastewater  operations to American Water Works,  Inc. for $745.0 million in
     cash and $90.0 million of assumed  debt.  This  transaction  is expected to
     close in the fourth quarter of 2001.

     Electric
     --------
     On February 15, 2000, we announced  that we had agreed to sell our electric
     utility  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 August 2000, the Hawaii Public Utilities  Commission denied the
     initial  application  requesting  approval  of the  purchase  of our  Kauai

                                       23
<PAGE>
     electric  division by the Kauai Island Electric Co-op for $270.0 million in
     cash including the assumption of certain  liabilities.  We are discussing a
     reduction of the purchase  price and other  options.  Our agreement for the
     sale of this  division  may be  terminated  if  regulatory  approval is not
     received before February 2002.

     Gas
     ---
     On July 2, 2001, we completed  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 approximately $139.3 million.

     In July 2001,  an agreement was signed to sell the Colorado Gas division to
     Kinder Morgan for $11.0 million in cash. This  transaction has received all
     necessary  regulatory  approvals  and is  expected  to close in the  fourth
     quarter of 2001.

Discontinued  operations in the  consolidated  statements of income  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 and electric 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 $11.4
million  and $39.5  million for the three and nine months  ended  September  30,
2001, respectively.  We continue to actively pursue buyers for our remaining gas
and electric businesses.

Discontinuation of SFAS 71
--------------------------

Prior to the 2000 and 2001  acquisitions  of the  Verizon,  Qwest  and  Frontier
Properties,   our  incumbent  local  exchange  telephone  properties  have  been
predominantly  regulated  following a cost of service/rate  of return  approach.
Accordingly, we have 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 11 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 found that 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.

                                       24
<PAGE>

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.  The  Frontier  acquisition,  which  closed  on June  29,  2001,  is
accounted for using the purchase method.

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.  The statement is effective for fiscal years  beginning  after
December 15, 2001 for companies whose annual  reporting  period ends on December
31, 2001 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.  We will  cease to  recognize  amortization  of the
goodwill  portion of  intangibles  starting  January 1,  2002.  Amortization  of
intangibles  for the three and nine months  ended  September  30, 2001 was $52.0
million  and  $78.3  million,  respectively.  We will be  required  to test  for
impairment  of goodwill  annually  starting  January 1, 2002.  The amount of any
future impairment, if any, cannot be estimated at this time.

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

Consolidated  revenue for the three and nine  months  ended  September  30, 2001
increased $208.4 million, or 46%, and $471.1 million, or 36%,  respectively,  as
compared  with the prior year  periods.  The  increases are primarily due to the
$260.4 million and $382.9 million increases in telecommunications revenue in the
respective  periods.  The increase in the three months ended  September 30, 2001
was partially offset by a decrease of $42.6 million in gas revenue primarily due
to the sale of our Louisiana gas operations on July 2, 2001.
<TABLE>
<CAPTION>
                                  ILEC REVENUE

($ in thousands)                         For the three months ended September 30,  For the nine months ended September 30,
                                         ----------------------------------------  ----------------------------------------
                                               2001           2000      % Change        2001          2000        % Change
                                         -------------- ------------- -----------  ------------- -------------- -----------
<S>                                          <C>           <C>               <C>      <C>            <C>               <C>
Network access services                      $ 189,034     $ 114,725         65%    $   461,549      $ 330,018         40%
Local network  services                        194,398        83,633        132%        390,802        231,557         69%
Long distance and data services                 71,860        26,422        172%        135,144         75,404         79%
Directory services                              25,253         9,376        169%         46,942         27,299         72%
Other                                           26,657        12,611        111%         48,898         36,197         35%
                                         -------------- -------------              ------------- --------------
                                             $ 507,202     $ 246,767        106%    $ 1,083,335      $ 700,475         55%
                                         ============== =============              ============= ==============
</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 Acquisitions contributed $245.5 million and $350.3 million to
the increase in revenue for the three and nine months ended  September 30, 2001,
respectively, as compared with the prior year periods. The following revenue and
expense  discussion  identifies as  acquisition  activity only that activity for
which there was no  corresponding  amount in the prior period (for example,  the
Verizon  Nebraska  results are not  presented  in  "Acquisitions"  for the three
months ended September 30, 2001).
<TABLE>
<CAPTION>
                                  ACCESS LINES

                                                      As of September 30,
                                           ---------------------------------------------
                                               2001            2000          % Change
                                           --------------   ------------   -------------
<S>                                              <C>           <C>              <C>
              Excluding acquisitions             1,261,406     1,223,876         3%
              Acquisitions                       1,229,058             -
                                           ---------------   ------------
                  Total                          2,490,464     1,223,876
                                           ===============   ============
</TABLE>
 <TABLE>
<CAPTION>
                                 MINUTES OF USE*

(In millions)                     For the three months ended September 30,       For the nine months ended September 30,
                                 -------------------------------------------   -------------------------------------------
                                     2001          2000         % Change          2001            2000         % Change
                                 ------------- -------------  --------------   ------------   -------------  -------------
<S>                                  <C>           <C>            <C>              <C>             <C>            <C>
Excluding acquisitions               1,676         1,454          15%              5,037           4,157          21%
Acquisitions                         1,426             -                           1,817               -
                                 ------------- -------------                   ------------   -------------
    Total                            3,102         1,454                           6,854           4,157
                                 ============= =============                   ============   =============
</TABLE>

*Acquisitions  represent  minutes of use  from entities acquired after September
30, 2000.

Network access  services  revenue for the three months ended  September 30, 2001
increased  $74.3  million,  or 65%,  as  compared  with the  prior  year  period
primarily due to the impact of the Acquisitions  which contributed $62.9 million
to the increase. Growth in special access and subsidies contributed $8.1 million
and $4.9 million,  respectively.  These increases were partially  offset by $3.3
million in rate  decreases  in effect as of July 1, 2001.  Network  access  also
includes a reclassification of $4.0 million in revenue reported as local network
services revenue in the prior year.


                                       26
<PAGE>

Network  access  services  revenue for the nine months ended  September 30, 2001
increased  $131.5  million,  or 40%,  as  compared  with the prior  year  period
primarily due to the impact of the Acquisitions which contributed $107.4 million
to the increase. Growth in minutes of use contributed $3.7 million and growth in
special  access and  subsidies  contributed  $11.5  million  and $12.3  million,
respectively.  These  increases were  partially  offset by $7.7 million from the
effect of the FCC's CALLS  mandate  which  reduced  access  charges paid by long
distance  companies  and $3.3 million in rate  decreases in effect as of July 1,
2001.  Network  access  also  includes a  reclassification  of $10.3  million in
revenue reported as local network services revenue in the prior year.

Local  network  services  revenue for the three months ended  September 30, 2001
increased  $110.8  million,  or 132%,  as  compared  with the prior year  period
primarily due to the impact of the Acquisitions which contributed $110.6 million
to the increase and growth in enhanced  services of $3.2 million.  Local network
services  revenue also  reflects a reduction  for the  reclassification  of $4.0
million in revenue reported as network access revenue in the prior year.

Local  network  services  revenue for the nine months ended  September  30, 2001
increased  $159.2  million,  or 69%,  as  compared  with the prior  year  period
primarily due to the impact of the Acquisitions which contributed $161.9 million
to the increase and growth in enhanced  services of $5.5 million.  Local network
services  revenue also  reflects a reduction for the  reclassification  of $10.3
million in revenue reported as network access revenue in the prior year.

Long distance and data services revenue for the three months ended September 30,
2001 increased  $45.4  million,  or 172%, as compared with the prior year period
primarily due to the impact of the  Acquisitions,  including  the  long-distance
revenue  associated  with  Frontier,  which  contributed  $38.5  million  to the
increase,  growth in Digital Subscriber Line (DSL) and Internet services of $2.1
million,  growth  related to data and  dedicated  circuits  of $1.8  million and
growth in long distance services of $1.4 million.

Long distance and data services  revenue for the nine months ended September 30,
2001  increased  $59.7  million,  or 79%, as compared with the prior year period
primarily due to the impact of the  Acquisitions,  principally the long-distance
and data revenue  associated with Frontier,  which  contributed $41.6 million to
the  increase,  growth in DSL and  Internet  services  of $4.9  million,  growth
related  to data and  dedicated  circuits  of $4.3  million  and  growth in long
distance services of $6.8 million.

Directory  services  revenue  for the three  months  ended  September  30,  2001
increased  $15.9  million,  or 169%,  as  compared  with the prior  year  period
primarily due to the impact of the Acquisitions  which contributed $15.2 million
to the increase and growth of $0.7 million.

Directory  services  revenue  for the  nine  months  ended  September  30,  2001
increased  $19.6  million,  or 72%,  as  compared  with the  prior  year  period
primarily due to the impact of the Acquisitions  which contributed $18.5 million
to the increase and growth of $1.2 million.

Other  revenue for the three months ended  September  30, 2001  increased  $14.0
million,  or 111%,  as compared  with the prior year  period.  The  Acquisitions
contributed  $18.3  million  to the  increase  which was  partially  offset by a
decrease of $5.4 million in miscellaneous revenue categories.

Other  revenue for the nine months  ended  September  30, 2001  increased  $12.7
million,  or 35%,  as  compared  with the prior year  period.  The  Acquisitions
contributed  $20.9  million  to the  increase  which was  partially  offset by a
decrease of $8.2 million in miscellaneous revenue categories.


                                       27
<PAGE>
<TABLE>
<CAPTION>

                                   ELI REVENUE

($ in thousands)                         For the three months ended September 30,  For the nine months ended September 30,
                                         ----------------------------------------  ----------------------------------------
                                               2001           2000      % Change        2001          2000        % Change
                                         -------------- ------------- -----------  ------------- -------------- -----------
<S>                                           <C>           <C>              <C>      <C>            <C>               <C>
Network services                              $ 26,077      $ 21,627         21%      $  77,966      $  54,804         42%
Local telephone services                        14,450        25,187        -43%         58,114         75,412        -23%
Long distance services                           3,131         3,728        -16%          9,314         12,590        -26%
Data services                                    9,672        13,068        -26%         30,927         38,202        -19%
                                         -------------- -------------              ------------- --------------
                                                53,330        63,610        -16%        176,321        181,008         -3%
Intersegment revenue  *                         (1,081)         (769)        N/A         (3,013)        (2,096)        N/A
                                         -------------- -------------              ------------- --------------
                                              $ 52,249      $ 62,841        -17%      $ 173,308      $ 178,912         -3%
                                         ============== =============              ============= ==============
</TABLE>

*Intersegment revenue reflects revenue received by ELI from our ILEC operations.

Included in revenue for the three and nine months  ended  September  30, 2001 is
approximately   $0.2  million  and  $4.0  million,   respectively,   of  revenue
representing a "net  settlement" of past billing disputes between ELI and Qwest.
Additionally,  we are currently  providing  service to customers that have filed
for  protection  under  Chapter  11 of  the  Bankruptcy  Code.  Of  our  largest
twenty-five customers, two are under Chapter 11 protection.  These two customers
contribute approximately $0.4 million of revenue monthly.

Network  services  include Private Line Interstate  (Long Haul) and Private Line
Intrastate  (MAN).  Network services revenue for the three and nine months ended
September 30, 2001  increased $4.4 million,  or 21%, and $23.2 million,  or 42%,
respectively,  as compared with the prior year  periods.  The increase is due to
continued  growth in our  network  and sales of  additional  circuits to new and
existing customers.

     Revenue for the three and nine  months  ended  September  30, 2001 from our
     Long Haul  services  decreased  $0.1 million,  or .4%, and  increased  $5.8
     million, or 21%, respectively, as compared with the prior year periods.

     Revenue for the three and nine months ended September 30, 2001 from our MAN
     services  increased  $4.5  million,  or 43%,  and  $17.4  million,  or 63%,
     respectively, as compared with the prior year periods.

Local telephone  services  revenue for the three and nine months ended September
30,  2001  decreased  $10.7  million,   or  43%,  and  $17.3  million,  or  23%,
respectively,  as compared with the prior year periods. Local telephone services
include  ISDN  PRI,  dial  tone,   Carrier   Access   Billings  and   reciprocal
compensation.
<TABLE>
<CAPTION>

($ In thousands)                    For the three months ended September 30,  For the nine months ended September 30,
                                    ----------------------------------------  ----------------------------------------
                                          2001           2000      % Change        2001          2000        % Change
                                    -------------- ------------- -----------  ------------- -------------- -----------
<S>                                    <C>             <C>              <C>       <C>            <C>             <C>
ISDN PRI                               $    6,788      $   9,296       -27%       $ 21,572       $ 25,527       -15%
Dial tone                                   3,614          5,509       -34%         12,845         14,258       -10%
Carrier access billings                     1,351          1,180        14%          5,275          6,399       -18%
Reciprocal compensation                     2,697          9,202       -71%         18,422         29,228       -37%
                                    -------------- -------------              ------------- --------------
                                       $   14,450      $  25,187       -43%       $ 58,114       $ 75,412       -23%
                                    ============== =============              ============= ==============
</TABLE>

     ISDN PRI  revenue for the three and nine months  ended  September  30, 2001
     decreased $2.5 million, or 27%, and $3.9 million, or 15%, respectively,  as
     compared  with the prior year periods  primarily  due to a decrease in ISDN
     revenue to three  customers  resulting from less demand for ISDN PRI trunks
     servicing internet routers.

     Dial tone revenue decreased $1.9 million, or 34%, and $1.4 million, or 10%,
     respectively, as compared with the prior year periods, primarily due to the
     bankruptcy of a customer,  and decreased  installation  fees resulting from
     fewer new customers.


                                       28
<PAGE>

     Reciprocal  compensation  revenue  for the  three  and  nine  months  ended
     September 30, 2001  decreased $6.5 million,  or 71%, and $10.8 million,  or
     37%, respectively, as compared with the prior year periods. The decrease is
     due to a decrease in average monthly minutes processed of 211.0 million, or
     18%, and 93.3 million, or 8%, for the three and nine months ended September
     30, 2001,  respectively,  as compared with the prior year periods and lower
     weighted average rates per minute.

     ELI has various interconnection agreements with Qwest, Verizon and PacBell,
     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  our  network.   We  recognize
     reciprocal  compensation  revenues  as  earned,  based on the  terms of the
     interconnection agreements.

Long distance services revenue for the three and nine months ended September 30,
2001 decreased $0.6 million, or 16%, and $3.3 million, or 26%, respectively,  as
compared  with the prior year  periods.  The  decrease  is due to a decrease  in
wholesale  average  monthly  minutes  processed of 3.3 million,  or 20%, and 4.5
million or 25%,  for the three and nine months  ended  September  30,  2001,  as
compared  to prior  year  periods.  The  decrease  is also  attributable  to the
discontinuation of the Voice Solutions portion of our business.

Data services  include  Internet,  RSVP,  Frame Relay and other  services.  Data
services  revenue  for the  three  and nine  months  ended  September  30,  2001
decreased  $3.4 million,  or 26%, and $7.3  million,  or 19%,  respectively,  as
compared  with the  prior  year  periods,  primarily  due to the  expiration  on
February  28,  2001  of an  18-month  take-or-pay  contract  with a  significant
customer. This take-or-pay contract was not renewed.
<TABLE>
<CAPTION>

                                   GAS REVENUE

($ in thousands)            For the three months ended September 30,  For the nine months ended September 30,
                            ----------------------------------------  ----------------------------------------
                                 2001           2000       % Change        2001          2000        % Change
                            -------------- ------------- -----------  ------------- -------------- -----------
<S>                            <C>            <C>             <C>       <C>             <C>             <C>
Gas revenue                    $ 37,717       $ 80,332       -53%       $ 360,387       270,753         33%
</TABLE>

Gas revenue for the three  months  ended  September  30,  2001  decreased  $42.6
million,  or 53%, as compared  with the prior year period  primarily  due to the
sale of our  Louisiana gas  operations.  There was no revenue from the Louisiana
gas  operations  for the three  months ended  September  30, 2001 since the sale
closed on July 2, 2001.

Gas  revenue for the nine  months  ended  September  30,  2001  increased  $89.6
million, or 33%, as compared with the prior year period, primarily due to higher
purchased  gas  costs  and  increased  consumption.   Under  tariff  provisions,
increases in our costs of gas purchased are largely passed on to customers.  The
increase  was  partially  offset  by  decreased  revenue  due to the sale of our
Louisiana  gas  operations  on  July  2,  2001.   Included  in  gas  revenue  is
approximately  $203.5  million for the nine months ended  September  30, 2001 of
revenue from our Louisiana gas operations.  This revenue will not continue since
the sale closed on July 2, 2001.
<TABLE>
<CAPTION>

                                ELECTRIC REVENUE

($ in thousands)              For the three months ended September 30,  For the nine months ended September 30,
                              ----------------------------------------  ----------------------------------------
                                  2001           2000       % Change        2001          2000        % Change
                              -------------- ------------- -----------  ------------- -------------- -----------
<S>                              <C>           <C>              <C>      <C>            <C>               <C>
 Electric revenue                $ 63,953      $ 62,770         2%       $ 174,114      $ 169,879         2%

</TABLE>

Electric  revenue  for the  three  and nine  months  ended  September  30,  2001
increased  $1.2  million,  or 2%,  and $4.2  million,  or 2%,  respectively,  as
compared  with the prior year  periods,  primarily  due to  customer  growth and
increased consumption due to warmer weather conditions.

                                       29
<PAGE>
<TABLE>
<CAPTION>

                                COST OF SERVICES

($ in thousands)                         For the three months ended September 30,  For the nine months ended September 30,
                                         ----------------------------------------  ----------------------------------------
                                             2001           2000       % Change        2001          2000        % Change
                                         -------------- ------------- -----------  ------------- -------------- -----------
<S>                                        <C>            <C>              <C>      <C>           <C>               <C>
Gas purchased                              $  24,988      $  48,182       -48%      $ 252,065     $ 148,238         70%
Electric energy and fuel oil purchased        36,149         32,540        11%         95,804        84,514         13%
Network access                                63,078         34,544        83%        132,008       108,183         22%
Eliminations  *                               (1,001)          (769)       N/A         (2,770)       (2,096)        N/A
                                         -------------- -------------              ------------- --------------
                                           $ 123,214      $ 114,497         8%      $ 477,107      $338,839         41%
                                         ============== =============              ============= ==============
</TABLE>

*Eliminations  represent  expenses  incurred by our ILEC  operations  related to
network services provided by ELI.

Gas purchased  for the three months ended  September  30, 2001  decreased  $23.2
million,  or 48%, as compared  with the prior year period,  primarily due to the
sale  of our  Louisiana  gas  operations.  There  was no gas  purchased  for the
Louisiana gas operations for the three months ended September 30, 2001 since the
sale closed on July 2, 2001.

Gas purchased  for the nine months ended  September  30, 2001  increased  $103.8
million,  or 70%, as compared  with the prior year period,  primarily  due to an
increase in the cost of gas. Under tariff provisions,  increases in our costs of
gas  purchased are largely  passed on to  customers.  The increase was partially
offset  by  decreased  gas  purchased  due to the  sale  of  our  Louisiana  gas
operations on July 2, 2001.  Included in gas purchased is  approximately  $161.3
million for the nine months  ended  September  30,  2001,  respectively,  of gas
purchased by our Louisiana gas operations. This cost will not continue since the
sale of our Louisiana gas operations closed on July 2, 2001.

Electric  energy  and fuel oil  purchased  for the three and nine  months  ended
September 30, 2001  increased $3.6 million,  or 11%, and $11.3 million,  or 13%,
respectively,  as compared with the prior year periods,  primarily due to higher
purchased power prices,  customer growth and increased consumption due to warmer
weather conditions.

During the past two years the decrease in the  availability  of power in certain
areas of the country has caused power  supply  costs to increase  substantially,
forcing  companies  to pay  higher  operating  costs to operate  their  electric
businesses.  As a result,  companies  have  attempted to offset these  increased
costs by either renegotiating prices with their power suppliers or passing these
additional costs on to their customers  through a rate  proceeding.  In Arizona,
excessive   power  costs  charged  by  our  power  supplier  in  the  amount  of
approximately $98 million through September 30, 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  deferred  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.

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 for the three months ended September 30, 2001 increased
$28.5 million, or 83%, as compared with the prior year period,  primarily due to
the impact of the  Acquisitions  and increased  circuit expense  associated with
additional data product  introductions  partially  offset by a reduction in long
distance access expense related to rate changes in the ILEC sector.

Network access  expenses for the nine months ended  September 30, 2001 increased
$23.8 million, or 22%, as compared with the prior year period,  primarily due to
the impact of the  Acquisitions  and 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 variable costs at ELI.

                                       30
<PAGE>
<TABLE>
<CAPTION>

                      DEPRECIATION AND AMORTIZATION EXPENSE

($ in thousands)                For the three months ended September 30,  For the nine months ended September 30,
                                ----------------------------------------  ----------------------------------------
                                      2001           2000       % Change        2001          2000        % Change
                                -------------- ------------- -----------  ------------- -------------- -----------
<S>                                 <C>            <C>              <C>      <C>            <C>               <C>
Depreciation  expense               $ 141,709      $ 92,004         54%      $ 335,452      $ 273,198         23%
Amortization expense                   51,953         3,855       1248%         78,282          5,285       1381%
                                -------------- -------------              ------------- --------------
                                    $ 193,662      $ 95,859        102%      $ 413,734      $ 278,483         49%
                                ============== =============              ============= ==============
</TABLE>

Depreciation  expense for the three and nine  months  ended  September  30, 2001
increased $49.7 million,  or 54%, and $62.3 million,  or 23%,  respectively,  as
compared  with the  prior  year  periods,  primarily  due to the  impact  of the
Acquisitions of $47.1 million and $78.5 million,  respectively, and $8.8 million
of  accelerated  depreciation  related  to the  change  in  useful  life  of our
accounting  and human  resource  systems and our Plano,  Texas office  building,
land,  furniture and fixtures as a result of our restructuring.  The accelerated
depreciation will continue over the next nine months.  The incremental  increase
to depreciation is estimated to be $13.2 million,  $11.9 million and $.9 million
for the fourth  quarter  of 2001,  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  $11.4 million and $39.5 million for the three and nine
months ended September 20, 2001, respectively.  The increase for the nine months
ended  September  30,  2001 is also  offset by $17.4  million  in the prior year
period of  accelerated  depreciation  related to the change in useful life of an
operating system in the telecommunications sector.

Amortization  expense for the three and nine  months  ended  September  30, 2001
increased $48.1 million, or 1,248%, and $73.0 million, or 1,381%,  respectively,
as  compared  with the prior year  periods,  primarily  due to  amortization  of
goodwill  of $47.6  million  and $71.0  million,  respectively,  related  to the
Acquisitions.
<TABLE>
<CAPTION>

                            OTHER OPERATING EXPENSES

($ in thousands)                    For the three months ended September 30,  For the nine months ended September 30,
                                    ----------------------------------------  ----------------------------------------
                                         2001           2000       % Change        2001          2000        % Change
                                    -------------- ------------- -----------  ------------- -------------- -----------
<S>                                     <C>           <C>               <C>      <C>            <C>               <C>
Operating expenses                      $ 203,625     $ 143,888         42%      $ 506,861      $ 427,465         19%
Taxes other than income taxes              34,789        25,704         35%         85,062         80,793          5%
Sales and marketing                        29,478        17,781         66%         71,049         55,169         29%
                                    -------------- -------------              ------------- --------------
                                        $ 267,892     $ 187,373         43%      $ 662,972      $ 563,427         18%
                                    ============== =============              ============= ==============
</TABLE>

Operating  expenses  for the three and nine  months  ended  September  30,  2001
increased $59.7 million, or 42%, and $79.4 million, or 19%, as compared with the
prior year  periods,  primarily due to increased  operating  expenses due to the
impact of the  Acquisitions.  The increases were  partially  offset by decreased
operating  expenses at ELI primarily due to a reduction in personnel,  increased
operating  efficiencies in the  telecommunications  sector,  decreased operating
expenses  in the gas  sector  primarily  due to the  sale of the  Louisiana  gas
operations on July 2, 2001, 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.

Taxes other than income taxes increased $9.1 million,  or 35%, and $4.3 million,
or 5%, respectively,  as compared with the prior year periods, primarily due the
impact of the Acquisitions. The increase for the nine months ended September 30,
2001 was partially offset by franchise tax refunds received by the gas sector.

Sales and marketing expenses increased $11.7 million, or 66%, and $15.9 million,
or 29%, respectively,  as compared with the prior year periods, primarily due to
the  impact  of the  Acquisitions  and  increased  telemarketing  costs  in the
telecommunications sector.


                                       31
<PAGE>
<TABLE>
<CAPTION>
                             RESTRUCTURING EXPENSES

($ in thousands)               For the three months ended September 30,  For the nine months ended September 30,
                               ----------------------------------------  ----------------------------------------
                                    2001           2000       % Change        2001          2000        % Change
                               -------------- ------------- -----------  ------------- -------------- -----------
<S>                               <C>             <C>           <C>        <C>             <C>             <C>
 Restructuring expenses           $ 13,002        $    -        100%       $ 13,002        $    -          100%
</TABLE>

Restructuring  expenses of $13.0  million  for the three and nine  months  ended
September 30, 2001 is related to our plan to close our operations support center
in Plano,  Texas by April 2002. The  restructuring  resulted in the reduction of
749  employees.  These  expenses  primarily  consist  of  severance,   benefits,
retention,  early lease  termination  costs and other planning and communication
costs. We expect to incur additional costs of approximately  $3,128,000  through
the first quarter of 2002.
<TABLE>
<CAPTION>
                        ACQUISITION ASSIMILATION EXPENSE

($ in thousands)                         For the three months ended September 30,  For the nine months ended September 30,
                                         ----------------------------------------  ----------------------------------------
                                             2001           2000       % Change        2001          2000        % Change
                                         -------------- ------------- -----------  ------------- -------------- -----------
<S>                                        <C>           <C>              <C>        <C>           <C>              <C>
 Acquisition assimilation expense          $ 5,119       $ 12,539        -59%        $ 17,665      $ 24,130        -27%

</TABLE>
Acquisition assimilation expense of $5.1 million and $12.5 million for the three
months ended  September 30, 2001 and 2000,  respectively,  and $17.7 million and
$24.1  million  for  the  nine  months  ended   September  30,  2001  and  2000,
respectively,  is related  to the  completed  and  pending  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 were significant due
to the unprecedented level of planned and completed acquisitions.  We anticipate
a lower level of assimilation  expense associated with our pending  acquisitions
in  California  and  Arizona  which  are  expected  to close  in 2002.  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>
                                OPERATING INCOME

($ in thousands)          For the three months ended September 30,  For the nine months ended September 30,
                          ----------------------------------------  ----------------------------------------
                              2001           2000       % Change        2001          2000        % Change
                          -------------- ------------- -----------  ------------- -------------- -----------
<S>                        <C>            <C>              <C>       <C>            <C>              <C>
Operating Income           $ 58,232       $ 42,442         37%       $ 206,664      $ 115,140        79%
</TABLE>
Operating  income  for the  three  and nine  months  ended  September  30,  2001
increased $15.8 million,  or 37%, and $91.5 million,  or 79%,  respectively,  as
compared with prior year periods,  primarily due to ILEC growth and acquisitions
partially  offset  by the  restructuring  expenses  and  increased  ELI  losses.
Included in operating income is approximately  $11.8 million of operating income
for the nine months ended  September 30, 2001 from our Louisiana gas operations.
This  operating  income will not continue  since the sale of our  Louisiana  gas
operations closed on July 2, 2001.
<TABLE>
<CAPTION>
              INVESTMENT AND OTHER INCOME, NET / MINORITY INTEREST
                          INTEREST EXPENSE/INCOME TAXES

($ in thousands)                         For the three months ended September 30,  For the nine months ended September 30,
                                         ----------------------------------------  ----------------------------------------
                                             2001           2000       % Change        2001          2000        % Change
                                         -------------- ------------- -----------  ------------- -------------- -----------
<S>                                          <C>            <C>            <C>       <C>             <C>              <C>
Investment and other income, net             $   3,070      $  5,096      -40%       $  16,495       $  14,913        11%
Gain on sale of assets                       $ 139,304      $      -      100%       $ 139,304       $       -       100%
Minority interest                            $       -      $      -        -        $       -       $  12,222      -100%
Interest expense                             $ 123,452      $ 49,559      149%       $ 258,033       $ 128,899       100%
Income taxes                                 $  39,610      $   (202)       -        $  49,183       $   5,096         -
</TABLE>


                                       32
<PAGE>
Investment and other income,  net for the three months ended  September 30, 2001
decreased  $2.0  million,  or 40%,  as  compared  with the  prior  year  period,
primarily due to lower average investment balances. Investment and other income,
net for the nine months ended September 30, 2001 increased $1.6 million, or 11%,
as compared with the prior year period,  primarily due to increased  income from
higher money market balances resulting from the temporary investment of proceeds
from debt  issuances,  an increase in the equity  component of the allowance for
funds used during  construction  (AFUDC) and increases in  miscellaneous  income
items.

Gain on sale of assets for the three and nine months  ended  September  30, 2001
represents the gain  recognized from the sale of our Louisiana Gas operations to
Atmos Energy Corporation on July 2, 2001.

Minority  interest,  as  presented  on  the  income  statement,  represents  the
minority's  share of ELI's  net loss  which we were able to  recognize  in prior
periods to the extent of minority  interest on our balance sheet. 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.

Interest  expense for the three months ended  September 30, 2001 increased $73.9
million,  or 149%,  as compared  with the prior year  periods,  primarily due to
$39.2  million of interest  expense on our $1.75  billion of notes issued in May
2001,  $17.5 million of interest expense on our $1.75 billion of notes issued in
August,  2001,  $2.9  million of interest  expense on our lines of credit,  $8.0
million of  interest  expense on our equity  units  issued in June 2001 and $3.1
million for  amortization  of costs  associated  with our committed  bank credit
facilities and $3.2 million of increased  amortization of debt discount expense.
During the three months ended September 30, 2001, we had average  long-term debt
outstanding  of $6.3 billion  compared to $2.7  billion  during the three months
ended  September 30, 2000.  Our composite  average  borrowing  rate paid for the
three months ended September 30, 2001 as compared with the prior year period was
51 basis  points  higher,  increasing  from  6.87% to 7.38% due to the impact of
higher interest rates on our new borrowings.

Interest  expense for the nine months ended September 30, 2001 increased  $129.1
million,  or 100%,  as compared  with the prior year  periods,  primarily due to
$56.1  million of interest  expense on our $1.75  billion of notes issued in May
2001,  $17.5 million of interest expense on our $1.75 billion of notes issued in
August 2001,  $26.9 million of interest  expense on our lines of credit,  a $4.2
million increase in ELI's interest expense related to increased borrowings, $9.2
million for  amortization  of costs  associated  with our committed  bank credit
facilities,  $3.7 million of increased amortization of debt discount expense and
$8.9 million of interest expense on our equity units issued in June.  During the
nine months ended September 30, 2001, we had average  long-term debt outstanding
of $4.7 billion  compared to $2.5 billion during the nine months ended September
30, 2000.  Our composite  average  borrowing rate paid for the nine months ended
September  30, 2001 as compared  with the prior year period was 63 basis  points
higher,  increasing  from 6.77% to 7.40%,  due to the impact of higher  interest
rates on our new borrowings.

Income taxes for the three and nine months ended  September  30, 2001  increased
$39.8 million and $44.1 million,  respectively,  as compared with the prior year
periods,  primarily  due to changes  in taxable  income.  The  estimated  annual
effective  tax rate for 2001 and 2000 is 37%.  Income tax  expense for the three
and nine months  ended  September  30,  2000  includes  adjustments  made in the
current period to arrive at this rate.
<TABLE>
<CAPTION>

                             DISCONTINUED OPERATIONS

($ in thousands)          For the three months ended September 30,  For the nine months ended September 30,
                          ----------------------------------------  ----------------------------------------
                               2001           2000       % Change        2001          2000        % Change
                          -------------- ------------- -----------  ------------- -------------- -----------
<S>                            <C>           <C>              <C>       <C>            <C>              <C>
Revenue                        $ 34,451      $ 29,272         18%       $ 87,880       $ 79,913         10%
Operating income               $ 14,832      $  9,716         53%       $ 26,777       $ 19,746         36%
Net income                     $  7,199      $  4,838         49%       $ 11,675       $  8,182         43%
</TABLE>

Revenue  from  discontinued  operations  for the  three  and nine  months  ended
September 30, 2001  increased  $5.2 million,  or 18%, and $8.0 million,  or 10%,
respectively, as compared with the prior year periods, primarily due to customer
growth and new water sales related to the completion of a multi-year $50 million
water pipeline project in Illinois in March 2001.

Operating  income  from  discontinued  operations  for the three and nine months
ended  September 30, 2001 increased $5.1 million,  or 53%, and $7.0 million,  or
36%,  respectively,  as compared with the prior year  periods,  primarily due to
customer  growth  and new  water  sales  related  to the  completion  of a water
pipeline project in Illinois in March 2001.


                                       33
<PAGE>

Net income from  discontinued  operations  for the three and nine  months  ended
September 30, 2001  increased  $2.4 million,  or 49%, and $3.5 million,  or 43%,
respectively,  as  compared  with  prior  year  periods,  primarily  due  to the
respective changes in operating income net of income taxes.
<TABLE>
<CAPTION>

                              EXTRAORDINARY EXPENSE

($ in thousands)                         For the three months ended September 30,  For the nine months ended September 30,
                                         ----------------------------------------  ----------------------------------------
                                             2001           2000       % Change        2001          2000        % Change
                                         -------------- ------------- -----------  ------------- -------------- -----------
Extraordinary expense - discontinuation
of Statement of Financial Accounting
<S>                                        <C>             <C>           <C>       <C>              <C>            <C>
Standards No. 71, net of tax                $ 43,631        $  -          100%      $ 43,631         $   -          100%

</TABLE>

Extraordinary  expense -  discontinuation  of Statement of Financial  Accounting
Standards  No. 71, net of tax,  of $43.6  million  for the three and nine months
ended  September  30, 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 11 of the
financial statements.
<TABLE>
<CAPTION>

                  NET INCOME/AVAILABLE TO COMMON SHAREHOLDERS/
          NET INCOME AVAILABLE TO COMMON SHAREHOLDERS PER COMMON SHARE

($ in thousands)                         For the three months ended September 30,  For the nine months ended September 30,
                                         ----------------------------------------  ----------------------------------------
                                              2001           2000       % Change        2001          2000        % Change
                                         -------------- ------------- -----------  ------------- -------------- -----------
<S>                                            <C>           <C>            <C>        <C>            <C>              <C>
Net income                                     $  (441)      $ 1,466       -130%       $ 18,633       $ 11,804         58%
Carrying cost of equity forward contracts        1,003             -         n/a         13,650              -         n/a
                                         -------------- ------------- -----------  ------------- -------------- -----------
 Available to common shareholders              $(1,444)      $ 1,466       -198%       $  4,983       $ 11,804        -58%
                                         ============== ============= ===========  ============= ============== ===========

Net income available to common
  shareholders per common share                $ (0.01)      $  0.01       -100%       $   0.02       $   0.05        -60%
</TABLE>

Net income for the three months ended September 30, 2001 decreased $1.9 million,
or 130%, as compared with the prior year period,  primarily due to restructuring
expenses,  extraordinary expense and increased interest expense partially offset
by increased  operating  income and the gain from the sale of our  Louisiana gas
operations.

Net income for the nine months ended  September 30, 2001 increased $6.8 million,
or 58%, as  compared  with the prior year  period,  primarily  due to  increased
operating  income  and the gain from the sale of our  Louisiana  gas  operations
partially offset by restructuring expenses,  extraordinary expense and increased
interest expense.

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.  Accordingly, on June 29, 2001, we accrued $42,995,000 to net cash
settle a portion of the contract, plus $12,647,000 in associated carrying costs.
At September 30, 2001, we settled the contract by paying the  redemption  amount
of $107,018,000 plus $1,003,000 in associated carrying costs.

                                       34
<PAGE>

Item 3.  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 September 30, 2001, a near-term  change in interest  rates would not
materially affect our consolidated financial position,  results of operations or
cash flows.

Sensitivity analysis of interest rate exposure
At September 30, 2001,  the fair value of our  long-term  debt and capital lease
obligations was estimated to be  approximately  $6,244.6  million,  based on our
overall  weighted  average  rate of 7.8% and our  overall  weighted  maturity of
approximately  12 years.  There  has been no  material  change  in the  weighted
average maturity applicable to our obligations since December 31, 2000. However,
the overall  weighted  average  interest rate  applicable to our obligations has
increased  by   approximately  85  basis  points  since  December  31,  2000.  A
hypothetical  increase of 78 basis points (10% of our overall  weighted  average
borrowing  rate) would result in an approximate  $305.5 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 September 30, 2001,  the fair value of the equity  portion of our  investment
portfolio was estimated to be $117.1  million.  A  hypothetical  10% decrease in
quoted market prices would result in an  approximate  $11.7 million  decrease in
the fair value of the equity portion of our investment portfolio.

                                       35
<PAGE>

Commodity Price Exposure

We purchase monthly gas future contracts 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.  Based upon our
overall  commodity  price  exposure at September 30, 2001, a material  near-term
change  in the  quoted  market  price of gas  would not  materially  affect  our
consolidated financial position or results of operations.

Disclosure of limitations of sensitivity analysis
Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation  of fair value of financial  instruments.  Actual  values may differ
from those presented should market  conditions vary from assumptions used in the
calculation of the fair value.  This analysis  incorporates only those exposures
that exist as of September  30, 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.


                                       36
<PAGE>


                           PART II. OTHER INFORMATION

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES


Item 1.  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  informed us that it intends to file 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
million in damages,  which is the aggregate of liquidated  damages under letters
of credit  established in the terminated  acquisition  agreements.  We intend to
file 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.

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 2.  Changes in Securities and Use of Proceeds
         -----------------------------------------
None.

Item 3.  Defaults upon Senior Securities
         -------------------------------
None.

Item 4.  Submission of Matters to a Vote of Security Holders
         ---------------------------------------------------
None.

Item 5.  Other Information
         -----------------

On April 2, 2001, ELI received a notice from the Nasdaq Stock Market,  Inc. that
its stock would be subject to delisting  from the Nasdaq  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 SmallCap  Market.  As part of the application  process,  we converted
approximately  25.3  million  shares of our Class B Common  Stock  into the same
number of shares of ELI's Class A Common Stock on August 27, 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 ELI's 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 of ELI's stock had been canceled and ELI's hearing file
closed for now.

As of January 2, 2002,  compliance with the minimum  requirements for listing on
the Nasdaq  National and SmallCap  Markets will start anew. If ELI does not meet
these  requirements for 30 consecutive  days, and is unable to regain compliance
within 90 days,  ELI's stock could be subject to delisting  at that time.  It is
uncertain whether ELI will be able to meet the applicable listing  requirements.
If the  requirements are not met, ELI's Class A Common Stock may not be eligible
for  trading on Nasdaq and ELI  expects it would  trade in the  over-the-counter
market.  If ELI's Class A Common Stock fails to remain  included on Nasdaq,  the
delisting may have a material  adverse impact on the market value of ELI's Class
A Common Stock.

                                       37
<PAGE>


Item 6.   Exhibits and Reports on Form 8-K
          --------------------------------

     a)   Exhibits:

          10.38    Competitive Advance and  Revolving Credit Facility  Agreement
                   for $680,000,000 dated October 24, 2001.

          10.39    Loan Agreement  between  Citizens Communications Company  and
                   Rural Telephone Finance  Cooperative for  $200,000,000  dated
                   October 24, 2001.

     b)   Reports on Form 8-K:

          We filed on Form 8-K on July 2, 2001 under Item 5 "Other  Events"  and
          Item 7 "Financial  Statements,  Exhibits," a press release  announcing
          the completion of our acquisition of Global  Crossing's local exchange
          telephone business, which operates under the name Frontier Telephone.

          We filed on Form 8-K on July 2, 2001 under Item 5 "Other  Events"  and
          Item 7 "Financial  Statements,  Exhibits," a press release  announcing
          that we had  completed  the sale of our  Louisiana  gas  operations to
          Atmos Energy Corporation for approximately $365 million in cash.

          We filed on Form 8-K on July 24, 2001 under Item 5 "Other  Events" and
          Item 7 "Financial  Statements,  Exhibits," a press release  announcing
          that we delivered a notice of termination  of our pending  acquisition
          agreements with Qwest Communications International, Inc.

          We filed on Form 8-K on August 10,  2001  under Item 5 "Other  Events"
          and Item 7 "Financial Statements,  Pro Forma Financial Information and
          Exhibits,"  financial statements of the Frontier business acquired and
          pro forma  financial  information  related  to the  Frontier  business
          acquired and the  disposition  of our  Louisiana  gas  operations  for
          period ended March 31, 2001.

          We  filed on Form 8-K on  August  10,  2001  under  Item 7  "Financial
          Statements,  Exhibits," a press  release  announcing  earnings for the
          quarter and six months ended June 30, 2001 and certain  financial  and
          operating data.

          We filed on Form 8-K on August 15,  2001  under Item 5 "Other  Events"
          and  Item  7  "Financial   Statements,   Exhibits,"  a  press  release
          announcing  that we priced a private  offering $1.75 billion of senior
          notes for resale under Rule 144A of the Securities Act of 1933.

          We filed on Form 8-K on August 22,  2001  under Item 5 "Other  Events"
          and  Item  7  "Financial  Statements,  Exhibits,"  certain  agreements
          related to our private offering of $1.75 billion of senior notes.

          We filed on Form 8-K on September 17, 2001 under Item 5 "Other Events"
          and Item 7 "Financial Statements,  Pro Forma Financial Information and
          Exhibits,"  financial statements of the Frontier business acquired and
          pro forma  financial  information  related  to the  Frontier  business
          acquired,  the remaining Verizon acquisitions and the public utilities
          services dispositions for period ended June 30, 2001.

          We filed on Form 8-K on September 21, 2001 under Item 5 "Other Events"
          and  Item  7  "Financial   Statements,   Exhibits,"  a  press  release
          announcing we received  California  PUC approval to sell our water and
          wastewater operations.


                                       38
<PAGE>





                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES



                                    SIGNATURE



Pursuant  to the  requirements  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/ Robert J. Larson
                                ---------------------------------------
                                  Robert J. Larson
                                  Vice President and Chief Accounting Officer






Date: November 13, 2001




                                       39