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, 2003



<PAGE>



                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                For the quarterly period ended September 30, 2003
                                               ------------------
                                       or
                                       --

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

              For the transition period from _________to__________

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

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

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


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

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

                                       N/A
         --------------------------------------------------------------
        (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 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                  Yes X  No
                                     ---   ---

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

                                  Yes X  No
                                     ---   ---

The number of shares outstanding of the registrant's  Common Stock as of October
31, 2003 was 284,436,272.

<PAGE>
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<CAPTION>

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES

                                      Index


                                                                                                     Page No.
                                                                                                     --------

   Part I.  Financial Information (Unaudited)

   Financial Statements

<S>                                                                                                      <C>
       Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                             2

       Consolidated Statements of Operations for the three months ended September 30, 2003 and 2002        3

       Consolidated Statements of Operations for the nine months ended September 30, 2003 and 2002         4

       Consolidated Statements of Shareholders' Equity for the year ended December 31, 2002 and
           the nine months ended September 30, 2003                                                        5

       Consolidated Statements of Comprehensive Income for the three and nine months ended
           September 30, 2003 and 2002                                                                     5

       Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002         6

       Notes to Consolidated Financial Statements                                                          7

    Management's Discussion and Analysis of Financial Condition and Results of Operations                 21

    Quantitative and Qualitative Disclosures About Market Risk                                            33

    Controls and Procedures                                                                               34

   Part II.  Other Information

    Legal Proceedings                                                                                     35

    Exhibits and Reports on Form 8-K                                                                      36

    Signature                                                                                             37

</TABLE>

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<TABLE>
<CAPTION>
                          PART I. FINANCIAL INFORMATION

   Item 1.Financial Statements
          --------------------

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                ($ in thousands)
                                   (Unaudited)


                                                                          September 30, 2003   December 31, 2002
                                                                          ------------------- -------------------
ASSETS
------
Current assets:
<S>                                                                              <C>                <C>
    Cash and cash equivalents                                                    $   597,124        $   393,177
    Accounts receivable, less allowances of $43,487 and $38,946, respectively        262,609            310,929
    Other current assets                                                              35,628             49,114
    Assets held for sale                                                              25,709            447,764
                                                                          ------------------- ------------------
      Total current assets                                                           921,070          1,200,984

Property, plant and equipment, net                                                 3,568,816          3,690,056
Goodwill, net                                                                      1,940,316          1,869,348
Other intangibles, net                                                               844,038            942,970
Investments                                                                           41,702             29,846
Other assets                                                                         387,671            413,538
                                                                          ------------------- ------------------
          Total assets                                                           $ 7,703,613        $ 8,146,742
                                                                          =================== ==================

LIABILITIES AND EQUITY
----------------------
Current liabilities:
    Long-term debt due within one year                                           $    89,769        $    58,911
    Accounts payable and other current liabilities                                   534,487            565,986
    Liabilities related to assets held for sale                                        3,546            145,969
                                                                          ------------------- ------------------
      Total current liabilities                                                      627,802            770,866

Deferred income taxes                                                                316,910            137,116
Customer advances for construction and contributions in aid of construction          130,095            146,661
Other liabilities                                                                    293,836            301,349
Equity units                                                                         460,000            460,000
Long-term debt                                                                     4,302,862          4,957,361
Company Obligated Manditorily Redeemable Convertible Preferred Securities*           201,250            201,250

Shareholders' equity:
    Common stock, $0.25 par value (600,000,000 authorized shares; 284,362,000
      and 282,482,000 outstanding and 295,434,000 and 294,080,000 issued at
      September 30, 2003 and December 31, 2002, respectively)                         73,858             73,520
    Additional paid-in capital                                                     1,952,786          1,943,406
    Accumulated deficit                                                             (380,133)          (553,033)
    Accumulated other comprehensive loss                                             (94,851)          (102,169)
    Treasury stock                                                                  (180,802)          (189,585)
                                                                          ------------------- ------------------
      Total shareholders' equity                                                   1,370,858          1,172,139
                                                                          ------------------- ------------------
          Total liabilities and equity                                           $ 7,703,613        $ 8,146,742
                                                                          =================== ==================

</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
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<CAPTION>

                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
                   ($ in thousands, except per-share amounts)
                                   (Unaudited)


                                                                                            2003             2002
                                                                                       --------------   --------------
<S>                                                                                        <C>             <C>
Revenue                                                                                    $ 595,037       $  668,831

Operating expenses:
     Cost of services                                                                         85,869          115,795
     Other operating expenses                                                                220,276          248,678
     Depreciation and amortization                                                           151,878          199,611
     Restructuring and other expenses                                                           (142)            (273)
     Loss on impairment                                                                        4,000        1,074,058
                                                                                       --------------   --------------
Total operating expenses                                                                     461,881        1,637,869
                                                                                       --------------   --------------
Operating income (loss)                                                                      133,156         (969,038)

Investment and other income (loss), net                                                       (7,464)          13,111
Gain (loss) on sales of assets, net                                                          (16,813)           1,901
Interest expense                                                                             103,124          115,711
                                                                                       --------------   --------------
     Income (loss) before income taxes and dividends on
        convertible preferred securities                                                       5,755       (1,069,737)

Income tax benefit                                                                            (7,210)        (371,186)
                                                                                       --------------   --------------
     Income (loss) before dividends on convertible preferred securities                       12,965         (698,551)

Dividends on convertible preferred securities, net of income tax benefit of $(963)             1,553            1,553
                                                                                       --------------   --------------

     Net income (loss) attributable to common shareholders                                 $  11,412       $ (700,104)
                                                                                       ==============   ==============

Basic and diluted income (loss) per common share                                           $    0.04       $    (2.49)

</TABLE>

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

                                       3
<PAGE>
<TABLE>
<CAPTION>

                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
                   ($ in thousands, except per-share amounts)
                                   (Unaudited)

                                                                                          2003             2002
                                                                                      --------------   --------------
<S>                                                                                      <C>              <C>
Revenue                                                                                  $1,890,853       $2,010,604

Operating expenses:
     Cost of services                                                                       312,625          357,819
     Other operating expenses                                                               688,590          760,958
     Depreciation and amortization                                                          440,785          564,163
     Reserve for telecommunications bankruptcies                                              2,260           17,805
     Restructuring and other expenses                                                         9,950           21,912
     Loss on impairment                                                                       4,000        1,074,058
                                                                                      --------------   --------------
Total operating expenses                                                                  1,458,210        2,796,715
                                                                                      --------------   --------------
Operating income (loss)                                                                     432,643         (786,111)

Investment and other income (loss), net                                                      66,924          (65,028)
Gain (loss) on sales of assets, net                                                         (11,792)           1,901
Interest expense                                                                            318,836          357,265
                                                                                      --------------   --------------
     Income (loss) from continuing operations before income taxes, dividends on
        convertible preferred securities and cumulative effect of change
           in accounting principle                                                          168,939       (1,206,503)
Income tax expense (benefit)                                                                 57,150         (424,688)
                                                                                      --------------   --------------
     Income (loss) from continuing operations before dividends on convertible
        securities and cumulative effect of change in accounting principle                  111,789         (781,815)

Dividends on convertible preferred securities, net of income tax benefit of $(2,889)          4,658            4,658
                                                                                      --------------   --------------
     Income (loss) from continuing operations before cumulative effect of
        change in accounting principle                                                      107,131         (786,473)
Loss from discontinued operations, net of income tax benefit of $(920)                            -           (1,478)
Gain on disposal of water segment, net of tax of $139,874                                         -          169,326
                                                                                      --------------   --------------
     Total income from discontinued operations, net of tax of $138,954                            -          167,848

Income (loss) before cumulative effect of change in accounting principle                    107,131         (618,625)

Cumulative effect of change in accounting principle, net of tax of
     $41,591 and $0, respectively                                                            65,769          (39,812)
                                                                                      --------------   --------------
     Net income (loss) attributable to common shareholders                               $  172,900       $ (658,437)
                                                                                      ==============   ==============
Basic income (loss) per common share:
     Income (loss) from continuing operations before cumulative effect of
        change in accounting principle                                                   $     0.38       $    (2.80)
     Income from discontinued operations                                                 $        -       $     0.60
     Income (loss) before cumulative effect of change in accounting principle            $     0.38       $    (2.21)
     Cumulative effect of change in accounting principle                                 $     0.23       $    (0.14)
     Net income (loss) attributable to common shareholders                               $     0.61       $    (2.35)

Diluted income (loss) per common share:
     Income (loss) from continuing operations before cumulative effect of
        change in accounting principle                                                   $     0.37       $    (2.80)
     Income from discontinued operations                                                 $        -       $     0.59
     Income (loss) before cumulative effect of change in accounting principle            $     0.37       $    (2.21)
     Cumulative effect of change in accounting principle                                 $     0.22       $    (0.14)
     Net income (loss) attributable to common shareholders                               $     0.59       $    (2.35)

</TABLE>

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

                                       4

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<TABLE>
<CAPTION>

                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 FOR THE YEAR ENDED DECEMBER 31, 2002 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2003
                                ($ in thousands)
                                   (Unaudited)


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

<S>                              <C>       <C>      <C>           <C>            <C>      <C>      <C>         <C>
Balances January 1, 2002          292,840   $73,210  $1,927,518    $ 129,864     $  4,907  (11,551) $ (189,357) $1,946,142
   Stock plans                      1,240       310      15,888            -            -      (47)       (228)     15,970
   Net loss                             -         -           -     (682,897)           -        -           -    (682,897)
   Other comprehensive income,
     net of tax and
     reclassifications adjustments      -         -           -            -     (107,076)       -           -    (107,076)
                                 --------- --------- ----------- ------------ ------------ -------- ----------- -----------
Balances December 31, 2002        294,080    73,520   1,943,406     (553,033)    (102,169) (11,598)   (189,585)  1,172,139
   Stock plans                      1,354       338       9,380            -            -      526       8,783      18,501
   Net income                           -         -           -      172,900            -        -           -     172,900
   Other comprehensive income,
     net of tax and
     reclassifications adjustments      -         -           -            -        7,318        -           -       7,318
                                 --------- --------- ----------- ------------ ------------ -------- ----------- -----------
Balances September 30, 2003       295,434   $73,858  $1,952,786    $(380,133)    $(94,851) (11,072) $ (180,802) $1,370,858
                                 ========= ========= =========== ============ ============ ======== =========== ===========

</TABLE>

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




                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
                                ($ in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                          For the three months ended September 30,   For the nine months ended September 30,
                                          ----------------------------------------   ---------------------------------------
                                                2003                 2002                  2003                2002
                                          ------------------  --------------------   -------------------  ------------------

<S>                                                <C>                <C>                    <C>                <C>
Net income (loss)                                  $ 11,412           $ (700,104)            $ 172,900          $ (658,437)
Other comprehensive income (loss), net of
  tax and reclassifications adjustments*              2,520                  796                 7,318              (4,686)
                                          ------------------  --------------------   -------------------  ------------------
  Total comprehensive income (loss)                $ 13,932           $ (699,308)            $ 180,218          $ (663,123)
                                          ==================  ====================   ===================  ==================

</TABLE>

* Consists of unrealized gains/(losses) of marketable securities.


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

                                       5


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<TABLE>
<CAPTION>

                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
                                ($ in thousands)

                                                                          2003             2002
                                                                     ---------------  ---------------

Income (loss) from continuing operations before cumulative
<S>                                                                     <C>             <C>
   effect of change in accounting principle                             $ 107,131       $ (786,473)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
      Depreciation and amortization expense                               440,785          564,163
      Investment write-downs                                                    -          100,377
      Gain on extinguishment of debt                                      (71,889)         (20,797)
      Investment (gains)/losses                                                 -           (3,363)
      (Gain)/loss on sales of assets, net                                  11,792           (1,901)
      Loss on impairment                                                    4,000        1,074,058
      Allowance for equity funds used during construction                    (129)          (1,168)
      Deferred and accrued income taxes                                    97,935         (374,312)
      Change in accounts receivable                                        57,091            4,191
      Change in accounts payable, accrued expenses and
         other liabilities                                                (88,790)        (158,267)
      Change in other current assets                                        6,547          102,387
                                                                     ---------------  ---------------
Net cash provided by continuing operating activities                      564,473          498,895

Cash flows from investing activities:
      Proceeds from sales of assets, net of selling expenses              380,735                -
      Capital expenditures                                               (191,658)        (354,203)
      Securities purchased                                                   (787)            (450)
      Securities sold                                                           -           11,681
      Securities matured                                                        -            2,014
      ELI share purchases                                                       -           (6,800)
      Other                                                                    17              912
                                                                     ---------------  ---------------
Net cash provided from (used by) investing activities                     188,307         (346,846)

Cash flows from financing activities:
      Long-term debt principal payments                                  (551,425)        (717,721)
      Issuance of common stock                                             10,357            8,389
      Customer advances for construction
        and contributions in aid of construction                           (7,765)          (5,526)
                                                                     ---------------  ---------------
Net cash used by financing activities                                    (548,833)        (714,858)

Cash provided by (used by) discontinued operations
      Proceeds from sale of discontinued operations                             -          859,065
      Net cash used by discontinued operations                                  -          (32,889)

Increase in cash and cash equivalents                                     203,947          263,367
Cash and cash equivalents at January 1,                                   393,177          215,869
                                                                     ---------------  ---------------

Cash and cash equivalents at September 30,                              $ 597,124       $  479,236
                                                                     ===============  ===============
Cash paid during the period for:
      Interest                                                          $ 303,913       $  349,177
      Income taxes (refunds)                                            $   2,425       $  (19,472)

Non-cash investing and financing activities:
      Assets acquired under capital lease                               $       -       $   38,000
      Change in fair value of interest rate swaps                       $  (1,238)      $   16,077


</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
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  Summary of Significant Accounting Policies:
     ------------------------------------------
     (a)  Basis of Presentation and Use of Estimates:
          Citizens  Communications  Company and its subsidiaries are referred to
          as "we," "us" "our" or the  "Company"  in this report.  Our  unaudited
          consolidated  financial  statements  have been  prepared in accordance
          with accounting  principles generally accepted in the United States of
          America (GAAP) and should be read in conjunction with the consolidated
          financial  statements  and notes included in our 2002 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.

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

          Certain information and footnote disclosures have been excluded and/or
          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)  Cash Equivalents:
          We consider all highly liquid investments with an original maturity of
          three months or less to be cash equivalents.

     (c)  Goodwill and Other Intangibles:
          Intangibles represent the excess of purchase price over the fair value
          of identifiable  tangible  assets  acquired.  We undertake  studies to
          determine  the fair values of assets  acquired and  allocate  purchase
          prices  to  property,   plant  and   equipment,   goodwill  and  other
          identifiable intangibles.  On January 1, 2002, we adopted Statement of
          Financial  Accounting  Standards  (SFAS) No. 142,  "Goodwill and Other
          Intangible Assets," which applies to all goodwill and other intangible
          assets recognized in the statement of financial position at that date,
          regardless  of  when  the  assets  were  initially  recognized.   This
          statement requires that goodwill and other intangibles with indefinite
          useful  lives no longer be  amortized  to  earnings,  but  instead  be
          reviewed  for  impairment,  at least  annually.  The  amortization  of
          goodwill and other  intangibles  with  indefinite  useful lives ceased
          upon adoption of the statement on January 1, 2002. We annually (during
          the fourth  quarter)  examine the  carrying  value of our goodwill and
          other  intangibles with indefinite  useful lives to determine  whether
          there are any  impairment  losses,  or  whenever  events or changes in
          circumstances indicate that the carrying amount is not recoverable.

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

                                       7
<PAGE>

     (e)  Derivative Instruments and Hedging Activities:
          On the date the derivative  contract is entered into, we designate the
          derivative  as either a fair value or cash flow hedge.  A hedge of the
          fair value of a recognized  asset or  liability or of an  unrecognized
          firm  commitment  is a fair  value  hedge.  A  hedge  of a  forecasted
          transaction  or the  variability  of cash flows to be received or paid
          related to a recognized  asset or  liability is a cash flow hedge.  We
          formally  document all relationships  between hedging  instruments and
          hedged items,  as well as its  risk-management  objective and strategy
          for undertaking the hedge  transaction.  This process includes linking
          all derivatives  that are designated as fair value or cash flow hedges
          to specific assets and liabilities on the balance sheet or to specific
          firm commitments or forecasted transactions.

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

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

          We have  entered into  interest  rate swap  arrangements  related to a
          portion of our fixed rate debt.  These  hedge  strategies  satisfy the
          fair value hedging requirements of SFAS No. 133. As a result, the fair
          value of the hedges is carried on the  balance  sheet in other  assets
          and the related underlying liabilities are also adjusted to fair value
          by the same amount.

     (f)  Employee Stock Plans:
          We have various employee stock-based  compensation plans. Awards under
          these plans are granted to eligible  employees.  Awards may be made in
          the form of incentive  stock  options,  non-qualified  stock  options,
          stock  appreciation  rights,  restricted  stock or other  stock  based
          awards.  As  permitted  by  current  accounting  rules,  we  recognize
          compensation  expense in the financial  statements  only if the market
          price of the  underlying  stock exceeds the exercise price on the date
          of grant.

          At September  30, 2003, we have four stock based  compensation  plans:
          the Management Equity Incentive Plan (MEIP), the Equity Incentive Plan
          (EIP),  the Employee  Stock  Purchase  Plan (ESPP) and our  Directors'
          Deferred  Fee  Equity  Plan.  We  apply  Accounting  Principles  Board
          Opinions  (APB) No. 25 and related  interpretations  in accounting for
          the employee stock plans  resulting in the use of the intrinsic  value
          to value the stock  option.  In addition,  we grant  restricted  stock
          awards to key employees in the form of our Common Stock.  Compensation
          expense is  recognized  as a component  of  operating  expense for our
          Directors'  Deferred  Fee Equity  Plan and  restricted  stock  grants.
          Compensation  cost  is  not  generally  recognized  in  the  financial
          statements  for  options  issued  pursuant  to the MEIP or EIP, as the
          exercise  price for such  options was equal to the market price of the
          stock at the time of grant.  Compensation  cost is also not recognized
          in the financial  statements  related to the ESPP because the purchase
          price is 85% of the fair value.  For purposes of presenting  pro forma
          information  the fair value of options  granted is computed  using the
          Black Scholes option-pricing model.

                                       8
<PAGE>
<TABLE>
<CAPTION>

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

                                                                Three Months Ended                  Nine Months Ended
                                                                   September 30,                      September 30,
                                                                ------------------                  -----------------
                                                              2003              2002             2003              2002
                                                         -------------    -------------    --------------    -------------
              ($ in thousands)

             Net income (loss)
             attributable to common
<S>                                                      <C>             <C>               <C>              <C>
             shareholders                 As reported    $    11,412     $  (700,104)      $  172,900       $  (658,437)
             Add: Stock-based employee
             compensation expense
             included in reported net
             income, net of related tax
             effects                                             220             160            3,785             1,764

             Deduct: Total stock-based
             employee compensation
             expense determined under
             fair value based method
             for all awards, net of
             related tax effects                              (3,165)         (3,049)         (11,729)          (11,447)
                                                         -----------      -----------      -----------       -----------

                                          Pro forma      $     8,467     $  (702,993)      $  164,956       $  (668,120)
                                                         ===========      ===========      ============      ===========
             Net income (loss)
             attributable to common
             shareholders per common
             share                        As reported:
                                             Basic       $      0.04     $     (2.49)      $     0.61       $     (2.35)
                                             Diluted     $      0.04     $     (2.49)      $     0.59       $     (2.35)

                                          Pro forma:
                                             Basic       $      0.03     $     (2.50)      $     0.58       $     (2.38)
                                             Diluted     $      0.03     $     (2.50)      $     0.56       $     (2.38)
</TABLE>

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

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

                                       9
<PAGE>

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

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

(2)  Property, Plant and Equipment, Net:
     ----------------------------------
     Property,  plant and  equipment at September 30, 2003 and December 31, 2002
     is as follows:
<TABLE>
<CAPTION>

($ in thousands)                              September 30, 2003     December 31, 2002
                                           ----------------------  ---------------------

<S>                                                <C>                    <C>
Property, plant and equipment                      $ 6,166,072            $ 6,139,772
Less accumulated depreciation                       (2,597,256)            (2,449,716)
                                           ----------------------  ---------------------
    Property, plant and equipment, net             $ 3,568,816            $ 3,690,056
                                           ======================  =====================
</TABLE>
     Depreciation  expense,  calculated using the straight-line method, is based
     upon the estimated  service lives of various  classifications  of property,
     plant and equipment. Depreciation expense was $120,012,000 and $167,772,000
     for the three months ended  September 30, 2003 and 2002,  respectively  and
     $345,577,000  and $471,642,000 for the nine months ended September 30, 2003
     and 2002,  respectively.  Effective  January  1,  2003,  as a result of the
     adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations," we
     ceased recognition of the cost of removal provision in depreciation expense
     and  eliminated  the  cumulative  cost of removal  included in  accumulated
     depreciation.  In addition,  we increased the average depreciable lives for
     certain of our  equipment.  This  change in estimate  reduced  depreciation
     expense by $9,956,000 and $30,054,000, or $0.03 and $0.07 per share for the
     three and nine months ended September 30, 2003, respectively.  For the nine
     months ended September 30, 2002, we recognized accelerated  depreciation of
     $12,800,000 related to the closing of our Plano, Texas facility.

(3)  Dispositions:
     ------------
     On April 1, 2003, we completed the sale of  approximately  11,000 telephone
     access lines in North Dakota for  approximately  $25,700,000  in cash.  The
     pre-tax gain on the sale was $2,274,000.

     On  April 4,  2003,  we  completed  the  sale of our  wireless  partnership
     interest in Wisconsin for  approximately  $7,500,000  in cash.  The pre-tax
     gain on the sale was $2,173,000.

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

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

          Electric and Gas
          ----------------
          On  November  1, 2002,  we  completed  the sale of our Kauai  Electric
          division for  $215,000,000  in cash.  The pre-tax gain on the sale was
          $8,273,000.

          On August 8, 2003,  we completed the sale of The Gas Company in Hawaii
          division for $119,290,000 in cash and assumed liabilities. The pre-tax
          loss  on the  sale  recognized  in  the  third  quarter  of  2003  was
          $18,480,000.

                                       10
<PAGE>

          On August 11,  2003,  we  completed  the sale of our  Arizona  gas and
          electric  divisions for  $224,100,000 in cash. The pre-tax loss on the
          sale recognized in the third quarter of 2003 was $12,791,000.

          We have entered into  definitive  agreements to sell the assets of our
          Vermont electric division to Vermont Electric Power Company,  Inc. and
          Vermont Electric  Cooperative,  Inc. for an aggregate of approximately
          $25,000,000 in cash, subject to adjustments (currently estimated to be
          a  reduction  of  approximately  $3,000,000)  under  the  terms of the
          agreements.  The  transactions,  which are subject to  regulatory  and
          other customary approvals, are expected to close by mid-2004.

     All  the  assets  of  our  Vermont  electric  division  and  their  related
     liabilities  are  classified  as  "assets  held for sale" and  "liabilities
     related to assets held for sale,"  respectively.  An additional  $4,000,000
     impairment  charge has been  recognized in the third quarter of 2003,  such
     that the net assets have been written down to our best  estimate of the net
     realizable value upon sale.

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

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

($ in thousands)                                    For the nine months ended September 30,
                                                   -------------------------------------------
                                                          2003                   2002
                                                   -------------------    --------------------
<S>                                                          <C>                <C>
Revenue                                                      $  -               $   4,650
Operating loss                                               $  -               $    (419)
Income tax benefit                                           $  -               $    (920)
Loss from discontinued operations, net of tax                $  -               $  (1,478)
Gain on disposal of water segment, net of tax                $  -               $ 169,326

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

($ in thousands)                                    September 30, 2003     December 31, 2002
                                                  --------------------------------------------

<S>                                                          <C>                  <C>
Current assets                                               $  4,801             $  49,549
Net property, plant and equipment                               9,530               358,135
Other assets                                                   11,378                40,080
                                                  ----------------------  --------------------
Total assets held for sale                                   $ 25,709             $ 447,764
                                                  ======================  ====================

Current liabilities                                          $  3,546             $  79,194
Other liabilities                                                   -                66,775
                                                  ----------------------  --------------------
Total liabilities related to assets held for sale            $  3,546             $ 145,969
                                                  ======================  ====================
</TABLE>

(5)  Other Intangibles:
     -----------------
     Other  intangibles  at  September  30,  2003 and  December  31, 2002 are as
     follows:
<TABLE>
<CAPTION>

($ in thousands)                                     September 30, 2003       December 31, 2002
                                                   ------------------------  ---------------------

<S>                              <C>                          <C>                   <C>
Customer base - amortizable over 96 months                    $  995,853            $ 1,000,816
Trade name - non-amortizable                                     122,058                122,058
                                                   ------------------------  ---------------------
   Other intangibles                                           1,117,911              1,122,874
Accumulated amortization                                        (273,873)              (179,904)
                                                   ------------------------  ---------------------
    Total other intangibles, net                              $  844,038            $   942,970
                                                   ========================  =====================
</TABLE>

                                       11
<PAGE>

     We have  reflected  assets  acquired at fair  market  values at the time of
     acquisition  in  accordance  with  purchase   accounting   standards.   Our
     allocations  are based  upon an  independent  appraisal  of the  respective
     properties acquired.

     Amortization  expense was  $31,866,000 and $31,839,000 for the three months
     ended  September  30,  2003 and  2002,  respectively  and  $95,208,000  and
     $92,521,000  for the  nine  months  ended  September  30,  2003  and  2002,
     respectively.  The decline in customer base at September 30, 2003 is due to
     the April 1, 2003 sale of access lines in North Dakota.

(6)  Restructuring Charges and Other Expenses:
     ----------------------------------------

     2003
     ----
     Restructuring  and other expenses  primarily consist of expenses related to
     reductions in personnel at our telecommunications  operations and the write
     off of software  no longer  useful.  We continue to review our  operations,
     personnel and facilities to achieve greater efficiency.

     2002
     ----
     Restructuring  and other expenses  primarily consist of expenses related to
     our  various  restructurings,  including  reductions  in  personnel  at our
     telecommunications  operations,  costs that were spent at our Plano,  Texas
     facility and at other locations as a result of transitioning  functions and
     jobs, and  $6,800,000 of costs and expenses  related to our tender offer in
     June 2002 for all ELI common shares that we did not own.

     2001
     ----
     During 2001,  we examined all aspects of our  business  operations  and our
     facilities to take advantage of operational and functional  synergies among
     all our telecommunications operations.

          Plano Restructuring
          Pursuant to a plan adopted in the third quarter of 2001, we closed our
          operations   support  center  in  Plano,  Texas  in  August  2002.  In
          connection  with this plan,  we recorded a pre-tax  charge of $839,000
          for the three  months ended March 31, 2002 and we adjusted our accrual
          down by  $92,000  for the  three  months  ended  June  30,  2002.  The
          restructuring   expenses  primarily  consist  of  severance  benefits,
          retention  earned  through  March  31,  2002 and  other  planning  and
          communication costs. We sold our Plano office building in March 2003.
<TABLE>
<CAPTION>

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

2001 Plano Restructuring
<S>                                                  <C>             <C>            <C>             <C>     <C>
Original accrued amount                              $ 9,353         $ 1,535        $ 1,178         $ 936   $ 13,002
Amount paid                                           (8,985)         (1,390)        (3,832)         (523)   (14,730)
Additional accrual                                       616               -          2,943            27      3,586
Adjustments                                             (984)           (132)          (289)         (440)    (1,845)
                                            -----------------  -------------- -------------- ------------- ----------
Accrued @ 12/31/2002                                       -              13              -             -         13
                                            -----------------  -------------- -------------- ------------- ----------
Amount paid                                                -             (13)             -             -        (13)
Additional accrual                                         -               -              -             -          -
Adjustments                                                -               -              -             -          -
                                            -----------------  -------------- -------------- ------------- ----------
Accrued @ 9/30/2003                                  $     -         $     -        $     -         $   -   $      -
                                            =================  ============== ============== ============= ==========
</TABLE>

          Sacramento Call Center Restructuring
          In April 2002, we closed our Sacramento  Customer Care Center pursuant
          to a plan adopted in the fourth  quarter of 2001. In  connection  with
          this  closing,  we recorded a pre-tax  charge of $62,000 for the three
          months ended March 31, 2002 and $9,000 for the three months ended June
          30, 2002.


                                       12
<PAGE>

          ELI Restructuring
          In the first half of 2002, ELI redeployed the internet routers,  frame
          relay switches and ATM switches from the Atlanta,  Cleveland,  Denver,
          Philadelphia  and New York markets to other locations in ELI's network
          pursuant to a plan adopted in the fourth  quarter of 2001.  ELI ceased
          leasing  the  collocation  facilities  and  off-net  circuits  for the
          backbone  and local loops  supporting  the  service  delivery in these
          markets.  It was  anticipated  that this would lead to  $4,179,000  of
          termination  fees, which were accrued for but not paid at December 31,
          2001.  In the first and second  quarters  of 2002,  ELI  adjusted  its
          original accrual down by $2,100,000 and $100,000, respectively, due to
          the favorable settlement of termination charges for an off-net circuit
          agreement.  As of December 31, 2002, this accrual was adjusted down by
          $625,000, $1,354,000 was paid and no accrual remained.

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


                                       13
<PAGE>
<TABLE>
<CAPTION>

(7)  Long-Term Debt:
     --------------
     The activity in our long-term  debt from December 31, 2002 to September 30,
     2003 is as follows:
                                                              Nine Months Ended September 30, 2003
                                                              -------------------------------------
                                                                                                                    Interest Rate*
                                                December 31,                 Interest                September 30,   September 30,
      ($ in thousands)                              2002        Payments**   Rate Swap     Other         2003            2003
                                                  --------      ----------   ---------    -------    -------------   -------------
      FIXED RATE

        Rural Utilities Service Loan
<S>                                              <C>          <C>          <C>         <C>           <C>               <C>
          Contracts                              $   30,874   $    (647)   $    -      $     -       $   30,227        6.210%

        Senior Unsecured Debt                     4,508,880    (335,700)     (1,238)         -        4,171,942        8.187%

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

        ELI Notes                                     5,975         -           -            -            5,975        6.232%
        ELI Capital Leases                          135,200      (7,940)        -        (53,385)        73,875       10.267%
        Industrial Development Revenue Bonds        186,390     (75,805)        -            -          110,585        5.846%
        Other                                            40         (13)        -            -               27       12.986%
                                                  ---------    ---------   ---------     --------    ----------
      TOTAL FIXED RATE                            5,327,359    (420,105)     (1,238)     (53,385)     4,852,631
                                                  ---------    ---------   ---------     --------    -----------
      VARIABLE RATE

        Industrial Development Revenue Bonds        148,913    (131,320)        -        (17,593)          -
                                                  ---------    ---------   ---------     --------    -----------

      TOTAL VARIABLE RATE                           148,913    (131,320)        -        (17,593)          -
                                                  ---------    ---------   ---------     --------    -----------
      TOTAL                                      $5,476,272   $(551,425)   $ (1,238)   $ (70,978)    $4,852,631
                                                  ---------    =========   =========     ========    -----------

        Less:  Current Portion                      (58,911)                                            (89,769)
        Less:  Equity Units                        (460,000)                                           (460,000)
                                                  ---------                                          -----------
      TOTAL LONG TERM DEBT                       $4,957,361                                          $4,302,862
                                                  =========                                          ===========
</TABLE>

* Interest rate includes  amortization of debt issuance expenses,  debt premiums
or discounts.  The interest  rate for Rural  Utilities  Service Loan  Contracts,
Senior  Unsecured  Debt, and Industrial  Development  Revenue Bonds  represent a
weighted average of multiple issuances.

** Includes purchases on the open market.

     On August 13, 2003, following the completion of the sale of our Arizona gas
     and electric  divisions,  we called for redemption the entire  $232,600,000
     outstanding of our 6.375% Senior Notes due 2004.  These notes were redeemed
     with cash on September 17, 2003, at a premium of approximately $10,300,000.
     In connection with this  redemption,  we terminated two interest rate swaps
     involving an aggregate  $100,000,000  notional amount of indebtedness  that
     were designated as fair value hedges against these notes. The proceeds from
     the  settlement  of the  swaps of  approximately  $3,000,000  were  applied
     against the cost to retire resulting in a net premium of $7,300,000.

     In  connection  with the August 8, 2003 sale of our Hawaii gas  operations,
     the buyer assumed $17,593,000 of our special purpose development bonds.

     During  June  2003,  we  redeemed  five  separate  issues of the  Company's
     Industrial  Development  Revenue Bonds aggregating  $75,500,000,  and seven
     issues  of  the  Company's   Special  Purpose  Revenue  Bonds   aggregating
     $88,800,000.  All of these  redemptions were funded with cash. In addition,
     we called for redemption two additional Industrial Development Revenue Bond
     series aggregating $13,500,000, $12,400,000 of which was redeemed with cash
     on July 2, 2003, and the remaining  $1,100,000 issue was redeemed with cash
     on August 1, 2003.

     During the first nine months of 2003,  we executed a series of purchases in
     the open market of our outstanding debt securities. The aggregate principal
     amount  of debt  securities  purchased  was  $94,900,000  at a  premium  of
     approximately $3,100,000.

                                       14
<PAGE>

     In March 2003,  we  terminated a capital  lease  obligation  at ELI,  which
     resulted in a non-cash  pre-tax gain of $40,703,000  included in investment
     and other income  (loss),  net. In addition,  in June 2003, ELI reduced the
     number of optical fibers leased under another capital lease, which resulted
     in a  non-cash  pre-tax  gain  of  approximately  $25,021,000  included  in
     investment and other income (loss),  net. Total future minimum cash payment
     commitments  over the next 24 years under ELI's  long-term  capital  leases
     amounted to $177,097,000 as of September 30, 2003.

     On  February  1,  2003,  we  repaid at  maturity  $35,000,000  of  Frontier
     Communications of Minnesota 7.61% Senior Notes.

(8)  Income (Loss) Per Common Share:
     ------------------------------
     The  reconciliation  of the income (loss) per common share  calculation for
     the three and nine months ended September 30, 2003 and 2002,  respectively,
     is as follows:
<TABLE>
<CAPTION>
                                                         For the three months                   For the nine months
($ in thousands, except per-share amounts)               ended September 30,                    ended September 30,
                                                 ------------------------------------    ------------------------------------
                                                       2003               2002                 2003               2002
                                                 -----------------  -----------------    -----------------  -----------------
Net income (loss) used for basic and diluted
   earnings per common share
Income (loss) from continuing operations before
   cumulative effect of change in accounting
<S>                                                    <C>              <C>                   <C>               <C>
   principle                                           $ 11,412         $ (700,104)           $ 107,131         $ (786,473)
Income from discontinued operations                           -                  -                    -            167,848
                                                 -----------------  -----------------    -----------------  -----------------
Income (loss) before cumulative effect of change
   in accounting principle                               11,412           (700,104)             107,131           (618,625)
Cumulative effect of change in accounting
   principle                                                  -                  -               65,769            (39,812)
                                                 -----------------  -----------------    -----------------  -----------------
Total basic net income (loss)                          $ 11,412         $ (700,104)           $ 172,900         $ (658,437)
                                                 =================  =================    =================  =================

Effect of conversion of preferred securities                  -                  -                4,658                  -
                                                 -----------------  -----------------    -----------------  -----------------
Total diluted net income (loss)                        $ 11,412         $ (700,104)           $ 177,558         $ (658,437)
                                                 =================  =================    =================  =================
Basic earnings (loss) per common share
Weighted-average shares outstanding - basic             282,838            280,778              282,217            280,540
                                                 -----------------  -----------------    -----------------  -----------------
Income (loss) from continuing operations before
   cumulative effect of change in accounting
   principle                                           $   0.04         $    (2.49)           $    0.38         $    (2.80)
Income from discontinued operations                           -                  -                    -               0.60
                                                 -----------------  -----------------    -----------------  -----------------
Income (loss) before cumulative effect of change
   in accounting principle                                 0.04              (2.49)                0.38              (2.21)
Cumulative effect of change in accounting
   principle                                                  -                  -                 0.23              (0.14)
                                                 -----------------  -----------------    -----------------  -----------------
Net income (loss) attributable to common
   shareholders                                        $   0.04         $    (2.49)           $    0.61         $    (2.35)
                                                 =================  =================    =================  =================
Diluted earnings (loss) per common share
Weighted-average shares outstanding                     282,838            280,778              282,217            280,540
Effect of dilutive shares                                 5,264                  -                4,900                  -
Effect of conversion of preferred securities                  -                  -               15,134                  -
                                                 -----------------  -----------------    -----------------  -----------------
Weighted-average shares outstanding - diluted           288,102            280,778              302,251            280,540
                                                 =================  =================    =================  =================
Income (loss) from continuing operations before
   cumulative effect of change in accounting
   principle                                           $   0.04         $    (2.49)           $    0.37         $    (2.80)
Income from discontinued operations                           -                  -                    -               0.59
                                                 -----------------  -----------------    -----------------  -----------------
Income (loss) before cumulative effect of change
   in accounting principle                                 0.04              (2.49)                0.37              (2.21)
Cumulative effect of change in accounting
   principle                                                  -                  -                 0.22              (0.14)
                                                 -----------------  -----------------    -----------------  -----------------
Net income (loss) attributable to common
   shareholders                                        $   0.04         $    (2.49)           $    0.59         $    (2.35)
                                                 =================  =================    =================  =================
</TABLE>

                                       15
<PAGE>

     For the  three  and nine  months  ended  September  30,  2003,  options  of
     10,420,894 and  10,770,894,  respectively,  at exercise prices ranging from
     $11.41 to $21.47 issuable under employee  compensation  plans were excluded
     from the  computation of diluted EPS for those periods because the exercise
     prices were  greater than the average  market  price of common  shares and,
     therefore, the effect would be antidilutive.

     In  addition,  for the three and nine  months  ended  September  30,  2003,
     restricted  stock awards of 385,333 and 363,566 shares,  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.

     We also have 18,400,000  potentially dilutive equity units with each equity
     unit  consisting  of a 6.75%  senior note due 2006 and a purchase  contract
     (warrant) for our common  stock.  These  securities  were excluded from the
     computation  of diluted EPS for all periods  reflected  above because their
     inclusion would have had an antidilutive effect.

     We  also  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
     that have been  included  in the  diluted  income  (loss) per common  share
     calculation for the period ended September 30, 2003.

     As a result of our loss from  continuing  operations for the three and nine
     months ended  September  30, 2002,  dilutive  securities  of 3,625,118  and
     3,936,054 issuable under employee compensation plans were excluded from the
     computation of diluted EPS for those periods,  respectively,  because their
     inclusion would have had an antidilutive effect.

     In  addition,  for the three and nine  months  ended  September  30,  2002,
     options of 20,458,775  and  15,324,607,  respectively,  at exercise  prices
     ranging from $9.18 to $21.47  issuable  under employee  compensation  plans
     were excluded from the computation of diluted EPS for those periods because
     the exercise  prices were  greater than the average  market price of common
     shares and, therefore, the effect would be antidilutive.

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

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


                                       16
<PAGE>
<TABLE>
<CAPTION>

($ in thousands)                                    For the three months ended September 30, 2003
                                      ---------------------------------------------------------------------------
                                                                                                      Total
                                          ILEC             ELI            Gas          Electric      Segments
                                      --------------  -------------- --------------- ------------- --------------
<S>                                     <C>               <C>             <C>           <C>          <C>
Revenue                                 $   511,574       $  40,416       $  18,005     $  25,042    $   595,037
Depreciation and amortization               146,261           5,617               -             -        151,878
Restructuring and other expenses                               (142)              -             -           (142)
Loss on impairment                                -               -               -         4,000          4,000
Operating income                            133,807           3,773          (2,806)       (1,618)       133,156
Capital expenditures, net                    66,968           3,113           2,412         3,515         76,008

($ in thousands)                                    For the three months ended September 30, 2002
                                      ---------------------------------------------------------------------------
                                                                                                       Total
                                          ILEC             ELI            Gas          Electric      Segments
                                      --------------  -------------- --------------- ------------- --------------
Revenue                                 $   519,777       $  41,311       $  40,584     $  67,159    $   668,831
Depreciation and amortization               148,798          50,587               9           217        199,611
Restructuring and other expenses                138            (411)              -             -           (273)
Loss on impairment                                -         656,658         152,300       265,100      1,074,058
Operating income (loss)                     131,239        (702,326)       (148,345)     (249,606)      (969,038)
Capital expenditures, net                    67,601           2,547           5,920         5,577         81,645

($ in thousands)                                     For the nine months ended September 30, 2003
                                      ---------------------------------------------------------------------------
                                                                                                       Total
                                          ILEC             ELI            Gas          Electric      Segments
                                      --------------  -------------- --------------- ------------- --------------
Revenue                                 $ 1,535,336       $ 125,228       $ 137,686     $  92,603    $ 1,890,853
Depreciation and amortization               422,990          17,795               -             -        440,785
Reserve for telecommunications
   bankruptcies                               1,113           1,147               -             -          2,260
Restructuring and other expenses              9,482             468               -             -          9,950
Loss on impairment                                -               -               -         4,000          4,000
Operating income                            402,536           6,658          15,204         8,245        432,643
Capital expenditures, net                   161,260           6,514           9,877        13,487        191,138

($ in thousands)                                     For the nine months ended September 30, 2002
                                      ---------------------------------------------------------------------------
                                                                                                       Total
                                          ILEC             ELI            Gas          Electric      Segments
                                      --------------  -------------- --------------- ------------- --------------
Revenue                                 $ 1,542,494       $ 133,845       $ 159,805     $ 174,460    $ 2,010,604
Depreciation and amortization               461,829         101,978             139           217        564,163
Reserve for telecommunications
   bankruptcies                              17,371             434               -             -         17,805
Restructuring and other expenses             15,350           6,562               -             -         21,912
Loss on impairment                                -         656,658         152,300       265,100      1,074,058
Operating income (loss)                     324,067        (758,322)       (128,041)     (223,815)      (786,111)
Capital expenditures, net                   205,005         118,203          15,239        15,281        353,728

</TABLE>

     The  following  table  reconciles  sector  capital  expenditures  to  total
     consolidated capital expenditures.
<TABLE>
<CAPTION>

($ in thousands)                       For the three months ended     For the nine months ended
                                              September 30,                  September 30,
                                      ------------------------------ -----------------------------
                                          2003            2002            2003           2002
                                      --------------  -------------- --------------- -------------
<S>                                        <C>             <C>            <C>           <C>
Total segment capital expenditures         $ 76,008        $ 81,645       $ 191,138     $ 353,728
General capital expenditures                     48               -             520           475
                                      --------------  -------------- --------------- -------------
Consolidated reported capital
   expenditures                            $ 76,056        $ 81,645       $ 191,658     $ 354,203
                                      ==============  ============== =============== =============
</TABLE>

                                       17
<PAGE>

(10) Adelphia Investment:
     -------------------
     We recognized  losses of $95,300,000 on our Adelphia  Communications  Corp.
     (Adelphia)  investment for the nine months ended  September 30, 2002.  This
     non-cash  charge  reflected an other than  temporary  decline in Adelphia's
     stock price.  As of June 30, 2002, we had written this  investment  down to
     zero.

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

     The  interest  rate  swap  contracts  are  reflected  at fair  value in our
     consolidated balance sheet and the related portion of fixed-rate debt being
     hedged is  reflected at an amount equal to the sum of its book value and an
     amount  representing  the  change  in fair  value of the  debt  obligations
     attributable  to the interest rate risk being hedged.  Payments made and/or
     received as a result of interest rate swap  contracts are recognized in the
     consolidated  statements of operations  in interest  expense.  The notional
     amounts of  fixed-rate  indebtedness  hedged as of  September  30, 2003 and
     December 31, 2002 was $350,000,000  and  $250,000,000,  respectively.  Such
     contracts require us to pay variable rates of interest (average pay rate of
     approximately  5.30% as of September  30, 2003) and receive  fixed rates of
     interest (average receive rate of 8.25% as of September 30, 2003). The fair
     value of these derivatives is reflected in other assets as of September 30,
     2003, in the amount of $15,420,000 and the related underlying debt has been
     increased by a like amount.  The amounts received during the three and nine
     months ended September 30, 2003 as a result of these contracts  amounted to
     $1,534,000  and  $5,651,000  and are  included as a  reduction  of interest
     expense.  We do not anticipate any  nonperformance by counterparties to its
     derivative  contracts as all  counterparties  have investment  grade credit
     ratings.

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

(13) Settlement of Retained Liabilities:
     ----------------------------------
     We were during 2002 actively  pursuing the  settlement of certain  retained
     liabilities  at less than face value,  which are  associated  with customer
     advances for construction from our disposed water properties.  For the nine
     months  ended  September  30,  2003  and  2002,  we  recognized  income  of
     $6,165,000 and $20,800,000,  respectively, which is reflected in investment
     and other income (loss), net, as a result of these settlements.

(14) Change in Accounting Principle and New Accounting Pronouncements:
     ----------------------------------------------------------------
     In June 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
     No. 143, "Accounting for Asset Retirement Obligations." We adopted SFAS No.
     143 effective January 1, 2003. As a result of our adoption of SFAS No. 143,
     we recognized an after tax non-cash gain of approximately $65,769,000. This
     gain  resulted  from the  elimination  of the  cumulative  cost of  removal
     included in accumulated  depreciation as a cumulative effect of a change in
     accounting principle in our statement of operations in the first quarter of
     2003 as the  Company  has no legal  obligation  to  remove  certain  of its
     long-lived assets.

                                       18
<PAGE>

     The following table presents a  reconciliation  between reported net income
     (loss) and adjusted net income (loss).  Adjusted net income (loss) excludes
     depreciation  expense  recognized in prior  periods  related to the cost of
     removal provision as required by SFAS No. 143.
<TABLE>
<CAPTION>
                                                              For the three months             For the nine months
                                                               ended September 30,              ended September 30,
                                                        ------------------------------   ------------------------------
(In thousands, except per-share amounts)                     2003            2002             2003            2002
                                                        --------------  --------------   --------------  --------------

<S>                                                          <C>           <C>               <C>            <C>
Reported attributable to common shareholders                 $ 11,412      $ (700,104)       $ 172,900      $ (658,437)
Add back: Cost of removal in depreciation expense, net
  of tax                                                            -           4,417                -          11,719
                                                        --------------  --------------   --------------  --------------
Adjusted attributable to common shareholders                 $ 11,412      $ (695,687)       $ 172,900      $ (646,718)
                                                        ==============  ==============   ==============  ==============

Basic earnings (loss) per share:
-------------------------------
Reported attributable to common shareholders                 $   0.04      $    (2.49)       $    0.61      $    (2.35)
Cost of removal in depreciation expense                             -            0.01                -            0.04
                                                        --------------  --------------   --------------  --------------
Adjusted attributable to common shareholders                 $   0.04      $    (2.48)       $    0.61      $    (2.31)
                                                        ==============  ==============   ==============  ==============

Diluted earnings (loss) per share:
---------------------------------
Reported attributable to common shareholders                 $   0.04      $    (2.49)       $    0.59      $    (2.35)
Cost of removal in depreciation expense                             -            0.01                -            0.04
                                                        --------------  --------------   --------------  --------------
Adjusted attributable to common shareholders                 $   0.04      $    (2.48)       $    0.59      $    (2.31)
                                                        ==============  ==============   ==============  ==============

</TABLE>

     In July 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets."  As a result of our  adoption of SFAS No.  142,  we  recognized  a
     transitional  impairment loss of $39,800,000 for goodwill related to ELI as
     a cumulative effect of a change in accounting principle in our statement of
     operations in the first quarter of 2002.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated  with Exit or Disposal  Activities,"  which  nullified  Emerging
     Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
     Employee  Termination  Benefits and Other Costs to Exit an Activity."  SFAS
     No. 146 requires  that a liability  for a cost  associated  with an exit or
     disposal activity be recognized when the liability is incurred, rather than
     on the date of commitment to an exit plan.  This Statement is effective for
     exit or disposal  activities that are initiated after December 31, 2002. We
     adopted  SFAS No. 146 on January 1, 2003.  The adoption of SFAS No. 146 did
     not have any  material  impact on our  financial  position  or  results  of
     operations.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
     Derivative  Instruments and Hedging," which clarifies financial  accounting
     and reporting for derivative  instruments including derivative  instruments
     embedded in other  contracts.  This  Statement is effective  for  contracts
     entered into or modified  after June 30,  2003.  We adopted SFAS No. 149 on
     July 1, 2003. The adoption of SFAS No. 149 did not have any material impact
     on our financial position or results of operations.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of Both Liabilities and Equity."
     The Statement  requires  issuers to classify as  liabilities  (or assets in
     some circumstance) certain financial instruments that embody obligations of
     the issuer. Generally, the Statement is effective for financial instruments
     entered into or modified  after May 31, 2003 and is otherwise  effective at
     the beginning of the first interim period beginning after June 15, 2003. We
     adopted the  provisions of the  Statement on July 1, 2003.  The adoption of
     SFAS No. 150 did not have any material impact on our financial  position or
     results of operations.

     The FASB also recently indicated that it would require stock-based employee
     compensation  to be recorded as a charge to earnings  beginning in 2004. We
     will continue to monitor the progress on the issuance of this standard.

                                       19
<PAGE>

(15) Commitments and Contingencies:
     -----------------------------
     We expect capital expenditures in 2003 to be approximately $260,000,000 for
     ILEC and ELI and  $25,000,000  for gas and electric.  Our remaining  public
     utility  property is currently  carried at an amount that  approximates our
     current  estimate of its net realizable value upon sale. Under the terms of
     the  definitive  agreements  relating  to  this  sale,  there  will  be  no
     adjustment to the sales prices for most of the capital expenditures we will
     make prior to the sale.  To the  extent  that the  carrying  amount of this
     property  increases  above its  realizable  value  upon sale as a result of
     capital expenditures or for any other reason, we would record an impairment
     charge for such excess.  We currently  estimate we will make  approximately
     $1,000,000 of capital  expenditures  for this property from October 1, 2003
     through the expected date of sale.

     In connection  with the sale of our Arizona utility  businesses,  we called
     for redemption in November 2003, approximately $31,240,000 of the Company's
     Arizona  industrial  development  revenue bonds. In addition,  we agreed to
     call at their first call dates in 2007  another  three  Arizona  industrial
     development revenue bond series totaling approximately $33,400,000.

     The City of Bangor,  Maine,  filed suit against us on November 22, 2002, in
     the U.S.  District  Court  for the  District  of Maine  (City of  Bangor v.
     Citizens Communications Company, Civ. Action No. 02-183-B-S).  The City has
     alleged,  among  other  things,  that we are  responsible  for the costs of
     cleaning up environmental  contamination  alleged to have resulted from the
     operation of a manufactured gas plant by Bangor Gas Company, which we owned
     from 1948-1963.  The City alleged the existence of extensive  contamination
     of the  Penobscot  River and nearby land areas and has asserted  that money
     damages  and  other  relief  at issue in the  lawsuit  could  exceed  $50.0
     million.  The City also requested that punitive damages be assessed against
     us.  We have  filed an  answer  denying  liability  to the  City,  and have
     asserted a number of counter  claims  against the City. We intend to defend
     ourselves  vigorously  against the City's  lawsuit.  In  addition,  we have
     identified a number of other  potentially  responsible  parties that may be
     responsible  for the damages alleged by the City and joined them as parties
     to the lawsuit. These additional parties include Honeywell Corporation, the
     Army Corps of Engineers,  Guilford  Transportation  (formerly Maine Central
     Railroad),   UGI  Utilities,   Inc.,  and  Centerpoint   Energy   Resources
     Corporation.  We also have demanded that various of our insurance  carriers
     defend and  indemnify  us with respect to the City's  lawsuit.  On or about
     December 26, 2002, we filed a  declaratory  judgment  action  against those
     insurance  carriers in the Superior Court of Penobscot  County,  Maine, for
     the purpose of  establishing  their  obligations  to us with respect to the
     City's lawsuit.  We intend to vigorously pursue insurance  coverage for the
     City's lawsuit.

(16) Subsequent Event:
     ----------------
     On October 1, 2003, ELI settled all of its outstanding  liabilities under a
     capital lease with a cash payment of  $44,500,000,  representing a discount
     from the carrying  value of the capital lease  obligation of  approximately
     $2,100,000.


                                       20
<PAGE>

                    PART I. FINANCIAL INFORMATION (Continued)

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES

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

This quarterly report on Form 10-Q contains forward-looking  statements that are
subject to risks and  uncertainties,  which could cause actual results to differ
materially from those  expressed or implied in the  statements.  Forward-looking
statements  (including oral  representations) are only predictions or statements
of current plans, which we review continuously.  Forward-looking  statements may
differ  from  actual  future  results due to, but not limited to, and our future
results may be materially affected by, any of the following possibilities:

     *    Changes in the number of our access lines;

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

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

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

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

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

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

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

     *    The effects of technological changes,  including the lack of assurance
          that our ongoing network improvements will be sufficient to adequately
          serve  our  customers  or to match the  capabilities  and  pricing  of
          competing networks;

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

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

     *    The effect of changes in the telecommunications  market, including the
          likelihood of significantly increased price and service competition;

     *    Our  ability  to   successfully   convert   the  billing   system  for
          approximately 775,000 of our access lines on a timely basis and within
          our  expected  budgeted  amount  for 2004 of $20.0 - $25.0  million (a
          significant  portion  of  which  is  expected  to be  capitalized  and
          amortized)  and,  beginning  in 2005,  to achieve  our  expected  cost
          savings;

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

     *    Our  ability to  successfully  renegotiate  expiring  union  contracts
          covering  approximately  1,500  employees that are scheduled to expire
          during 2004; and

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


                                       21
<PAGE>

Competition in the telecommunications  industry is increasing.  Although we have
not  faced  as  much  competition  as  larger,  more  urban   telecommunications
companies,  we do experience  competition  from other  wireline  local  carriers
through  Unbundled  Network  Elements (UNE),  VOIP and potentially in the future
through  Unbundled  Network Elements  Platform (UNEP),  from other long distance
carriers (including Regional Bell Operating Companies), from cable companies and
internet  service  providers with respect to internet  access and potentially in
the future cable  telephony,  and from wireless  carriers.  Most of the wireline
competition we face is in our Rochester,  New York market, with competition also
present in a few other areas.  Competition  from cable companies with respect to
high-speed internet access is intense in Rochester and some of our other markets
such as Elk  Grove,  California  (which is near  Sacramento).  Competition  from
wireless companies, other long distance companies and internet service providers
is increasing in all of our markets.

Our ILEC business has been experiencing  declining access lines,  minutes of use
and  revenues  because  of  economic   conditions,   high  unemployment  levels,
increasing competition (as described above),  changing consumer behavior such as
wireless displacement of wireline use and email use and regulatory  constraints.
These  factors  are  likely to cause our local  service,  network  access,  long
distance  and subsidy  revenues to continue to decline  during the  remainder of
2003 and into 2004.  One of the ways we are  responding  to actual and potential
competition is by bundling  services and products and offering them for a single
price, which in many cases results in lower pricing than purchasing the services
separately.  Revenues  from data  services such as DSL continue to increase as a
percentage of our total revenues and revenues from high margin  services such as
local line and access  charges and subsidies  are  decreasing as a percentage of
our revenues. These factors, along with increasing operating costs may cause our
profitability  to  decrease.  In  addition,  costs we will incur  during 2004 to
convert  the  billing  system  for some of our  access  lines  will  affect  our
profitability during 2004.

The  telecommunications  industry in general, and the CLEC sector in particular,
are undergoing  significant  changes and  difficulties.  The market for internet
access,  long-haul  and  related  services  in the  United  States is  extremely
competitive, with substantial overcapacity in the market. Demand and pricing for
CLEC services have decreased substantially, particularly for long haul services.
These  trends are likely to  continue.  These  factors  result in a  challenging
environment  with  respect to  revenues  for our CLEC  business  and to a lesser
extent our ILEC business.  These factors could also result in more  bankruptcies
in the sector and  therefore  affect our ability to collect  money owed to us by
bankrupt  carriers.  In  addition,   new  and  enhanced  internet  services  are
constantly under development in the market and we expect  additional  innovation
in this market by a range of competitors. Several Interexchange Carriers (IXC's)
have filed for  bankruptcy  protection,  which will allow them to  substantially
reduce  their cost  structure  and debt.  This could  enable such  companies  to
further reduce prices and increase competition.

You should consider these important  factors in evaluating any statement in this
Form 10-Q or otherwise made by us or on our behalf. 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
2002 Annual Report on Form 10-K. We have no obligation to update or revise these
forward-looking statements.

(a)  Liquidity and Capital Resources
     -------------------------------
For the nine months ended  September 30, 2003, we used cash flow from continuing
operations,  proceeds from the sale of gas and electric  properties and cash and
investment balances to fund debt repayments,  capital  expenditures and interest
payments. As of September 30, 2003, we maintained cash and short-term investment
balances aggregating $597.1 million.

We expect to spend in 2003 for capital projects approximately $250.0 million for
the ILEC  segment,  $10.0  million for the ELI segment and $25.0 million for the
public utilities segment, most of which had been sold by mid-August 2003. In the
ordinary  course of  business,  capital  expenditures  for the public  utilities
segment  would  increase  the amount of assets  that would be  reflected  on the
balance sheet.  However, we may expense certain of our capital expenditures with
respect to our one remaining  public utility  property if book value exceeds our
estimate of expected  net  realizable  sales price (see Note 16 to  Consolidated
Financial Statements).

For the nine months ended  September 30, 2003, our actual  capital  expenditures
were $161.3  million for the ILEC  segment,  $6.5  million for the ELI  segment,
$23.4  million for the public  utilities  segments  and $0.5 million for general
capital  expenditures.  Funds necessary for our 2003 capital  expenditures were,
and are  expected  to  continue  to be,  provided  from our  operations  and our
existing cash and investment balances.

                                       22
<PAGE>

We have an available shelf registration for $825.6 million and we have available
lines of credit with financial  institutions  in the aggregate  amount of $805.0
million.  Associated  facility fees vary depending on our credit ratings and are
0.25%  per  annum as of  September  30,  2003.  The  expiration  date for  these
facilities is October 24, 2006. During the term of the facilities we may borrow,
repay and reborrow  funds.  As of September 30, 2003,  there were no outstanding
borrowings under these facilities.

In connection  with the sale of our Arizona  utility  businesses,  we called for
redemption  in  November  2003,  approximately  $31.2  million of the  Company's
Arizona industrial  development revenue bonds. In addition, we agreed to call at
their first call dates in 2007  another  three  Arizona  industrial  development
revenue bond series  totaling  approximately  $33.4  million.  We intend to fund
these redemptions using cash flows from continuing operations, the proceeds from
the sale of the remaining utility property, and/or cash and cash equivalents and
investment balances.

Debt Reduction
--------------
On  February  1,  2003,  we  repaid  at  maturity   $35.0  million  of  Frontier
Communications of Minnesota 7.61% Senior Notes.

In March 2003, we terminated a capital lease  obligation at ELI,  which resulted
in a non-cash  pre-tax gain of $40.7 million  included in  investment  and other
income (loss), net. In addition, in June 2003, ELI reduced the number of optical
fibers leased under another capital lease,  which resulted in a non-cash pre-tax
gain of $25.0 million included in investment and other income (loss), net.

During June 2003, we redeemed five separate  issues of the Company's  Industrial
Development  Revenue Bonds  aggregating  $75.5 million,  and seven issues of the
Company's Special Purpose Revenue Bonds aggregating $88.8 million.  All of these
redemptions  were funded with cash. In addition,  we called for  redemption  two
additional Industrial Development Revenue Bond series aggregating $13.5 million,
$12.4 million of which was redeemed with cash on July 2, 2003, and the remaining
$1.1 million issue was redeemed with cash on August 1, 2003.

During the first nine months of 2003,  we executed a series of  purchases in the
open market of our outstanding debt securities.  The aggregate  principal amount
of debt  securities  purchased was $94.9  million at a premium of  approximately
$3.1 million.

During  the  period  between  June 15,  2003 and July 15,  2003,  holders of the
Company's  outstanding  $15.1 million  principal  amount of 6.80% Debentures due
August  15,  2026  had the  option  to put the  Debentures  to the  Company  for
mandatory  redemption  at par on  August  15,  2003.  As a  result,  the  entire
outstanding principal amount of these debentures had been classified as debt due
within one year on the Company's  balance sheet since the third quarter of 2002.
By July 15, 2003 holders of just $2.5 million of the  debentures  had  exercised
their right to put the  debentures  to us on August 15, 2003.  Accordingly,  the
$11.6 million of debentures  that were not put to us for redemption or otherwise
repurchased by us has been  reclassified as long-term debt on the balance sheet,
with a final maturity of August 15, 2026.

On  August  13,  2003,  we called  for  redemption  the  entire  $232.6  million
outstanding of our 6.375% Senior Notes due 2004.  These notes were redeemed with
cash on  September  17, 2003 at a premium of  approximately  $10.3  million.  In
connection with this redemption, we terminated two interest rate swaps involving
an aggregate $100 million notional amount of indebtedness. The proceeds from the
settlement of the swaps of  approximately  $3.0 million were applied against the
cost to retire resulting in a net premium of $7.3 million.

On October 1, 2003,  ELI  settled  all of its  outstanding  liabilities  under a
capital lease with a cash payment of $44.5 million, representing a discount from
the  carrying  value of the  capital  lease  obligation  of  approximately  $2.1
million.

Interest Rate Management
------------------------
In order to manage our interest  expense,  we have entered  into  interest  swap
agreements.  Under the terms of the agreements,  we make  semi-annual,  floating
rate interest  payments based on six month LIBOR and receive a fixed rate on the
notional  amount.  The underlying  variable rate on these swaps is set either in
advance, in arrears or, based on each period's daily average six-month LIBOR.

                                       23
<PAGE>

The notional amounts of fixed-rate  indebtedness hedged as of September 30, 2003
and December 31, 2002 was  $350,000,000  and  $250,000,000,  respectively.  Such
contracts  require us to pay  variable  rates of interest  (average  pay rate of
approximately  5.30% as of  September  30,  2003)  and  receive  fixed  rates of
interest (average receive rate of 8.25% as of September 30, 2003). All swaps are
accounted for under SFAS No. 133 as fair value hedges. For the first nine months
of 2003, the interest  savings  resulting from these interest rate swaps totaled
approximately $5.7 million.

Covenants
---------
The terms  and  conditions  contained  in our  indentures  and  credit  facility
agreements  are of a general  nature,  and do not currently  impose  significant
financial performance criteria on us. These general covenants include the timely
and punctual  payment of principal and interest when due, the maintenance of our
corporate  existence,  keeping proper books and records in accordance with 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.

Our $805.0 million  credit  facilities and our $200.0 million term loan facility
with the Rural Telephone Finance  Cooperative  (RTFC) contain a maximum leverage
ratio covenant. Under the leverage ratio covenant, we are required to maintain a
ratio of (i) total indebtedness minus cash and cash equivalents in excess of $50
million to (ii) consolidated adjusted EBITDA (as defined in the agreements) over
the last four quarters no greater than 4.50 to 1 through December 30, 2003, 4.25
to 1 from then until  December 30,  2004,  and 4.00 to 1  thereafter.  We are in
compliance with all of our debt covenants.

Divestitures
------------
On August 24, 1999, our Board of Directors  approved a plan of  divestiture  for
our public utilities services businesses, which included gas, electric and water
and wastewater  businesses.  We have sold all of those properties except for one
electric utility in Vermont.

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

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

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

On April 1, 2003, we completed the sale of approximately 11,000 telephone access
lines in North Dakota for approximately $25.7 million in cash.

On April 4, 2003, we completed the sale of our wireless partnership interest in
Wisconsin for approximately $7.5 million in cash.

On August 8, 2003, we completed  the sale of The Gas Company in Hawaii  division
for $119.3 million in cash and assumed liabilities.

On August 11,  2003,  we  completed  the sale of our  Arizona  gas and  electric
divisions for $224.1 million in cash.

We have entered  into  definitive  agreements  to sell the assets of our Vermont
electric  division to Vermont Electric Power Company,  Inc. and Vermont Electric
Cooperative,  Inc.  for an  aggregate  of  approximately  $25.0  million in cash
subject to adjustments  (currently  estimated to be a reduction of approximately
$3.0 million) under the terms of the  agreements.  The  transactions,  which are
subject to  regulatory  and other  customary  approvals,  are  expected to close
during the first half of 2004.

All of the assets of our Vermont electric division and their related liabilities
are classified as "assets held for sale" and "liabilities related to assets held
for  sale,"  respectively.  These  assets  have  been  written  down to our best
estimate  of the net  realizable  value upon sale.  As  discussed  in Note 15 to
Consolidated  Financial  Statements we may record  additional  impairment losses
during 2003.

                                       24
<PAGE>

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

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

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

We  believe  that the  accounting  estimate  related  to asset  impairment  is a
"critical  accounting  estimate."  With  respect to ELI,  the estimate is highly
susceptible  to change from period to period  because it requires  management to
make significant judgments and assumptions about future revenue, operating costs
and capital  expenditures  over the life of the  property,  plant and  equipment
(generally  5 to 15  years)  as well as the  probability  of  occurrence  of the
various scenarios and appropriate discount rates. Management's assumptions about
ELI's future revenue,  operating  costs and capital  expenditures as well as the
probability  of  occurrence  of  these  various  scenarios  require  significant
judgment  because  the CLEC  industry is changing  and because  actual  revenue,
operating costs and capital  expenditures  have  fluctuated  dramatically in the
past and may continue to do so in the future.

The  calculation  of  depreciation  and  amortization  expense  is  based on the
estimated economic useful lives of the underlying property,  plant and equipment
and identifiable  intangible  assets.  Rapid changes in technology or changes in
market  conditions could result in revisions to such estimates that could affect
the  carrying  value of  these  assets  and our  future  consolidated  operating
results. Our depreciation expense has decreased substantially from prior periods
as a result of the impairment  write down we recorded  during 2002, the adoption
of SFAS No. 143 and the increase in the average depreciable lives for certain of
our equipment.

With respect to our remaining electric property,  our estimate of net realizable
value is based upon the expected future sales price of this property.

Our  indefinite  lived  intangibles  consist of goodwill  and trade name,  which
resulted from the purchase of ILEC  properties.  We test for impairment of these
assets annually, or more frequently,  as circumstances  warrant. All of our ILEC
properties share similar economic characteristics and as a result, our reporting
unit is the ILEC segment.  In determining fair value during 2002 we utilized two
tests.  One test utilized recent trading prices for completed ILEC  acquisitions
of similarly situated properties.  A second test utilized current trading values
for the Company's  publicly traded common stock. We reviewed the results of both
tests  for  consistency  to  ensure  that  our  conclusions  were   appropriate.
Additionally,  we  utilized  a range of prices to gauge  sensitivity.  Our tests
determined that fair values exceeded book value.

Our  estimates of pension  expense,  other post  retirement  benefits  including
retiree  medical  benefits  and related  liabilities  are  "critical  accounting
estimates."  Our pension and other post retirement  benefits  expenses are based
upon a set of assumptions that include  projections of future interest rates and
asset returns.  Actual results may vary from these estimates.  We are assuming a
long-term  rate of return on plan  assets of 8.25% and a discount  rate of 6.75%
for 2003.  Actual  returns have been negative in recent years.  If future market
conditions  cause  either a decline in interest  rates used to value our pension
plan  liabilities  or  reductions  to the value of our  pension  plan  assets we
potentially could incur additional charges to our shareholder's equity.


                                       25
<PAGE>

Our income tax expense is  computed  utilizing  an  estimated  annual  effective
income tax rate in accordance  with Accounting  Principles  Board Opinions (APB)
No. 28, "Interim Financial  Reporting." The tax rate is computed using estimates
as to the  Company's  net income before income taxes for the entire year and the
impact of estimated permanent book-tax differences relative to that forecast.

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

New Accounting Pronouncements
-----------------------------
In June 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations."  SFAS No. 143  applies to fiscal  years  beginning  after June 15,
2002, and addresses financial  accounting and reporting  obligations  associated
with the  retirement  of tangible  long-lived  assets and the  associated  asset
retirement  costs.  We adopted  SFAS No.  143  effective  January  1, 2003.  The
standard  applies  to  legal  obligations  associated  with  the  retirement  of
long-lived  assets that result from  acquisition,  construction,  development or
normal  use of the  assets  and  requires  that a legal  liability  for an asset
retirement  obligation be recognized  when incurred,  recorded at fair value and
classified as a liability in the balance sheet.  When the liability is initially
recorded, the entity will capitalize the cost and increase the carrying value of
the related  long-lived  asset.  The  liability is then  accreted to its present
value each period and the  capitalized  cost is  depreciated  over the estimated
useful life of the related asset. At the settlement date, the entity will settle
the  obligation  for its  recorded  amount  or  recognize  a gain  or loss  upon
settlement.

Depreciation  expense for the Company's  wireline  operations  has  historically
included  an  additional  provision  for  cost of  removal.  Effective  with the
adoption of SFAS No. 143, on January 1, 2003, the Company ceased  recognition of
the cost of  removal  provision  in  depreciation  expense  and  eliminated  the
cumulative cost of removal included in accumulated depreciation,  as the Company
has no legal  obligation to remove  certain  long-lived  assets.  The cumulative
effect of  retroactively  applying  these changes to periods prior to January 1,
2003,  resulted in an after tax non-cash  gain of  approximately  $65.8  million
recognized in the first quarter of 2003.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities,"  which nullified  Emerging Issues Task Force
(EITF) Issue No. 94-3,  "Liability  Recognition for Certain Employee Termination
Benefits  and Other Costs to Exit an  Activity."  SFAS No. 146  requires  that a
liability for a cost associated with an exit or disposal  activity be recognized
when the liability is incurred, rather than on the date of commitment to an exit
plan.  This  Statement is  effective  for exit or disposal  activities  that are
initiated  after  December 31, 2002. We adopted SFAS No. 146 on January 1, 2003.
The adoption of SFAS No. 146 did not have any material  impact on our  financial
position or results of operations.

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative  Instruments and Hedging," which clarifies  financial  accounting and
reporting for derivative  instruments including derivative  instruments embedded
in other  contracts.  This Statement is effective for contracts  entered into or
modified  after  June 30,  2003.  We adopted  SFAS No. 149 on July 1, 2003.  The
adoption  of SFAS No.  149 did not have any  material  impact  on our  financial
position or results of operations.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics of Both Liabilities and Equity." The Statement
requires  issuers to classify as liabilities  (or assets in some  circumstances)
certain financial instruments that embody obligations of the issuer.  Generally,
the Statement is effective for  financial  instruments  entered into or modified
after May 31, 2003 and is  otherwise  effective  at the  beginning  of the first
interim period  beginning  after June 15, 2003. We adopted the provisions of the
Statement  on July 1,  2003.  The  adoption  of SFAS  No.  150 did not  have any
material impact on our financial position or results of operations.

The FASB also  recently  indicated  that it will  require  stock-based  employee
compensation  to be recorded as a charge to earnings  beginning in 2004. We will
continue to monitor the progress on the issuance of this standard.

                                       26

<PAGE>

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

Consolidated  revenue for the three and nine  months  ended  September  30, 2003
decreased $73.8 million,  or 11% and $119.8 million, or 6%, as compared with the
prior year periods.  The decrease for the three months ended  September 30, 2003
is due to a $64.7 million  decrease in gas and electric  revenue  largely due to
the dispositions of public utility  businesses,  a $8.2 million decrease in ILEC
revenue,  and a  decrease  in ELI  revenue  of $0.9  million.  The  year-to-date
decrease is due to a $104.0 million decrease in gas and electric revenue largely
due to the dispositions of public utility businesses, a $7.2 million decrease in
ILEC revenue,  and a decrease in ELI revenue of $8.6 million.  On April 1, 2003,
we completed the sale of  approximately  11,000  telephone access lines in North
Dakota.  The North Dakota  revenues  related to these access lines  totaled $1.9
million and $8.3 million for the nine months ended  September 30, 2003 and 2002,
respectively.
<TABLE>
<CAPTION>
                           TELECOMMUNICATIONS REVENUE

($ in thousands)                 For the three months ended September 30,       For the nine months ended September 30,
                               --------------------------------------------  ----------------------------------------------
                                  2003        2002      $ Change    % Change    2003        2002      $ Change    % Change
                               ----------- ----------- ------------ -------- ----------- ----------- ------------ ---------
<S>                             <C>         <C>           <C>           <C>  <C>          <C>          <C>              <C>
Access services                 $ 166,705   $ 170,069     $ (3,364)    -2%   $  491,844   $ 507,065    $ (15,221)      -3%
Local services                    216,349     221,671       (5,322)    -2%      658,155     656,109        2,046        0%
Long distance and data services    76,146      73,396        2,750      4%      227,410     214,711       12,699        6%
Directory services                 26,817      26,443          374      1%       80,595      78,497        2,098        3%
Other                              25,557      28,198       (2,641)    -9%       77,332      86,112       (8,780)     -10%
                               ----------- ----------- ------------          ----------- ----------- ------------
   ILEC revenue                   511,574     519,777       (8,203)    -2%    1,535,336   1,542,494       (7,158)       0%
ELI                                40,416      41,311         (895)    -2%      125,228     133,845       (8,617)      -6%
                               ----------- ----------- ------------          ----------- ----------- ------------
                                $ 551,990   $ 561,088     $ (9,098)    -2%   $ 1,660,564  $1,676,339   $ (15,775)      -1%
                               =========== =========== ============          =========== =========== ============
</TABLE>
Changes  in the  number of our access  lines is the most  fundamental  driver of
changes in our  telecommunications  revenue. In recent quarters many rural local
telephone  companies  (including  ours) have  experienced a loss of access lines
because  of   difficult   economic   conditions,   increased   competition   and
disconnecting  second  lines  by some  customers  when  they  add  DSL or  other
high-speed   internet  service.   Excluding  the  North  Dakota  sale,  we  lost
approximately  29,400  access lines during the nine months ended  September  30,
2003 but added more than 35,000 DSL subscribers during this period.  Residential
lines lost represented 67 percent of the total loss,  excluding the North Dakota
sale. The  non-residential  line losses were principally in Rochester,  New York
while the  residential  losses were  throughout  most of our markets  other than
Arizona and  California.  We expect to continue to lose access  lines during the
remainder of 2003 and into 2004. A continued decrease in access lines,  combined
with continuing difficult economic  conditions,  lower minutes of use and access
rates and  increased  competition,  may cause our  revenues to decrease  further
during the remainder of 2003 and into 2004.

Beginning in the first  quarter 2003,  the  presentation  of revenue  categories
includes  certain   reclassifications  to  ensure  consistency  among  reporting
properties.

Access services  revenue for the three months ended September 30, 2003 decreased
$3.4  million or 2% as  compared  with the prior year  period.  Switched  access
revenue  decreased  $8.3 million  primarily  due to the $4.4  million  effect of
access rate reductions  effective July 1, 2003. Special access revenue increased
$4.5 million primarily due to a $6.9 million  reclassification  of local private
line revenue from local services to special access offset by the discontinuation
of a $2.9 million reclassification from data services to special access.

Access  services  revenue for the nine months ended September 30, 2003 decreased
$15.2  million or 3% as compared  with the prior year  period.  Switched  access
revenue  decreased  $20.0 million due to the $15.2 million effect of access rate
reductions effective July 1, 2003. Special access revenue increased $3.7 million
primarily due to a $6.9 million  reclassification  of local private line revenue
from local  services  to special  access and growth in special  circuits of $3.1
million offset by the  discontinuation of a $5.8 million  reclassification  from
data services to special access.  Access services  revenue  includes our subsidy
revenue, which we expect to be slightly lower in 2003 than in 2002.

Local services  revenue for the three months ended  September 30, 2003 decreased
$5.3  million  or 2% as  compared  with the prior  year  period.  Local  revenue
decreased $7.6 million primarily due to a $6.9 million reclassification of local
private  line revenue from local  services to special  access,  the $1.5 million
impact  of the sale of our North  Dakota  exchanges  in 2003 and a $0.5  million
decrease  from  continued  losses of access  lines,  partially  offset by a $1.3
million increase in subscriber line charges (SLC) due to rate changes.  Enhanced
services revenue  increased $2.3 million primarily due to the sale of additional
feature  packages.  Continued  losses of access lines will result in lower local
service revenue.

                                       27
<PAGE>

Local  services  revenue for the nine months ended  September 30, 2003 increased
$2.0 million as compared with the prior year period.  Enhanced  services revenue
increased $7.7 million primarily due to the sale of additional feature packages.
Local  revenue   decreased  $5.6  million   primarily  due  to  a  $6.9  million
reclassification  of local  private line revenue from local  services to special
access,  a $3.9 million  decrease from continued  losses of access lines and the
$3.5 million impact of the sale of our North Dakota exchanges in 2003, partially
offset by an $8.7 million increase in SLC due to rate changes.

Long distance and data services revenue for the three months ended September 30,
2003  increased  $2.8  million  or 4% as  compared  with the prior  year  period
primarily  due to growth in data  service  revenue  of $5.8  million  and a $2.9
reclassification  from  special  access to data  services.  The increase in data
services  revenue  was offset by a  decrease  of $4.7  million in long  distance
revenue due to declining minutes of use.

Long distance and data services  revenue for the nine months ended September 30,
2003  increased  $12.7  million or 6% as  compared  with the prior  year  period
primarily  due to growth of $13.2  million  related to data  services and a $5.8
million  reclassification from special access to data services.  The increase in
data services revenue was partially offset by a decrease of $6.0 million in long
distance  revenue.  Our long  distance  revenues  decreased  during  2003 due to
competition  from wireless  providers  and  declining  minutes of use. We expect
these  factors will  continue to affect our long  distance  revenues  during the
remainder of 2003 and into 2004.

Directory  revenue  for the three  and nine  months  ended  September  30,  2003
increased $0.4 million or 1%, and $2.1 million or 3%, respectively,  as compared
with the prior year periods primarily due to growth in yellow pages advertising.

Other  revenue for the three  months ended  September  30, 2003  decreased  $2.6
million or 9% compared with the prior year period  primarily due to decreases of
$1.4 million in customer premises equipment (CPE) sales, $1.0 million in service
activation revenue,  $0.9 million in other revenue and a $0.5 million adjustment
related to contract services provided to Global Crossing Ltd. (Global) partially
offset by a $1.4 million decrease in uncollectible revenue.

Other  revenue for the nine months  ended  September  30,  2003  decreased  $8.8
million,  or 10% compared with the prior year period primarily due to a decrease
of $3.3 million in service activation  revenue,  the termination in 2002 of $2.0
million  (for the nine  months)  in  contract  services  provided  to Global and
decreases of $1.3 million in CPE sales and $1.0 million in conferencing  revenue
partially offset by a $1.2 million decrease in uncollectible revenue.

ELI revenue for the three and nine months  ended  September  30, 2003  decreased
$0.9 million, or 2%, and $8.6 million, or 6%,  respectively,  as compared to the
prior year  period  primarily  due to a decline in  Integrated  Service  Digital
Network (ISDN) services due to less demand from Internet  service  providers and
lower demand for long haul services.
<TABLE>
<CAPTION>
                            GAS AND ELECTRIC REVENUE

      ($ in thousands)            For the three months ended September 30,        For the nine months ended September 30,
                               ---------------------------------------------  -----------------------------------------------
                                  2003        2002      $ Change    % Change      2003        2002      $ Change    % Change
                               ----------- ----------- ------------ --------  ------------ ----------- ------------ ---------
<S>                              <C>         <C>         <C>           <C>     <C>         <C>          <C>             <C>
      Gas revenue                $ 18,005    $ 40,584    $ (22,579)   -56%     $ 137,686   $ 159,805    $ (22,119)     -14%
      Electric revenue           $ 25,042    $ 67,159    $ (42,117)   -63%     $  92,603   $ 174,460    $ (81,857)     -47%
</TABLE>

Gas revenue for the three and nine months  ended  September  30, 2003  decreased
$22.6 million, or 56%, and $22.1 million, or 14%, respectively, as compared with
the prior  year  periods  due to the sales of The Gas  Company in Hawaii and our
Arizona  gas  division,  which were sold on August 8, 2003 and August 11,  2003,
respectively.  We have sold all of our gas  operations and as a result will have
no operating results in future periods for these businesses.

Electric  revenue  for the  three  and nine  months  ended  September  30,  2003
decreased $42.1 million,  or 63%, and $81.9 million,  or 47%,  respectively,  as
compared  with the prior year periods  primarily due to the sales of our Arizona
electric division and Kauai Electric. Included in electric revenue for the three
and nine months ended  September  30, 2002 is  approximately  $59.2  million and
$151.5 million,  respectively, of revenue from our Arizona electric division and
Kauai  Electric  which  were sold on  August  11,  2003 and  November  1,  2002,
respectively.  We have  just  one  remaining  electric  utility  property  as of
September 30, 2003. We expect to sell this property by mid - 2004.

                                       28
<PAGE>
<TABLE>
<CAPTION>
                                COST OF SERVICES

      ($ in thousands)            For the three months ended September 30,        For the nine months ended September 30,
                               ---------------------------------------------  ----------------------------------------------
                                  2003        2002      $ Change    % Change     2003        2002      $ Change     % Change
                               ----------- ----------- ------------ --------  ----------   ----------- ------------ ---------
<S>                              <C>         <C>         <C>            <C>   <C>         <C>           <C>             <C>
      Network access             $ 57,133    $ 58,218    $  (1,085)    -2%    $ 171,816   $ 174,774     $ (2,958)      -2%
      Gas purchased                12,324      21,329       (9,005)   -42%       82,311      91,130       (8,819)     -10%
      Electric energy and
        fuel oil purchased         16,412      36,248      (19,836)   -55%       58,498      91,915      (33,417)     -36%
                               ----------- ----------- ------------           -----------  ----------- ------------
                                 $ 85,869    $115,795    $ (29,926)   -26%    $ 312,625   $ 357,819     $(45,194)     -13%
                               =========== =========== ============           ===========  =========== ============
</TABLE>

Network access  expenses for the three months ended September 30, 2003 decreased
$1.1  million,  or 2%, as compared  with the prior year  period.  ELI costs have
declined  slightly  due to a drop in  demand  while  the ILEC  sector  decreased
primarily due to lower minutes of use.

Network access  expenses for the nine months ended  September 30, 2003 decreased
$3.0  million,  or 2%, as compared  with the prior year  period.  ELI costs have
declined due to a drop in demand while ILEC sector costs have risen slightly due
to increased  circuit expense  associated with additional data product sales and
increased  long  distance  access  expense.  If we  increase  our  sales of data
products such as DSL, our network access expense could increase.

Gas purchased for the three and nine months ended  September 30, 2003  decreased
$9.0 million, or 42%, and $8.8 million, or 10%,  respectively,  as compared with
the prior year periods  primarily  due to the sales of The Gas Company in Hawaii
and our Arizona gas division. We no longer have any gas operations.

Electric  energy  and fuel oil  purchased  for the three and nine  months  ended
September 30, 2003 decreased $19.8 million,  or 55%, and $33.4 million,  or 36%,
respectively, as compared with the prior year periods primarily due to the sales
of our Arizona electric division and Kauai Electric.
<TABLE>
<CAPTION>

                            OTHER OPERATING EXPENSES

($ in thousands)                  For the three months ended September 30,        For the nine months ended September 30,
                               ---------------------------------------------  ----------------------------------------------
                                  2003        2002      $ Change    % Change     2003        2002      $ Change     % Change
                               ----------- ----------- ------------ --------  ----------   ----------  ------------ --------
<S>                             <C>         <C>          <C>           <C>     <C>         <C>          <C>              <C>
Operating expenses              $ 165,498   $ 189,410    $ (23,912)   -13%     $ 521,116   $ 570,904    $ (49,788)      -9%
Taxes other than income taxes      26,095      33,550       (7,455)   -22%        84,982     107,076      (22,094)     -21%
Sales and marketing                28,683      25,718        2,965     12%        82,492      82,978         (486)      -1%
                               ----------- ----------- ------------           -----------  ----------  ------------
                                $ 220,276   $ 248,678    $ (28,402)   -11%     $ 688,590   $ 760,958    $ (72,368)     -10%
                               =========== =========== ============           ===========  ==========  ============
</TABLE>

Operating expenses for the three months ended September 30, 2003 decreased $23.9
million,  or 13%,  as  compared  with the prior  year  period  primarily  due to
increased  operating  efficiencies  and a reduction of personnel in the ILEC and
ELI sectors and decreased operating expenses in the gas and electric sectors due
to the  sales  of The Gas  Company  in  Hawaii,  our  Arizona  gas and  electric
divisions and Kauai Electric.  Operating  expenses were  negatively  impacted by
increased pension expenses as discussed below.

Operating  expenses for the nine months ended September 30, 2003 decreased $49.8
million,  or 9%,  as  compared  with the  prior  year  period  primarily  due to
increased  operating  efficiencies  and a reduction of personnel in the ILEC and
ELI sectors and decreased operating expenses in the gas and electric sectors due
to the  sales  of The Gas  Company  in  Hawaii,  our  Arizona  gas and  electric
divisions and Kauai  Electric.  Expenses were  negatively  impacted by increased
compensation  expense  of $2.7  million  related  to  variable  stock  plans and
increased   pension  expenses  as  discussed  below.  We  routinely  review  our
operations,  personnel and  facilities to achieve  greater  efficiencies.  These
reviews may result in  reductions  in  personnel  and an  increase in  severance
costs.

Included in operating  expenses is pension  expense.  In future periods,  if the
value of our pension assets decline and/or projected benefit costs increase,  we
may have increased pension expenses. Based on current assumptions and plan asset
values,  we estimate that our pension expense will increase from $4.3 million in
2002 to approximately  $12.0 - $13.0 million in 2003 but that no contribution to
our pension  plans will be  required  in 2003.  In  addition,  as medical  costs
increase the costs of our retiree medical obligations also increase. Our retiree
medical costs for 2002 were $15.1  million and our current  estimate for 2003 is
$16.0 - $17.0  million.  Increases in medical costs also  increase  expenses for
providing  health care benefits to our existing  employees.  We expect our total
benefit costs for existing employees to increase in 2003 compared to 2002.

                                       29
<PAGE>

Included in  operating  expenses is  compensation  expense.  In future  periods,
compensation  expense related to variable stock plans may be materially affected
by our stock price.

Taxes other than income taxes for the three and nine months ended  September 30,
2003 decreased $7.5 million, or 22%, and $22.1 million, or 21%, respectively, as
compared with the prior year periods  primarily due to decreased  property taxes
at ELI due to lower asset values and the sales of the Gas Company in Hawaii, our
Arizona gas and electric divisions and Kauai Electric.

Sales and  marketing  expenses  for the three months  ended  September  30, 2003
increased $3.0 million,  or 12%, as compared to the prior year period  primarily
due to  increased  marketing  costs  in the ILEC  sector.  Sales  and  marketing
expenses for the nine months ended September 30, 2003 decreased $0.5 million, or
1%, as compared to the prior year period due to a  reduction  of  personnel  and
related costs in the ILEC sector.
<TABLE>
<CAPTION>

                      DEPRECIATION AND AMORTIZATION EXPENSE

      ($ in thousands)           For the three months ended September 30,        For the nine months ended September 30,
                               ---------------------------------------------   --------------------------------------------
                                  2003        2002      $ Change    % Change      2003        2002      $ Change    % Change
                               ----------- ----------- ------------ --------   ------------ ----------- ------------ ------
<S>                             <C>         <C>          <C>           <C>     <C>         <C>         <C>              <C>
      Depreciation  expense     $ 120,012   $ 167,772    $ (47,760)   -28%     $ 345,577   $ 471,642   $ (126,065)     -27%
      Amortization expense         31,866      31,839           27      0%        95,208      92,521        2,687        3%
                               ----------- ----------- ------------            ----------- ----------- ------------
                                $ 151,878   $ 199,611    $ (47,733)   -24%     $ 440,785   $ 564,163   $ (123,378)     -22%
                               =========== =========== ============            =========== =========== ============
</TABLE>

Depreciation  expense for the three months ended  September  30, 2003  decreased
$47.8 million,  or 28%, as compared with the prior year period  primarily due to
the ELI impairment  charge  recognized  during the third quarter of 2002,  which
reduced  ELI's asset base,  the adoption of SFAS No. 143 and the increase in the
average depreciable lives for certain of our equipment.

Depreciation  expense for the nine months  ended  September  30, 2003  decreased
$126.1 million,  or 27%, as compared with the prior year period primarily due to
the ELI impairment  charge  recognized  during the third quarter of 2002,  which
reduced  ELI's asset base,  the adoption of SFAS No. 143 and the increase in the
average depreciable lives for certain of our equipment. Accelerated depreciation
in 2002 of $12.8 million  relating to the closing of our Plano,  Texas  facility
also contributed to the decrease.

Amortization expense for the nine months ended September 30, 2003 increased $2.7
million,  or 3%,  as  compared  with the  prior  year  period  primarily  due to
increased  amortization  of  customer  base,  due  to  a  final  purchase  price
allocation,  resulting  from the  receipt of the final  valuation  report of our
Frontier acquisition during the second quarter of 2002.
<TABLE>
<CAPTION>

                 RESERVE FOR TELECOMMUNICATIONS BANKRUPTCIES / RESTRUCTURING AND OTHER EXPENSES

($ in thousands)                 For the three months ended September 30,        For the nine months ended September 30,
                               ---------------------------------------------  ----------------------------------------------
                                  2003        2002      $ Change    % Change      2003        2002      $ Change    % Change
                               ----------- ----------- ------------ --------  ------------ ----------- ------------ --------
Reserve for telecommunications
<S>                                <C>         <C>           <C>                <C>        <C>         <C>             <C>
  bankruptcies                     $    -      $    -        $   -       -      $ 2,260    $ 17,805    $ (15,545)     -87%
Restructuring and other expenses   $ (142)     $ (273)       $ 131     48%      $ 9,950    $ 21,912    $ (11,962)     -55%
</TABLE>

An  agreement  has been  reached with  WorldCom/MCI  settling  all  pre-petition
obligations and receivables. The bankruptcy court has approved the agreement and
we expect to  recognize  a gain of  approximately  $5.6  million  in the  fourth
quarter of 2003 as a result of the settlement.

During the second quarter 2003, we reserved  approximately $2.3 million of trade
receivables  with  Touch  America  as a result  of Touch  America's  filing  for
bankruptcy.  These receivables were generated as a result of providing  ordinary
course telecommunication  services. If other  telecommunications  companies file
for bankruptcy we may have additional significant reserves in future periods.

                                       30
<PAGE>

During the second quarter 2002, we reserved approximately $21.6 million of trade
receivables  with  WorldCom,  as a result of WorldCom's  filing for  bankruptcy.
These  receivables  were  generated  as a result of  providing  ordinary  course
telecommunications  services.  We have  ongoing  commercial  relationships  with
WorldCom.  This charge was partially offset by an $11.6 million  settlement with
Global as discussed below.

Concurrent with the acquisition of Frontier,  we entered into several  operating
agreements with Global.  We have ongoing  commercial  relationships  with Global
affiliates.  We reserved a total of $29.0 million of Global  receivables  during
2001 and 2002 as a result of Global's  filing for bankruptcy to reflect our best
estimate  of the  net  realizable  value  of  receivables  incurred  from  these
commercial  relationships.  We recorded a write-down of such  receivables in the
amount of $7.8 million in the first quarter 2002 and $21.2 million in the fourth
quarter  of 2001.  In the second  quarter  2002,  as the result of a  settlement
agreement with Global,  we reversed $11.6 million of our previous  write-down of
the net realizable value of these receivables.

Restructuring  and other expenses for 2003 primarily consist of expenses related
to reductions in personnel at our  telecommunications  operations  and the write
off of software no longer used.

During 2002,  restructuring  and other  expenses  primarily  consist of expenses
related to our various restructurings,  including reductions in personnel at our
telecommunications  operations,  and costs that were  spent at our Plano,  Texas
facility and at other locations as a result of transitioning functions and jobs,
and $6.8  million of costs  related to our tender  offer in June 2002 of all the
ELI common shares that we did not already own.
<TABLE>
<CAPTION>

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

      ($ in thousands)                For the three months ended September 30,        For the nine months ended September 30,
                                    ---------------------------------------------  ----------------------------------------------
                                       2003        2002      $ Change    % Change     2003         2002      $ Change    % Change
                                    ----------- ----------- ------------ --------  ------------ ----------- ------------ --------
      <S>                            <C>         <C>           <C>          <C>     <C>         <C>           <C>            <C>
      Investment and
        other income (loss), net     $  (7,464)  $   13,111    $ (20,575)  -157%    $  66,924   $  (65,028)   $ 131,952      203%
      Gain (loss) on sale of assets  $ (16,813)  $    1,901    $ (18,714)  -984%    $ (11,792)  $    1,901    $ (13,693)    -720%
      Interest expense               $ 103,124   $  115,711    $ (12,587)   -11%    $ 318,836   $  357,265    $ (38,429)     -11%
      Income tax expense (benefit)   $  (7,210)  $ (371,186)   $ 363,976     98%    $  57,150   $ (424,688)   $ 481,838      113%
</TABLE>

Investment and other income (loss), net for the three months ended September 30,
2003  decreased  $20.6 million as compared with the prior year period  primarily
due to the write off of unamortized debt expense and net premium associated with
our early debt  retirements.  The 2002 activity included $10.8 million of income
from the settlement of certain retained liabilities at less than face value that
were associated with customer  advances for construction from our disposed water
properties.  The increase was partially offset by lower income from money market
balances and short-term investments.

Investment and other income (loss),  net for the nine months ended September 30,
2003 increased  $132.0 million as compared with the prior year period  primarily
due to $65.7 million in non-cash  pre-tax gains in 2003 related to capital lease
restructurings  at ELI,  $6.2  million  of  income in 2003  associated  with the
retained liabilities  settlements and the recognition in 2002 of a $95.3 million
non-cash  pre-tax loss  resulting  from an other than  temporary  decline in the
value of our  investment  in  Adelphia  (see Note 10 to  Consolidated  Financial
Statements),  partially  offset  by $20.8  million  of  income  in 2002 from the
settlement of retained  liabilities.  The increase was partially offset by lower
income from money market balances and short-term investments.

Gain/(loss) on sales of assets, net decreased $18.7 million and $13.7 million as
compared  with the prior year  primarily  due to the sales of The Gas Company in
Hawaii and our Arizona gas and electric  divisions  during the third  quarter of
2003,  the sale of access  lines in North  Dakota and our  wireless  partnership
interest in  Wisconsin  during the second  quarter of 2003,  and the sale of our
Plano office building in March 2003.

Interest  expense for the three months ended  September 30, 2003 decreased $12.6
million,  or 11%, as compared  with the prior year period  primarily  due to the
retirement of debt partially offset by higher average interest rates. During the
three months ended September 30, 2003, we had average  long-term debt (excluding
equity  units and  convertible  preferred  stock)  outstanding  of $4.4  billion
compared to $5.3 billion  during the three months ended  September 30, 2002. Our
weighted average borrowing rate for the three months ended September 30, 2003 as
compared with the prior year period was 15 basis points higher,  increasing from
7.93% to 8.08%,  due to the  repayment  of debt with  interest  rates  below our
average rate.

                                       31
<PAGE>

Interest  expense for the nine months ended  September 30, 2003 decreased  $38.4
million,  or 11%, as compared  with the prior year period  primarily  due to the
retirement of debt partially offset by higher average interest rates. During the
nine months ended  September 30, 2003, we had average  long-term debt (excluding
equity  units and  convertible  preferred  stock)  outstanding  of $4.6  billion
compared to $5.4 billion  during the nine months ended  September 30, 2002.  Our
weighted average  borrowing rate for the nine months ended September 30, 2003 as
compared with the prior year period was 27 basis points higher,  increasing from
7.82% to 8.09%,  due to the  repayment  of debt with  interest  rates  below our
average rate.

Income taxes for the three and nine months ended  September  30, 2003  increased
$364.0 million and $482.0 million, respectively, as compared with the prior year
periods  primarily due to changes in taxable income.  The effective tax rate for
the first nine  months of 2003 was 34% as  compared  with 35% for the first nine
months of 2002.
<TABLE>
<CAPTION>

              LOSS ON IMPAIRMENT

      ($ in thousands)            For the three months ended September 30,        For the nine months ended September 30,
                               ---------------------------------------------  ----------------------------------------------
                                  2003        2002      $ Change    % Change     2003         2002      $ Change    % Change
                               ----------- ----------- ------------ --------  ------------ ----------- ------------ --------
<S>                              <C>       <C>         <C>             <C>      <C>        <C>          <C>             <C>
      Loss on impairment         $ 4,000   $1,074,058  $(1,070,058)   -100%     $ 4,000    $ 1,074,058  $(1,070,058)   -100%
</TABLE>

An additional  non-cash  pre-tax  impairment loss of $4.0 million related to our
Vermont property has been recognized in the third quarter of 2003, such that the
net assets have been  written  down to our best  estimate of the net  realizable
value upon sale.

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

                             DISCONTINUED OPERATIONS

($ in thousands)                For the nine months
                                ended September 30,
                                  2003        2002
                               ----------- -----------
Revenue                           $   -    $  4,650
Operating income (loss)           $   -    $   (419)
Income (loss) from discontinued
  operations, net of tax          $   -    $ (1,478)
Gain on disposal of water
  segment, net of tax             $   -    $ 169,326

On  January  15,  2002,  we  completed  the  sale of our  water  and  wastewater
operations  for $859.1  million in cash and $122.5  million of assumed  debt and
other  liabilities.  The pre-tax gain on the sale  recognized in 2002 was $316.7
million.  The gain on the disposal of the water  segment,  net of tax was $169.3
million.

               CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

During the first  quarter of 2003,  as a result of our adoption of SFAS No. 143,
"Accounting  for  Asset  Retirement  Obligations,"  we  recognized  an after tax
non-cash gain of approximately $65.8 million.  During the first quarter of 2002,
as a result of our  adoption of SFAS No.  142,  "Goodwill  and Other  Intangible
Assets," we  recognized  a  transitional  impairment  loss of $39.8  million for
goodwill related to ELI (see Note 14 to Consolidated Financial Statements).

                                       32
<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  prices.  We do not hold or issue
derivative  instruments,  derivative  commodity  instruments or other  financial
instruments for trading purposes.  As a result, we do not undertake any specific
actions to cover our exposure to market risks and we are not party to any market
risk  management  agreements  other than in the normal  course of business or to
hedge  long-term  interest  rate risk.  Our primary  market risk  exposures  are
interest rate risk and equity price risk as follows:

Interest Rate Exposure

Our exposure to market risk for changes in interest  rates relates  primarily to
the  interest-bearing  portion of our  investment  portfolio and interest on our
long term debt and  capital  lease  obligations.  The long term debt and capital
lease  obligations  include  various  instruments  with various  maturities  and
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. Consequently,  we have limited material future earnings or
cash flow  exposures  from changes in interest  rates on our long-term  debt and
capital lease  obligations.  A hypothetical 10% adverse change in interest rates
would  increase  the amount that we pay on our  variable  obligations  and could
result in  fluctuations in the fair value of our fixed rate  obligations.  Based
upon our overall  interest  rate  exposure at  September  30,  2003, a near-term
change in interest rates would not materially affect our consolidated  financial
position, results of operations or cash flows.

In order to  manage  our  interest  rate risk  exposure,  we have  entered  into
interest  swap  agreements.   Under  the  terms  of  the  agreements,   we  make
semi-annual,  floating  interest rate interest payments based on six month LIBOR
and receive a fixed rate on the notional amount. The underlying variable rate on
the swaps is set either in advance,  in arrears or based on each period's  daily
average  six-month  LIBOR. In connection  with these swaps,  the Company entered
into a series of supplemental  rate  agreements  which had the effect of setting
the floating  rate portion of the swaps in advance of the  contractually  agreed
upon rate determination date.

Sensitivity analysis of interest rate exposure
At September 30, 2003,  the fair value of our  long-term  debt and capital lease
obligations was estimated to be approximately $5.1 billion, based on our overall
weighted  average  rate of 8.1% and our overall  weighted  maturity of 13 years.
There has been no material change in the weighted average maturity applicable to
our obligations  since December 31, 2002. The overall  weighted average interest
rate increased approximately 8 basis points during 2003. A hypothetical increase
of 81 basis points (10% of our overall  weighted  average  borrowing rate) would
result in an approximate  $244.1 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 equity securities of telecommunications companies.

As of September 30, 2003, we owned 3,059,000 shares of Adelphia common stock. As
of June 30, 2002, we had written this  investment down to zero, and therefore we
have no additional exposure related to the market value of Adelphia stock.

As of September 30, 2003, we owned  2,305,908  common shares which  represent an
ownership of 19% of the equity in Hungarian Telephone and Cable Corp., a company
of which our  Chairman and Chief  Executive  Officer is a member of the Board of
Directors.  In  addition,  we  hold  30,000  shares  of  non-voting  convertible
preferred stock,  each share having a liquidation value of $70 per share and are
convertible at our option into 10 shares of common stock.


                                       33
<PAGE>

As of September 30, 2003, we owned 1,333,500 shares of D & E Communications (D &
E) common stock.  The stock price of D & E was $14.18 and $8.36 at September 30,
2003 and December 31, 2002,  respectively.

Sensitivity analysis of equity price exposure
At September 30, 2003,  the fair value of the equity  portion of our  investment
portfolio  was estimated to be $41.7  million.  A  hypothetical  10% decrease in
quoted market prices would result in an approximate $4.2 million decrease in the
fair value of the equity portion of our investment portfolio.

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, 2003.  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.

Item 4.   Controls and Procedures
          -----------------------

(a) Evaluation of disclosure controls and procedures.

We carried out an evaluation,  under the supervision and with the  participation
of  our  management,  of  the  effectiveness  of  our  disclosure  controls  and
procedures (as defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) as of the
end of the  period  covered  by  this  report.  Based  on this  evaluation,  our
principal  executive officer and principal  financial officer concluded that our
disclosure  controls and procedures were effective.  It should be noted that the
design of any system of controls is based in part upon certain assumptions,  and
there can be no assurance  that any design will succeed in achieving  its stated
goals.

(b) Changes in internal control over financial reporting.

There  was no change in our  internal  control  over  financial  reporting  that
occurred  during the fiscal  quarter  covered by this report that has materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.

                                       34

<PAGE>

                           PART II. OTHER INFORMATION

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES


Item 1.   Legal Proceedings
          -----------------

The City of Bangor,  Maine,  filed suit against us on November 22, 2002,  in the
U.S.  District  Court for the  District  of Maine  (City of  Bangor v.  Citizens
Communications Company, Civ. Action No. 02-183-B-S). The City has alleged, among
other things, that we are responsible for the costs of cleaning up environmental
contamination  alleged to have resulted from the operation of a manufactured gas
plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the
existence  of extensive  contamination  of the  Penobscot  River and nearby land
areas and has  asserted  that  money  damages  and other  relief at issue in the
lawsuit  could exceed  $50.0  million.  The City also  requested  that  punitive
damages be assessed against us. We have filed an answer denying liability to the
City,  and have asserted a number of counter  claims against the City. We intend
to defend ourselves vigorously against the City's lawsuit. In addition,  we have
identified  a  number  of  other  potentially  responsible  parties  that may be
responsible  for the  damages  alleged by the City and joined them as parties to
the lawsuit.  These additional parties include Honeywell  Corporation,  the Army
Corps of Engineers,  Guilford Transportation  (formerly Maine Central Railroad),
UGI Utilities, Inc., and Centerpoint Energy Resources Corporation.  We also have
demanded  that various of our  insurance  carriers  defend and indemnify us with
respect  to the  City's  lawsuit.  On or about  December  26,  2002,  we filed a
declaratory  judgment  action against those  insurance  carriers in the Superior
Court  of  Penobscot  County,  Maine,  for the  purpose  of  establishing  their
obligations  to us with respect to the City's  lawsuit.  We intend to vigorously
pursue insurance coverage for the City's lawsuit.

On February 7, 2003, we received a letter from counsel  representing Enron North
America  Corporation  (formerly  known as Enron Gas Marketing,  Inc.)  demanding
payment of an "early termination  liability" of approximately $12.5 million that
Enron claims it is owed under a gas supply agreement that we lawfully terminated
in  November  2001.  The  demand was made in  connection  with  Enron's  ongoing
bankruptcy  proceeding  in the United States  Bankruptcy  Court for the Southern
District of New York.  The parties have entered into a settlement  agreement and
mutual release resolving,  among other things, all issues raised by Enron in its
demand  letter.  The  Bankruptcy  Court  approved  the  agreement by order dated
September  25,  2003.  There was no  material  adverse  impact on our  financial
position or results of operations as a result of the settlement.

In  connection  with an  inquiry  that we  believe  has  arisen  as a result  of
allegations  made  to  federal  authorities  during  their  investigation  of an
embezzlement by two of our former officers, our employees and we are cooperating
fully with the Office of the U.S. Attorney for the Southern District of New York
and with the New York office of the Securities and Exchange Commission.  We have
provided requested documents to the SEC and we have agreed to comply with an SEC
request that, in connection with the informal inquiry that it has initiated,  we
preserve financial,  audit, and accounting records. On August 20, 2003, the U.S.
Attorney notified us that it had closed its investigation.

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.

                                       35
<PAGE>

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

a) Exhibits:

31.1  Certification of Principal  Executive  Officer  pursuant to Rule 13a-14(a)
      under the Securities Exchange Act of 1934.

31.2  Certification  of Principal Financial  Officer  pursuant to Rule 13a-14(a)
      under the Securities Exchange Act of 1934.

32.1  Certification  of Chief  Executive  Officer  pursuant to 18 U.S.C. Section
      1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2  Certification  of Chief  Financial  Officer  pursuant to 18 U.S.C. Section
      1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


b)   Reports on Form 8-K:

     We filed on Form 8-K on August 7, 2003 under Item 12 "Disclosure of Results
     of Operations  and Financial  Condition,"  a press release  announcing  our
     earnings for the quarter and six months ended June 30, 2003.

     We filed on Form 8-K on August 12,  2003 under  Item 5 "Other  Events"  and
     Item  7  "Financial   Statements,   Pro  forma  Financial  Information  and
     Exhibits," a press release  announcing  the  completion of the sales of our
     Arizona Gas and Electric  divisions  and the  completion of the sale of The
     Gas Company of Hawaii division.


                                       36

<PAGE>

                                    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
                            Senior Vice President and
                            Chief Accounting Officer






Date: November 12, 2003


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