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 üNo

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

At ~~September 30, 2002, 2,735,762,590~~March 31, 2003, 2,750,250,114 shares of the registrant’s Common Stock were outstanding, after deducting ~~15,887,894~~4,553,774 shares held in treasury.

Condensed Consolidated Statements of Income
Verizon Communications Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
Verizon Communications Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
Verizon Communications Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
Verizon Communications Inc. and Subsidiaries
(Unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission (SEC) rules that permit reduced disclosure for interim periods. These financial statements reflect all adjustments that are necessary for a fair presentation of results of operations and financial condition for the interim periods shown including normal recurring accruals and other items. The results for the interim periods are not necessarily indicative of results for the full year. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in the Verizon Communications Inc. (Verizon) Annual Report on Form 10-K for the year ended December 31, ~~2001, as amended by the Annual Report on Form 10-K/A for the year ended December 31, 2001.~~2002.

We have reclassified certain amounts from prior year’s data to conform to the ~~2002~~2003 presentation.

2. ~~Merger Charges~~Accounting Changes — Stock-Based Compensation and ~~Other Strategic Actions~~Asset Retirement Obligations

Prior to 2003, we accounted for stock-based employee compensation under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and followed the ~~Bell Atlantic Corporation—GTE Corporation merger on June 30, 2000, we incurred charges associated with employee severance~~disclosure-only provisions of $584 million ($371 million after-tax) for the separation of approximately 5,500 management employees who were entitled to benefits under pre-existing separation plans, as well as an accrual of ongoing Statement of Financial Accounting Standards (SFAS) No. ~~112, “Employers’ Accounting~~123, “Accounting for ~~Postemployment Benefits,~~Stock-Based Compensation.” In accordance with APB Opinion No. 25, no stock-based employee compensation expense for our fixed stock option plans is reflected in our 2002 net loss as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, using the prospective method (as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”) to all new awards granted, modified or settled after January 1, 2003. Under the prospective method, employee compensation expense in the first year will be recognized for new awards granted, modified, or settled. The options generally vest over a term of three years, therefore the expense related to stock-based employee compensation included in the determination of net income for the first quarter of 2003 is less than what would have been recorded if the fair value method was also applied to previously issued awards. The following table illustrates the effect on net income (loss) and earnings (loss) per share if the fair value method had been applied to all outstanding and unvested options in each period.

After-tax compensation expense for other stock-based compensation included in net income (loss) as reported for the three months ended March 31, 2003 and 2002 was $20 million and $5 million, respectively.

Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement provides the accounting for the cost of legal obligations associated with the retirement of long-lived

assets. SFAS No. 143 requires that companies recognize the fair value of a liability for ~~GTE employees. The severances~~asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as part of the book value of the long-lived asset. We have determined that Verizon does not have a material legal obligation to remove long-lived assets as described by this statement. However, prior to the adoption of SFAS No. 143, we included estimated removal costs in our group depreciation models. These costs have increased depreciation expense and accumulated depreciation for future removal costs for existing assets. These removal costs were recorded as a reduction to accumulated depreciation when the assets were retired and removal costs were incurred.

For some assets, such as telephone poles, the removal costs exceeded salvage value. Under the provisions of SFAS No. 143, we are required to exclude costs of removal from our depreciation rates for assets for which the removal costs exceed salvage. Accordingly, in connection with the ~~Bell Atlantic—GTE merger are complete.~~initial adoption of this standard on January 1, 2003, we have reversed accrued costs of removal in excess of salvage from our accumulated depreciation accounts for these assets. The adjustment was recorded as a cumulative effect of an accounting change, resulting in the recognition of a gain of approximately $3,499 million ($2,150 million after-tax). Effective January 1, 2003, we began expensing costs of removal in excess of salvage for these assets as incurred. The impact of this change in accounting will result in a decrease in depreciation expense and an increase in cost of services and sales.

During the fourth quarter of 2001, we recorded a special charge of $765 million ($477 million after-tax), as required under SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” for the voluntary and involuntary separation of approximately 10,000 employees. Also, during ~~the second quarter of~~ 2002 we recorded a special ~~charge~~charges of ~~$734~~$805 million ($~~475~~521 million after taxes and minority interest) primarily associated with employee severance costs and severance-related activities in connection with the voluntary and involuntary separation of approximately 8,000 employees. As of ~~September 30, 2002, a total~~March 31, 2003, nearly all of ~~approximately 12,800 employees have been separated~~the separations under the 2001 and 2002 severance ~~programs.~~activity have occurred. The remaining severance liability relating to these programs is ~~$878~~$629 million, which principally includes future payments to employees separated as of ~~September 30, 2002.~~March 31, 2003. We expect to complete the severance programs within a year of when the respective charges were recorded.

During the third quarter of 2002, we recorded a pretax charge of $295 million ($185 million after-tax) related to settlement losses incurred in connection with previously announced employee separations. SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” requires that settlement losses be recorded once prescribed payment thresholds have been reached. In the third quarter of 2002, we also recorded a pretax impairment charge of $224 million ($136 million after-tax) pertaining to Verizon’s leasing operations related to airplanes leased to airlines currently experiencing financial difficulties.

During the second quarter of 2002, we recorded pretax charges of $394 million ($254 million after-tax) primarily resulting from a pretax impairment charge in connection with our financial statement exposure to WorldCom Inc. of $300 million ($183 million after-tax) and other pretax charges of $94 million ($71 million after-tax). In addition, during the second quarter of 2002, we recorded a pretax charge of $175 million ($114 million after-tax) related to a proposed settlement of a litigation matter that arose from our decision to terminate an agreement with NorthPoint Communications Group, Inc. (NorthPoint) to combine the two companies’ digital subscriber line (DSL) businesses (see Note 14).

AsWe announced at the time of the Bell ~~Atlantic—GTE~~Atlantic-GTE merger that we ~~expect~~expected to incur a total of approximately $2 billion of transition costs related to the merger and the formation of the wireless joint venture. These costs ~~are~~were incurred to integrate systems, consolidate real estate and relocate employees. They also ~~include~~included approximately $500 million for advertising and other costs to establish the Verizon brand. Transition activities ~~are expected to be~~were complete ~~by the end of~~at December 31, 2002 and ~~total between $2.1 billion and $2.2 billion. Transition costs incurred through the third quarter of 2002 total $2,025~~totaled $2,243 million. Transition costs for the ~~three and nine months~~quarter ended ~~September 30,~~March 31, 2002 were ~~$94~~

~~million and $292~~$96 million ($~~50 million and $159~~52 million after taxes and minority interest), respectively. Transition costs for the three and nine months ended September 30, 2001 were $254 million and $696 million ($144 million and $394 million after taxes and minority interest), respectively..

In October 2001, we agreed to sell all 675,000 of our switched access lines in Alabama and Missouri to CenturyTel Inc. (CenturyTel) and 600,000 of our switched access lines in Kentucky to ALLTEL Corporation (ALLTEL). During the third quarter of 2002, we completed the sales of these access lines for $4,059 million in cash proceeds ($191 million of which was received in 2001). We recorded a pretax gain of $2,527 million ($1,550 million after-tax) related to these sales.

During the first quarter of 2002, we recorded a net pretax gain of $220 million ($116 million after-tax), primarily resulting from a pretax gain on the sale of TSI Telecommunication Services Inc. (TSI) of $466 million ($275 million after-tax), partially offset by an impairment charge in connection with our exit from the video business and other charges of $246 million ($159 million after-tax).

~~At December 31, 2001, the net assets of the switched access lines sold to CenturyTel~~5. Investments and ~~ALLTEL and the net assets of TSI were classified as Net Assets Held for Sale in the condensed consolidated balance sheets.~~

Results for the nine months ended September 30, 2001 include a pretax gain of $80 million ($48 million after-tax) recorded on the sale of the Cincinnati wireless market during the second quarter of 2001. In addition, during the second quarter of 2001, an agreement to sell the overlapping Chicago wireless market at a price lower than the net book value of the Chicago assets was executed. Consequently, we recorded an impairment charge of $75 million ($45 million after-tax) related to the expected sale. The sale of the Chicago market closed in the fourth quarter of 2001.

In the third quarter of 2002, we recognized a net pretax extraordinary loss of $8 million ($3 million after-tax) related to the extinguishment of $520 million of debt prior to the stated maturity date. Results for the nine months ended September 30, 2002 include a net pretax extraordinary charge of $11 million ($6 million after-tax) recorded in the first half of 2002 related to the extinguishment of $1,779 million of debt prior to the stated maturity date.

~~During the third quarter of 2001, we retired $228 million of debt prior to the stated maturity date, resulting in a pretax extraordinary charge of $12 million ($8 million after-tax).~~

We have investments in marketable securities, primarily ~~common stocks,~~bonds and mutual funds, which are considered “available-for-sale” under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” These investments have been included in our condensed consolidated balance sheets in Investments in Unconsolidated Businesses and Other Assets.

Under SFAS No. 115, available-for-sale securities are required to be carried at their fair value, with unrealized gains and losses (net of income taxes) that are considered temporary in nature recorded in Accumulated Other Comprehensive Loss. The fair values of our investments in marketable securities are determined based on market quotations.

The following table shows certain summarized information related to our investments in marketable securities:

We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded in Income (Loss) From Unconsolidated Businesses in the condensed consolidated statements of income for all or a portion of the unrealized loss, and a new cost basis in the investment is established.

At September 30, 2002, the decrease in marketable securities from December 31, 2001 is primarily due to the other than temporary declines in the market value of Cable & Wireless plc (C&W) and Metromedia Fiber Network, Inc. (MFN) (see “Investment-Related Charges” below) and the sale of nearly all of our interest in Telecom Corporation of New Zealand Limited (TCNZ) (see “Investment Ownership Changes” below). At December 31, 2001, the unrealized gains on marketable securities related primarily to our investment in TCNZ.

On January 25, 2002, Verizon exercised its option to purchase an additional 12% of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) common stock from the government of Puerto Rico. We now hold 52% of TELPRI stock, up from 40% held at December 31, 2001. As a result of gaining control of TELPRI, Verizon changed the accounting for its investment in TELPRI from the equity method to full consolidation, effective January 1, 2002.

On March 28, 2002, Verizon transferred 5.5 million of its shares in CTI Holdings, S.A. (CTI) to an indirectly wholly-owned subsidiary of Verizon and subsequently transferred ownership of that subsidiary to a newly created trust for CTI employees. This decreased Verizon’s ownership percentage in CTI from 65% to 48%. We also reduced our representation on CTI’s Board of Directors from five of nine members to four of nine (subsequently reduced to one of five members). As a result of these actions that surrender control of CTI, we changed our method of accounting for this investment from consolidation to the equity method. On June 3, 2002, as a result of an option exercised by Telfone (BVI) Limited (Telfone), a CTI shareholder, Verizon acquired approximately 5.3 million additional CTI shares. Also on June 3, 2002, we transferred ownership of a wholly owned subsidiary of Verizon that held 5.4 million CTI shares to a second independent trust leaving us with an approximately 48% non-controlling interest in CTI. Since we have no remaining investment in CTI or other future commitments or plans to fund CTI’s operations, in accordance with the accounting rules for equity method investments, we are no longer recording operating income or losses related to CTI’s operations.

~~On September 30, 2002, we sold nearly all of our investment in TCNZ for net cash proceeds of $769 million, which resulted in a pretax gain of $383 million ($229 million after-tax).~~

In December 2001, Verizon Wireless and Price Communications Corp. (Price) announced that an agreement had been reached combining Price’s wireless business with a portion of Verizon Wireless in a transaction valued at approximately $1.7 billion, including $550 million of net debt. The transaction closed on August 15, 2002 and the assumed debt was redeemed on August 16, 2002. The resulting limited partnership is controlled and managed by Verizon Wireless. In exchange for its contributed assets, Price received a limited partnership interest in the new partnership which is exchangeable into common stock of Verizon Wireless if an initial public offering of that stock occurs, or into the common stock of Verizon on the fourth anniversary of the asset contribution date if the initial public offering of Verizon Wireless common stock does not occur prior to then. The price of the Verizon common stock used in determining the number of Verizon common shares received in an exchange is also subject to a maximum and minimum amount.

In the third quarter of 2002, we recorded a pretax loss of $101 million ($74 million after-tax) to market value primarily related to our investment in C&W, as a result of our decision to pursue selling this investment in the near future, which was sold in early November 2002.

During the second quarter of 2002, we recorded pretax losses of $3,558 million ($3,305 million after-tax), including a loss of $2,443 million ($2,443 million after-tax) related to our interest in Genuity Inc. (Genuity) (see “Other Securities” below for additional information); a loss of $580 million ($430 million after-tax) to the market value of our investment in TELUS Corporation (TELUS); a loss of $303 million ($201 million after-tax) to the market value of our investment in C&W and a loss of $232 million ($231 million after-tax) relating to several other investments. We determined that market value declines in these investments were considered other than temporary.

During the first quarter of 2002, we recorded a pretax loss of $1,400 million ($1,400 million after-tax) due to the other than temporary decline in the market value of our investment in Compañia Anónima Nacional Teléfonos de Venezuela (CANTV). As a result of the political and economic instability in Venezuela, including the devaluation of the Venezuelan bolivar, and the related impact on CANTV’s future economic prospects, we no longer expected that the future undiscounted cash flows applicable to CANTV were sufficient to recover our investment. Accordingly, we wrote our investment down to market value as of March 31, 2002.

During the first quarter of 2002, we recorded a pretax loss of $516 million ($436 million after-tax) to market value due primarily to the other than temporary decline in the market value of our investment in ~~MFN.~~Metromedia Fiber Network, Inc. (MFN). We wrote off our remaining investment and other financial statement exposure related to MFN in the first quarter of 2002 primarily as a result of its deteriorating financial condition and related defaults. ~~In addition, we delivered to MFN a notice of termination of our fiber optic capacity purchase agreement.~~

During the first quarter of 2002, we recorded a pretax loss of $230 million ($190 million after-tax) to fair value due to the other than temporary decline in the fair value of our remaining investment in CTI Holdings, S.A. (CTI) as a result of the impact of the deterioration of the Argentinean economy and the devaluation of the Argentinean peso on CTI’s financial position. As a result of the first quarter 2002 charge, and a charge recorded in 2001, our financial exposure related to our equity investment in CTI has been eliminated.

~~During the second quarter of 2001, we recognized a pretax loss of $3,913 million ($2,926 million after-tax) primarily relating to~~We continually evaluate our investments in ~~C&W, NTL Incorporated (NTL) and MFN. We determined, based on the evaluations described above, that the market value declines in these investments were considered other than temporary.~~

~~As a result of capital gains~~unconsolidated businesses and other ~~income on access line sales~~long-lived assets for impairment. In particular, we analyzed our investments in CANTV and ~~investment sales~~Grupo Iusacell S.A. de C.V. due to the declining economic and operating conditions in ~~2002,~~Venezuela and Mexico, as well as ~~assessments and transactions related~~the assets leased by our leasing operations to ~~several~~commercial airlines, where indicators of ~~the impaired investments during the third quarter~~impairment have necessitated further analysis. As of ~~2002, we recorded tax benefits in the third quarter of 2002 pertaining~~March 31, 2003, no further impairments were determined to ~~current and prior year investment impairments of $983 million. The investment impairments primarily related to debt and equity investments in MFN and debt investments in Genuity.~~exist.

Prior to the merger of Bell Atlantic and GTE, we owned and consolidated Genuity (a tier-one interLATA Internet backbone and related data business). In June 2000, as a condition of the merger, 90.5% of the voting equity of Genuity was issued in an initial public offering. As a result of the initial public offering and our loss of control, we deconsolidated Genuity. Our remaining ownership interest in Genuity contained a contingent conversion feature that gave us the option (if prescribed conditions were met), among other things, to regain control of Genuity. Our ability to legally exercise this conversion feature was dependent on obtaining approvals to provide long distance service in the former Bell Atlantic states and satisfaction of other regulatory and legal requirements.

On July 24, 2002, we converted all but one of our shares of Class B common stock of Genuity into shares of Class A common stock of Genuity. We now own a voting and economic interest in Genuity of less than 10%, in accordance with regulatory restrictions. As a result, we have relinquished the right to convert our current ownership into a controlling interest as described above. See Note 14 for additional information on our ongoing business relationship and future commitments to Genuity.

As a result of Genuity’s continuing operating losses and a significant decrease in the market price of the Class A common stock of Genuity during the second quarter of 2002, we have determined that recoverability of our investment in Genuity is not reasonably assured. As a result, we recorded a pretax charge of $2,443 million to reduce the carrying value of our interest in Genuity to its estimated fair value.

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible ~~Assets.” SFAS No. 142~~Assets” and, as required, no longer ~~permits the amortization of~~amortize goodwill (including goodwill recorded on our equity method investments), acquired workforce intangible assets and ~~indefinite-lived intangible assets.~~wireless licenses, which we have determined have an indefinite life. Instead, these assets ~~must be~~are reviewed annually (or more frequently under various conditions) for impairment ~~in accordance with this statement. This impairment test uses~~using a fair value ~~approach rather than the undiscounted cash flows~~ approach. The goodwill impairment test under SFAS No. 142 requires a two-step approach, which is performed at the reporting unit level, as defined in SFAS No. 142. Step one identifies potential impairments by comparing the fair value of the reporting unit to its carrying amount. Step two, which is only performed if there is a potential impairment, compares the carrying amount of the reporting unit’s goodwill to its implied value, as defined in SFAS No. 142. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess. The amortization of goodwill included in our investments in equity investees is no longer recorded in accordance with the new rules. Intangible assets that do not have indefinite lives are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The initial impact of adoption of SFAS No. 142 on our condensed consolidated financial statements was recorded as a cumulative effect of an accounting change resulting in a charge of $496 million, net of ~~tax.~~tax in the quarter ended March 31, 2002. This charge is comprised of $204 million ($203 million after-tax) for goodwill, $294 million ($293 million after-tax) for wireless licenses and goodwill of equity method investments and for other intangible assets. In accordance with SFAS No. 142, we ceased amortizing existing goodwill (including goodwill recorded on our equity investments), acquired workforce intangible assets and wireless licenses which we determined have an indefinite life (see discussion below).

In conjunction with the adoption of SFAS No. 142, we have reassessed the useful lives of previously recognized intangible assets. A significant portion of our intangible assets are Domestic Wireless licenses, including licenses associated with equity method investments, that provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide cellular communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the FCC. Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses. As a result, the wireless licenses will be treated as an indefinite-lived intangible asset under the provisions of SFAS No. 142 and will not be amortized but rather will be tested for impairment. We will reevaluate the useful life determination for wireless licenses each reporting period to determine whether events and circumstances continue to support an indefinite useful life.

Previous wireless business combinations have been for the purpose of acquiring existing licenses and related infrastructure to enable us to build out our existing nationwide wireless network. The primary asset acquired in such combinations has been wireless licenses. In the allocation of the purchase price of these previous acquisitions, amounts classified as goodwill have related predominately to the expected synergies of placing the acquired licenses in our national footprint. Further, in purchase accounting, the values assigned to both wireless licenses and goodwill were principally determined based on an allocation of the excess of the purchase price over the other acquired net assets. We believe that the nature of our wireless licenses and the related goodwill are fundamentally indistinguishable.

In light of these considerations, on January 1, 2002, amounts previously classified as goodwill, approximately $7.9 billion as of December 31, 2001, were reclassified into wireless licenses. Also, assembled workforce, previously included in other intangible assets, will no longer be recognized separately from wireless licenses. Amounts for 2001 have been reclassified to conform to the presentation adopted on January 1, 2002. In conjunction with this reclassification, and in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes,” we have recognized a deferred tax liability of approximately $1.6 billion related to the difference in the tax basis compared to the book basis of the wireless licenses. This reclassification, including the related impact on deferred taxes, had no impact on our results of operations. This reclassification and the methodology to be subsequently used to test

~~wireless licenses for impairment under SFAS No. 142 as described in the next paragraph have been reviewed with the staff of the SEC.~~

When testing the carrying value of the wireless licenses for impairment, we will determine the fair value of the aggregated wireless licenses by subtracting from wireless operations’ discounted cash flows the fair value of all of the other net tangible and intangible assets of our wireless operations. If the fair value of the aggregated wireless licenses as determined above is less than the aggregated carrying amount of the licenses, an impairment will be recognized. Upon adoption of SFAS No. 142, a test for impairment of wireless licenses was performed with no impairment recognized. Future tests for impairment will be performed at least annually and more often if events or circumstances warrant.

The following tables present the impact of SFAS No. 142 on reported income before extraordinary item and cumulative effect of accounting change, reported net income and earnings per share had the standard been in effect for the three and nine months ended September 30, 2001:

The preceding tables exclude $35 million and $80 million, or $.01 per share and $.03 per share, in the third quarter and the first nine months of 2001, respectively, related to amortization of goodwill and other intangible assets with indefinite lives of equity method investments.

Changes in the carrying amount of goodwill for the ~~nine~~three months ended ~~September 30, 2002~~March 31, 2003 are as follows:

The major components and average useful lives of our other ~~acquired~~ intangible assets follows:

Intangible asset amortization expense was ~~$286~~$342 million and ~~$856~~$285 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2003 and 2002, respectively. It is estimated to be ~~$309~~$1,000 million for the remainder of ~~2002, $1,241 million in~~ 2003, ~~$1,156~~$1,300 million in 2004, ~~$996~~$1,082 million in 2005, ~~and $570~~$621 million in 2006 and $335 million in 2007, primarily related to customer lists and non-network software.

~~Effective January 1, 2001, we adopted~~The ongoing effect of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging ~~Activities.~~Activities,” The initial impact of adoption on our consolidated financial statements was recorded as a cumulative effect of an accounting change resulting in a charge of $182 million to current earnings and income of $110 million to other comprehensive income (loss). The recognition of assets and liabilities was immaterial to our financial position.

~~The ongoing effect of SFAS No. 133~~ on our consolidated financial statements is determined each quarter by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions at the end of each period. For the three ~~and nine~~ months ended ~~September 30, 2002,~~March 31, 2003, we recorded ~~pretax losses on mark-to-market adjustments~~a charge to current earnings of ~~$17~~$6 million and ~~$28 million, respectively, and losses~~a loss of ~~$5 million and income of $12~~$32 million to other comprehensive income (loss)~~, respectively.~~. The ~~pretax losses relate~~charge to current earnings relates primarily to the mark-to-market adjustments on our long-term call options and the loss in other comprehensive income (loss) relates primarily to the results of a hedge on the interest rate of an anticipated financing. The loss will be amortized to interest expense over the ten-year term of the related financing. For the three months ended March 31, 2002, we recorded a charge to current earnings of $3 million and a loss of $3 million to other comprehensive income (loss). The charge to current earnings relates primarily to the mark-to-market adjustments on our long-term call options and the loss in other comprehensive income (loss) relates to our cash flow hedges on foreign exchange risk. For the three and nine months ended September 30, 2001, we recorded pretax losses of $13 million and $166 million, respectively, and losses of $14 million and $28 million to other comprehensive income (loss), respectively. The pretax losses in 2001 related primarily to the mark-to-market adjustment on the conversion option on our MFN debt securities and the loss in other comprehensive income (loss) related to our cash flow hedges on foreign exchange risk.

Previously, Verizon Global Funding Corp. issued two series of notes: $2,455 million of 5.75% ~~Senior Exchangeable Notes~~senior exchangeable notes due on April 1, 2003 that ~~are~~were exchangeable into shares of ~~TCNZ~~Telecom Corporation of New Zealand Limited (TCNZ) (the 5.75% Notes) and $3,180 million of 4.25% ~~Senior Exchangeable Notes~~senior exchangeable notes due on September 15, 2005 that, ~~are exchangeable into C&W~~in connection with a restructuring of Cable & Wireless Communications plc in 2000 and ~~NTL Incorporated (NTL) shares (the 4.25% Notes).~~

~~The exchangeable notes are indexed to the fair market value of the exchange property into which they are exchangeable. As a result of~~ the bankruptcy of NTL ~~it is anticipated that the exchange property for the 4.25% Notes will consist~~Incorporated (NTL) in 2002, were exchangeable into shares of ~~C&W shares~~Cable & Wireless plc (C&W) and a combination of shares ~~warrants~~ and ~~equity rights~~warrants in the reorganized NTL ~~entities. If the fair market value~~entities (the 4.25% Notes).

On April 1, 2003, all of the exchange property exceeds the exchange price established at the offering date, a mark-to-market adjustment is recorded, recognizing an increase in the carrying value of the debt obligation and a charge to income. If the fair market value of the exchange property subsequently declines, the debt obligation is reduced (but not to less than the amortized carrying value of the notes).

~~At September 30, 2002 and 2001, the exchange prices of each~~outstanding $2,455 million principal amount of the 5.75% Notes ~~and~~were redeemed at maturity. On March 15, 2003, Verizon Global Funding redeemed all of the outstanding 4.25% Notes. The cash redemption price for the 4.25% Notes ~~exceeded the fair market value~~was $1,048.29 for each $1,000 principal amount of the ~~exchange property. Consequently,~~notes. The principal amount of 4.25% Notes outstanding, before unamortized discount, at the ~~notes were recorded at their amortized carrying value with no mark-to-market adjustments recorded in the third quarter or in the first nine months~~time of ~~2002 and 2001. In the second and third quarters of 2002, we recorded the extinguishment of $243 million and $323 million, respectively, of the 4.25% Notes.~~redemption, was $2,839 million.

All of Verizon Global Funding’s debt has the benefit of Support Agreements between us and Verizon Global Funding, which guarantee payment of interest, premium (if any) and principal outstanding should Verizon Global Funding fail to pay. The holders of Verizon Global Funding debt do not have recourse to the stock or assets of most of our telephone operations; however, they do have recourse to dividends paid to us by any of our consolidated subsidiaries as well as assets not covered by the exclusion. Verizon Global Funding’s long-term debt, including current portion, aggregated ~~$21,376~~$17,618 million at ~~September 30, 2002.~~March 31, 2003. The carrying value of the available assets reflected in our condensed consolidated financial statements was approximately ~~$63.1~~$61.4 billion at ~~September 30, 2002.~~March 31, 2003.

In ~~September 2002, Verizon Global Funding issued $850 million of 13-month floating rate exchangeable notes at par value. The notes may be exchanged periodically into similar notes until 2007.~~

~~In August 2002,~~January 2003, Verizon Global Funding issued $1 billion of ~~7.375%~~4% notes due ~~2012~~2008 at a discount, resulting in ~~gross~~ proceeds, net of ~~$991 million.~~

~~In June 2002, Verizon Global Funding issued $1 billion~~discount, of ~~6.125% notes due 2007, $600 million of 6.875% notes due 2012 and $400 million of 7.750% notes due 2032 at discounts, resulting in total gross proceeds of $1,978 million.~~

~~In May 2002, Verizon New England Inc., a wholly owned subsidiary of Verizon, issued $480 million of 7% quarterly interest Series B debentures due 2042 at par, resulting in gross proceeds of $465~~$993 million.

In March ~~2002,~~2003, Verizon ~~New York~~Virginia Inc., a wholly owned subsidiary of Verizon, issued $1 billion of ~~6.875%~~4.625% Series A debentures due ~~2012 and $500 million of 7.375% Series B debentures due 2032 at discounts, resulting in gross proceeds of $990 million and $489 million, respectively.~~

~~In February 2002, Verizon Maryland Inc., a wholly owned subsidiary of Verizon, issued $500 million of 6.125% Series A debentures due 2012~~2013 at a discount, resulting in ~~gross~~ proceeds, net of ~~$497~~discount, of $998 million.

~~In January 2002, Verizon New Jersey Inc., a wholly owned subsidiary of Verizon, issued $1 billion of 5.875% Series A debentures due 2012 at a discount, resulting in gross proceeds of $987 million.~~

Comprehensive income (loss) consists of net income and other gains and losses affecting shareowners’ investment that, under generally accepted accounting principles are excluded from net income.

The ~~decrease in the~~ net unrealized ~~gains~~losses on marketable securities in 2002 primarily ~~relates~~relate to ~~the reclassification of the after-tax realized gain on the sale of nearly all of~~ our ~~interest~~investment in ~~TCNZ, partially offset by the reclassification of after-tax realized losses recorded due to the other than temporary declines in the market value of~~ C~~&W and MFN (see Note 5).~~&W. The minimum pension liability was increased in the first quarter of 2002 to include the minimum pension liability of TELPRI (see Note 5). The change in the net unrealized gains on marketable securities in 2001 primarily relates to the reclassification of after-tax realized losses of $2,926 million recorded primarily due to the other than temporary decline in market value of investments in C&W, NTL and MFN (see Note 5).Telecomunicaciones de Puerto Rico, Inc., which became a fully consolidated subsidiary effective January 1, 2002.

The following table is a reconciliation of the share amounts used in computing earnings per share.

Stock options for ~~254~~228 million shares for the three months ended ~~September 30, 2002~~March 31, 2003 and ~~225~~148 million shares for the ~~nine~~three months ended ~~September 30,~~March 31, 2002 were not included in the computation of diluted earnings per share because the exercise price of stock options was greater than the average market price of the common stock. ~~For the three and nine months ended September 30, 2001, the numbers of shares not included in the computation of diluted earnings per share were 101 million and 115 million, respectively.~~

~~The diluted earnings per share calculation considers the assumed conversion of an exchangeable equity interest (see Note 5).~~

We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments include a Domestic Telecom group which provides domestic wireline communications services; a Domestic Wireless group which provides domestic wireless communications services;

~~an International group which includes our foreign wireline and wireless communications investments; and~~ an Information Services group which is responsible for our domestic and international publishing businesses and electronic commerce ~~services.~~services; and an International group which includes our foreign wireline and wireless communications investments.

We measure and evaluate our reportable segments based on segment income. This segment income excludes unallocated corporate expenses and other adjustments arising during each period. The other adjustments include transactions that the chief operating decision makers exclude in assessing business unit performance due primarily to their nonrecurring and/or non-operational nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses that are not individually significant are included in all segment results, since these items are included in the chief operating decision makers’ assessment of unit performance. These are mostly contained in International and Information Services since they actively manage investment portfolios.

The following table provides operating financial information for our four reportable segments and a reconciliation of segment results to consolidated results:

Major reconciling items between the segments and the consolidated results are as follows:

Financial information for Domestic Telecom in the first quarter of 2002 excludes the effects of access lines sold in the third quarter of 2002. In addition, the transfer of Global Solutions Inc. from International to Domestic Telecom effective January 1, 2003 is reflected in this financial information as if it had occurred for all periods presented.

Corporate, eliminations and other includes unallocated corporate expenses, intersegment eliminations recorded in consolidation and the results of other businesses such as lease financing. We generally account for intersegment sales of products and services and asset transfers at current market prices. We are not dependent on any single customer.

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring).” EITF Issue No. 94-3 required accrual of liabilities related to exit and disposal activities at a plan (commitment) date. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. That cost is then depreciated over the remaining life of the underlying long-lived asset. We are required to adopt SFAS No. 143 effective January 1, 2003. We are currently evaluating the impact this new standard will have on our future results of operations or financial position.

~~13. Accounting for the Impact of the September 11, 2001 Terrorist Attacks~~

The primary financial statement impact of the September 11th terrorist attacks pertained to Verizon’s plant, equipment and administrative office space located either in, or adjacent to the World Trade Center complex, and the associated service restoration efforts. During the quarter ended September 30, 2001, we recorded an estimate of equipment losses and costs incurred during the quarter associated with service disruption and restoration of $290 million. In addition, we accrued an insurance recovery of $150 million, resulting in a net impact of $140 million ($84 million after-tax) recorded in Operations and Support Expense in the condensed consolidated statements of income, and also reported by our Domestic Telecom segment. The costs and estimated insurance recovery were recorded in accordance with Emerging Issues Task Force Issue No. 01-10, “Accounting for the Impact of the Terrorist Attacks of September 11, 2001.”

Several state and federal regulatory proceedings may require our telephone operations to pay penalties or to refund to customers a portion of the revenues collected in the current and prior periods. There are also various legal actions pending to which we are a party and claims which, if asserted, may lead to other legal actions. We have established reserves for specific liabilities in connection with regulatory and legal actions, including environmental matters that we currently deem to be probable and estimable. We do not expect that the ultimate resolution of pending regulatory and legal matters in future periods will have a material effect on our financial condition, but it could have a material effect on our results of operations.

On January 29, 2001, the bidding phase of the FCC reauction of 1.9 GHz C and F block broadband Personal Communications Services spectrum licenses, which began December 12, 2000, officially ended. Verizon Wireless was the winning bidder for 113 licenses. The total price of these licenses was $8,781 million, $1,822 million of which had been paid. Most of the licenses that were reauctioned relate to spectrum that was previously licensed to NextWave Personal Communications Inc. and NextWave Power Partners Inc. (collectively NextWave), which have appealed to the federal courts the FCC’s action canceling NextWave’s licenses and reclaiming the spectrum.

In a decision on June 22, 2001, the U.S. Court of Appeals for the D.C. Circuit ruled that the FCC’s cancellation and repossession of NextWave’s licenses was unlawful. The FCC sought a stay of the court’s decision which was denied. The FCC subsequently reinstated NextWave’s licenses but it did not return Verizon Wireless’s payment on the NextWave licenses nor did it acknowledge that the court’s decision extinguished Verizon Wireless’s obligation to purchase the licenses. On October 19, 2001, the FCC filed a petition asking the U.S. Supreme Court to consider reversing the U.S. Court of Appeals for the D.C. Circuit’s decision. On March 4, 2002, the U.S. Supreme Court granted the FCC’s petition and agreed to hear the appeal. Oral argument on the appeal was heard on October 8, 2002, and a decision by the U.S. Supreme Court is expected in early 2003.

In April 2002, the FCC returned $1,479 million of Verizon Wireless’s $1,822 million license payment and stated its view that Verizon Wireless remains obligated to purchase the licenses if and when the FCC succeeds in regaining them from NextWave. On April 4, 2002, Verizon Wireless filed a complaint in the U.S. Court of Federal Claims against the United States government seeking both a declaration that Verizon Wireless has no further performance obligations with respect to the reauction, and monetary damages. On April 8, 2002, Verizon Wireless filed a petition with the U.S. Court of Appeals for the D.C. Circuit seeking a declaration that the auction obligation is voidable and a return of its remaining down payment of $261 million. Both of these matters are pending, and their outcome (as well as the outcome of the U.S. Supreme Court appeal) is uncertain. Verizon Wireless is also seeking legislation from the U.S. Congress that would permit bidders to withdraw their bids and receive their deposits back in full. In September 2002, the FCC issued a notice requesting comment on proposals that would let winning bidders receive full repayment of their deposits and opt out of their winning bids. The proposal is subject to comment and may not be enacted.

In 2001, we agreed to provide up to $2.0 billion in financing to Genuity with maturity in 2005 and have loaned $1,150 million of that commitment to date, which was included in our analysis of financial statement exposure to Genuity (see Note 5). As a result of our decision to convert all but one of our shares of Class B common stock of Genuity into shares of Class A common stock of Genuity and relinquish our right to convert to a controlling interest in Genuity, we are no longer obligated to fund the remaining commitment under the $2.0 billion agreement. Our commercial relationship with Genuity continues, which includes a five-year purchase commitment for Genuity

services such as dedicated Internet access, managed web hosting and Internet security. Under this purchase commitment, which terminates in 2005, Verizon has agreed to pay Genuity a minimum of approximately $500 million over five years for its services, of which we have satisfied approximately $260 million as of September 30, 2002.

In addition, under the terms of an investment agreement, ~~relating to our wireless joint venture,~~ Vodafone Group plc (Vodafone) may require ~~us or~~ Verizon Wireless to purchase up to an aggregate of $20 billion worth of ~~its~~Vodafone’s interest in Verizon Wireless between 2003 and 2007 at its then fair market value. ~~The~~We have the right, exercisable at our sole discretion, to purchase up to $12.5 billion of this interest instead of Verizon Wireless for cash or Verizon stock at our option. Vodafone may require the purchase of up to $10 billion ~~in cash or stock at our option, may be required~~ in the summer of 2003 or 2004, and the remainder, which may not exceed $10 billion atin any one ~~time,~~year, in the summers of 2005 through 2007. Vodafone has the option to require ~~us or Verizon Wireless to satisfy~~that up to $7.5 billion of the remainder ~~with cash or contributed debt.~~

As discussed in Note 2, during the second quarter of 2002, we recorded a pretax charge of $175 million ($114 million after-tax) for a proposed settlement of the NorthPoint litigation. The lawsuit arose from Verizon’s decision to terminate an agreement with NorthPoint to combine the two companies’ DSL businesses. Verizon terminated the merger agreement due to the deterioration in NorthPoint’s business, operations and financial condition. The proposed settlement has been approved by the bankruptcy court andbe paid by Verizon Wireless through the ~~NorthPoint litigation has been dismissed with prejudice, and the bankruptcy court’s order is under appeal. Final review~~assumption or incurrence of ~~the order is not expected until 2003 at the earliest.~~debt.

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

Verizon Communications Inc. is one of the world’s leading providers of communications services. Verizon companies are the largest providers of wireline and wireless communications in the United States, with ~~135.0~~136.6 million access line equivalents and ~~31.5~~33.3 million wireless customers. Verizon is the third largest long distance carrier for U.S. consumers, with 13.2 million long distance lines, and the company is also the largest directory publisher in the ~~world.~~world, as measured by directory titles and circulation. With ~~more than~~approximately $67 billion in annual revenues and ~~approximately 236,000~~227,000 employees, Verizon’s global presence extends to ~~more than 35 countries in~~ the Americas, Europe, Asia and the Pacific.

We have four reportable segments, which we operate and manage as strategic business units: Domestic Telecom, Domestic Wireless, ~~International~~Information Services and ~~Information Services.~~International. Domestic Telecom includes local, long distance and other telecommunication services. Domestic Wireless products and services include wireless voice and data services, paging services and equipment sales. Information Services consists of our domestic and international publishing businesses, including print SuperPages® and electronic SuperPages.com® directories, as well as includes website creation and other electronic commerce services. International operations include wireline and wireless communications operations and investments in the Americas, Europe, Asia and the Pacific. ~~Information Services consists~~

Consolidated Results of our domestic and international publishing businesses, including print and electronic directories and Internet-based shopping guides, as well as includes website creation and other electronic commerce services.

~~Consolidated Results of~~ Operations

In this section, we discuss our overall ~~reported~~ results of operations and highlight special and ~~nonrecurring~~non-recurring items. In the following section, we review the performance of our four reportable segments. We exclude the effects of the special and non-recurring items from the segments’ ~~reported~~ results ~~the effects~~ of ~~these items, which~~operations since management does not consider them in assessing segment performance, due primarily to their ~~nonrecurring~~non-recurring and/or non-operational nature. We believe that this presentation will assist readers in better understanding ~~operating~~our results of operations and trends from period to period.

~~Reported~~ This section on consolidated ~~revenues were $17,201 million~~results of operations carries forward the segment results, which exclude the special and ~~$50,411 million for the quarter~~non-recurring items, and highlights and describes those items separately to ensure consistency of presentation in this section and the nine months ended September 30, 2002, respectively, compared to $17,004 million and $50,179 million for the quarter and nine months ended September 30, 2001, respectively. Reported consolidated operating expenses were $11,184 million and $38,200 million for the third quarter and the first nine months of 2002, respectively, compared to $13,327 million and $39,094 million, respectively, for the similar periods of 2001. Prior year reported consolidated revenues and operating expenses were not adjusted to reflect the third quarter 2002 sales of 1.27 million switched access lines in Alabama, Missouri and Kentucky (the non-strategic access lines), the deconsolidation of CTI Holdings, S.A. (CTI) to the equity method and the consolidation of Telecomunicaciones de Puerto Rico, Inc. (TELPRI). See “Special Items — Sales of Assets, Net” and “Segment Results of ~~Operations~~Operations” section.

Consolidated Revenues


(Dollars in Millions)	Three Months Ended March 31,
	2003			2002			% Change

Domestic Telecom	$	9,941		$	10,251			(3.0	)%
Domestic Wireless		5,086			4,430			14.8
Information Services		700			803			(12.8	)
International		621			708			(12.3	)
Corporate & Other		(69	)		(3	)		nm
Revenues of access lines sold		–			241			(100.0	)

Operating Revenues	$	16,279		$	16,430			(.9	)

nm — International” for additional discussion of the switched access line sales and the CTI and TELPRI transactions. We reported net income of $4,405 million ($1.60 per diluted share) and $1,789 million ($.65 per diluted share) for theNot meaningful

Domestic Telecom’s first quarter and nine months ended September 30, 2002, respectively, compared to net income of $1,875 million ($.69 per diluted share) and $2,426 million ($.89 per diluted share) for the quarter and nine months ended September 30, 2001, respectively.

Reported consolidated revenues increased by $197 million, or 1.2%, in the third quarter of 2002 and grew by $232 million, or 0.5%, in the first nine months of 2002, compared to the similar periods of the prior year. For the third quarter and the first nine months of 2002, reported consolidated operating expenses decreased $2,143 million, or 16.1%, and were lower by $894 million, or 2.3%, respectively, compared to the similar periods of 2001. In the third quarter and nine months ended September 30, 2002, higher Domestic Wireless and International2003 revenues were ~~partially offset by~~$310 million lower Domestic Telecom revenues compared to the similar periods of 2001. In addition, higher Domestic Wireless and International operating expenses were largely offset by lower Domestic Telecom operating expenses in the third quarter of 2002 compared to the prior year third quarter. For the nine months ended September 30, 2002, higher Domestic Wireless and International operating expenses were more than ~~offset by lower Domestic Telecom operating expenses compared to~~ the similar period of 2001 (see summary below and “Segment Results of Operations”). In addition, operating expenses in the current quarter and year-to-date period are favorably impacted by the pretax gain on the sale of the non-strategic access lines of $2,527 million, partially offset by severance and related pension settlement costs and other special charges (see summary below and “Special Items”).

Net income increased by $2,530 million, or 134.9%, in the third quarter of 2002 and was $637 million, or 26.3%, lower in the first nine months of 2002, compared to the similar periods of the prior year. The significant items impacting net income in the third quarter of 2002 compared to the third quarter of 2001 include the after-tax impact of changes in revenues and operating expenses previously described and tax benefits of $983 million recorded in the

current quarter pertaining to current and prior year investment impairments. The year-to-date period ended September 30, 2002 also includes higher investment-related charges and a higher cumulative effect of accounting change, partially offset by lower unfavorable mark-to-market adjustments related to financial instruments compared to the similar period of 2001 (see summary below and “Special Items”).

~~Consolidated Revenues~~

Domestic Wireless revenues grew by $461 million, or 10.2%, in the third quarter of 2002 and $1,144 million, or 8.8%, for the nine months ended September 30, 2002 compared to the similar periods in 2001. This increase was primarily due to a 9.9% increase in subscribers since September 30, 2001.

Revenues earned by our International segment grew by $129 million, or 21.6%, in the third quarter of 2002 and $509 million, or 29.6%, in the first nine months of 2002 compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first nine months of 2001 to be comparable with 2002, revenues earned from our international businesses declined by $78 million, or 9.7%, in the third quarter of 2002 and $128 million, or 5.4%, in the first nine months of 2002 compared to the similar periods in 2001. These decreases in revenues are due to the weak economies and increased competition in our Latin America markets as well as reduced software sales. These decreases were offset in part by higher revenues generated by the GSI network, which began its commercial operations in the first quarter of 2001.

The decline in Domestic Telecom’s revenues in the current quarter and nine months ended September 30, 2002 was primarily driven by lower local and other services, partially offset by higher network access services for the nine months ended September 30, 2002. Local service revenues ~~were lower~~declined by ~~$100~~$216 million ~~or 1.9%, in the third quarter of 2002 and $796 million, or 4.9%, in the nine months of 2002 largely~~ due to lower demand and usage of our basic local wireline services. The effects of mandated price reductions on unbundled network elements (UNEs), technology substitution and the lagging economy largely drove the decline in local service revenue growth. Our network access revenues declined by $55 million in the first quarter of 2003 due largely to declining switched minutes of use (MOUs) and price reductions associated with federal and state price cap filings and other regulatory decisions. Long distance service revenues, including interLATA and intraLATA toll services, increased $110 million in the first quarter of 2003, primarily as a result of subscriber growth from our interLATA long distance services. Long distance service revenue growth in the first three months of 2003 was partially offset by the effects of competition and ~~mandated intrastate price reductions.~~toll calling discount packages and product bundling offers of our intraLATA toll services. Revenues from Domestic Telecom’s other services declined ~~$158~~by $149 million ~~or 14.1%, in the third quarter of 2002 and $607 million, or 17.0%, in the first nine months of 2002. This decline was substantially~~ due to lower customer premises equipment and supply sales to some major customers, lower volumes at some of our non-regulated businesses due to the ~~slowing~~lagging economy and a decline in public telephone revenues as more customers substituted wireless communications for pay telephone services. ~~Our network access~~

Domestic Wireless’s revenues ~~increased $196~~grew by $656 million ~~or 2.0%,~~ in the first ~~nine months~~quarter of ~~2002~~2003 compared to the similar period in 2002. This increase was primarily due to a 12.6% increase in subscribers as well as an increase in average service revenue per subscriber per month of 3.0% to $47. Average service revenue per subscriber per month increased primarily due to higher access price plan offerings and a higher concentration of retail customers, who generally have higher service revenue than wholesale customers. This increase was partially offset by decreased roaming revenue as a result of rate reductions with third-party carriers and decreased long distance revenue due to bundled pricing.

Operating revenues from our Information Services segment decreased $103 million and revenues generated by International decreased $87 million in the first quarter of 2003 compared to the similar period of 2002. The Information Services decrease was primarily due to the ~~prior year. Access growth~~impact of changes in timing of publication dates and lower book extension revenues. The International decrease was ~~mainly attributable~~primarily due to ~~higher customer demand for data transport services (primarily special access services and DSL). However, volume-related growth was more than offset~~declining foreign exchange rates in the ~~current quarter~~Dominican Republic and ~~partially offset year-to-date by price reductions associated with federal and state price cap filings and other regulatory decisions and by one-time billing adjustments.~~Mexico as well as reduced software sales.

The operating ~~revenues~~revenue of the non-strategic access lines sold ~~during~~in the ~~current~~third quarter ~~were $136 million and $244~~of 2002 was $241 million for the three months ended ~~September 30, 2002 and 2001, respectively, and $623 million and $754 million for the nine months ended September 30, 2002 and 2001, respectively.~~March 31, 2002. These revenues are included in consolidated results, but are excluded from Domestic ~~Telecom~~Telecom’s 2002 segment results.

Consolidated Operating Expenses


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002			% Change

Cost of services and sales	$	5,141	$	4,874			5.5	%
Selling, general and administrative expense		4,253		4,945			(14.0	)
Depreciation and amortization expense		3,385		3,320			2.0
Sales of assets, net		–		(220	)		(100.0	)

Total Operating Expenses	$	12,779	$	12,919			(1.1	)

~~Domestic Wireless’s operations~~Cost of Services and ~~support expenses~~Sales

Cost of services and sales increased by ~~$294~~$267 million ~~or 10.2%,~~ in the ~~third~~first quarter of ~~2002 and $705 million, or 8.4%, for the nine months ended September 30, 2002~~2003 compared to the similar ~~periods~~period of 2002. This cost increase was mainly driven by lower net pension and other postretirement benefit income in ~~2001.~~2003. In addition, higher direct telecom charges were driven by increased minutes of use on our wireless network for the first quarter 2003 compared to the similar period in 2002. Cost of wireless equipment sales grew in the first quarter of 2003 compared to the similar period in 2002 due to an increase in handsets sold related to growth in gross activations and an increase in equipment upgrades.

These cost increases were partially offset by lower access and transport costs at Domestic Telecom and our disciplined expense controls, including reduced spending for contracted services and materials and supplies, and the effect of work force reductions of approximately 18,000 Domestic Telecom employees over the past year, and by lower roaming, local interconnection and long distance rates at Domestic Wireless.

We continually evaluate employee levels, and accordingly, may incur future severance costs.

Selling, General and Administrative Expense

Selling, general and administrative expense declined by $692 million in the first quarter of 2003 compared to the similar period of 2002. In the first quarter of 2002, we recorded a pretax loss of $230 million ($190 million after-tax, or $.07 per diluted share) to fair value due to the other than temporary decline in the fair value of our remaining investment in CTI Holdings, S.A. (CTI) as a result of the impact of the deterioration of the Argentinean economy and the devaluation of the Argentinean peso on CTI’s financial position. In addition, in the first quarter of 2002 we recorded a pretax loss of $228 million ($147 million after-tax, or $.05 per diluted share) related to our investment in Metromedia Fiber Network, Inc. (MFN). In addition, in the first quarter of 2002, we recorded transition costs in connection with the Bell Atlantic Corporation-GTE Corporation merger and the formation of the wireless joint venture of $96 million ($52 million after taxes and minority interest, or $.02 per diluted share) that primarily impacted selling, general and administrative expense. Transition activities were completed at December 31, 2002.

In addition, selling, general and administrative expenses declined as a result of effective cost containment measures and timing of expenditures. Bad debt expenses were also lower in the first three months of 2003 as a result of

improved collections, customer deposit requirements and lower accounts receivable. Taxes other than income also declined due to lower gross receipts and property taxes in the first quarter of 2003 compared to the similar period in 2002. Selling, general and administrative expenses also decreased as a result of the replacement of a revenue-based operating tax in the Dominican Republic with an income tax, reduction of losses previously recognized on sales of fixed assets and declining foreign exchange rates.

These current quarter declines in selling, general and administrative expenses were partially offset by increases in Domestic Wireless sales commissions in our direct and indirect channels related to an increase in gross subscriber additions in the first quarter 2003 compared to the first quarter 2002.

Depreciation and Amortization Expense

Depreciation and amortization expense increased by $65 million in the first quarter of 2003 compared to the similar period of 2002. This increase was primarily due to increased salary and wage expense in customer care and sales channels and advertising and selling expenses related to an increase in gross retail customer additions in the 2002 periods compared to the similar periods of 2001. Partially offsetting this increase, Domestic Wireless’s depreciation and amortization decreased by $115 million, or 12.2%, for the third quarter of 2002 and by $355 million, or 12.9%, for the nine months ended September 30, 2002 compared to the similar periods in 2001. The decrease was primarily attributable to a reduction of amortization expense from the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002, which requires that goodwill and indefinite-lived intangible assets no longer be amortized. This decrease was partially offset by increased depreciation expense related to the increase in depreciable ~~assets related~~assets. This increase was partially offset by a decrease in depreciation at Domestic Telecom principally due to ~~an increased asset base.~~the favorable impact of adopting Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” (see “Cumulative Effect of Accounting Change”), effective January 1, 2003.

~~International’s operations and support expenses increased by $6 million, or 1.6%, in~~Sales of Assets, Net

During the ~~third~~first quarter of 2002, we recorded a net pretax gain of $220 million ($116 million after-tax, or $.04 per diluted share), primarily resulting from a pretax gain on the sale of TSI Telecommunication Services Inc. (TSI) of $466 million ($275 million after-tax, or $.10 per diluted share), partially offset by an impairment charge in connection with our exit from the video business and ~~$162~~other charges of $246 million ($159 million after-tax, or $.06 per diluted share).

Other Consolidated Results

The following discussion of several non-operating items is based on the amounts reported in our unaudited condensed consolidated financial statements.

Income (Loss) From Unconsolidated Businesses

Income from unconsolidated businesses increased by $1,709 million, or ~~13.5%~~110.8%, from a loss of $1,543 million in the first ~~nine~~quarter of 2002 to income of $166 million in the first quarter of 2003.

The first quarter of 2002 loss was principally caused by pretax charges totaling $1,689 million ($1,689 million after-tax, or $.62 per diluted share) relating to our investments in Compañia Anónima Nacional Teléfonos de Venezuela (CANTV) and MFN. We recorded a pretax loss of $1,400 million ($1,400 million after-tax, or $.51 per diluted share) due to the other than temporary decline in the market value of our investment in CANTV. As a result of the political and economic instability in Venezuela, including the devaluation of the Venezuelan bolivar, and the related impact on CANTV’s future economic prospects, we no longer expected that the future undiscounted cash flows applicable to CANTV were sufficient to recover our investment. Accordingly, we wrote our investment down to market value as of March 31, 2002. In addition, we recorded a pretax loss of $289 million ($289 million after-tax, or $.11 per diluted share) to market value primarily due to the other than temporary decline in the market value of our investment in MFN. We wrote off our remaining investment and other financial statement exposure related to MFN in the first quarter of 2002 primarily as a result of its deteriorating financial condition and related defaults.

Income from unconsolidated businesses also increased in the first quarter of 2003 by $38 million as a result of continued operational growth of Verizon’s equity investments, offset in part by unfavorable foreign currency impacts, predominantly at CANTV.


(Dollars in Millions)	Three Months Ended March 31,
	2003			2002			% Change

Other Income and (Expense), Net
Interest income	$	58		$	54			7.4	%
Foreign exchange gains (losses), net		(23	)		2			nm
Other, net		(1	)		(9	)		(88.9	)

Total	$	34		$	47			(27.7	)

nm — Not meaningful

The changes in other income and expense were primarily due to the change in foreign exchange gains and losses. Foreign exchange gains and losses were affected primarily by Grupo Iusacell S.A. de C.V. (Iusacell), which uses the Mexican peso as its functional currency. We expect that our earnings will continue to be affected by foreign currency gains or losses associated with the U.S. dollar denominated debt issued by Iusacell.


(Dollars in Millions)	Three Months Ended March 31,
	2003			2002			% Change

Interest Expense
Interest expense	$	778		$	814			(4.4	)%
Capitalized interest costs		35			37			(5.4	)

Total interest costs on debt balances	$	813		$	851			(4.5	)

Average debt outstanding	$	54,247		$	64,678			(16.1	)
Effective interest rate		6.0	%		5.3	%

The decrease in interest costs for the three months ~~of 2002~~ended March 31, 2003, compared to the similar ~~periods~~period in ~~2001. These increases are~~2002, was principally attributable to lower average debt levels and was partially offset by higher average interest rates.


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Minority Interest	$	326	$	243		34.2	%

The increase in minority interest expense for the three months ended March 31, 2003, compared to the similar period in 2002, is primarily due to the ~~consolidation~~higher earnings at Verizon Wireless, which has a significant minority interest attributable to Vodafone Group plc (Vodafone).


(Dollars in Millions)	Three Months Ended March 31,
	2003			2002			% Change

Provision for Income Taxes	$	838		$	963			(13.0	)%
Effective income tax rate		32.3	%		100.5	%

The effective income tax rate is the provision for income taxes as a percentage of ~~TELPRI partially offset~~income before the provision for income taxes. Our effective income tax rate for the three months ended March 31, 2002 was impacted by the ~~deconsolidation~~other than temporary decline in fair value of ~~CTI in 2002. Adjusting~~several of our investments during the ~~quarter and~~ first ~~nine months of 2001 to be comparable with 2002, operations and support expenses decreased $104 million, or 20.9%, in the third~~ quarter of 2002 ~~and $112 million, or 7.6%,~~because tax benefits were not available on many of the losses (see “Income (Loss) From Unconsolidated Businesses”).

Cumulative Effect of Accounting Change

Impact of SFAS No. 143

We adopted the provisions of SFAS No. 143 on January 1, 2003. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the ~~first nine months~~period in which the obligations are incurred and capitalize that amount as part of ~~2002 compared~~the book value of the long-lived asset. We have determined that Verizon does not have a material legal obligation to remove long-lived assets as described by this statement. However, prior to the ~~similar periods~~adoption of SFAS No. 143, we included estimated removal costs in ~~2001.~~our group depreciation models. These ~~decreases reflect lower variable~~ costs ~~associated~~have increased depreciation expense and accumulated depreciation for future removal costs for existing assets. These removal costs were recorded as a reduction to accumulated depreciation when the assets were retired and removal costs were incurred.

1915

~~volumes~~have reversed accrued costs of removal in ~~Latin America and~~excess of salvage from our accumulated depreciation accounts for these assets. The adjustment was recorded as a cumulative effect of an accounting change, resulting in the ~~settlement~~recognition of a ~~contract dispute~~gain of approximately $3,499 million ($2,150 million after-tax, or $.77 per diluted share).

Impact of SFAS No. 142

We adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under various conditions) for impairment in the third quarter of 2002. Depreciation and amortization expense increased by $47 million, or 55.3%, in the third quarter of 2002 and $101 million, or 33.2%, in the first nine months of 2002 compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjustingaccordance with this statement. Our results for the quarter ~~and first nine months~~ended March 31, 2002 include the initial impact of 2001 to be comparable with 2002, depreciation and amortization expense increased $20 million, or 17.9%, for the third quarter of 2002 and $10 million, or 2.5%, for the first nine months of 2002 compared to the similar periods in 2001.

Domestic Telecom’s operations and support expenses decreased by $197 million, or 3.3%, in the third quarter of 2002 and $880 million, or 5.0%, in the first nine months of 2002 principally due to lower costs at our domestic telephone operations. These reductions were attributable to reduced spending for materials and contracted services, lower overtime for repair and maintenance activity principallyadoption recorded as a result of reduced volumes at our dispatch and call centers and lower employee costs associated with declining workforce levels. Operating costs have also decreased due to business integration activities, achievement of merger synergies and other effective cost containment measures. In addition, service restoration costs associated with the terrorist attacks on September 11, 2001 and cost of equipment sales from reduced sales volumes were lower in both the quarter and year-to-date periods in 2002. These cost reductions were partially offset by higher costs associated with our growth businesses such as data and long distance services. Domestic Telecom’s depreciation and amortization expense in both periods of 2002 included thecumulative effect of growth in depreciable telephone plant and increased software amortization costs. These factors were more than offset in the third quarter of 2002 and partially offset year-to-date by the effect of lower rates of depreciation.

Operating expenses of the non-strategic access lines sold during the current quarter were $81 million and $82 million for the three months ended September 30, 2002 and 2001, respectively, and $241 million and $335 million for the nine months ended September 30, 2002 and 2001, respectively. These operating expenses are included in consolidated results, but are excluded from Domestic Telecom segment results.

Consolidated operating expenses in the current quarter and year-to-date periods are favorably impacted by the pretax gain on the sale of the non-strategic access lines of $2,527 million and lower transition costs of $160 million and $404 million in third quarter of 2002 and nine months ended September 30, 2002, respectively, compared to the similar 2001 periods. This benefit is partially offset by severance and related pension settlement costs in the current quarter and year-to-date periods of $295 million and $987 million, respectively, and other special items of $224 million and $800 million in the current quarter and year-to-date periods, respectively. Other special items are primarily comprised of asset impairment charges.

~~Consolidated Net Income~~

The significant items impacting net income in the third quarter of 2002 and nine months ended September 30, 2002 compared to the similar periods of 2001 include the impact, after taxes and minority interest, of changes in revenues and operating expenses previously described and special items excluded from operating income. These special items recorded during the current quarter include tax benefits of $983 million pertaining to current and prior year investment impairments and an after-tax gain on the sale of an international investment of $229 million, partially offset by an after-tax loss on an international investment of $74 million. The year-to-date period ended September 30, 2002 also includes investment-related charges recorded in Income (Loss) from Unconsolidated Businesses of $5,246 million ($4,993 million after-tax) compared to similar charges in the 2001 period of $3,913 million ($2,926 million after-tax). In addition, the nine-month period ended September 30, 2002 includes an after-tax chargeaccounting change of $496 million ~~associated with the cumulative effect~~after-tax (or $.18 per diluted share).

Segment Results of adopting SFAS No. 142. The similar period of 2001 includes an after-tax charge of $182 million associated with the cumulative effect of adopting new accounting for derivative financial instruments. These higher charges in the first nine months of 2002 are partially offset by lower after-tax unfavorable mark-to-market adjustments related to financial instruments of $136 million compared to the similar period of 2001.

~~Segment Results of~~ Operations

We have four reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments are Domestic Telecom, Domestic Wireless, ~~International~~Information Services and ~~Information Services.~~International. You can find additional information about our segments in Note 11 to the condensed consolidated financial statements.

We measure and evaluate our reportable segments based on segment income. This segment income excludes unallocated corporate expenses and other adjustments arising during each period. The other adjustments include transactions that the chief operating decision makers exclude in assessing business unit performance due primarily to their nonrecurring and/or non-operational nature. Although such transactions are excluded from business segment results, they are included in reported consolidated earnings. We previously highlighted the more significant of these transactions in the “Consolidated Results of Operations” section. Gains and losses that are not individually significant are included in all segment results, since these items are included in the chief operating decision makers’ assessment of unit performance. These are mostly contained in ~~International~~Information Services and ~~Information Services~~International since they actively manage investment portfolios.

~~Domestic Telecom~~

Effective January 1, 2003, our Global Solutions Inc. subsidiary was transferred from our International segment to, and consolidated with, our Domestic Telecom segment. Prior year’s segment results of operations have been reclassified to reflect the transfer to enhance comparability. The transfer of Global Solutions’ revenues and costs of operations will not be significant to the results of operations of Domestic Telecom or International.

Domestic Telecom

Domestic Telecom provides local telephone services, including voice and data transport, enhanced and custom calling features, network access, directory assistance, private lines and public telephones in 29 states and the District of Columbia. As discussed earlier under “Consolidated Results of Operations,” in the third quarter of 2002 we ~~recently~~ sold wireline properties representing approximately 1.27 million access lines or 2% of the total Domestic Telecom switched access lines in service. For comparability purposes, the results of operations ~~shown~~discussed in ~~the tables below~~this section exclude the properties that have been sold. This segment also provides long distance services, customer premises equipment distribution, data solutions and systems integration, billing and collections, Internet access services and inventory management services.

Operating Revenues

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Local services $ 5,138 $ 5,238 (1.9 )% $ 15,365 $ 16,161 (4.9 )%
Network access services 3,278 3,281 (.1 ) 9,954 9,758 2.0
Long distance services 853 784 8.8 2,393 2,286 4.7
Other services 961 1,119 (14.1 ) 2,973 3,580 (17.0 )

$ 10,230 $ 10,422 (1.8 ) $ 30,685 $ 31,785 (3.5 )


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Local services	$	4,900	$	5,116		(4.2	)%
Network access services		3,324		3,379		(1.6	)
Long distance services		881		771		14.3
Other services		836		985		(15.1	)

	$	9,941	$	10,251		(3.0	)

Local Services

Local service revenues are earned by our telephone operations from the provision of local exchange, local private line, wire maintenance, voice messaging and value-added services. Value-added services are a family of services that expand the utilization of the network, including products such as Caller ID, Call Waiting and Return Call. The

provision of local exchange services not only includes retail revenue but also includes local wholesale revenues from ~~unbundled network elements (UNEs),~~UNEs, interconnection revenues from competitive local exchange carriers (CLECs), wireless interconnection revenues and some data transport revenues.

The decline in local service revenues of ~~$100~~$216 million, or ~~1.9%, in the third quarter of 2002 and $796 million, or 4.9%, in the nine months of 2002~~4.2% was ~~largely~~ due to lower demand and usage of our basic local wireline ~~services~~services. The effects of mandated price reductions on UNEs, technology substitution and ~~mandated intrastate price reductions.~~the lagging economy largely drove the decline in local service revenue growth. Our switched access lines in service declined ~~3.6%~~3.8% from September 30, 2001, primarily reflecting the impact of the economic slowdown and competition for some local services. Technology substitution has also affected local service revenue growth, as indicated by lower demand for residentiala year ago, including a decline in business access lines of ~~2.4%~~5.0% and a decline in residence access lines of 3.0%. Increased competition and technology substitution from ~~a year ago. A primary contributor to~~wireless services are driving the decline in residential access lines, while the business access line decline is ~~negative growth~~being affected largely by the soft economy. Regulatory pricing rules for UNEs are shifting the mix of access lines from retail to wholesale, resulting in ~~additional~~more competition for local exchange services. During the first quarter of 2003, we added 386,000 UNE platform lines, ~~with second line penetration at 19% at September 30, 2002,~~bringing total UNE platform provisioned lines to approximately 3.6 million, compared to ~~20% at the similar period last year. At the same time, business access~~2.3 million UNE platform lines ~~have declined 5.4% from~~ a year ~~ago, primarily reflecting the continued weakness in the economy.~~ago.

These factors were partially offset by higher payments received from CLECs for interconnection of their networks with our network and by increased sales of packaged wireline ~~services. Sales of packages of wireline~~ services ~~increased by more than 25% year-over-year~~ as a result of ~~recently introduced and~~ expanded new products and pricing plans. ~~More than 19%~~In the first quarter of 2003, we launched a new service bundle which includes unlimited local, regional and domestic long distance calling in eight key markets of our ~~consumer customer base subscribes to a package. Sales~~region, covering nearly 60% of our new “Veriations” package, which combines core services, long distance, wireless and Internet access in a discounted bundle on one bill, continue to exceed expectations, with more than 250,000 packages sold throughfootprint by the end of the ~~third~~first quarter ~~of 2002. Further, our~~2003. These plans can be expanded to add digital subscriber line (DSL) or dial-up Internet access and/or wireless services at a discount. Our ONE-BILL service, ~~has been completed~~which provides Verizon local, long distance and wireless charges on a single monthly bill, is also available in ~~all~~most states ~~in the former Bell Atlantic territory and the roll-out continues nationwide.~~

where Verizon provides wireline services.

Network Access Services

Network access services revenues are earned from end-user subscribers and long distance and other competing carriers who use our local exchange facilities to provide usage services to their customers. Switched access revenues are derived from fixed and usage-based charges paid by carriers for access to our local network. Special access revenues originate from carriers and end-users that buy dedicated local exchange capacity to support their private networks. End-user access revenues are earned from our customers and from resellers who purchase dial-tone ~~services.~~services, including DSL.

Our network access revenues declined $3by $55 million, or ~~0.1%, in the third quarter of 2002 and increased $196 million, or 2.0%,~~1.6% in the first ~~nine months~~quarter of ~~2002. Access revenues in both periods in~~2003. This decrease was mainly attributable to declining switched MOUs and price reductions associated with federal and state price cap filings and other regulatory decisions. Switched MOUs declined by 7.4% from March 31, 2002, ~~included~~reflecting the impact of the soft economy and wireless substitution.

These factors were partially offset by higher customer demand for data transport services (primarily special access services and DSL) that grew ~~6.7% and 10.0%~~1.2% in the ~~third quarter and~~ first ~~nine~~three months of ~~2002, respectively, over~~2003, compared to the ~~comparable periods in 2001.~~first quarter of 2002. Special access revenue growth reflects ~~strong~~continuing demand in the business market for high-capacity, high-speed digital services,. offset by lessening demand for older, low-speed data products and services. Voice-grade equivalents (switched access lines and data circuits) grew ~~6.7% from September 30, 2001~~3.9% in the first quarter of 2003, compared to the similar period in 2002, as ~~more~~ customers chose more high-capacity digital services. We added ~~155,000~~160,000 new DSL lines in the ~~third~~first quarter of ~~2002 and 452,000 lines year-to-date,~~2003, for a total of ~~1.64~~1.8 million lines ~~in service~~ at ~~September 30, 2002, a 70% year-over-year increase. At the same time, customer service levels continue to show improvement through a reduction in the~~March 31, 2003. Currently, 63% of our total access lines qualify for DSL ~~order provisioning interval from more than fifteen days a year ago to five days by the third quarter of 2002, and we have nearly reached a 100% self installation rate by our customers.~~

Volume-related growth was more than offset in the current quarter and partially offset year-to-date by price reductions associated with federal and state price cap filings and other regulatory decisions and by one-time billing adjustments. Revenue growth in both periods of 2002 was also negatively affected by the slowing economy, as reflected by declines in minutes of use from carriers and CLECs of 8.1% in the third quarter of 2002 and 7.8% year-to-date from the similar periods last year.

WorldCom Inc., including its affiliates, purchases dedicated local exchange capacity from us to support its private networks and we also charge WorldCom for access to our local network. In addition, we sell local wholesale interconnection services and provide billing and collection services to WorldCom. We purchase long distance and related services from WorldCom. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection. During the third quarter of 2002, we recorded revenues earned from the provision of primarily network access services to WorldCom of approximately $520 million. If WorldCom terminates contracts with us for the provision of services, our operating revenues would be lower in future periods. Lower revenues as a result of canceling contracts for the provision of services could be partially offset, in some cases, by the migration of customers on the terminated facilities to Verizon or other carriers who purchase capacity and/or interconnection services from Verizon. At September 30, 2002, accounts receivable from WorldCom, net of a provision for uncollectibles, was approximately $150 million. We continue to closely monitor our collections on WorldCom account balances. WorldCom is current with respect to its post-bankruptcy obligations. We believe we are adequately reserved for the potential risk of non-payment of pre-bankruptcy receivables from WorldCom.service.

Long Distance Services

Long distance service revenues include both intraLATA toll services and interLATA long distance voice and data services.

Long distance service revenues increased ~~$69~~$110 million, or ~~8.8%, in the third quarter of 2002 and $107 million, or 4.7%,~~14.3% in the first ~~nine months~~quarter of ~~2002,~~2003, primarily as a result of ~~revenue~~subscriber growth from our interLATA long distance ~~services offered throughout~~services. In the region. We now offer long distance service in 47 states and to more than 84% of our local telephone customers across the country. Nearly 50% of our long distance customers come from states where service was most recently introduced — New York, Massachusetts, Pennsylvania, Connecticut, Rhode Island, Vermont, Maine and New Jersey. We added 804,000 new long distance customers in the thirdfirst quarter of ~~2002 and 2.4 million customers in the first nine months of 2002. At September 30, 2002,~~2003, we had a total of 9.8 million long distance customers nationwide, representing an increase of 3.0 million long distance customers year-over-year or nearly 44% customer growth and 28% revenue growth from the similar period last year. In September 2002, we received final Federal Communications Commission (FCC) approval to ~~sell~~offer long distance services in ~~New Hampshire and Delaware and~~the remaining three jurisdictions. We now can offer long distance services throughout the United States, capping a seven-year effort. We began offering long distance services in Maryland and Washington, D.C. in April 2003. We plan to launch long distance service in ~~those states~~West Virginia in ~~October 2002. On October 30, 2002, we received FCC approval~~May 2003. Our authority in Alaska is limited to ~~sell~~interstate and international services. We added 710,000 long distance lines in ~~Virginia, and expect to begin offering service~~first quarter 2003, for a total of 13.2 million long distance lines nationwide, representing a 36.5% increase in ~~early November 2002. We are targeting completion of the FCC filing process in all former Bell Atlantic jurisdictions by year-end.~~long distance lines from a year ago.

2217

~~This~~Long distance service revenue growth in the first three months of 2003 was partially offset by the effects of competition and toll calling discount packages and product bundling offers of our intraLATA toll services. However, we are experiencing net win-backs of customers for intraLATA toll services in the states where interLATA long distance service has been introduced. Technology substitution and lower access line growth due to the ~~slowing~~soft economy also affected long distance ~~services~~service revenue growth.

Other Services

Our other services include such services as billing and collections for long distance carriers, public (coin) telephone and customer premises equipment ~~(CPE)~~ and supply sales. Other services revenues also include services provided by our non-regulated subsidiaries such as inventory management and purchasing, and data solutions and systems integration businesses.

~~Revenues~~During the first three months of 2003, revenues from other services declined ~~$158~~by $149 million, or ~~14.1%, in the third quarter of 2002 and $607 million, or 17.0%, in the first nine months of 2002.~~15.1%. This decline was substantially due to lower ~~CPE~~customer premises equipment and supply sales to some major customers, lower volumes at some of our non-regulated businesses due to the ~~slowing~~lagging economy and a decline in public telephone revenues as more customers substituted wireless communications for pay telephone services.

Operating Expenses

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Operations and support $ 5,782 $ 5,979 (3.3 )% $ 16,791 $ 17,671 (5.0 )%
Depreciation and amortization 2,316 2,332 (.7 ) 7,074 6,875 2.9

$ 8,098 $ 8,311 (2.6 ) $ 23,865 $ 24,546 (2.8 )


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Cost of services and sales	$	3,523	$	3,352		5.1	%
Selling, general and administrative expense		2,000		2,172		(7.9	)
Depreciation and amortization expense		2,331		2,371		(1.7	)

	$	7,854	$	7,895		(.5	)

~~Operations~~Cost of Services and ~~Support~~Sales

~~Operations~~Cost of services and sales includes the following costs directly attributable to a service or product: salaries and wages, benefits, materials and supplies, contracted services, network access and transport costs, customer provisioning costs, computer systems support ~~expenses,~~and cost of products sold. Aggregate customer care costs, which ~~consist~~include billing and service provisioning, are allocated between cost of ~~employee costs~~services and ~~other operating expenses, decreased by $197~~sales and selling, general and administrative expense.

The increase in cost of services and sales of $171 million, or ~~3.3%, in the third quarter of 2002 and $880 million, or 5.0%,~~5.1% in the first ~~nine months~~quarter of 2003 was mainly driven by lower net pension and other postretirement benefit income. As of December 31, 2002, ~~principally due~~Verizon changed key employee benefit plan assumptions in response to lower costs at our domestic telephone operations. These reductions were attributable to reduced spending for materials and contracted services, lower overtime for repair and maintenance activity principally as a result of reduced volumes at our dispatch and call centers and lower employee costs associated with declining workforce levels. We have reduced our full-time headcount by 19,700 employees, or 10.5% from a year ago and 10,200 employees, or 5.7% since year-end 2001. We have reduced the installation and repair overtime hours per employee per week by 13.7% from a year ago. Further, service restoration costs related to the events of September 11, 2001 were lowercurrent conditions in the ~~third quarter~~securities markets and medical and prescription drug cost trends. The expected rate of return on pension plan assets has been changed from 9.25% in 2002 to 8.50% in 2003 and ~~year-to-date compared to similar periods in 2001. Lower cost~~the expected rate of sales at our CPE and supply business driven by declining business volumes also contributed to the cost reductions in both periods of 2002. The year-to-date period included favorable adjustments to ongoing expense estimates as a result of specific regulatory decisions in New York andreturn on other ~~states.~~

Operating costs have also decreased due to business integration activities and achievement of merger synergies. Many of our effective cost containment measures are reflected in improved productivity levels of 12.3% for installation and 9.5% for repair services, as compared to the third quarter of 2001. We have reduced rework service levels from a year ago by 9.9% for installation and 14.5% for repair, and repair dispatches have declined by more than 6.1% since the third quarter of 2001.

These cost reductions were partially offset by higher costs associated with our growth businesses such as data and long distance services. Increased costs associated with salary and wage increases for employees, higher employee medical costs and higher uncollectible accounts receivable for CLECs and other wholesale customers further offset cost reductions in both periods of 2002. Pension income, net of postretirement benefit ~~costs, was $500 million~~plan assets has been changed from 9.10% in 2002 to 8.50% in 2003. The discount rate assumption has been lowered from 7.25% in 2002 to 6.75% in 2003 and ~~$1,157 million for~~ the ~~third quarter and year-to-date~~medical cost trend rate assumption has been increased from 10.00% in 2002 ~~respectively, compared~~ to ~~$525 million and $1,287 million for~~11.00% in 2003. The overall impact of these assumption changes, combined with the ~~third quarter and year-to-date 2001, respectively. We expect that~~impact of lower than expected actual asset returns over the past three years, reduced pension income, net of postretirement benefit ~~costs, will continue to be slightly lower~~expenses, by approximately $232 million in the ~~current year,~~first quarter of 2003 (primarily in cost of services and sales) compared to ~~2001.~~the first quarter of 2002. In addition, the first quarter of 2003 included approximately $50 million of land and building costs primarily related to snow removal, energy, and a façade inspection and repair program.

~~Depreciation~~These cost increases were partially offset by lower access and ~~Amortization~~

~~The change in depreciation and amortization expense~~transport costs primarily due to a favorable adjustment of approximately $80 million recorded in the first quarter of 2003. As part of our ongoing review of local interconnection expense charged by CLECs, we determined that selected charges from CLECs, previously recorded as expense but not paid, were no longer required and ~~year-to-date periods~~accordingly we adjusted our first quarter 2003 operating expenses. In addition, effective in 2003, we recognize as local interconnection expense no more than the amount payable under the April 27, 2001 FCC order addressing intercarrier compensation for dial-up connections for Internet-bound traffic. Services and sales cost increases in the first quarter of ~~2002 included~~2003 were also offset, in part, by our disciplined expense controls, including reduced spending for contracted services and materials and supplies, and the effect of ~~growth in depreciable telephone plant and increased software amortization costs. These factors were more than offset in~~work force reductions of approximately 18,000 employees or 10.2% over the ~~third quarter of 2002 and partially offset year-to-date by the effect of lower rates of depreciation.~~past year.

2318

See “Other Factors That May Affect Future Results — Compensation for Internet Traffic” for additional information on FCC rulemakings and other court decisions addressing intercarrier compensation for dial-up connections for Internet-bound traffic.

Selling, General and Administrative Expense

Selling, general and administrative expense includes salaries and wages and benefits not directly attributable to a service or product, bad debt charges, taxes other than income, advertising and sales commission costs, customer billing, call center and information technology costs, professional service fees and rent for administrative space.

The decline in selling, general and administrative expense of $172 million, or 7.9% was primarily driven by effective cost containment measures and timing of expenditures. Bad debt expense was lower in the first three months of 2003 as a result of improved collections, customer deposit requirements and lower accounts receivable. Taxes other than income also declined due to lower gross receipts and property taxes in the first quarter of 2003, compared to the similar period in 2002.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased by $40 million, or 1.7% in the first quarter of 2003. This expense decrease was principally due to the favorable impact of adopting SFAS No. 143, effective January 1, 2003. Under SFAS No. 143, we began expensing the costs of removal in excess of salvage for outside plant assets as incurred. Previously, we had included costs of removal for these assets in our depreciation rates.

Segment Income

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Segment Income $ 1,036 $ 1,052 (1.5 )% $ 3,334 $ 3,605 (7.5 )%


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Segment Income	$	1,007	$	1,157		(13.0	)%

Segment income decreased by ~~$16~~$150 million, or ~~1.5%,~~13.0% in the ~~third~~first quarter of ~~2002 and $271 million, or 7.5%, year-to-date~~2003, compared to the ~~similar periods last year~~first quarter of 2002, primarily as a result of the after-tax impact of operating revenues and operating expenses described above.

~~Domestic Wireless~~

Domestic Wireless

Our Domestic Wireless segment provides wireless voice and data services, paging services and equipment sales. This segment primarily represents the operations of the Verizon Wireless joint venture.

Operating Revenues

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Wireless sales and services $ 4,982 $ 4,521 10.2 % $ 14,094 $ 12,950 8.8 %


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Wireless sales and services	$	5,086	$	4,430		14.8	%

Revenues earned from our consolidated wireless segment grew by ~~$461~~$656 million, or ~~10.2%,~~14.8% in the ~~third~~first quarter of ~~2002 and $1,144 million, or 8.8%, for the nine months ended September 30, 2002~~2003 compared to the similar ~~periods~~period in ~~2001.~~2002. Service revenue of $4,660 million grew by $608 million, or 15.0% in the first quarter of 2003 compared to the similar period in 2002. This increase was primarily due to a ~~9.9%~~12.6% increase in subscribers ~~since September 30, 2001.~~as well as an increase in average service revenue per subscriber per month of 3.0% to $47.

~~Our Domestic Wireless segment~~We ended the ~~third~~first quarter of ~~2002~~2003 with ~~31.5~~more than 33.3 million subscribers, compared to ~~28.7~~29.6 million subscribers at the end of the ~~third~~first quarter of ~~2001,~~2002, an increase of ~~9.9%~~12.6%. Approximately ~~26.8~~29.7 million, or ~~more than 85%,~~89% of these customers subscribe to ~~CDMA~~ digital service, compared to ~~69%~~81% in the ~~third~~first quarter of ~~2001.~~ 2002. The overall composition of our customer base as of March 31, 2003 was 90% retail postpaid, 6% retail prepaid and 4% resellers. In addition, our average monthly churn rate, the rate at which customers disconnect service, was 2.1%, compared to 2.6% in the first quarter of 2002.

Approximately ~~1.1 million net retail~~827,000 customers were added through internal growth during the ~~third~~first quarter of ~~2002, partially offset by a net reduction of wholesale customers of~~2003, including approximately ~~0.3 million driven primarily by subscribers related to WorldCom. As of September 30, 2002, Verizon Wireless no longer has any WorldCom subscribers in its customer base. In August 2002, we~~72,000 through our reseller channel. We added approximately ~~0.4 million~~6,000 subscribers ~~as a result of~~during the acquisition of Price Communications Corp.’s (Price) wireless operations (see “Other Factors That May Affect Future Results — Recent Developments — Price Transaction”). Overall, total customers including acquisitions increased by 1.2 million in the thirdfirst quarter of 2002. Total churn, including retail and wholesale, increased slightly to 2.3% in the third quarter of 2002 and decreased to 2.4% for the nine months ended September 30, 2002, compared to 2.2% in the third quarter of 2001 and 2.5% in the nine months ended September 30, 2001.2003 through property acquisitions.

Average service revenue per subscriber per month increased ~~0.4%~~3.0% to ~~almost $50~~$47 for the ~~third~~first quarter of ~~2002~~2003 compared to the ~~third~~first quarter ~~of 2001,~~2002, primarily due to ~~our America’s Choice~~higher access price plans. Approximately 60% of new contract customers chose the America’s Choice plans since their launch in February 2002 and 19% of America’s Choice subscribers are on price plans with monthly access of $55 and above.plan offerings. In addition, retail customers, who generally ~~contribute~~have higher service revenue ~~now comprise~~than wholesale customers, comprised approximately ~~97%~~96% of the subscriber base at the end of the first quarter of 2003, compared to ~~93% in~~94% at the ~~third~~end of the first quarter of ~~2001. The overall composition~~2002. This increase was partially offset by decreased roaming revenue as a result of rate reductions with third-party carriers and decreased long distance revenue due to bundled pricing.

Operating Expenses


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Cost of services and sales	$	1,439	$	1,246		15.5	%
Selling, general and administrative expense		1,866		1,629		14.5
Depreciation and amortization expense		907		781		16.1

	$	4,212	$	3,656		15.2

Cost of Services and Sales

Cost of services and sales, which are costs to operate the ~~customer base is 91% contract retail customers, 6% retail prepaid~~wireless network as well as costs of roaming, long distance and ~~3% resellers. Average service revenue per subscriber per month decreased~~equipment sales, grew by ~~0.6% to approximately $48~~$193 million, or 15.5% for the ~~nine months ended September 30, 2002~~first quarter of 2003 compared to the similar period in ~~2001. This decrease~~2002. The increase was ~~mainly attributable~~primarily due to ~~decreased~~increased direct telecom charges caused by increased minutes of use on the wireless network for the first quarter 2003 compared to the similar period in 2002, partially offset by lower roaming, local interconnection and long distance ~~revenues for the third quarter~~rates. Cost of ~~2002 and the nine months ended September 30, 2002 compared to similar periods in 2001.~~

~~The Express Network, which was launched~~equipment sales grew by 26% in the first quarter of 2002 and is based on next generation 1XRTT technology, now covers a population of 170 million or approximately 75% of Verizon Wireless’s network in third quarter of 2002 compared to a population of 145 million, or approximately 65% of the Domestic Wireless network in second quarter 2002.

~~Operating Expenses~~

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Operations and support $ 3,184 $ 2,890 10.2 % $ 9,049 $ 8,344 8.4 %
Depreciation and amortization 828 943 (12.2 ) 2,394 2,749 (12.9 )

$ 4,012 $ 3,833 4.7 $ 11,443 $ 11,093 3.2

~~Operations and Support~~

Operations and support expenses, which represent employee costs and other operating expenses, increased by $294 million, or 10.2%, in the third quarter of 2002 and $705 million, or 8.4%, for the nine months ended September 30, 20022003 compared to the similar ~~periods~~period in ~~2001.~~2002. The increase was primarily due to an increase in handsets sold, due to growth in gross activations and an increase in equipment upgrades for the first quarter 2003 compared to the similar period in 2002.

Selling, General and Administrative Expense

Selling, general and administrative expenses grew by $237 million, or 14.5% in the first quarter of 2003 compared to the similar period in 2002. This increase was primarily due to ~~increased salary~~a $95 million aggregate increase in sales commissions in our direct and ~~wage expense~~indirect channels, for the first quarter 2003 compared to the similar period in ~~customer care and sales channels and advertising and selling expenses~~2002, primarily related to an increase in gross ~~retail customer~~subscriber additions in the ~~2002 periods~~first quarter 2003 compared to the first quarter 2002. Also contributing to the increase was a $58 million increase in salary and wage expense for the first quarter 2003 compared to the similar ~~periods of 2001.~~period in 2002.

Depreciation and Amortization Expense

Depreciation and amortization ~~decreased~~increased by ~~$115~~$126 million, or ~~12.2%,~~16.1% in the ~~third~~first quarter of ~~2002 and by $355 million, or 12.9%, for the nine months ended September 30, 2002~~2003 compared to the similar ~~periods~~period in ~~2001. The decrease~~2002. This increase was primarily ~~attributable~~due to a reduction of amortization expense from the adoption of SFAS No. 142, effective January 1, 2002, which requires that goodwill and indefinite-lived intangible assets no longer be amortized. This decrease was partially offset by increased depreciation expense related to the increase in depreciable ~~assets related to an increased asset base.~~assets.

Segment Income

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Segment Income $ 268 $ 182 47.3 % $ 705 $ 431 63.6 %


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Segment Income	$	218	$	197		10.7	%

Segment income increased by ~~$86~~$21 million, or ~~47.3%,~~10.7% in the ~~third~~first quarter of 2003 compared to the first quarter of 2002 ~~and by $274 million, or 63.6%, for the nine months ended September 30, 2002 when compared to the similar periods in 2001. The increase is~~ primarily ~~due to the~~as a result of the after-tax impact of operating revenues and operating expenses described above, partially offset by an increase in minority interest.

The significant increase in minority interest in the first quarter of ~~$111~~2003 of $47 million, or ~~42.4%~~17.3% to ~~$373~~$319 million ~~in third quarter of 2002 and $330 million, or 50.8% to $979 million for the nine months ended September 30, 2002~~ was principally due to the increase in the earnings of the Domestic Wireless segment, which has a significant minority interest attributable to ~~Vodafone Group plc (Vodafone).~~Vodafone.

~~International~~

Information Services

Our Information Services segment consists of our domestic and international publishing businesses, including print SuperPages® and electronic SuperPages.com® directories, as well as includes website creation and other electronic commerce services. Our directory business uses the publication date method for recognizing revenues. Under that

method, costs and advertising revenues associated with the publication of a directory are recognized when the directory is distributed. This segment has operations principally in North America, Europe and Latin America.

Operating Revenues


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Operating Revenues	$	700	$	803		(12.8	)%

Operating revenues from our Information Services segment decreased $103 million, or 12.8% in the first quarter of 2003 compared to the similar period in 2002. This decrease was primarily due to the impact of changes in timing of publication dates and lower book extension revenues. Verizon’s domestic Internet directory service, SuperPages.com®, continued to achieve strong growth as demonstrated by a 45.1% increase in revenue and a 33.4% increase in searches over the first quarter of 2002.

Operating Expenses


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Cost of services and sales	$	121	$	137		(11.7	)%
Selling, general and administrative expense		288		297		(3.0	)
Depreciation and amortization expense		21		15		40.0

	$	430	$	449		(4.2	)

Cost of Services and Sales

Cost of services and sales decreased $16 million, or 11.7% in the first quarter of 2003. This first quarter 2003 decrease was primarily due to lower costs associated with the changes in publication dates.

Selling, General and Administrative Expense

Selling, general and administrative expenses declined $9 million, or 3.0% in the first quarter of 2003. This first quarter 2003 decrease was primarily due to lower costs associated with the changes in publication dates.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $6 million, or 40% over the first quarter of 2002, primarily due to amortization of new systems placed into service late in 2002.

Segment Income


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Segment Income	$	157	$	213		(26.3	)%

Segment income decreased $56 million, or 26.3% in the first quarter 2003 compared to the first quarter of 2002 primarily as a result of the after-tax impact of the operating revenues and operating expenses described above.

International

Our International segment includes international wireline and wireless telecommunication operations and investments in the Americas, Europe, Asia and the Pacific. Our consolidated international investments as of ~~September 30, 2002~~March 31, 2003 included ~~Grupo~~ Iusacell ~~S.A. de C.V. (Iusacell)~~ in Mexico, CODETEL, C. por A. (Codetel) in the Dominican Republic, ~~TELPRI~~Telecomunicaciones de Puerto Rico, Inc. in Puerto Rico and Micronesian Telecommunications Corporation in the Northern Mariana ~~Islands and Global Solutions Inc. (GSI).~~Islands. Those investments in which we have less than a controlling interest are accounted for by either the cost or equity method.

~~On January 25, 2002, we exercised our option to purchase an additional 12%~~The total number of TELPRI common stock from the government of Puerto Rico. We now hold 52% of TELPRI stock, up from 40% held at December 31, 2001. As a result of gaining control over TELPRI, we changed the accounting for this investment from the equity method to full consolidation, effective January 1, 2002. Accordingly, TELPRI’s net results are reported as a component of Income (Loss) from Unconsolidated Businesses for the three and nine months ended September 30, 2001, while 2002 results of operations are included in consolidated revenues and expenseswireless subscribers served by Verizon’s International investments in the ~~tables below.~~first quarter of 2003 passed 33 million, an increase of more than 3 million compared to the similar period in 2002.

On March 28, 2002, we transferred 5.5 million of our shares in CTI to an indirectly wholly-owned subsidiary of Verizon and subsequently transferred ownership of that subsidiary to a newly created trust for CTI employees. This decreased our ownership percentage in CTI from 65% to 48%. We also reduced our representation on CTI’s Board of Directors from five of nine members to four of nine (subsequently reduced to one of five members). As a result

2521

of these actions that surrender control of CTI, we changed our method of accounting for this investment from consolidation to the equity method. On June 3, 2002, as a result of an option exercised by Telfone (BVI) Limited (Telfone), a CTI shareholder, Verizon acquired approximately 5.3 million additional CTI shares. Also on June 3, 2002, we transferred ownership of a wholly owned subsidiary of Verizon that held 5.4 million CTI shares to a second independent trust leaving us with an approximately 48% non-controlling interest in CTI. In addition, during the first quarter of 2002, we wrote our remaining investment in CTI, including those shares we were contractually committed to purchase under the Telfone option, down to zero (see “Special Items”). Since we have no other future commitments or plans to fund CTI’s operations and we have written our investment down to zero, in accordance with the accounting rules for equity method investments, we are no longer recording operating income or losses related to CTI’s operations. CTI’s results of operations are reported in revenues and expenses for the three and nine months ended September 30, 2001, while 2002 revenues and expenses are not included in the tables below.

Operating Revenues

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Operating revenues $ 726 $ 597 21.6 % $ 2,231 $ 1,722 29.6 %


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Operating Revenues	$	621	$	708		(12.3	)%

Revenues generated by our international businesses ~~grew by $129~~decreased $87 million, or ~~21.6%, in the third quarter of 2002 and $509 million, or 29.6%,~~12.3% in the first ~~nine months~~quarter of ~~2002~~2003 compared to the similar ~~periods~~period in ~~2001.~~2002. This ~~growth~~decrease is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first nine months of 2001 to be comparable with 2002, revenues generated by our international businesses declined by $78 million, or 9.7%,declining foreign exchange rates in the ~~third quarter of 2002~~Dominican Republic and $128 million, or 5.4%, in the first nine months of 2002 compared to the similar periods in 2001. These decreases in revenues are due to the weak economies and increased competition in our Latin America marketsMexico as well as reduced software sales. ~~These decreases were offset in part by higher revenues generated by the GSI network, which began its commercial operations~~

Operating Expenses


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Cost of services and sales	$	185	$	215		(14.0	)%
Selling, general and administrative expense		168		233		(27.9	)
Depreciation and amortization expense		105		130		(19.2	)

	$	458	$	578		(20.8	)

Cost of Services and Sales

Cost of services and sales decreased $30 million, or 14.0% in the first quarter of ~~2001.~~

~~Operating Expenses~~

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Operations and support $ 393 $ 387 1.6 % $ 1,365 $ 1,203 13.5 %
Depreciation and amortization 132 85 55.3 405 304 33.2

$ 525 $ 472 11.2 $ 1,770 $ 1,507 17.5

~~Operations and Support~~

Operations and support expenses, which include employee costs and other operating expenses, increased by $6 million, or 1.6%, in the third quarter of 2002 and $162 million, or 13.5%, in the first nine months of 20022003 compared to the similar ~~periods in 2001. These increases are primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI~~period in 2002. Adjusting the quarter and first nine months of 2001 to be comparable with 2002, operations and support expenses decreased $104 million, or 20.9%, in the third quarter of 2002 and $112 million, or 7.6%, in the first nine months of 2002 compared to the similar periods in 2001. These decreases reflectThis decrease reflects lower variable costs associated with reduced sales volumes ~~in Latin America~~ and ~~credits related to a one-time contractual settlement of $66~~declining foreign exchange rates.

Selling, General and Administrative Expense

Selling, general and administrative expenses decreased $65 million, or 27.9% in the ~~third~~first quarter of ~~2002, offset~~2003 compared to the similar period in ~~part by higher variable costs associated~~2002. This decrease is the result of cost reduction programs, the replacement of a revenue-based operating tax in the Dominican Republic with ~~the increased revenues~~an income tax, reduction of losses previously recognized on sales of fixed assets and ~~costs of GSI’s operations.~~declining foreign exchange rates.

Depreciation and Amortization Expense

Depreciation and amortization expense ~~increased by $47~~decreased $25 million, or ~~55.3%, in the third quarter of 2002 and $101 million, or 33.2%,~~19.2% in the first nine months of 2002 compared to the similar periods in 2001. This growth is primarily due to the consolidation of TELPRI partially offset by the deconsolidation of CTI in 2002. Adjusting the third quarter and first nine months of 2001 to be comparable with 2002, depreciation and amortization expense increased $20 million, or 17.9%, for the third quarter of 2002 and $10 million, or 2.5%, for the first nine months of 2002 compared to the similar periods in 2001. These increases were attributable to the ongoing network capital expenditures necessary to service the increased subscriber base, partially offset by the January 1, 2002 cessation of the amortization of goodwill and intangible assets with indefinite lives as required by SFAS No. 142.

~~Segment Income~~

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Segment Income $ 312 $ 238 31.1 % $ 779 $ 691 12.7 %

~~Segment income increased by $74 million, or 31.1%, in the third quarter of 2002~~2003 compared to the similar period in ~~2001.~~2002. This decrease is due to declining foreign exchange rates, depreciation life adjustments, and the adoption of SFAS No. 143, offset in part by increased depreciation generated from ongoing network capital expenditures.

Segment Income


(Dollars in Millions)	Three Months Ended March 31,
	2003		2002		% Change

Segment Income	$	257	$	221		16.3	%

Segment income increased by $36 million, or 16.3% in the first quarter of 2003 compared to the similar period in 2002. The 2003 increase isin segment income was primarily the result of an increase in income from unconsolidated businesses and the after-tax impact of operating revenues and operating expenses described above, ~~an increase in income from unconsolidated businesses and~~offset by the impact on Iusacell of fluctuations of the Mexican peso of $36 million, before minority interest expense of $23 million. The third quarter of 2002 also includes a gain on the sale of a small equity investment. Segment income increased by $88 million, or 12.7%, in the first nine months of 2002 compared to the similar period in 2001. The increase is primarily the result of the after-tax impact of operating revenues and operating expenses described above, partially offset by a decrease in income from unconsolidated businesses and the impact on Iusacell of fluctuations of the Mexican peso of $72$27 million, before minority interest benefit of $44 million. An after-tax gain on the sale of a portion of our interest in Taiwan Cellular Corporation (TCC) of $31.5 million was recorded in the second quarter of 2002, compared to an after-tax gain on the sale of our interest in QuebecTel in the second quarter of 2001 of $63.7$16 million.

Income from unconsolidated businesses increased by ~~$24~~$38 million, or ~~11.9%, for~~21.6% in the ~~third~~first quarter of ~~2002 and decreased by $8 million, or 1.2%, for the first nine months of 2002~~2003 compared to the similar ~~periods~~period in ~~2001. Adjusting the quarter and first nine months~~2002. This increase reflects continued operational growth of 2001 for the consolidation of TELPRI and the deconsolidation of CTI, income from unconsolidated businesses increased by $59 million, or 35.3%, for the third quarter of 2002 and $125 million, or 22.6%, for the first nine months of 2002 compared to the similar periods in 2001. The increases reflect the 2002 cessation of recording CTI’s operating losses, gains on sales ofVerizon’s equity investments, ~~described~~offset in ~~the preceding paragraph and the discontinuation of amortization of goodwill and intangible assets with indefinite lives of our equity investments, as required~~part by SFAS No. 142. Partially offsetting these increases was the impact of fluctuations of the Venezuelan bolivar on the results of Compañia Anónima Nacional Teléfonos de Venezuela (CANTV) in 2002 and the cessation of recording TCC equity income.unfavorable foreign currency impacts, predominantly at CANTV.

~~Information Services~~

Our Information Services segment consists of our domestic and international publishing businesses, including print and electronic directories and Internet-based shopping guides, as well as includes website creation and other electronic commerce services. This segment has operations principally in North America, Europe and Latin America.

~~Operating Revenues~~

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Operating revenues $ 1,174 $ 1,112 5.6 % $ 2,913 $ 2,885 1.0 %

Operating revenues from our Information Services segment increased by $62 million, or 5.6%, in the third quarter of 2002 and $28 million, or 1.0%, in the first nine months of 2002 compared to the similar periods in 2001. The quarter-to-date increase was primarily due to the impact of timing and extension of publications partially offset by a sales performance shortfall for the quarter due to the slowing economy and lower affiliated revenues. The year-to-date increase was primarily due to increased revenue from the 2001 acquisition of TELUS Corporation’s (TELUS) advertising services business in Canada and increased revenues from multi-product revenue growth, though this growth was limited due to the impacts of the slowing economy. These revenue increases were offset by the impact of timing and extension of publications and lower affiliated revenues. Verizon’s Internet directory service revenue grew 59.4% over third quarter 2001 as Information Services continues to be the dominant leader in online directory services.

~~Operating Expenses~~

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Operations and support $ 581 $ 485 19.8 % $ 1,492 $ 1,354 10.2 %
Depreciation and amortization 21 21 — 52 62 (16.1 )

$ 602 $ 506 19.0 $ 1,544 $ 1,416 9.0

2722

Total operating expenses for the third quarter of 2002 increased $96 million, or 19.0%, and $128 million, or 9.0%, in the first nine months of 2002 from the corresponding periods in 2001. The quarter-to-date increase was primarily due to higher costs associated with changes in publication dates mentioned above, uncollectible accounts receivable and timing of expenses. The year-to-date increase was primarily due to higher uncollectible accounts receivable, the timing of expenses in 2002 and a small asset sale gain recognized in 2001.

~~Segment Income~~

(Dollars in Millions) Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 % Change 2002 2001 % Change

Segment Income $ 347 $ 363 (4.4 )% $ 820 $ 873 (6.1 )%

Segment income decreased by $16 million, or 4.4%, in the third quarter of 2002 and $53 million, or 6.1%, in the first nine months of 2002 compared to the similar periods in 2001 primarily as a result of the after-tax impact of operating revenue and expense issues described above.

~~Special Items~~

Special items generally represent revenues and gains as well as expenses and losses that are nonrecurring and/or non-operational in nature. Several of these special items include impairment losses. These impairment losses were determined in accordance with our policy of comparing the fair value of the asset with its carrying value. The fair value is determined by quoted market prices, if available, or by estimates of future cash flows.

These special items are not considered in assessing operational performance, either at the segment level or for the consolidated company. However, they are included in our reported results. This section provides a detailed description of these special items.

~~Transition Costs~~

In connection with the Bell Atlantic Corporation—GTE Corporation merger and the formation of the wireless joint venture, we announced that we expect to incur a total of approximately $2 billion of transition costs. These costs are incurred to integrate systems, consolidate real estate and relocate employees. They also include approximately $500 million for advertising and other costs to establish the Verizon brand. Transition activities are expected to be complete by the end of 2002 and total between $2.1 billion and $2.2 billion. Transition costs incurred through the third quarter of 2002 total $2,025 million. Transition costs in the third quarter and for the first nine months of 2002 were $94 million and $292 million ($50 million and $159 million after taxes and minority interest, or $.02 and $.06 per diluted share), respectively. During the third quarter and for the first nine months of 2001, we incurred transition costs of $254 million and $696 million ($144 million and $394 million after taxes and minority interest, or $.05 and $.14 per diluted share), respectively.

~~Sales of Assets, Net~~

~~In October 2001~~,we agreed to sell all 675,000 of our switched access lines in Alabama and Missouri to CenturyTel Inc. (CenturyTel) and 600,000 of our switched access lines in Kentucky to ALLTEL Corporation (ALLTEL). During the third quarter of 2002, we completed the sales of these access lines for $4,059 million in cash proceeds ($191 million of which was received in 2001). We recorded a pretax gain of $2,527 million ($1,550 million after-tax, or $.56 per diluted share). The operating revenues of the access lines sold were $136 million and $244 million for the three months ended September 30, 2002 and 2001, respectively, and $623 million and $754 million for the nine months ended September 30, 2002 and 2001, respectively. Operating expenses of the access lines sold were $81 million and $82 million for the three months ended September 30, 2002 and 2001, respectively, and $241 million and $335 million for the nine months ended September 30, 2002 and 2001, respectively.

During the first quarter of 2002, we recorded a net pretax gain of $220 million ($116 million after-tax, or $.04 per diluted share), primarily resulting from a pretax gain on the sale of TSI Telecommunication Services Inc. (TSI) of $466 million ($275 million after-tax, or $.10 per diluted share), partially offset by an impairment charge in connection with our exit from the video business and other charges of $246 million ($159 million after-tax, or $.06 per diluted share).

Results for the nine months ended September 30, 2001 include a pretax gain of $80 million ($48 million after-tax, or $.02 per diluted share) recorded on the sale of the Cincinnati wireless market during the second quarter of 2001. In addition, during the second quarter of 2001, an agreement to sell the overlapping Chicago wireless market at a price lower than the net book value of the Chicago assets was executed. Consequently, we recorded an impairment charge of $75 million ($45 million after-tax, or $.02 per diluted share) related to the expected sale. The sale of the Chicago market closed in the fourth quarter of 2001.

~~Severance/Retirement Enhancement Costs and Settlement Gains~~

During the third quarter of 2002, we recorded a pretax charge of $295 million ($185 million after-tax, or $.07 per diluted share) related to settlement losses incurred in connection with employee separations announced earlier this year. SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” requires that settlement losses be recorded once prescribed payment thresholds have been reached.

During the second quarter of 2002, we recorded a special charge of $734 million ($475 million after taxes and minority interest, or $.17 per diluted share) primarily associated with employee severance costs and severance-related activities in connection with the voluntary and involuntary separation of approximately 8,000 employees.

~~We continually evaluate employee levels, and accordingly, may incur future severance costs.~~

~~Mark-to-Market Adjustment — Financial Instruments~~

During 2001, we began recording mark-to-market adjustments in earnings relating to some of our financial instruments in accordance with newly effective accounting rules on derivative financial instruments. For the three and nine months ended September 30, 2002, we recorded pretax losses on mark-to-market adjustments of $17 million ($17 million after-tax, or $.01 per diluted share) and $28 million ($28 million after-tax, or $.01 per diluted share), respectively. In the third quarter and the first nine months of 2001, we recorded pretax losses on mark-to-market adjustments of $13 million ($13 million after taxes and minority interest, or less than $.01 per diluted share) and $166 million ($164 million after taxes and minority interest, or $.06 per diluted share), respectively. The losses on mark-to-market adjustments in 2001 were primarily due to the change in the fair value of the Metromedia Fiber Network, Inc. (MFN) debt conversion option.

~~Investment-Related Charges~~

In the third quarter of 2002, we recorded a pretax loss of $101 million ($74 million after-tax, or $.03 per diluted share) to market value primarily related to our investment in Cable & Wireless plc (C&W), as a result of our decision to pursue selling this investment in the near future, which was sold in early November 2002.

During the second quarter of 2002, we recorded pretax losses of $3,558 million ($3,305 million after-tax, or $1.20 per diluted share), including a loss of $2,443 million ($2,443 million after-tax, or $.89 per diluted share) related to our interest in Genuity Inc. (Genuity) (see “Other Factors That May Affect Future Results — Genuity and Bell Atlantic—GTE Merger” for additional information); a loss of $580 million ($430 million after-tax, or $.16 per diluted share) to the market value of our investment in TELUS; a loss of $303 million ($201 million after-tax, or $.07 per diluted share) to the market value of our investment in C&W and a loss of $232 million ($231 million after-tax, or $.08 per diluted share) relating to several other investments. We determined that market value declines in these investments were considered other than temporary.

Results for the nine months ended September 30, 2002 also include the recognition of pretax losses totaling $2,146 million ($2,026 million after-tax, or $.74 per diluted share) recorded in the first quarter of 2002 relating to our investments in CANTV, MFN and CTI which are described below.

We recorded a pretax loss of $1,400 million ($1,400 million after-tax, or $.51 per diluted share) due to the other than temporary decline in the market value of our investment in CANTV. As a result of the political and economic instability in Venezuela, including the devaluation of the Venezuelan bolivar, and the related impact on CANTV’s future economic prospects, we no longer expected that the future undiscounted cash flows applicable to CANTV were sufficient to recover our investment. Accordingly, we wrote our investment down to market value as of March 31, 2002.

We recorded a pretax loss of $516 million ($436 million after-tax, or $.16 per diluted share) to market value primarily due to the other than temporary decline in the market value of our investment in MFN. During 2001, we wrote down our investment in MFN due to the declining market value of its stock. We wrote off our remaining investment and other financial statement exposure related to MFN in the first quarter of 2002 primarily as a result of its deteriorating financial condition and related defaults. In addition, we delivered to MFN a notice of termination of our fiber optic capacity purchase agreement.

We recorded a pretax loss of $230 million ($190 million after-tax, or $.07 per diluted share) to fair value due to the other than temporary decline in the fair value of our remaining investment in CTI. In 2001, we recorded an estimated loss of $637 million ($637 million after-tax, or $.23 per diluted share) to reflect the impact of the deteriorating Argentinean economy and devaluation of the Argentinean peso on CTI’s financial position. As a result of the first quarter 2002 and 2001 charges, our financial exposure related to our equity investment in CTI has been eliminated.

Results for the nine months ended September 30, 2001 include a pretax loss of $3,913 million ($2,926 million after-tax, or $1.07 diluted loss per share) recognized in the second quarter of 2001 primarily relating to our investments in C&W, NTL Incorporated (NTL) and MFN. We determined that market value declines in these investments were considered other than temporary.

As a result of capital gains and other income on access line sales and investment sales in 2002, as well as assessments and transactions related to several of the impaired investments during the third quarter of 2002, we recorded tax benefits in the third quarter of 2002 pertaining to current and prior year investment impairments of $983 million ($.36 per diluted share). The investment impairments primarily related to debt and equity investments in MFN and debt investments in Genuity.

~~Other Charges and Special Items~~

On September 30, 2002, we sold nearly all of our investment in Telecom Corporation of New Zealand Limited (TCNZ) for net cash proceeds of $769 million, which resulted in a pretax gain of $383 million ($229 million after-tax, or $.08 per diluted share).

In the third quarter of 2002, we recorded a pretax impairment charge of $224 million ($136 million after-tax, or $.05 per diluted share) pertaining to Verizon’s leasing operations related to airplanes leased to airlines currently experiencing financial difficulties.

During the second quarter of 2002, we recorded pretax charges of $394 million ($254 million after-tax, or $.09 per diluted share) primarily resulting from a pretax impairment charge in connection with our financial statement exposure to WorldCom of $300 million ($183 million after-tax, or $.07 per diluted share) and other pretax charges of $94 million ($71 million after-tax, or $.02 per diluted share). In addition, during the second quarter of 2002, we recorded a pretax charge of $175 million ($114 million after-tax, or $.04 per diluted share) related to a proposed settlement of a litigation matter that arose from our decision to terminate an agreement with NorthPoint Communications Group, Inc. to combine the two companies’ DSL businesses.

~~Extraordinary Item~~

In the third quarter of 2002, we recognized a net pretax extraordinary loss of $8 million ($3 million after-tax, or less than $.01 per diluted share) related to the extinguishment of $520 million of debt prior to the stated maturity date. Results for the nine months ended September 30, 2002 include a net pretax extraordinary charge of $11 million ($6 million after-tax, or less than $.01 per diluted share) recorded in the first half of 2002 related to the extinguishment of $1,779 million of debt prior to the stated maturity date.

During the third quarter of 2001, we retired $228 million of debt prior to the stated maturity date, resulting in a pretax extraordinary charge of $12 million ($8 million after-tax, or less than $.01 per diluted share).

~~Cumulative Effect of Accounting Change~~

~~Impact of SFAS No. 142~~

We adopted the provisions of SFAS No. 142 on January 1, 2002. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under various conditions) for impairment in accordance with this statement. Our results for the nine months ended September 30, 2002 include the initial impact of adoption recorded as a cumulative effect of an accounting change of $496 million after-tax ($.18 per diluted share). In accordance with the new rules, starting January 1, 2002, we are no longer amortizing goodwill, acquired workforce intangible assets and wireless licenses which we determined have an indefinite life. On a comparable basis, had we not amortized these intangible assets in the quarter and nine months ended September 30, 2001, net income before extraordinary item and cumulative effect of accounting change would have been $1,982 million, or $.72 per diluted share, and $2,906 million, or $1.06 per diluted share, respectively.

~~Impact of SFAS No. 133~~

We adopted the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and the related SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” on January 1, 2001. The impact to Verizon pertains to the recognition of changes in the fair value of derivative instruments. The initial impact of adoption was recorded as a cumulative effect of an accounting change of $182 million after-tax ($.07 per diluted share) and is included in our results for the nine months ended September 30, 2001. This cumulative effect charge primarily relates to the change in the fair value of the MFN debt conversion option prior to January 1, 2001.

~~Other~~ Consolidated ~~Results~~

~~The following discussion of several nonoperating items is based on the amounts reported in our condensed consolidated financial statements.~~

(Dollars in Millions) Three Months Ended Nine Months Ended
September 30, September 30,

2002 2001 % Change 2002 2001 % Change

Other Income and (Expense), Net

Interest income $ 44 $ 115 (61.7 )% $ 151 $ 230 (34.3 )%
Foreign exchange gains (losses), net (3 ) (36 ) (91.7 ) (64 ) 4 (1,700.0 )
Other, net (4 ) 5 (180.0 ) 19 34 (44.1 )

Total $ 37 $ 84 (56.0 ) $ 106 $ 268 (60.4 )

The changes in other income and expense, net in the three and nine months ended September 30, 2002, compared to the similar periods in 2001, were primarily due to the changes in interest income and foreign exchange gains and losses. We recorded additional interest income in the three months ended September 30, 2001 primarily as a result of interest on notes receivable and the settlement of a tax-related matter. Foreign exchange gains and losses were affected primarily by our Iusacell subsidiary, which uses the Mexican peso as its functional currency. We expect that our earnings will continue to be affected by foreign currency gains or losses associated with the U.S. dollar denominated debt issued by Iusacell.

(Dollars in Millions) Three Months Ended Nine Months Ended
September 30, September 30,

2002 2001 % Change 2002 2001 % Change

Interest Expense

Interest expense $ 803 $ 797 .8 % $ 2,415 $ 2,627 (8.1 )%
Capitalized interest costs 47 137 (65.7 ) 148 314 (52.9 )

Total interest costs on debt balances $ 850 $ 934 (9.0 ) $ 2,563 $ 2,941 (12.9 )

Average debt outstanding $ 58,406 $ 63,648 (8.2 ) $ 61,431 $ 62,107 (1.1 )
Effective interest rate 5.8 % 5.9 % 5.6 % 6.3 %

The decrease in interest costs for the three and nine months ended September 30, 2002, compared to the similar periods in 2001, was principally attributable to lower average interest rates and lower debt levels. Interest costs decreased in the three-month period primarily due to lower debt levels and decreased in the nine-month period primarily due to lower average interest rates. The decrease in the average debt levels for the three months and the nine months ended September 30, 2002 was primarily due to lower commercial paper borrowings. Cash from

~~operations, asset sales and other favorable cash flows (see “Consolidated~~ Financial ~~Condition”) reduced the need for financing in 2002. In addition, lower capital expenditures in 2002 contributed to lower capitalized interest costs.~~

(Dollars in Millions) Three Months Ended Nine Months Ended
September 30, September 30,

2002 2001 % Change 2002 2001 % Change

Minority Interest
$ 372 $ 226 64.6 % $ 928 $ 533 74.1 %

The increase in minority interest expense for the three and nine months ended September 30, 2002, compared to the similar periods in 2001, was primarily due to higher earnings at Domestic Wireless, which has a significant minority interest attributable to Vodafone (see “Segment Results of Operations—Domestic Wireless”). The decrease in minority interest expense from losses at Iusacell is more than offset by the consolidation of TELPRI and the deconsolidation of CTI (see “Segment Results of Operations—International”).

Three Months Ended September 30, Nine Months Ended September 30,

2002 2001 2002 2001

Effective Income Tax Rates
17.5 % 34.3 % 49.2 % 44.6 %

The effective income tax rate is the provision for income taxes as a percentage of income before the provision for income taxes. Our effective income tax rate for the three months ended September 30, 2002 was favorably impacted by tax benefits relating to the other than temporary decline in fair value of several of our investments during 2002 that were not available at the time the investments were written down, as the decline in fair value was not recognizable at the time of the impairment (see “Special Items — Investment-Related Charges”). The effective rate for third quarter of 2002 was also favorably impacted by a tax law change relating to ESOP dividend deductions, increased state tax benefits and capital loss utilization. Our effective income tax rate for the nine months ended September 30, 2002 was favorably impacted by the third quarter of 2002 items; however, higher charges associated with the other than temporary decline in fair value of several of our investments without related tax benefits recorded during 2002 resulted in a higher effective tax rate in the 2002 period.

~~Consolidated Financial Condition~~Condition


(Dollars in Millions)	Three Months Ended March 31,
	2003			2002			$ Change

Cash Flows Provided By (Used In)
Operating activities	$	5,812		$	4,478		$	1,334
Investing activities		(2,094	)		(2,020	)		(74	)
Financing activities		(1,021	)		(2,422	)		1,401

Increase in Cash and Cash Equivalents	$	2,697		$	36		$	2,661

(Dollars in Millions) Nine Months Ended September 30,

2002 2001 $ Change

Cash Flows Provided By (Used In)

Operating activities $ 16,078 $ 13,096 $ 2,982
Investing activities (977 ) (15,157 ) 14,180
Financing activities (10,429 ) 2,669 (13,098 )

Increase in Cash and Cash Equivalents
$ 4,672 $ 608 $ 4,064

We use the net cash generated from our operations to fund capital expenditures for network expansion and modernization, repay external financing, pay dividends and invest in new businesses. Additional external financing is utilized when necessary. While our current liabilities typically ~~exceeded our~~exceed current assets, our sources of funds, primarily from operations and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that capital spending requirements will continue to be financed primarily through internally generated funds. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure our financial flexibility.

~~Cash Flows Provided By Operating Activities~~

Cash Flows Provided By Operating Activities

Our primary source of funds continues to be cash generated from operations. The increase in cash from operations in the ~~first nine~~three months ~~of 2002~~ended March 31, 2003 compared to the similar period of ~~2001~~2002 was primarily ~~reflects a decrease~~driven by the receipt of income tax refunds in the current quarter and effective working capital ~~requirements.~~management, including improvements in accounts receivable days sales outstanding, partially offset by the Verizon Wireless dividends to Vodafone.

~~Cash Flows Used In Investing Activities~~

Cash Flows Used In Investing Activities

Capital expenditures continue to be our primary use of capital resources and facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of our networks. WeIncluding capitalized network and non-network software, we invested ~~$4,723~~$1,286 million in our Domestic Telecom business in the first ~~nine~~

three months of ~~2002,~~2003, compared to ~~$8,470~~$1,657 million in the first ~~nine~~three months of ~~2001. We also invested $2,981 million in our Domestic Wireless business in the first nine months of 2002, compared to $3,342 million in the first nine months of 2001.~~2002. The decrease in Domestic Telecom capital spending ~~in 2002, particularly by Domestic Telecom,~~ is primarily due to the effective management of our capital expenditure ~~budget~~budget. We also invested $1,107 million in our Domestic Wireless business in the first three months of 2003, compared to ~~current network demand.~~$819 million in the first three months of 2002. The increase represents our continuing effort to invest in high growth areas. We expect total capital expenditures, including capitalized network and non-network software, in ~~2002~~2003 to be approximately ~~$12.3~~$12.5 billion to ~~$12.7~~$13.5 billion.

We invested ~~$1,017~~$169 million in acquisitions and investments in businesses during the first ~~nine~~three months of 2003, including $146 million to acquire interests in some wireless properties. In the first three months of 2002, we invested $930 million in acquisitions and investments in businesses including $556 million to acquire some of the cellular properties of Dobson Communications Corporation and $218 million for other wireless properties. We also received a $1,479 million refund from the FCC in connection with our wireless auction deposit (see “Other Factors That May Affect Future Results — Recent Developments — FCC Auction” for additional information). In the first nine months of 2001, we invested $3,005 million in acquisitions and investments in businesses, including $1,691 million related to an FCC auction of wireless licenses (see “Other Factors That May Affect Future Results — Recent Developments — FCC Auction” for additional information), $410 million for additional wireless spectrum purchased from another telecommunications carrier, $178 million in wireless properties and $497 million to acquire the directory business of TELUS.

In the first ~~nine months of~~quarter 2002, we received cash proceeds of ~~$4,638 million, including $3,868 million from the sale of non-strategic access lines and $770~~$728 million in connection with the sale of TSI. ~~In the first nine months of 2001, we received cash proceeds of $200 million in connection with the sale of our Cincinnati wireless overlap property.~~

Other, net investing activities include capitalized non-network software of $742 million in the first nine months of 2002 compared with $823 million in the similar period of 2001. Other net investing activities for the first nine months of 2002 also includes net cash proceeds of $769 million in connection with the sale of our investment in TCNZ in the current quarter. The first nine months of 2001 also includes $1,150 million of loans to Genuity (see “Other Factors That May Affect Future Results — Genuity and Bell Atlantic—GTE Merger”), partially offset by proceeds of $515 million related to wireless asset sales.

~~In addition, under~~Under the terms of an investment agreement relating to our wireless joint venture, Vodafone may require ~~us or~~ Verizon Wireless to purchase up to an aggregate of $20 billion worth of ~~its~~Vodafone’s interest in Verizon Wireless between 2003 and 2007 at its then fair market value. ~~The~~We have the right, exercisable at our sole discretion, to purchase up to $12.5 billion of this interest instead of Verizon Wireless for cash or Verizon stock at our option. Vodafone may require the purchase of up to $10 billion ~~in cash or stock at our option, may be required~~ in the summer of 2003 or 2004, and the remainder, which may not exceed $10 billion atin any one ~~time,~~year, in the summers of 2005 through 2007. Vodafone has the option to require ~~us or Verizon Wireless to satisfy~~that up to $7.5 billion of the remainder ~~with cash~~be paid by Verizon Wireless through the assumption or ~~contributed~~incurrence of debt.

~~Cash Flows Provided By (Used In) Financing Activities~~

Cash Flows Used In Financing Activities

Our total debt was essentially unchanged from December 31, 2002. We repaid $2,761 million of Verizon Global Funding Corp. long-term debt and $756 million of Domestic Telecom long-term debt with the issuance of short and long-term debt. We increased our short-term borrowings by $1,576 million while Verizon Global Funding and Domestic Telecom each issued long-term debt with a principal amount of $1 billion for total cash proceeds of $1,944 million, net of discounts, costs and a payment related to a hedge on the interest rate for the anticipated financing.

Cash of ~~$8,018~~$1,629 million was used to reduce our total debt during the first ~~nine months~~quarter of 2002. We repaid ~~$2,081~~$493 million of Verizon Global Funding ~~Corp., $2,073 million of~~long-term debt at maturity with cash and reduced Domestic Telecom and ~~$1,013 million of Domestic Wireless long-term debt (including $585 million of~~Verizon Global Funding net ~~debt assumed in connection with the Price transaction), and reduced our~~ short-term borrowings by ~~$9,632~~$2,331 million ~~primarily~~ with cash and the issuance of Domestic Telecom ~~and Verizon Global Funding~~ long-term debt. Domestic Telecom ~~and Verizon Global Funding~~ issued ~~$3,430 million and $3,816 million of long-term debt, respectively.~~

The net cash proceeds from increases in our total debt during the first nine months of 2001 was primarily due to the issuance of $7,006 million of long-term debt by Verizon Global Funding, partially offset by net repayments of $783 million of commercial paper and other short-term borrowings by Verizon Global Funding and by $638 million of maturities of other corporate long-term debt. In addition, Verizon Wireless issued $580$2,967 million of long-term debt and ~~Domestic Telecom incurred $1,296 million of long-term debt, repaid $613 million of net short-term debt and~~ retired ~~$910~~$1,691 million of long-term debt.

Our ratio of debt to debt combined with shareowners’ equity ~~ratio~~ was ~~64.3%~~60.2% at ~~September 30, 2002,~~March 31, 2003, compared to ~~64.7%~~67.0% at ~~September 30, 2001.~~March 31, 2002.

As of ~~September 30, 2002,~~March 31, 2003, we had ~~$569~~$550 million in bank borrowings outstanding. In addition, we had approximately ~~$8.0~~$7.9 billion of unused bank lines of credit and our telephone and financing subsidiaries had shelf registrations for the issuance of up to ~~$5.1~~$4.0 billion of unsecured debt securities. The debt securities of our telephone and financing subsidiaries continue to be accorded high ratings by primary rating agencies. ~~However, in March~~In December 2002, ~~Standard & Poor’s (S&P) revised~~Moody’s Investors Service downgraded our senior unsecured debt rating from A1 to A2, and changed our credit rating outlook from ~~stable~~negative to ~~negative, and Moody’s Investors Service (Moody’s) reaffirmed~~stable. The short term rating of Prime-1 was maintained. In February 2003, Standard & Poor’s upgraded our credit rating outlook ~~as negative. S&P and Moody’s cited concern about~~from negative to stable, citing debt reduction efforts over the ~~overall debt level of~~

~~Verizon.~~past year. We have adopted a debt portfolio strategy that ~~includes a~~continues our overall debt reduction ~~in total debt as well as a reduction in~~efforts through the short-term debt component. A change in an outlook does not necessarily signal a rating downgrade but rather highlights an issue whose final resolution may result in placing a company on review for possible downgrade. In May 2002, Moody’s placed our debt under review for possible downgrade. However,remainder of the ~~short-term debt ratings were affirmed.~~year.

As in prior quarters, dividend payments were a significant use of capital resources. We determine the appropriateness of the level of our dividend payments on a periodic basis by considering such factors as long-term growth opportunities, internal cash requirements, and the expectations of our shareowners. In the first ~~second and third~~ quarters of ~~2002~~2003 and ~~2001,~~2002, we announced quarterly cash dividends of $.385 per share.

~~Increase in Cash and Cash Equivalents~~

Increase in Cash and Cash Equivalents

Our cash and cash equivalents at ~~September 30, 2002~~March 31, 2003 totaled ~~$5,651~~$4,135 million, a ~~$4,672~~$2,697 million increase over cash and cash equivalents at December 31, ~~2001~~2002 of ~~$979~~$1,438 million. ~~This~~The increase in cash and cash equivalents in the current quarter was primarily driven by favorable results of operations and working capital ~~requirements, proceeds from the non-strategic access line sales and other sales,~~changes, partially offset by ~~a significant reduction in borrowings in 2002. Higher fourth quarter~~ capital expenditures and ~~normal, recurring fourth quarter payments as well as higher anticipated income tax payments are expected to reduce~~dividends paid. The increase in cash and cash equivalents at March 31, 2003 was planned, in part, for the ~~cash balance at September 30, 2002.~~

April 1, 2003 repayment of $2,455 million of exchangeable notes.

Market Risk

We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in equity investment prices and changes in corporate tax rates. We employ risk management strategies using a variety of derivatives, including interest rate swap agreements, interest rate caps and floors, foreign currency forwards and options, equity options and basis swap agreements. We do not hold derivatives for trading purposes.

It is our general policy to enter into interest rate, foreign currency and other derivative transactions only to the extent necessary to achieve our desired objectives in limiting our exposures to the various market risks. Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions. We do not hedge our market risk exposure in a manner that would completely eliminate the effect of changes in interest rates, equity prices and foreign exchange rates on our earnings. ~~While we~~We do not expect that our net income, liquidity and cash flows will be materially affected by these risk management ~~strategies, our net income may be materially affected by market risks associated with the exchangeable notes discussed below.~~strategies.

~~Exchangeable Notes~~

Exchangeable Notes

In 1998, we issued exchangeable notes as described in Note 8 to the condensed consolidated financial statements. These financial instruments ~~expose~~exposed us to market risk, including:

• ~~Equity price risk, because the notes are exchangeable into shares that are traded on the open market and routinely fluctuate in value.~~
• ~~Foreign exchange rate risk, because the notes are exchangeable into shares that are denominated in a foreign currency.~~
• ~~Interest rate risk, because the notes carry fixed interest rates.~~

Equity price risk, because the notes were exchangeable into shares that are traded on the open market and routinely fluctuate in value.

~~Periodically, equity price or foreign~~

Foreign exchange rate ~~movements may require us to mark-to-market~~risk, because the notes were exchangeable ~~note liability to reflect~~into shares that are denominated in a foreign currency.

Interest rate risk, because the ~~increase or decrease~~notes carried fixed interest rates.

On April 1, 2003, all of the outstanding $2,455 million principal amount of the 5.75% notes that were exchangeable into shares of Telecom Corporation of New Zealand Limited were redeemed at maturity. On March 15, 2003, Verizon Global Funding, the issuer of the 4.25% notes that were exchangeable into shares of Cable & Wireless plc and a combination of shares and warrants in the ~~current share~~reorganized NTL Incorporated entities, redeemed all of the outstanding 4.25% notes. The cash redemption price compared to the established exchange price, resulting in a charge or credit to income. The following sensitivity analysis measures the effect on earnings and financial condition due to changes in the exchange property for the ~~exchangeable notes.~~

~~At September 30, 2002,~~4.25% notes was $1,048.29 for each $1,000 principal amount of ~~5.75% notes (each, a 5.75% Note) was exchangeable into 178.0369 ordinary shares of TCNZ (5.75% Note Exchange Property), and~~ the ~~market value~~notes. The principal amount of the ~~5.75% Note Exchange Property~~4.25% notes outstanding, before unamortized discount, at the time of redemption, was substantially below the debt liability associated with each 5.75% Note. Each $20 increase in the value of the 5.75% Note Exchange Property above the value of the associated debt liability would in the aggregate reduce our pretax earnings by $49$2,839 million.

Equity Risk

• At September 30, 2002, each $1,000 principal amount of 4.25% notes (each, a 4.25% Note) was exchangeable into 40.3702 ordinary shares of C&W and 7.6949 shares of NTL (collectively, 4.25% Note Exchange Property), and the market value of the 4.25% Note Exchange Property was substantially below the debt liability associated with each 4.25% Note. As a result of the bankruptcy of NTL, it is anticipated that the 4.25% Note Exchange Property will consist of C&W shares and a combination of shares, warrants and equity rights in the reorganized NTL entities. Each $20 increase in the value of the 4.25% Note Exchange Property above the value of the associated debt liability would in the aggregate reduce our pretax earnings by $53 million.
• A subsequent decrease in the value of the 5.75% Note Exchange Property or the 4.25% Note Exchange Property would correspondingly increase earnings, but not to exceed the amount of any previous reduction in earnings.
• ~~Our cash flows would not be affected by mark-to-market activity relating to the exchangeable notes.~~

If we decide to deliver the exchange property, which we may have to purchase for cash, in exchange for the notes, the exchangeable note liability (including any mark-to-market adjustments) will be eliminated and the investment will be reduced by the fair market value of the exchange property delivered. Upon settlement, any excess of the liability over the book value of the exchange property delivered will be recorded as a gain. We also have the option to settle these liabilities with cash upon exchange.

~~Equity Risk~~

We also have equity price risk associated with our cost investments, primarily in common stocks and equity price sensitive derivatives that are carried at fair value. The value of these cost investments and derivatives is subject to changes in the market prices of the underlying securities. Our cost investments and equity price sensitive derivatives recorded at fair value totaled ~~$606~~$390 million at ~~September 30, 2002.~~March 31, 2003.

A sensitivity analysis of our cost investments and equity price sensitive derivatives recorded at fair value indicated that a 10% increase or decrease in the fair value of the underlying common stock equity prices would result in ~~a $34~~an $11 million increase or decrease in the fair value of our cost investments and equity price sensitive derivatives. Of this amount, a change in the fair value of our cost investments of ~~$31~~$6 million would be recognized in Accumulated Other Comprehensive Loss in our condensed consolidated balance sheets under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Our equity price sensitive derivatives, primarily several long-term call options on our common stock (see Note 7 — Financial Instruments), do not qualify for hedge accounting under SFAS No. ~~133.~~133, “Accounting for Derivative Instruments and Hedging Activities.” As such, a change of approximately $3$5 million in the fair value of our equity price sensitive derivatives would be recognized in our condensed consolidated balance sheets and in current ~~earnings in mark-to-market adjustment.~~earnings.

We continually evaluate our investments in marketable securities for impairment due to declines in market value considered to be other than temporary. That evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific evaluations. In the event of a determination that a decline in market value is other than temporary, a charge to earnings is recorded for ~~all or a portion of~~ the unrealized loss, and a new cost basis in the investment is established.

~~Other Factors That May Affect Future Results~~

~~Genuity and Bell Atlantic — GTE Merger~~

Other Factors That May Affect Future Results

~~Prior~~

Recent Developments

Verizon Wireless

In December 2002, Verizon Wireless announced that it signed an agreement with Northcoast Communications LLC to ~~the merger of Bell Atlantic and GTE, we owned and consolidated Genuity (a tier-one interLATA Internet backbone~~purchase 50 PCS licenses and related ~~data business). In June 2000, as a condition~~network assets for approximately $750 million. The licenses cover large portions of the ~~merger, 90.5%~~U.S. including such markets as New York, NY, Boston, MA, Minneapolis, MN, Columbus, OH, Providence, RI, Rochester, NY and Hartford, CT. The transaction is expected to close during the second quarter of the voting equity of Genuity was issued in an initial public offering. As a result of the initial public offering and our loss of control, we deconsolidated Genuity. Our remaining ownership interest in Genuity contained a contingent conversion feature that gave us the option (if prescribed conditions were met), among other things, to regain control of Genuity. Our ability to legally exercise this conversion feature was dependent on obtaining approvals to provide long distance service in the former Bell Atlantic states and satisfaction of other regulatory and legal requirements.2003.

On July 24, 2002, we converted all but one of our shares of Class B common stock of Genuity into shares of Class A common stock of Genuity. We now own a voting and economic interest in Genuity of less than 10%, in accordance with regulatory restrictions. As a result, we have relinquished the right to convert our current ownership into a controlling interest as described above. Our commercial relationship with Genuity continues, which includes a five-

3525

~~year purchase commitment for Genuity services such as dedicated Internet access, managed web hosting~~Verizon Information Services

Verizon Information Services has reached an agreement to sell our operations in Austria, the Czech Republic, Gibraltar, Hungary, Poland and ~~Internet security. Under this purchase commitment, which terminates in 2005, Verizon has agreed~~Slovakia to ~~pay Genuity~~Veronis Suhler Stevenson, a ~~minimum of approximately $500 million over five years for its services, of which we have satisfied approximately $260 million as of September 30, 2002.~~

~~As a result of Genuity’s continuing operating losses~~merchant bank and ~~a significant decrease~~financial investor that specializes in the market price of the Class A common stock of Genuity during the second quarter of 2002, we determined that recoverability of our investment in Genuity is not reasonably assured. As a result, we recorded a pretax charge of $2,443 million to reduce the carrying value of our interest in Genuity to its estimated fair value in the second quarter of 2002.

~~Federal~~media and state regulatory conditions to the merger also included commitments to, among other things, promote competition and the widespread deployment of advanced services while helping to ensure that consumers continue to receive high-quality, low-cost telephone services. In some cases, there are significant penalties associated with not meeting these commitments.directory industry. The cost of satisfying these commitments could have a significant impact on net income in future periods. The pretax cost to begin compliance with these conditions was approximately $200 million in 2000 and approximately $300 million in 2001. We expect to spend $200 million to $300 million in 2002.

~~Recent Developments~~

~~Verizon Wireless~~

~~FCC Auction~~

In a decision on June 22, 2001, the U.S. Court of Appeals for the D.C. Circuit ruled that the FCC’s cancellation and repossession of NextWave’s licenses was unlawful. The FCC sought a stay of the court’s decision which was denied. The FCC subsequently reinstated NextWave’s licenses, but it did not return Verizon Wireless’s payment on the NextWave licenses nor did it acknowledge that the court’s decision extinguished Verizon Wireless’s obligation to purchase the licenses. On October 19, 2001, the FCC filed a petition asking the U.S. Supreme Court to consider reversing the U.S. Court of Appeals for the D.C. Circuit’s decision. On March 4, 2002, the U.S Supreme Court granted the FCC’s petition and agreed to hear the appeal. Oral argument on the appeal was heard on October 8, 2002, and a decision by the U.S. Supreme Courtsale is expected ~~in early 2003.~~

~~In April 2002, the FCC returned $1,479 million of Verizon Wireless’s $1,822 million license payment and stated its view that Verizon Wireless remains obligated~~ to ~~purchase the licenses if and~~close when the FCC succeeds in regaining them from NextWave. On April 4, 2002, Verizon Wireless filed a complaint in the U.S. Court of Federal Claims against the United States government seeking both a declaration that Verizon Wireless has no further performance obligations with respect to the reauction, and monetary damages. On April 8, 2002, Verizon Wireless filed a petition with the U.S. Court of Appeals for the D.C. Circuit seeking a declaration that the auction obligation is voidable and a return of its remaining down payment of $261 million. Both of these mattersappropriate regulatory approvals are pending, and their outcome (as well as the outcome of the U.S. Supreme Court appeal) is uncertain. Verizon Wireless is also seeking legislation from the U.S. Congress that would permit bidders to withdraw their bids and receive their deposits back in full. In September 2002, the FCC issued a notice requesting comment on proposals that would let winning bidders receive full repayment of their deposits and opt out of their winning bids. The proposal is subject to comment and may not be adopted.

~~Price Transaction~~

In December 2001, Verizon Wireless and Price announced that an agreement had been reached combining Price’s wireless business with a portion of Verizon Wireless in a transaction valued at approximately $1.7 billion, including $550 million of net debt. The transaction closed on August 15, 2002 and the assumed debt was redeemed on August 16, 2002. The resulting limited partnership is controlled and managed by Verizon Wireless. In exchange for its contributed assets, Price received a limited partnership interest in the new partnership which is exchangeable into common stock of Verizon Wireless if an initial public offering of that stock occurs, or into the common stock of

Verizon on the fourth anniversary of the asset contribution date if the initial public offering of Verizon Wireless common stock does not occur prior to then. The price of the Verizon common stock used in determining the number of Verizon common shares received in an exchange is also subject to a maximum and minimum amount.

~~New York Recovery Funding~~

In August 2002, President Bush signed the Supplemental Appropriations bill passed earlier this year by the U.S. House of Representatives and the U.S. Senate. The Supplemental Appropriations bill includes $5.5 billion in New York recovery funding. Of that amount, approximately $750 million has been allocated to cover the uninsured losses of businesses (including the restoration of utility infrastructure) as a result of the September 11th terrorist attacks. These funds will be distributed through the Lower Manhattan Development Corporation following an application process.completed.

Telecommunications Act of 1996

We face increasing competition in all areas of our business. The Telecommunications Act of 1996 (the 1996 Act), regulatory and judicial actions and the development of new technologies, products and services have created opportunities for alternative telecommunication service providers, many of which are subject to fewer regulatory constraints. We are unable to predict definitively the impact that the ongoing changes in the telecommunications industry will ultimately have on our business, results of operations or financial condition. The financial impact will depend on several factors, including the timing, extent and success of competition in our markets, the timing and outcome of various regulatory proceedings and any appeals, and the timing, extent and success of our pursuit of new opportunities resulting from the 1996 Act and technological advances.

In-Region Long Distance

We have now received the FCC approvals needed to offer long distance service throughout ~~most of~~ the ~~country, except~~country. Under the 1996 Act, our ability to offer in-region long distance services in ~~those~~the regions ~~served by~~where the former Bell Atlantic telephone ~~operations where~~subsidiaries operate as local exchange carriers was largely dependent on satisfying specified requirements. These requirements included a 14-point “competitive checklist” of steps which we ~~have not yet received authority~~must take to help competitors offer local services through resale, through purchase of UNEs, or by interconnecting their own networks to ours. We were required to demonstrate to the FCC that our entry into the in-region long distance ~~service under~~market would be in the ~~Telecommunications Act of 1996 (1996 Act).~~ public interest.

We now have authority to offer in-region long distance service in ~~11 states in~~all 14 of the former Bell Atlantic territory, accounting for approximately 90% of the lines served by the former Bell Atlantic. These states are New York, Massachusetts, Connecticut, Pennsylvania, Rhode Island, Vermont, Maine, New Jersey, New Hampshire, Delaware and Virginia.jurisdictions. The Pennsylvania ~~Vermont~~ and New Jersey orders are currently on appeal to the U.S. Court of Appeals. The U.S. Court of Appeals has remanded the Massachusetts order to the FCC for further explanation on one issue, but left our long distance authority in effect. ~~We expect to file applications by year-end with the FCC for permission to enter the in-region long distance market in Maryland, West Virginia and the District of Columbia.~~

FCC Regulation and Interstate Rates

Our telephone operations are subject to the jurisdiction of the FCC with respect to interstate services and related matters. In 2002, the FCC continued to implement reforms to the interstate access charge system and to implement the “universal service” and other requirements of the 1996 Act.

Access Charges and Universal Service

On May 31, 2000, the FCC adopted the Coalition for Affordable Local and Long Distance Services (CALLS) plan as a comprehensive five-year plan for regulation of interstate access charges. The CALLS plan has three main components. First, it establishes a portable interstate access universal service support of $650 million for the industry. This explicit support replaces implicit support embedded in interstate access charges. Second, the plan simplifies the patchwork of common line charges into one subscriber line charge (SLC) and provides for de-averaging of the SLC by zones and class of customers in a manner that will not undermine comparable and affordable universal service. Third, the plan sets into place a mechanism to transition to a set target of $0.0055 per minute for switched access services. Once that target rate is reached, local exchange carriers are no longer required to make further annual price cap reductions to their switched access prices. The annual reductions leading to the target rate, as well as annual reductions for the subset of special access services that remain subject to price cap regulation was set at 6.5% per year.

On September 10, 2001, the U.S. Court of Appeals for the Fifth Circuit ruled on an appeal of the FCC order adopting the plan. The court upheld the FCC on several challenges to the order, but remanded two aspects of the decision back to the FCC on the grounds that they lacked sufficient justification. The court remanded back to the FCC for further consideration its decision setting the annual reduction factor at 6.5% minus an inflation factor and the size of the new universal service fund at $650 million. The entire plan (including these elements) will continue in effect pending the FCC’s further consideration of its justification of these components.

As a result of tariff adjustments which became effective in July 2002, approximately 98% of our access lines reached the $0.0055 benchmark.

The FCC has adopted rules for special access services that provide for pricing flexibility and ultimately the removal of services from price regulation when prescribed competitive thresholds are met. In order to use these rules, carriers must forego the ability to take advantage of provisions in the current rules that provide relief in the event earnings fall below prescribed thresholds. We have been authorized to remove special access and dedicated transport services from price caps in 37 Metropolitan Statistical Areas (MSAs) in the former Bell Atlantic territory and in 19 additional MSAs in the former GTE territory. In addition, the FCC has found that in 22 MSAs we have met the stricter standards to remove special access connections to end-user customers from price caps. Approximately 56% of special access revenues are now removed from price regulation.

In November 1999, the FCC adopted a new mechanism for providing universal service support to high cost areas served by large local telephone companies. This funding mechanism provides additional support for local telephone services in several states served by our telephone operations. This system has been supplemented by the new FCC access charge plan described above. On July 31, 2001, the U.S. Court of Appeals for the Tenth Circuit reversed and remanded to the FCC for further proceedings. The court concluded that the FCC had failed to adequately explain some aspects of its decision and had failed to address any need for a state universal service mechanism. The current universal service mechanism remains in place pending the outcome of any FCC review as a result of these appeals. The FCC also has proceedings underway to evaluate possible changes to its current rules for assessing contributions to the universal service fund. Any change in the current assessment mechanism could result in a change in the contribution that local telephone companies must make and that would have to be collected from customers.

Unbundling of Network Elements

In ~~July 2000,~~November 1999, the ~~U.S. Court~~FCC announced its decision setting forth new unbundling requirements, eliminating elements that it had previously required to be unbundled, limiting the obligation to provide others and adding new elements.

In addition to the unbundling requirements released in November 1999, the FCC released an order in a separate proceeding in December 1999, requiring incumbent local exchange companies also to unbundle and provide to competitors the higher frequency portion of ~~Appeals for the Eighth Circuit found that some aspects of the FCC’s requirements for pricing UNEs were inconsistent~~their local loop. This provides competitors with the ~~1996 Act. In particular, it found that the FCC was wrong~~ability to ~~require~~provision data services on top of incumbent carriers to base these prices not on their real costs but on the imaginary costs of the most efficient equipment and the most efficient network configuration. This portion of the court’s decision was stayed pending review by the U.S. Supreme Court. On May 13, 2002, the U.S. Supreme Court reversed that decision and upheld the FCC’s pricing rules.carriers’ voice services.

On May 24, 2002, the U.S. Court of Appeals for the D.C. Circuit released an order that overturned the most recent FCC decision establishing which network elements were required to be unbundled. In particular, the court found that the FCC did not adequately consider the limitations of the “necessary and impair” standards of the 1996 Act when it chose national rules for unbundling and that it failed to consider the relevance of competition from other types of service providers, including cable and satellite. The court also vacated a separate order that had authorized an unbundling requirement for “line sharing” where a competing carrier purchases only a portion of the copper connection to the end-user in order to provide high-speed broadband services using DSL technology. ~~Several parties, including the FCC, petitioned the court for rehearing of the court order.~~ The ~~court rejected the petitions~~U.S. Supreme Court subsequently declined to review that ~~asked it to change its decision on September 4, 2002. The court did, however, stay its order vacating the FCC’s rules until January 2, 2003.~~

~~The court granted the limited stay in order to provide the FCC time to complete an ongoing rulemaking to determine what elements should be unbundled.~~decision.

On October 25, 2002, the U.S. Court of Appeals for the D.C. Circuit released an order upholding the FCC’s decisions that established interim limits on the availability of combinations of ~~unbundled network elements~~UNEs known as enhanced extended links or “EELs.” EELs consist of unbundled loops and transport elements. The FCC decisions limited access to EELs to carriers that would use them to provide a significant amount of local traffic, and not just use them as substitutes for special access services.

Prior to the issuance of these orders from the U.S. Court of Appeals for the D.C. Circuit, the FCC had already begun a review of the scope of its unbundling requirement through a rulemaking referred to as the triennial review of UNEs. This rulemaking ~~reopens~~reopened the question of what network elements must be made available on an unbundled

basis under the 1996 Act, and will ~~revisit~~address the ~~unbundling decisions made in~~impact of the order ~~overturned~~ by the U.S. Court of Appeals for the D.C. ~~Circuit. In this rulemaking, the FCC also will address~~Circuit overturning its previous rules, as well as other pending issues relating to unbundled elements, including the question of whether competing carriers may substitute combinations of unbundled loops and transport for already competitive special access services. On February 20, 2003, the FCC announced a decision in its triennial review, but the order has not yet been released.

Compensation for Internet Traffic

On April 27, 2001, the FCC released an order addressing intercarrier compensation for dial-up connections for Internet-bound traffic. The FCC found that Internet-bound traffic is interstate and subject to the FCC’s jurisdiction. Moreover, the FCC again found that Internet-bound traffic is not subject to reciprocal compensation under Section 251(b)(5) of the 1996 Act. Instead, the FCC established federal rates per minute for this traffic that decline from $0.0015 to $0.0007 over a three-year period. The FCC order also sets caps on the total minutes of this traffic that may be subject to any intercarrier compensation and requires that incumbent local exchange carriers must offer to both bill and pay reciprocal compensation for local traffic at the same rate as they are required to pay on Internet-bound traffic. On May 3, 2002, the U.S. Court of Appeals for the D.C. Circuit rejected part of the ~~justification relied upon by the FCC in~~FCC’s rationale for its April 27, 2001 order, ~~and remanded~~but declined to vacate the order ~~for further proceedings. It did not vacate the interim pricing rules established in that order.~~while it is on remand.

Several parties requested rehearing, asking the court to vacate the underlying order. Those requests were denied in a series of orders released on September 24, 2002 and September 25, 2002. ~~As a result,~~The U.S. Supreme Court has declined to review that denial. In the meantime, pending further action by the FCC, the FCC’s underlying order remains in effect.

~~Other Matters~~

~~Recent Accounting Pronouncements~~

3828

Cautionary Statement Concerning Forward-Looking Statements

In this Management’s Discussion and Analysis, and elsewhere in this Quarterly Report, we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The following important factors, along with those discussed elsewhere in this Quarterly Report, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:

• ~~the duration and extent of the current economic downturn;~~
• ~~materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments;~~
• ~~material changes in available technology;~~
• ~~technology substitution;~~
• ~~an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations;~~
• ~~the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results;~~
• ~~the effects of competition in our markets;~~
• ~~our ability to satisfy regulatory merger conditions and obtain combined company revenue enhancements and cost savings;~~
• ~~the ability of Verizon Wireless to achieve revenue enhancements and cost savings, and obtain sufficient spectrum resources;~~
• ~~the outcome of litigation concerning the FCC NextWave spectrum auction;~~
• ~~our ability to recover insurance proceeds relating to equipment losses and other adverse financial impacts resulting from the terrorist attacks on Sept. 11, 2001; and~~
• changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings.

the duration and extent of the current economic downturn;

materially adverse changes in economic or labor conditions in the markets served by us or by companies in which we have substantial investments;

material changes in available technology;

technology substitution;

an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations;

the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results;

the effects of competition in our markets;

our ability to satisfy regulatory merger conditions;

the ability of Verizon Wireless to continue to obtain sufficient spectrum resources;

our ability to recover insurance proceeds relating to equipment losses and other adverse financial impacts resulting from the terrorist attacks on September 11, 2001; and

changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Information relating to market risk is included in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in the ~~Consolidated Financial Condition~~ section under the caption “Market Risk.”

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer have evaluated the effectiveness of the registrant’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934), as of a date within 90 days of the filing date of this quarterly report (Evaluation Date), that ensure that information relating to the registrant which is required to be disclosed in this report is recorded, processed, summarized and reported, within required time periods. They have concluded that as of the Evaluation Date, the registrant’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the registrant and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report was being prepared.

(b) Changes in Internal Controls

There were no significant changes in the registrant’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in these controls requiring corrective actions.

4030

Part II — Other Information

Item 6. Exhibits and Reports on Form 8-K

~~(a) Exhibits:~~

(a)

Exhibits:


Exhibit
Number

1010z		~~Amendment to the~~ Employment Agreement between Verizon and ~~Charles R. Lee.~~William P. Barr.

12		Computation of Ratio of Earnings to Fixed Charges.

99.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~(b) Reports on Form 8-K filed or furnished during the quarter ended September 30, 2002:~~

(b) Reports on Form 8-K filed or furnished during the quarter ended March 31, 2003:

A Current Report on Form 8-K, filed ~~July 25, 2002,~~January 16, 2003, containing ~~a press release announcing the decision not~~an exhibit of computation of ratio of earnings to ~~reintegrate Genuity into the Company.~~fixed charges.

A Current Report on Form 8-K, furnished on ~~July 31, 2002,~~January 29, 2003, containing a press release announcing earnings for the ~~second~~fourth quarter ofand year ended December 31, 2002, and ~~supplemental information about~~providing our financial ~~and other projections.~~outlook for 2003.

A Current Report on Form 8-K, furnished on ~~August 12, 2002,~~March 14, 2003, containing certification statements to the Securities and Exchange Commission, ~~relating to Exchange Act filings,~~ signed by President and Chief Executive Officer Ivan G. Seidenberg and by Executive Vice President and Chief Financial Officer Doreen A. Toben.
~~A Current Report on Form 8-K, filed August 21, 2002, containing an exhibit of computation of ratio of earnings to fixed charges.~~
A Current Report on Form 8-K, furnished on September 30, 2002, containing an update provided by Executive Vice President and Chief Financial Officer Doreen A. Toben on the company’s continued progress in reducing its debt levels.

4131

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.


	VERIZON COMMUNICATIONS INC.

Date: ~~November 13, 2002~~May 12, 2003	By	/s/ John F. Killian

		John F. Killian
		Senior Vice President and Controller ~~(Principal~~ (Principal Accounting Officer)

UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF ~~NOVEMBER 6, 2002~~MAY 5, 2003.

1.		I have reviewed this quarterly report on Form 10-Q of Verizon Communications Inc.;

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

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

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

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

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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

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

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

1.		I have reviewed this quarterly report on Form 10-Q of Verizon Communications Inc.;

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

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

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

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

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

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

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


(Mark one)
~~[x]~~x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended ~~September 30, 2002~~	March 31, 2003

	OR

[OR]

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to


Delaware ~~(State of Incorporation)~~		23-2259884
(State of Incorporation)		(I.R.S. Employer
		Identification No.)

1095 Avenue of the Americas		10036
New York, New York		(Zip Code)
(Address of principal executive offices)		~~10036~~ ~~(Zip Code)~~


		Page

Part I. Financial Information		~~Page~~

Item 1. Financial Statements (Unaudited)

	Condensed Consolidated Statements of Income ~~Three and nine~~For the three months ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~		1

	Condensed Consolidated Balance Sheets ~~September 30, 2002~~March 31, 2003 and December 31, ~~2001~~2002		2

	Condensed Consolidated Statements of Cash Flows ~~Nine~~For the three months ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~		3

	Notes to Condensed Consolidated Financial Statements		4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1812

Item 3. Quantitative and Qualitative Disclosures About Market Risk			4030

Item 4. Controls and Procedures			4030


Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K			4131


Signature			4232


Certifications			4333


(Dollars in Millions, Except Per Share Amounts) (Unaudited)	Three Months Ended September 30,						Nine Months Ended September 30,

	2002			2001			2002			2001

Operating Revenues	$	17,201		$	17,004		$	50,411		$	50,179
Operations and support expense (exclusive of items shown below)		10,391			9,925			30,951			28,937
Depreciation and amortization		3,320			3,402			9,996			10,162
Sales of assets, net		(2,527	)		—			(2,747	)		(5	)

Operating Income		6,017			3,677			12,211			11,085
Income (loss) from unconsolidated businesses		478			142			(4,426	)		(3,306	)
Other income and (expense), net		37			84			106			268
Interest expense		(803	)		(797	)		(2,415	)		(2,627	)
Minority interest		(372	)		(226	)		(928	)		(533	)
Mark-to-market adjustment — financial instruments		(17	)		(13	)		(28	)		(166	)

Income before provision for income taxes, extraordinary item and cumulative effect of accounting change		5,340			2,867			4,520			4,721
Provision for income taxes		932			984			2,226			2,105

Income Before Extraordinary Item and Cumulative Effect of Accounting Change		4,408			1,883			2,294			2,616
Extraordinary item, net of tax		(3	)		(8	)		(9	)		(8	)
Cumulative effect of accounting change, net of tax		—			—			(496	)		(182	)

Net Income	$	4,405		$	1,875		$	1,789		$	2,426

Basic Earnings Per Common Share:
Income before extraordinary item and cumulative effect of accounting change	$	1.61		$	.69		$	.84		$	.97
Extraordinary item, net of tax		—			—			—			—
Cumulative effect of accounting change, net of tax		—			—			(.18	)		(.07	)

Net Income	$	1.61		$	.69		$	.66		$	.90

Weighted-average shares outstanding (in millions)		2,732			2,712			2,726			2,708

Diluted Earnings Per Common Share:
Income before extraordinary item and cumulative effect of accounting change	$	1.60		$	.69		$	.83		$	.96
Extraordinary item, net of tax		—			—			—			—
Cumulative effect of accounting change, net of tax		—			—			(.18	)		(.07	)

Net Income	$	1.60		$	.69		$	.65		$	.89

Weighted-average shares outstanding — diluted (in millions)		2,749			2,735			2,737			2,729

Dividends declared per common share	$	.385		$	.385		$	1.155		$	1.155


(Dollars in Millions, Except Per Share Amounts) (Unaudited)		Three Months Ended March 31,
		2003			2002

Operating Revenues		$	16,279		$	16,430

Operating Expenses
	Cost of services and sales (exclusive of items shown below)		5,141			4,874
	Selling, general and administrative expense		4,253			4,945
	Depreciation and amortization expense		3,385			3,320
	Sales of assets, net		–			(220	)

Total Operating Expenses			12,779			12,919

Operating Income			3,500			3,511
Income (loss) from unconsolidated businesses			166			(1,543	)
Other income and (expense), net			34			47
Interest expense			(778	)		(814	)
Minority interest			(326	)		(243	)

Income before provision for income taxes and cumulative effect of accounting change			2,596			958
Provision for income taxes			838			963

Income (Loss) Before Cumulative Effect of Accounting Change			1,758			(5	)
Cumulative effect of accounting change, net of tax			2,150			(496	)

Net Income (Loss)		$	3,908		$	(501	)

Basic Earnings (Loss) Per Common Share⁽¹⁾
Income before cumulative effect of accounting change		$	.64		$	–
Cumulative effect of accounting change, net of tax			.78			(.18	)

Net Income (Loss)		$	1.42		$	(.18	)

Weighted-average shares outstanding (in millions)			2,748			2,719

Diluted Earnings (Loss) Per Common Share⁽¹⁾
Income before cumulative effect of accounting change		$	.63		$	–
Cumulative effect of accounting change, net of tax			.77			(.18	)

Net Income (Loss)		$	1.41		$	(.18	)

Weighted-average shares outstanding (in millions)			2,780			2,719

Dividends declared per common share		$	.385		$	.385


(Dollars in Millions, Except Per Share Amounts) (Unaudited)		September 30,			December 31,
		2002			2001

Assets
Current assets
	Cash and cash equivalents	$	5,651		$	979
	Short-term investments		246			1,991
	Accounts receivable, net of allowances of $2,519 and $2,153		12,956			14,254
	Inventories		1,612			1,968
	Net assets held for sale		—			1,199
	Prepaid expenses and other		3,001			2,796

Total current assets			23,466			23,187

Plant, property and equipment			176,779			169,586
	Less accumulated depreciation		102,642			95,167

			74,137			74,419

Investments in unconsolidated businesses			4,950			10,202
Intangible assets, net			46,761			44,262
Other assets			19,785			18,725

Total assets		$	169,099		$	170,795

Liabilities and Shareowners’ Investment
Current liabilities
	Debt maturing within one year	$	11,422		$	18,669
	Accounts payable and accrued liabilities		14,242			13,947
	Other		5,320			5,404

Total current liabilities			30,984			38,020

Long-term debt			46,029			45,657
Employee benefit obligations			13,648			11,898
Deferred income taxes			18,802			16,543
Other liabilities			3,951			3,989

Minority interest			23,840			22,149

Shareowners’ investment
	Series preferred stock ($.10 par value; none issued)		—			—
	Common stock ($.10 par value; 2,751,650,484 shares issued in both periods)		275			275
	Contributed capital		24,671			24,676
	Reinvested earnings		9,223			10,704
	Accumulated other comprehensive loss		(1,336	)		(1,187	)

			32,833			34,468
	Less common stock in treasury, at cost		402			1,182
	Less deferred compensation — employee stock ownership plans and other		586			747

Total shareowners’ investment			31,845			32,539

Total liabilities and shareowners’ investment		$	169,099		$	170,795


(Dollars in Millions, Except Per Share Amounts) (Unaudited)		March 31,			December 31,
		2003			2002

Assets
Current assets
	Cash and cash equivalents	$	4,135		$	1,438
	Short-term investments		1,479			2,042
	Accounts receivable, net of allowances of $2,761 and $2,782		11,462			12,598
	Inventories		1,536			1,502
	Prepaid expenses and other		3,679			3,341

Total current assets			22,291			20,921

Plant, property and equipment			179,147			178,028
	Less accumulated depreciation		102,027			103,532

			77,120			74,496

Investments in unconsolidated businesses			5,242			4,988
Intangible assets, net			46,661			46,739
Other assets			20,739			20,324

Total assets		$	172,053		$	167,468

Liabilities and Shareowners’ Investment
Current liabilities
	Debt maturing within one year	$	10,619		$	9,288
	Accounts payable and accrued liabilities		12,767			12,745
	Other		5,046			5,014

Total current liabilities			28,432			27,047

Long-term debt			43,462			44,791
Employee benefit obligations			15,291			15,390
Deferred income taxes			21,333			19,468
Other liabilities			3,959			4,015
Minority interest			23,803			24,141
Shareowners’ investment
	Series preferred stock ($.10 par value; none issued)		–			–
	Common stock ($.10 par value; 2,754,803,888 shares and 2,751,650,484 shares issued)		276			275
	Contributed capital		24,804			24,685
	Reinvested earnings		13,424			10,536
	Accumulated other comprehensive loss		(2,138	)		(2,110	)

			36,366			33,386
	Less common stock in treasury, at cost		115			218
	Less deferred compensation — employee stock ownership plans and other		478			552

Total shareowners’ investment			35,773			32,616

Total liabilities and shareowners’ investment		$	172,053		$	167,468


(Dollars in Millions) (Unaudited)		Nine Months Ended September 30,

		2002			2001

Cash Flows from Operating Activities
Income before extraordinary item and cumulative effect of accounting change		$	2,294		$	2,616
Adjustments to reconcile income before extraordinary item and cumulative effect of accounting change to net cash provided by operating activities:
	Depreciation and amortization		9,996			10,162
	Sales of assets, net		(2,747	)		(5	)
	Mark-to-market adjustment — financial instruments		28			166
	Employee retirement benefits		(963	)		(1,610	)
	Deferred income taxes		869			552
	Provision for uncollectible accounts		2,191			1,374
	Loss from unconsolidated businesses		4,426			3,306
	Changes in current assets and liabilities, net of effects from acquisition/disposition of businesses		17			(3,469	)
	Other, net		(33	)		4

Net cash provided by operating activities			16,078			13,096

Cash Flows from Investing Activities
Capital expenditures			(8,108	)		(12,477	)
Acquisitions, net of cash acquired, and investments			(1,017	)		(3,005	)
Proceeds from disposition of businesses			4,638			200
Proceeds from spectrum payment refund			1,479			—
Net change in short-term investments			1,648			1,338
Other, net			383			(1,213	)

Net cash used in investing activities			(977	)		(15,157	)

Cash Flows from Financing Activities
Proceeds from long-term borrowings			7,533			9,204
Repayments of long-term borrowings and capital lease obligations			(5,919	)		(2,003	)
Decrease in short-term obligations, excluding current maturities			(9,632	)		(1,436	)
Dividends paid			(3,147	)		(3,119	)
Proceeds from sale of common stock			653			436
Other, net			83			(413	)

Net cash provided by (used in) financing activities			(10,429	)		2,669

Increase in cash and cash equivalents			4,672			608
Cash and cash equivalents, beginning of period			979			757

Cash and cash equivalents, end of period		$	5,651		$	1,365


(Dollars in Millions)			Gross		Gross
			Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value

At September 30, 2002
Investments in Unconsolidated Businesses	$	345	$	28	$	(22	)	$	351
Other Assets		203		41		—			244

	$	548	$	69	$	(22	)	$	595

At December 31, 2001
Investments in Unconsolidated Businesses	$	1,337	$	578	$	(80	)	$	1,835
Other Assets		243		26		—			269

	$	1,580	$	604	$	(80	)	$	2,104


(Dollars in Millions)		Domestic Telecom			Domestic Wireless		International			Information Services			Corporate & Other			Total

Balance as of December 31, 2001		$	401		$	—	$	627		$	558		$	112		$	1,698
	Goodwill reclassifications		—			—		351			19			—			370
	Goodwill acquired during the period		—			—		51			—			—			51
	CTI goodwill in impairment charge		—			—		(220	)		—			—			(220	)
	Goodwill impairment losses under SFAS No. 142		(90	)		—		—			(2	)		(112	)		(204	)

Balance as of September 30, 2002		$	311		$	—	$	809		$	575		$	—		$	1,695


(Dollars in Millions)		Domestic		Domestic					Information		Corporate &
		Telecom		Wireless		International			Services		Other		Total

Balance as of December 31, 2002		$	314	$	–	$	796		$	579	$	–	$	1,689
	Goodwill reclassifications		–		–		(45	)		19		–		(26	)
	Goodwill acquired during the period		–		–		–			–		–		–
	Goodwill impairment losses under SFAS No. 142		–		–		–			–		–		–

Balance as of March 31, 2003		$	314	$	–	$	751		$	598	$	–	$	1,663


(Dollars in Millions)		As of September 30, 2002				As of December 31, 2001

		Gross Carrying		Accumulated		Gross Carrying		Accumulated
		Amount		Amortization		Amount		Amortization

Amortized intangible assets:
	Customer lists (4 to 7 years)	$	3,448	$	1,712	$	3,349	$	1,279
	Non-network software (3 to 7 years)		4,181		1,181		3,187		793
	Other (2 to 30 years)		79		16		74		29

Total		$	7,708	$	2,909	$	6,610	$	2,101

Unamortized intangible assets:
	Wireless licenses	$	40,267			$	38,055


(Dollars in Millions)		As of March 31, 2003				As of December 31, 2002
		Gross Carrying		Accumulated		Gross Carrying		Accumulated
		Amount		Amortization		Amount		Amortization

Amortized intangible assets:
	Customer lists (4 to 7 years)	$	3,442	$	1,979	$	3,440	$	1,846
	Non-network software (3 to 7 years)		4,878		1,597		4,700		1,399
	Other (2 to 30 years)		166		27		81		14

Total		$	8,486	$	3,603	$	8,221	$	3,259

Unamortized intangible assets:
	Wireless licenses	$	40,115			$	40,088


(Dollars in Millions)	At March 31, 2003			At December 31, 2002

Foreign currency translation adjustments	$	(1,198	)	$	(1,228	)
Unrealized gains on marketable securities		17			23
Unrealized derivative losses on cash flow hedges		(65	)		(33	)
Minimum pension liability adjustment		(892	)		(872	)

Accumulated other comprehensive loss	$	(2,138	)	$	(2,110	)


(Dollars and Shares in Millions, Except Per Share Amounts)		Three Months Ended September 30,						Nine Months Ended September 30,

		2002			2001			2002			2001

Net Income Used For Basic Earnings Per Common Share
Income before extraordinary item and cumulative effect of accounting change		$	4,408		$	1,883		$	2,294		$	2,616
Extraordinary item, net of tax			(3	)		(8	)		(9	)		(8	)
Cumulative effect of accounting change, net of tax			—			—			(496	)		(182	)

Net income		$	4,405		$	1,875		$	1,789		$	2,426

Net Income Used For Diluted Earnings Per Common Share
Income before extraordinary item and cumulative effect of accounting change		$	4,408		$	1,883		$	2,294		$	2,616
After-tax minority interest expense related to exchangeable equity interest			3			—			3			—

Income before extraordinary item and cumulative effect of accounting change — after assumed conversion of dilutive securities			4,411			1,883			2,297			2,616
Extraordinary item, net of tax			(3	)		(8	)		(9	)		(8	)
Cumulative effect of accounting change, net of tax			—			—			(496	)		(182	)

Net income after assumed conversion of dilutive securities		$	4,408		$	1,875		$	1,792		$	2,426

Basic Earnings Per Common Share
Weighted-average shares outstanding — basic			2,732			2,712			2,726			2,708

Income before extraordinary item and cumulative effect of accounting change		$	1.61		$	.69		$	.84		$	.97
Extraordinary item, net of tax			—			—			—			—
Cumulative effect of accounting change, net of tax			—			—			(.18	)		(.07	)

Net income		$	1.61		$	.69		$	.66		$	.90

Diluted Earnings Per Common Share
Weighted-average shares outstanding			2,732			2,712			2,726			2,708
Effect of dilutive securities:
	Stock options		3			23			6			21
	Exchangeable equity interest		14			—			5			—

Weighted-average shares outstanding — diluted			2,749			2,735			2,737			2,729

Income before extraordinary item and cumulative effect of accounting change		$	1.60		$	.69		$	.83		$	.96
Extraordinary item, net of tax			—			—			—			—
Cumulative effect of accounting change, net of tax			—			—			(.18	)		(.07	)

Net income		$	1.60		$	.69		$	.65		$	.89


(Dollars in Millions)	March 31, 2003		December 31, 2002

Assets
Domestic Telecom	$	84,055	$	82,257
Domestic Wireless		63,407		63,470
Information Services		4,337		4,319
International		11,970		11,955

Total segments		163,769		162,001
Reconciling items		8,284		5,467

Total consolidated	$	172,053	$	167,468


(Dollars in Millions)	September 30, 2002		December 31, 2001

Assets
Domestic Telecom	$	79,441	$	82,635
Domestic Wireless		63,309		60,262
International		11,305		14,324
Information Services		4,260		4,160

Total segments		158,315		161,381
Reconciling items		10,784		9,414

Total consolidated	$	169,099	$	170,795


(Dollars in Millions)	Three Months Ended									Nine Months Ended
	September 30,									September 30,

	2002			2001			% Change			2002			2001		% Change

Other Income and (Expense), Net
Interest income	$	44		$	115			(61.7	)%	$	151		$	230		(34.3	)%
Foreign exchange gains (losses), net		(3	)		(36	)		(91.7	)		(64	)		4		(1,700.0	)
Other, net		(4	)		5			(180.0	)		19			34		(44.1	)

Total	$	37		$	84			(56.0	)	$	106		$	268		(60.4	)

•		~~Equity price risk, because the notes are exchangeable into shares that are traded on the open market and routinely fluctuate in value.~~

•		~~Foreign exchange rate risk, because the notes are exchangeable into shares that are denominated in a foreign currency.~~

•		~~Interest rate risk, because the notes carry fixed interest rates.~~

•		At September 30, 2002, each $1,000 principal amount of 4.25% notes (each, a 4.25% Note) was exchangeable into 40.3702 ordinary shares of C&W and 7.6949 shares of NTL (collectively, 4.25% Note Exchange Property), and the market value of the 4.25% Note Exchange Property was substantially below the debt liability associated with each 4.25% Note. As a result of the bankruptcy of NTL, it is anticipated that the 4.25% Note Exchange Property will consist of C&W shares and a combination of shares, warrants and equity rights in the reorganized NTL entities. Each $20 increase in the value of the 4.25% Note Exchange Property above the value of the associated debt liability would in the aggregate reduce our pretax earnings by $53 million.

•		A subsequent decrease in the value of the 5.75% Note Exchange Property or the 4.25% Note Exchange Property would correspondingly increase earnings, but not to exceed the amount of any previous reduction in earnings.

•		~~Our cash flows would not be affected by mark-to-market activity relating to the exchangeable notes.~~

•		~~the duration and extent of the current economic downturn;~~

•		~~materially adverse changes in economic conditions in the markets served by us or by companies in which we have substantial investments;~~

•		~~material changes in available technology;~~

•		~~technology substitution;~~

•		~~an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations;~~

•		~~the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results;~~

•		~~the effects of competition in our markets;~~

•		~~our ability to satisfy regulatory merger conditions and obtain combined company revenue enhancements and cost savings;~~

•		~~the ability of Verizon Wireless to achieve revenue enhancements and cost savings, and obtain sufficient spectrum resources;~~

•		~~the outcome of litigation concerning the FCC NextWave spectrum auction;~~

•		~~our ability to recover insurance proceeds relating to equipment losses and other adverse financial impacts resulting from the terrorist attacks on Sept. 11, 2001; and~~

•		changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings.


			A Current Report on Form 8-K, furnished on ~~August 12, 2002,~~March 14, 2003, containing certification statements to the Securities and Exchange Commission, ~~relating to Exchange Act filings,~~ signed by President and Chief Executive Officer Ivan G. Seidenberg and by Executive Vice President and Chief Financial Officer Doreen A. Toben.

			~~A Current Report on Form 8-K, filed August 21, 2002, containing an exhibit of computation of ratio of earnings to fixed charges.~~

			A Current Report on Form 8-K, furnished on September 30, 2002, containing an update provided by Executive Vice President and Chief Financial Officer Doreen A. Toben on the company’s continued progress in reducing its debt levels.


Date: ~~November 13, 2002~~May 12, 2003		/s/ Ivan G. Seidenberg

		Ivan G. Seidenberg
		President and Chief Executive Officer


Date: ~~November 13, 2002~~May 12, 2003		/s/ Doreen A. Toben

		Doreen A. Toben
		Executive Vice President and Chief Financial Officer

~~Exhibit~~
~~Number~~

~~Amendment to the Employment Agreement between Verizon and Charles R. Lee.~~