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



                                    FORM 10-K
                                    ---------



                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                  ---------------------------------------------


                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     --------------------------------------


                      FOR THE YEAR ENDED DECEMBER 31, 2004
                      ------------------------------------






                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

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

For the fiscal year ended December 31, 2004
                          ------------------

                                       OR

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

For the transition period from _________ to ___________

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

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

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

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

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



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


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

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

The  aggregate  market  value of  common  stock  held by  non-affiliates  of the
registrant  on June  30,  2004  was  approximately  $3,351,287,851  based on the
closing price of $12.10 per share.

The number of shares outstanding of the registrant's Common Stock as of February
28, 2005 was 340,187,920.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  for the  registrant's  2005 Annual  Meeting of
Stockholders to be held on May 26, 2005 are  incorporated by reference into Part
III of this Form 10-K.




                               TABLE OF CONTENTS
                               -----------------

                                                                                        Page
                                                                                        ----
PART I
- ------

                                                                                     
Item 1.    Business                                                                        2

Item 2.    Properties                                                                      9

Item 3.    Legal Proceedings                                                              10

Item 4.    Submission of Matters to a Vote of Security Holders                            10

Executive Officers                                                                        11

PART II
- -------

Item 5.    Market for Registrant's Common Equity,
               Related Stockholder Matters and Issuer Purchases of Equity Securities      13

Item 6.    Selected Financial Data                                                        14

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

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk                     34

Item 8.    Financial Statements and Supplementary Data                                    35

Item 9.    Changes in and Disagreements with Accountants on Accounting                    35
               and Financial Disclosure

Item 9A.   Controls and Procedures                                                        35

Item 9B.   Other Information                                                              35

PART III
- --------

Item 10.   Directors and Executive Officers of the Registrant                             35

Item 11.   Executive Compensation                                                         36

Item 12.   Security Ownership of Certain Beneficial Owners
                and Management and Related Stockholder Matters                            36

Item 13.   Certain Relationships and Related Transactions                                 36

Item 14.   Principal Accountant Fees and Services                                         36

PART IV
- -------

Item 15.   Exhibits and Financial Statement Schedules                                     36

Signatures                                                                                40

Index to Consolidated Financial Statements                                               F-1




                                     PART I
                                     ------

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

Citizens Communications Company and its subsidiaries (Citizens) will be referred
to as the "Company," "we," "us" or "our" throughout this report.

We are a communications  company providing services to rural areas and small and
medium-sized  towns and cities as an incumbent local exchange carrier,  or ILEC.
We offer our ILEC services  under the "Frontier"  name. In addition,  we provide
competitive local exchange carrier,  or CLEC, services to business customers and
to other  communications  carriers in certain  metropolitan areas in the western
United  States  through  Electric  Lightwave,  LLC,  or  ELI,  our  wholly-owned
subsidiary.  On April 1, 2004,  we announced  the  completion of the sale of our
Vermont Electric Division.  With that transaction,  we completed the divestiture
of our public utilities  services  segments pursuant to plans announced in 1999.
Among the highlights for 2004:

          *    Cash Generation
               The Company  continued  to drive free cash flow  through  further
               growth  of  broadband  and  value  added  services,  productivity
               improvements,  and a disciplined capital expenditure program that
               emphasizes return on investment.

          *    Debt Reduction
               In our concerted  efforts to maintain the quality and strength of
               our  balance  sheet,  we retired  $662.0  million of debt in 2004
               ($514.0  million  from cash on hand and $148.0  million of Equity
               Providing   Preferred  Income  Convertible   Securities  (EPPICS)
               converted to our common stock). In addition, we refinanced $700.0
               million of debt that reduced the coupon from 8.5% to 6.25% a year
               and  extended  the  maturity  from 2006 to 2013.  The annual cost
               savings  from  these  debt   repayments,   conversions   and  the
               refinancing will be approximately $60.4 million.

          *    Stockholder Value
               In  2004,  the  Board  of  Directors  determined  that  the  best
               alternative for enhancing  stockholder value was to capitalize on
               the Company's strong free cash flow by returning significant cash
               to stockholders by paying a special, non-recurring dividend of $2
               per common share and  instituting a regular annual dividend of $1
               per common share to be paid quarterly.

          *    Growth
               We  continue to have  success in selling  enhanced  services  and
               high-speed  internet  products and we expect continued demand and
               growth opportunities.

The  telecommunications  industry is facing significant changes and difficulties
and our financial results reflect the impact of this challenging environment. As
discussed  in more detail in  Management's  Discussion  & Analysis of  Financial
Condition  and  Results  of  Operations  (MD&A),  our ILEC  revenues  have  been
decreasing,   and  demand  and  pricing  for  CLEC   services   have   decreased
substantially,  particularly for long-haul services, and these trends are likely
to  continue.  Revenue from our ILEC,  CLEC and public  utility  operations  was
$2,027.2 million, $156.0 million, and $9.7 million, respectively, in 2004.

Telecommunications Services

Our  telecommunications  services are principally ILEC services and also include
CLEC services  delivered through ELI. As of December 31, 2004, we operated ILECs
in 23 states,  serving  approximately  2.321  million  access  lines and 212,300
high-speed  internet  customers.  Our CLEC  services  consist  of a  variety  of
integrated telecommunications products.

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

                                       2


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

Our ILEC segment accounted for $2,027.2  million,  or 93%, of our total revenues
in 2004.  Approximately  8% of our 2004 ILEC segment  revenues came from federal
and state subsidies and approximately 14% from regulated access charges.

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

         *        local network services,

         *        enhanced services,

         *        network access services,

         *        long distance,

         *        data services, and

         *        directory services.

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

Enhanced  services.  We provide our ILEC customers a number of calling  features
including call forwarding, conference calling, caller identification,  voicemail
and call  waiting.  We offer  packages  of  telecommunications  services.  These
packages permit customers to bundle their basic telephone line with their choice
of enhanced,  long distance and internet services for a monthly fee and/or usage
depending on the plan.

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

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

Revenue is  recognized  when services are provided to customers or when products
are delivered to customers.  Monthly recurring network access service revenue is
billed in advance. The unearned portion of this revenue is initially deferred on
our balance  sheet and  recognized  in revenue over the period that the services
are provided. Non-recurring network access service revenue is billed in arrears.
The earned but unbilled  portion of this revenue is recognized in revenue in the
period that the services are provided.

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

Data services.  We offer data services  including internet access via dial up or
high-speed internet access, frame relay, ethernet and asynchronous transfer mode
(ATM) switching in portions of our system.

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

                                       3


During 2005 we will begin selling voice over internet protocol or VOIP solutions
to commercial  customers in certain of our markets and,  through a  relationship
with a satellite television operator, we will be bundling and selling television
services to our residential  customers in all our markets. We will also consider
providing wireless internet access in some of our markets.

The following table sets forth certain  information  with respect to our revenue
generating units (RGUs), which consists of access lines plus high-speed internet
subscribers, as of December 31, 2004 and 2003.

                                        ILEC RGUs at December 31,
                                        -------------------------
          State                          2004               2003
          -----                          ----               ----

          New York............          1,029,700         1,034,300
          Minnesota...........            289,300           284,300
          Arizona.............            182,000           175,500
          West Virginia.......            179,400           167,200
          California..........            165,000           163,200
          Illinois............            128,600           127,900
          Tennessee...........            104,500           101,800
          Wisconsin...........             77,600            76,800
          Iowa................             62,100            63,000
          Nebraska............             54,400            54,900
          All other states (13)...        260,400           258,000
                                        ---------         ---------
             Total                      2,533,000         2,506,900
                                        =========         =========


Change  in the  number of our  access  lines is the most  fundamental  driver of
changes  in our  revenue.  We have  been  experiencing  a loss of  access  lines
primarily because of difficult economic conditions,  changing consumer behavior,
increased  competition  from  competitive  wireline  providers,   from  wireless
providers  and from  cable  companies  (with  respect  to  broadband  and  cable
telephony),  and by some  customers  disconnecting  second  lines  when they add
high-speed  internet service.  We lost approximately  65,700 access lines during
the year ended  December  31,  2004 but added  approximately  91,800  high-speed
internet  subscribers  during  this  period.  The loss of lines  during 2004 was
primarily   residential   customers.   The  non-residential   line  losses  were
principally in Rochester, New York, while the residential losses were throughout
our  markets.  We expect  to  continue  to lose  access  lines  but to  increase
high-speed  internet  subscribers  during 2005.  A continued  decrease in access
lines,  combined with increased  competition and the other factors  discussed in
MD&A, will cause our revenues to decrease during 2005.

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

ELI provides a broad range of wireline  communications  products and services to
businesses and other  carriers in the western  United States.  ELI accounted for
$156.0  million,  or 7%, of our total  revenues in 2004.  Our CLEC revenues have
declined from a peak of $240.8 million in 2000.

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

Regulatory Environment

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

The  majority of our  operations  are  regulated  extensively  by various  state
regulatory agencies, often called public service commissions, and the FCC.

                                       4


The  Telecommunications  Act of 1996, or the 1996 Act,  dramatically changed the
telecommunications  industry. The main purpose of the 1996 Act was to open local
telecommunications  marketplaces to competition. The 1996 Act preempts state and
local laws to the extent that they prevent  competitive entry into the provision
of any switched  communications  service.  Under the 1996 Act,  however,  states
retain  authority  to impose  requirements  on  carriers  necessary  to preserve
universal service,  protect public safety and welfare, ensure quality of service
and protect consumers. States are also responsible for mediating and arbitrating
interconnection  agreements  between  CLECs and ILECs if voluntary  negotiations
fail.  In  order to  create  an  environment  in which  local  competition  is a
practical possibility,  the 1996 Act imposes a number of requirements for access
to network facilities and interconnection on all local communications providers.
All local  carriers  must  interconnect  with  other  carriers,  unbundle  their
services at wholesale rates, permit resale of their services, enable collocation
of equipment,  provide local  telephone  number  portability and dialing parity,
provide access to poles, ducts, conduits, and rights-of-way,  and complete calls
originated by competing carriers under termination arrangements.

At the  federal  level and in a number of the  states in which we operate we are
subject  to price cap or  incentive  regulation  plans  under  which  prices for
regulated  services are capped in return for the  elimination  or  relaxation of
earnings oversight.  The goal of these plans is to provide incentives to improve
efficiencies and increased  pricing  flexibility for competitive  services while
ensuring that customers  receive  reasonable  rates for basic services.  Some of
these plans have limited terms and, as they expire,  we may need to  renegotiate
with various  states.  These  negotiations  could impact rates,  service quality
and/or infrastructure requirements which could impact our earnings. In the other
states in which we  operate,  we are subject to rate of return  regulation  that
limits levels of earnings and returns on investments.

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

For  interstate  services  regulated  by the  FCC,  we  have  elected  a form of
incentive regulation known as price caps for most of our operations. Under price
caps, interstate access rates are capped and adjusted annually by the difference
between the level of inflation and a productivity  factor.  Given the relatively
low inflation rate in recent years,  interstate  access rates have been adjusted
downward  annually.  In May 2000,  the FCC  adopted a  revised  methodology  for
regulating the interstate  access rates of price cap companies through May 2005.
The program,  known as the  Coalition  for  Affordable  Local and Long  Distance
Services,  or CALLS  plan,  establishes  a price  floor for  interstate-switched
access services and phases out many of the subsidies in interstate access rates.
We have been able to offset some of the  reduction  in  interstate  access rates
through end-user charges.  We believe the net effect of reductions in interstate
access  rates and  increases  in end-user  charges  will reduce our  revenues by
approximately $4.0 million in 2005 compared to 2004. The CALLS program is set to
expire in 2005.  The FCC is expected  to address  future  changes in  interstate
access charges during the year.

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

Some state  legislatures  and  regulators  are also  examining  the provision of
telecommunications  services to previously  unserved areas.  Since many unserved
areas are located in rural  markets,  we could be required to expand our service
territory into some of these areas.

Recent and Potential Regulatory Developments
- --------------------------------------------

Effective  November 24,  2003,  the FCC issued an order  requiring  wireline and
wireless carriers to provide local number  portability (LNP). LNP is the ability
of customers to switch from a wireline  carrier to a wireless  carrier,  or from
one wireless carrier to another  wireless  carrier,  without changing  telephone
numbers.  We are 100% LNP capable in our largest markets and will deploy in each
of the remaining  exchanges in response to bona fide requests as required by the
FCC order.

                                       5


LNP will most likely promote further  competition  between wireline and wireless
carriers  in an  environment  where the  displacement  of  traditional  wireline
services has been increasing because of technological substitutions such as cell
phones, e-mail and Internet phone calling.

In 1994,  Congress passed the Communications  Assistance for Law Enforcement Act
(CALEA)  to ensure  that  telecommunication  networks  can meet law  enforcement
wiretapping needs. In June 2004, the Company filed for additional  extensions of
time to make our entire network CALEA compliant.  However, failure to be granted
further  extensions  could increase our budgeted  capital  expenditures by up to
$6.2 million in 2005.

The FCC in 2003 issued an order as a result of its triennial  review of the 1996
Act. The order  essentially  kept in place the existing  regulatory  regime with
respect to Unbundled  Network  Elements  Platform (UNEP)  competition,  provided
significant  authority to state  regulators to implement  UNEP  competition  and
pricing,  and  eliminated  a  previous  requirement  of  ILECs  to  share  their
high-speed lines with competitors.  The Federal appeals court in the District of
Columbia  overturned  many aspects of the FCC's order,  in particular  the broad
delegation to state  authorities to implement UNEP competition and pricing.  The
appeals court did, however,  uphold the line sharing provisions of the order. On
February 4, 2005,  the FCC  released  permanent  rules  governing  UNEPs.  It is
anticipated  that  portions of these new rules will be  appealed,  and we cannot
predict the impact of such appeals.  We anticipate  that there will be little or
no impact on our ILEC  operations  because the impairment  thresholds set by the
FCC are at a level beyond  Citizens'  demographics  and we do not currently have
UNEP competition in our markets.

The FCC is expected to address issues involving inter-carrier compensation,  the
universal service fund and internet telephony in 2005. The FCC adopted a Further
Notice of Proposed Rulemaking (FNPRM) addressing  inter-carrier  compensation on
February  10,  2005.  Some of the  proposals  being  discussed  with  respect to
inter-carrier compensation, such as "bill and keep" (under which switched access
charges  and  reciprocal  compensation  would be reduced or  eliminated),  could
reduce our access  revenues.  The  universal  service fund is under  pressure as
local exchange  companies lose access lines and more entities,  such as wireless
companies,  seek to receive  monies  from the fund.  The rules  surrounding  the
eligibility of Competitive Eligible  Telecommunication Carriers such as wireless
companies to receive universal service funds are expected to be clarified by the
Federal  State  Joint  Board on  Universal  Service in 2005 and the  outcome may
heighten the  pressures  on the fund.  Changes in the funding or payout rules of
the  universal  service  fund could  further  reduce our  subsidy  revenues.  As
discussed in MD&A, our subsidy revenues are expected to decline in 2005 compared
to 2004.

The development  and growth of internet  telephony (also known as VOIP) by cable
and other  companies  has  increased  the  importance  of regulators at both the
federal and state levels  addressing  whether  such  services are subject to the
same or different regulatory and financial schemes as traditional telephony.  On
November  9, 2004,  the FCC issued an order in  response to a petition by Vonage
Holdings  Corp.   (Vonage),   declaring  that  Vonage-style  VOIP  services  are
jurisdictionally  interstate  in  nature  and  are  thereby  exempt  from  state
telecommunications regulations. The FCC stated that its order was not limited to
Vonage,  but rather  applied to all  Vonage-type  VOIP  offerings  provided over
broadband  services.  The FCC did not address  other  related  issues,  such as:
whether  or under  what  terms  VOIP  traffic  may be  subject  to  intercarrier
compensation;  if VOIP  services  are  subject  to  general  state  requirements
relating to taxation and general commercial  business  requirements;  or whether
VOIP is subject to 911,  USF,  and CALEA  obligations.  The FCC is  planning  on
addressing these open questions in subsequent orders in its ongoing  "IP-Enabled
Services  Proceeding," which was opened in February 2004. Internet telephony may
have an advantage over our traditional services if it remains less regulated. We
are actively participating in the FCC's consideration of all these issues.

The FCC's revised  service  outage  reporting  rules require  telecommunications
providers (regardless of whether they are cable, satellite, wireless, SS7, E911,
or wireline  communications  providers) to report outages of at least 30 minutes
duration that potentially affect at least 900,000 user-minutes.  The initial FCC
order,  which included required  reporting of certain  non-service  interrupting
network outages, was partially stayed. The required network  modifications to be
compliant  with the stayed portion of the order would cost us in excess of $16.0
million.  The New York Public  Service  Commission is also  considering  network
reliability  requirements  that could cost us as much as $65.0  million.  We and
other carriers are opposing these proposed requirements.

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

                                       6


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

As a CLEC, ELI is subject to federal,  state and local regulation.  However, the
level of regulation is typically less than that  experienced  by an ILEC.  Local
governments may require ELI to obtain licenses or franchises  regulating the use
of public rights-of-way necessary to install and operate its networks.

ELI has various  interconnection  agreements in the states in which it operates.
These agreements  govern reciprocal  compensation  relating to the transport and
termination  of  traffic  between  the ILEC's  and ELI's  networks.  The FCC has
significantly  reduced intercarrier  compensation for ISP traffic, also known as
"reciprocal compensation." On December 15, 2004, the FCC adopted permanent rules
governing  UNEPs.  It is  anticipated  that  portions of these new rules will be
appealed,  and we cannot  predict the impact of such appeals.  If the rules take
effect,  we  anticipate  that there will be increased  costs to ELI for services
that they buy today from ILECs.

Most  state  public  service  commissions  require  competitive   communications
providers,  such as ELI,  to  obtain  operating  authority  prior to  initiating
intrastate  services.  Most states  also  require the filing of tariffs or price
lists  and/or  customer-specific  contracts.  ELI is not  currently  subject  to
rate-of-return  or price regulation.  However,  ELI is subject to state-specific
quality of service,  universal service,  periodic reporting and other regulatory
requirements,  although the extent of these  requirements is generally less than
those applicable to ILECs.

Competition

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

Competition  in the  telecommunications  industry is  increasing.  We experience
competition from other wireline  carriers,  VOIP providers such as Vonage,  from
other long distance carriers (including Regional Bell Operating Companies), from
cable companies,  internet service providers and from wireless carriers. Most of
the wireline  competition  we face is in our  Rochester,  New York market,  with
competition  also  present  in a  few  other  markets.  Competition  from  cable
companies with respect to high-speed  internet  access is intense and increasing
in many of our markets.  The cable  company in Rochester  and other parts of our
New York markets began offering a telephony product during 2004. We expect cable
telephony  competition  to increase in  Rochester  and  elsewhere  during  2005.
Competition from wireless companies,  other long distance companies and internet
service providers is increasing in all of our markets.

Our ILEC business has been experiencing  declining access lines, switched access
minutes of use,  and  revenues  because  of  economic  conditions,  unemployment
levels,  increasing competition (as described above), changing consumer behavior
such as wireless  displacement of wireline use and email use, technology changes
and regulatory constraints. These factors are likely to cause our local service,
network access, long distance and subsidy revenues to continue to decline during
2005. One of the ways we are  responding to actual and potential  competition is
by bundling  services and products and offering them for a single  price,  which
results in lower pricing than purchasing the services separately.  Revenues from
data  services  such as  high-speed  internet  access  continue to increase as a
percentage of our total revenues and revenues from high margin  services such as
local line and access  charges and subsidies  are  decreasing as a percentage of
our revenues.  These factors,  along with increasing operating costs, will cause
our profitability to decrease.

The   telecommunications   industry  is  undergoing   significant   changes  and
difficulties.  The market is extremely  competitive,  resulting in lower prices.
Demand and pricing for CLEC services have decreased substantially,  particularly
for  long-haul  services.  These  trends are likely to continue.  These  factors
result in a  challenging  environment  with respect to revenues.  These  factors
could also result in more  bankruptcies  in the sector and therefore  affect our
ability to collect  money owed to us by  bankrupt  carriers.  Several  IXCs have
filed for bankruptcy  protection,  which will allow them to substantially reduce
their cost  structure  and debt.  This could  enable such  companies  to further
reduce prices and increase competition.

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

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

                                       7


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

Competition is based on price, quality,  network reliability,  customer service,
service  features and  responsiveness  to the  customer's  needs.  Many of these
competitors  have  greater  market  presence and greater  financial,  technical,
marketing  and human  resources,  more  extensive  infrastructure  and  stronger
customer and strategic  relationships  than are available to us.  Competition in
the CLEC industry is intense and pricing  continues to decline.  ELI's  revenues
have declined every year since 2000.

Divestiture of Public Utilities Services

In the  past  we  provided  public  utilities  services  including  natural  gas
transmission and distribution,  electric  transmission and  distribution,  water
distribution and wastewater  treatment  services to primarily rural and suburban
customers  throughout  the  United  States.  In  1999,  we  announced  a plan of
divestiture for our public utilities  services  properties.  Since then, we have
divested all of our public utility operations for an aggregate of $1.9 billion.

In 2001, we sold our Louisiana gas operations for $363.4 million in cash and our
Colorado gas division for $8.9 million in cash.  In 2002,  we sold our water and
wastewater  services operations for $859.1 million in cash and $122.5 million in
assumed debt and other  liabilities,  and our Kauai electric division for $215.0
million in cash.  In 2003,  we completed  the sales of The Gas Company in Hawaii
division for $119.3 million in cash and assumed liabilities, our Arizona gas and
electric  divisions  for $224.1  million in cash and our  electric  transmission
operations  in Vermont for $7.3 million in cash.  In 2004, we completed the sale
of our Vermont electric division for an aggregate of approximately $14.0 million
in cash,  net of selling  expenses.  These  transactions  are subject to routine
purchase price adjustments.

Our electric  segment  accounted for $9.7 million of our total revenues in 2004.
At December 31, 2004, we had sold all of our public utilities  services segments
and, as a result,  will have no  operating  results in future  periods for these
businesses.

We have retained a potential  payment  obligation  associated  with our previous
electric  utility  activities in the state of Vermont.  The Vermont Joint Owners
(VJO),  a  consortium  of 14 Vermont  utilities,  including  us,  entered into a
purchase power  agreement  with  Hydro-Quebec  in 1987.  The agreement  contains
"step-up" provisions which state that if any VJO member defaults on its purchase
obligation  under the  contract to purchase  power from  Hydro-Quebec,  then the
other VJO participants  will assume  responsibility  for the defaulting  party's
share on a pro-rata basis.  Our pro-rata share of the purchase power  obligation
is  10%.  If any  member  of the  VJO  defaults  on its  obligations  under  the
Hydro-Quebec  agreement,  the remaining members of the VJO, including us, may be
required  to pay for a  substantially  larger  share of the  VJO's  total  power
purchase  obligation  for the  remainder  of the  agreement  (which runs through
2015).  Paragraph 13 of FIN 45 requires that we disclose "the maximum  potential
amount of future payments (undiscounted) the guarantor could be required to make
under the guarantee." Paragraph 13 also states that we must make such disclosure
"... even if the likelihood of the guarantor's having to make any payments under
the  guarantee is  remote..." As noted above,  our  obligation  only arises as a
result of default by another VJO member such as upon bankruptcy.  Therefore,  to
satisfy the "maximum  potential  amount"  disclosure  requirement we must assume
that all members of the VJO  simultaneously  default, a highly unlikely scenario
given that the two  members of the VJO that have the largest  potential  payment
obligations are publicly traded with investment  grade credit ratings,  and that
all VJO members are regulated  utility  providers  with regulated cost recovery.
Regardless,  despite the remote  chance that such an event could occur,  or that
the State of Vermont  could or would allow such an event,  assuming that all the
members of the VJO  defaulted on January 1, 2006 and remained in default for the
duration of the contract  (another 10 years),  we estimate that our undiscounted
purchase  obligation for 2006 through 2015 would be approximately  $1.4 billion.
In such a  scenario  the  Company  would  then own the power  and could  seek to
recover  its costs.  We would do this by  seeking to recover  our costs from the
defaulting  members and/or reselling the power to other utility providers or the
northeast power grid.  There is an active market for the sale of power. We could
potentially  lose money if we were unable to sell the power at cost.  We caution
that we cannot predict with any degree of certainty any potential outcome.

Segment Information

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

                                       8


Financial Information about Foreign and Domestic Operations and Export Sales

We have no foreign operations.

General

Order backlog is not a significant  consideration in our businesses.  We have no
contracts or subcontracts  that may be subject to  renegotiations  of profits or
termination  at the  election  of the  Federal  government.  We hold no patents,
licenses or concessions that are material.

Employees

As of December 31, 2004, we had 6,373  employees,  of whom 5,912 were associated
with ILEC operations and 461 were associated with ELI. At December 31, 2004, the
total number of our employees affiliated with a union was 3,333, of which 78 are
covered by agreements  set to expire during 2005. We consider our relations with
our employees to be good.

Available Information

We make available on our website,  free of charge,  the periodic reports that we
file with or furnish to the Securities and Exchange  Commission (the "SEC"),  as
well as all amendments to these reports, as soon as reasonably practicable after
such reports are filed with or  furnished to the SEC. We also make  available on
our website,  or in printed form upon  request,  free of charge,  our  Corporate
Governance Guidelines, Code of Business Conduct and Ethics, and the charters for
the Audit, Compensation and Retirement,  and Nominating and Corporate Governance
committees of the Board of Directors. Stockholders may request printed copies of
these materials by writing to: 3 High Ridge Park,  Stamford,  Connecticut  06905
Attention: Corporate Secretary. Our website address is http://www.czn.com.

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

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

An  operations  support  office is currently  located in leased  premises at 180
South Clinton Avenue,  Rochester, New York. In addition, our ILEC segment leases
and owns space in various markets throughout the United States.

An operations  support office for ELI is located in a building we own at 4400 NE
77th Avenue,  Vancouver,  Washington. In addition, our CLEC segment leases local
office space in various markets throughout the United States, and also maintains
a warehouse  facility in Portland,  Oregon. Our CLEC segment also leases network
hub and network equipment installation sites in various locations throughout the
areas  in which it  provides  services.  For  additional  information  regarding
obligations under lease, see Note 26 to Consolidated Financial Statements.

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

                                       9


Item 3.  Legal Proceedings
         -----------------

The City of Bangor,  Maine,  filed suit against us on November 22, 2002,  in the
U.S.  District  Court for the  District  of Maine  (City of  Bangor v.  Citizens
Communications  Company,  Civ.  Action  No.  02-183-B-S).  We  intend  to defend
ourselves  vigorously  against the City's lawsuit.  The City has alleged,  among
other things, that we are responsible for the costs of cleaning up environmental
contamination  alleged to have resulted from the operation of a manufactured gas
plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the
existence of extensive  contamination  of the  Penobscot  River and has asserted
that money  damages and other relief at issue in the lawsuit  could exceed $50.0
million.  The City also requested that punitive  damages be assessed against us.
We have  filed an answer  denying  liability  to the City,  and have  asserted a
number of  counterclaims  against the City.  In addition,  we have  identified a
number of other  potentially  responsible  parties  that may be  liable  for the
damages  alleged by the City and have  joined  them as  parties to the  lawsuit.
These  additional  parties  include  Honeywell  Corporation,  the Army  Corps of
Engineers,  Guilford  Transportation  (formerly  Maine  Central  Railroad),  UGI
Utilities,  Inc., and Centerpoint  Energy Resources  Corporation.  The Court has
dismissed all but two of the City's  claims  including its CERCLA claims and the
claim  against us for punitive  damages.  We are currently  pursuing  settlement
discussions  with the other  parties,  but if those  efforts fail a trial of the
City's  remaining claims could begin as early as May 2005. We have demanded that
various of our  insurance  carriers  defend and indemnify us with respect to the
City's lawsuit, and on December 26, 2002, we filed a declaratory judgment action
against  those  insurance  carriers in the Superior  Court of Penobscot  County,
Maine, for the purpose of establishing  their  obligations to us with respect to
the City's lawsuit.  We intend to vigorously  pursue this lawsuit to obtain from
our  insurance  carriers  indemnification  for any damages  that may be assessed
against us in the City's  lawsuit as well as to recover the costs of our defense
of that lawsuit.

On June 7, 2004,  representatives  of Robert A. Katz Technology  Licensing,  LP,
contacted us regarding  possible  infringement  of several  patents held by that
firm.  The  patents  cover a wide  range of  operations  in which  telephony  is
supported by  computers,  including  obtaining  information  from  databases via
telephone,  interactive  telephone  transactions,  and  customer  and  technical
support applications.  We are cooperating with the patent holder to determine if
we are currently  using any of the processes  that are protected by its patents.
If we determine that we are utilizing the patent holder's intellectual property,
we expect to commence negotiations on a license agreement.

On June 24,  2004,  one of our  subsidiaries,  Frontier  Subsidiary  Telco Inc.,
received a "Notice of Indemnity Claim" from Citibank, N.A., that is related to a
complaint  pending against Citibank and others in the U.S.  Bankruptcy Court for
the  Southern  District  of New York as part of the Global  Crossing  bankruptcy
proceeding. Citibank bases its claim for indemnity on the provisions of a credit
agreement  that was  entered  into in  October  2000  between  Citibank  and our
subsidiary.  We purchased Frontier  Subsidiary Telco, Inc., in June 2001 as part
of our acquisition of the Frontier  telephone  companies.  The complaint against
Citibank, for which it seeks indemnification, alleges that the seller improperly
used a portion of the  proceeds  from the  Frontier  transaction  to pay off the
Citibank credit  agreement,  thereby  defrauding  certain debt holders of Global
Crossing  North America Inc.  Although the credit  agreement was paid off at the
closing  of  the  Frontier  transaction,  Citibank  claims  the  indemnification
obligation survives. Damages sought against Citibank and its co-defendants could
exceed  $1.0  billion.  In August  2004 we  notified  Citibank by letter that we
believe its claims for  indemnification  are invalid  and are not  supported  by
applicable law. We have received no further  communications  from Citibank since
our August letter.

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

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

None in fourth quarter 2004.

                                       10



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

Information as to Executive Officers of the Company as of March 4, 2005 follows:



          Name               Age             Current Position and Officer
          ----               ---             ----------------------------
                                
Mary Agnes Wilderotter        50      President and Chief Executive Officer
Donald B. Armour              57      Senior Vice President, Finance and Treasurer
John H. Casey, III            48      Executive Vice President
Jeanne M. DiSturco            41      Senior Vice President, Human Resources
Jerry Elliott                 45      Executive Vice President and Chief Financial Officer
Peter B. Hayes                47      Senior Vice President Sales, Marketing and Business Development
Robert J. Larson              45      Senior Vice President and Chief Accounting Officer
Daniel J. McCarthy            40      Senior Vice President, Field Operations
L. Russell Mitten             53      Senior Vice President, General Counsel and Secretary


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

MARY AGNES  WILDEROTTER  has been  associated  with Citizens since September 30,
2004 when she was elected President and Chief Executive Officer. Previously, she
was Senior Vice President - Worldwide Public Sector in 2004, Microsoft Corp. and
Senior Vice President - Worldwide  Business  Strategy,  Microsoft Corp., 2002 to
2004.  Before  that  she  was  President  and  Chief  Executive  Officer,   Wink
Communications, 1996 to 2002.

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

JOHN H. CASEY,  III has been associated with Citizens since November 1999. He is
currently Executive Vice President of Citizens.  He was Executive Vice President
and President and Chief  Operating  Officer of our ILEC Sector from July 2002 to
December 2004. He was Vice President of Citizens,  President and Chief Operating
Officer,  ILEC Sector from January 2002 to July 2002,  Vice  President and Chief
Operating  Officer,  ILEC Sector from February  2000 to January  2002,  and Vice
President, ILEC Sector from December 1999 to February 2000.

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

JERRY ELLIOTT has been associated with Citizens since March 2002. He was elected
Executive Vice President and Chief Financial  Officer in July 2004.  Previously,
he was Senior Vice President and Chief  Financial  Officer from December 2002 to
July 2004 and Vice  President  and Chief  Financial  Officer  from March 2002 to
December 2002.  Prior to joining  Citizens,  he was Managing  Director of Morgan
Stanley's Media and Communications Investment Banking Group.

PETER B. HAYES has been  associated with Citizens since February 1, 2005 when he
was elected Senior Vice President,  Sales,  Marketing and Business  Development.
Prior to joining Citizens,  he was associated with Microsoft Corp. and served as
Vice President,  Public Sector,  Europe,  Middle East, Africa from 2003 to 2005,
Vice President and General Manager, Microsoft U.S. Government from 1997 to 2003,
Director,  Worldwide Enterprise Field Strategy, from 1995 to 1997, and Director,
Field and Customer Relations, from 1994 to 1995.

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

                                       11


DANIEL J. McCARTHY has been  associated with Citizens since December 1990. He is
currently Senior Vice President, Field Operations. He was previously Senior Vice
President Broadband Operations from January 2004 to December 2004, and President
and Chief Operating Officer of Electric  Lightwave from January 2002 to December
2004. Previously,  he was President and Chief Operating Officer, Public Services
Sector from November 2001 to January 2002,  Vice  President and Chief  Operating
Officer,  Public  Services  Sector  from  March  2001  to  November  2001,  Vice
President, Citizens Arizona Energy from April 1998 to March 2001.

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

                                       12



                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES


                                     PART II
                                     -------

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and
         ----------------------------------------------------------------------
         Issuer Purchases of Equity Securities
         -------------------------------------


                           PRICE RANGE OF COMMON STOCK

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

                                  2004                  2003
                         -------------------    -------------------
                           High       Low         High        Low
   First Quarter          $13.25     $11.37      $11.55      $8.81
   Second Quarter         $13.54     $12.06      $13.40      $9.99
   Third Quarter          $14.80     $12.04      $13.39     $10.93
   Fourth Quarter         $14.63     $13.11      $12.80     $10.23

As of February 28, 2005, the approximate number of security holders of record of
our Common Stock was 27,366.  This  information  was obtained  from our transfer
agent.

                                    DIVIDENDS
The amount and timing of  dividends  payable on our Common  Stock are within the
sole  discretion  of our Board of  Directors.  In 2004,  the Board of  Directors
approved a special,  non-recurring  dividend of $2.00 per share of Common Stock,
and instituted a regular  annual  dividend of $1.00 per share of Common Stock to
be paid quarterly. Cash dividends paid to shareholders were approximately $832.8
million  in  2004.  No  dividends  were  paid in  2003.  There  are no  material
restrictions on our ability to pay dividends.

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

None

                      ISSUER PURCHASES OF EQUITY SECURITIES

None

                                       13



Item 6.  Selected Financial Data
         -----------------------




($ in thousands, except per share amounts)                            Year Ended December 31,
- ------------------------------------------        --------------------------------------------------------------
                                                     2004         2003        2002         2001         2000
                                                  ------------ ----------- ------------ ------------ -----------
                                                                                     
Revenue (1)                                       $ 2,192,980  $ 2,444,938 $ 2,669,332  $ 2,456,993  $ 1,802,358
Income (loss) from continuing operations before
  extraordinary expense and cumulative effect of
  changes in accounting principle (2)             $    72,150  $  122,083  $  (822,976) $   (63,926) $  (40,071)
Net income (loss)                                 $    72,150  $  187,852  $  (682,897) $   (89,682) $  (28,394)
Basic income (loss) per share of Common Stock
  from continuing operations before extraordinary
  expense and cumulative effect of changes in
  accounting principle (2)                        $      0.24  $     0.44  $     (2.93) $     (0.28) $    (0.15)
Available for common shareholders per basic share $      0.24  $     0.67  $     (2.43) $     (0.38) $    (0.11)
Available for common shareholders per diluted
  share                                           $      0.23  $     0.64  $     (2.43) $     (0.38) $    (0.11)
Cash dividends declared (and paid) per common
  share                                           $      2.50  $        -  $         -  $         -  $        -

                                                                         As of December 31,
                                                  --------------------------------------------------------------
                                                     2004         2003        2002         2001         2000
                                                  ------------ ----------- ------------ ------------ -----------
Total assets                                      $ 6,668,419  $ 7,445,545 $ 8,144,502  $10,551,351  $ 6,954,954
Long-term debt                                    $ 4,266,998  $ 4,195,629 $ 4,957,361  $ 5,534,906  $ 3,062,289
Equity units (3)                                  $         -  $   460,000 $   460,000  $   460,000  $         -
Company Obligated Mandatorily Redeemable
  Convertible Preferred Securities (4)            $         -  $   201,250 $   201,250  $   201,250  $   201,250
Shareholders' equity                              $ 1,362,240  $ 1,415,183 $ 1,172,139  $ 1,946,142  $ 1,720,001



(1)  Represents  revenue from continuing  operations.  Revenue from acquisitions
     contributed  $569.8  million and $49.5 million for the years ended December
     31,  2001  and  2000,  respectively.   Revenue  from  gas  operations  sold
     represented $137.7 million, $218.8 million and $232.3 million in 2003, 2001
     and 2000,  respectively.  Revenue from electric operations sold represented
     $9.7 million, $67.4 million, $76.6 million, $94.3 million and $95.1 million
     in 2004, 2003, 2002, 2001 and 2000, respectively.
(2)  Extraordinary  expense  represents  an  extraordinary  after tax expense of
     $43.6 million related to the discontinuance of the application of Statement
     of Financial  Accounting  Standards No. 71 to our local exchange  telephone
     operations  in  2001.  The  cumulative  effect  of  changes  in  accounting
     principles  represents  the $65.8 million after tax non-cash gain resulting
     from the adoption of Statement of Financial Accounting Standards No. 143 in
     2003, and the write-off of ELI's  goodwill of $39.8 million  resulting from
     the  adoption of Statement of  Financial  Accounting  Standards  No. 142 in
     2002.
(3)  On August  17,  2004,  we issued  common  stock to equity  unit  holders in
     settlement of the equity purchase  contract.
(4)  The  consolidation  of this item  changed  effective  January  1, 2004 as a
     result of the  adoption of FIN 46R,  "Consolidation  of  Variable  Interest
     Entities." See Note 16 for a complete discussion.

                                       14




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

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

     *    Changes in the number of our revenue  generating units, which consists
          of access lines plus high-speed internet subscribers;

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

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

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

     *    Our ability to successfully  introduce new product offerings including
          our ability to offer bundled  service  packages on terms that are both
          profitable to us and attractive to our  customers,  and our ability to
          sell enhanced and data services in order to offset  declines in highly
          profitable revenue from local services, access services and subsidies;

     *    Our ability to comply with  Section 404 of the  Sarbanes-Oxley  Act of
          2002, which requires management to assess its internal control systems
          and disclose whether the internal  control systems are effective,  and
          the identification of any material  weaknesses in our internal control
          over financial reporting;

     *    The  effects  of  changes  in  regulation  in  the  telecommunications
          industry as a result of federal and state  legislation and regulation,
          including  potential  changes in access charges and subsidy  payments,
          regulatory   network   upgrade  and  reliability   requirements,   and
          portability requirements;

     *    Our ability to successfully  renegotiate certain ILEC state regulatory
          plans as they expire or come up for renewal from time to time;

     *    Our ability to manage our operating  expenses,  capital  expenditures,
          pay dividends and reduce or refinance our debt;

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

     *    The effects of bankruptcies in the  telecommunications  industry which
          could result in more price competition and potential bad debts;

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

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

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

                                       15


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

     *    Our  ability to  successfully  renegotiate  expiring  union  contracts
          covering  approximately  78  employees  that are  scheduled  to expire
          during 2005;

     *    Our ability to pay a $1.00 per common share  dividend  annually may be
          affected  by  our  cash  flow  from  operations,   amount  of  capital
          expenditures,  debt service  requirements,  cash paid for income taxes
          and our liquidity;

     *    The  effects  of  any  future   liabilities  or  compliance  costs  in
          connection with environmental and worker health and safety matters;

     *    The  effects of any  unfavorable  outcome  with  respect to any of our
          current or future  legal,  governmental,  or  regulatory  proceedings,
          audits or disputes; and

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

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

Overview
- --------

We are a communications  company providing services to rural areas and small and
medium-sized  towns and cities as an incumbent local exchange carrier,  or ILEC.
We offer our ILEC services  under the "Frontier"  name. In addition,  we provide
competitive local exchange carrier,  or CLEC, services to business customers and
to other  communications  carriers in certain  metropolitan areas in the western
United  States  through  Electric  Lightwave,  LLC,  or  ELI,  our  wholly-owned
subsidiary.

Competition  in the  telecommunications  industry is  increasing.  We experience
competition  from other wireline local carriers,  VOIP providers such as Vonage,
from other long distance carriers (including Regional Bell Operating Companies),
from cable  companies and internet  service  providers  with respect to internet
access and cable  telephony,  and from wireless  carriers.  Most of the wireline
competition we face is in our Rochester,  New York market, with competition also
present  in a few other  markets.  Competition  from cable  companies  and other
high-speed internet service providers with respect to internet access is intense
and increasing in many of our markets.  The cable company in Rochester and other
parts of our New York markets began offering a telephony product during 2004. We
expect cable telephony competition to increase in Rochester and elsewhere during
2005.  Competition from wireless  companies and other long distance companies is
increasing in all of our markets.

The   telecommunications   industry  is  undergoing   significant   changes  and
difficulties.  The market is extremely  competitive,  resulting in lower prices.
Demand and pricing for  certain  CLEC  services  have  decreased  substantially,
particularly  for  long-haul  services.  These trends are likely to continue and
result in a challenging revenue environment.  These factors could also result in
more  bankruptcies  in the sector and  therefore  affect our  ability to collect
money owed to us by  carriers.  Several  long  distance  and IXCs have filed for
bankruptcy protection,  which will allow them to substantially reduce their cost
structure and debt.  This could enable such  companies to further  reduce prices
and increase competition.

Revenues from data services such as high-speed  internet continue to increase as
a percentage of our total  revenues and revenues from high margin  services such
as local line and access charges and subsidies are decreasing as a percentage of
our revenues.  These factors, along with increasing operating and employee costs
will cause our cash generated by operations to decrease.

                                       16


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

For the year  ended  December  31,  2004,  we used cash  flows  from  continuing
operations,  the proceeds from the sale of utility  properties and  investments,
cash and cash  equivalents  to fund capital  expenditures,  dividends,  interest
payments,  a $20.0 million  voluntary  contribution to our pension plan and debt
repayments.  As  of  December  31,  2004,  we  had  cash  and  cash  equivalents
aggregating $167.5 million.

For the year ended  December  31,  2004,  our capital  expenditures  were $276.3
million,  including  $264.3 million for the ILEC segment,  $11.6 million for the
ELI segment and $0.4  million of general  capital  expenditures.  We continue to
closely  scrutinize all of our capital projects,  emphasize return on investment
and focus our capital  expenditures on areas and services that have the greatest
opportunities with respect to revenue growth and cost reduction. For example, in
2005 we  will  allocate  significant  capital  to  services  such as  high-speed
internet  in areas that are growing or  demonstrate  meaningful  demand.  In the
past, large capital outlays were made in newly acquired properties to be able to
offer  all of our  services  across  all of our  areas  and in order to  improve
network  capability and service quality.  After those investments were made, the
total amount of capital  spending has been further  reduced because of declining
revenues and lower costs from vendors. We will continue to focus on managing our
costs  while  increasing  our  investment  in  certain  product  areas  such  as
high-speed internet. Increasing competition, offering new services or a decision
to improve the  capabilities  and reduce the maintenance  costs of our plant may
cause our capital expenditures to increase in the future.

We have  budgeted  approximately  $270.0  million for our 2005 capital  projects
including  $255.0  million for the ILEC  segment  and $15.0  million for the ELI
segment.  Included in these  budgeted  capital  amounts are  approximately  $6.9
million  of  capital  expenditures  associated  with  CALEA.  We  have  received
extensions of time to make our entire network CALEA compliant,  however, failure
to  be  granted  further   extensions   could  increase  our  budgeted   capital
expenditures by up to $6.2 million in 2005.

As of December  31,  2004,  we have  available  lines of credit  with  financial
institutions in the aggregate amount of $250.0 million. Associated facility fees
vary,  depending  on our debt  leverage  ratio,  and are  0.375% per annum as of
December 31,  2004.  The  expiration  date for the facility is October 29, 2009.
During the term of the  facility we may borrow,  repay and reborrow  funds.  The
credit facility is available for general corporate  purposes but may not be used
to fund dividend payments. There are no outstanding advances under the facility.

In July  2004,  our  Board of  Directors  concluded  a review of  financial  and
strategic alternatives. After analysis of alternatives by the Board of Directors
and its financial  and legal  advisors,  the Board  determined to pay a special,
non-recurring  dividend of $2 per common  share and  institute a regular  annual
dividend  of $1 per share of Common  Stock  which  will be paid  quarterly.  The
special,  non-recurring  dividend  and  first  quarterly  dividend  were paid on
September 2, 2004  utilizing  the  Company's  cash on hand.  The next  quarterly
dividend of $0.25 per share of Common Stock was paid on December 31, 2004.

The $832.8 million of dividends paid during 2004 significantly  reduced our cash
balances  and  liquidity.   In  addition,   our  ongoing  annual   dividends  of
approximately $340.0 million will reduce our operating and financial flexibility
and our ability to significantly increase capital expenditures. While we believe
that the amount of our  dividends  will allow for adequate  amounts of cash flow
for other  purposes,  any  reduction  in cash  generated by  operations  and any
increases in capital  expenditures,  interest expense or cash taxes would reduce
the amount of cash  generated in excess of  dividends.  Losses of access  lines,
increases  in  competition,  lower  subsidy  and access  revenues  and the other
factors  described  above is expected to reduce our cash generated by operations
and may require us to  increase  capital  expenditures.  The  downgrades  in our
credit ratings in July 2004 to below investment grade may make it more difficult
and  expensive to  refinance  our  maturing  debt.  We have in recent years paid
relatively  low amounts of cash  taxes.  We expect that over time our cash taxes
will increase.

As a result of the adoption of our dividend policy,  Standard and Poor's lowered
its ratings on Citizens debt from "BBB" to "BB-plus",  Moody's Investors Service
lowered its ratings from "Baa3" to "Ba3" and Fitch  Ratings  lowered its ratings
from "BBB" to "BB".

We  believe  our  operating  cash  flows,  existing  cash  balances,  and credit
facilities  will be adequate to finance our working capital  requirements,  fund
capital expenditures, make required debt payments through 2007, pay dividends to
our  shareholders  in  accordance  with our  dividend  policy,  and  support our
short-term  and  long-term  operating  strategies.  We have  approximately  $6.4
million,  $227.8  million and $37.9 million of debt  maturing in 2005,  2006 and
2007, respectively.

                                       17


Issuance of Common Stock
- ------------------------
On August  17,  2004 we issued  32,073,633  shares  of common  stock,  including
3,591,000  treasury  shares,  to our equity unit  holders in  settlement  of the
equity  purchase  contract  component of the equity  units.  With respect to the
$460.0 million senior note component of the equity units, we repurchased  $300.0
million  principal  amount of these  notes in July 2004.  The  remaining  $160.0
million of the senior notes were repriced and a portion was remarketed on August
12, 2004 as the 6.75% notes due August 17, 2006.  During  August and  September,
2004, we repurchased an additional  $108.2 million of the 6.75% notes which,  in
addition to the $300.0 million  purchased in July,  resulted in a pre-tax charge
of approximately $20.1 million during the third quarter of 2004, but will result
in an annual  reduction in interest expense of about $27.6 million per year. See
discussion below concerning EPPICS conversions for further information regarding
the issuance of common stock.

Issuance of Debt Securities
- ---------------------------
On November 8, 2004, we issued an aggregate  $700.0 million  principal amount of
6.25% senior notes due January 15, 2013 through a registered underwritten public
offering.  Proceeds  from the sale were used to redeem  our  outstanding  $700.0
million of 8.50% Notes due 2006, which is discussed below.

Debt Reduction
- --------------
For the year ended December 31, 2004, we retired an aggregate  principal  amount
of  $1,362.0  million of debt,  including  $148.0  million  of EPPICS  that were
converted to our common stock.

On January 15,  2004,  we repaid at maturity  the  remaining  outstanding  $81.0
million of our 7.45% Debentures.

On January 15, 2004, we redeemed at 101% the remaining outstanding $12.3 million
of our Hawaii Special Purpose Revenue Bonds, Series 1993A and Series 1993B.

On May 17, 2004, we repaid at maturity the remaining outstanding $6.0 million of
Electric  Lightwave,  LLC's  6.05%  Notes.  These Notes had been  guaranteed  by
Citizens.

On July 15,  2004,  we  renegotiated  and prepaid  with $5.0 million of cash the
entire remaining $5.5 million ELI capital lease obligation to a third party.

On July 30,  2004,  we purchased  $300.0  million of the 6.75% notes that were a
component of our equity units at 105.075% of par,  plus accrued  interest,  at a
premium of approximately $15.2 million.

During  August  and  September   2004,  we  repurchased   through  a  series  of
transactions  an  additional  $108.2  million  of the 6.75%  notes due 2006 at a
weighted average price of 104.486% of par, plus accrued  interest,  at a premium
of approximately $4.9 million.

On November 12, 2004,  we called for  redemption on December 13, 2004 the entire
$700.0  million  of our  8.50%  notes  due  2006 at a price of  107.182%  of the
principal amount called,  plus accrued  interest,  at a premium of approximately
$50.3 million.

We may from time to time repurchase our debt in the open market,  through tender
offers or privately negotiated transactions.

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

The notional amounts of fixed-rate  indebtedness  hedged as of December 31, 2004
and December 31, 2003 were $300.0 million and $400.0 million, respectively. Such
contracts  require us to pay  variable  rates of interest  (average  pay rate of
approximately 6.12% as of December 31, 2004) and receive fixed rates of interest
(average receive rate of 8.44% as of December 31, 2004). All swaps are accounted
for under SFAS No. 133 as fair value  hedges.  For the year ended  December  31,
2004,  the interest  savings  resulting  from these  interest rate swaps totaled
approximately $9.4 million.

                                       18


As the result of our call of all of our 8.50% Notes due 2006 in  November  2004,
we terminated  five interest rate swaps used to hedge our interest rate exposure
on that issue,  each swap having a notional  amount of $50.0  million.  Proceeds
from the swap terminations of approximately  $3.0 million and U.S. Treasury rate
lock  agreements  of  approximately  $1.0  million  were used to offset the call
premium associated with the notes retired.

Sale of Non-Strategic Investments
- ---------------------------------
On August 13, 2004, we sold our entire 1,333,500 shares of D & E Communications,
Inc. (D & E) for approximately $13.3 million in cash.

On September  3, 2004,  we sold our entire  holdings of  2,605,908  common share
equivalents  in Hungarian  Telephone  and Cable Corp.  (HTCC) for  approximately
$13.2 million in cash.

During  the  third  quarter  of  2004,  we  sold  our  corporate   aircraft  for
approximately $15.3 million in cash.

Off-Balance Sheet Arrangements
- ------------------------------
We do not maintain any off-balance sheet arrangements, transactions, obligations
or other  relationship  with  unconsolidated  entities that would be expected to
have a material current or future effect upon our financial statements.

Future Commitments
- ------------------
A summary of our future contractual obligations and commercial commitments as of
December 31, 2004 is as follows:



                                                                           Payment due by period
                                                       ----------------------------------------------------------
Contractual Obligations:                                 Less than                                     More than
- ------------------------                     Total         1 year        1-3 years      3-5 years       5 years
($ in thousands)                            ------        ------        ---------      ----------      --------
- ---------------

Long-term debt obligations,
                                                                                       
 excluding interest (see Note 11) (1)     $ 4,219,054     $   6,302      $ 265,464      $ 751,938      $ 3,195,350


Capital lease
 obligations (see Note 26)                      4,421            81            204            271            3,865

Operating lease
   obligations (see Note 26)                  104,992        21,198         26,765         21,535           35,494


Purchase obligations (see Note 26)             70,880        35,831         33,159            900              990


Other long-term liabilities  (2)               63,765             -              -              -           63,765
                                          -----------     ---------      ---------       ---------     -----------
          Total                           $ 4,463,112     $ 63,412       $ 325,592       $ 774,644     $ 3,299,464
                                          ===========     =========      =========       =========     ===========


(1) Includes interest rate swaps ($4.5 million).
(2) Consists of our Equity Providing Preferred Income Convertible Securities
(EPPICS) reflected on our balance sheet.

At December 31, 2004, we have outstanding performance letters of credit totaling
$22.4 million.

Management Succession and Strategic Alternatives Expenses
- ---------------------------------------------------------
On July 11, 2004, our Board of Directors  announced that it completed its review
of the  Company's  financial and  strategic  alternatives.  In 2004, we expensed
approximately  $90.6 million of costs related to management  succession  and our
exploration of financial and strategic alternatives.  Included are $36.6 million
of non-cash  expenses for the  acceleration of stock benefits,  cash expenses of
$19.2  million for advisory  fees,  $19.3  million for  severance  and retention
arrangements and $15.5 million primarily for tax reimbursements.

                                       19

EPPICS
- ------
In 1996, our consolidated wholly-owned subsidiary, Citizens Utilities Trust (the
Trust),  issued,  in an underwritten  public  offering,  4,025,000  shares of 5%
Company Obligated  Mandatorily  Redeemable  Convertible Preferred Securities due
2036 (Trust Convertible Preferred Securities or EPPICS),  representing preferred
undivided interests in the assets of the Trust, with a liquidation preference of
$50 per  security  (for a total  liquidation  amount of $201.3  million).  These
securities  have an  adjusted  conversion  price of $11.46 per  Citizens  common
share.  The conversion  price was reduced from $13.30 to $11.46 during the third
quarter  of 2004 as a result  of the  $2.00  per  share  special,  non-recurring
dividend.  The  proceeds  from the issuance of the Trust  Convertible  Preferred
Securities  and a Company  capital  contribution  were used to  purchase  $207.5
million aggregate  liquidation  amount of 5% Partnership  Convertible  Preferred
Securities due 2036 from another wholly owned consolidated subsidiary,  Citizens
Utilities Capital L.P. (the Partnership).  The proceeds from the issuance of the
Partnership  Convertible Preferred Securities and a Company capital contribution
were used to purchase from us $211.8 million  aggregate  principal  amount of 5%
Convertible  Subordinated  Debentures due 2036. The sole assets of the Trust are
the  Partnership   Convertible   Preferred   Securities,   and  our  Convertible
Subordinated Debentures are substantially all the assets of the Partnership. Our
obligations  under the agreements  related to the issuances of such  securities,
taken  together,  constitute  a full and  unconditional  guarantee  by us of the
Trust's obligations  relating to the Trust Convertible  Preferred Securities and
the Partnership's  obligations relating to the Partnership Convertible Preferred
Securities.

In accordance with the terms of the issuances, we paid the annual 5% interest in
quarterly installments on the Convertible  Subordinated Debentures in 2004, 2003
and 2002.  Only cash was paid (net of investment  returns) to the Partnership in
payment of the interest on the Convertible Subordinated Debentures. The cash was
then  distributed  by the  Partnership to the Trust and then by the Trust to the
holders of the EPPICS.

As of December 31, 2004, EPPICS  representing a total principal amount of $148.0
million had been converted into 11,622,749  shares of Citizens common stock, and
a total of $53.3 million EPPICS remains outstanding.

We have adopted the provisions of FASB  Interpretation No. 46R (revised December
2003) ("FIN 46R"),  "Consolidation  of Variable  Interest  Entities,"  effective
January 1, 2004. We have not restated prior periods.

We have  included the  following  description  to provide  readers a comparative
analysis  of the  accounting  impact  of this  standard.  Both the Trust and the
Partnership  have  been  consolidated  from the date of their  creation  through
December 31, 2003. As a result of the new consolidation standards established by
FIN 46R, the Company,  effective January 1, 2004,  deconsolidated the activities
of the Trust and the Partnership.  We have highlighted the comparative effect of
this change in the following table:


Balance Sheet
- -------------
                                                                 As of
                                     -------------------------------------------------------------
($ in thousands)                      December 31, 2003     December 31, 2004           Change
- ----------------                     --------------------- --------------------     --------------
Assets:
                                                                                       
     Cash                                        $  2,103              $     -           $ (2,103) (1)
     Investments                                        -               12,645             12,645  (2)

Liabilities:
     Long-term debt                                     -               63,765  (3)      (137,485) (3)
     EPPICS                                       201,250                    -  (3)

Statement of Operations
- -----------------------
                                                      As reported for the year ended
                                     -------------------------------------------------------------
($ in thousands)                      December 31, 2003     December 31, 2004           Change
- ----------------                     --------------------- --------------------     --------------
Investment income                                $      -              $   632           $    632  (4)
Interest expense                                        -                8,082              8,082  (5)
Dividends on EPPICS (before tax)                   10,063                    -            (10,063) (6)
                                     --------------------- --------------------     --------------
     Net                                         $ 10,063              $ 7,450           $ (2,613)
                                     ===================== ====================     ==============

     (1)  Represents  a cash  balance  on the books of the  Partnership  that is
          removed as a result of the deconsolidation.
     (2)  Represents Citizens'  investments in the Partnership and the Trust. At
          December 31, 2003, these  investments were eliminated in consolidation
          against the equity of the Partnership and the Trust.

                                       20


     (3)  As a result of the  deconsolidation,  the  Trust  and the  Partnership
          balance  sheets were  removed,  leaving debt issued by Citizens to the
          Partnership in the amount of $211.8 million.  The nominal effect of an
          increase in debt of $10.5 million is debt that is  "intercompany."  As
          of December 31, 2004,  Citizens has $53.3 million  ($63.8 million less
          $10.5  million  of  intercompany  debt) of debt  outstanding  to third
          parties and will continue to pay interest on that amount at 5%.
     (4)  Represents interest income to be paid by the Partnership and the Trust
          to Citizens for its  investments  noted in (2) above.  The Partnership
          and the Trust have no source of cash except as  provided by  Citizens.
          Interest is payable at the rate of 5% per annum.
     (5)  Represents  interest expense on the convertible  debentures  issued by
          Citizens to the partnership. Interest is payable at the rate of 5% per
          annum.
     (6)  As a result of the  deconsolidation of the Trust,  previously reported
          dividends on the convertible preferred securities issued to the public
          by the Trust are removed and replaced by the interest  accruing on the
          debt  issued by  Citizens  to the  Partnership.  Citizens  remains the
          guarantor  of the EPPICS debt and  continues  to be the sole source of
          cash for the Trust to pay dividends.

Covenants
- ---------
The terms and  conditions  contained  in our  indentures  and credit  facilities
agreements  include the timely and punctual  payment of  principal  and interest
when due, the maintenance of our corporate  existence,  keeping proper books and
records in accordance  with GAAP,  restrictions on the allowance of liens on our
assets, and restrictions on asset sales and transfers, mergers and other changes
in  corporate  control.  We  currently  have no  restrictions  on the payment of
dividends either by contract, rule or regulation.

Our  $200.0  million  term  loan  facility  with  the  Rural  Telephone  Finance
Cooperative  (RTFC)  contains  a  maximum  leverage  ratio  covenant.  Under the
leverage  ratio  covenant,  we are  required  to  maintain  a ratio of (i) total
indebtedness  minus cash and cash equivalents in excess of $50.0 million to (ii)
consolidated  adjusted EBITDA (as defined in the agreements)  over the last four
quarters no greater  than 4.25 to 1 through  December  30,  2004,  and 4.00 to 1
thereafter.

Our new $250 million credit facility contains a maximum leverage ratio covenant.
Under the leverage  ratio  covenant,  we are required to maintain a ratio of (i)
total indebtedness minus cash and cash equivalents in excess of $50.0 million to
(ii)  consolidated  adjusted  EBITDA (as defined in the agreement) over the last
four  quarters no greater than 4.50 to 1.  Although  the new credit  facility is
unsecured,  it will be equally and ratably  secured by certain liens and equally
and ratably  guaranteed by certain of our  subsidiaries if we issue debt that is
secured  or  guaranteed.  We are in  compliance  with all of our debt and credit
facility covenants.

Divestitures
- ------------
On August 24, 1999, our Board of Directors  approved a plan of  divestiture  for
our public utilities services businesses, which included gas, electric and water
and wastewater businesses. As of April 1, 2004, we sold all of these properties.
All of the  agreements  relating to the sales provide that we will indemnify the
buyer against certain liabilities (typically liabilities relating to events that
occurred prior to sale), including environmental liabilities, for claims made by
specified dates and that exceed threshold amounts specified in each agreement.

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

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

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

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

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

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

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

                                       21


On  December  2,  2003,  we  completed  the  sale of our  electric  transmission
facilities in Vermont for $7.3 million in cash.

On April 1, 2004, we completed the sale of our electric distribution  facilities
in Vermont for $14.0 million in cash, net of selling expenses.

In February 2005, we entered into a definitive agreement to sell Conference-Call
USA, LLC, (CCUSA) our conferencing  services business for $41.0 million in cash,
subject to  adjustments  under the terms of the agreement.  This  transaction is
expected to close by March 31,  2005.  CCUSA had  revenues of $24.6  million and
operating  income of $8.0  million  for the year ended  December  31,  2004.  At
December 31, 2004, CCUSA's net assets totaled $24.4 million.

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

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

Asset Impairment
Our asset impairment charges in 2002 were critical estimates.  In 2003 and 2004,
we had no "critical estimates" related to asset impairments.

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

Intangibles
Our  indefinite  lived  intangibles  consist of goodwill  and trade name,  which
resulted from the purchase of ILEC  properties.  We test for impairment of these
assets annually, or more frequently,  as circumstances  warrant. All of our ILEC
properties share similar economic characteristics and as a result, our reporting
unit is the ILEC segment.  In determining  fair value of goodwill during 2004 we
compared  the net  book  value of the  ILEC  assets  to  trading  values  of the
Company's  publicly  traded common stock.  Additionally,  we utilized a range of
prices to gauge  sensitivity.  Our test determined that fair value exceeded book
value of goodwill. An independent third party appraiser analyzed trade name.

Pension and Other Postretirement Benefits
Our  estimates of pension  expense,  other post  retirement  benefits  including
retiree  medical  benefits  and related  liabilities  are  "critical  accounting
estimates." We sponsor a noncontributory defined benefit pension plan covering a
significant number of our employees and other post retirement benefit plans that
provide medical,  dental, life insurance benefits and other benefits for covered
retired employees and their beneficiaries and covered dependents. The accounting
results  for pension  and post  retirement  benefit  costs and  obligations  are
dependent upon various  actuarial  assumptions  applied in the  determination of
such amounts. These actuarial assumptions include the following: discount rates,
expected long-term rate of return on plan assets, future compensation increases,
employee  turnover,  healthcare  cost  trend  rates,  expected  retirement  age,
optional form of benefit and mortality.  The Company  reviews these  assumptions
for changes annually with its outside  actuaries.  We consider our discount rate
and  expected  long-term  rate of return on plan assets to be our most  critical
assumptions.

                                       22


The discount  rate is used to value,  on a present  basis,  our pension and post
retirement  benefit  obligation as of the balance  sheet date.  The same rate is
also used in the  interest  cost  component  of the pension and post  retirement
benefit cost  determination for the following year. The measurement date used in
the selection of our discount rate is the balance sheet date.  Our discount rate
assumption is determined  annually with  assistance  from our actuaries based on
the interest rates for long-term  high quality  corporate  bonds.  This rate can
change from  year-to-year  based on market conditions that impact corporate bond
yields.  Our  discount  rate  declined  from 6.25% at  year-end  2003 to 6.0% at
year-end 2004.

The  expected  long-term  rate  of  return  on plan  assets  is  applied  in the
determination  of  periodic  pension  and  post  retirement  benefit  cost  as a
reduction  in the  computation  of  the  expense.  In  developing  the  expected
long-term rate of return assumption, we considered published surveys of expected
market returns, 10 and 20 year actual returns of various major indices,  and our
own historical 5-year and 10-year  investment  returns.  The expected  long-term
rate of return on plan assets is based on an asset allocation  assumption of 30%
to 45% in fixed income securities and 55% to 70% in equity securities. We review
our  asset  allocation  at least  annually  and  make  changes  when  considered
appropriate.  In 2004, we did not change our expected  long-term  rate of return
from the 8.25% used in 2003. Our pension plan assets are valued at actual market
value as of the measurement date.

Accounting  standards  require  that we record  an  additional  minimum  pension
liability  when the plan's  "accumulated  benefit  obligation"  exceeds the fair
market  value of plan assets at the pension  plan  measurement  (balance  sheet)
date. In the fourth  quarter of 2003,  due to strong  performance  in the equity
markets  during 2003,  partially  offset by a decrease in the year-end  discount
rate, the Company  recorded a reduction to its minimum pension  liability in the
amount of $35.0 million with a corresponding increase to shareholders' equity of
$22.0  million,  net of taxes of $13.0  million.  In the fourth quarter of 2004,
mainly due to a decrease in the year-end  discount rate, the Company recorded an
additional  minimum  pension  liability  in the amount of $17.4  million  with a
corresponding  charge to shareholders'  equity of $10.7 million, net of taxes of
$6.7 million. These adjustments did not impact our earnings or cash flows.

Actual results that differ from our  assumptions  are added or subtracted to our
balance of unrecognized actuarial gains and losses. For example, if the year-end
discount rate used to value the plan's projected  benefit  obligation  decreases
from the prior year-end then the plan's  actuarial  loss will  increase.  If the
discount rate increases  from the prior year-end then the plan's  actuarial loss
will decrease.  Similarly, the difference generated from the plan's actual asset
performance as compared to expected performance would be included in the balance
of unrecognized gains and losses.

The  impact  of the  balance  of  accumulated  actuarial  gains and  losses  are
recognized  in the  computation  of pension cost only to the extent this balance
exceeds 10% of the greater of the plan's projected benefit  obligation or market
value of plan assets.  If this  occurs,  that portion of gain or loss that is in
excess of 10% is amortized  over the  estimated  future  service  period of plan
participants  as a  component  of pension  cost.  The level of  amortization  is
affected  each  year by the  change in  actuarial  gains  and  losses  and could
potentially be eliminated if the gain/loss  activity reduces the net accumulated
gain/loss balance to a level below the 10% threshold.

We expect that our pension expense for 2005 will be $5.0 million to $7.0 million
(it was $3.6 million in 2004) and no contribution will be required to be made by
us to  the  pension  plan  in  2005.  In  October  2004,  we  made  a  voluntary
contribution of $20.0 million to the pension plan.

Income Taxes
Our effective tax rate has declined as a result of the completion of audits with
federal and state taxing authorities during 2004 and changes in the structure of
certain of our subsidiaries.

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

                                       23


New Accounting Pronouncements
- -----------------------------

Goodwill and Other Intangibles
In July 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets."  This  statement  requires  that  goodwill and other  intangibles  with
indefinite  useful  lives no longer be  amortized  to  earnings,  but instead be
reviewed for impairment.  We have no intangibles  with  indefinite  useful lives
other than goodwill and trade name. The  amortization of goodwill and trade name
ceased upon  adoption of the  statement on January 1, 2002.  We were required to
test for impairment of goodwill and other  intangibles  with  indefinite  useful
lives as of January 1, 2002 and at least annually  thereafter.  Any transitional
impairment loss at January 1, 2002 was recognized as the cumulative  effect of a
change in accounting  principle in our statement of  operations.  As a result of
our  adoption of SFAS No. 142, we  recognized  a  transitional  impairment  loss
related to ELI of $39.8 million as a cumulative effect of a change in accounting
principle  in our  statement  of  operations  in 2002.  We annually  examine the
carrying value of our goodwill and other intangibles with estimated useful lives
to determine whether there are any impairment losses and have determined for the
year ended December 31, 2004 that there was no impairment.

SFAS No. 142 also requires that intangible assets with estimated useful lives be
amortized  over those lives and be reviewed for  impairment in  accordance  with
SFAS No. 144,  "Accounting for Impairment or Disposal of Long-Lived  Assets." We
reassess the useful life of our intangible  assets with  estimated  useful lives
annually.  The impact of the  adoption of SFAS No. 142 is discussed in Note 2 to
Consolidated Financial Statements.

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

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

Long-Lived Assets
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived  Assets." This statement  establishes a single accounting
model,  based on the framework  established  in SFAS No. 121, for  impairment of
long-lived  assets held and used and for long-lived  assets to be disposed of by
sale,  whether  previously  held and used or newly  acquired,  and  broadens the
presentation of discontinued  operations to include more disposal  transactions.
We adopted this statement on January 1, 2002.

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

                                       24


During the year ended  December 31, 2004 and 2003, we  recognized  $66.5 million
and $10.9 million,  respectively,  of losses from the early  retirement of debt.
During the year ended  December 31, 2002,  we  recognized  $5.6 million of gains
from early debt retirement.  In addition,  for the year ended December 31, 2002,
we recognized a $12.8 million loss due to a tender offer related to certain debt
securities. These gains/losses were recorded in other income (loss), net.

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

Guarantees
In  November  2002,  the FASB  issued  FASB  Interpretation  No. 45 ("FIN  45"),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Guarantees  of  Indebtedness  of Others."  FIN 45 requires  that a guarantor  be
required to recognize, at the inception of a guarantee, a liability for the fair
value of the  obligation  assumed  under  the  guarantee.  FIN 45 also  requires
additional  disclosures  by a  guarantor  in its  interim  and annual  financial
statements about the obligations  associated with the guarantee.  The provisions
of FIN 45 are effective for  guarantees  issued or modified  after  December 31,
2002, and the disclosure  requirements  were effective for financial  statements
for periods  ending after  December  15,  2002.  We adopted FIN 45 on January 1,
2003.  The adoption of FIN 45 did not have any material  impact on our financial
position or results of operations.

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

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment," ("SFAS No. 123R").  SFAS No. 123R requires that  stock-based  employee
compensation  be recorded as a charge to earnings for interim or annual  periods
beginning  after  June 15,  2005.  Accordingly,  we will  adopt  SFAS  No.  123R
commencing  July 1, 2005 (third  quarter) and expect to recognize  approximately
$3.0 million of expense for the last six months of 2005.

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

Financial Instruments with Characteristics of Both Liabilities and Equity
In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics  of Both Liabilities and Equity." SFAS No. 150
establishes   standards  for  the  classification  and  measurement  of  certain
financial  instruments  with  characteristics  of both  liabilities  and equity.
Generally,  SFAS No. 150 is effective for financial  instruments entered into or
modified  after May 31, 2003 and is otherwise  effective at the beginning of the
first interim period beginning after June 15, 2003. We adopted the provisions of
SFAS No.  150 on July 1,  2003.  The  adoption  of SFAS No. 150 did not have any
material  impact on our financial  position or results of  operations.

                                       25


Variable Interest Entities
In December 2003, the FASB issued FASB  Interpretation  No. 46 (revised December
2003)  ("FIN  46R"),   "Consolidation  of  Variable  Interest  Entities,"  which
addresses how a business enterprise should evaluate whether it has a controlling
financial  interest in an entity  through  means  other than  voting  rights and
accordingly should consolidate the entity. FIN 46R replaces FASB  Interpretation
No. 46,  "Consolidation  of  Variable  Interest  Entities,"  which was issued in
January 2003. We are required to apply FIN 46R to variable interests in variable
interest  entities or VIEs created  after  December 31, 2003.  For any VIEs that
must be consolidated under FIN 46R that were created before January 1, 2004, the
assets,  liabilities and noncontrolling  interests of the VIE initially would be
measured at their carrying  amounts with any  difference  between the net amount
added  to the  balance  sheet  and  any  previously  recognized  interest  being
recognized as the cumulative effect of an accounting  change. If determining the
carrying  amounts  is not  practicable,  fair  value at the  date FIN 46R  first
applies  may be used to  measure  the  assets,  liabilities  and  noncontrolling
interest of the VIE. We reviewed all of our  investments and determined that the
Trust  Convertible  Preferred  Securities  (EPPICS),  issued by our consolidated
wholly-owned  subsidiary,  Citizens  Utilities  Trust and the  related  Citizens
Utilities  Capital L.P.,  were our only VIEs. The adoption of FIN 46R on January
1, 2004 did not have any material impact on our financial position or results of
operations.

Pension and Other Postretirement Benefits
In  December  2003,  the  FASB  issued  SFAS  No.  132  (revised),   "Employers'
Disclosures  about  Pensions and Other  Postretirement  Benefits."  SFAS No. 132
retains  and revises  the  disclosure  requirements  contained  in the  original
statement.  It requires additional  disclosures including information describing
the  types  of plan  assets,  investment  strategy,  measurement  date(s),  plan
obligations,  cash flows, and components of net periodic benefit cost recognized
in interim  periods.  SFAS No. 132 is  effective  for fiscal  years ending after
December 15, 2003. We adopted the expanded  disclosure  requirements of SFAS No.
132 (revised).

Investments
In  March  2004,  the  FASB  issued  EITF  Issue  No.  03-1,   "The  Meaning  of
Other-Than-Temporary  Impairment  and Its  Application  to Certain  Investments"
(EITF 03-1) which provides new guidance for assessing  impairment losses on debt
and  equity  investments.   Additionally,  EITF  03-1  includes  new  disclosure
requirements for investments that are deemed not to be temporarily  impaired. In
September  2004,  the FASB  delayed  the  accounting  provisions  of EITF  03-1;
however, the disclosure  requirements remain effective and have been adopted for
our year ended  December 31, 2004.  Although we have no material  investments at
the present time,  we will evaluate the effect,  if any, of EITF 03-1 when final
guidance is released.


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

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

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

Consolidated  revenue decreased $252.0 million,  or 10% in 2004. The decrease in
2004 was primarily due to $228.9  million of decreased gas and electric  revenue
primarily due to the disposition of our Arizona gas and electric operations, The
Gas Company in Hawaii and our Vermont  electric  division  and $23.1  million of
decreased telecommunications revenue.

Consolidated  revenue  decreased $224.4 million,  or 8% in 2003. The decrease in
2003 was primarily due to $192.7  million of decreased gas and electric  revenue
primarily due to the disposition of our Arizona gas and electric  operations and
The  Gas   Company  in  Hawaii   division   and  $31.7   million  of   decreased
telecommunications revenue.

                                       26

Consolidated  revenue increased $212.3 million,  or 9%, in 2002. The increase in
2002  was  primarily  due to  $420.5  million  of  increased  telecommunications
revenue, largely due to the impact of the Frontier acquisition on June 29, 2001,
partially  offset by $195.0 million of decreased gas revenue  largely due to the
disposition of the Louisiana and Colorado gas operations and the  disposition of
the Kauai electric division.

On October 31, 2002 and April 1, 2003,  we sold  approximately  4,000 and 11,000
telephone access lines,  respectively,  in North Dakota. The revenues related to
these access lines totaled $1.9 million; $10.2 million and $11.1 million for the
years ended December 31, 2003, 2002 and 2001, respectively.

Change  in the  number of our  access  lines is the most  fundamental  driver of
changes in our  telecommunications  revenue.  We have been losing  access  lines
primarily because of difficult economic conditions,  increased  competition from
competitive wireline providers, from wireless providers and from cable companies
(with  respect  to  broadband  and  cable  telephony),  and  by  some  customers
disconnecting  second  lines when they add  high-speed  internet  or cable modem
service.  We lost  approximately  65,700  access  lines  during  2004 but  added
approximately  91,800 high-speed  internet  subscribers  during this period. The
loss of lines  during  2004  was  primarily  among  residential  customers.  The
non-residential  line losses were principally in Rochester,  New York, while the
residential  losses were  throughout our markets.  We expect to continue to lose
access  lines but to increase  high-speed  internet  subscribers  during 2005. A
continued  loss of access lines,  combined with  increased  competition  and the
other factors discussed in MD&A, will cause our revenues to decrease in 2005. In
addition,  we have entered into a definitive  agreement to sell our conferencing
services business, which had revenue of $24.6 million during 2004.


                           TELECOMMUNICATIONS REVENUE

      ($ in thousands)                      2004                          2003                 2002
      ----------------           ----------------------------- ----------------------------- ---------
                                  Amount    $ Change  % Change  Amount    $ Change  % Change  Amount
                                 ---------  ------------------ ----------- ----------------- ---------
                                                                        
      Access services          $  634,196  $ (32,846)     -5%  $  667,042  $ (24,852)    -4% $  691,894
      Local services              851,177     (7,825)     -1%     859,002      8,683      1%    850,319
      Long distance and data
       services                   321,854     15,020       5%     306,834      7,508      3%    299,326
      Directory services          110,623      3,689       3%     106,934      2,551      2%    104,383
      Other                       109,365      8,242       8%     101,123    (15,860)   -14%    116,983
                                 ---------  ---------          ---------- ----------         ---------
        ILEC revenue            2,027,215    (13,720)     -1%   2,040,935    (21,970)    -1%  2,062,905
      ELI                         156,030     (9,359)     -6%     165,389     (9,690)    -6%    175,079
                                 ---------  ---------          ---------- ----------         ---------
                               $2,183,245  $ (23,079)     -1%  $2,206,324  $ (31,660)    -1% $2,237,984
                                 =========  =========          ========== ==========         =========

Access Services
Access  services  revenue for the year ended December 31, 2004  decreased  $32.8
million  or 5%,  as  compared  with the  prior  year.  Switched  access  revenue
decreased $19.6 million primarily due to $8.3 million  attributable to a decline
in minutes of use, the $7.4 million  effect of  federally  mandated  access rate
reductions  and $2.7  million  associated  with  state  intrastate  access  rate
reductions.  Access service revenue  includes  subsidy  payments we receive from
federal and state agencies.  Subsidies revenue decreased $12.8 million primarily
due to an $8.3 million decline in federal  Universal  Service Fund (USF) support
because of  increases in the  national  average cost per loop,  including a $3.5
million  accrual  recorded  during the third  quarter of 2004 for mistakes  made
during 2002 and 2003 by the agency that calculates subsidy payments and true-ups
related to 2002.  The  decreases  were  partially  offset by an  increase in USF
surcharge revenue of $2.1 million resulting from a rate increase.

Access  services  revenue for the year ended December 31, 2003  decreased  $24.9
million or 4% as compared with the prior year. Switched access revenue decreased
$20.7 million  primarily due to the $18.1 million  effect of federally  mandated
access rate  reductions,  $2.6  million in  increased  disputes and $1.2 million
related  to the sale of our  North  Dakota  exchanges.  Special  access  revenue
increased  $4.6  million  primarily  due to growth in  special  (point-to-point)
circuits  of $8.4  million  partially  offset  by a  decrease  of  $1.7  million
attributable  to the sale of our North  Dakota  exchanges  and $1.2  million  in
increased  disputes.  Subsidy  revenue  decreased $8.7 million  primarily due to
decreased USF support of $11.8 million  partially  offset by an increase of $4.9
million in USF surcharge rates.

We  currently  expect  that our  subsidy  revenue in 2005 will be at least $20.0
million  lower  than  2004  because  of the  improvement  in prior  years in the
profitability  of our operations and lower expenses and capital  expenditures in
prior  years  than  previously  anticipated,  and  because of  increases  in the
national  average cost per loop (NACPL).  Increases in the number of competitive
communications   companies  (including  wireless  companies)  receiving  federal
subsidies  may lead to further  increases  in the NACPL,  thereby  resulting  in
further  decreases  in our  subsidy  revenue  in the  future.  The FCC and state
regulators  are  currently  considering  a number of proposals  for changing the
manner in which  eligibility for federal  subsidies is determined as well as the

                                       27

amounts of such  subsidies.  The FCC is also  reviewing  the  mechanism by which
subsidies  are  funded.  We cannot  predict  when or how these  matters  will be
decided nor the effect on our subsidy revenues.  Our subsidy and access revenues
are  very  profitable  so any  reductions  in those  revenues  will  reduce  our
profitability.

Local Services
Local  services  revenue for the year ended  December  31, 2004  decreased  $7.8
million or 1% as compared  with the prior year.  Local revenue  decreased  $17.9
million  primarily  due to $4.7 million  related to  continued  losses of access
lines,  $2.2  million  as a result of  refunds  to  customers  because  of state
earnings  limitations,  the termination of an operator services contract of $3.4
million,  $3.5 million in decreased local measured service revenue and a decline
of $2.0 million in certain business services revenue.  Enhanced services revenue
increased $10.1 million,  primarily due to sales of additional feature packages.
Economic  conditions or increasing  competition  could make it more difficult to
sell our  packages  and  bundles  and  cause us to lower  our  prices  for those
products and services, which would adversely affect our revenues.

Local  services  revenue for the year ended  December  31, 2003  increased  $8.7
million,  or 1% as compared with the prior year.  Local revenue  decreased  $1.1
million primarily due to a $7.6 million decrease from continued losses of access
lines and the $4.0 million  impact of the sale of our North Dakota  exchanges in
2003,  partially  offset by an $10.4 million increase in subscriber line charges
due to rate changes.  Enhanced services revenue increased $9.8 million primarily
due to the sale of additional feature packages.

Long Distance and Data Services
Long  distance and data  services  revenue for the year ended  December 31, 2004
increased  $15.0 million or 5%, as compared  with the prior year.  Data services
(data includes  high-speed  internet) increased primarily due to growth of $30.7
million,  partially  offset by decreased long distance  revenue of $15.8 million
primarily attributable to a 21% decline in the average rate per minute. Our long
distance  minutes of use  increased  approximately  6.0% during  2004.  Our long
distance  revenues  could  decrease  in the future  due to lower  long  distance
minutes of use because consumers are increasingly using their wireless phones or
calling  cards to make long  distance  calls and lower  average rates per minute
because of unlimited and packages of minutes for long distance  plans. We expect
these  factors will  continue to  adversely  affect our long  distance  revenues
during 2005.

Long  distance and data  services  revenue for the year ended  December 31, 2003
increased  $7.5 million or 3% as compared  with the prior year  primarily due to
growth of $17.6 million related to data services, partially offset by a decrease
of $10.0 million in long distance revenue.  Our long distance revenues decreased
during 2003 due to lower average rates per minute related to the introduction of
new products  including  unlimited long distance and lower long distance minutes
of use because consumers are increasingly using their wireless phones or calling
cards to make long distance calls.

Directory Services
Directory revenue for the year ended December 31, 2004 increased $3.7 million or
3%, as compared with the prior year due to growth in yellow pages advertising.

Directory revenue for the year ended December 31, 2003 increased $2.6 million or
2%, as  compared  with the prior year  primarily  due to growth in yellow  pages
advertising.

Other
Other revenue for the year ended December 31, 2004 increased $8.2 million or 8%,
as compared with the prior year primarily due to a $4.1 million  carrier dispute
settlement,  $3.6 million in increased  conferencing  revenue,  a decline in bad
debt  expense of $3.2 million and an increase in service  activation  revenue of
$2.5 million, partially offset by decreases of $3.6 million in sales of customer
premise equipment (CPE) and $1.5 million in call center services revenue.

Other revenue for the year ended December 31, 2003 decreased  $15.9 million,  or
14%  compared  with the prior year  primarily  due to $7.8  million in increased
dispute  reserves,  the termination in 2002 of $2.5 million in contract services
provided  to Global  Crossing  and a decrease of $2.0  million in CPE sales.  In
addition,  revenue from collocation/rents declined $1.1 million and conferencing
revenue decreased $1.0 million.

                                       28


ELI
- ---
ELI revenue  for the years  ended  December  31,  2004 and 2003  decreased  $9.4
million,  or 6%, and $9.7 million, or 6%,  respectively,  primarily due to lower
demand and prices  for  long-haul  services  and lower  reciprocal  compensation
revenues.



                        GAS AND ELECTRIC REVENUE

         ($ in thousands)                          2004                          2003                  2002
         ----------------           ----------------------------- --------------------------------- ---------
                                     Amount    $ Change  % Change   Amount    $ Change    % Change   Amount
                                    ---------  ------------------ ----------- --------------------- ---------
                                                                               
         Gas revenue                 $     -   $ (137,686) -100%   $ 137,686  $  (78,831)   -36%    $ 216,517
         Electric revenue            $ 9,735   $  (91,193)  -90%   $ 100,928  $ (113,903)   -53%    $ 214,831



Gas revenue
We did not have any gas  operations  in the year ended  December 31,  2004.  Gas
revenue for the year ended December 31, 2003 decreased $78.8 million, or 36%, as
compared  with the prior year due to the sales of The Gas  Company in Hawaii and
our Arizona gas division, which were sold on August 8, 2003 and August 11, 2003,
respectively.

Electric revenue
Electric  revenue for the year ended December 31, 2004 decreased  $91.2 million,
or 90%, as compared  with the prior year. We completed the sale of our remaining
electric  utility  property on April 1, 2004.  We have sold all of our  electric
operations and as a result will have no operating  results in future periods for
these businesses.

Electric  revenue for the year ended December 31, 2003 decreased $113.9 million,
or 53%,  as  compared  with the  prior  year  primarily  due to the sales of our
Arizona electric  division and Kauai Electric.  Included in electric revenue for
the year ended December 31, 2002 is approximately $183.5 million of revenue from
our Arizona electric division and Kauai Electric,  which were sold on August 11,
2003 and  November 1, 2002,  respectively.  We had just one  remaining  electric
utility property as of December 31, 2003.



                                COST OF SERVICES

      ($ in thousands)                       2004                          2003                 2002
      ----------------           ----------------------------- ----------------------------- ---------
                                  Amount    $ Change  % Change  Amount    $ Change  % Change  Amount
                                 ---------  ------------------ ----------- ----------------- ---------
                                                                        
      Network access             $ 199,643  $ (23,904)   -11%  $ 223,547  $ (11,915)    -5%  $ 235,462
      Gas purchased                     -     (82,311)  -100%     82,311    (40,604)   -33%    122,915
      Electric energy and fuel
       oil purchased                 5,523    (58,308)   -91%     63,831    (54,712)   -46%    118,543
                                 ---------  ---------          ---------- ----------         ---------
                                 $ 205,166  $(164,523)   -45%  $ 369,689  $ (107,231)  -22%  $ 476,920
                                 =========  =========          ========== ==========         =========


Network access
Network access  expenses for the year ended  December 31, 2004  decreased  $23.9
million,  or 11%, as compared  with the prior year  primarily  due to  decreased
costs in long distance access expense related to rate changes  partially  offset
by increased  circuit  expense  associated with additional data product sales in
the ILEC sector.  ELI costs have  declined due to a drop in demand  coupled with
improved network cost efficiencies. If we continue to increase our sales of data
products such as high-speed internet or expand the availability of our unlimited
calling plans, our network access expense could increase.

Network access  expenses for the year ended  December 31, 2003  decreased  $11.9
million, or 5%, as compared with the prior year primarily due to decreased costs
in long distance  access  expense  related to rate changes  partially  offset by
increased  circuit expense  associated with additional data product sales in the
ILEC  sector.  ELI costs  have  declined  due to a drop in demand  coupled  with
improved network cost efficiencies.

Gas purchased
We did not have any gas  operations  in the year ended  December 31,  2004.  Gas
purchased for the year ended December 31, 2003 decreased $40.6 million,  or 33%,
as compared with the prior year primarily due to the sales of The Gas Company in
Hawaii and our Arizona gas division.

                                       29

Electric energy and fuel oil purchased
Electric  energy and fuel oil  purchased  for the year ended  December  31, 2004
decreased  $58.3 million,  or 91%, as compared with the prior year. We completed
the sale of our remaining  electric  utility  property on April 1, 2004. We have
sold all of our  electric  operations  and as a result  will  have no  operating
results in future periods for these businesses.

Electric  energy and fuel oil  purchased  for the year ended  December  31, 2003
decreased  $54.7 million,  or 46%, as compared with the prior year primarily due
to the sales of our Arizona electric division and Kauai Electric.



                            OTHER OPERATING EXPENSES

      ($ in thousands)                      2004                          2003                  2002
      ----------------           ----------------------------- ----------------------------- ----------
                                  Amount    $ Change  % Change  Amount    $ Change  % Change  Amount
                                 ---------  ------------------ ----------- ----------------- ----------
                                                                        
      Operating expenses         $630,669   $ (61,580)    -9%  $ 692,249  $ (70,624)    -9%  $  762,873
      Taxes other than income
        taxes                      94,481      (2,638)    -3%     97,119    (34,139)   -26%     131,258
      Sales and marketing         115,036       2,653      2%    112,383      4,159      4%     108,224
                                 ---------  ---------          ---------- ----------         ----------
                                 $ 840,186  $ (61,565)    -7%  $ 901,751  $ (100,604)  -10%  $1,002,355
                                 =========  =========          ========== ==========         ==========


Operating Expenses
Operating expenses for the year ended December 31, 2004 decreased $61.6 million,
or 9%, as compared  with the prior year  primarily  due to  decreased  operating
expenses in the public  services  sector due to the sales of our  utilities  and
increased   operating   efficiencies   and  a  reduction  of  personnel  in  our
communications  business.  We routinely  review our  operations,  personnel  and
facilities  to  achieve  greater  efficiencies.  These  reviews  may  result  in
reductions in personnel and an increase in severance costs.

Included in  operating  expenses  are  expenses  attributable  to our efforts to
comply with the internal control requirements of the Sarbanes-Oxley Act of 2002.
As of  December  31,  2004,  we have  incurred  approximately  $4.2  million  in
connection with this initiative.

Included in  operating  expenses  is stock  compensation  expense.  Compensation
arrangements entered into in connection with management succession and strategic
alternatives  will result in stock  compensation  expense of approximately  $5.2
million in 2005,  $5.1  million in 2006 and $1.0  million in 2007.  In addition,
during  the third  quarter  of 2005,  we will  begin  expensing  the cost of the
unvested  portion of  outstanding  stock  options  pursuant to SFAS No. 123R. We
expect to  recognize  approximately  $3.0  million of  expense  for the last six
months of 2005.

Included in operating  expenses is pension  expense.  In future periods,  if the
value of our pension assets decline and/or projected benefit costs increase,  we
may have increased pension expenses. Based on current assumptions and plan asset
values,  we estimate that our pension expense will increase from $3.6 million in
2004  to  approximately  $5.0  million  to $7.0  million  in  2005  and  that no
contribution  to our  pension  plans  will be  required  to be made by us to the
pension plan in 2005. In addition,  as medical  costs  increase the costs of our
postretirement  benefit costs also increase.  Our retiree medical costs for 2004
were $16.6  million and our current  estimate  for 2005 is  approximately  $17.0
million.

Operating expenses for the year ended December 31, 2003 decreased $70.6 million,
or 9%, as compared  with the prior year  primarily  due to  increased  operating
efficiencies and a reduction of personnel in the ILEC and ELI sectors (310 fewer
employees  than 2002) and decreased  operating  expenses in the gas and electric
sectors  due to the sales of The Gas  Company  in Hawaii  ($11.3  million),  our
Arizona gas and electric  divisions  ($16.4  million) and Kauai Electric  ($21.5
million). Expenses were negatively impacted by increased compensation expense of
$1.5 million related to variable stock plans and increased pension expenses.

Taxes Other than Income Taxes
Taxes other than income  taxes for the year ended  December  31, 2004  decreased
$2.6 million,  or 3%, as compared with the prior year primarily due to decreased
property taxes in the public  services  sector due to the sales of our utilities
and lower  gross  receipts  taxes of $3.7  million in the ILEC  sector that were
partially  offset by  higher  payroll,  property  and  franchise  taxes of $13.0
million.

Taxes other than income  taxes for the year ended  December  31, 2003  decreased
$34.1  million,  or 26%,  as  compared  with the  prior  year  primarily  due to
decreased  property taxes at ELI as a result of lower asset values and the sales
of our utilities.

                                       30


Sales and Marketing
Sales and marketing expenses for the year ended December 31, 2004 increased $2.7
million, or 2%, as compared with the prior year primarily due to increased costs
in the ILEC sector.

Sales and marketing expenses for the year ended December 31, 2003 increased $4.2
million,  or 4%, as compared to the prior year due to increased  marketing costs
in the ILEC  sector  primarily  related  to  enhanced  services  and  high-speed
internet.



                       DEPRECIATION AND AMORTIZATION EXPENSE

            ($ in thousands)                2004                          2003                 2002
            ----------------     ----------------------------- ----------------------------- ---------
                                  Amount    $ Change  % Change  Amount    $ Change  % Change  Amount
                                 ---------  ------------------ ----------- ----------------- ---------
                                                                        
            Depreciation expense $ 446,190  $ (22,248)    -5%  $ 468,438  $ (161,675)  -26%  $ 630,113
            Amortization expense   126,520       (318)     0%    126,838       1,429     1%    125,409
                                 ---------  ---------          ---------- ----------         ---------
                                 $ 572,710  $ (22,566)    -4%  $ 595,276  $ (160,246)  -21%  $ 755,522
                                 =========  =========          ========== ==========         =========


Depreciation  expense  for the year ended  December  31,  2004  decreased  $22.2
million,  or 5% as  compared  to the prior  year  because  the net asset base is
declining.

Depreciation  expense  for the year ended  December  31, 2003  decreased  $161.7
million,  or 26%,  as  compared  with the prior  year  primarily  due to the ELI
impairment  charge  recognized  during the third quarter of 2002,  which reduced
ELI's asset base,  the  adoption of SFAS No. 143 and the increase in the average
depreciable lives for certain of our equipment. Accelerated depreciation in 2002
of $23.4  million  relating to the  closing of our Plano,  Texas  facility  also
contributed to the decrease.

Amortization  expense  for the year  ended  December  31,  2003  increased  $1.4
million,  or 1% as compared with the prior year  primarily due to the receipt of
the final valuation report of our Frontier acquisition during the second quarter
of 2002, which resulted in an increase in our customer base.



          RESERVE FOR TELECOMMUNICATIONS BANKRUPTCIES / RESTRUCTURING AND OTHER EXPENSES /
                 MANAGEMENT SUCCESSION AND STRATEGIC ALTERNATIVES EXPENSES

($ in thousands)                             2004                          2003                 2002
- ----------------                 ------------------------------ ----------------------------- ---------
                                   Amount    $ Change  % Change  Amount    $ Change  % Change  Amount
                                 ---------  ------------------- ---------- ------------------ ---------
Reserve for (recovery of)
                                                                          
  telecommunications bankruptcies  $      -   $  4,377    -100%   $ (4,377) $ (15,257)  -140%  $ 10,880
Restructuring and other expenses   $      -   $ (9,687)   -100%   $  9,687  $ (27,499)   -74%  $ 37,186
Management succession and
  strategic alternatives expenses  $ 90,632   $ 90,632     100%   $      -  $       -      0%  $      -


Management succession and strategic  alternatives expenses in 2004 include a mix
of cash retention payments,  equity awards and severance agreements (see Note 13
to Consolidated Financial Statements for a complete discussion).

During the fourth quarter of 2003, an agreement with  WorldCom/MCI  settling all
pre-bankruptcy   petition  obligations  and  receivables  was  approved  by  the
bankruptcy  court.  This  settlement  resulted  in  reduction  to our reserve of
approximately  $6.6  million  in the fourth  quarter of 2003.  During the second
quarter of 2003,  we reserved  approximately  $2.3 million of trade  receivables
with Touch America as a result of Touch America's  filing for bankruptcy.  These
receivables   were   generated  as  a  result  of  providing   ordinary   course
telecommunication  services.  If  other  telecommunications  companies  file for
bankruptcy, we may have additional significant reserves in future periods.

Concurrent with the acquisition of Frontier,  we entered into several  operating
agreements with Global Crossing.  We have ongoing commercial  relationships with
Global  Crossing  affiliates.  We  reserved  a total of $29.0  million of Global
Crossing  receivables  during  2001 and 2002 as a result  of  Global  Crossing's
filing for bankruptcy to reflect our best estimate of the net  realizable  value
of receivables  resulting  from these  commercial  relationships.  We recorded a
write-down of such  receivables  in the amount of $7.8 million in 2002 and $21.2
million in 2001.  In 2002, as the result of a settlement  agreement  with Global
Crossing,  we reversed $17.9 million of our previous  write-down  reserve of the
net realizable value of these receivables.

                                       31

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

                 LOSS ON IMPAIRMENT

            ($ in thousands)       2003       2002
            ----------------     ---------  ---------
                                   Amount     Amount
                                 ---------  ---------
            Loss on impairment   $ 15,300   $ 1,074,058

During the third and fourth quarters of 2003, we recognized  additional  pre-tax
impairment  losses of $4.0  million  and $11.3  million  related to our  Vermont
property  to write  down  assets  to be sold to our best  estimate  of their net
realizable value upon sale.

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


          INVESTMENT AND OTHER INCOME (LOSS), NET / INTEREST EXPENSE /
                          INCOME TAX EXPENSE (BENEFIT)

            ($ in thousands)                   2004                          2003             2002
            ----------------     ----------------------------- ----------------------------- ---------
                                  Amount    $ Change  % Change  Amount    $ Change  % Change  Amount
                                 ---------  ------------------ ----------- ----------------- ---------
            Investment income
                                                                         
             (loss), net         $  33,626  $  23,194     222%  $  10,432  $ 108,791    111%  $ (98,359)
            Other income (loss),
             net                 $ (53,359) $ (97,348)   -221%  $  43,989  $  21,452     95%  $  22,537
            Interest expense     $ 379,024  $ (37,500)     -9%  $ 416,524  $ (51,705)   -11%  $ 468,229
            Income tax expense
             (benefit)           $  13,379  $ (53,837)    -80%  $  67,216  $ 482,090    116%  $(414,874)

Investment Income
Investment  income for the year ended December 31, 2004 increased  $23.2 million
as compared with the prior year primarily due to the sale of our  investments in
D & E and HTCC and higher  income  from money  market  balances  and  short-term
investments.

Investment  income for the year ended December 31, 2003 increased $108.8 million
as compared to prior year  primarily due to the  recognition in 2002 of non-cash
pre-tax losses of $95.3 million  resulting from an other than temporary  decline
in the value of our  investment in Adelphia and $16.4 million  resulting from an
other than temporary decline in the value of our investment in D & E (see Note 9
to Consolidated Financial Statements),  partially offset by lower income in 2003
from money market balances and short-term investments.

Other Income (Loss)
Other loss, net for the year ended December 31, 2004 increased  $97.3 million as
compared  to  prior  year  primarily  due  to a  pre-tax  loss  from  the  early
extinguishment  of debt of $66.5 million in 2004, and the recognition in 2003 of
$69.5 million in non-cash  pre-tax gains related to a capital lease  termination
and a capital  lease  restructuring  at ELI,  partially  offset in 2004 by $25.3
million in income from the  expiration of certain  retained  liabilities at less
than face value,  which are associated with customer  advances for  construction
from our disposed water  properties and a net loss on sales of assets in 2004 of
$1.9  million,  which is primarily  attributable  to the loss on the sale of our
corporate  aircraft,  compared to a net loss on sales of assets in 2003 of $20.5
million.

Other income,  net for the year ended December 31, 2003 increased $21.5 million,
or 95%, as compared to the prior year primarily due to $69.5 million in non-cash
pre-tax  gains in 2003  related to capital  lease  restructurings  at ELI,  $6.2
million of income in 2003 from the settlement of certain retained liabilities at
less  than  face  value,   which  are  associated  with  customer  advances  for
construction  from our disposed  water  properties,  a decrease of $20.1 million
compared to income of $26.3 million in 2002,  partially  offset by a net loss on
sales of assets in 2003 of $20.5 million, compared with the prior year's gain of
$9.8  million,  primarily  due to the sales of The Gas Company in Hawaii and our
Arizona gas and electric divisions, the sale of access lines in North Dakota and

                                      32

our wireless partnership interest in Wisconsin, and the sale of our Plano, Texas
office  building.  During  2003,  we executed a series of  purchases in the open
market of our  outstanding  notes and  debentures  that generated a pre-tax loss
from the early extinguishment of debt of approximately $3.1 million.

Interest Expense
Interest  expense for the year ended December 31, 2004 decreased  $37.5 million,
or 9%, as compared with the prior year  primarily due to the retirement of debt.
During  the  year  ended  December  31,  2004,  we had  average  long-term  debt
(excluding  equity units and convertible  preferred  stock)  outstanding of $4.2
billion  compared to $4.6 billion  during the year ended  December 31, 2003. Our
composite  average  borrowing  rate  for the year  ended  December  31,  2004 as
compared with the prior year period was 11 basis points lower,  decreasing  from
8.07% to 7.96%.

Interest  expense for the year ended December 31, 2003 decreased  $51.7 million,
or 11%, as compared with the prior year  primarily due to the retirement of debt
partially  offset  by higher  average  interest  rates.  During  the year  ended
December 31, 2003, we had average  long-term  debt  (excluding  equity units and
convertible  preferred  stock)  outstanding  of $4.6  billion  compared  to $5.2
billion during the year ended December 31, 2002. Our weighted average  borrowing
rate for the year ended December 31, 2003 as compared with the prior year period
was 20 basis points higher, increasing from 7.87% to 8.07%, due to the repayment
of debt with interest rates below our average rate.

Income Taxes
Income taxes for the year ended  December 31, 2004 decreased  $53.8 million,  or
80%, as compared with the prior year  primarily due to changes in taxable income
(loss). Income tax benefit for the year ended December 31, 2003 increased $482.1
million  as  compared  with the prior year  primarily  due to changes in taxable
income  (loss).  The  effective  tax rate for 2004 is 15.6% as compared  with an
effective  tax rate of 34.4% for 2003.  Our effective tax rate has declined as a
result of the  completion  of audits with federal and state  taxing  authorities
during 2004 and changes in the structure of certain of our subsidiaries.

              CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

($ in thousands)                              2003       2002
- ----------------                            ---------  ---------
                                             Amount     Amount
                                            ---------  ---------
Cumulative effect of change in accounting
  principle                                 $ 65,769   $ (39,812)

During the first  quarter of 2003,  as a result of our adoption of SFAS No. 143,
"Accounting  for  Asset  Retirement  Obligations,"  we  recognized  an after tax
non-cash gain of approximately $65.8 million.  During the first quarter of 2002,
as a result of our  adoption of SFAS No.  142,  "Goodwill  and Other  Intangible
Assets," we  recognized  a  transitional  impairment  loss of $39.8  million for
goodwill related to ELI (see Note 2 to Consolidated Financial Statements).

                             DISCONTINUED OPERATIONS

($ in thousands)                               2002
- ----------------                            -----------
                                              Amount
                                            -----------
Revenue                                       $   4,650
Operating income (loss)                       $    (415)
Income (loss) from discontinued operations,
  net of tax                                  $  (1,478)
Gain on disposal of water segment
  net of tax                                  $ 181,369

On  January  15,  2002,  we  completed  the  sale of our  water  and  wastewater
operations  for $859.1  million in cash and $122.5  million of assumed  debt and
other  liabilities.  The gain on the disposal of the water segment,  net of tax,
was $181.4 million.

                                       33


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

Disclosure of primary market risks and how they are managed
We are exposed to market risk in the normal  course of our  business  operations
due to ongoing investing and funding activities, including those associated with
our pension assets.  Market risk refers to the potential change in fair value of
a financial  instrument as a result of fluctuations in interest rates and equity
and commodity prices. We do not hold or issue derivative instruments, derivative
commodity  instruments or other financial instruments for trading purposes. As a
result, we do not undertake any specific actions to cover our exposure to market
risks and we are not party to any market risk management  agreements  other than
in the normal course of business or to hedge  long-term  interest rate risk. Our
primary market risk exposure is interest rate risk as follows:

Interest Rate Exposure

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

Our  objectives  in managing our  interest  rate risk are to limit the impact of
interest  rate  changes  on  earnings  and cash  flows and to lower our  overall
borrowing costs. To achieve these objectives,  a majority of our borrowings have
fixed interest rates. Consequently,  we have limited material future earnings or
cash flow  exposures  from changes in interest  rates on our long-term  debt and
capital lease  obligations.  A hypothetical 10% adverse change in interest rates
would  increase  the amount that we pay on our  variable  obligations  and could
result in  fluctuations in the fair value of our fixed rate  obligations.  Based
upon our overall interest rate exposure at December 31, 2004, a near-term change
in  interest  rates  would not  materially  affect  our  consolidated  financial
position, results of operations or cash flows.

In order to  manage  our  interest  rate risk  exposure,  we have  entered  into
interest  rate  swap  agreements.  Under the  terms of the  agreements,  we make
semi-annual,  floating  interest rate interest payments based on six month LIBOR
and receive a fixed rate on the notional amount. For the year ended December 31,
2004,  the interest  savings  resulting  from these  interest rate swaps totaled
approximately $9.4 million.

Sensitivity analysis of interest rate exposure
At December 31, 2004,  the fair value of our  long-term  debt and capital  lease
obligations was estimated to be approximately $4.6 billion, based on our overall
weighted average borrowing rate of 7.83% and our overall weighted maturity of 13
years.  There has been no material change in the weighted average maturity since
December 31, 2003.

The overall weighted average interest rate decreased in 2004 by approximately 26
basis points. A hypothetical increase of 78 basis points in our weighted average
interest rate (10% of our overall weighted average  borrowing rate) would result
in an approximate  $218.4  million  decrease in the fair value of our fixed rate
obligations.

Equity Price Exposure

Our  exposure to market  risks for changes in equity  prices as of December  31,
2004 is limited to our investment in Adelphia,  and our pension assets of $761.2
million.

As of December  31, 2004 and December 31,  2003,  we owned  3,059,000  shares of
Adelphia  common  stock.  The  stock  price of  Adelphia  was $0.39 and $0.55 at
December 31, 2004 and December 31, 2003, respectively.

On  August  13,  2004,  we  sold  our  entire  1,333,500  shares  of  D & E  for
approximately $13.3 million in cash.

On September  3, 2004,  we sold our entire  holdings of  2,605,908  common share
equivalents in HTCC for approximately $13.2 million in cash.

Sensitivity analysis of equity price exposure
At December 31,  2004,  the fair value of the equity  portion of our  investment
portfolio  was  estimated to be $1.2  million.  A  hypothetical  10% decrease in
quoted market  prices would result in an  approximate  $120,000  decrease in the
fair value of the equity portion of our investment portfolio.

                                       34


Disclosure of limitations of sensitivity analysis
Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation  of fair value of financial  instruments.  Actual  values may differ
from those presented should market  conditions vary from assumptions used in the
calculation of the fair value.  This analysis  incorporates only those exposures
that exist as of December 31,  2004.  It does not  consider  those  exposures or
positions which could arise after that date. As a result,  our ultimate exposure
with respect to our market risks will depend on the exposures  that arise during
the period and the fluctuation of interest rates and quoted market prices.

Item 8.   Financial Statements and Supplementary Data
          -------------------------------------------

The following documents are filed as part of this Report:

               1.   Financial Statements, See Index on page F-1.

               2.   Supplementary Data,  Quarterly Financial Data is included in
                    the Financial Statements (see 1. above).

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

None

Item 9A.  Controls and Procedures
          -----------------------

(i)  Disclosure Controls and Procedures
     We  carried  out  an  evaluation,   under  the  supervision  and  with  the
     participation of our management  including our principal  executive officer
     and principal financial officer,  regarding the effectiveness of the design
     and operation of our disclosure  controls and  procedures.  Based upon this
     evaluation, our principal executive officer and principal financial officer
     concluded, as of the end of the period covered by this report, December 31,
     2004, that our disclosure controls and procedures are effective.

(ii) Internal Control Over Financial Reporting
     (a) Management's annual report on internal control over financial reporting
     Our management report on internal control over financial reporting  appears
     on page F-2 and is incorporated by reference.
     (b) Attestation report of registered public accounting firm
     The  attestation  report  of KPMG LLP, our  independent  registered  public
     accounting  firm, on  management's  assessment of the  effectiveness of our
     internal  control  over financial  reporting  appears  on  page F-3 and  is
     incorporated by reference.
     (c) Changes in internal control over financial reporting
     We reviewed our internal control over financial  reporting at  December 31,
     2004. During  the  fourth  quarter of 2004,  we engaged the tax  consulting
     services  of  PricewaterhouseCoopers, LLP  to  supplement our  internal tax
     staff and enhance our internal controls over income tax accounting. We made
     no other change in our internal control over financial reporting during the
     last  fiscal  quarter of  2004 that  materially  affected or is  reasonably
     likely to materially affect our internal control over financial reporting.

Item 9B.  Other Information
          -----------------

None

                                    PART III
                                    --------

Item 10.  Directors and Executive Officers of the Registrant
          --------------------------------------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2005 Annual Meeting of  Stockholders  to be
filed  with the  Commission  pursuant  to  Regulation  14A within 120 days after
December 31, 2004. See "Executive  Officers of the Registrant" in Part I of this
Report following Item 4 for information relating to executive officers.

                                       35


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

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2005 Annual Meeting of  Stockholders  to be
filed  with the  Commission  pursuant  to  Regulation  14A within 120 days after
December 31, 2004.

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

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2005 Annual Meeting of  Stockholders  to be
filed  with the  Commission  pursuant  to  Regulation  14A within 120 days after
December 31, 2004.

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

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2005 Annual Meeting of  Stockholders  to be
filed  with the  Commission  pursuant  to  Regulation  14A within 120 days after
December 31, 2004.

Item 14.   Principal Accountant Fees and Services
           --------------------------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2005 Annual Meeting of  Stockholders  to be
filed  with the  Commission  pursuant  to  Regulation  14A within 120 days after
December 31, 2004.


                                     PART IV
                                     -------

Item 15.  Exhibits and Financial Statement Schedules
          ------------------------------------------

           List of Documents Filed as a Part of This Report:

                (1) Index to Consolidated Financial Statements:

Independent Auditors' Report

Consolidated balance sheets as of December 31, 2004 and 2003 Consolidated
statements of operations for the years ended
   December 31, 2004, 2003 and 2002

Consolidated statements of shareholders' equity for the years ended
   December 31, 2004, 2003 and 2002

Consolidated statements of comprehensive income (loss) for the years ended
   December 31, 2004, 2003 and 2002

Consolidated statements of cash flows for the years ended
   December 31, 2004, 2003 and 2002

Notes to consolidated financial statements

                (2) Index to Financial Statement Schedules:

                    Schedule II - Valuation and Qualifying Accounts

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

                                       36


                (3) Index to Exhibits:

Exhibit
  No.          Description
- -------        -----------
3.200.1        Restated  Certificate of Incorporation of Citizens Communications
               Company, as restated May 19, 2000  (incorporated by  reference to
               Exhibit 3.200.1 to the Registrant's Quarterly Report on Form 10-Q
               for the six months ended June 30, 2000, File No. 001-11001).
3.200.5        By-laws of Citizens  Communications  Company, as  amended through
               July 10, 2004 (incorporated by  reference to  Exhibit 3.200.5  to
               the  Registrant's  Quarterly  Report on  Form  10-Q  for the nine
               months ended September 30, 2004, File No. 001-11001).
4.100.1        Certificate of Trust of Citizens Communications Trust dated as of
               April 27, 2001 (incorporated by reference to Exhibit  4.5 of  the
               Registrant's  Amendment  No.1  to  Form  S-3  filed  May  7, 2001
               (Registration No. 333-58044).
4.100.2        Trust Agreement of Citizens Capital Trust I,  dated  as of  April
               27, 2001  (incorporated  by  reference  to  Exhibit 4.6  of  the
               Registrant's  Amendment  No.1  to  Form  S-3  filed  May  7, 2001
               (Registration No. 333-58044).
4.100.3        Form of 2011 Note (incorporated by reference  to  Exhibit  4.4 of
               the Registrant's Current  Report  on  Form 8-K filed  on  May 24,
               2001, File No. 001-11001).
4.100.4        Form of  Senior  Note  due 2006  (incorporated  by  reference  to
               Exhibit 4.5 of the Registrant's Current Report on Form  8-K filed
               on June 21, 2001, File No. 001-11001).
4.100.5        Form of Senior Notes due  2008  and  due  2031  (incorporated  by
               reference to Exhibit 4.1  of  the  Registrant's Current Report on
               Form 8-K filed on August 22, 2001, File No. 001-11001).
4.100.6        Form of 2013 Note (incorporated by  reference to  Exhibit  4.2 of
               the Registrant's Current Report on Form 8-K filed on November 12,
               2004, File No. 001-11001).
4.200.1        First  Supplemental  Indenture  dated  as  of  January  15, 1996,
               between  Citizens  Utilities   Company  and  Chemical  Bank,  as
               indenture trustee (incorporated by reference  to Exhibit  4.200.2
               to the Registrant's Form 8-K Current  Report filed  May 28, 1996,
               File No. 001-11001).
4.200.2        5% Convertible  Subordinated  Debenture  due  2036  (contained as
               Exhibit A  to  Exhibit  4.200.2), (incorporated  by reference  to
               Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed
               May 28, 1996, File No. 001-11001).
4.200.3        Amended and Restated Declaration of Trust dated as of January 15,
               1996, of Citizens Utilities Trust (incorporated  by reference  to
               Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed
               May 28, 1996, File No. 001-11001).
4.200.4        Convertible Preferred Security Certificate (contained as  Exhibit
               A-1 to Exhibit 4.200.4),  (incorporated by  reference  to Exhibit
               4.200.4 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.5        Amended and Restated Limited  Partnership  Agreement  dated as of
               January 15, 1996 of Citizens Utilities Capital L.P. (incorporated
               by reference to  Exhibit  4.200.6  to the  Registrant's  Form 8-K
               Current Report filed May 28, 1996, File No. 001-11001).
4.200.6        Partnership Preferred Security Certificate (contained  as Annex A
               to  Exhibit  4.200.6),  (incorporated   by  reference to  Exhibit
               4.200.6 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.7        Convertible Preferred Securities Guarantee Agreement dated  as of
               January 15, 1996 between Citizens Utilities Company  and Chemical
               Bank, as guarantee trustee (incorporated by reference to  Exhibit
               4.200.8 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.8        Partnership Preferred Securities Guarantee Agreement  dated as of
               January 15, 1996 between Citizens Utilities  Company and Chemical
               Bank, as guarantee trustee (incorporated by reference  to Exhibit
               4.200.9 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.9        Letter of Representations dated January 18, 1996,  from  Citizens
               Utilities  Company and  Chemical  Bank, as trustee,  to DTC,  for
               deposit    of   Convertible   Preferred   Securities   with   DTC
               (incorporated   by   reference  to  Exhibit   4.200.10    to  the
               Registrant's Form 8-K Current Report filed May 28, 1996, File No.
               001-11001).
4.300          Indenture of Securities, dated as of August 15, 1991, to Chemical
               Bank,  as Trustee  (incorporated  by reference to Exhibit 4.100.1
               to the  Registrant's  Quarterly  Report on Form 10-Q for the nine
               months ended September 30, 1991, File No. 001-11001).
4.300.1        Second   Supplemental  Indenture,  dated   January  15, 1992,  to
               Chemical Bank, as Trustee (incorporated  by  reference to Exhibit
               4.100.4 to the Registrant's  Annual Report  on Form 10-K for  the
               year ended December 31, 1991, File No. 001-11001).
4.300.2        Third Supplemental Indenture, dated  April 15, 1994, to  Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.6 to
               the Registrant's Form 8-K Current Report filed July 5, 1994, File
               No. 001-11001).

                                       37

4.300.3        Fourth Supplemental Indenture, dated October 1, 1994, to Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.7 to
               Registrant's Form 8-K Current Report filed  January 3, 1995, File
               No. 001-11001).
4.300.4        Fifth  Supplemental  Indenture, dated as  of  June  15, 1995,  to
               Chemical Bank, as Trustee (incorporated by reference  to  Exhibit
               4.100.8 to Registrant's Form 8-K Current  Report filed  March 29,
               1996, File No. 001-11001).
4.300.5        Sixth Supplemental Indenture, dated  as of  October 15, 1995,  to
               Chemical Bank, as Trustee (incorporated by  reference to  Exhibit
               4.100.9 to Registrant's Form 8-K Current Report  filed  March 29,
               1996, File No. 001-11001).
4.300.6        Seventh  Supplemental  Indenture,  dated  as  of   June  1,  1996
               (incorporated   by   reference   to   Exhibit   4.100.11  to  the
               Registrant's Annual Report  on  Form  10-K  for  the  year  ended
               December 31, 1996, File No. 001-11001).
4.300.7        Eighth Supplemental  Indenture,  dated  as  of  December  1, 1996
               (incorporated   by   reference   to   Exhibit   4.100.12  to  the
               Registrant's Annual Report  on  Form  10-K  for  the  year  ended
               December 31, 1996, File No. 001-11001).
4.400          Senior  Indenture,  dated  as of May 23,  2001,  between Citizens
               Communications  Company  and The Chase Manhattan Bank, as trustee
               (incorporated by reference to Exhibit  4.1  of  the  Registrant's
               Current  Report  on  Form  8-K  filed  on  May 24, 2001, File No.
               001-11001).
4.400.1        First Supplemental Indenture to Senior Indenture, dated as of May
               23, 2001  (incorporated  by  reference  to  Exhibit  4.2  of  the
               Registrant's Current Report on  Form 8-K  filed on May  24, 2001,
               File No. 001-11001).
4.400.2        Second Supplemental Indenture,  dated  as  of  June 19, 2001,  to
               Senior Indenture,  dated  as of  May 23,  2001  (incorporated  by
               reference  to Exhibit  4.3 of the  Registrant's Current Report on
               Form 8-K filed on June 21, 2001, File No. 001-11001).
4.400.3        Third Supplemental Indenture, dated as  of  November 12, 2004, to
               Senior I ndenture,  dated  as  of  May 23, 2001 (incorporated  by
               reference  to  Exhibit 4.1 of the Registrant's  Current Report on
               Form 8-K filed on November 12, 2004, File No. 001-11001).
4.400.4        Indenture,  dated  as  of  August   16,  2001,  between  Citizens
               Communications Company and The Chase Manhattan Bank,  as  Trustee
               (incorporated by reference to  Exhibit 4.1  of  the  Registrant's
               Current Report on Form 8-K filed  on  August  22, 2001,  File No.
               001-11001).
4.400.5        Underwriting Agreement dated November 8, 2004,  between  Citizens
               Communications  Company  and  J.P.  Morgan  Securities  Inc.,  as
               Representative of the several listed  Underwriters,  relating  to
               the sale of $700,000,000 principal amount  of the  6 1/4%  Senior
               Notes due 2013 (incorporated by reference to  Exhibit 4.1 of  the
               Registrant's Current Report on  Form 8-K  filed  on  November 12,
               2004, File No. 001-11001).
10.1           Amended  and  Restated   Non-Employee  Directors'  Deferred   Fee
               Equity Plan dated as of May  18, 2004,(incorporated  by reference
               to Exhibit  10.1.2 to the  Registrant's Quarterly  Report on Form
               10-Q for the three months ended June 30, 2004,File No.001-11001).
10.2.1         Separation Agreement between Citizens Communications Company  and
               Leonard Tow effective July 10, 2004 (incorporated by reference to
               Exhibit 10.2.4 of the Registrants' Quarterly Report  on Form 10-Q
               for the six months ended June 30, 2004, File No. 001-11001).
10.3           Incentive Award Agreement between Citizens Communications Company
               and Scott N. Schneider, effective March 11, 2004 (incorporated by
               reference to Exhibit 10.3  to the Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2003, File No.
               001-11001).
10.4           Citizens Executive Deferred Savings  Plan  dated  January 1, 1996
               (incorporated by reference to Exhibit 10.19 to  the  Registrant's
               Annual Report on Form 10-K for the year ended December  31, 1999,
               File No. 001-11001).
10.5           Citizens  Incentive  Plan   restated  as   of   March   21,  2000
               (incorporated  by reference to Exhibit 10.19 to the  Registrant's
               Annual Report on Form 10-K for the year ended  December 31, 1999,
               File No. 001-11001).
10.6.1         1996 Equity Incentive Plan (incorporated by reference to Appendix
               A to the Registrant's definitive proxy statement on  Schedule 14A
               filed on March 29, 1996, File No. 001-11001).
10.6.2         Amendment  to  1996  Equity  Incentive   Plan  (incorporated   by
               reference  to Exhibit B  to  the  Registrant's  definitive  proxy
               statement  on  Schedule  14A  filed  on  March 31, 1997, File No.
               001-11001).
10.7.1         2000 Equity Incentive Plan  dated May 18, 2000  (incorporated  by
               reference to Exhibit 10.33 to the Registrant's Annual Report  on
               Form  10-K  for  the  year  ended  December  31,  2000,  File No.
               001-11001).
10.7.2         Amendment No. 2 to 2000 Equity  Incentive  Plan  (effective  June
               30, 2003)  (incorporated  by reference to  Exhibit 10.7.1 to  the
               Registrant's  Annual  Report on  Form  10-K for  the  year  ended
               December 31, 2003,  File No. 001-11001).

                                       38

10.8           Citizens 401(K) Savings  Plan  effective  as  of  January 1, 1997
               reflecting amendments made through  April 2001  (incorporated  by
               reference to Exhibit 10.37 to the Registrant's  Quarterly  Report
               on Form 10-Q for the six months ended June 30, 2001, File No.
               001-11001).
10.9           Loan Agreement between Citizens Communications Company  and Rural
               Telephone Finance Cooperative for $200,000,000  dated October 24,
               2001  (incorporated  by  reference  to  Exhibit  10.39   to   the
               Registrant's Quarterly Report on Form 10-Q  for  the nine  months
               ended September 30, 2001, File No. 001-11001).
10.10.1        Amendment No. 1, dated as of March 31, 2003,  to  Loan  Agreement
               between  Citizens  Communications  Company  and  Rural  Telephone
               Finance Cooperative (incorporated by reference to Exhibit 10.1 to
               the Registrant's Quarterly Report  on  Form 10-Q  for  the  three
               months ended March 31, 2003, File No. 001-11001).
10.16          Employment  Agreement  between  Citizens  Communications  Company
               and  Mary  Agnes   Wilderotter,  effective     November  1,  2004
               (incorporated by reference to Exhibit  10.16 to the  Registrant's
               Quarterly Report on Form 10-Q for the nine months ended September
               30, 2004, File No. 001-11001).
10.17          Employment Agreement between Citizens Communications Company  and
               Jerry  Elliott,  effective  September  1, 2004  (incorporated  by
               reference to Exhibit 10.17 to the Registrant's  Quarterly  Report
               on Form 10-Q for the nine months ended September  30, 2004,  File
               No. 001-11001).
10.18          Employment Agreement between Citizens Communications  Company and
               Robert  Larson,  effective  September  1, 2004  (incorporated  by
               reference to Exhibit 10.18 to the Registrant's  Quarterly  Report
               on Form 10-Q for the nine months ended September  30, 2004,  File
               No. 001-11001).
10.19          Summary of Compensation Arrangements for Named Executive Officers
               Outside  of  Employment  Agreements and Summary  of  Non-Employee
               Directors' Compensation Arrangements.
10.19.1        Split   Dollar  Life   Insurance   Agreement   between   Citizens
               Communications Company and L. Russell Mitten, effective April 28,
               1994.
10.20          Employment  Agreement  between  Citizens  Communications  Company
               and John H. Casey, III,  effective  February 15, 2005.
10.21          1996  Equity  Incentive  Plan  restated  as  of  March  21, 2000,
               (incorporated  by  reference  to  Exhibit  A to  the Registrant's
               Proxy  Statement  dated  March 29, 1996  and  Exhibit B to  Proxy
               Statement dated March 28, 1997, respectively, File No.001-11001).
10.22          Competitive Advance and Revolving Credit Facility  Agreement  for
               $250,000,000 dated October 29, 2004 (incorporated by reference to
               Exhibit 10.19 to the Registrant's Quarterly  Report on Form  10-Q
               for  the  nine  months  ended   September  30,  2004,   File  No.
               001-11001).
10.23          Offer of  Employment   Letter  between  Citizens   Communications
               Company and Peter B. Hayes,  effective  February 1, 2005.
12             Computation  of ratio  of earnings to fixed  charges  (this  item
               is included  herein for the  sole  purpose  of  incorporation  by
               reference).
21             Subsidiaries of the Registrant
23             Auditors' Consent
31.1           Certification of Principal  Executive  Officer  pursuant  to Rule
               13a-14(a) under the Securities  Exchange Act of 1934.
31.2           Certification of  Principal   Financial Officer pursuant  to Rule
               13a-14(a) under the Securities  Exchange Act of 1934.
32.1           Certification  of Chief  Executive Officer  pursuant to 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.
32.2           Certification  of Chief  Financial Officer  pursuant to 18 U.S.C.
               Section  1350,   as  adopted   pursuant  to  Section  906  of the
               Sarbanes-Oxley Act of 2002.

Exhibits 10.1, 10.2.1, 10.3, 10.4, 10.5, 10.6.1,  10.6.2,  10.7.1, 10.7.2, 10.8,
10.16,  10.17,  10.18,  10.19,  10.19.1,  10.20,  10.21 and 10.23 are management
contracts or compensatory plans or arrangements.

                                       39




                                   SIGNATURES
                                   ----------

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

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

                        By:    /s/ Mary Agnes Wilderotter
                               ---------------------------
                                  Mary Agnes Wilderotter
                   President; Chief Executive Officer and Director

                                 March 11, 2005


                                       40



     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated on the 11th day of March 2005.

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


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

                                              Director
- -----------------------------------------
        (Lawton Fitt)

     /s/ Rudy J. Graf                         Chairman of the Board
- -----------------------------------------
        (Rudy J. Graf)

     /s/ Stanley Harfenist                    Director
- -----------------------------------------
        (Stanley Harfenist)

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

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

     /s/ Scott N. Schneider                   Director
- -----------------------------------------
        (Scott N. Schneider)

                                              Director
- -----------------------------------------
        (Larraine D. Segil)

     /s/ Robert A. Stanger                    Director
- -----------------------------------------
        (Robert A. Stanger)

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

     /s/ David H. Ward                        Director
- -----------------------------------------
        (David H. Ward)

                                              Director
- -----------------------------------------
        (Myron A. Wick, III)

     /s/ Mary Agnes Wilderotter               President and Chief Executive
- -----------------------------------------     Officer and Director
        (Mary Agnes Wilderotter)


                                       41







                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                   Index to Consolidated Financial Statements


                                                                                                  
Item                                                                                                  Page
- ----                                                                                                  ----

Management's Report on Internal Control Over Financial Reporting                                       F-2

Report of Independent Registered Public Accounting Firm                                                F-3

Report of Independent Registered Public Accounting Firm                                                F-4

Consolidated balance sheets as of December 31, 2004 and 2003                                           F-5

Consolidated statements of operations for the years ended
   December 31, 2004, 2003 and 2002                                                                    F-6

Consolidated statements of shareholders' equity for the years ended
   December 31, 2004, 2003 and 2002                                                                    F-7

Consolidated statements of comprehensive income (loss) for the years ended
   December 31, 2004, 2003 and 2002                                                                    F-7

Consolidated statements of cash flows for the years ended
   December 31, 2004, 2003 and 2002                                                                    F-8

Notes to consolidated financial statements                                                             F-9



                                      F-1


        Management's Report on Internal Control Over Financial Reporting
        ----------------------------------------------------------------


The Board of Directors and Shareholders
Citizens Communications Company:


The  management  of  Citizens   Communications   Company  and   subsidiaries  is
responsible for  establishing  and maintaining  adequate  internal  control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f).

Under the supervision and with the participation of our management, we conducted
an  evaluation  of the  effectiveness  of our internal  control  over  financial
reporting  based on the  framework in Internal  Control -  Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway Commission.
Based on our  evaluation  under the  framework in Internal  Control - Integrated
Framework,  our management  concluded  that our internal  control over financial
reporting was effective as of December 31, 2004.

Our  management's  assessment of the  effectiveness of our internal control over
financial  reporting  as of December  31, 2004 has been  audited by KPMG LLP, an
independent  registered  public accounting firm, as stated in their report which
is included herein.





Stamford, Connecticut
March 11, 2005

                                      F-2


             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------


The Board of Directors and Shareholders
Citizens Communications Company:

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's Report on Internal Control Over Financial Reporting,  that Citizens
Communications  Company and subsidiaries  maintained  effective internal control
over financial reporting as of December 31, 2004, based on criteria  established
in Internal  Control-Integrated  Framework issued by the Committee of Sponsoring
Organizations  of  the  Treadway  Commission  (COSO).   Citizens  Communications
Company's  management is responsible for maintaining  effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that Citizens Communications Company and
subsidiaries  maintained  effective internal control over financial reporting as
of December 31, 2004,  is fairly  stated,  in all  material  respects,  based on
criteria  established  in Internal  Control-Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission (COSO).  Also,
in our opinion,  Citizens Communications Company and subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal  Control-Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission (COSO).

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets of
Citizens  Communications  Company and  subsidiaries  as of December 31, 2004 and
2003,  and the related  consolidated  statements  of  operations,  shareholders'
equity and comprehensive  income (loss), and cash flows for each of the years in
the  three-year  period ended  December 31, 2004, and our report dated March 11,
2005  expressed  an  unqualified   opinion  on  those   consolidated   financial
statements.



                                              /s/ KPMG LLP

New York, New York
March 11, 2005


                                      F-3


             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------



The Board of Directors and Shareholders
Citizens Communications Company:


We have  audited  the  accompanying  consolidated  balance  sheets  of  Citizens
Communications  Company and  subsidiaries  as of December 31, 2004 and 2003, and
the  related  consolidated  statements  of  operations,   shareholders'  equity,
comprehensive  income  (loss)  and  cash  flows  for  each of the  years  in the
three-year  period  ended  December  31,  2004.  These  consolidated   financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material   respects,   the  financial   position  of  Citizens
Communications Company and subsidiaries as of December 31, 2004 and 2003 and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December 31, 2004, in conformity  with U.S.  generally
accepted  accounting  principles.  As  discussed  in Note 2 to the  consolidated
financial  statements,  the Company  adopted  Statement of Financial  Accounting
Standards No. 143,  "Accounting for Asset Retirement  Obligations" as of January
1, 2003.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  the  effectiveness  of Citizens
Communications   Company  and  subsidiaries   internal  control  over  financial
reporting  as of December 31, 2004,  based on criteria  established  in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), and our report dated March 11, 2005 expressed
an  unqualified  opinion  on  management's  assessment  of,  and  the  effective
operation of, internal control over financial reporting.




                                              /s/ KPMG LLP




New York, New York
March 11, 2005


                                      F-4




                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2004 AND 2003
                                ($ in thousands)

                                                                                                  2004           2003
                                                                                             -------------- --------------
ASSETS
- ------
Current assets:
                                                                                                          
   Cash and cash equivalents                                                                   $   167,463    $   583,671
   Accounts receivable, less allowances of $36,042 and $47,332, respectively                       236,306        248,750
   Prepaid expenses                                                                                 30,753         39,434
   Other current assets                                                                             15,055         11,648
   Assets held for sale                                                                                  -         23,130
                                                                                             -------------- --------------
     Total current assets                                                                          449,577        906,633

Property, plant and equipment, net                                                               3,338,300      3,530,542
Goodwill, net                                                                                    1,940,318      1,940,318
Other intangibles, net                                                                             685,111        812,407
Investments                                                                                         23,062         57,103
Other assets                                                                                       232,051        198,542
                                                                                             -------------- --------------
        Total assets                                                                           $ 6,668,419    $ 7,445,545
                                                                                             ============== ==============

LIABILITIES AND EQUITY
- ----------------------
Current liabilities:
   Long-term debt due within one year                                                          $     6,383    $    88,002
   Accounts payable                                                                                169,999        192,607
   Advanced billings                                                                                29,446         29,473
   Income taxes accrued                                                                             27,446         77,159
   Other taxes accrued                                                                              30,203         32,039
   Interest accrued                                                                                 82,534         81,244
   Customer deposits                                                                                   927          2,105
   Other current liabilities                                                                        70,582         74,997
   Liabilities related to assets held for sale                                                           -         11,128
                                                                                             -------------- --------------
     Total current liabilities                                                                     417,520        588,754

Deferred income taxes                                                                              232,766        198,312
Customer advances for construction and contributions in aid of construction                         94,601        122,035
Other liabilities                                                                                  294,294        264,382
Equity units                                                                                             -        460,000
Long-term debt                                                                                   4,266,998      4,195,629
Company Obligated Mandatorily Redeemable Convertible Preferred Securities*                               -        201,250

Shareholders' equity:
   Common stock, $0.25 par value (600,000,000 authorized shares; 339,633,000 and 284,709,000
     outstanding and 339,635,000 and 295,434,000 issued at December 31, 2004 and 2003,
     respectively)                                                                                  84,909         73,858
   Additional paid-in capital                                                                    1,664,627      1,953,317
   Accumulated deficit                                                                            (287,719)      (365,181)
   Accumulated other comprehensive loss, net of tax                                                (99,569)       (71,676)
   Treasury stock                                                                                       (8)      (175,135)
                                                                                             -------------- --------------
     Total shareholders' equity                                                                  1,362,240      1,415,183
                                                                                             -------------- --------------
        Total liabilities and equity                                                           $ 6,668,419    $ 7,445,545
                                                                                             ============== ==============


*    Represents  securities of a subsidiary  trust, the sole assets of which are
     securities  of a subsidiary  partnership,  substantially  all the assets of
     which are convertible  debentures of the Company. The consolidation of this
     item changed  effective January 1, 2004 as a result of the application of a
     newly  mandated  accounting  standard "FIN 46R." See Note 16 for a complete
     discussion.

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

                                      F-5



                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
                 ($ in thousands, except for per-share amounts)
                                                                         2004           2003            2002
                                                                    --------------- --------------  --------------
                                                                                             
Revenue                                                                $ 2,192,980    $ 2,444,938     $ 2,669,332

Operating expenses:
    Cost of services (exclusive of depreciation and amortization)          205,166        369,689         476,920
    Other operating expenses                                               840,186        901,751       1,002,355
    Depreciation and amortization                                          572,710        595,276         755,522
    Reserve for (recovery of) telecommunications bankruptcies                    -         (4,377)         10,880
    Restructuring and other expenses                                             -          9,687          37,186
    Loss on impairment                                                           -         15,300       1,074,058
    Management succession and strategic alternatives expenses
     (see Note 13)                                                          90,632              -               -
                                                                    --------------- --------------  --------------
 Total operating expenses                                                1,708,694      1,887,326       3,356,921
                                                                    --------------- --------------  --------------
Operating income (loss)                                                    484,286        557,612        (687,589)

Investment income (loss), net                                               33,626         10,432         (98,359)
Other income (loss), net                                                   (53,359)        43,989          22,537
Interest expense                                                           379,024        416,524         468,229
                                                                    --------------- --------------  --------------
     Income (loss) from continuing operations before income taxes,
      dividends on convertible preferred securities and cumulative
      effect of change in accounting principle                              85,529        195,509      (1,231,640)

Income tax expense (benefit)                                                13,379         67,216        (414,874)
                                                                    --------------- --------------  --------------
    Income (loss) from continuing operations before dividends on
      convertible preferred securities and cumulative effect of
      change in accounting principle                                        72,150        128,293        (816,766)

Dividends on convertible preferred securities, net of income tax
      benefit of $(3,853)*                                                       -          6,210           6,210
                                                                    --------------- --------------  --------------
Income (loss) from continuing operations before cumulative effect
      of change in accounting principle                                     72,150        122,083        (822,976)

Loss from discontinued operations, net of income tax benefit of $0,
    $0 and $554, respectively                                                    -              -          (1,478)
Gain on disposal of water segment, net of income taxes of $135,303               -              -         181,369
                                                                    --------------- --------------  --------------
     Total income from discontinued operations, net of income taxes
      of $0, $0 and $134,749, respectively                                       -              -         179,891
                                                                    --------------- --------------  --------------
    Income (loss) before cumulative effect of change in accounting
       principle                                                            72,150        122,083        (643,085)

Cumulative effect of change in accounting principle, net of tax of
    $0, $41,591 and $0, respectively                                             -         65,769         (39,812)
                                                                    --------------- --------------  --------------
    Net income (loss) available for common shareholders                $    72,150    $   187,852     $  (682,897)
                                                                    =============== ==============  ==============
Basic income (loss) per common share:
    Income (loss) from continuing operations before cumulative
      effect of change in accounting principle                         $      0.24    $      0.44     $     (2.93)
    Income from discontinued operations                                          -              -            0.64
    Income (loss) from cumulative effect of change in accounting
      principle                                                                  -           0.23           (0.14)
                                                                    --------------- --------------  --------------
    Net income (loss) per common share available for common
      shareholders                                                     $      0.24    $      0.67     $     (2.43)
                                                                    =============== ==============  ==============
Diluted income (loss) per common share:
    Income (loss) from continuing operations before cumulative
      effect of change in accounting principle                         $      0.23    $      0.42     $     (2.93)
    Income from discontinued operations                                          -              -            0.64
    Income (loss) from cumulative effect of change in accounting
      principle                                                                  -           0.22           (0.14)
                                                                    --------------- --------------  --------------
    Net income (loss) per common share available for common
      shareholders                                                     $      0.23    $      0.64     $     (2.43)
                                                                    =============== ==============  ==============

 *   The  consolidation  of this item  changed  effective  January  1, 2004 as a
     result of the  application  of a newly  mandated  accounting  standard "FIN
     46R." See Note 16 for a complete discussion.

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

                                      F-6




                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
                 ($ in thousands, except for per-share amounts)


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

                                                                                              
Balance January 1, 2002                292,840  $ 73,210  $1,927,518     $ 129,864   $  4,907     (11,551) $(189,357)  $ 1,946,142
Stock plans                              1,240       310      15,888             -          -         (47)      (228)       15,970
Net loss                                     -         -           -      (682,897)         -           -          -      (682,897)
Other comprehensive loss, net of tax
   and reclassifications adjustments         -         -           -             -   (107,076)          -          -      (107,076)
                                      --------- --------- -----------  ------------   -----------  -------- ---------- -------------
Balance December 31, 2002              294,080    73,520   1,943,406      (553,033)  (102,169)    (11,598)  (189,585)    1,172,139
Stock plans                              1,354       338       9,911             -          -         873     14,450        24,699
Net income                                   -         -           -       187,852          -           -          -       187,852
Other comprehensive income, net of tax
   and reclassifications adjustments         -         -           -             -     30,493           -          -        30,493
                                      --------- --------- -----------  ------------   -----------  -------- ---------- -------------
Balance December 31, 2003              295,434    73,858   1,953,317      (365,181)   (71,676)    (10,725)  (175,135)    1,415,183
Stock plans                              4,821     1,206      14,236             -          -       6,407    106,823       122,265
Conversion of EPPICS                    10,897     2,724     133,621             -          -         725     11,646       147,991
Conversion of Equity Units              28,483     7,121     396,221             -          -       3,591     56,658       460,000
Dividends on common stock of
   $2.50 per share                           -         -    (832,768)            -          -           -          -      (832,768)
Net income                                   -         -           -        72,150          -           -          -        72,150
Tax benefit on equity forward contracts      -         -           -         5,312          -           -          -         5,312
Other comprehensive loss, net of tax
   and reclassifications adjustments         -         -           -             -    (27,893)          -          -       (27,893)
                                      --------- --------- -----------  ------------   -----------  -------- ---------- -------------
Balance December 31, 2004              339,635  $ 84,909  $1,664,627     $(287,719)  $(99,569)         (2) $      (8)  $ 1,362,240
                                      ========= ========= ===========  ============   ===========  ======== ========== =============


                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
                 ($ in thousands, except for per-share amounts)


                                                                 2004            2003           2002
                                                             --------------  -------------  -------------

Net income (loss)                                                 $ 72,150      $ 187,852      $(682,897)
Other comprehensive income (loss), net of tax
  and reclassifications adjustments*                               (27,893)        30,493       (107,076)
                                                             --------------  -------------  -------------
  Total comprehensive income (loss)                               $ 44,257      $ 218,345      $(789,973)
                                                             ==============  =============  =============



*    Consists of unrealized  holding  (losses)/gains  of marketable  securities,
     realized  gains taken to income as a result of the sale of  securities  and
     minimum pension liability (see Note 22).



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


                                      F-7





                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 and 2002
                                ($ in thousands)

                                                                    2004             2003              2002
                                                               ---------------  ----------------  ----------------

Income (loss) from continuing operations before cumulative
                                                                                            
   effect of change in accounting principle                       $    72,150       $   122,083      $   (822,976)
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
       Depreciation and amortization expense                          572,710           595,276           755,522
       Investment write-downs                                               -                 -           117,455
       Gain on expiration/settlement of customer advance              (25,345)           (6,165)          (26,330)
       Gain on capital lease termination/restructuring                      -           (69,512)                -
       Stock based compensation expense                                45,313             8,552             7,029
       (Gain)/loss on extinguishment of debt                           66,480            10,851            (5,550)
       Investment (gains)/losses                                      (12,066)                -            (3,363)
       (Gain)/loss on sales of assets, net                              1,945            20,492            (9,798)
       Loss on impairment                                                   -            15,300         1,074,058
       Other non-cash adjustments                                      21,923            14,574            18,762
       Deferred taxes, net                                             13,379            67,216          (414,874)
       Change in accounts receivable                                   11,877            70,077             1,373
       Change in accounts payable and other liabilities               (51,460)         (106,567)         (161,367)
       Change in other current assets                                     169               999           101,376
                                                               ---------------  ----------------  ----------------
Net cash provided by continuing operating activities                  717,075           743,176           631,317

Cash flows from investing activities:
       Proceeds from sales of assets, net of selling expenses          30,959           388,079           224,678
       Capital expenditures                                          (276,348)         (278,015)         (468,742)
       Securities purchased                                                 -            (1,680)           (1,175)
       Securities sold                                                 26,514                 -             8,212
       Securities matured                                                   -                 -             2,014
       ELI share purchases                                                  -                 -            (6,800)
       Other asset purchases                                          (28,110)               68               727
                                                               ---------------  ----------------  ----------------
Net cash provided from (used by) investing activities                (246,985)          108,452          (241,086)

Cash flows from financing activities:
       Repayment of customer advances for construction
         and contributions in aid of construction                      (2,089)          (10,030)           (4,895)
       Long-term debt borrowings                                      700,000                 -                 -
       Debt issuance costs                                            (15,502)                -                 -
       Long-term debt payments                                     (1,214,021)         (653,462)       (1,062,169)
       (Premium) discount to retire debt                              (66,480)          (10,851)            5,550
       Issuance of common stock                                       544,562            13,209            14,943
       Dividends paid                                                (832,768)                -                 -
                                                               ---------------  ----------------  ----------------
Net cash used by financing activities                                (886,298)         (661,134)       (1,046,571)

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

                                                               ---------------  ----------------  ----------------
Increase (decrease) in cash and cash equivalents                     (416,208)          190,494           177,308
Cash and cash equivalents at January 1,                               583,671           393,177           215,869
                                                               ---------------  ----------------  ----------------

Cash and cash equivalents at December 31,                         $   167,463       $   583,671      $    393,177
                                                               ===============  ================  ================

Cash paid during the period for:
       Interest                                                   $   370,128       $   418,561      $    473,029
       Income taxes (refunds)                                     $    (4,901)      $    (2,532)     $    (17,621)

Non-cash investing and financing activities:
       Assets acquired under capital lease                        $         -       $         -      $     38,000
       Change in fair value of interest rate swaps                $    (6,135)      $    (6,057)     $     16,229
       Investment write-downs                                     $     5,286       $         -      $    117,455
       Conversion of EPPICS                                       $   147,991       $         -      $          -



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

                                      F-8



                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


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

     (a)  Description of Business:
          -----------------------
          Citizens  Communications  Company and its subsidiaries are referred to
          as  "we",  "us",  the  "Company"  or "our"  in this  report.  We are a
          communications company providing services to rural areas and small and
          medium-sized  towns and cities as an incumbent local exchange carrier,
          or ILEC.  We offer our ILEC  services  under the  "Frontier"  name. In
          addition,  we provide  competitive  local exchange  carrier,  or CLEC,
          services to business customers and to other communications carriers in
          certain  metropolitan  areas  in the  western  United  States  through
          Electric Lightwave, LLC, or ELI, our wholly-owned subsidiary. On April
          1,  2004,  we  announced  the  completion  of the sale of our  Vermont
          Electric Division. With that transaction, we completed the divestiture
          of our public  utilities  services segment pursuant to plans announced
          in 1999.

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

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

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

     (d)  Revenue Recognition:
          -------------------

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

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

     (e)  Property, Plant and Equipment:
          -----------------------------
          Property,  plant and  equipment  are stated at  original  cost or fair
          market  value  for  our  acquired  properties,  including  capitalized
          interest. Maintenance and repairs are charged to operating expenses as
          incurred.  The book value, net of salvage, of routine property,  plant
          and   equipment    dispositions   is   charged   against   accumulated
          depreciation.

                                      F-9

     (f)  Goodwill and Other Intangibles:
          ------------------------------
          Intangibles represent the excess of purchase price over the fair value
          of identifiable  tangible  assets  acquired.  We undertake  studies to
          determine  the fair  values of assets  and  liabilities  acquired  and
          allocate   purchase  prices  to  assets  and  liabilities,   including
          property,  plant  and  equipment,   goodwill  and  other  identifiable
          intangibles.  On January 1, 2002,  we adopted  Statement  of Financial
          Accounting  Standards  (SFAS) No. 142,  "Goodwill and Other Intangible
          Assets,"  which  applies to all goodwill and other  intangible  assets
          recognized  in the  statement  of  financial  position  at that  date,
          regardless  of  when  the  assets  were  initially  recognized.   This
          statement requires that goodwill and other intangibles with indefinite
          useful lives no longer be amortized to earnings, but instead be tested
          for  impairment,  at least  annually.  In  performing  this test,  the
          Company first compares the carrying  amount of its reporting  units to
          their respective fair values.  If the carrying amount of any reporting
          unit  exceeds its fair value,  the Company is required to perform step
          two of the impairment  test by comparing the implied fair value of the
          reporting unit's goodwill with its carrying  amount.  The amortization
          of goodwill and other  intangibles with indefinite useful lives ceased
          upon adoption of the statement on January 1, 2002. We annually (during
          the fourth  quarter)  examine the  carrying  value of our goodwill and
          trade name to determine  whether there are any  impairment  losses and
          have determined for the year ended December 31, 2004 that there was no
          impairment (see Notes 2 and 7). All remaining  intangibles at December
          31, 2004 are associated with the ILEC segment,  which is the reporting
          unit.

          SFAS No. 142 also  requires  that  intangible  assets  with  estimated
          useful  lives be  amortized  over  those  lives  and be  reviewed  for
          impairment in accordance with SFAS No. 144, "Accounting for Impairment
          or Disposal of Long-Lived  Assets" to determine whether any changes to
          these lives are required.  We periodically reassess the useful life of
          our intangible assets with estimated useful lives to determine whether
          any changes to those lives are required.

     (g)  Impairment of Long-Lived  Assets and Long-Lived  Assets to Be Disposed
          ----------------------------------------------------------------------
          Of:
          --
          We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
          Long-Lived  Assets" as of January 1, 2002. In accordance with SFAS No.
          144, we review  long-lived  assets to be held and used and  long-lived
          assets to be disposed of, including  intangible  assets with estimated
          useful  lives,   for   impairment   whenever   events  or  changes  in
          circumstances indicate that the carrying amount of such assets may not
          be  recoverable.  Recoverability  of  assets  to be held  and  used is
          measured by comparing  the carrying  amount of the asset to the future
          undiscounted  net cash flows  expected to be  generated  by the asset.
          Recoverability  of assets held for sale is measured by  comparing  the
          carrying amount of the assets to their estimated fair market value. If
          any assets are  considered to be impaired,  the impairment is measured
          by the amount by which the carrying  amount of the assets  exceeds the
          estimated fair value (see Note 5).

     (h)  Derivative Instruments and Hedging Activities:
          ---------------------------------------------
          We account  for  derivative  instruments  and  hedging  activities  in
          accordance with SFAS No. 133,  "Accounting for Derivative  Instruments
          and  Hedging  Activities",  as  amended.  SFAS No.  133,  as  amended,
          requires that all derivative instruments, such as interest rate swaps,
          be recognized in the financial  statements  and measured at fair value
          regardless of the purpose or intent of holding them.

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

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

                                      F-10

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

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

     (i)  Investments:
          -----------

          Marketable Securities
          We   classify   our   cost   method   investments   at   purchase   as
          available-for-sale.   We  do  not  maintain  a  trading  portfolio  or
          held-to-maturity securities.

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

          Investments in Other Entities
          Investments in entities that we do not control,  but where we have the
          ability to exercise significant influence over operating and financial
          policies, are accounted for using the equity method of accounting.

          We evaluate our  investments  periodically  to  determine  whether any
          decline in fair value,  below the cost basis, is other than temporary.
          To  determine  whether  an  impairment  is other  than  temporary,  we
          consider whether we have the ability and intent to hold the investment
          until a market price recovery and whether evidence indicating the cost
          of the investment is recoverable  outweighs  evidence to the contrary.
          Evidence  considered in this  assessment  includes the reasons for the
          impairment,  the severity and duration of the  impairment,  changes in
          value  subsequent  to  year-end,  and  forecasted  performance  of the
          investee.  If we determine  that a decline in fair value is other than
          temporary, the cost basis of the individual investment is written down
          to fair value,  which  becomes  the new cost basis.  The amount of the
          write-down is transferred from other  comprehensive  income (loss) and
          included in the statement of operations as a loss.

     (j)  Income Taxes and Deferred Income Taxes:
          --------------------------------------
          We file a consolidated federal income tax return. We utilize the asset
          and liability  method of accounting for income taxes.  Under the asset
          and liability  method,  deferred income taxes are recorded for the tax
          effect of temporary  differences between the financial statement basis
          and the tax basis of assets and  liabilities  using tax rates to be in
          effect when the temporary differences are expected to reverse.

     (k)  Employee Stock Plans:
          --------------------
          We have various employee stock-based  compensation plans. Awards under
          these  plans  are  granted  to  eligible   officers,   management  and
          non-management employees.  Awards may be made in the form of incentive
          stock options, non-qualified stock options, stock appreciation rights,
          restricted stock or other stock based awards.  As permitted by current
          accounting rules, we apply Accounting  Principles Board Opinions (APB)
          No. 25 and related  interpretations  in  accounting  for the  employee
          stock plans  resulting in the use of the intrinsic  value to value the
          stock.

          SFAS No. 123,  "Accounting for Stock-Based  Compensation" and SFAS No.
          148,  "Accounting  for  Stock-Based   Compensation  -  Transition  and
          Disclosure,  an amendment of SFAS No. 123," established accounting and
          disclosure  requirements using a fair-value-based method of accounting
          for stock-based employee  compensation plans. As permitted by existing
          accounting standards, the Company has elected to continue to apply the
          intrinsic-valued-based  method of accounting  described above, and has
          adopted only the disclosure requirements of SFAS No. 123, as amended.

          In  December  2004,  the FASB  issued  SFAS No.  123  (revised  2004),
          "Share-Based  Payment,"  ("SFAS No.  123R").  SFAS 123R  requires that
          stock-based employee  compensation be recorded as a charge to earnings
          for  interim  or  annual  periods   beginning  after  June  15,  2005.
          Accordingly,  we will adopt SFAS 123R  commencing  July 1, 2005 (third
          quarter) and expect to recognize  approximately  $3,000,000 of expense
          for the last six months of 2005.

                                      F-11


          We provide pro forma net income (loss) and pro forma net income (loss)
          per common share disclosures for employee stock option grants based on
          the fair value of the options at the date of grant (see Note 18).  For
          purposes  of  presenting  pro  forma  information,  the fair  value of
          options  granted is computed  using the Black  Scholes  option-pricing
          model.

          Had we  determined  compensation  cost  based on the fair value at the
          grant date for the Management  Equity  Incentive  Plan (MEIP),  Equity
          Incentive  Plan  (EIP),   Employee  Stock  Purchase  Plan  (ESPP)  and
          Directors'  Deferred Fee Equity Plan,  our pro forma net income (loss)
          and  net  income   (loss)  per  common  share   available  for  common
          shareholders would have been as follows:



                                                                               2004             2003           2002
                                                                         ----------------- --------------- --------------
             ($ in thousands)
             ----------------

             Net income (loss) available for common
                                                                                                  
             shareholders                                 As reported       $ 72,150       $   187,852    $  (682,897)

             Add: Stock-based employee compensation
             expense included in reported net income
             (loss), net of related tax effects                               29,381             6,014          4,899


             Deduct: Total stock-based employee
             compensation expense determined under fair
             value based method for all awards, net of
             related tax effects                                             (38,312)          (16,139)       (16,990)
                                                                             --------     ------------     -----------

                                                          Pro forma         $ 63,219       $   177,727      $(694,988)
                                                                            =========     ============     ===========


             Net income (loss) per common share           As reported:
                available for common shareholders            Basic          $   0.24       $      0.67      $   (2.43)
                                                             Diluted            0.23              0.64          (2.43)
                                                           Pro forma:
                                                             Basic          $   0.21       $      0.63      $   (2.48)
                                                             Diluted            0.20              0.61          (2.48)


          In connection with the payment of the special,  non-recurring dividend
          of $2 per common share on September  2, 2004,  the exercise  price and
          number of all  outstanding  options was adjusted such that each option
          had the same value to the holder  after the  dividend as it had before
          the dividend.  In  accordance  with FASB  Interpretation  No. 44 ("FIN
          44"),   "Accounting   for   Certain   Transactions   Involving   Stock
          Compensation"  and EITF 00-23,  "Issues  Related to the Accounting for
          Stock  Compensation  under  APB  No.  25  and  FIN  44",  there  is no
          accounting  consequence for changes made to the exercise price and the
          number of shares of a fixed stock  option or award as a direct  result
          of the special, non-recurring dividend.

     (l)  Net Income (Loss) Per Common Share Available for Common Shareholders:
          --------------------------------------------------------------------
          Basic  net  income  (loss)  per  common  share is  computed  using the
          weighted average number of common shares outstanding during the period
          being  reported  on.  Except  when the effect  would be  antidilutive,
          diluted net income per common share  reflects  the dilutive  effect of
          the assumed  exercise of stock options using the treasury stock method
          at the  beginning  of the period  being  reported on as well as common
          shares that would result from the conversion of convertible  preferred
          stock. In addition,  the related interest on preferred stock dividends
          (net of tax) is added back to income since it would not be paid if the
          preferred stock was converted to common stock.

                                      F-12


(2)  Recent Accounting Literature and Changes in Accounting Principles:
     -----------------------------------------------------------------

          Goodwill and Other Intangibles
          ------------------------------
          In July 2001, the Financial  Accounting  Standards Board (FASB) issued
          Statement of Financial  Accounting Standards (SFAS) No. 142, "Goodwill
          and Other  Intangible  Assets." This statement  requires that goodwill
          and  other  intangibles  with  indefinite  useful  lives no  longer be
          amortized to earnings, but instead be reviewed for impairment. We have
          no intangibles  with  indefinite  useful lives other than goodwill and
          trade name.  The  amortization  of goodwill and trade name ceased upon
          adoption of the statement on January 1, 2002. We were required to test
          for  impairment  of goodwill  and other  intangibles  with  indefinite
          useful lives as of January 1, 2002 and at least  annually  thereafter.
          Any transitional  impairment loss at January 1, 2002 was recognized as
          the  cumulative  effect of a change  in  accounting  principle  in our
          statement of operations.  As a result of our adoption of SFAS No. 142,
          we  recognized  a  transitional  impairment  loss  related  to  ELI of
          $39,812,000 as a cumulative effect of a change in accounting principle
          in our  statement  of  operations  in 2002.  We  annually  examine the
          carrying value of our goodwill and other  intangibles  with indefinite
          useful lives to determine  whether there are any impairment losses and
          have determined for the year ended December 31, 2004 that there was no
          impairment.

          SFAS No. 142 also  requires  that  intangible  assets  with  estimated
          useful  lives be  amortized  over  those  lives  and be  reviewed  for
          impairment in accordance with SFAS No. 144, "Accounting for Impairment
          or Disposal of Long-Lived  Assets." We reassess the useful life of our
          intangible assets with estimated useful lives annually.

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

          The following  table presents a  reconciliation  between  reported net
          income (loss) and adjusted net income  (loss)  related to the adoption
          of SFAS 143. Adjusted net income (loss) excludes  depreciation expense
          recognized in prior periods  related to the cost of removal  provision
          as required by SFAS No. 143.



(In thousands, except per-share amounts)                         2004                 2003                2002
- ----------------------------------------                  -------------------  -------------------  ------------------

                                                                                                  
Reported available for common shareholders                          $ 72,150            $ 187,852          $ (682,897)
Add back: Cost of removal in depreciation expense                          -                    -              15,990
                                                          -------------------  -------------------  ------------------
Adjusted available for common shareholders                          $ 72,150            $ 187,852          $ (666,907)
                                                          ===================  ===================  ==================

Basic income (loss) per share:
- ------------------------------
Reported available for common shareholders per share                $   0.24            $    0.67          $    (2.43)
Cost of removal in depreciation expense                                    -                    -                0.06
                                                          -------------------  -------------------  ------------------
Adjusted available for common shareholders per share                $   0.24            $    0.67          $    (2.37)
                                                          ===================  ===================  ==================

Diluted income (loss) per share:
- --------------------------------
Reported available for common shareholders per share                $   0.23            $    0.64          $    (2.43)
Cost of removal in depreciation expense                                    -                    -                0.06
                                                          -------------------  -------------------  ------------------
Adjusted available for common shareholders per share                $   0.23            $    0.64          $    (2.37)
                                                          ===================  ===================  ==================

          Long-Lived Assets
          -----------------
          In October  2001,  the FASB issued SFAS No. 144,  "Accounting  for the
          Impairment   or  Disposal  of  Long-Lived   Assets."  This   statement
          establishes  a  single  accounting  model,   based  on  the  framework
          established in SFAS No. 121, for impairment of long-lived  assets held
          and used and for long-lived assets to be disposed of by sale,  whether
          previously  held  and  used  or  newly  acquired,   and  broadens  the
          presentation  of  discontinued  operations  to include  more  disposal
          transactions. We adopted this statement on January 1, 2002.

                                      F-13


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

          For  the  year  ended  December  31,  2004  and  2003,  we  recognized
          $66,480,000  and  $10,851,000,   respectively,   of  losses  on  early
          retirement  of  debt.  For  the  year  ended  December  31,  2002,  we
          recognized  $5,550,000  of  gains  from  early  debt  retirement.   In
          addition,  for the year ended  December  31,  2002,  we  recognized  a
          $12,800,000  loss  due to a  tender  offer  related  to  certain  debt
          securities.

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

          Guarantees
          ----------
          In November  2002,  the FASB issued FASB  Interpretation  No. 45 ("FIN
          45"),   "Guarantor's   Accounting  and  Disclosure   Requirements  for
          Guarantees,  Including  Guarantees of  Indebtedness of Others." FIN 45
          requires that a guarantor be required to  recognize,  at the inception
          of a  guarantee,  a  liability  for the fair  value of the  obligation
          assumed  under  the  guarantee.   FIN  45  also  requires   additional
          disclosures  by a  guarantor  in  its  interim  and  annual  financial
          statements  about the obligations  associated with the guarantee.  The
          provisions of FIN 45 are effective for  guarantees  issued or modified
          after  December 31, 2002,  whereas the  disclosure  requirements  were
          effective for financial  statements  for period ending after  December
          15, 2002 (see Note 26). We adopted FIN No. 45 on January 1, 2003.  The
          adoption of FIN 45 did not have any material  impact on our  financial
          position or results of operations.

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

          In December  2004,  the FASB issued SFAS No. 123R.  SFAS 123R requires
          that  stock-based  employee  compensation  be  recorded as a charge to
          earnings for interim or annual periods  beginning after June 15, 2005.
          Accordingly,  we will adopt SFAS 123R  commencing  July 1, 2005 (third
          quarter) and expect to recognize  approximately  $3,000,000 of expense
          for the last six months of 2005.

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

                                      F-14

          Financial  Instruments  with  Characteristics  of Both Liabilities and
          ----------------------------------------------------------------------
          Equity
          ------
          In May 2003,  the FASB issued SFAS No.  150,  "Accounting  for Certain
          Financial  Instruments  with  Characteristics  of Both Liabilities and
          Equity." The Statement  establishes  standards for the  classification
          and measurement of certain financial  instruments with characteristics
          of both liabilities and equity.  Generally, the Statement is effective
          for financial  instruments entered into or modified after May 31, 2003
          and is  otherwise  effective  at the  beginning  of the first  interim
          period beginning after June 15, 2003. We adopted the provisions of the
          Statement  on July 1, 2003.  The adoption of SFAS No. 150 did not have
          any  material   impact  on  our  financial   position  or  results  of
          operations.

          Variable Interest Entities
          --------------------------
          In December 2003, the FASB issued FASB  Interpretation No. 46 (revised
          December  2003)  ("FIN  46R"),  "Consolidation  of  Variable  Interest
          Entities," which addresses how a business  enterprise  should evaluate
          whether it has a controlling  financial  interest in an entity through
          means other than voting rights and accordingly  should consolidate the
          entity. FIN 46R replaces FASB Interpretation No. 46, "Consolidation of
          Variable Interest  Entities," which was issued in January 2003. We are
          required to apply FIN 46R to variable  interests in variable  interest
          entities or VIEs created  after  December 31, 2003.  For any VIEs that
          must be consolidated under FIN 46R that were created before January 1,
          2004, the assets,  liabilities and noncontrolling interests of the VIE
          initially  would  be  measured  at  their  carrying  amounts  with any
          difference  between the net amount added to the balance  sheet and any
          previously  recognized  interest  being  recognized as the  cumulative
          effect of an accounting change. If determining the carrying amounts is
          not  practicable,  fair value at the date FIN 46R first applies may be
          used to measure the assets, liabilities and noncontrolling interest of
          the VIE. We reviewed all of our  investments  and determined  that the
          Trust  Convertible  Preferred  Securities  (EPPICS),   issued  by  our
          consolidated wholly-owned subsidiary, Citizens Utilities Trust and the
          related  Citizens  Utilities  Capital  L.P.,  were our only VIEs.  The
          adoption  of FIN 46R on  January  1,  2004 did not  have any  material
          impact on our financial position or results of operations.

          Pension and Other Postretirement Benefits
          -----------------------------------------
          In December 2003, the FASB issued SFAS No. 132 (revised),  "Employers'
          Disclosures  about Pensions and Other  Postretirement  Benefits." This
          statement retains and revises the disclosure requirements contained in
          the original statement.  It requires additional  disclosures including
          information describing the types of plan assets,  investment strategy,
          measurement date(s),  plan obligations,  cash flows, and components of
          net  periodic  benefit  cost  recognized  in  interim  periods.   This
          statement  is effective  for fiscal  years  ending after  December 15,
          2003. We have adopted the expanded disclosure requirements of SFAS No.
          132 (revised).

          Investments
          -----------
          In March 2004,  the FASB issued EITF Issue No.  03-1,  "The Meaning of
          Other-Than-Temporary   Impairment  and  Its   Application  to  Certain
          Investments"  (EITF 03-1) which  provides new  guidance for  assessing
          impairment losses on debt and equity investments.  Additionally,  EITF
          03-1 includes new disclosure  requirements  for  investments  that are
          deemed to be temporarily impaired. In September 2004, the FASB delayed
          the  accounting  provisions  of EITF  03-1;  however,  the  disclosure
          requirements remain effective and have been adopted for our year ended
          December 31,  2004.  Although we have no material  investments  at the
          present time,  we will evaluate the effect,  if any, of EITF 03-1 when
          final guidance is released.

 (3) Accounts Receivable:
     -------------------

     The  components of accounts  receivable,  net at December 31, 2004 and 2003
     are as follows:

($ in thousands)                                2004             2003
- ----------------                            --------------  ---------------
Customers                                       $ 230,029        $ 250,515
Other                                              42,319           45,567
Less:  Allowance for doubtful accounts            (36,042)         (47,332)
                                            --------------  ---------------
   Accounts receivable, net                     $ 236,306        $ 248,750
                                            ==============  ===============


                                      F-15

     The Company  maintains an allowance  for  estimated  bad debts based on its
     estimate of collectibility of its accounts  receivables.  Bad debt expense,
     which is recorded as a reduction of revenue,  was $17,859,000,  $21,525,000
     and  $24,249,000  for the years ended  December 31, 2004,  2003,  and 2002,
     respectively.  In addition,  additional  reserves are provided for known or
     impending  telecommunications  bankruptcies,  disputes or other significant
     collection issues.

     An  agreement  was reached  with  WorldCom/MCI  settling  all  pre-petition
     obligations and  receivables.  The bankruptcy  court approved the agreement
     and we reduced  our  reserves  by  approximately  $6,600,000  in the fourth
     quarter 2003 as a result of the settlement. During the second quarter 2002,
     we reserved approximately $21,600,000 of trade receivables with WorldCom as
     a result of  WorldCom's  filing  for  bankruptcy.  These  receivables  were
     generated  as a result  of  providing  ordinary  course  telecommunications
     services. We have ongoing commercial relationships with WorldCom.

     Concurrent  with the  acquisition  of  Frontier,  we entered  into  several
     operating  agreements  with Global  Crossing.  We have  ongoing  commercial
     relationships  with  Global  Crossing  affiliates.  We  reserved a total of
     $29,000,000 of Global Crossing receivables during 2001 and 2002 as a result
     of Global  Crossing's filing for bankruptcy to reflect our best estimate of
     the net  realizable  value of receivables  resulting from these  commercial
     relationships.  We recorded a write-down of such  receivables in the amount
     of $7,800,000 in 2002 and  $21,200,000 in 2001. In 2002, as the result of a
     settlement  agreement with Global Crossing,  we reversed $17,900,000 of our
     previous   write-down   reserve  of  the  net  realizable  value  of  these
     receivables.

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

     The  components  of property,  plant and equipment at December 31, 2004 and
     2003 are as follows:


                                                            Estimated
($ in thousands)                                           Useful Lives           2004              2003
- ----------------                                        ------------------- ----------------- -----------------
                                                                                             
Land                                                           N/A               $    21,481       $    21,650
Buildings and leasehold improvements                      30 to 41 years             357,983           354,855
General support                                           3 to 17 years              425,720           411,660
Central office/electronic circuit equipment               5 to 11 years            2,536,579         2,421,341
Cable and wire                                            15 to 55 years           2,972,919         2,848,412
Other                                                     5 to 20 years               31,993            53,303
Construction work in progress                                                         93,049           114,988
                                                                            ----------------- -----------------
                                                                                   6,439,724         6,226,209
Less: accumulated depreciation                                                    (3,101,424)       (2,695,667)
                                                                            ----------------- -----------------
Property, plant and equipment, net                                               $ 3,338,300       $ 3,530,542
                                                                            ================= =================

     Depreciation  expense is principally  based on the composite  group method.
     Depreciation  expense was  $446,190,000,  $468,438,000 and $630,113,000 for
     the years ended December 31, 2004, 2003 and 2002,  respectively.  Effective
     January 1, 2003,  as a result of the adoption of SFAS No. 143,  "Accounting
     for Asset  Retirement  Obligations,"  we ceased  recognition of the cost of
     removal  provision in  depreciation  expense and  eliminated the cumulative
     cost of removal  included in  accumulated  depreciation.  In  addition,  we
     increased the average depreciable lives for certain of our equipment in our
     ILEC segment.  As part of the  preparation and adoption of SFAS No. 143, we
     analyzed  depreciation  rates for the ILEC  segment  and  compared  them to
     industry  averages and historical  expense data. Based on this review,  the
     Company increased the depreciable lives of certain assets.

     During 2002, we recognized accelerated  depreciation of $23,379,000 related
     to the change in useful lives of our accounting and human resource  systems
     and our Plano, Texas office building, furniture and fixtures as a result of
     a restructuring.

(5)  Losses on Impairment:
     --------------------

     In the third and fourth  quarters of 2003, we recognized  non-cash  pre-tax
     impairment losses of $4,000,000 and $11,300,000,  respectively,  related to
     our Vermont  electric  division assets held for sale in accordance with the
     provisions of SFAS No. 144.


                                      F-16


     In the third quarter 2002, we recognized non-cash pre-tax impairment losses
     of $656,658,000 related to property,  plant and equipment in the ELI sector
     and  $417,400,000  related to the gas and electric  sector  assets held for
     sale, in each case in accordance with the provisions of SFAS No. 144.

     ELI
     ---
     Prior to the third  quarter of 2002,  we tested for  impairment  of ELI and
     determined that,  based on our assumptions,  the sum of the expected future
     cash  flows,  undiscounted  and  without  interest  charges,  exceeded  the
     carrying value of its long-lived  assets and therefore we did not recognize
     an impairment.  Because sales for the nine months ended  September 30, 2002
     were  lower than those in 2001 and were  significantly  below our  original
     2002 budget  (which was used in the test for  impairment  at  December  31,
     2001), we evaluated the long-lived  assets of ELI as of September 30, 2002.
     At that date,  we estimated  that our  undiscounted  future cash flows were
     less  than the  carrying  value of our  long-lived  assets.  As a result we
     recognized a non-cash pre-tax impairment loss of $656,658,000, equal to the
     difference  between  the  estimated  fair  value of the  assets  (which  we
     determined by calculating the discounted value of the estimated future cash
     flows weighting various possible  scenarios for management's  assessment of
     probability of occurrence and  discounting  the  probability-weighted  cash
     flows at an appropriate rate) and the carrying amount of the assets. Making
     the  determinations  of  impairment  and the amount of  impairment  require
     significant  judgment by  management  and  assumptions  with respect to the
     future cash flows of the ELI  sector.  The  telecommunications  industry in
     general and the CLEC sector in particular is undergoing  significant change
     and disruption,  which makes judgments and assumptions  with respect to the
     future cash flows highly subjective.

(6)  Dispositions:
     ------------

     Pre-tax gains (losses) in connection with the following  transactions  were
     recorded in Other income (loss), net:

     In October 2004, we sold cable assets in California,  Arizona, Indiana, and
     Wisconsin for  approximately  $2,263,000  in cash.  The pre-tax gain on the
     sale was $40,000.

     During  the third  quarter  of 2004,  we sold our  corporate  aircraft  for
     approximately  $15,298,000  in  cash.  The  pre-tax  loss on the  sale  was
     $1,087,000.

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

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

(7)  Intangibles:
     -----------

     Intangibles at December 31, 2004 and 2003 are as follows:



($ in thousands)                                        2004             2003
- ----------------                                   ---------------  ----------------

                                                                
Customer base - amortizable over 96 months             $  994,605        $  995,853
Trade name - non-amortizable                              122,058           122,058
                                                   ---------------  ----------------
    Other intangibles                                   1,116,663         1,117,911
Accumulated amortization                                 (431,552)         (305,504)
                                                   ---------------  ----------------
    Total other intangibles, net                       $  685,111        $  812,407
                                                   ===============  ================

     Amortization  expense was  $126,520,000,  $126,838,000 and $125,409,000 for
     the  years  ended   December  31,  2004,   2003  and  2002,   respectively.
     Amortization  expense,  based on our estimate of useful lives, is estimated
     to be $126,520,000  per year for the next four years and $57,113,000 in the
     fifth year, at which point these assets will have been fully amortized. The
     decrease in customer base is due to the sale of cable assets in 2004.

                                      F-17


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

     On August 24, 1999,  our Board of Directors  approved a plan of divestiture
     for our public utilities services businesses, which included our water, gas
     and electric businesses. All of these properties have been sold.

          Water and Wastewater
          --------------------
          On January 15, 2002, we completed the sale of our water and wastewater
          operations for  $859,100,000 in cash and  $122,500,000 of assumed debt
          and other  liabilities.  The pre-tax gain on the disposal of the water
          segment was $316,700,000.

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

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


        ($ in thousands)                               For the year ended
        -----------------                              December 31, 2002
                                                      --------------------
        Revenue                                              $   4,650
        Operating loss                                       $    (415)
        Income tax benefit                                   $    (554)
        Net loss                                             $  (1,478)
        Gain on disposal of water segment, net of tax        $ 181,369


          Electric and Gas
          ----------------
          On April 1,  2004,  we  completed  the  sale of our  Vermont  electric
          distribution operations for approximately  $13,992,000 in cash, net of
          selling expenses.

          On December 2, 2003, we completed the sale of substantially all of our
          Vermont electric division's transmission assets for $7,344,000 in cash
          (less  $1,837,000  in refunds to  customers  as ordered by the Vermont
          Public Service Board).  Losses on the sales of our Vermont  properties
          were included in the impairment charges recorded during 2003.

          Pre-tax  gains/(losses) in connection with the following  transactions
          were included in Other income (loss), net:

          On August 8, 2003,  we completed the sale of The Gas Company in Hawaii
          division for $119,290,000 in cash and assumed liabilities. The pre-tax
          loss on the sale recognized in 2003 was $19,180,000.

          On August 11,  2003,  we  completed  the sale of our  Arizona  gas and
          electric  divisions for  $224,100,000 in cash. The pre-tax loss on the
          sale recognized in 2003 was $18,491,000.

          On  November  1, 2002,  we  completed  the sale of our Kauai  electric
          division for $215,000,000 in cash.

          On July 2, 2001, we completed the sale of our Louisiana Gas operations
          for $363,436,000 in cash.

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


                                      F-18


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


($ in thousands)                                       2003
- ----------------                                   --------------

Current assets                                          $  4,688
Net property, plant and equipment                          7,225
Other assets                                              11,217
                                                   --------------
Total assets held for sale                              $ 23,130
                                                   ==============

Current liabilities                                     $  3,651
Other liabilities                                          7,477
                                                   --------------
Total liabilities related to assets held for sale       $ 11,128
                                                   ==============

(9)  Investments:
     -----------

     The components of investments at December 31, 2004 and 2003 are as follows:


($ in thousands)                          2004             2003
- ----------------                     ---------------- ----------------

Marketable equity securities                $  2,336         $ 44,314
Other fixed income securities                      -                2
Equity method investments                     20,726           12,787
                                     ---------------- ----------------
                                            $ 23,062         $ 57,103
                                     ================ ================

     Marketable Securities
     During 2004, we sold our investments in D & E Communications,  Inc. (D & E)
     and  Hungarian   Telephone  and  Cable  Corp.   (HTCC)  for   approximately
     $13,300,000 and $13,200,000 in cash, respectively. Accordingly, we recorded
     net realized  gains of  $12,066,000  in our statement of operations for the
     sale of these marketable securities.

     As of December  31, 2004 and 2003,  we owned  3,059,000  shares of Adelphia
     Communications  Corp.  (Adelphia)  common stock.  As a result of Adelphia's
     price  declines  and  filing  for  bankruptcy,   we  recognized  losses  of
     $95,300,000  and $79,000,000 on our investment for the years ended December
     31, 2002 and 2001,  respectively,  as the declines  were  determined  to be
     other than temporary. As a result of the write downs, our "book cost basis"
     was reduced to zero and  subsequent  increases  and  decreases,  except for
     those  deemed  other than  temporary,  are  included in  accumulated  other
     comprehensive income (loss).

     The following  summarizes the adjusted cost, gross unrealized holding gains
     and losses and fair market value for marketable securities:



($ in thousands)                                      Unrealized Holding
- ----------------                   Adjusted     ---------------------------------  Aggregate Fair
Investment Classification            Cost            Gains          (Losses)        Market Value
- -------------------------      ---------------- ---------------- ---------------- ----------------

As of December 31, 2004
- -----------------------
                                                                          
Available-for-Sale                    $  1,138         $  1,198           $ -         $  2,336

As of December 31, 2003
- -----------------------
Available-for-Sale                    $ 14,452         $ 29,864           $ -         $ 44,316



     At December 31, 2004 and 2003,  we did not have any  investments  that have
     been in a continuous  unrealized  loss position  deemed to be temporary for
     more than 12 months.  The Company has determined  that market  fluctuations
     during the period are not other than  temporary  because the  severity  and
     duration of the unrealized losses were not significant.


                                      F-19


     As of December 31, 2003, we owned  1,333,500  shares of D & E common stock.
     As the result of an other than temporary decline in D & E's stock price, we
     recognized  a loss of  $16,400,000  on our  investment  for the year  ended
     December 31, 2002.

     Marketable equity securities for 2003 include 2,305,908 common shares which
     represent  an ownership of 19% of the equity in HTCC a company of which our
     former  Chairman and Chief  Executive  Officer was a member of the Board of
     Directors.  In  addition,  in 2003  we held  30,000  shares  of  non-voting
     convertible  preferred stock,  each share having a liquidation value of $70
     per share and is convertible at our option into 10 shares of common stock.

     Investments in Other Entities
     During 2004, we reclassified our investments accounted for under the equity
     method  from other  assets to the  investment  caption in our  consolidated
     balance sheets and conformed prior periods to the current presentation.

     The  Company's  investments  in entities  that are  accounted for under the
     equity method of accounting consist of the following: (1) a 33% interest in
     the Mohave Cellular Limited Partnership which is engaged in cellular mobile
     telephone  service in the Arizona area; (2) a 25% interest in the Fairmount
     Cellular Limited  Partnership which is engaged in cellular mobile telephone
     service in the Rural  Service Area (RSA)  designated  by the FCC as Georgia
     RSA No. 3; and (3) our investments in CU Capital and CU Trust with relation
     to our convertible preferred securities (for 2004 only). The investments in
     these entities amounted to $20,726,000 and $12,787,000 at December 31, 2004
     and 2003, respectively.

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

     The following  table  summarizes  the carrying  amounts and estimated  fair
     values for certain of our  financial  instruments  at December 31, 2004 and
     2003. For the other  financial  instruments,  representing  cash,  accounts
     receivables, long-term debt due within one year, accounts payable and other
     accrued liabilities, the carrying amounts approximate fair value due to the
     relatively short maturities of those instruments.



($ in thousands)                                             2004                                2003
- ----------------                            ----------------------------------- ---------------------------------
                                               Carrying                            Carrying
                                                Amount          Fair Value          Amount         Fair Value
                                            ---------------- ------------------ ---------------- ----------------
                                                                                         
Investments                                     $    23,062        $    23,062      $    57,103      $    57,103
Long-term debt (1)                              $ 4,266,998        $ 4,607,298      $ 4,195,629      $ 4,608,205
Equity Providing Preferred
   Income Convertible Securities (EPPICS)       $         -        $         -      $   201,250      $   205,275



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

(1)  2004 and 2003 includes  interest rate swaps of $4,466,000 and  $10,601,000,
     respectively.  2003  excludes the  $460,000,000  debt portion of the equity
     units. 2004 includes EPPICS of $63,765,000.


                                      F-20


(11) Long-term Debt:
     --------------

     The activity in our  long-term  debt from December 31, 2003 to December 31,
     2004 is summarized as follows:


                                                                  Twelve Months Ended
                                                  ----------------------------------------------------
                                                                                                                          Interest
                                                                             Interest                                     Rate* at
                                    December 31,                               Rate                       December 31,  December 31,
($ in thousands)                        2003      Borrowings   Payments***     Swap    Reclassification       2004         2004
- ----------------

  Rural Utilities Service Loan
                                                                                                      
    Contracts                         $   30,010   $        -  $       (902)   $     -      $      -       $   29,108      6.120%

  Senior Unsecured Debt                4,167,123      700,000      (780,955)    (6,135)        51,770       4,131,803      7.912%


  EPPICS** (reclassified as a
   result of adopting FIN 46R)                 -            -             -          -         63,765          63,765      5.000%

  Equity Units                           460,000            -      (408,230)         -        (51,770)              -          -

  ELI Notes                                5,975            -        (5,975)         -              -               -          -
  ELI Capital Leases                      10,061            -        (5,640)         -              -           4,421     10.363%
  Industrial Development Revenue
     Bonds                                70,440            -       (12,300)         -              -          58,140      5.559%
  Other                                       22            -           (19)         -              -               3     12.990%
                                      ----------   ----------  -------------   --------     -----------    -----------

TOTAL LONG TERM DEBT                  $4,743,631   $ 700,000   $ (1,214,021)   $(6,135)     $  63,765      $4,287,240
                                      ----------   ==========  =============   ========     ===========    -----------

  Less:       Debt Discount                    -                                                              (13,859)
  Less:       Current Portion            (88,002)                                                              (6,383)
  Less:       Equity Units              (460,000)                                                                   -
                                      -----------                                                           ----------
                                      $4,195,629                                                           $4,266,998
                                      ===========                                                           ==========


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

**   In  accordance  with FIN 46R, the Trust  holding the EPPICS and the related
     Citizens Utilities Capital L.P. are now deconsolidated (see Note 16).

***  Includes purchases on the open market (see note 2).

     On January  15,  2004,  we repaid at  maturity  the  remaining  outstanding
     $80,955,000 of our 7.45% Debentures.

     On  January  15,  2004,  we  redeemed  at 101%  the  remaining  outstanding
     $12,300,000 of our Hawaii Special Purpose  Revenue Bonds,  Series 1993A and
     Series 1993B.

     On May 17, 2004, we repaid at maturity the remaining outstanding $5,975,000
     of Electric  Lightwave,  LLC's 6.05% Notes. These Notes had been guaranteed
     by Citizens.

     On July 15, 2004, we  renegotiated  and prepaid with $4,954,000 of cash the
     entire remaining  $5,524,000 Electric Lightwave capital lease obligation to
     a third party.

     On July 30, 2004, we purchased  $300,000,000 of the 6.75% notes that were a
     component of our equity units at 105.075% of par, plus accrued interest, at
     a premium of  approximately  $15,225,000  recorded in investment  and other
     income (loss), net.

     During  August  and  September  2004,  we  repurchased  through a series of
     transactions  an additional  $108,230,000  of the 6.75% notes due 2006 at a
     weighted  average  price of 104.486% of par,  plus accrued  interest,  at a
     premium of approximately $4,855,000 recorded in investment and other income
     (loss), net.

     On November 8, 2004, we issued an aggregate  $700,000,000  principal amount
     of  6.25%   senior   notes  due  January  15,  2013  through  a  registered
     underwritten  public  offering.  Proceeds from the sale were used to redeem
     our outstanding  $700,000,000  of 8.50% Notes due 2006,  which is discussed
     below.


                                      F-21


     On November 12,  2004,  we called for  redemption  on December 13, 2004 the
     entire  $700,000,000  of our 8.50% Notes due 2006 at a price of 107.182% of
     the  principal  amount  called,  plus  accrued  interest,  at a premium  of
     approximately $50,300,000.

     As of December 31, 2004,  EPPICS  representing a total principal  amount of
     $147,991,000  had been converted into 11,622,749  shares of Citizens common
     stock.

     Total future minimum cash payment commitments under ELI's long-term capital
     leases amounted to $10,017,000 as of December 31, 2004.

     The total outstanding  principal amounts of industrial  development revenue
     bonds were  $58,140,000  and  $70,440,000  at  December  31, 2004 and 2003,
     respectively. The earliest maturity date for these bonds is in August 2015.
     Holders of certain  industrial  development  revenue  bonds may tender such
     bonds to us at par prior to  maturity.  The next  tender  date is August 1,
     2007 for  $30,350,000  principal  amount of bonds.  We expect to retire all
     such bonds that are tendered.

     As of December  31, 2004 we had  available  lines of credit with  financial
     institutions in the aggregate  amount of $250,000,000  with a maturity date
     of  October  29,  2009.  Associated  facility  fees vary  depending  on our
     leverage ratio and were 0.375% as of December 31, 2004.  During the term of
     the credit facility we may borrow,  repay and re-borrow  funds.  The credit
     facility is available for general corporate purposes but may not be used to
     fund  dividend  payments.  There are no  outstanding  borrowings  under the
     facility.

     During the twelve  months ended  December 31, 2003, we executed a series of
     purchases  in the open  market  of our  outstanding  debt  securities.  The
     aggregate principal amount of debt securities purchased was $94,895,000 and
     they  generated  a pre-tax  loss on the early  extinguishment  of debt at a
     premium of approximately $3,117,000 recorded in other income (loss), net.

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

     For  the  year  ended   December   31,   2004,   we  retired  an  aggregate
     $1,362,012,000  of debt  (including  $147,991,000  of EPPICS  conversions),
     representing  approximately  28% of total debt  outstanding at December 31,
     2003.

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

                      ($ in thousands)
                      ----------------
                                           Principal      Capital
                                           ---------      -------
                                           Payments    Lease Payments
                                           ---------   --------------

                            2005           $  6,302       $  81
                            2006            227,693          94
                            2007             37,771         110
                            2008            750,938         126
                            2009              1,000         145

(12) Derivative Instruments and Hedging Activities:
     ---------------------------------------------

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

                                      F-22


     The  interest  rate  swap  contracts  are  reflected  at fair  value in our
     consolidated balance sheet and the related portion of fixed-rate debt being
     hedged is  reflected at an amount equal to the sum of its book value and an
     amount  representing  the  change  in fair  value of the  debt  obligations
     attributable  to the interest rate risk being  hedged.  Changes in the fair
     value of interest rate swap  contracts,  and the offsetting  changes in the
     adjusted carrying value of the related portion of the fixed-rate debt being
     hedged,  are  recognized  in the  consolidated  statements of operations in
     interest expense. The notional amounts of fixed-rate indebtedness hedged as
     of  December  31,  2004  and  December  31,  2003  was   $300,000,000   and
     $400,000,000, respectively. Such contracts require us to pay variable rates
     of interest  (average  pay rate of  approximately  6.12% as of December 31,
     2004) and receive fixed rates of interest (average receive rate of 8.44% as
     of December 31, 2004). The fair value of these  derivatives is reflected in
     other assets as of December 31, 2004, in the amount of  $4,466,000  and the
     related  underlying  debt has been increased by a like amount.  The amounts
     received  during  the year  ended  December  31,  2004 as a result of these
     contracts  amounted  to  $9,363,000  and are  included  as a  reduction  of
     interest expense.

     As the  result of our call of all of our 8.50%  Notes due 2006 in  November
     2004,  we  terminated  five  interest  rate swaps  involving  an  aggregate
     $250,000,000  notional  amount  of  indebtedness.  Proceeds  from  the swap
     terminations  of  approximately  $3,026,000  and U.S.  Treasury  rate  lock
     agreements  of  approximately  $971,000  were  applied  against the cost to
     retire the debt,  resulting in a net premium of  approximately  $46,277,000
     recorded in other income (loss), net.

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

(13) Management Succession and Strategic Alternatives Expenses:
     ---------------------------------------------------------

     On July 11, 2004,  our Board of Directors  announced  that it had completed
     its review of the Company's  financial and  strategic  alternatives  and on
     September 2, 2004 the Company paid a special,  non-recurring dividend of $2
     per common  share and a  quarterly  dividend  of $0.25 per common  share to
     shareholders  of record on  August  18,  2004.  Concurrently,  Leonard  Tow
     decided  to step  down  from  his  position  as  chief  executive  officer,
     effective  immediately,  and resigned his position as Chairman of the board
     on September 27, 2004. The Board of Directors named Mary Agnes  Wilderotter
     president  and  chief  executive  officer,  and Rudy J.  Graf  was  elected
     Chairman of the board, on September 30, 2004.

     In  2004,  we  expensed  approximately  $90,632,000  of  costs  related  to
     management  succession  and our  exploration  of  financial  and  strategic
     alternatives.  Included  are  $36,618,000  of  non-cash  expenses  for  the
     acceleration of stock  benefits,  cash expenses of $19,229,000 for advisory
     fees,  $19,339,000 for severance and retention arrangements and $15,446,000
     primarily for tax reimbursements.

(14) Shareholder Rights Plan:
     -----------------------

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

                                      F-23


(15) Other Income (Loss), net:
     ------------------------

     The components of other income (loss), net for the years ended December 31,
     2004, 2003 and 2002 are as follows:



($ in thousands)                                        2004              2003               2002
- ----------------                                  -----------------  ----------------  -----------------
                                                                                   
Gain on capital lease termination/restructuring                  -            69,512                  -
Gain on expiration/settlement of customer advances          25,345             6,165             26,330
(Premium) discount on debt repurchases                     (66,480)          (10,851)             5,550
Gain (loss) on sale of assets                               (1,945)          (20,492)             9,798
Other, net                                                 (10,279)             (345)           (19,141)
                                                  -----------------  ----------------  -----------------
     Total other income (loss), net                      $ (53,359)         $ 43,989           $ 22,537
                                                  =================  ================  =================


     During 2004, 2003 and 2002, we recognized income in connection with certain
     retained  liabilities  associated with customer  advances for  construction
     from  our  disposed  water  properties,  as  a  result  of  some  of  these
     liabilities  terminating.  During 2003, we  recognized  gains in connection
     with the termination/restructuring of capital leases at ELI. Gain (loss) on
     sale of assets in 2004 is primarily attributable to the loss on the sale of
     our  corporate  aircraft  during  the third  quarter.  In 2003,  the amount
     represents  the sales of The Gas  Company in Hawaii and our Arizona gas and
     electric  divisions,   access  lines  in  North  Dakota  and  our  wireless
     partnership  interest in Wisconsin,  and our Plano,  Texas office building.
     Other,  net for 2002 includes a $12,800,000  loss related to a tender offer
     completed in 2002 with respect to our 6.80%  Debentures  due 2026 (puttable
     at par in 2003) and ELI's 6.05% Guaranteed Notes due 2004.

(16) Company Obligated Mandatorily Redeemable Convertible Preferred Securities:
     -------------------------------------------------------------------------

     In 1996, our consolidated wholly-owned subsidiary, Citizens Utilities Trust
     (the Trust),  issued, in an underwritten public offering,  4,025,000 shares
     of  5%  Company  Obligated  Mandatorily  Redeemable  Convertible  Preferred
     Securities due 2036 (EPPICS), representing preferred undivided interests in
     the assets of the Trust, with a liquidation  preference of $50 per security
     (for a total liquidation amount of $201,250,000).  These securities have an
     adjusted  conversion  price  of  $11.46  per  Citizens  common  share.  The
     conversion price was reduced from $13.30 to $11.46 during the third quarter
     of 2004 as a result of the $2.00 per share special, non-recurring dividend.
     The  proceeds  from  the  issuance  of  the  Trust  Convertible   Preferred
     Securities  and a  Company  capital  contribution  were  used  to  purchase
     $207,475,000  aggregate  liquidation  amount of 5% Partnership  Convertible
     Preferred  Securities  due  2036  from  another  wholly-owned   subsidiary,
     Citizens  Utilities Capital L.P. (the  Partnership).  The proceeds from the
     issuance of the Partnership  Convertible Preferred Securities and a Company
     capital  contribution were used to purchase from us $211,756,000  aggregate
     principal  amount of 5% Convertible  Subordinated  Debentures due 2036. The
     sole  assets  of  the  Trust  are  the  Partnership  Convertible  Preferred
     Securities,  and our Convertible  Subordinated Debentures are substantially
     all the assets of the  Partnership.  Our  obligations  under the agreements
     related to the issuances of such securities,  taken together,  constitute a
     full and unconditional  guarantee by us of the Trust's obligations relating
     to  the  Trust  Convertible  Preferred  Securities  and  the  Partnership's
     obligations relating to the Partnership Convertible Preferred Securities.

     In  accordance  with the  terms of the  issuances,  we paid the  annual  5%
     interest  in  quarterly   installments  on  the  Convertible   Subordinated
     Debentures in the four quarters of 2004,  2003 and 2002. Only cash was paid
     (net of investment  returns) to the  Partnership in payment of the interest
     on the Convertible Subordinated  Debentures.  The cash was then distributed
     by the Partnership to the Trust and then by the Trust to the holders of the
     EPPICS.

     As of December 31, 2004,  EPPICS  representing a total principal  amount of
     $147,991,000  had been converted into 11,622,749  shares of Citizens common
     stock.

     We have adopted the  provisions  of FIN 46R (revised  December  2003) ("FIN
     46R"),  "Consolidation of Variable Interest Entities," effective January 1,
     2004. We have not restated prior periods.

                                      F-24


     We have included the following description to provide readers a comparative
     analysis of the accounting impact of this standard.  Both the Trust and the
     Partnership have been  consolidated from the date of their creation through
     December  31,  2003.  As  a  result  of  the  new  consolidation  standards
     established   by  FIN  46R,  the  Company,   effective   January  1,  2004,
     deconsolidated  the  activities of the Trust and the  Partnership.  We have
     highlighted the comparative effect of this change in the following table:



Balance Sheet
- -------------
                                                       As of
                                     -------------------------------------------------------------
($ in thousands)                      December 31, 2003     December 31, 2004           Change
- ----------------                     --------------------- --------------------     --------------
Assets:
                                                                                       
     Cash                                        $  2,103              $     -          $  (2,103) (1)
     Investments                                        -               12,645             12,645  (2)

Liabilities:
     Long-term debt                                     -               63,765  (3)      (137,485) (3)
     EPPICS                                       201,250                    -  (3)

Statement of Operations
- -----------------------
                                          As reported for the year ended
                                     -------------------------------------------------------------
($ in thousands)                      December 31, 2003     December 31, 2004           Change
- ----------------                     --------------------- --------------------     --------------
Investment income                                $       -             $    632         $      632  (4)
Interest expense                                         -                8,082              8,082  (5)
Dividends on EPPICS (before tax)                    10,063                    -            (10,063) (6)
                                     --------------------- --------------------     --------------
      Net                                        $  10,063             $  7,450         $   (2,613)
                                     ===================== ====================     ==============



(1)  Represents a cash balance on the books of the  Partnership  that is removed
     as a result of the deconsolidation.
(2)  Represents  Citizens'  investments  in the  Partnership  and the Trust.  At
     December 31, 2003,  these  investments  were  eliminated  in  consolidation
     against the equity of the Partnership and the Trust.
(3)  As a result of the  deconsolidation,  the Trust and the Partnership balance
     sheets were removed,  leaving debt issued by Citizens to the Partnership in
     the amount of  $211,756,000.  The nominal  effect of an increase in debt of
     $10,506,000  is debt  that is  "intercompany."  As of  December  31,  2004,
     Citizens has  $53,259,000  ($63,765,000  less  $10,506,000 of  intercompany
     debt)  of debt  outstanding  to third  parties  and  will  continue  to pay
     interest on that amount at 5%.
(4)  Represents  interest  income to be paid by the Partnership and the Trust to
     Citizens for its  investments  noted in (2) above.  The Partnership and the
     Trust have no source of cash except as provided  by  Citizens.  Interest is
     payable at the rate of 5% per annum.
(5)  Represents  interest  expense  on  the  convertible  debentures  issued  by
     Citizens  to the  Partnership.  Interest  is  payable at the rate of 5% per
     annum.
(6)  As a  result  of the  deconsolidation  of the  Trust,  previously  reported
     dividends on the convertible  preferred  securities issued to the public by
     the Trust are removed and  replaced  by the  interest  accruing on the debt
     issued by Citizens to the  Partnership.  Citizens  remains the guarantor of
     the EPPICS debt and  continues  to be the sole source of cash for the Trust
     to pay dividends.

(17) Capital Stock:
     -------------

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

                                      F-25


(18) Stock Plans:
     -----------

     At December 31, 2004, we have five stock based  compensation  plans,  which
     are   described   below.   We  apply  APB   Opinion   No.  25  and  related
     interpretations in accounting for the employee stock plans resulting in the
     use of the intrinsic value to value the stock option. Compensation cost has
     not  generally  been  recognized in the  financial  statements  for options
     issued pursuant to the Management  Equity  Incentive Plan (MEIP),  the 1996
     Equity  Incentive  Plan (1996 EIP) or the Amended and Restated  2000 Equity
     Incentive Plan (2000 EIP), as the exercise price for such options was equal
     to the market price of the stock at the time of grant. However, during 2002
     the  expiration  date of  approximately  79,000  options was  extended  and
     compensation cost of approximately $220,000 was recognized. No compensation
     cost  has  been  recognized  in the  financial  statements  related  to the
     Employee  Stock  Purchase Plan (ESPP)  because the purchase price is 85% of
     the fair value. In connection with our Directors' Deferred Fee Equity Plan,
     compensation   cost  associated  with  the  issuance  of  stock  units  was
     $2,222,000,  $607,000  and $359,000 in 2004,  2003 and 2002,  respectively.
     Cash  compensation  associated  with this plan was  $642,000,  $374,000 and
     $236,000 in 2004, 2003 and 2002,  respectively.  These costs are recognized
     in operating expense.

     We have granted restricted stock awards to key employees in the form of our
     Common Stock. The number of shares issued as restricted stock awards during
     2004, 2003 and 2002 were 2,172,085, 312,000 and 538,000, respectively. None
     of the restricted stock awards may be sold, assigned,  pledged or otherwise
     transferred,  voluntarily  or  involuntarily,  by the  employees  until the
     restrictions  lapse. The restrictions are time based. At December 31, 2004,
     1,686,248  shares  of  restricted  stock  were  outstanding.   Compensation
     expense,  recognized in operating expense, of $45,313,000,  $8,552,000, and
     $7,029,000  for  the  years  ended  December  31,  2004,   2003  and  2002,
     respectively, has been recorded in connection with these grants.

                        Management Equity Incentive Plan
                        --------------------------------
     Under the MEIP,  awards of our  Common  Stock may be  granted  to  eligible
     officers,  management employees and non-management employees in the form of
     incentive stock options,  non-qualified  stock options,  stock appreciation
     rights  (SARs),   restricted  stock  or  other  stock-based   awards.   The
     Compensation Committee of the Board of Directors administers the MEIP.

     Since the expiration  date of the MEIP plan on June 21, 2000, no awards can
     be granted under the MEIP.  The exercise  price of stock options issued was
     equal to or greater  than the fair market  value of the  underlying  common
     stock on the date of grant.  Stock options are generally not exercisable on
     the date of grant but vest  over a period  of time.  Under the terms of the
     MEIP,  subsequent  stock  dividends  and stock  splits  have the  effect of
     increasing the option shares outstanding,  which correspondingly  decreases
     the average exercise price of outstanding options.

                             Equity Incentive Plans
                             ----------------------
     In May 1996,  our  shareholders  approved the 1996 EIP and in May 2001, our
     shareholders  approved  the 2000 EIP.  Under the EIP  plans,  awards of our
     Common Stock may be granted to eligible officers,  management employees and
     non-management   employees  in  the  form  of  incentive   stock   options,
     non-qualified  stock options,  SARs,  restricted stock or other stock-based
     awards. Directors may receive awards under the 2000 EIP (other than options
     for annual  retainer  fees).  SARs may be granted  under the 1996 EIP.  The
     Compensation Committee of the Board of Directors administers the EIP plans.

     The maximum number of shares of common stock,  which may be issued pursuant
     to awards at any time for both plans, is 25,358,000 shares,  which has been
     adjusted for  subsequent  stock  dividends.  No awards will be granted more
     than 10 years after the effective  dates (May 23, 1996 and May 18, 2000) of
     the EIP plans. The exercise price of stock options and SARs generally shall
     be equal to or greater than the fair market value of the underlying  common
     stock on the date of grant.  Stock options are generally not exercisable on
     the date of grant but vest over a period of time.

     Under the terms of the EIP  plans,  subsequent  stock  dividends  and stock
     splits have the effect of increasing the option shares  outstanding,  which
     correspondingly decrease the average exercise price of outstanding options.

     In connection with the payment of the special, non-recurring dividend of $2
     per common share on September 2, 2004, the exercise price and number of all
     outstanding  options was adjusted  such that each option had the same value
     to the  holder  after  the  dividend  as it had  before  the  dividend.  In
     accordance  with FASB  Interpretation  No. 44 ("FIN 44"),  "Accounting  for
     Certain Transactions  Involving Stock Compensation" and EITF 00-23, "Issues
     Related to the Accounting for Stock  Compensation  under APB No. 25 and FIN
     44",  there is no accounting  consequence  for changes made to the exercise
     price and the number of shares of a fixed stock option or award as a direct
     result of the special, non-recurring dividend.

                                      F-26


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


                                                                                                  Weighted
                                                                               Shares              Average
                                                                             Subject to         Option Price
                                                                               Option             Per Share
     ---------------------------------------------------------------------------------------------------------
                                                                                            
     Balance at January 1, 2002                                               19,057,000            $11.87
         Options granted                                                       3,065,000              9.53
         Options exercised                                                      (812,000)             7.90
         Options canceled, forfeited or lapsed                                (2,178,000)            11.94
     ---------------------------------------------------------------------------------------
     Balance at December 31, 2002                                             19,132,000             11.66
         Options granted                                                       2,017,000             12.14
         Options exercised                                                    (1,612,000)             7.97
         Options canceled, forfeited or lapsed                                (1,572,000)            12.92
     ---------------------------------------------------------------------------------------
      Balance at December 31, 2003                                            17,965,000             11.94

         Options granted                                                               -                 -

         Options exercised                                                    (7,411,000)             9.69
         Options canceled, forfeited or lapsed                                  (355,000)            12.14

         Effect of special, non-recurring dividend                             2,212,000                 -

     ---------------------------------------------------------------------------------------
     Balance at December 31, 2004                                             12,411,000            $11.15

     =======================================================================================

     The following table summarizes  information about shares subject to options
     under the MEIP and EIP at December 31, 2004.

                                  Options Outstanding                                          Options Exercisable
    ---------------------------------------------------------------------------------    ---------------------------------
                                                                  Weighted Average                            Weighted
         Number             Range of         Weighted Average         Remaining               Number          Average
       Outstanding       Exercise Prices      Exercise Price        Life in Years          Exercisable     Exercise Price
    ------------------ -------------------- -------------------- -------------------- -- ----------------- ---------------
           569,000       $  6.45  - 6.64           $  6.48            4.23                   569,000         $ 6.48
           764,000          6.67  - 7.33              7.06            2.70                   764,000           7.06
            50,000          7.89  - 8.06              7.96            4.37                    27,000           8.01
         1,685,000          8.19  - 8.19              8.19            7.38                   612,000           8.19
           391,000          8.80  - 9.68              9.05            2.67                   391,000           9.05
         1,937,000          9.80 - 10.44             10.40            8.15                   456,000          10.28
           656,000         10.64 - 11.09             10.88            5.50                   656,000          10.88
         1,091,000         11.15 - 11.15             11.15            7.38                 1,091,000          11.15
           586,000         11.51 - 11.58             11.58            6.45                   582,000          11.58
         2,013,000         11.79 - 11.79             11.79            6.38                 1,418,000          11.79
         2,669,000         11.83 - 18.46             15.57            5.72                 2,669,000          15.57
    ------------------                                                                   -------------
        12,411,000       $  6.45 - 18.46           $ 11.15            6.24                 9,235,000        $ 11.57
    ==================                                                                   =============


     The  number of  options  exercisable  at  December  31,  2003 and 2002 were
     11,690,000 and 12,198,000, respectively.

     There were no option  grants made during 2004.  The  weighted  average fair
     value of  options  granted  during  2003 and 2002  were  $6.04  and  $4.98,
     respectively.  For purposes of the pro forma calculation, the fair value of
     each option grant is estimated on the date of grant using the Black Scholes
     option-pricing  model with the following weighted average  assumptions used
     for grants in 2003 and 2002:

                                            2003           2002
           --------------------------- --------------- --------------
           Dividend yield                          -              -
           Expected volatility                    44%            44%
           Risk-free interest rate              2.94%          4.94%
           Expected life                      7 years        7 years
           --------------------------- --------------- --------------

                                      F-27


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

     Effective   November  30,  2002,  the  employee  stock  purchase  plan  was
     temporarily  suspended for future purchase periods. In 2002, 146,406 shares
     were purchased under the ESPP and 4,072,647 shares were purchased under the
     plan as of date of suspension.  For purposes of the pro forma  calculation,
     compensation  cost is  recognized  for the  fair  value  of the  employees'
     purchase rights, which was estimated using the Black Scholes option pricing
     model with the following  assumptions for subscription periods beginning in
     2002:

                                                    2002
                                               -------------
                Dividend yield                         -
                Expected volatility                   44%
                Risk-free interest rate             1.93%
                Expected life                    6 months

     The weighted  average fair value of those  purchase  rights granted in 2002
     was $2.57.

                    Non-Employee Directors' Compensation Plan
                    -----------------------------------------
     Upon  commencement  of his or her service on the Board of  Directors,  each
     non-employee  director  receives a grant of 10,000 stock options,  which is
     awarded under our 2000 Equity  Incentive  Plan. The price of these options,
     which are  immediately  exercisable,  is set at the average of the high and
     low market  prices of the Company's  common stock on the effective  date of
     the director's initial election to the board.

     Annually,  each non-employee  director also receives a grant of 3,500 stock
     units  under  the  Company's  Formula  Plan,  which  commenced  in 1997 and
     continues  through May 22, 2007. Prior to April 20, 2004, each non-employee
     director  received an award of 5,000 stock  options.  The exercise price of
     the options  granted  under the Formula Plan was set at 100% of the average
     of the high and low  market  prices of the  Company's  common  stock on the
     third,  fourth,  fifth,  and  sixth  trading  days of the year in which the
     options  were  granted.  The options are  exercisable  six months after the
     grant date and remain  exercisable  for ten years after the grant date.  In
     addition,  on  September 1, 1996,  each  non-employee  director  received a
     grant,  under the  Formula  Plan,  of options to purchase  2,500  shares of
     common  stock.   These  options  granted  under  the  Formula  Plan  became
     exercisable six months after the grant date and remain  exercisable for ten
     years after the grant date.

     Effective  April 2004,  the Formula  Plan was amended to replace the annual
     grant of stock options with an annual grant of 3,500 stock units. The stock
     units are awarded on the first  business day of each  calendar  year.  Each
     non-employee  director must elect,  by December 31 of the  preceding  year,
     whether the stock units  awarded under the Formula Plan will be redeemed in
     cash or stock upon the  director's  retirement or death,  whichever  occurs
     first.

     In  addition,  each  non-employee  director  is also  entitled  to annually
     receive a retainer, meeting fees, and, when applicable, fees for serving as
     a  committee  chair  or as Lead  Director,  which  are  awarded  under  the
     Non-Employee   Directors'  Deferred  Fee  Equity  Plan.  Each  non-employee
     director  must  elect,  by December 31 of the  preceding  year,  to receive
     $30,000 cash or 5,000 stock units as an annual retainer. Directors making a
     stock unit  election  must also elect to convert the units to either  stock
     (convertible on a one-to-one basis) or cash upon retirement or death. Prior
     to June 30, 2003, a director could elect to receive 20,000 stock options as
     an annual  retainer in lieu of cash or stock units.  The exercise  price of
     the stock  options was set at the average of the high and low market prices
     of the  Company's  common  stock on the date of  grant.  The  options  were
     exercisable six months after the date of grant and had a 10-year term.


                                      F-28


     As of any date,  the  maximum  number of shares of common  stock  which the
     Non-Employee  Directors'  Deferred  Fee Equity Plan is obligated to deliver
     shall not be more than one percent (1%) of the total outstanding  shares of
     the  Company's  common stock as of June 30, 2003,  subject to adjustment in
     the event of changes in our corporate  structure  affecting  capital stock.
     There were 11 directors  participating in the Directors' Plan during all or
     part of 2004. In 2004, the total options, plan units, and stock earned were
     50,000, 57,226 and 0, respectively. In 2003, the total options, plan units,
     and stock  earned were 83,125,  46,034 and 0,  respectively.  In 2002,  the
     total options,  plan units, and stock earned were 99,583, 43,031 and 1,514,
     respectively.  At December 31, 2004,  699,979 options were exercisable at a
     weighted average exercise price of $9.36.

     For 2004, each non-employee director received fees of $2,000 for each Board
     of Directors and committee meeting attended. In addition,  committee chairs
     (except the chairs of the Audit and  Compensation  Committees)  received an
     additional  annual fee of $5,000.  The chairs of the Audit and Compensation
     Committees were each paid an additional  annual fee of $50,000 and $30,000,
     respectively.  In  addition,  the  Lead  Director,  who  heads  the  ad hoc
     committee of non-employee  directors,  received an additional annual fee of
     $30,000.  A director must elect,  by December 31 of the preceding  year, to
     receive his meeting and other fees in cash,  stock units,  or a combination
     of both. All fees paid to the non-employee directors are paid quarterly. If
     the  director  elects  stock  units,  the number of units  credited  to the
     director's  account is determined  as follows:  the total cash value of the
     fees  payable to the director are divided by 85% of the average of the high
     and low market  prices of the  Company's  common stock on the first trading
     day of the year the  election  is in  effect.  Units  are  credited  to the
     director's  account  quarterly.  The number of stock units awarded during a
     given  year as fees will be  increased  if the  average of the high and low
     market  prices of the  Company's  common  stock on the last  trading day of
     November is less than the average market price used to initially  value the
     stock  units.  If an  increase  in the  number  of units is  required,  the
     additional units are credited to the director's account in December.

     The  Company  accounts  for the  Directors'  Deferred  Fee  Equity  Plan in
     accordance  with APB  Opinion  No.  25,  "Accounting  for  Stock  Issued to
     Employees" and related interpretations. Compensation expense is recorded if
     cash  or  stock  units  are  elected.  If  stock  units  are  elected,  the
     compensation  expense is based on the market  value of our common  stock at
     the date of grant.  If the stock  option  election is chosen,  compensation
     expense is not recorded  because the options are granted at the fair market
     value of our common stock on the grant date.

     We had also maintained a Non-Employee  Directors' Retirement Plan providing
     for the payment of specified sums annually to our  non-employee  directors,
     or their designated  beneficiaries,  starting at the director's retirement,
     death or termination of directorship. In 1999, we terminated this Plan. The
     vested  benefit of each  non-employee  director,  as of May 31,  1999,  was
     credited to the director's account in the form of stock units. Such benefit
     will be payable to each director upon  retirement,  death or termination of
     directorship. Each participant had until July 15, 1999 to elect whether the
     value of the stock units awarded  would be payable in the Company's  common
     stock  (convertible  on a one for one basis) or in cash. As of December 31,
     2004,  the liability for such payments was  $2,155,000 of which  $1,411,000
     will be  payable  in stock  (based on the July 15,  1999  stock  price) and
     $744,000  will be  payable  in cash.  While  the  number of shares of stock
     payable  to those  directors  electing  to be paid in stock is  fixed,  the
     amount of cash payable to those directors  electing to be paid in cash will
     be based on the number of stock units awarded multiplied by the stock price
     on the payment date.

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

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

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


                                      F-29


(20) Income Taxes:
     ------------

     The following is a  reconciliation  of the  provision  (benefit) for income
     taxes for continuing  operations computed at federal statutory rates to the
     effective rates for the years ended December 31, 2004, 2003 and 2002:


                                                                    2004          2003         2002
                                                                 ------------  ------------ ------------
                                                                                       
Consolidated tax provision (benefit) at federal statutory rate        35.0 %        35.0 %      (35.0)%
State income tax provisions (benefit), net of federal income tax
 benefit                                                               1.7 %         6.4 %       (1.3)%
Write-off of regulatory assets                                         0.0 %         0.0 %        2.6 %
Tax reserve adjustment                                               (17.5)%        (8.0)%        0.0 %
All other, net                                                        (3.6)%         1.0 %        0.0 %
                                                                 ------------  ------------ -----------
                                                                      15.6 %        34.4 %      (33.7)%
                                                                 ============  ============ ============


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



($ in thousands)                                                    2004          2003
- ----------------                                                 ------------  ------------

Deferred income tax liabilities:
- --------------------------------
                                                                           
   Property, plant and equipment basis differences                 $ 578,501     $ 412,795
   Intangibles                                                       161,955       152,226
   Unrealized securities gain                                            458        11,432
   Other, net                                                          8,546        15,042
                                                                 ------------  ------------
                                                                     749,460       591,495
                                                                 ------------  ------------

Deferred income tax assets:
- ---------------------------
   Minimum pension liability                                          62,435        55,837
   Tax operating loss carryforward                                   394,797       253,215
   Alternate minimum tax credit carryforward                          37,796        49,864
   Employee benefits                                                  55,566        47,856
   Other, net                                                         23,095        40,745
                                                                 ------------  ------------
                                                                     573,689       447,517
    Less: Valuation allowance                                        (43,503)      (44,236)
                                                                 ------------  ------------
   Net deferred income tax asset                                     530,186       403,281
                                                                 ------------  ------------
    Net deferred income tax liability                              $ 219,274     $ 188,214
                                                                 ============  ============


Deferred tax assets and liabilities are reflected in the following
   captions on the balance sheet:
    Deferred income taxes                                          $ 232,766     $ 198,312
    Other current assets                                             (13,492)      (10,098)
                                                                 ------------  ------------
      Net deferred income tax liability                            $ 219,274     $ 188,214
                                                                 ============  ============


     Our federal and state tax operating loss  carryforwards  as of December 31,
     2004 are estimated at $933,722,000 and  $1,302,736,000,  respectively.  Our
     federal loss  carryforward will begin to expire in the year 2020. A portion
     of  our  state  loss  carryforward  will  begin  to  expire  in  2005.  Our
     alternative  minimum  tax  credit as of  December  31,  2004 can be carried
     forward indefinitely to reduce future regular tax liability.

                                      F-30



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



($ in thousands)                                                    2004          2003         2002
- ----------------                                                 ------------  ------------ ------------

Income taxes charged (credited) to the income statement for
   continuing operations:
Current:
                                                                                    
   Federal                                                         $       -     $ (12,632)  $ (159,844)
   State                                                                 772         2,900       (2,562)
                                                                 ------------  ------------ ------------
    Total current                                                        772        (9,732)    (162,406)

Deferred:
   Federal                                                            19,451        80,152     (230,388)
   Federal tax credits                                                   (40)       (3,128)        (352)
   State                                                              (6,804)          (76)     (21,728)
                                                                 ------------  ------------ ------------
    Total deferred                                                    12,607        76,948     (252,468)
                                                                 ------------  ------------ ------------
    Subtotal                                                          13,379        67,216     (414,874)
Income taxes charged (credited) to the income statement for
   discontinued operations:
Current:
   Federal                                                                 -             -      169,246
   State                                                                   -             -       11,328
                                                                 ------------  ------------ ------------
    Total current                                                          -             -      180,574

Deferred:
   Federal                                                                 -             -      (39,904)
   Investment tax credits                                                  -             -            -
   State                                                                   -             -       (5,921)
                                                                 ------------  ------------ ------------
    Total deferred                                                         -             -      (45,825)
                                                                 ------------  ------------ ------------
    Subtotal                                                               -             -      134,749
Income tax benefit on dividends on convertible preferred securities:
Current:
   Federal                                                                 -        (3,344)      (3,344)
   State                                                                   -          (508)        (508)
                                                                 ------------  ------------ ------------
    Subtotal                                                               -        (3,852)      (3,852)
Income taxes charged  to the income statement for
   cumulative effect of change in accounting principle:
Deferred:
   Federal                                                                 -        35,414            -
   State                                                                   -         6,177            -
                                                                 ------------  ------------ ------------
    Subtotal                                                               -        41,591            -
                                                                 ------------  ------------ ------------
      Total income taxes charged (credited) to the income
        statement (a)                                                 13,379       104,955     (283,977)

Income taxes charged (credited) to shareholders' equity:
Deferred income taxes (benefits) on unrealized/realized gains or
   losses on securities classified as available-for-sale             (10,982)        5,539        2,726
Current benefit arising from stock options exercised and
   restricted stock                                                  (13,765)       (2,535)        (720)
Deferred income taxes (benefits) arising from recognition of
   a minimum pension liability                                        (6,645)       13,373      (69,209)
                                                                 ------------  ------------ ------------
      Income taxes charged (credited) to shareholders' equity (b)    (31,392)       16,377      (67,203)

                                                                 ------------  ------------ ------------
Total income taxes: (a) plus (b)                                   $ (18,013)    $ 121,332   $ (351,180)
                                                                 ============  ============ ============




                                      F-31


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

     The  reconciliation  of the net income (loss) per common share  calculation
     for the years ended December 31, 2004, 2003 and 2002 is as follows:



($ in thousands, except per-share amounts)
- ------------------------------------------                               2004                2003                 2002
                                                                 ------------------  ------------------   ------------------
Net income (loss) used for basic and diluted
   earnings per common share:
Income (loss) from continuing operations before cumulative
                                                                                                        
   effect of change in accounting principle                               $ 72,150           $ 122,083           $ (822,976)
Income from discontinued operations                                              -                   -              179,891
                                                                 ------------------  ------------------   ------------------
Income (loss) before cumulative effect of change in accounting
   principle                                                                72,150             122,083  #          (643,085)
Income (loss) from cumulative effect of change in accounting
   principle                                                                     -              65,769              (39,812)
                                                                 ------------------  ------------------   ------------------
Total basic net income (loss) available for common shareholders           $ 72,150           $ 187,852           $ (682,897)
                                                                 ==================  ==================   ==================

Effect of conversion of preferred securities                                     -               6,210                    -
                                                                 ------------------  ------------------   ------------------
Total diluted net income (loss) available for common shareholders         $ 72,150           $ 194,062           $ (682,897)
                                                                 ==================  ==================   ==================

Basic earnings (loss) per common share:
Weighted-average shares outstanding - basic                                303,989             282,434              280,686
                                                                 ------------------  ------------------   ------------------
Income (loss) from continuing operations before cumulative
   effect of change in accounting principle                               $   0.24           $    0.44           $    (2.93)
Income from discontinued operations                                              -                   -                 0.64
                                                                 ------------------  ------------------   ------------------
Income (loss) before cumulative effect of change in accounting
   principle                                                                  0.24                0.44                (2.29)
Income (loss) from cumulative effect of change in accounting
   principle                                                                     -                0.23                (0.14)
                                                                 ------------------  ------------------   ------------------
Net income (loss) per share available for common shareholders             $   0.24           $    0.67           $    (2.43)
                                                                 ==================  ==================   ==================

Diluted earnings (loss) per common share:
Weighted-average shares outstanding                                        303,989             282,434              280,686
Effect of dilutive shares                                                    5,194               4,868                3,887
Effect of conversion of preferred securities                                     -              15,134                    -
                                                                 ------------------  ------------------   ------------------
Weighted-average shares outstanding - diluted                              309,183             302,436              284,573
                                                                 ==================  ==================   ==================
Income (loss) from continuing operations before cumulative
   effect of change in accounting principle                               $   0.23           $    0.42           $    (2.93)
Income from discontinued operations                                              -                   -                 0.64
                                                                 ------------------  ------------------   ------------------
Income (loss) before cumulative effect of change in accounting
   principle                                                                  0.23                0.42                (2.29)
Income (loss) from cumulative effect of change in accounting
   principle                                                                     -                0.22                (0.14)
                                                                 ------------------  ------------------   ------------------
Net income (loss) per share available for common shareholders             $   0.23           $    0.64           $    (2.43)
                                                                 ==================  ==================   ==================

     Stock Options
     -------------
     For the year ended  December 31,  2004,  2003 and 2002 options of 2,494,634
     (at exercise  prices  ranging from $13.30 to $18.46),  and  10,190,000  and
     14,391,000 (at exercise prices ranging from $9.18 to $21.47), respectively,
     issuable  under  employee   compensation   plans  were  excluded  from  the
     computation  of diluted EPS for those periods  because the exercise  prices
     were greater than the average market price of common shares and, therefore,
     the effect would be antidilutive.

     In connection with the payment of the special, non-recurring dividend of $2
     per common share on September 2, 2004, the exercise price and number of all
     outstanding  options was adjusted  such that each option had the same value
     to the  holder  after  the  dividend  as it had  before  the  dividend.  In
     accordance  with FASB  Interpretation  No. 44 ("FIN 44"),  "Accounting  for
     Certain Transactions  involving Stock Compensation" and EITF 00-23, "Issues
     Related to the Accounting for Stock  Compensation  under APB No. 25 and FIN
     44",  there is no accounting  consequence  for changes made to the exercise
     price and the number of shares of a fixed stock option or award as a direct
     result of the special, non-recurring dividend.


                                      F-32


     As a result  of our loss  from  continuing  operations  for the year  ended
     December 31, 2002 dilutive  securities of 3,373,846 issuable under employee
     compensation  plans were  excluded  from the  computation  of  diluted  EPS
     because their inclusion would have had an antidilutive effect.

     In  addition,  for the  years  ended  December  31,  2004,  2003 and  2002,
     restricted  stock awards of 1,686,000,  1,249,000,  and  1,004,000  shares,
     respectively,   are  excluded  from  our  basic  weighted   average  shares
     outstanding  and  included in our  dilutive  shares until the shares are no
     longer contingent upon the satisfaction of all specified conditions.

     Equity Units and EPPICS
     -----------------------
     On August 17, 2004 we issued 32,073,633  shares of common stock,  including
     3,591,000  treasury shares, to our equity unit holders in settlement of the
     equity purchase contract component of the equity units. With respect to the
     $460,000,000  Senior Note  component of the equity  units,  we  repurchased
     $300,000,000  principal  amount of these Notes in July 2004.  The remaining
     $160,000,000 of the Senior Notes were repriced and a portion was remarketed
     on August 12, 2004 as the 6.75% Notes due August 17, 2006.  During 2004, we
     repurchased  an  additional  $108,230,000  of the  6.75%  Notes  which,  in
     addition  to the  $300,000,000  purchased  in July,  resulted  in a pre-tax
     charge of approximately  $20,080,000  during the third quarter of 2004, but
     will result in an annual reduction in interest expense of about $27,555,000
     per year.

     As a result of our July  dividend  announcement  with respect to our common
     shares,  our  5%  Company  Obligated  Mandatorily   Redeemable  Convertible
     Preferred  Securities due 2036 (EPPICS) began to convert to Citizens common
     shares.  As  of  December  31,  2004,   approximately  74%  of  the  EPPICS
     outstanding,  or about  $147,991,000  aggregate  principal amount of units,
     have  converted to 11,622,749  Citizens  common shares,  including  725,000
     issued from treasury.

     At December 31,  2004,  we had  1,065,171  shares of  potentially  dilutive
     EPPICS, which were convertible into common stock at a 4.36 to 1 ratio at an
     exercise  price of $11.46  per  share.  As a result of the  September  2004
     special,  non-recurring  dividend, the EPPICS exercise price for conversion
     into common stock was reduced from $13.30 to $11.46.  These securities have
     not been included in the diluted income per share calculation because their
     inclusion would have had an antidilutive effect.

     At  December  31, 2003 and 2002,  we had  4,025,000  shares of  potentially
     dilutive  EPPICS that have been  included in the diluted  income (loss) per
     common share calculation for the period ended December 31, 2003.

     Stock Units
     -----------
     At December 31, 2004,  2003 and 2002,  we had 432,872,  427,475 and 416,305
     stock  units,  respectively,  issuable  under our  Directors'  Deferred Fee
     Equity Plan and Non-Employee  Directors'  Retirement Plan. These securities
     have not been included in the diluted income per share calculation  because
     their inclusion would have had an antidilutive effect.


                                      F-33


(22) Comprehensive Income (Loss):
     ---------------------------

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

     Our other  comprehensive  income  (loss) for the years ended  December  31,
     2004, 2003 and 2002 is as follows:


                                                                               2004
                                                          ---------------------------------------------
                                                           Before-Tax      Tax Expense/    Net-of-Tax
($ in thousands)                                             Amount         (Benefit)        Amount
- ----------------                                          --------------  --------------- -------------

Net unrealized losses on securities:
                                                                                    
   Net unrealized holding losses arising during period       $   (1,901)       $    (742)    $  (1,159)
   Minimum pension liability                                    (17,372)          (6,645)      (10,727)
   Less: Reclassification adjustments for net
             gains realized in net income                       (26,247)         (10,240)      (16,007)
                                                          --------------  --------------- -------------
Other comprehensive loss                                     $  (45,520)       $ (17,627)    $ (27,893)
                                                          ==============  =============== =============

                                                                               2003
                                                          ---------------------------------------------
                                                           Before-Tax      Tax Expense/    Net-of-Tax
($ in thousands)                                             Amount         (Benefit)        Amount
- ----------------                                          --------------  --------------- -------------

Net unrealized gains on securities:
   Net unrealized holding gains arising during period        $   14,470        $   5,539     $   8,931
   Minimum pension liability                                     34,935           13,373        21,562
                                                          --------------  --------------- -------------
Other comprehensive income                                   $   49,405        $  18,912     $  30,493
                                                          ==============  =============== =============

                                                                               2002
                                                          ---------------------------------------------
                                                           Before-Tax      Tax Expense/    Net-of-Tax
($ in thousands)                                             Amount         (Benefit)        Amount
- ----------------                                          --------------  --------------- -------------

Net unrealized losses on securities:
   Net unrealized holding losses arising during period       $ (101,137)       $ (38,078)    $ (63,059)
   Minimum pension liability                                   (180,798)         (69,209)     (111,589)
   Add: Reclassification adjustments for net
            losses realized in net loss                         108,376           40,804        67,572
                                                          --------------  --------------- -------------
Other comprehensive loss                                     $ (173,559)       $ (66,483)    $(107,076)
                                                          ==============  =============== =============



(23) Segment Information:
     -------------------

     As of April 1, 2004, we operate in two segments, ILEC and ELI (a CLEC). The
     ILEC  segment  provides  both  regulated  and  unregulated   communications
     services to residential,  business and wholesale customers and is typically
     the incumbent provider in its service areas.

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

     As permitted by SFAS No. 131, we have utilized the aggregation  criteria in
     combining our markets  because all of the Company's ILEC  properties  share
     similar  economic  characteristics:  they  provide  the same  products  and
     services to similar  customers using comparable  technologies in all of the
     states that we operate in. The regulatory  structure is generally  similar.
     Differences  in the regulatory  regime of a particular  state do not impact
     the economic characteristics or operating results of a particular property.

                                      F-34




($ in thousands)                       For the year ended December 31, 2004
- ----------------                ----------------------------------------------------------
                                                                                 Total
                                    ILEC           ELI          Electric (1)    Segments
                                ------------- --------------    -------------  -----------
                                                                  
Revenue                          $ 2,027,215      $ 156,030        $   9,735   $2,192,980
Depreciation and Amortization        548,649         24,061                -      572,710
Management succession and
   strategic alternatives expenses    87,279          3,353                -       90,632
Operating Income (Loss)              477,070         10,350           (3,134)     484,286
Capital Expenditures                 264,337         11,644                -      275,981
Assets                             6,101,546        173,369                -    6,274,915

($ in thousands)                              For the year ended December 31, 2003
- ----------------                -------------------------------------------------------------------------
                                                                                               Total
                                    ILEC           ELI              Gas         Electric      Segments
                                ------------- --------------    -------------  -----------  -------------
Revenue                          $ 2,040,935      $ 165,389        $ 137,686   $  100,928    $ 2,444,938
Depreciation and Amortization        571,766         23,510                -            -        595,276
Reserve for Telecommunications
  Bankruptcies                        (5,524)         1,147                -            -         (4,377)
Restructuring and Other Expenses       9,373            314                -            -          9,687
Loss on Impairment                         -              -                -       15,300         15,300
Operating Income (Loss)              537,248          9,710           14,013       (3,359)       557,612
Capital Expenditures                 244,089          9,496            9,877       13,984        277,446
Assets                             6,425,383        184,559                -       23,130      6,633,072

($ in thousands)                              For the year ended December 31, 2002
- ----------------                -------------------------------------------------------------------------
                                                                                               Total
                                    ILEC           ELI              Gas         Electric      Segments
                                ------------- --------------    -------------  -----------  -------------
 Revenue                          $ 2,062,905      $ 175,079        $ 216,517  $   214,831    $ 2,669,332
Depreciation and Amortization        643,123        112,035              148          216        755,522
Reserve for Telecommunications
  Bankruptcies                        10,446            434                -            -         10,880
Restructuring and Other Expenses      30,054          7,132                -            -         37,186
Loss on Impairment                         -        656,658          152,300      265,100      1,074,058
Operating Income (Loss)              413,241       (759,161)        (119,579)    (222,090)      (687,589)
Capital Expenditures                 288,823        122,003 (2)       21,035       18,625 (3)    450,486
Assets                             6,681,448        214,252          389,737       58,027      7,343,464



1    Consists principally of post-sale activities associated with the completion
     of our utility divestiture  program.  These costs could not be accrued as a
     selling cost at the time of sale.
2    Includes  $110,000,000 of previously leased facilities  purchased by ELI in
     April 2002.
3    Does not  include  approximately  $38,000,000  of  non-cash  capital  lease
     additions.

                                      F-35


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



($ in thousands)
- ----------------                                    For the years ended December 31,
Capital Expenditures                              2004              2003          2002
                                              --------------    -------------  -----------
                                                                       
Total segment capital expenditures              $   275,981      $   277,446    $ 450,486
General capital expenditures                            367              569       18,256
                                              --------------    -------------  -----------
Consolidated reported capital expenditures      $   276,348      $   278,015    $ 468,742
                                              ==============    =============  ===========


Assets                                            2004              2003
                                              --------------    -------------
Total segment assets                            $ 6,274,915      $ 6,633,072
General assets                                      393,504          812,473
                                              --------------    -------------
Consolidated reported assets                    $ 6,668,419      $ 7,445,545
                                              ==============    =============


(24) Quarterly Financial Data (Unaudited):
     ------------------------------------



($ in thousands, except per share amounts)
- -------------------------------------------
                                                            First quarter  Second quarter  Third quarter  Fourth quarter
                                                            -------------  --------------  -------------  --------------
2004
- ----
                                                                                              
Revenue                                                         $558,468    $ 544,091      $ 545,393      $ 545,028
Operating income                                                 139,806      128,175         71,954        144,351
Net income (loss)                                                 42,868       23,792        (11,290)        16,780
Net income (loss) available for common shareholders per
  basic share                                                   $   0.15    $    0.08      $   (0.04)     $    0.05
Net income (loss) available for common shareholders per
  diluted share                                                 $   0.15    $    0.08      $   (0.04)     $    0.05

2003
- ----
Revenue                                                         $651,862    $ 643,954      $ 595,037      $ 554,085
Operating income                                                 164,295      135,192        133,156        124,969
Income before cumulative effect of change in accounting
  principle                                                       61,662       34,057         11,412         14,952
Net income                                                       127,431       34,057         11,412         14,952
Income before cumulative effect of change in accounting
  principle available for common shareholders per basic share   $   0.22    $    0.12      $    0.04      $    0.05
Income before cumulative effect of change in accounting
  principle available for common shareholders per diluted share $   0.22    $    0.12      $    0.04      $    0.05
Net income available for common shareholders per basic share    $   0.45    $    0.12      $    0.04      $    0.05
Net income available for common shareholders per diluted share  $   0.43    $    0.12      $    0.04      $    0.05



     The quarterly net income (loss) per common share amounts are rounded to the
     nearest cent.  Annual net income (loss) per common share may vary depending
     on the effect of such rounding.

     2004 Transactions
     -----------------
     On  April  1,  2004,  we  completed  the  sale  of  our  Vermont   electric
     distribution  operations  for  approximately  $13,992,000  in cash,  net of
     selling expenses.

     During  the third  quarter  of 2004,  we sold our  corporate  aircraft  for
     approximately  $15,298,000  in  cash.  The  pre-tax  loss on the  sale  was
     $1,087,000.

     In October 2004, we sold cable assets in California,  Arizona, Indiana, and
     Wisconsin for  approximately  $2,263,000 in cash. The pre-tax gain on these
     sales was $40,000.

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


                                      F-36


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

     On August 8,  2003,  we  completed  the sale of The Gas  Company  in Hawaii
     division  for  $119,290,000  in cash and assumed  liabilities.  The initial
     pre-tax loss on the sale was $18,480,000 recognized in the third quarter of
     2003.  We  recognized  an  additional  loss on the sale of  $700,000 in the
     fourth quarter of 2003 due to customary sale price adjustments.

     On August 11, 2003,  we completed  the sale of our Arizona gas and electric
     divisions for  $224,100,000  in cash. The initial  pre-tax loss on the sale
     was  $12,791,000  recognized in the third quarter of 2003. We recognized an
     additional loss on the sale of $5,700,000 in the fourth quarter of 2003 due
     to customary sale price adjustments.

     In the third quarter 2003, we recognized a non-cash pre-tax impairment loss
     of  $4,000,000  related to the  electric  sector  assets held for sale,  in
     accordance with the provisions of SFAS No. 144.

     In the fourth  quarter 2003, we recognized an additional  non-cash  pre-tax
     impairment  loss of $11,300,000  related to the electric sector assets held
     for sale, in accordance with the provisions of SFAS No. 144.

     On December 2, 2003,  we  completed  the sale of  substantially  all of our
     Vermont  electric  division's  transmission  assets for  $7,344,000 in cash
     (less $1,837,000 in refunds to customers per an order by the Vermont Public
     Service Board).

     In the fourth  quarter 2003, we reduced our reserve for  telecommunications
     bankruptcies by  approximately  $6,600,000 as a result of a settlement with
     WorldCom/MCI.

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

(25) Retirement Plans:
     ----------------

     We  sponsor a  noncontributory  defined  benefit  pension  plan  covering a
     significant number of our employees and other postretirement  benefit plans
     that provide medical,  dental,  life insurance  benefits and other benefits
     for  covered  retired   employees  and  their   beneficiaries  and  covered
     dependents.  The benefits  are based on years of service and final  average
     pay or career average pay.  Contributions are made in amounts sufficient to
     meet ERISA funding  requirements while considering tax deductibility.  Plan
     assets are invested in a diversified  portfolio of equity and  fixed-income
     securities.

     The  accounting  results for pension and  postretirement  benefit costs and
     obligations are dependent upon various actuarial assumptions applied in the
     determination  of such amounts.  These  actuarial  assumptions  include the
     following:  discount  rates,  expected  long-term  rate of  return  on plan
     assets, future compensation increases,  employee turnover,  healthcare cost
     trend  rates,  expected  retirement  age,  optional  form  of  benefit  and
     mortality.  The Company reviews these assumptions for changes annually with
     its outside actuaries. We consider our discount rate and expected long-term
     rate of return on plan assets to be our most critical assumptions.

     The discount  rate is used to value,  on a present  basis,  our pension and
     postretirement  benefit  obligation as of the balance sheet date.  The same
     rate is  also  used in the  interest  cost  component  of the  pension  and
     postretirement  benefit cost  determination  for the  following  year.  The
     measurement  date used in the selection of our discount rate is the balance
     sheet date.  Our discount  rate  assumption  is  determined  annually  with
     assistance  from our  actuaries  based on the interest  rates for long-term
     high quality corporate bonds. This rate can change from year-to-year  based
     on market conditions that impact corporate bond yields.

     The  expected  long-term  rate of return on plan  assets is  applied in the
     determination  of periodic  pension and  postretirement  benefit  cost as a
     reduction in the  computation  of the expense.  In developing  the expected
     long-term rate of return  assumption,  we considered  published  surveys of
     expected  market  returns,  10 and 20 year actual  returns of various major
     indices, and our own historical 5-year and 10-year investment returns.


                                      F-37


     The expected  long-term  rate of return on plan assets is based on an asset
     allocation  assumption of 30% to 45% in fixed income  securities and 55% to
     70% in equity securities.  We review our asset allocation at least annually
     and make changes when  considered  appropriate.  In 2004, we did not change
     our  expected  long-term  rate of return  from the 8.25% used in 2003.  Our
     pension plan assets are valued at actual market value as of the measurement
     date.   The   measurement   date  used  to  determine   pension  and  other
     postretirement benefit measures for the pension plan and the postretirement
     benefit plan is December 31.

     Accounting  standards  require that Citizens  record an additional  minimum
     pension liability when the plan's "accumulated  benefit obligation" exceeds
     the fair  market  value of plan  assets  at the  pension  plan  measurement
     (balance  sheet)  date.  In the  fourth  quarter  of  2003,  due to  strong
     performance  in the  equity  markets  during  2003,  partially  offset by a
     decrease in the year-end discount rate, the Company recorded a reduction to
     its  minimum  pension  liability  in  the  amount  of  $34,935,000  with  a
     corresponding credit to shareholders'  equity of $21,562,000,  net of taxes
     of $13,373,000.  In the fourth quarter of 2004, mainly due to a decrease in
     the year-end  discount  rate,  the Company  recorded an additional  minimum
     pension liability in the amount of $17,372,000 with a corresponding  charge
     to shareholders' equity of $10,727,000,  net of taxes of $6,645,000.  These
     adjustments  did not impact our earnings or cash flows for either year.  If
     discount  rates and the equity  markets  performance  decline,  the Company
     would be required to increase its minimum  pension  liabilities  and record
     additional charges to shareholder's equity in the future.

     Actual results that differ from our  assumptions are added or subtracted to
     our balance of unrecognized actuarial gains and losses. For example, if the
     year-end   discount  rate  used  to  value  the  plan's  projected  benefit
     obligation  decreases from the prior  year-end,  then the plan's  actuarial
     loss will increase.  If the discount rate increases from the prior year-end
     then the plan's  actuarial  loss will decrease.  Similarly,  the difference
     generated from the plan's actual asset  performance as compared to expected
     performance  would be  included in the  balance of  unrecognized  gains and
     losses.

     The impact of the  balance of  accumulated  actuarial  gains and losses are
     recognized  in the  computation  of pension  cost only to the  extent  this
     balance  exceeds  10%  of  the  greater  of the  plan's  projected  benefit
     obligation or market value of plan assets. If this occurs,  that portion of
     gain or loss  that is in  excess  of 10% is  amortized  over the  estimated
     future service period of plan  participants as a component of pension cost.
     The level of  amortization is affected each year by the change in actuarial
     gains and losses  and could  potentially  be  eliminated  if the  gain/loss
     activity reduces the net accumulated gain/loss balance to a level below the
     10% threshold.

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

                                      F-38

                                  Pension Plan
                                  ------------
     The  following  tables set forth the plan's  benefit  obligations  and fair
     values of plan  assets as of December  31,  2004 and 2003 and net  periodic
     benefit cost for the years ended December 31, 2004, 2003 and 2002.




($ in thousands)                                                  2004          2003
- ----------------                                              ------------- --------------

Change in benefit obligation
- ----------------------------
                                                                          
Benefit obligation at beginning of year                          $ 761,683      $ 780,237
Service cost                                                         5,748          6,479
Interest cost                                                       46,468         49,103
Amendments                                                               -        (22,164)
Actuarial loss                                                      44,350         43,146
Settlement due to transfer of plan                                       -        (22,475)
Plant closings/Reduction in force                                        -         (1,198)
Benefits paid                                                      (58,791)       (71,445)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 799,458      $ 761,683
                                                              ============= ==============

Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year                   $ 719,622      $ 692,361
Actual return on plan assets                                        80,337        121,821
Settlement due to transfer of plan                                       -        (23,115)
Employer contribution                                               20,000              -
Benefits paid                                                      (58,791)       (71,445)
                                                              ------------- --------------
Fair value of plan assets at end of year                         $ 761,168      $ 719,622
                                                              ============= ==============

(Accrued)/Prepaid benefit cost
- ------------------------------
Funded status                                                    $ (38,290)     $ (42,061)
Unrecognized net liability                                               -              -
Unrecognized prior service cost                                     (1,988)        (2,232)
Unrecognized net actuarial loss                                    183,481        171,071
                                                              ------------- --------------
Prepaid benefit cost                                             $ 143,203      $ 126,778
                                                              ============= ==============

Amounts recognized in the statement of financial position
- ---------------------------------------------------------
Accrued benefit liability                                        $ (20,034)     $ (19,086)
Other comprehensive income                                         163,237        145,864
                                                              ------------- --------------
Net amount recognized                                            $ 143,203      $ 126,778
                                                              ============= ==============


($ in thousands)                                                  2004          2003            2002
- ----------------                                              ------------- -------------- ---------------
Components of net periodic benefit cost
- ---------------------------------------
Service cost                                                       $ 5,748       $  6,479        $ 12,159
Interest cost on projected benefit obligation                       46,468         49,103          53,320
Return on plan assets                                              (57,203)       (53,999)        (63,258)
Amortization of prior service cost and unrecognized
       net obligation                                                 (244)          (172)           (106)
Amortization of unrecognized loss                                    8,806         11,026           2,137
                                                              ------------- -------------- ---------------
Net periodic benefit cost                                            3,575         12,437           4,252
Curtailment/settlement charge                                            -          6,585               -
                                                              ------------- -------------- ---------------
Total periodic benefit cost                                        $ 3,575       $ 19,022        $  4,252
                                                              ============= ============== ===============


                                      F-39


     The plan's weighted average asset allocations at December 31, 2004 and 2003
     by asset category are as follows:

                                    2004          2003
                                    ----          ----
Asset category:
- --------------
    Equity securities                65%           62%
    Debt securities                  32%           36%
    Cash and other                    3%            2%
                                   ------        ------
       Total                         100%         100%
                                   ======        ======

     The Plan's expected benefit payments by year are as follows:

($ in thousands)
- -----------------
                     Year           Amount
                ---------------  -------------
                    2005             $ 51,878
                    2006               53,072
                    2007               54,267
                    2008               55,187
                    2009               57,357
                2010 - 2014           290,983
                                 -------------
                   Total            $ 562,744
                                 =============

     The Company's required contribution to the plan in 2005 is $0.

     The  accumulated  benefit  obligation  for the  plan was  $781,202,000  and
     $738,709,000 at December 31, 2004 and 2003, respectively.

     Assumptions used in the computation of pension and postretirement  benefits
     other than pension costs/year-end benefit obligations were as follows:

                                                       2004            2003
                                                       ----            ----
Discount rate                                       6.25/6.00%     6.75/6.25%
Expected long-term rate of return on plan assets     8.25%/N/A      8.25%/N/A
Rate of increase in compensation levels              4.0%/4.0%      4.0%/4.0%

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

                                      F-40


                   Postretirement Benefits Other Than Pensions
                   -------------------------------------------
     The following table sets forth the plan's benefit obligations,  fair values
     of plan assets and the postretirement  benefit liability  recognized on our
     balance   sheets  at  December   31,   2004  and  2003  and  net   periodic
     postretirement  benefit costs for the years ended  December 31, 2004,  2003
     and 2002:




($ in thousands)                                                  2004          2003
- ----------------                                              ------------- --------------

Change in benefit obligation
- ----------------------------
                                                                          
Benefit obligation at beginning of year                          $ 223,337      $ 210,683
Service cost                                                         1,128          1,387
Interest cost                                                       12,698         13,606
Plan participants' contributions                                     4,118          3,723
Actuarial (gain) loss                                               (1,706)        16,835
Amendments                                                          (3,045)             -
Benefits paid                                                      (19,150)       (22,897)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 217,380      $ 223,337
                                                              ============= ==============

Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year                   $  27,493      $  27,050
Actual return on plan assets                                           987          1,624
Benefits paid                                                      (15,032)       (19,173)
Employer contribution                                                1,678         19,568
Acquisitions/Divestitures                                                -         (1,576)
                                                              ------------- --------------
 Fair value of plan assets at end of year                        $  15,126      $  27,493
                                                              ============= ==============

Accrued benefit cost
- --------------------
Funded status                                                    $(202,254)     $(195,844)
Unrecognized transition obligation                                       -            211
Unrecognized prior service cost                                     (2,617)            13
Unrecognized loss                                                   44,319         49,982
                                                              ------------- --------------
Accrued benefit cost                                             $(160,552)     $(145,638)
                                                              ============= ==============


($ in thousands)                                                  2004          2003            2002
- ----------------                                              ------------- -------------- ---------------
Components of net periodic postretirement benefit cost
- ------------------------------------------------------
Service cost                                                      $  1,128       $  1,387        $  1,350
Interest cost on projected benefit obligation                       12,698         13,606          13,753
Return on plan assets                                               (2,268)        (2,133)         (2,438)
Amortization of prior service cost and transition obligation          (204)            26              26
Amortization of unrecognized (gain)/loss                             5,238          3,985           2,383
                                                              ------------- -------------- ---------------
Net periodic postretirement benefit cost                          $ 16,592       $ 16,871        $ 15,074
                                                              ============= ============== ===============


     The plan's weighted average asset allocations at December 31, 2004 and 2003
     by asset category are as follows:

                                       2004           2003
                                       ----           ----
Asset category:
- --------------
    Equity securities                    0%            16%
    Debt securities                    100%            63%
    Cash and other                       0%            21%
                                      ------        -------
       Total                           100%           100%
                                      ======        =======

                                      F-41


     The Plan's expected benefit payments by year are as follows:

($ in thousands)
- ----------------
                    Year           Amount
                ---------------  -------------
                    2005            $  14,477
                    2006               15,172
                    2007               15,846
                    2008               16,401
                    2009               16,921
                 2010 - 2014           89,998
                                 -------------
                    Total           $ 168,815
                                 =============


     The Company's expected contribution to the plan in 2005 is $14,477,000.

     For purposes of measuring year-end benefit obligations,  we used, depending
     on medical plan coverage for  different  retiree  groups,  a 7 - 10% annual
     rate of  increase  in the  per-capita  cost of  covered  medical  benefits,
     gradually  decreasing  to 5% in the year 2010 and  remaining  at that level
     thereafter.  The effect of a 1% increase in the assumed  medical cost trend
     rates for each future  year on the  aggregate  of the service and  interest
     cost  components  of  the  total  postretirement   benefit  cost  would  be
     $1,397,000  and  the  effect  on  the  accumulated  postretirement  benefit
     obligation  for health  benefits would be  $21,428,000.  The effect of a 1%
     decrease  in the assumed  medical  cost trend rates for each future year on
     the  aggregate of the service and  interest  cost  components  of the total
     postretirement  benefit  cost would be  $(1,145,000)  and the effect on the
     accumulated  postretirement benefit obligation for health benefits would be
     $(17,711,000).

     In  December  2003,  the  Medicare   Prescription  Drug,   Improvement  and
     Modernization  Act of 2003 (the  Act)  became  law.  The Act  introduces  a
     prescription  drug benefit under  Medicare as well as a federal  subsidy to
     sponsors of retiree  health care benefit  plans that provide a benefit that
     is at least actuarially  equivalent to the Medicare benefit.  The amount of
     the  federal  subsidy  will  be  based  on  28  percent  of  an  individual
     beneficiary's annual eligible  prescription drug costs ranging between $250
     and  $5,000.  Currently,  the  Company  has not yet been  able to  conclude
     whether  the  benefits  provided  by its  postretirement  medical  plan are
     actuarially  equivalent  to Medicare Part D under the Act.  Therefore,  the
     Company cannot quantify the effects,  if any, that the Act will have on its
     future benefit costs or accumulated  postretirement  benefit obligation and
     accordingly,  the  effects  of the  Act  have  not  been  reflected  in the
     accompanying consolidated financial statements.

     In August 1999, our Board of Directors  approved a plan of divestiture  for
     the public services properties.  Any pension and/or  postretirement gain or
     loss associated with the divestiture of these properties will be recognized
     when  realized.  During  2002,  we sold our entire water  distribution  and
     wastewater treatment business and one of our three electric businesses. The
     pension  plan has been  frozen  from the date of sale and we have  retained
     those  liabilities.  During 2003, we sold our  remaining gas  businesses in
     Hawaii and Arizona as well as our electric business in Arizona. The pension
     plan covering union employees for the Hawaiian gas property was transferred
     in its  entirety to the buyer.  The pension plan  liabilities  covering the
     remaining   employees   transferred  have  been  retained  by  us.  In  all
     transactions,  the buyer assumed the retiree medical  liabilities for those
     properties.

                              401(k) Savings Plans
                              --------------------
     We sponsor an employee  retirement savings plan under section 401(k) of the
     Internal  Revenue  Code.  The  Plan  covers   substantially  all  full-time
     employees.  Under the Plan, we provide matching and certain  profit-sharing
     contributions.  Effective May 1, 2002,  the Plan was amended to provide for
     employer  contributions  to be made  in cash  rather  than  Company  stock,
     impacting  all  non-union  employees  and most  union  employees.  Employer
     contributions  were  $8,403,000,  $9,724,000 and $10,331,000 for 2004, 2003
     and 2002, respectively.

                                      F-42


(26) Commitments and Contingencies:
     -----------------------------

     The City of Bangor,  Maine,  filed suit against us on November 22, 2002, in
     the U.S.  District  Court  for the  District  of Maine  (City of  Bangor v.
     Citizens Communications Company, Civ. Action No. 02-183-B-S).  We intend to
     defend  ourselves  vigorously  against  the  City's  lawsuit.  The City has
     alleged,  among  other  things,  that we are  responsible  for the costs of
     cleaning up environmental  contamination  alleged to have resulted from the
     operation of a manufactured gas plant by Bangor Gas Company, which we owned
     from 1948-1963.  The City alleged the existence of extensive  contamination
     of the Penobscot River and has asserted that money damages and other relief
     at issue in the lawsuit could exceed  $50,000,000.  The City also requested
     that  punitive  damages  be  assessed  against  us. We have filed an answer
     denying  liability to the City, and have asserted a number of counterclaims
     against  the  City.  In  addition,  we have  identified  a number  of other
     potentially  responsible parties that may be liable for the damages alleged
     by the  City  and  have  joined  them  as  parties  to the  lawsuit.  These
     additional  parties  include  Honeywell  Corporation,  the  Army  Corps  of
     Engineers,  Guilford Transportation  (formerly Maine Central Railroad), UGI
     Utilities,  Inc., and Centerpoint Energy Resources  Corporation.  The Court
     has dismissed all but two of the City's claims  including its CERCLA claims
     and the claim against us for punitive  damages.  We are currently  pursuing
     settlement  discussions with the other parties, but if those efforts fail a
     trial of the City's  remaining  claims could begin as early as May 2005. We
     have demanded that various of our insurance  carriers  defend and indemnify
     us with respect to the City's lawsuit, and on December 26, 2002, we filed a
     declaratory  judgment  action  against  those  insurance  carriers  in  the
     Superior Court of Penobscot County,  Maine, for the purpose of establishing
     their  obligations to us with respect to the City's  lawsuit.  We intend to
     vigorously  pursue  this  lawsuit  to obtain  from our  insurance  carriers
     indemnification  for any  damages  that may be  assessed  against us in the
     City's  lawsuit  as well as to  recover  the costs of our  defense  of that
     lawsuit.

     On June 7, 2004,  representatives  of Robert A. Katz Technology  Licensing,
     LP, contacted us regarding possible infringement of several patents held by
     that firm. The patents cover a wide range of operations in which  telephony
     is supported by computers,  including obtaining  information from databases
     via  telephone,   interactive  telephone  transactions,  and  customer  and
     technical support  applications.  We are cooperating with the patent holder
     to  determine  if we are  currently  using  any of the  processes  that are
     protected by its patents.  If we determine that we are utilizing the patent
     holder's  intellectual  property,  we expect to commence  negotiations on a
     license agreement.

     On June 24, 2004, one of our subsidiaries,  Frontier Subsidiary Telco Inc.,
     received a "Notice of Indemnity Claim" from Citibank, N.A., that is related
     to a complaint  pending against Citibank and others in the U.S.  Bankruptcy
     Court for the Southern  District of New York as part of the Global Crossing
     bankruptcy  proceeding.  Citibank  bases  its claim  for  indemnity  on the
     provisions  of a credit  agreement  that was entered  into in October  2000
     between  Citibank  and our  subsidiary.  We purchased  Frontier  Subsidiary
     Telco,  Inc.,  in June  2001 as part  of our  acquisition  of the  Frontier
     telephone  companies.  The complaint against  Citibank,  for which it seeks
     indemnification,  alleges that the seller  improperly used a portion of the
     proceeds  from the  Frontier  transaction  to pay off the  Citibank  credit
     agreement, thereby defrauding certain debt holders of Global Crossing North
     America Inc.  Although the credit  agreement was paid off at the closing of
     the Frontier  transaction,  Citibank claims the indemnification  obligation
     survives.  Damages  sought  against  Citibank and its  co-defendants  could
     exceed  $1,000,000,000.  In August 2004 we notified Citibank by letter that
     we believe its claims for indemnification are invalid and are not supported
     by applicable law. We have received no further communications from Citibank
     since our August letter.

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

     We  have   budgeted   capital   expenditures   in  2005  of   approximately
     $270,000,000,  including  $255,000,000  for ILEC and  $15,000,000  for ELI.
     Although we from time to time make  short-term  purchasing  commitments  to
     vendors with respect to these expenditures,  we generally do not enter into
     firm, written contracts for such activities.

                                      F-43


     We conduct  certain of our  operations  in leased  premises  and also lease
     certain  equipment and other assets  pursuant to operating  leases.  Future
     minimum rental commitments for all long-term noncancelable operating leases
     and future minimum  capital lease payments for continuing  operations as of
     December 31, 2004 are as follows:



       ($ in thousands)                                                             Capital         Operating
       ----------------                                                             Leases            Leases

       Year ending December 31:
                                                                                              
            2005                                                                    $   539          $  21,198
            2006                                                                        544             14,228
            2007                                                                        549             12,537
            2008                                                                        555             11,517
            2009                                                                        561             10,018
            Thereafter                                                                7,269             35,494
                                                                                  ----------        -----------
                     Total minimum lease payments                                    10,017           $104,992
                                                                                                    ===========

        Less amount representing interest (rates range from 9.25% to 10.65%)         (5,596)
                                                                                  ----------

                     Present value of net minimum capital lease payments              4,421

       Less current installments of obligations under capital leases
                                                                                        (81)
                                                                                  ----------
                     Obligations under capital leases, excluding
                         current installments                                       $ 4,340
                                                                                  ==========


     Total rental  expense  included in our results of operations  for the years
     ended December 31, 2004,  2003 and 2002 was  $26,349,000,  $33,801,000  and
     $37,480,000,  respectively.  Until March 1, 2005, we sublet  certain office
     space in our  corporate  office to a  charitable  foundation  formed by our
     ex-Chairman.

     We are a party to contracts with several unrelated long distance  carriers.
     The  contracts  provide  fees based on traffic they carry for us subject to
     minimum monthly fees.

     At December 31, 2004, the estimated future payments for obligations under
     our long distance contracts and service agreements are as follows:


($ in thousands)              Year          ILEC / ELI
- ----------------         --------------   --------------
                              2005              $ 35,831
                              2006                26,363
                              2007                 6,796
                              2008                   735
                              2009                   165
                           thereafter                990
                                           -------------
                              Total             $ 70,880
                                           =============


                                      F-44


     The  Company  sold all of its  utility  businesses  as of  April  1,  2004.
     However,  we have retained a potential payment  obligation  associated with
     our  previous  electric  utility  activities  in the state of Vermont.  The
     Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including
     us, entered into a purchase power agreement with  Hydro-Quebec in 1987. The
     agreement contains  "step-up"  provisions that state that if any VJO member
     defaults on its purchase  obligation  under the contract to purchase  power
     from Hydro-Quebec the other VJO participants will assume responsibility for
     the defaulting party's share on a pro-rata basis. Our pro-rata share of the
     purchase power  obligation is 10%. If any member of the VJO defaults on its
     obligations under the Hydro-Quebec agreement, then the remaining members of
     the VJO,  including us, may be required to pay for a  substantially  larger
     share of the VJO's total power purchase obligation for the remainder of the
     agreement  (which runs through 2015).  Paragraph 13 of FIN 45 requires that
     we disclose "the maximum potential amount of future payments (undiscounted)
     the guarantor could be required to make under the guarantee."  Paragraph 13
     also states that we must make such  disclosure  "... even if the likelihood
     of the  guarantor's  having to make any  payments  under the  guarantee  is
     remote..."  As noted  above,  our  obligation  only  arises  as a result of
     default  by another  VJO  member  such as upon  bankruptcy.  Therefore,  to
     satisfy the  "maximum  potential  amount"  disclosure  requirement  we must
     assume  that  all  members  of the VJO  simultaneously  default,  a  highly
     unlikely  scenario  given  that the two  members  of the VJO that  have the
     largest potential  payment  obligations are publicly traded with investment
     grade  credit  ratings,  and that all VJO  members  are  regulated  utility
     providers  with regulated  cost  recovery.  Regardless,  despite the remote
     chance that such an event could occur,  or that the State of Vermont  could
     or would  allow  such an event,  assuming  that all the  members of the VJO
     defaulted  on January 1, 2006 and  remained in default for the  duration of
     the contract (another 10 years), we estimate that our undiscounted purchase
     obligation for 2006 through 2015 would be approximately $1,400,000,000.  In
     such a  scenario  the  Company  would  then own the power and could seek to
     recover  its costs.  We would do this by seeking to recover  our costs from
     the  defaulting  members  and/or  reselling  the  power  to  other  utility
     providers or the  northeast  power grid.  There is an active market for the
     sale of power.  We could  potentially  lose money if we were unable to sell
     the power at cost.  We caution  that we cannot  predict  with any degree of
     certainty any potential outcome.

     At December 31, 2004, we have outstanding  performance letters of credit as
     follows:

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

                  CNA                             $ 19,404
                  State of New York                  2,993
                  ELI projects                          50
                                               -----------
                     Total                        $ 22,447
                                               ===========

     In 2004,  we assumed a letter of credit with the State of New York (related
     to workers  compensation  claims) from Global Crossing,  Inc. CNA serves as
     our  agent  with  respect  to  general  liability  claims  (auto,   workers
     compensation and other insured perils of the Company).  As our agent,  they
     administer  all claims and make  payments  for  claims on our  behalf.  The
     Company  reimburses  CNA for  such  services  upon  presentation  of  their
     invoice.  To serve  as our  agent  and make  payments  on our  behalf,  CNA
     requires  that we  establish a letter of credit in their  favor.  CNA could
     potentially  draw  against  this letter of credit if we failed to reimburse
     CNA in accordance with the terms of our agreement.  The value of the letter
     of credit is reviewed annually and adjusted based on claims history.

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

(27) Subsequent Events:
     -----------------

     In  February  2005,  we  entered  into  a  definitive   agreement  to  sell
     Conference-Call USA, LLC, our conferencing  services business,  to Premiere
     Global Services, Inc. for $41,000,000 in cash, subject to adjustments under
     the terms of the agreement.  This transaction is expected to close by March
     31, 2005.


                                      F-45



                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES


             Report of Independent Registered Public Accounting Firm



     The Board of Directors and Shareholders
     Citizens Communications Company:

     Under date of March 11, 2005, we reported  separately  on the  consolidated
     balance sheets of Citizens  Communications  Company and  subsidiaries as of
     December  31, 2004 and 2003,  and the related  consolidated  statements  of
     operations,  shareholders'  equity,  comprehensive  income  (loss) and cash
     flows for each of the years in the  three-year  period  ended  December 31,
     2004.  In  connection  with our audits of the  aforementioned  consolidated
     financial statements,  we have also audited the related financial statement
     schedule.  The financial  statement  schedule is the  responsibility of the
     Company's  management.  Our  responsibility is to express an opinion on the
     financial  statement  schedule  based on our audits.  In our opinion,  such
     financial  statement  schedule,  when  considered  in relation to the basic
     consolidated financial statements taken as a whole, presents fairly, in all
     material respects, the information set forth therein.

     Our report  refers to the adoption of  Statement  of  Financial  Accounting
     Standards No. 143,  "Accounting  for Asset  Retirement  Obligations"  as of
     January 1, 2003.





                                                     /s/ KPMG LLP



     New York, New York
     March 11, 2005



                                      F-46

                                                           Schedule II


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




                                                          Additions
                                                ------------------------------
                                   Balance at    Charged to   Charged to other                Balance at
                                  beginning of   costs and       accounts -                    End of
 Accounts                            period      expenses        Revenue          Deductions   Period
- ------------------------------  --------------  ------------------------------  ------------- ---------

Allowance for doubtful accounts
                                                                             
         2002                         67,601        24,249           42,686       (95,590)(1)   38,946
         2003                         38,946        21,525           32,240       (45,379)      47,332
         2004                         47,332        17,859           13,586       (42,735)      36,042



(1) Net of recoveries of amounts previously written off.






                                      F-47