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CITIZENS COMMUNICATIONS COMPANY
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE YEAR ENDED DECEMBER 31, 2004
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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
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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
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CITIZENS COMMUNICATIONS COMPANY
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(Exact name of registrant as specified in its charter)

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

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

Registrant's telephone number, including area code: (203) 614-5600
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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
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Page
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PART I
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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
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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
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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
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Item 15. Exhibits and Financial Statement Schedules 36

Signatures 40

Index to Consolidated Financial Statements F-1




PART I
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Item 1. Business
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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
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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