VERIZON COMMUNICATIONS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002

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 1-8606

VERIZON COMMUNICATIONS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 23-2259884
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)

1095 AVENUE OF THE AMERICAS 10036
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER (212) 395-2121

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 [ ]

At June 30, 2002, 2,728,421,871 shares of the registrant's Common Stock were
outstanding, after deducting 23,228,613 shares held in treasury.

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TABLE OF CONTENTS

ITEM NO.

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Verizon Communications Inc. and Subsidiaries

See Notes to Condensed Consolidated Financial Statements

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CONDENSED CONSOLIDATED BALANCE SHEETS
Verizon Communications Inc. and Subsidiaries

See Notes to Condensed Consolidated Financial Statements

2

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Verizon Communications Inc. and Subsidiaries

See Notes to Condensed Consolidated Financial Statements

3

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Verizon Communications Inc. and Subsidiaries
(Unaudited)

1. BASIS OF PRESENTATION

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

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

2. MERGER CHARGES AND OTHER STRATEGIC ACTIONS

In connection with the Bell Atlantic Corporation-GTE Corporation merger on June
30, 2000, we incurred charges associated with employee severance of $584 million
($371 million after-tax) for the separation of approximately 5,500 management
employees who were entitled to benefits under pre-existing separation plans, as
well as an accrual of ongoing Statement of Financial Accounting Standards (SFAS)
No. 112, "Employers' Accounting for Postemployment Benefits," obligations for
GTE employees. As of June 30, 2002, the severances in connection with the Bell
Atlantic-GTE merger are complete.

During the fourth quarter of 2001, we recorded a special charge of $765 million
($477 million after-tax) for the voluntary and involuntary separation of
approximately 10,000 employees. Also, during the second quarter of 2002, we
recorded a special charge of $734 million ($475 million after-taxes and minority
interest) primarily associated with employee severance costs and
severance-related activities in connection with the voluntary and involuntary
separation of approximately 8,000 employees. As of June 30, 2002, a total of
approximately 8,900 employees have been separated under the 2001 and 2002
severance programs, excluding a significant number of voluntary separations that
were not processed by June 30, 2002. The remaining severance liability relating
to these programs is $1,085 million, which includes future payments to employees
separated as of June 30, 2002. We expect to complete the severance programs
within a year of when the charge was recorded.

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

We expect to incur a total of approximately $2 billion of transition costs
through the end of 2002 related to the merger and the formation of the wireless
joint venture. These costs are incurred to integrate systems, consolidate real
estate and relocate employees. They also include approximately $500 million for
advertising and other costs to establish the Verizon brand. Transition costs
incurred through the second quarter of 2002 total $1,931 million. Transition
costs for the three and six months ended June 30, 2002 were $102 million and
$198 million ($57 million and $109 million after taxes and minority interest),
respectively. Transition costs for the three and six months ended June 30, 2001
were $279 million and $442 million ($162 million and $250 million after taxes
and minority interest), respectively.

3. SALES OF ASSETS, NET

During the first quarter of 2002, we recorded a net pretax gain of $220 million
($116 million after-tax), primarily resulting from a pretax gain on the sale of
TSI Telecommunication Services Inc. (TSI) of $466 million ($275 million

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after-tax), partially offset by an impairment charge in connection with our exit
from the video business and other charges of $246 million ($159 million
after-tax).

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

4. EXTRAORDINARY ITEM

During the second quarter of 2002, we recognized a pretax extraordinary gain of
$4 million ($3 million after-tax) related to the extinguishment of $243 million
of debt prior to the stated maturity date. Results for the six months ended June
30, 2002 include the retirement in the first quarter of 2002 of $1,536 million
of debt prior to the stated maturity date, resulting in a pretax extraordinary
charge of $15 million ($9 million after-tax).

5. NET ASSETS HELD FOR SALE

In October 2001, we agreed to sell all 675,000 of our switched access lines in
Alabama and Missouri to CenturyTel Inc. (CenturyTel) for $2.2 billion. In early
July 2002, we completed the sale of approximately 300,000 switched access lines
and related local exchange operations in Alabama to CenturyTel for approximately
$1.0 billion in cash. The Missouri sale has been approved by the Missouri Public
Service Commission and the Federal Communications Commission (FCC). We expect to
close the Missouri transaction in the third quarter of 2002.

Also in October 2001, we agreed to sell approximately 600,000 switched access
lines in Kentucky to ALLTEL Corporation for $1.9 billion. This sale was
completed on July 31, 2002.

In December 2001, we agreed to sell TSI, for approximately $800 million. The
transaction closed on February 14, 2002 (see Note 3).

6. INVESTMENTS

Marketable Securities

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

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

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

We continually evaluate our investments in marketable securities for impairment
due to declines in market value considered to be other than temporary. That
evaluation includes, in addition to persistent, declining stock prices,

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general economic and company-specific evaluations. In the event of a
determination that a decline in market value is other than temporary, a charge
to earnings is recorded for all or a portion of the unrealized loss, and a new
cost basis in the investment is established.

At June 30, 2002 and December 31, 2001, the unrealized gains on marketable
securities related primarily to our investment in Telecom Corporation of New
Zealand Limited (TCNZ).

Investment Ownership Changes

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

On March 28, 2002, Verizon transferred 5.5 million of its shares in CTI
Holdings, S.A. (CTI), our wireless investment in Argentina, to an indirectly
wholly-owned subsidiary of Verizon and subsequently transferred ownership of
that subsidiary to a newly created trust for CTI employees. This decreased our
ownership percentage in CTI from 65% to 48%. We also reduced our representation
on CTI's Board of Directors from five of nine members to four of nine
(subsequently reduced to two of five members). As a result of these actions that
surrender control of CTI, we changed the method of accounting for our investment
in CTI from consolidation to the equity method.

Investment-Related Charges

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

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

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

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

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

Other Securities

Prior to the merger of Bell Atlantic and GTE, we owned and consolidated Genuity
(a tier-one interLATA Internet backbone and related data business). In June
2000, as a condition of the merger, 90.5% of the voting equity of

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Genuity was issued in an initial public offering. As a result of the initial
public offering and our loss of control, we deconsolidated Genuity. Our
remaining ownership interest in Genuity contained a contingent conversion
feature that gave us the option (if prescribed conditions were met), among other
things, to regain control of Genuity. Our ability to legally exercise this
conversion feature was dependent on obtaining approvals to provide long distance
service in the former Bell Atlantic states and satisfaction of other regulatory
and legal requirements.

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

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

7. ACCOUNTING CHANGE - GOODWILL AND OTHER INTANGIBLE ASSETS

Accounting Change

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

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

Wireless Licenses

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

Previous wireless business combinations have been for the purpose of acquiring
existing licenses and related infrastructure to enable us to build out our
existing nationwide wireless network. The primary asset acquired in such
combinations has been wireless licenses. In the allocation of the purchase price
of these previous acquisitions, amounts classified as goodwill have related
predominately to the expected synergies of placing the acquired licenses in our
national footprint. Further, in purchase accounting, the values assigned to both
wireless licenses and goodwill

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were principally determined based on an allocation of the excess of the purchase
price over the other acquired net assets. We believe that the nature of our
wireless licenses and related goodwill are fundamentally indistinguishable.

In light of these considerations, on January 1, 2002, amounts previously
classified as goodwill, approximately $7.9 billion for the year ended December
31, 2001, were reclassified into wireless licenses. Also, assembled workforce,
previously included in other intangible assets, will no longer be recognized
separately from wireless licenses. Amounts for 2001 have been reclassified to
conform to the presentation adopted on January 1, 2002. In conjunction with this
reclassification, and in accordance with the provisions of SFAS No. 109,
"Accounting for Income Taxes," we have recognized a deferred tax liability of
approximately $1.6 billion related to the difference in the tax basis versus
book basis of the wireless licenses. This reclassification, including the
related impact on deferred taxes, had no impact on our results of operations.
This reclassification and the methodology to be subsequently used to test
wireless licenses for impairment under SFAS No. 142 as described in the next
paragraph have been reviewed with the staff of the SEC.

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

Impact of SFAS No. 142

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

The preceding tables exclude $27 million and $45 million, or $.01 per share and
$.02 per share, in the second quarter and the first six months of 2001,
respectively, related to amortization of goodwill and other intangible assets
with indefinite lives of equity method investments.

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Goodwill

Changes in the carrying amount of goodwill for the six months ended June 30,
2002 are as follows:

Other Intangible Assets

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

Intangible assets amortization expense was $285 million and $570 million for the
three and six months ended June 30, 2002, respectively. It is estimated to be
$926 million for the remainder of 2002, $1,251 million in 2003, $1,130 million
in 2004, $921 million in 2005 and $478 million in 2006, primarily related to
customer lists and non-network software.

8. FINANCIAL INSTRUMENTS

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

The ongoing effect of SFAS No. 133 on our consolidated financial statements is
determined each quarter by several factors, including the specific hedging
instruments in place and their relationships to hedged items, as well as market
conditions at the end of each period. For the three and six months ended June
30, 2002, we recorded charges to current earnings of $8 million and $11 million,
respectively, and income of $20 million and $17 million to other comprehensive
income (loss), respectively. The charges to current earnings relate primarily to
the mark-to-market adjustments on our long-term call options and the income in
other comprehensive income (loss) relates to our cash flow hedges on foreign
exchange risk. For the three and six months ended June 30, 2001, we recorded
charges to current earnings of $37 million and $153 million, respectively, and
losses of $2 million and $14 million to other comprehensive income (loss),
respectively. The charges to current earnings in 2001 related primarily to the
mark-to-market adjustment on the conversion option on our MFN debt securities
and the loss in other comprehensive income (loss) related to our cash flow
hedges on foreign exchange risk.

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9. DEBT

Exchangeable Notes

Previously, Verizon Global Funding issued two series of notes that are
exchangeable into shares of TCNZ and into C&W and NTL shares.

The exchangeable notes are indexed to the fair market value of the common stock
into which they are exchangeable. If the price of the shares exceeds the
exchange price established at the offering date, a mark-to-market adjustment is
recorded, recognizing an increase in the carrying value of the debt obligation
and a charge to income. If the price of the shares subsequently declines, the
debt obligation is reduced (but not to less than the amortized carrying value of
the notes).

At June 30, 2002 and 2001, the exchange prices of the notes exchangeable into
TCNZ and into C&W and NTL shares exceeded the fair market value of the common
stocks into which they are exchangeable. Consequently, the notes were recorded
at their amortized carrying value with no mark-to-market adjustments recorded in
the second quarter or in the first six months of 2002 and 2001. In the second
quarter of 2002, we recorded the extinguishment of $243 million of the notes
exchangeable into C&W and NTL shares. As of June 30, 2002, $8,000 in principal
amount of TCNZ notes has been delivered for exchange.

Support Agreements

All of Verizon Global Funding's debt has the benefit of Support Agreements
between us and Verizon Global Funding, which guarantee payment of interest,
premium (if any) and principal outstanding should Verizon Global Funding fail to
pay. The holders of Verizon Global Funding debt do not have recourse to the
stock or assets of most of our telephone operations or TCNZ; however, they do
have recourse to dividends paid to us by any of our consolidated subsidiaries as
well as assets not covered by the exclusion. Verizon Global Funding's long-term
debt, including current portion, aggregated $19,796 million at June 30, 2002.
The carrying value of the available assets reflected in our condensed
consolidated financial statements was approximately $61.1 billion at June 30,
2002.

Debt Issuances

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

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

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

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

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

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10. COMPREHENSIVE INCOME (LOSS)

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

Changes in the components of other comprehensive income (loss) are as follows:

The increase in the net unrealized gains on marketable securities in 2002
primarily relate to reclassification of after-tax realized losses of $246
million recorded due to the other than temporary decline in market value of
certain of our marketable securities in the second quarter of 2002 and our
investment in TCNZ (see Note 6). The minimum pension liability was increased in
2002 to include the minimum pension liability of TELPRI (see Note 6). The change
in unrealized gains on marketable securities in 2001 primarily relates to the
reclassification of after-tax realized losses of $2,926 million recorded
primarily due to the other than temporary decline in market value of investments
in C&W, NTL and MFN (see Note 6).

The components of accumulated other comprehensive loss are as follows:

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11. EARNINGS (LOSS) PER SHARE

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

Stock options for 226 million shares for the three months ended June 30, 2002
and 171 million shares for the six months ended June 30, 2002 were not included
in the computation of diluted earnings per share because the exercise price of
stock options was greater than the average market price of the common stock. For
the three and six months ended June 30, 2001, the number of shares not included
in the computation of diluted earnings per share was 116 million and 117
million, respectively.

12. SEGMENT INFORMATION

We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments include a
Domestic Telecom group which provides domestic wireline communications services;
a Domestic Wireless group which provides domestic wireless communications
services; an International group which includes our foreign wireline and
wireless communications investments; and an Information Services group which is
responsible for our domestic and international publishing businesses and
electronic commerce services.

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

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REPORTABLE SEGMENTS

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

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

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

13. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

14. COMMITMENTS AND CONTINGENCIES

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

On January 29, 2001, the bidding phase of the FCC reauction of 1.9 GHz C and F
block broadband Personal Communications Services spectrum licenses, which began
December 12, 2000, officially ended. Verizon Wireless was the winning bidder for
113 licenses. The total price of these licenses was $8,781 million, $1,822
million of which had been paid. Most of the licenses that were reauctioned
relate to spectrum that was previously licensed to

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NextWave Personal Communications Inc. and NextWave Power Partners Inc.
(collectively NextWave), which have appealed to the federal courts the FCC's
action canceling NextWave's licenses and reclaiming the spectrum.

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

In April 2002, the FCC returned $1,479 million of Verizon Wireless's $1,822
million license payment and stated its view that Verizon Wireless remains
obligated to purchase the licenses if and when the FCC succeeds in regaining
them from NextWave. On April 4, 2002, Verizon Wireless filed a complaint in the
U.S. Court of Federal Claims against the United States government seeking both a
declaration that Verizon Wireless has no further performance obligations with
respect to the reauction, and money damages. On April 8, 2002, Verizon Wireless
filed a petition with the U.S. Court of Appeals for the District of Columbia
seeking a declaration that the auction obligation is voidable and a return of
its remaining down payment of $261 million. Both of these matters are pending.

In December 2001, Verizon Wireless and Price Communications Corp. (Price)
announced that an agreement had been reached combining Price's wireless business
with a portion of Verizon Wireless in a transaction valued at approximately $1.7
billion, including $550 million of net debt. The resulting limited partnership
will be controlled and managed by Verizon Wireless. Price's partnership interest
will be exchangeable into Verizon Wireless or Verizon stock, subject to several
conditions including an exchange price minimum and maximum. Price's shareholders
approved the transaction on July 23, 2002, and the transaction is now expected
to close in the third quarter of 2002.

In 2001, we agreed to provide up to $2.0 billion in financing to Genuity with
maturity in 2005 and have loaned $1,150 million of that commitment to date,
which was included in our analysis of financial statement exposure to Genuity
(see Note 6). As a result of our recent decision to convert all but one of our
shares of Class B common stock of Genuity into shares of Class A common stock of
Genuity and relinquish our right to convert to a controlling interest in
Genuity, we are no longer committed to fund the additional $850 million under
the $2.0 billion agreement. Our commercial relationship with Genuity will
continue, which includes a five-year purchase commitment for Genuity services
such as dedicated Internet access, managed web hosting and Internet security.
Under this purchase commitment, which terminates in 2005, Verizon has agreed to
pay Genuity a minimum of $500 million over five years for its services, of which
we have satisfied $230 million as of June 30, 2002.

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

As previously discussed in Note 2, during the second quarter of 2002, we
recorded a pretax charge of $175 million ($114 million after-tax) for a proposed
settlement of the NorthPoint litigation. The lawsuit arose from Verizon's
decision to terminate an agreement with NorthPoint to combine the two companies'
DSL businesses. Verizon terminated the merger agreement due to the deterioration
in NorthPoint's business, operations and financial condition. The proposed
settlement is subject to approval by the bankruptcy court, expected in the third
quarter of 2002.

15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Verizon Communications Inc. is one of the world's leading providers of
communications services. Verizon companies are the largest providers of wireline
and wireless communications in the United States, with 135.1 million access line
equivalents and 30.3 million wireless customers. Verizon is also the largest
directory publisher in the world. With more than $67 billion in annual revenues
and approximately 241,000 employees, Verizon's global presence extends to more
than 40 countries in the Americas, Europe, Asia and the Pacific.

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

CONSOLIDATED RESULTS OF OPERATIONS

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

Reported consolidated revenues were $16,835 million and $33,210 million for the
quarter and the six months ended June 30, 2002, respectively, compared to
$16,909 million and $33,175 million for the quarter and six months ended June
30, 2001, respectively. Reported consolidated expenses were $14,152 million and
$27,016 million for the second quarter and the first six months of 2002,
respectively, compared to $13,108 million and $25,767 million, respectively, for
the same periods of 2001. Prior year reported consolidated revenues and
operating expenses were not adjusted to reflect the deconsolidation of CTI
Holdings, S.A. (CTI) to the equity method and the consolidation of
Telecomunicaciones de Puerto Rico, Inc. (TELPRI). See "Segment Results of
Operations - International" for additional discussion of the CTI and TELPRI
transactions. We reported net losses of $2,115 million ($.78 per diluted share)
and $2,616 million ($.96 per diluted share) for the quarter and six months ended
June 30, 2002, respectively, compared to a net loss of $1,021 million ($.38 per
diluted share) and net income of $551 million ($.20 per diluted share) for the
quarter and six months ended June 30, 2001, respectively.

Reported consolidated revenues decreased by $74 million, or 0.4% in the second
quarter of 2002 and grew by $35 million, or 0.1% in the first six months of
2002, compared to the similar periods of the prior year. For the second quarter
and the first half of 2002, reported consolidated operating expenses increased
$1,044 million, or 8.0% and increased $1,249 million, or 4.8% compared to the
similar periods of 2001, respectively. In the second quarter and six months
ended June 30, 2002, higher Domestic Wireless and International revenues and
expenses were offset by lower Domestic Telecom revenues and expenses compared to
the similar periods of 2001 (see summary below and "Segment Results of
Operations"). In addition, operating expenses in the current quarter are
impacted by severance costs and other special charges primarily related to our
financial statement exposure to WorldCom Inc. and a proposed settlement of a
litigation matter involving NorthPoint Communications Group, Inc. (NorthPoint),
partially offset by lower transition costs, compared to the second quarter of
2001. Operating expenses in the first six months of 2002 also include a portion
of our investment-related charges, partially offset by a net gain on asset sales
compared to the similar period of 2001 (see summary below and "Special Items").
The significant items impacting net income also include higher
investment-related charges in the current quarter, partially offset by lower
unfavorable mark-to-market adjustments related to financial instruments compared
to the second quarter of 2001, and a higher cumulative effect of accounting
change, partially offset by lower unfavorable mark-to-market adjustments related
to financial instruments, in the first six months of 2002 compared to the
similar period of 2001. These items are described in the "Special Items"
section.

16

CONSOLIDATED REVENUES

Domestic Wireless revenues grew by $355 million, or 8.1%, in the second quarter
of 2002 and $683 million, or 8.1%, for the six months ended 2002 compared to the
similar periods in 2001. This increase was primarily due to an 8.5% increase in
subscribers, partially offset by a slight decline in average service revenue per
subscriber. Average service revenue per subscriber decreased 1.4% to slightly
under $49 for the quarter and by 1.1% to $47 for the six months ended 2002
compared to the similar periods in 2001.

Revenues earned by our International segment grew by $156 million, or 26.1%, in
the second quarter of 2002 and $380 million, or 33.8% in the first six months of
2002 as compared to the similar periods in 2001. This growth is primarily due to
the consolidation of TELPRI partially offset by the deconsolidation of CTI in
2002. Adjusting the quarter and first six months of 2001 to be comparable with
2002, revenues earned from our international businesses declined by $74 million,
or 8.9%, in the second quarter of 2002 and $50 million, or 3.2%, in the first
six months of 2002 as compared to the similar periods in 2001 primarily due to
weak economies and increased competition in Latin America.

The decline in Domestic Telecom's revenues in the current quarter and six months
ended June 30, 2002 was driven by lower local and other services, partially
offset by higher network access services for the six months ended June 30, 2002.
The decline in local service revenues of $315 million, or 5.7% in the second
quarter of 2002 and $700 million, or 6.3% in the first half of 2002 was largely
due to lower demand and usage of our basic local wireline services and mandated
intrastate price reductions. Revenues from other services declined $208 million,
or 16.6% in the second quarter of 2002 and $451 million, or 18.1% in the first
half of 2002. This decline was substantially due to lower sales of customer
premises equipment to some major customers and a decline in public telephone
revenues as more customers substituted wireless communications for pay telephone
services. Our network access revenues grew $184 million, or 2.7% in the first
half of 2002. This growth was mainly attributable to higher customer demand for
data transport services (primarily special access services and digital
subscriber line, or DSL).

CONSOLIDATED OPERATING EXPENSES

Domestic Wireless's operations and support expenses increased by $229 million,
or 8.1%, in the second quarter 2002 and $411 million, or 7.5%, for the six
months ended June 30, 2002 compared to the similar periods in 2001. This
increase was primarily due to increased salary and wage expense, advertising and
billing and data processing charges and selling expenses related to an increase
in gross customer additions in the second quarter 2002 compared to the second
quarter 2001, partially offset by cost savings resulting from headcount
reductions. Partially offsetting this increase, Domestic Wireless's depreciation
and amortization decreased by $102 million, or 11.5%, for the quarter ended June
30, 2002 and by $240 million, or 13.3%, in the six months ended June 30, 2002
compared to the similar periods in 2001. The decrease was primarily attributable
to a reduction of amortization expense from the adoption of Statement of
Financial Accounting Standards (SFAS) No.142, "Goodwill and Other Intangible
Assets," effective January 1, 2002, which requires that goodwill and
indefinite-lived intangible assets no longer be amortized. This decrease was
partially offset by increased depreciation expense related to the increase in
depreciable assets related to an increased asset base.

International's operations and support expenses increased by $42 million, or
9.7%, in the second quarter of 2002 and $156 million, or 19.1%, in the first six
months of 2002 as compared to the similar periods in 2001. This growth is
primarily due to the consolidation of TELPRI partially offset by the
deconsolidation of CTI in 2002. Adjusting the quarter and first six months of
2001 to be comparable with 2002, operations and support expenses decreased $51
million, or 9.7%, in the second quarter of 2002 and $8 million, or 0.8%, in the
first six months of 2002 as compared to the similar periods in 2001 reflecting
lower variable costs associated with reduced sales volumes in Latin America
offset in part by higher variable start-up costs. Adjusting the quarter and
first six months of 2001 to be comparable with 2002, depreciation and
amortization expense decreased $7 million, or 4.9%, in the second quarter of
2002 and $10 million, or 3.5%, in the first six months of 2002 as compared to
the similar periods in 2001.

Domestic Telecom's operations and support expenses decreased by $312 million, or
5.3% in the second quarter of 2002 and $691 million, or 5.8% in the first half
of 2002 principally due to lower costs at our domestic telephone operations.
These reductions were attributable to reduced spending for materials and
contracted services, lower overtime for repair and maintenance activity
principally as a result of reduced volumes at our dispatch and call centers and
lower employee costs associated with declining workforce levels. Operating costs
have also decreased due to business integration activities, achievement of
merger synergies and other effective cost containment measures, including lower
spending by non-strategic businesses, and favorable adjustments to ongoing
expense

17

estimates as a result of specific regulatory decisions in New York and
other states. These cost reductions were partially offset by higher costs
associated with our growth businesses such as data and long distance services.
Increased costs associated with higher uncollectible accounts receivable and
salary and wage increases for employees further offset cost reductions in both
periods of 2002. Pension income, net of postretirement benefit costs, was $335
million and $657 million for the second quarter and year-to-date 2002,
respectively, compared to $420 million and $762 million for the second quarter
and year-to-date 2001, respectively. Partially offsetting this decrease,
Domestic Telecom's depreciation and amortization expense increased by $49
million, or 2.1% in the second quarter of 2002 and $131 million, or 2.8% in the
first half of 2002. This expense increase was principally due to growth and a
change in the mix of depreciable telephone plant and increased software
amortization costs partially offset by the effect of lower rates of
depreciation.

Consolidated operating expenses in the second quarter of 2002 include $692
million of severance charges, $394 million of special charges primarily related
to our financial statement exposure to WorldCom Inc. and a charge of $175
million related to the NorthPoint litigation matter, partially offset by lower
transition costs of $102 million compared to $279 million in the second quarter
of 2001. For the six months ended June 30, 2002, consolidated operating expenses
also include $227 million of investment-related charges, partially offset by
lower transition costs of $198 million compared to $442 million in the first six
months of 2001 and a net pretax gain of $220 million primarily resulting from
the sale of a business and exit activities.

CONSOLIDATED NET INCOME (LOSS)

Total segment income was driven by the after-tax impact of operating revenues
and operating expenses, after minority interests. Our reported results for all
periods were primarily affected by special items. These special items, described
in detail on pages 25 to 27, impacted net income (loss) by $4,210 million ($1.55
per diluted share) and $6,680 million ($2.45 per diluted share) in the current
quarter and the first six months of 2002, respectively, and by $3,122 million
($1.15 per diluted share) and $3,506 million ($1.29 per diluted share) in the
comparable periods of 2001, respectively. In addition, for the three and six
months ended June 30, 2002, our net losses were impacted by lower interest
expense and by higher minority interest and income taxes, compared to the
similar periods of the prior year. See "Other Consolidated Results" for
additional discussion of these items.

SEGMENT RESULTS OF OPERATIONS

We have four reportable segments, which we operate and manage as strategic
business units and organize by products and services. Our segments are Domestic
Telecom, Domestic Wireless, International and Information Services. You can find
additional information about our segments in Note 12 to the condensed
consolidated financial statements.

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

DOMESTIC TELECOM

Domestic Telecom provides local telephone services, including voice and data
transport, enhanced and custom calling features, network access, directory
assistance, private lines and public telephones in 30 states and the District of
Columbia. This segment also provides long distance services, customer premises
equipment distribution, data solutions and systems integration, billing and
collections, Internet access services and inventory management services.

18

OPERATING REVENUES

Local Services

Local service revenues are earned by our telephone operations from the provision
of local exchange, local private line, wire maintenance, voice messaging and
value-added services. Value-added services are a family of services that expand
the utilization of the network, including products such as Caller ID, Call
Waiting and Return Call. The provision of local exchange services not only
includes retail revenue but also includes local wholesale revenues from
unbundled network elements (UNEs), interconnection revenues from competitive
local exchange carriers (CLECs), wireless interconnection revenues and some data
transport revenues.

The decline in local service revenues of $315 million, or 5.7% in the second
quarter of 2002 and $700 million, or 6.3% in the first half of 2002 was largely
due to lower demand and usage of our basic local wireline services and mandated
intrastate price reductions. Our switched access lines in service declined 3.3%
from June 30, 2001, primarily reflecting the impact of the economic slowdown and
competition for some local services. Technology substitution has also affected
local service revenue growth, as indicated by lower demand for residential
access lines of 2.1% from a year ago. The primary contributor to the decline in
residential access lines is negative growth in additional lines, with second
line penetration at 19% at June 30, 2002, compared to 20% at the similar period
last year. At the same time, business access lines have declined 5.3% from a
year ago, primarily reflecting the continued weakness in the economy. Local
service revenues were also negatively impacted in both periods of 2002 by
one-time billing increases recorded in the prior year.

These factors were partially offset by higher payments received from CLECs for
interconnection of their networks with our network and by increased sales of
packaged wireline services. Sales of packages of wireline services increased by
27% year-over-year, with over half of our new lines installed with packages.
Furthermore, we have expanded our new ONE-BILL service, which bundles Verizon
wireline and wireless charges on a single monthly bill. This service was
expanded in the second quarter of 2002 to Vermont, Maine and New Hampshire,
after successful launches in New York, Massachusetts, New Jersey and
Connecticut.

Network Access Services

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

Our network access revenues grew $19 million, or 0.6%, in the second quarter of
2002 and $184 million, or 2.7% in the first half of 2002. This growth was mainly
attributable to higher customer demand for data transport services (primarily
special access services and DSL) that grew 7.5% and 8.9% in the second quarter
and first six months of 2002, respectively. Special access revenue growth
reflects strong demand in the business market for high-capacity, high-speed
digital services. Voice-grade equivalents (switched access lines and data
circuits) grew 7.9% from June 30, 2001 as more customers chose digital services.
We added 150,000 new DSL lines in the second quarter of 2002 and 300,000 lines
year-to-date, for a total of 1.5 million lines in service at June 30, 2002, a
nearly 80% year-over-year increase. Currently, 55% of our total access lines
qualify for DSL service. At the same time, customer service levels continue to
show improvement through a reduction in the DSL order provisioning interval from
more than fifteen days a year ago to five days by the second quarter 2002, and
we have nearly reached a 100% self installation rate by our customers.

19

Volume-related growth was partially offset by price reductions of approximately
$40 million in the second quarter of 2002 and $90 million year-to-date
associated with federal and state price cap filings and other regulatory
decisions. Revenue growth in both periods of 2002 was also affected by the
slowing economy, as reflected by declines in minutes of use from carriers and
CLECs of 7.4% in the second quarter 2002 and 7.5% year-to-date from the similar
periods last year.

WorldCom Inc. currently has several long-term contracts with us for the
provision of various network access products and services. If WorldCom Inc.
terminated those contracts, our network access revenues would be lower in future
periods. Lower revenues as a result of cancelling these contracts could be
partially offset with termination liabilities and/or migration of customers to
other interexchange carriers that interconnect with us.

Long Distance Services

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

Long distance service revenues increased $19 million, or 2.5% in the second
quarter of 2002 and $36 million, or 2.4% in the first half of 2002, primarily as
a result of revenue growth from our interLATA long distance services offered
throughout the region. We now offer long distance service in 44 states and to
more than 80% of our local telephone customers across the country. More than 45%
of our long distance customers come from states where service was most recently
introduced - New York, Massachusetts, Pennsylvania, Connecticut, Rhode Island
and Vermont. In June 2002, we received Federal Communications Commission (FCC)
approval to sell long distance in Maine and New Jersey and began offering
service in those states in July 2002. We added 800,000 new long distance
customers in the second quarter of 2002 and 1.6 million new customers in the
first half of 2002. At June 30, 2002, we had a total of 9.0 million long
distance customers nationwide, representing an increase of 3.0 million long
distance customers year-over-year or nearly 51% customer growth and 26% revenue
growth from the similar period last year. We currently have applications at the
FCC for New Hampshire, Delaware and Virginia. The FCC must decide on the New
Hampshire and Delaware applications by September 25, 2002 and decide on the
Virginia application by October 30, 2002. We are targeting completion of the FCC
filing process in all former Bell Atlantic jurisdictions by year-end.

This growth was partially offset by the effects of competition and toll calling
discount packages and product bundling offers of our intraLATA toll services.
However, in the second quarter of 2002, we saw a net win-back in customers for
intraLATA toll services in the states where interLATA long distance service has
been introduced. Technology substitution and lower access line growth due to the
slowing economy also affected long distance services revenue growth.

Other Services

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

Revenues from other services declined $208 million, or 16.6% in the second
quarter of 2002 and $451 million, or 18.1% in the first half of 2002. This
decline was substantially due to lower sales of customer premises equipment to
some major customers and a decline in public telephone revenues as more
customers substituted wireless communications for pay telephone services.

OPERATING EXPENSES

20

Operations and Support

Operations and support expenses, which consist of employee costs and other
operating expenses, decreased by $312 million, or 5.3% in the second quarter of
2002 and $691 million, or 5.8% in the first half of 2002 principally due to
lower costs at our domestic telephone operations. These reductions were
attributable to reduced spending for materials and contracted services, lower
overtime for repair and maintenance activity principally as a result of reduced
volumes at our dispatch and call centers and lower employee costs associated
with declining workforce levels. We have reduced our full-time headcount by
21,000 employees, or 10.8% from a year ago and 6,400 employees, or 3.6% since
year-end 2001. We have reduced overtime hours per employee, per week, by 38.4%
from a year ago. Operating costs have also decreased due to business integration
activities and achievement of merger synergies. Other effective cost containment
measures, including lower spending by non-strategic businesses, and favorable
adjustments to ongoing expense estimates as a result of specific regulatory
decisions in New York and other states also contributed to cost reductions in
both periods of 2002. These cost reductions are reflected in improved
productivity levels of 9.1% for installation and 6.4% for repair services, as
compared to the second quarter of 2001. Furthermore, we have reduced rework
service levels from a year ago by 11.7% for installation and 20.9% for repair,
and repair dispatches have declined by more than 11.5% since the second quarter
of 2001.

These cost reductions were partially offset by higher costs associated with our
growth businesses such as data and long distance services. Increased costs
associated with higher uncollectible accounts receivable and salary and wage
increases for employees further offset cost reductions in both periods of 2002.
Pension income, net of postretirement benefit costs, was $335 million and $657
million for the second quarter and year-to-date 2002, respectively, compared to
$420 million and $762 million for the second quarter and year-to-date 2001,
respectively.

Depreciation and Amortization

Depreciation and amortization expense increased by $49 million, or 2.1% in the
second quarter of 2002 and $131 million, or 2.8% in the first half of 2002. This
expense increase was principally due to growth and a change in the mix of
depreciable telephone plant and increased software amortization costs. These
factors were partially offset by the effect of lower rates of depreciation.

SEGMENT INCOME

Segment income decreased by $129 million, or 9.5% in the second quarter of 2002
and $213 million, or 7.9% on year-to-date, compared to the similar periods last
year, primarily as a result of the after-tax impact of operating revenues and
operating expenses described above.

DOMESTIC WIRELESS

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

OPERATING REVENUES

Revenues earned from our consolidated wireless segment grew by $355 million, or
8.1%, in the second quarter of 2002 and $683 million, or 8.1%, for the six
months ended June 30, 2002 compared to the similar periods in 2001. This
increase was primarily due to an 8.5% increase in subscribers, partially offset
by a slight decline in average service revenue per subscriber.

Our Domestic Wireless segment ended the second quarter 2002 with 30.3 million
subscribers, compared to 27.9 million subscribers at the end of the second
quarter 2001, an increase of 8.5%. Approximately 25 million, or 83%, of these
customers subscribe to digital service, compared to 64% in the second quarter
2001. Approximately 1.1 million net retail customers were added during the
second quarter of 2002, partially offset by a net reduction of

21

wholesale customers of 378,000 driven primarily by subscribers related to
WorldCom Inc. Overall, total customers including wholesale increased by 723,000.
Total churn, including retail and wholesale, remained constant at 2.3% in the
second quarter of 2002 and decreased to 2.4% for the six months ended June 30,
2002, compared to 2.6% for the similar period in 2001.

Average service revenue per subscriber decreased 1.4% to slightly under $49 for
the second quarter of 2002 and by 1.1% to $47 for the six months ended June 30,
2002 compared to the similar periods in 2001. This decrease is mainly
attributable to decreased roaming and long distance revenues for the second
quarter of 2002 compared to the second quarter of 2001. Offsetting these
decreases was the launch of America's Choice in February 2002. Since then,
approximately 61% of new contract customers chose the America's Choice plans.
Nearly 21% of America's Choice subscribers are on price plans with monthly
access of $55 and above. In addition, retail customers, who generally have
higher service revenue, now comprise approximately 95% of the subscriber base,
compared to 92% in the second quarter of 2001. The overall composition of the
customer base is 90% contract retail customers, 5% retail prepaid and 5%
resellers.

The Express Network, which was launched in the first quarter of 2002 and is
based on third generation 1XRTT technology, now covers a population of 145
million or approximately 65% of Verizon Wireless' network in second quarter of
2002 compared to a population of 74 million, or approximately one-third of the
Domestic Wireless network in first quarter 2002.

OPERATING EXPENSES

Operations and Support

Operations and support expenses, which represent employee costs and other
operating expenses, increased by $229 million, or 8.1%, in the second quarter
2002 and $411 million, or 7.5%, for the six months ended June 30, 2002 compared
to the similar periods in 2001. This increase was primarily due to increased
salary and wage expense, advertising, billing and data processing charges and
selling expenses related to an increase in gross customer additions in the
second quarter 2002 compared to the second quarter 2001, partially offset by
cost savings resulting from headcount reductions occurring earlier this year.

Depreciation and Amortization

Depreciation and amortization decreased by $102 million, or 11.5%, in the second
quarter 2002 and by $240 million, or 13.3%, for the six months ended June 30,
2002 compared to the similar periods in 2001. The decrease was primarily
attributable to a reduction of amortization expense from the adoption of SFAS
No. 142, effective January 1, 2002, which requires that goodwill and
indefinite-lived intangible assets no longer be amortized. This decrease was
partially offset by increased depreciation expense related to the increase in
depreciable assets related to an increased asset base.

SEGMENT INCOME

Segment income increased by $89 million, or 58.9% in the second quarter of 2002
and by $188 million, or 75.5%, for the six months ended June 30, 2002 when
compared to the similar period in 2001. The increase is primarily due to the
result of the after-tax impact of operating revenues and operating expenses
described above, partially offset by an increase in minority interest.

The significant increase in minority interest of $102 million, or 44.0% to $334
million in second quarter 2002 and $219 million, or 56.6% to $606 million for
the six months ended June 30, 2002 was principally due to the increase in the
earnings of the Domestic Wireless segment, which has a significant minority
interest attributable to Vodafone Group plc (Vodafone).

22

INTERNATIONAL

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

On January 25, 2002, we exercised our option to purchase an additional 12% of
TELPRI common stock, from the government of Puerto Rico. We now hold 52% of
TELPRI stock, up from 40% held at December 31, 2001. As a result of gaining
control over TELPRI, we changed the accounting for this investment from the
equity method to full consolidation, effective January 1, 2002. Accordingly,
TELPRI's net results are reported as a component of Income from Unconsolidated
Businesses for the three and six month periods ended June 30, 2001, while 2002
results of operations are included in consolidated revenues and expenses in the
tables below.

On March 28, 2002, we transferred 5.5 million of our shares in CTI to an
indirectly wholly-owned subsidiary of Verizon and subsequently transferred
ownership of that subsidiary to a newly created trust for CTI employees. This
decreased our ownership percentage in CTI from 65% to 48%. We also reduced our
representation on CTI's Board of Directors from five of nine members to four of
nine (subsequently reduced to two of five members). As a result of these actions
that surrender control of CTI, we changed our method of accounting for this
investment from consolidation to the equity method. On June 3, 2002, as a result
of an option exercised by Telfone (BVI) Limited (Telfone), a CTI shareholder,
Verizon acquired approximately 5.3 million additional CTI shares. Also on June
3, 2002, we transferred ownership of a wholly owned subsidiary of Verizon that
held 5.4 million CTI shares to a second independent trust leaving us with an
approximately 48% non-controlling interest in CTI. In addition, during the first
quarter of 2002, we wrote our remaining investment in CTI, including those
shares we were contractually committed to purchase under the Telfone option,
down to zero (see "Special Items"). Since we have no other future commitments or
plans to fund CTI's operations and we have written our investment down to zero,
in accordance with the accounting rules for equity method investments, we are no
longer recording operating income or losses related to CTI's operations. CTI's
results of operations are reported in revenues and expenses for the three and
six month periods ended June 30, 2001, while 2002 revenues and expenses are not
included in the tables below.

OPERATING REVENUES

Revenues earned from our international businesses grew by $156 million, or
26.1%, in the second quarter of 2002 and $380 million, or 33.8% in the first six
months of 2002 as compared to the similar periods in 2001. This growth is
primarily due to the consolidation of TELPRI partially offset by the
deconsolidation of CTI in 2002. Adjusting the quarter and first six months of
2001 to be comparable with 2002, revenues earned from our international
businesses declined by $74 million, or 8.9%, in the second quarter of 2002 and
$50 million, or 3.2%, in the first six months of 2002 as compared to the similar
periods in 2001. These decreases in revenues are primarily due to the weak
economies and increased competition in Latin America. These decreases were
offset in part by higher revenues generated by the GSI network, which began its
commercial operations in the first quarter of 2001.

OPERATING EXPENSES

Operations and Support

Operations and support expenses, which include employee costs and other
operating expenses, increased by $42 million, or 9.7%, in the second quarter of
2002 and $156 million, or 19.1%, in the first six months of 2002 as compared to
the similar periods in 2001. This growth is primarily due to the consolidation
of TELPRI partially

23

offset by the deconsolidation of CTI in 2002. Adjusting the quarter and first
six months of 2001 to be comparable with 2002, operations and support expenses
decreased $51 million, or 9.7%, in the second quarter of 2002 and $8 million, or
0.8%, in the first six months of 2002 as compared to the similar periods in
2001. These decreases reflect lower variable costs associated with reduced sales
volumes in Latin America offset in part by higher variable costs associated with
the increased revenues and start-up of GSI's operations.

Depreciation and Amortization

Depreciation and amortization expense increased by $23 million, or 20.2%, in the
second quarter of 2002 and $54 million, or 24.7%, in the first six months of
2002 as compared to the similar periods in 2001. This growth is primarily due to
the consolidation of TELPRI partially offset by the deconsolidation of CTI in
2002. Adjusting the quarter and first six months of 2001 to be comparable with
2002, depreciation and amortization expense decreased $7 million, or 4.9%, for
the second quarter of 2002 and $10 million, or 3.5%, for the first six months of
2002 as compared to the similar periods in 2001. These decreases were
attributable to the January 1, 2002 cessation of the amortization of goodwill
and intangible assets with indefinite lives as required by SFAS No.142, offset
in part by increased depreciation due to ongoing network capital expenditures
necessary to meet the increase in subscriber base.

SEGMENT INCOME

Segment income increased by $13 million, or 5.3%, for the second quarter of 2002
as compared to the similar period in 2001. The increase is primarily the result
of the after-tax impact of operating revenues and operating expenses described
above, as well as an increase in income from unconsolidated businesses partially
offset by the impact on Iusacell of fluctuations of the Mexican peso of $104
million, before minority interest benefit of $64 million. An after-tax gain on
the sale of a portion of our interest in Taiwan Cellular Corporation of $31.5
million was recorded in the second quarter of 2002, compared to an after-tax
gain on the sale of our interest in QuebecTel in the second quarter of 2001 of
$63.7 million. Proportionate wireless subscribers grew 9.8% over the second
quarter 2001 to 8.7 million. Segment income increased by $14 million, or 3.1%,
for the first six months of 2002 as compared to the similar period in 2001. The
increase is primarily the result of the after-tax impact of operating revenues
and operating expenses described above, partially offset by a decrease in income
from unconsolidated businesses and the impact on Iusacell of fluctuations of the
Mexican peso of $108 million, before minority interest benefit of $67 million.
The favorable impact on minority interest expense of losses at Iusacell was
offset by the consolidation of TELPRI and the deconsolidation of CTI for the
second quarter and six months ended June 30, 2002 as compared to the similar
periods in 2001.

Income from unconsolidated businesses increased by $9 million, or 3.4%, for the
second quarter of 2002 and decreased by $32 million, or 6.6%, for the first six
months of 2002 as compared to the similar periods in 2001. Adjusting the quarter
and first six months of 2001 for the consolidation of TELPRI and the
deconsolidation of CTI in 2002, income from unconsolidated businesses increased
by $58 million, or 26.7%, for the second quarter of 2002 and $66 million, or
17.1%, for the first six months of 2002 as compared to the similar periods in
2001. The increases reflect the 2002 cessation of recording CTI's operating
losses and the discontinuation of amortization of goodwill and intangible assets
with indefinite lives of our equity investments, as required by SFAS 142.
Partially offsetting these increases was the impact of fluctuations of the
Venezuelan bolivar on the results of Compania Anonima Nacional Telefonos de
Venezuela (CANTV) in 2002.

INFORMATION SERVICES

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

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OPERATING REVENUES

Operating revenues from our Information Services segment decreased by $48
million, or 4.9%, in the second quarter of 2002 and $34 million, or 1.9%, in the
first six months of 2002 compared to the similar periods in 2001. The decreases
were primarily due to the negative impact of shifts in the timing of directory
publications and reduced affiliate revenues partially offset by domestic
operational multi-product revenue growth and increased revenue from the 2001
acquisition of TELUS Corporation's (TELUS) advertising services business in
Canada. Revenues from SuperPages.com, Verizon's Internet directory service, grew
81.6% over second quarter 2001 as Information Services continues to strengthen
its leadership position in online directory services.

OPERATING EXPENSES

Total operating expenses for the second quarter of 2002 increased $20 million,
or 4.2%, and $32 million, or 3.5%, in the first six months of 2002 compared to
similar periods in 2001. The increases were primarily due to a small asset sale
gain in 2001 partially offset by the lower costs associated with changes in
publication dates mentioned above.

SEGMENT INCOME

Segment income decreased by $38 million, or 12.8% in the second quarter of 2002
and $37 million, or 7.3% in the first six months of 2002 compared to the similar
periods in 2001 primarily as a result of the after-tax impact of operating
revenue and expense issues described above.

SPECIAL ITEMS

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

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

TRANSITION COSTS

In connection with the Bell Atlantic Corporation-GTE Corporation merger and the
formation of the wireless joint venture, we expect to incur a total of
approximately $2 billion of transition costs through the end of 2002. These
costs are incurred to integrate systems, consolidate real estate and relocate
employees. They also include approximately $500 million for advertising and
other costs to establish the Verizon brand. Transition costs incurred through
the second quarter of 2002 total $1,931 million. Transition costs in the second
quarter and for the first six months of 2002 were $102 million and $198 million
($57 million and $109 million after taxes and minority interest, or $.02 and
$.04 per diluted share), respectively. During the second quarter and for the
first six months of 2001, we incurred transition costs of $279 million and $442
million ($162 million and $250 million after taxes and minority interest, or
$.06 and $.09 per diluted share), respectively.

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SALES OF ASSETS, NET

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

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

SEVERANCE/RETIREMENT ENHANCEMENT COSTS AND SETTLEMENT GAINS

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

MARK-TO-MARKET ADJUSTMENT - FINANCIAL INSTRUMENTS

During 2001, we began recording mark-to-market adjustments in earnings relating
to some of our financial instruments in accordance with newly effective
accounting rules on derivative financial instruments. In the second quarter and
the first six months of 2002, we recorded losses on mark-to-market adjustments
of $8 million ($8 million after-tax, or less than $.01 per diluted share) and
$11 million ($11 million after-tax, or less than $.01 per diluted share),
respectively. In the second quarter and the first six months of 2001, we
recorded losses on mark-to-market adjustments of $37 million ($37 million after
taxes and minority interest, or $.01 per diluted share) and $153 million ($151
million after taxes and minority interest, or $.06 per diluted share),
respectively. The losses on mark-to-market adjustments in 2001 were primarily
due to the change in the fair value of the Metromedia Fiber Network, Inc. (MFN)
debt conversion option.

INVESTMENT-RELATED CHARGES

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

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

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

We recorded a pretax loss of $516 million ($436 million after-tax, or $.16 per
diluted share) to market value primarily due to the other than temporary decline
in the market value of our investment in MFN. During 2001, we

26

wrote down our investment in MFN due to the declining market value of its stock.
We wrote off our remaining investment and other financial statement exposure
related to MFN in the first quarter of 2002 primarily as a result of its
deteriorating financial condition and related defaults. In addition, we
delivered to MFN a notice of termination of our fiber optic capacity purchase
agreement.

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

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

OTHER CHARGES AND SPECIAL ITEMS

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

EXTRAORDINARY ITEM

During the second quarter of 2002, we recognized a pretax extraordinary gain of
$4 million ($3 million after-tax, or less than $.01 per diluted share) related
to the extinguishment of $243 million of debt prior to the stated maturity date.
Results for the six months ended June 30, 2002 include the retirement in the
first quarter of 2002 of $1,536 million of debt prior to the stated maturity
date, resulting in a pretax extraordinary charge of $15 million ($9 million
after-tax, or less than $.01 per diluted share).

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

Impact of SFAS No. 142

We adopted the provisions of SFAS No. 142 on January 1, 2002. SFAS No. 142 no
longer permits the amortization of goodwill and indefinite-lived intangible
assets. Instead, these assets must be reviewed annually (or more frequently
under various conditions) for impairment in accordance with this statement. Our
results for the six months ended June 30, 2002 include the initial impact of
adoption recorded as a cumulative effect of an accounting change of $496 million
after-tax (or $.18 per diluted share). In accordance with the new rules,
starting January 1, 2002, we are no longer amortizing goodwill, acquired
workforce intangible assets and wireless licenses which we determined have an
indefinite life. On a comparable basis, had we not amortized these intangible
assets in the quarter and six months ended June 30, 2001, net income (loss)
before extraordinary item and cumulative effect of accounting change would have
been $(924) million, or $(.34) per diluted share, and $924 million, or $.34 per
diluted share, respectively.

Impact of SFAS No. 133

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

27

OTHER CONSOLIDATED RESULTS

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

The changes in other income and expense in the three and six months ended June
30, 2002, compared to the similar periods in 2001, were primarily due to the
changes in foreign exchange gains and losses. Foreign exchange gains and losses
were driven primarily by fluctuations in the Mexican peso, which is used by
Iusacell as its functional currency. We expect that our earnings will continue
to be affected by foreign currency gains or losses associated with the U.S.
dollar denominated debt issued by Iusacell.

The decrease in interest costs for the three and six months ended June 30, 2002,
as compared to the similar periods in 2001, was principally attributable to
lower average interest rates and was partially offset in the six months ended
June 30, 2002 by the higher average debt level. The increase in the average debt
level for the six months ended June 30, 2002 was mainly the result of funding
for capital expenditures and acquisitions at our Domestic Telecom and Domestic
Wireless segments. The reduction in the average debt level for the second
quarter of 2002 is primarily due to lower commercial paper borrowings.

The increase in minority interest expense for the three and six months ended
June 30, 2002, compared to the similar periods in 2001, was primarily due to
higher earnings at Domestic Wireless, which has a significant minority interest
attributable to Vodafone (see "Segment Results of Operations-Domestic
Wireless"). The favorable impact on minority interest expense of losses at
Iusacell was offset by the consolidation of TELPRI and the deconsolidation of
CTI for the second quarter and six months ended June 30, 2002 as compared to the
similar periods in 2001 (see "Segment Results of Operations-International").

The effective income tax rate is the provision for income taxes as a percentage
of income before the provision for income taxes. Our effective income tax rates
for the three and six months ended June 30, 2002 and 2001 were impacted by the
other than temporary decline in fair value of several of our investments during
2002 and 2001 because tax benefits were not available on some of the losses (see
"Special Items"). The effective rate for the quarter and six months ended June
30, 2002 was favorably impacted by a tax law change relating to ESOP dividend
deductions, increased state tax benefits and capital loss utilization.

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CONSOLIDATED FINANCIAL CONDITION

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

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES

Our primary source of funds continues to be cash generated from operations. The
increase in cash from operations in the first half of 2002 compared to the
similar period of 2001 primarily reflects a decrease in working capital
requirements and deferred tax favorability.

CASH FLOWS USED IN INVESTING ACTIVITIES

Capital expenditures continue to be our primary use of capital resources. We
invested $3,175 million in our Domestic Telecom business in the first half of
2002, compared to $6,406 million in the first half of 2001 to facilitate the
introduction of new products and services, enhance responsiveness to competitive
challenges and increase the operating efficiency and productivity of the
network. We also invested $2,060 million in our Domestic Wireless business in
the first half of 2002, compared to $2,372 million in the first half of 2001.
The decrease in 2002 is primarily due to the effective management of our capital
expenditure budget to current network demand. We expect total capital
expenditures in 2002 to be approximately $13 billion to $13.5 billion.

We invested $998 million in acquisitions and investments in businesses during
the first six months of 2002, including $556 million to acquire some of the
cellular properties of Dobson Communications Corporation and $218 million for
other wireless properties. We also received a $1,479 million refund from the FCC
in connection with our wireless auction deposit (see "Other Factors That May
Affect Future Results - Recent Developments - FCC Auction" for additional
information). In the first six months of 2001, we invested $2,212 million in
acquisitions and investments in businesses, including $1,625 million related to
an FCC auction of wireless licenses (see "Other Factors That May Affect Future
Results - Recent Developments - FCC Auction" for additional information) and
$410 million for additional wireless spectrum purchased from another
telecommunications carrier.

In the first half of 2002, we received cash proceeds of $770 million in
connection with the sale of TSI.

Other, net investing activities include capitalized non-network software of $513
million in the first half of 2002 compared with $473 million in the similar
period of 2001. The first half of 2001 also includes $750 million of loans to
Genuity (see "Other Factors That May Affect Future Results - Genuity and Bell
Atlantic-GTE Merger"), largely offset by proceeds of $515 million related to
wireless asset sales.

In addition, under the terms of an investment agreement relating to our wireless
joint venture, Vodafone may require us or Verizon Wireless to purchase up to an
aggregate of $20 billion worth of its interest in Verizon Wireless between 2003
and 2007 at its then fair market value. The purchase of up to $10 billion, in
cash or stock at our option, may be required in the summer of 2003 or 2004 and
the remainder, which may not exceed $10 billion at any one time, in the summers
of 2005 through 2007. Vodafone has the option to require us or Verizon Wireless
to satisfy up to $7.5 billion of the remainder with cash or contributed debt.

29

CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES

Cash of $2,978 million was used to reduce our total debt during the first half
of 2002. We repaid $1,659 million of Verizon Global Funding Corp. and $1,796
million of Domestic Telecom long-term debt and reduced our short-term borrowings
by $4,623 million primarily with cash and the issuance of Domestic Telecom and
Verizon Global Funding long-term debt. Domestic Telecom and Verizon Global
Funding issued $3,429 million and $1,978 million of long-term debt,
respectively.

The net cash proceeds from increases in our total debt during the first six
months of 2001 was primarily due to the issuance of $7,006 million of long-term
debt by Verizon Global Funding, partially offset by net repayments of $589
million of commercial paper and other short-term borrowings by Verizon Global
Funding and by $617 million of maturities of other corporate long-term debt. In
addition, Verizon Wireless issued $580 million of long-term debt and Domestic
Telecom incurred $298 million of long-term debt, issued $1,225 million of net
short-term debt and retired $570 million of long-term debt.

Our debt to equity ratio was 68.3% at June 30, 2002, compared to 65.0% at June
30, 2001.

As of June 30, 2002, we had approximately $8.0 billion of unused bank lines of
credit and $560 million in bank borrowings outstanding. As of June 30, 2002, our
telephone and financing subsidiaries had shelf registrations for the issuance of
up to $6.4 billion of unsecured debt securities. The debt securities of our
telephone and financing subsidiaries continue to be accorded high ratings by
primary rating agencies. However, in March 2002, Standard & Poor's (S&P) revised
our credit rating outlook from stable to negative, and Moody's Investors Service
(Moody's) reaffirmed our credit rating outlook as negative. S&P and Moody's
cited concern about the overall debt level of Verizon. We have adopted a debt
portfolio strategy that includes a reduction in total debt as well as a
reduction in the short-term debt component. A change in an outlook does not
necessarily signal a rating downgrade but rather highlights an issue whose final
resolution may result in placing a company on review for possible downgrade. In
May 2002, Moody's placed our debt under review for possible downgrade.

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

INCREASE IN CASH AND CASH EQUIVALENTS

Our cash and cash equivalents at June 30, 2002 totaled $2,962 million, a $1,983
million increase over cash and cash equivalents at December 31, 2001 of $979
million. This increase in cash and cash equivalents was primarily driven by a
debt issuance at the end of the current quarter, which will be used to reduce
outstanding borrowings after quarter-end.

MARKET RISK

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

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

30

EXCHANGEABLE NOTES

In 1998, we issued exchangeable notes as described in Note 9 to the condensed
consolidated financial statements. These financial instruments expose us to
market risk, including:

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

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

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

Periodically, equity price or foreign exchange rate movements may require us to
mark-to-market the exchangeable note liability to reflect the increase or
decrease in the current share price compared to the established exchange price,
resulting in a charge or credit to income. The following sensitivity analysis
measures the effect on earnings and financial condition due to changes in the
underlying share prices of the Telecom Corporation of New Zealand Limited
(TCNZ), C&W and NTL stock.

o At June 30, 2002, the exchange price for the TCNZ shares (expressed as
American Depositary Receipts) was $44.93. The C&W and NTL notes in the
amount of $2,946 million are exchangeable into 118.9 million shares of C&W
stock and 22.7 million shares of NTL stock.

o For each $1 increase in the value of the TCNZ shares above the exchange
price, our pretax earnings would be reduced by approximately $55 million.
Assuming the aggregate value of the C&W and NTL stocks exceeds the value of
the debt liability, each $1 increase in the value of the C&W shares
(expressed as American Depositary Receipts) or NTL shares would reduce our
pretax earnings by approximately $40 million or $23 million, respectively.
A subsequent decrease in the value of these shares would correspondingly
increase earnings, but not to exceed the amount of any previous reduction
in earnings.

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

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

EQUITY RISK

We also have equity price risk associated with our cost investments, primarily
in common stocks and equity price sensitive derivatives that are carried at fair
value. The value of these cost investments and derivatives is subject to changes
in the market prices of the underlying securities. Our cost investments and
equity price sensitive derivatives recorded at fair value totaled $1,634 million
at June 30, 2002.

A sensitivity analysis of our cost investments and equity price sensitive
derivatives recorded at fair value indicated that a 10% increase or decrease in
the fair value of the underlying common stock equity prices would result in a
$140 million increase or decrease in the fair value of our cost investments and
equity price sensitive derivatives. Of this amount, a change in the fair value
of our cost investments of $133 million would be recognized in Accumulated Other
Comprehensive Loss in our condensed consolidated balance sheets under SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities." Our
equity price sensitive derivatives (primarily several long-term call options on
our common stock) (see Note 8 - Financial Instruments) do not qualify for hedge
accounting under SFAS No. 133. As such, a change of approximately $7 million in
the fair value of our equity price sensitive derivatives would be recognized in
our condensed consolidated balance sheets and in current earnings in
mark-to-market adjustment.

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

31

OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS

GENUITY AND BELL ATLANTIC - GTE MERGER

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

On July 24, 2002, we converted all but one of our shares of Class B common stock
of Genuity into shares of Class A common stock of Genuity. We now own just under
a 10% voting and economic interest in Genuity. As a result, we have relinquished
the right to convert our current ownership into a controlling interest as
described above. Our commercial relationship with Genuity will continue, which
includes a five-year purchase commitment for Genuity services such as dedicated
Internet access, managed web hosting and Internet security. Under this purchase
commitment, which terminates in 2005, Verizon has agreed to pay Genuity a
minimum of $500 million over five years for its services, of which we have
satisfied $230 million as of June 30, 2002.

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

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

RECENT DEVELOPMENTS

VERIZON WIRELESS

FCC Auction

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

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

In April 2002, the FCC returned $1,479 million of Verizon Wireless's $1,822
million license payment and stated its view that Verizon Wireless remains
obligated to purchase the licenses if and when the FCC succeeds in regaining
them from NextWave. On April 4, 2002, Verizon Wireless filed a complaint in the
U.S. Court of Federal Claims against the United States government seeking both a
declaration that Verizon Wireless has no further performance

32

obligations with respect to the reauction, and money damages. On April 8, 2002,
Verizon Wireless filed a petition with the U.S. Court of Appeals for the
District of Columbia seeking a declaration that the auction obligation is
voidable and a return of its remaining down payment of $261 million. Both of
these matters are pending.

Price Communications Transaction

In December 2001, Verizon Wireless and Price Communications Corp. (Price)
announced that an agreement had been reached combining Price's wireless business
with a portion of Verizon Wireless in a transaction valued at approximately $1.7
billion, including $550 million of net debt. The resulting limited partnership
will be controlled and managed by Verizon Wireless. Price's partnership interest
will be exchangeable into Verizon Wireless or Verizon stock, subject to several
conditions including an exchange price minimum and maximum. Price's shareholders
approved the transaction on July 23, 2002, and the transaction is now expected
to close in the third quarter of 2002.

SALE OF ACCESS LINES

In October 2001, we agreed to sell all 675,000 of our switched access lines in
Alabama and Missouri to CenturyTel Inc. (CenturyTel) for $2.2 billion. In early
July 2002, we completed the sale of approximately 300,000 switched access lines
and related local exchange operations in Alabama to CenturyTel for approximately
$1.0 billion in cash. The Missouri sale has been approved by the Missouri Public
Service Commission and the FCC. We expect to close the Missouri transaction in
the third quarter of 2002.

Also in October 2001, we agreed to sell approximately 600,000 switched access
lines in Kentucky to ALLTEL Corporation for $1.9 billion. This sale was
completed on July 31, 2002.

NEW YORK RECOVERY FUNDING

In August 2002, President Bush signed the Supplemental Appropriations bill
passed earlier this year by the U.S. House of Representatives and the U.S.
Senate. The Supplemental Appropriations bill includes $5.5 billion in New York
recovery funding. Of that amount, $750 million has been allocated to cover the
uninsured losses of two major utilities, which includes Verizon, incurred in
connection with the September 11th terrorist attacks. These funds will be
distributed as federal grants through the Lower Manhattan Development
Corporation following a thorough application process.

TELECOMMUNICATIONS ACT OF 1996

In-Region Long Distance

We offer long distance service throughout most of the country, except in those
regions served by the former Bell Atlantic telephone operations where we have
not yet received authority to offer long distance service under the
Telecommunications Act of 1996 (1996 Act). We now have authority to offer
in-region long distance service in eight states in the former Bell Atlantic
territory, accounting for three-quarters of the lines served by the former Bell
Atlantic. In addition to its New York order released in December 1999, the FCC
released orders on April 16, 2001, July 23, 2001, September 19, 2001, February
22, 2002, April 17, 2002, June 19, 2002 and June 24, 2002, approving our
applications for permission to enter the in-region long distance market in
Massachusetts, Connecticut, Pennsylvania, Rhode Island, Vermont, Maine and New
Jersey, respectively. The Massachusetts, Pennsylvania, Vermont and New Jersey
orders are currently on appeal to the U.S. Court of Appeals. Manhattan
Telecommunications Corporation (doing business as Metropolitan
Telecommunications) has filed a motion for a stay of the New Jersey order or, in
the alternative, for expedited briefing. We and the FCC filed oppositions to the
motion. WorldCom Inc. filed a complaint with the FCC seeking to have our long
distance authority in Massachusetts revoked or suspended. On July 23, 2002, the
FCC denied the complaint.

We have filed a joint application with the FCC to offer long distance service in
New Hampshire and Delaware. The FCC must rule on this application by September
25, 2002. We have also filed an application to offer long distance service in
Virginia. The FCC must rule on this application by October 30, 2002. We have
also filed state applications for support of anticipated applications with the
FCC for permission to enter the in-region long distance market in Maryland, West
Virginia and the District of Columbia.

33

FCC REGULATION AND INTERSTATE RATES

Access Charges and Universal Service

On May 31, 2000, the FCC adopted the Coalition for Affordable Local and Long
Distance Services (CALLS) plan as a comprehensive five-year plan for regulation
of interstate access charges. The CALLS plan has three main components. First,
it establishes a portable interstate access universal service support of $650
million for the industry. This explicit support replaces implicit support
embedded in interstate access charges. Second, the plan simplifies the patchwork
of common line charges into one subscriber line charge (SLC) and provides for
de-averaging of the SLC by zones and class of customers in a manner that will
not undermine comparable and affordable universal service. Third, the plan sets
into place a mechanism to transition to a set target of $.0055 per minute for
switched access services. Once that target rate is reached, local exchange
carriers are no longer required to make further annual price cap reductions to
their switched access prices. The annual reductions leading to the target rate,
as well as annual reductions for the subset of special access services that
remain subject to price cap regulation was set at 6.5% per year.

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

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

Unbundling of Network Elements

In July 2000, the U.S. Court of Appeals for the Eighth Circuit found that some
aspects of the FCC's requirements for pricing UNEs were inconsistent with the
1996 Act. In particular, it found that the FCC was wrong to require incumbent
carriers to base these prices not on their real costs but on the imaginary costs
of the most efficient equipment and the most efficient network configuration.
This portion of the court's decision was stayed pending review by the U.S.
Supreme Court. On May 13, 2002, the U.S. Supreme Court reversed that decision
and upheld the FCC's pricing rules.

On May 24, 2002, the U.S. Court of Appeals for the District of Columbia Circuit
released an order that overturned the most recent FCC decision establishing
which network elements were required to be unbundled. In particular, the court
found that the FCC did not adequately consider the limitations of the "necessary
and impair" standards of the 1996 Act when it chose national rules for
unbundling and that it failed to consider the relevance of competition from
other types of service providers, including cable and satellite. The court also
vacated a separate order that had authorized an unbundling requirement for "line
sharing" where a competing carrier purchases only a portion of the copper
connection to the end-user in order to provide high-speed broadband services
using DSL technology. Several parties, including the FCC, have petitioned the
court for rehearing of the court order.

Prior to the issuance of this order, the FCC had already begun a review of the
scope of its unbundling requirement through a rulemaking, the triennial review
of UNEs. This rulemaking reopens the question of what network elements must be
made available on an unbundled basis under the 1996 Act and will revisit the
unbundling decisions made in the order overturned by the U.S. Court of Appeals
for the District of Columbia Circuit. In this rulemaking, the FCC also will
address other pending issues relating to unbundled elements, including the
question of whether competing carriers may substitute combinations of unbundled
loops and transport for already competitive special access services.

Compensation for Internet Traffic

On April 27, 2001, the FCC released an order addressing intercarrier
compensation for dial-up connections for Internet-bound traffic. The FCC found
that Internet-bound traffic is interstate and subject to the FCC's jurisdiction.
Moreover, the FCC again found that Internet-bound traffic is not subject to
reciprocal compensation under Section 251(b)(5) of the 1996 Act. Instead, the
FCC established federal rates per minute for this traffic that decline from
$0.0015 to $0.0007 over a three-year period. The FCC order also sets caps on the
total minutes of this traffic that may be subject to any intercarrier
compensation and requires that incumbent local exchange carriers must offer to
pay reciprocal compensation for local traffic at the same rate as they are
required to pay on Internet-bound traffic.

34

On May 3, 2002, the U.S. Court of Appeals for the District of Columbia Circuit
rejected the justification relied upon by the FCC in its April 27, 2001 order,
and remanded the order for further proceedings. It did not vacate the interim
pricing rules established in that order.

Several parties, including Pac-West Telecomm and Focal Communications Corp. have
requested rehearing, asking the court to vacate the underlying order. A decision
on the rehearing petitions remains pending, and the FCC's underlying order
remains in effect.

OTHER MATTERS

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

35

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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

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

o the duration and extent of the current economic downturn;

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

o material changes in available technology;

o technology substitution;

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

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

o the effects of competition in our markets;

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

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

o the outcome of litigation concerning the FCC NextWave spectrum auction;

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

36

PART II -- OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our 2002 Annual Meeting of Shareholders was held on April 24, 2002. At the
meeting, the following items were submitted to a vote of shareholders.

The number of common shares present at the Annual Meeting of Shareholders of
Verizon Communications Inc. voting and withholding authority to vote in the
election of Directors (the "Total Vote") was 2,224,172,047 or 81.79% of the
common shares outstanding on February 25, 2002, the record date for said
meeting.

(a) The following nominees were elected to serve on the Board of Directors:

(b) The appointment of Ernst and Young LLP as independent accountants for 2002
was ratified with 2,114,750,670 votes for, 85,619,046 votes against, and
23,802,331 abstentions.

(c) A shareholder proposal regarding Cumulative Voting was defeated with
519,554,375 votes for, 1,181,461,380 votes against, 119,681,624 abstentions
and 403,474,668 broker non-votes.

(d) A shareholder proposal regarding Executive Severance Agreements was
defeated with 544,830,236 votes for, 1,211,469,524 votes against,
64,397,335 abstentions and 403,474,952 broker non-votes.

(e) A shareholder proposal regarding composition of the Board of Directors was
defeated with 483,719,748 votes for, 1,288,847,110 votes against,
48,129,941 abstentions and 403,475,248 broker non-votes.

(f) A shareholder proposal regarding Calculation of Incentive Compensation was
defeated with 728,056,432 votes for, 972,294,070 votes against, 120,346,593
abstentions and 403,474,952 broker non-votes.

(g) A shareholder proposal regarding Additional Director Nominees was defeated
with 194,627,486 votes for, 1,570,731,791 votes against, 55,337,816
abstentions and 403,474,954 broker non-votes.

37

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit
Number

10a Employment Agreement between Verizon and Mary Beth Bardin.

10b Employment Agreement between Verizon and David H. Benson.

10c Employment Agreement between Verizon and Ezra D. Singer.

10d Employment Agreement between Verizon and Doreen A. Toben.

10e Supplemental Letter to Employment Agreement between Verizon
and Charles R. Lee.

10f Verizon Communications Inc. Income Deferral Plan, as amended
and restated.

10g Description of the Split-Dollar Insurance Arrangements for
Lawrence T. Babbio and William P. Barr.

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

A Current Report on Form 8-K, filed April 9, 2002, containing a press
release providing an estimate of adjusted diluted earnings per share,
and estimating charges for goodwill and other investments, for the
first quarter of 2002.

A Current Report on Form 8-K, filed April 10, 2002, containing a legal
opinion issued in connection with the Verizon Communications Direct
Invest direct stock purchase and share ownership plan.

A Current Report on Form 8-K, filed April 23, 2002, containing a press
release announcing earnings for the first quarter of 2002 and selected
slides containing supplemental information about our financial and
other projections.

A Current Report on Form 8-K, filed April 29, 2002, containing a press
release announcing the retirement of Vice Chairman and Chief Financial
Officer Frederic V. Salerno before year-end 2002.

A Current Report on Form 8-K, filed April 30, 2002, containing a press
release announcing the appointment of Doreen A. Toben as Executive Vice
President and Chief Financial Officer, effective immediately.

A Current Report on Form 8-K, furnished on May 22, 2002, containing the
consolidated financial statements of Cellco Partnership, doing business
as Verizon Wireless, as of December 31, 2001 and 2000 and for the years
ended December 31, 2001, 2000 and 1999.

A Current Report on Form 8-K, filed June 19, 2002, containing a Form of
Purchase Agreement to be used in connection with the offering of debt
securities.

38

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

VERIZON COMMUNICATIONS INC.

Date: August 12, 2002 By /s/ John F. Killian
------------------------------------
John F. Killian
Senior Vice President and Controller
(Principal Accounting Officer)

UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF AUGUST 7, 2002.

39

EXHIBIT INDEX