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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file number 1-8606

Verizon Communications Inc.

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 o

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

At September 30, 2003, 2,761,550,374 shares of the registrant’s Common Stock were outstanding, after deducting 4,553,774 shares held in treasury.

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Item 1. Financial Statements

Condensed Consolidated Statements of Income
Verizon Communications Inc. and Subsidiaries

(1)

Total per share amounts may not add due to rounding.

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

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

See Notes to Condensed Consolidated Financial Statements

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

1. Basis of Presentation

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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, 2002.

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

2. Accounting Changes

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Directory Accounting Change

During the second quarter of 2003, we changed our method for recognizing revenues and expenses in our directory business from the publication-date method to the amortization method. The publication-date method recognizes revenues and direct expenses when directories are distributed. Under the amortization method, which is increasingly becoming the industry standard, revenues and direct expenses, primarily printing and distribution costs, are recognized over the life of the directory, which is usually 12 months. This accounting change affects the timing of the recognition of revenues and expenses. As required by generally accepted accounting principles (GAAP), the directory accounting change was recorded retroactively to January 1, 2003, and resulted in an impact on previously reported first-quarter financial results, including a cumulative effect of the accounting change. The cumulative effect of the accounting change resulted in a one-time charge of $2,697 million ($1,647 million after-tax), recorded as of January 1, 2003.

The following table presents our 2002 results for comparison to the current periods, assuming we had applied the amortization method during 2002:

* Includes reclassification of Iusacell to discontinued operations and other reclassifications.

Stock-Based Compensation

Prior to 2003, we accounted for stock-based employee compensation under Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and followed the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” In accordance with APB Opinion No. 25, no stock-based employee compensation expense for our fixed stock option plans is reflected in our 2002 net income as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective January 1, 2003, we adopted the fair value recognition provisions of SFAS No. 123, using the prospective method (as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and

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Disclosure”) to all new awards granted, modified or settled after January 1, 2003. Under the prospective method, employee compensation expense in the first year will be recognized for new awards granted, modified, or settled. The options generally vest over a term of three years, therefore the expenses related to stock-based employee compensation included in the determination of net income for the third quarter and the first nine months of 2003 are less than what would have been recorded if the fair value method was also applied to previously issued awards. The following table illustrates the effect on net income and earnings per share if the fair value method had been applied to all outstanding and unvested options in each period.

After-tax compensation expense for other stock-based compensation included in net income as reported for the three and nine months ended September 30, 2003 was $37 million and $73 million, respectively. For the three and nine months ended September 30, 2002, after-tax compensation expense for other stock-based compensation included in net income as reported was $(3) million and $6 million, respectively.

Asset Retirement Obligations

Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as part of the book value of the long-lived asset. We have determined that Verizon does not have a material legal obligation to remove long-lived assets as described by this statement. However, prior to the adoption of SFAS No. 143, we included estimated removal costs in our group depreciation models. These costs have increased depreciation expense and accumulated depreciation for future removal costs for existing assets. These removal costs were recorded as a reduction to accumulated depreciation when the assets were retired and removal costs were incurred.

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

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3. Completion of Merger and Other Strategic Actions

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Severance, Pension and Benefit Charges

During the third quarter of 2003, we recorded pretax pension settlement losses of $131 million ($81 million after-tax) related to employees that received lump-sum distributions during the quarter in connection with previously announced employee separations. During the third quarter of 2002, we recorded a pretax charge of $294 million ($185 million after-tax) related to settlement losses incurred in connection with previously announced employee separations.

During the second quarter of 2003, we recorded a special charge of $235 million ($150 million after-tax) primarily associated with employee severance costs and severance-related activities in connection with the voluntary separation of approximately 4,000 employees. As of September 30, 2003, nearly all of the separations under the year-to-date 2003 severance activity have occurred. 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. Nearly all of the separations under prior year severance activity have occurred. The remaining severance liability relating to previous severance activity is $605 million, which principally includes future payments to employees separated as of September 30, 2003. We expect to complete the severance activities within a year of when the respective charges were recorded. We continually evaluate employee levels, and accordingly, may incur future severance costs.

In the second quarter of 2003, we recorded a special charge of $463 million ($286 million after-tax) in connection with enhanced pension benefits granted to employees retiring in the first half of 2003, estimated costs associated with the July 10, 2003 Verizon-New York arbitration ruling and pension settlement losses related to lump-sum pay-outs in 2003. On July 10, 2003, an arbitrator ruled that Verizon-New York’s termination of 2,300 employees in 2002 was not permitted under a union contract; similar cases were pending impacting an additional 1,100 employees. Verizon offered to reinstate all 3,400 impacted employees, and accordingly, recorded a charge in the second quarter of 2003 representing estimated payments to employees and other related company-paid costs.

Merger Transition Costs

We announced at the time of the Bell Atlantic-GTE merger that we expected to incur a total of approximately $2 billion of transition costs related to the merger and the formation of the wireless joint venture. These costs were incurred to integrate systems, consolidate real estate and relocate employees. They also included approximately $500 million for advertising and other costs to establish the Verizon brand. Transition activities were complete at December 31, 2002 and totaled $2,243 million. Transition costs for the three and nine months ended September 30, 2002 were $94 million and $292 million ($50 million and $159 million after taxes and minority interest), respectively.

Other Special Items

During the second quarter of 2003, we recorded pretax charges of $258 million ($204 million after-tax) primarily related to a pretax impairment charge of $125 million ($125 million after-tax) pertaining to our leasing operations for airplanes leased to airlines experiencing financial difficulties and for power generating facilities. These second quarter 2003 charges also include pretax charges of $61 million ($38 million after-tax) related to the early retirement of debt and other pretax charges of $72 million ($41 million after-tax). During the third quarter of 2002, we recorded a pretax impairment charge of $249 million ($156 million after-tax) primarily pertaining to Verizon’s leasing operations related to airplanes leased to airlines experiencing financial difficulties.

During the second quarter of 2002, we recorded pretax charges of $398 million ($259 million after-tax) primarily resulting from a pretax impairment charge in connection with our financial statement exposure to WorldCom of $300 million ($183 million after-tax) and other pretax charges of $98 million ($76 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 settlement of a litigation matter that arose from our decision to terminate an agreement with NorthPoint Communications Group, Inc. to combine the two companies’ DSL businesses. The nine-month period ended September 30, 2002 also includes other pretax charges of $18 million ($12 million after-tax).

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4. Discontinued Operations and Sales of Businesses, Net

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Discontinued Operations

During the second quarter of 2003, we announced our decision to sell our 39.4% consolidated interest in Grupo Iusacell S.A. de C.V. (Iusacell) into the tender offer launched by Movil Access, a Mexican company. Verizon tendered its shares shortly after the tender offer commenced, and the tender offer closed on July 29, 2003. In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have classified the results of operations of Iusacell as discontinued operations in the unaudited condensed consolidated statements of income. In connection with the decision to sell our interest in Iusacell and a comparison of expected sale proceeds, less cost to sell, to the net book value of our investment in Iusacell (including the foreign currency translation balance), we recorded a pretax loss of $957 million ($931 million after-tax). This loss included $317 million of goodwill. In addition, the assets and liabilities of Iusacell are summarized and disclosed as current assets and current liabilities in the unaudited condensed consolidated balance sheet at December 31, 2002. Additional detail related to the assets and liabilities of Iusacell, which was part of our International segment, follows:

Summarized results of operations for Iusacell are as follows:

Included in loss from operations of Iusacell before income taxes in the preceding table are operating revenues of $181 million for the nine months ended September 30, 2003. Operating revenues from operations of Iusacell were $137 million and $421 million for the three and nine months ended September 30, 2002, respectively.

Sales of Businesses, Net

During the third quarter of 2003, we recorded a net pretax gain of $141 million primarily related to the sale of our directory publication operations in Austria, the Czech Republic, Gibraltar, Hungary, Poland and Slovakia.

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

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

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5. Investments

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Marketable Securities

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

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

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

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

Investment Ownership Changes

During the third quarter of 2002, we sold nearly all of our investment in Telecom Corporation of New Zealand Limited (TCNZ) for net cash proceeds of $769 million, which resulted in a pretax gain of $383 million ($229 million after-tax).

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

Investment-Related Charges

We continually evaluate our investments in unconsolidated businesses and other long-lived assets for impairment. As of September 30, 2003, no impairments were determined to exist.

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

During the second quarter of 2002, we recorded pretax losses of $3,558 million ($3,305 million after-tax), including a loss of $2,443 million ($2,443 million after-tax) related to our interest in Genuity Inc. (Genuity), a loss of $580

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million ($430 million after-tax) to the market value of our investment in TELUS Corporation, a loss of $303 million ($201 million after-tax) to the market value of our investment in C&W and a loss of $232 million ($231 million after-tax) relating to several other investments. We determined that market value declines in these investments were considered other than temporary.

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

In addition, 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.

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

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

6. Goodwill and Other Intangible Assets

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Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and, as required, no longer amortize goodwill (including goodwill recorded on our equity method investments), acquired workforce intangible assets and wireless licenses, which we have determined have an indefinite life. Instead, these assets are reviewed annually (or more frequently under various conditions) for impairment using a fair value approach. Intangible assets that do not have indefinite lives are amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The initial impact of adoption of SFAS No. 142 on our condensed consolidated financial statements was recorded as a cumulative effect of an accounting change resulting in a charge of $496 million, net of tax in the quarter ended March 31, 2002. This charge is comprised of $204 million ($203 million after-tax) for goodwill, $294 million ($293 million after-tax) for wireless licenses and goodwill of equity method investments and for other intangible assets.

Goodwill

Changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows:

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Other Intangible Assets

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

Intangible asset amortization expense was $355 million and $1,047 million for the three and nine months ended September 30, 2003, respectively. For the three and nine months ended September 30, 2002, intangible asset amortization expense was $286 million and $856 million, respectively. It is estimated to be $326 million for the remainder of 2003, $1,359 million in 2004, $1,206 million in 2005, $681 million in 2006 and $392 million in 2007, primarily related to customer lists and non-network software.

7. Debt

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Exchangeable Notes

Previously, Verizon Global Funding Corp. (Verizon Global Funding) issued two series of notes: $2,455 million of 5.75% senior exchangeable notes due on April 1, 2003 that were exchangeable into shares of TCNZ (the 5.75% Notes) and $3,180 million of 4.25% senior exchangeable notes due on September 15, 2005 that, in connection with a restructuring of Cable & Wireless Communications plc in 2000 and the bankruptcy of NTL Incorporated (NTL) in 2002, were exchangeable into shares of Cable & Wireless plc and a combination of shares and warrants in the reorganized NTL entities (the 4.25% Notes).

On April 1, 2003, all of the outstanding $2,455 million principal amount of the 5.75% Notes were redeemed at maturity. On March 15, 2003, Verizon Global Funding redeemed all of the outstanding 4.25% Notes. The cash redemption price for the 4.25% Notes was $1,048.29 for each $1,000 principal amount of the notes. The principal amount of the 4.25% Notes outstanding, before unamortized discount, at the time of redemption, was $2,839 million.

Support Agreements

All of Verizon Global Funding’s debt has the benefit of Support Agreements between us and Verizon Global Funding, which give holders of Verizon Global Funding debt the right to proceed directly against us for payment of interest, premium (if any) and principal outstanding should Verizon Global Funding fail to pay. The holders of Verizon Global Funding debt do not have recourse to the stock or assets of most of our telephone operations; however, they do have recourse to dividends paid to us by any of our consolidated subsidiaries as well as assets not covered by the exclusion. Verizon Global Funding’s long-term debt, including current portion, aggregated $15,265 million at September 30, 2003. The carrying value of the available assets reflected in our condensed consolidated financial statements was approximately $56.6 billion at September 30, 2003.

Debt Issuances

In June 2003, Verizon Maryland Inc. issued $350 million of 5.125% Series B debentures due 2033 at a discount, resulting in proceeds, net of discount, of $343 million. Also in June 2003, Verizon Global Funding issued $500 million of 4.375% notes due 2013 at a discount, resulting in proceeds, net of discount, of $493 million.

In March 2003, Verizon Virginia Inc. issued $1 billion of 4.625% Series A debentures due 2013 at a discount, resulting in proceeds, net of discount, of $998 million.

In January 2003, Verizon Global Funding issued $1 billion of 4% notes due 2008 at a discount, resulting in proceeds, net of discount, of $993 million.

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8. Comprehensive Income

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Comprehensive income consists of net income and other gains and losses affecting shareowners’ investment that, under GAAP are excluded from net income.

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

The net unrealized losses on marketable securities in 2002 primarily relate to the reclassification of the after-tax realized gain on the sale of nearly all of our interest in TCNZ, partially offset by the reclassification of after-tax realized losses recorded due to the other than temporary declines in the market value of C&W and MFN.

The components of accumulated other comprehensive loss are as follows:

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9. Earnings Per Share

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

(1)

Total per share amounts may not add due to rounding.

Stock options for 249 million shares for the three months ended September 30, 2003 and 246 million shares for the nine months ended September 30, 2003 were not included in the computation of diluted earnings per share because the exercise price of the stock options was greater than the average market price of the common stock. For the three and nine months ended September 30, 2002, the number of shares not included in the computation of diluted earnings per share was 254 million and 225 million, respectively.

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10. Segment Information

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

We measure and evaluate our reportable segments based on segment income. This segment income excludes unallocated corporate expenses and other adjustments arising during each period. The other adjustments include transactions that the chief operating decision makers exclude in assessing business unit performance due primarily to their non-recurring 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 gains and losses are primarily 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:

Financial information for Domestic Telecom for the three and nine months ended September 30, 2002 excludes the effects of access lines sold in the third quarter of 2002. In addition, the transfer of Global Solutions Inc. from International to Domestic Telecom effective January 1, 2003 is reflected in this financial information as if it had occurred for all periods presented. Financial information for International excludes the effects of Iusacell (see Note 4).

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.

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

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Verizon recorded an additional insurance recovery related to the terrorist attacks on September 11, 2001 of $20 million in the third quarter of 2003 and $245 million year-to-date, primarily offsetting fixed asset losses and expenses incurred in the current and prior years. Of the amounts recorded, approximately $11 million and $122 million relate to operating expenses (primarily cost of services and sales) in the third quarter and year-to-date periods, respectively. The costs and estimated insurance recovery were recorded in accordance with Emerging Issues Task Force No. 01-10, “Accounting for the Impact of the Terrorist Attacks of September 11, 2001.”

12. Commitments and Contingencies

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

In addition, under the terms of an investment agreement, Vodafone Group plc (Vodafone) may require Verizon Wireless to purchase up to an aggregate of $20 billion worth of Vodafone’s interest in Verizon Wireless at designated times between 2003 and 2007 at its then fair market value. We have the right, exercisable at our sole discretion, to purchase up to $12.5 billion of Vodafone’s interest instead of Verizon Wireless for cash or Verizon stock at our option. Vodafone may require the purchase of up to $10 billion during a 61-day period opening on June 10 and closing on August 9 in 2003 or 2004, and the remainder, which may not exceed $10 billion in any one year, during a 61-day period opening on June 10 and closing on August 9 in 2005 through 2007. Vodafone also may require that Verizon Wireless pay for up to $7.5 billion of the required repurchase through the assumption or incurrence of debt. Vodafone did not exercise its put rights during the 61-day period that ended on August 9, 2003.

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

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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 139.4 million access line equivalents and 36 million wireless customers. Verizon is the third largest long distance carrier for U.S. consumers, with 15.9 million long distance lines, and the company is also the largest directory publisher in the world, as measured by directory titles and circulation. With approximately $67 billion in annual revenues and 221,000 employees, Verizon’s international presence extends primarily to the Americas, as well as investments in Europe.

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

In this section, we discuss our overall results of operations and highlight special and non-recurring items. In the following section, we review the performance of our four reportable segments. We exclude the effects of the special and non-recurring items from the segments’ results of operations since management does not consider them in assessing segment performance, due primarily to their non-recurring and/or non-operational nature. We believe that this presentation will assist readers in better understanding our results of operations and trends from period to period. This section on consolidated results of operations carries forward the segment results, which exclude the special and non-recurring items, and highlights and describes those items separately to ensure consistency of presentation in this section and the “Segment Results of Operations” section.

nm — Not meaningful

Increases in consolidated revenues of $42 million in the quarter ended September 30, 2003 and $324 million for the nine months ended September 30, 2003, compared to the prior year periods, are driven by higher revenues at Domestic Wireless and higher year-to-date revenues at Information Services, partially offset by lower Domestic Telecom revenues and the impact of Domestic Telecom access lines sold in 2002.

Domestic Telecom’s revenues for the three- and nine-month periods ended September 30, 2003 were lower by $417 million and $1,076 million, respectively, compared to the similar periods in 2002. Local service revenues declined by $312 million in the third quarter of 2003 and $736 million year-to-date mainly due to lower demand and usage of our basic local exchange and accompanying services mainly driven by the effects of regulatory pricing rules for unbundled network elements (UNEs) and technology substitution. Network access revenues declined by $225 million in the third quarter of 2003 and by $398 million year-to-date principally as a result of decreasing switched minutes of use (MOUs) and access lines, as well as price reductions associated with federal and state price cap filings and other regulatory decisions, partially offset by increased demand for digital subscriber line (DSL) services.

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Revenues from other Domestic Telecom services during the year-to-date 2003 period declined by $331 million due to lower sales of supplies to some major customers as a result of the termination of contracts and lower volumes at some of our non-regulated businesses. Partially offsetting these declines, long distance service revenues increased $147 million in the third quarter of 2003 and $389 million year-to-date, primarily as a result of subscriber growth from our interLATA long distance services.

Domestic Wireless revenues grew by $913 million in the third quarter of 2003 and $2,255 million for the nine months ended September 30, 2003 compared to the similar periods in 2002. Wireless service revenues for the three- and nine-month periods ended September 30, 2003 were higher by $686 million and $1,936 million, respectively, compared to the similar periods in 2002. This increase was primarily due to a 14.3% increase in subscribers as well as an increase in average service revenue per subscriber. Average wireless service revenue per subscriber increased by .9% to $50.03 for the third quarter of 2003 and by 1.7% to $48.85 for the nine months ended September 30, 2003 compared to similar periods in 2002, primarily due to higher access price plan offerings.

As announced July 1, 2003, Information Services changed its method of recognizing revenue and expenses from the publication-date method to the amortization method effective January 1, 2003. Under the amortization method, revenue and direct expenses are recognized over the life of the directory, which is usually 12 months. Information Services revenues decreased $143 million in the third quarter and increased $188 million in the first nine months of 2003 compared to the similar periods in 2002 primarily as a result of the accounting change from publication-date to amortization method.

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

Cost of services and sales increased for the three- and nine-month periods ended September 30, 2003 by $605 million and $1,011 million, respectively, compared to the similar periods in 2002. These increases are principally driven by lower net pension and other postretirement benefit income. The overall impact of assumption changes, combined with the impact of lower than expected actual asset returns over the past three years, reduced pension income, net of postretirement benefit expenses, by approximately $422 million in the third quarter of 2003 and $975 million in the nine-month period ended September 30, 2003 (primarily in cost of services and sales), compared to the similar periods of 2002. In addition, cost of services and sales increased in both periods as a result of additional overtime pay due to higher weather-related repair volumes and contingency costs to maintain operational readiness during recent labor negotiations at Domestic Telecom. Domestic Wireless reported higher variable costs in connection with increased wireless MOUs and increases in handsets sold due to growth in gross wireless activations and an increase in wireless handset equipment upgrades.

Cost increases in both periods of 2003 were partially offset by lower access and transport costs and the effect of workforce reductions and disciplined expense controls. In addition, we recorded an additional insurance recovery related to the terrorist attacks on September 11, 2001 of $245 million year-to-date ($20 million in the third quarter), primarily offsetting fixed asset losses and expenses incurred in the current and prior years, of which approximately $122 million relates to operating expenses (primarily cost of services and sales). In addition, Domestic Wireless reported cost favorability from lower roaming rates.

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Selling, General and Administrative Expense

Selling, general and administrative expense declined for the three- and nine-month periods ended September 30, 2003 by $272 million and $998 million, respectively, compared to the similar periods in 2002. These cost reductions were primarily driven by lower special charges in the three- and nine-month periods ended September 30, 2003 by $482 million and $1,526 million, respectively, compared to the similar periods in 2002. The prior year periods include higher impairment charges and pension settlement expenses as well as merger transition costs. In addition, costs were positively impacted in both the third quarter and year-to-date periods of 2003 as a result of lower bad debt expense principally due to a reduction in uncollectible accounts receivable, improved collections and additional customer deposit requirements and lower gross receipts and property taxes. These cost reductions were partially offset by higher salary and wage expenses, including higher employee and agent sales commissions related to an increase in gross wireless subscriber additions and renewals and higher net pension and other employee benefit costs in 2003.

Depreciation and Amortization Expense

Depreciation and amortization expense increased for the three- and nine-month periods ended September 30, 2003 by $132 million and $275 million, respectively, compared to the similar periods in 2002, primarily due to increased depreciation expense related to the increase in depreciable assets and higher software amortization costs. The increases were partially offset by lower rates of depreciation on telephone plant at Domestic Telecom, as well as the favorable impact on depreciation expense of adopting Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” effective January 1, 2003.

Sales of Businesses, Net

On July 24, 2003, Information Services completed the sale of its directory businesses in Europe, which consisted of publishing operations in Austria, the Czech Republic, Gibraltar, Hungary, Poland and Slovakia. During the third quarter of 2003, we recorded a net pretax gain on sale of $141 million.

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

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

Equity in Earnings (Loss) of Unconsolidated Businesses

Equity in earnings of unconsolidated businesses increased by $171 million in the third quarter of 2003 and by $2,348 million in the nine-month period ended September 30, 2003, compared to the similar periods in 2002. The increase for the third quarter of 2003 was primarily driven by additional Italian tax benefits recorded at Vodafone Omnitel N.V. (Omnitel) related to a reorganization. During the second quarter of 2002, we recorded pretax losses of $610 million related to determinations that market value declines in several investments were considered other than temporary. In addition during the first quarter of 2002, we recorded losses of $1,400 million due to the other than temporary decline in the market value of our investment in Compañia Anónima Nacional Teléfonos de Venezuela (CANTV).

Income (Loss) From Other Unconsolidated Businesses

Income from other unconsolidated businesses decreased by $219 million in the third quarter of 2003 and increased by $2,901 million in the nine-month period ended September 30, 2003, compared to the similar periods in 2002. The third quarter of 2003 includes gains on sales of interests in unconsolidated investments, including Taiwan Cellular Corporation. During the third quarter of 2002, we recorded a pretax gain of $383 million related to the sale of our investment in Telecom Corporation of New Zealand Limited (TCNZ), partially offset by a pretax loss of $101 million to market value of our investment in Cable & Wireless plc (C&W). In the second quarter of 2002, we recorded pretax losses of $2,948 million related to determinations that market value declines in several investments were considered other than temporary. In addition, during the first quarter of 2002 we recorded losses of $289

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million due to the other than temporary decline in the market value of our investments in Metromedia Fiber Network, Inc. (MFN).

Other Income and (Expense), Net

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The increase in other income and expense, net for the three months ended September 30, 2003, compared to the similar period in 2002, was primarily due to charges recorded in 2002 in connection with the mark-to-market of some of our financial instruments included in other, net, partially offset by lower interest income in 2003. The decrease in other income and expense, net for the nine months ended September 30, 2003, compared to the similar period in 2002, was primarily driven by lower interest income and higher charges in connection with the early retirement of debt in 2003 included in other, net.

Interest Expense

The decrease in interest costs for the three and nine months ended September 30, 2003, compared to the similar periods in 2002, was principally attributable to lower average debt levels, partially offset by higher average interest rates.

Minority Interest

The increase in minority interest expense for the three and nine months ended September 30, 2003, compared to the similar periods in 2002, is primarily due to higher earnings at Verizon Wireless, which has a significant minority interest attributable to Vodafone Group plc (Vodafone).

Provision for Income Taxes

The effective income tax rate is the provision for income taxes as a percentage of income from continuing operations before the related provision for income taxes. Our effective income tax rate for the three months ended September 30, 2002 was favorably impacted by tax benefits relating to the other than temporary decline in fair value of several of our investments during 2002 that were not available at the time the investments were written down, as the decline in fair value was not recognizable at the time of the impairment (see “Special Items — Investment-Related Charges”). The effective rate for the third quarter of 2002 was also favorably impacted by a tax law change relating to ESOP dividend deductions and capital loss utilization. The effective income tax rate in the third quarter

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of 2003 was favorably impacted by higher equity income from Omnitel and the 2003 quarter was impacted by lower state tax rates.

Our effective income tax rate for the nine months ended September 30, 2002 was favorably impacted by the third quarter of 2002 items; however, higher charges associated with the other than temporary decline in fair value of several of our investments without related tax benefits recorded during the first half of 2002 resulted in a higher effective tax rate in the 2002 period.

Discontinued Operations

Discontinued operations represent the results of operations of Grupo Iusacell S.A. de C.V. (Iusacell) prior to the sale of Iusacell in July 2003. In connection with our decision to sell our interest in Iusacell and a comparison of expected sale proceeds, less cost to sell, to the net book value of our investment in Iusacell, we recorded a pretax loss of $957 million ($931 million after-tax) in the second quarter of 2003. Losses reported by Iusacell in the third quarter and nine-month period ended September 30, 2002 are primarily driven by the unfavorable impact of fluctuation in the Mexican peso on U.S. dollar denominated debt issued by Iusacell.

Cumulative Effect of Accounting Change

Directory Accounting Change

During the second quarter of 2003, we changed our method for recognizing revenues and expenses in our directory business from the publication-date method to the amortization method. The publication-date method recognizes revenues and direct expenses when directories are distributed. Under the amortization method, which is increasingly becoming the industry standard, revenues and direct expenses, primarily printing and distribution costs, are recognized over the life of the directory, which is usually 12 months. This accounting change affects the timing of the recognition of revenues and expenses. As required by generally accepted accounting principles (GAAP), the directory accounting change was recorded retroactively to January 1, 2003, and resulted in an impact on previously reported first-quarter financial results, including a cumulative effect of the accounting change. The cumulative effect of the accounting change resulted in a one-time charge of $2,697 million ($1,647 million after-tax, or $.59 per diluted share), recorded as of January 1, 2003.

Impact of SFAS No. 143

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

For some assets, such as telephone poles, the removal costs exceeded salvage value. Under the provisions of SFAS No. 143, we are required to exclude costs of removal from our depreciation rates for assets for which the removal costs exceed salvage. Accordingly, in connection with the initial adoption of this standard on January 1, 2003, we have reversed accrued costs of removal in excess of salvage from our accumulated depreciation accounts for these assets. The adjustment was recorded as a cumulative effect of an accounting change, resulting in the recognition of a gain of approximately $3,499 million ($2,150 million after-tax, or $.77 per diluted share).

Impact of SFAS No. 142

We adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under various conditions) for impairment in accordance with this statement. Our results for the nine months ended September 30, 2002 include the initial impact of adoption recorded as a cumulative effect of an accounting change of $496 million after-tax (or $.18 per diluted share).

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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, Information Services and International. You can find additional information about our segments in Note 10 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 non-recurring 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 gains and losses are primarily contained in Information Services and International since they actively manage investment portfolios.

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

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

Operating Revenues

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 UNEs, interconnection revenues from competitive local exchange carriers (CLECs) and wireless carriers, and some data transport revenues.

The decline in local service revenues of $312 million, or 6.1% in the third quarter of 2003 and $736 million, or 4.8% year-to-date was mainly due to lower demand and usage of our basic local exchange and accompanying services, as reflected by a decline in switched access lines in service of 3.9% from a year ago, including a decline in business access lines of 4.6% and a decline in residence access lines of 3.5%. This revenue decline was mainly driven by the effects of regulatory pricing rules for UNEs and technology substitution. Regulatory pricing rules for UNEs are shifting the mix of access lines from retail to wholesale, resulting in price reductions and more competition for local exchange services. We added 1.9 million UNE platform lines from a year ago, including 479,000 lines in the third quarter, bringing total UNE platform provisioned lines to 4.6 million, compared to 2.7 million UNE platform lines a year ago.

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We continue to seek opportunities to retain and win-back customers. The launch of our Freedom plans in 2003 offers local services with various combinations of long distance, wireless and Internet access services in a discounted bundle available on one bill. Currently, we have introduced our Freedom service plans in 12 key markets, which cover more than 80% of consumer access lines, since the end of January 2003. For small businesses, we have also rolled out Verizon Freedom for Business in six markets, covering more than 60% of business access lines, since May 2003.

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. Further, network access revenues include our DSL services.

Our network access revenues declined by $225 million, or 6.8% in the third quarter of 2003 and by $398 million, or 4.0% year-to-date principally as a result of decreasing switched MOUs and access lines, as well as price reductions associated with federal and state price cap filings and other regulatory decisions. Switched MOUs declined year-to-date by 7.5% from September 30, 2002, reflecting the impact of access line loss and wireless substitution. Total revenues for high-capacity and data services were $1.8 billion in the third quarter of 2003 and $5.4 billion for the nine-month period ended September 30, 2003, down slightly in both periods from a year ago. Increased demand for high-speed services was offset by reduced demand for lower-speed services. Voice-grade equivalents (switched access lines and data circuits) grew to 139.4 million at September 30, 2003, up 3.3%, compared to a year ago. Further, our special access revenues in both periods were negatively impacted by a reduction in rates for modem aggregation services provided to MCI under Verizon’s CyberPOP tariff. Under the CyberPOP agreement, we provided access circuits for MCI’s managed modem business. This rate reduction was necessary in order to avoid rejection and termination of the CyberPOP agreement by MCI in its bankruptcy case and the total loss of revenues that would have resulted.

These decreases were partially offset in both periods by increased demand for our DSL services. Currently, approximately 74% of our total access lines qualify for DSL service. In the third quarter and first nine months of 2003, we added 185,000 and 446,000, respectively, of new DSL lines, for a total of 2.1 million lines at September 30, 2003.

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 $147 million, or 17.2% in the third quarter of 2003 and $389 million, or 16.3% year-to-date, primarily as a result of subscriber growth from our interLATA long distance services. In the first quarter of 2003, we received final Federal Communications Commission (FCC) approval to offer long distance services in our remaining three jurisdictions. We began offering long distance services in Maryland and Washington, D.C. in April 2003 and in West Virginia in May 2003. We now offer long distance services throughout the United States, capping a seven-year effort. Our authority in Alaska is limited to interstate and international services. We added 1.3 million long distance lines in the third quarter 2003 and 4.2 million long distance lines since the third quarter of 2002, for a total of 15.9 million long distance lines nationwide, representing a 35.4% increase in long distance lines from a year ago.

Other Services

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

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During the third quarter and year-to-date of 2003, revenues from other services declined by $27 million, or 2.8% and by $331 million, or 11.1%, respectively. These revenue declines were substantially due to lower sales of supplies to some major customers as a result of the termination of contracts and lower volumes at some of our non-regulated businesses due to declines in customer demand. Customers substituting wireless communications for pay telephone services and customers taking-back billing and collections services were also factors that contributed to the reduction in other services revenues in 2003. These decreases were partially offset in the third quarter of 2003 by increased sales of voice and data CPE services.

Operating Expenses

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

Our cost of services and sales increased in both periods of 2003, principally driven by lower net pension and other postretirement benefit income. As of December 31, 2002, Verizon changed key employee benefit plan assumptions in response to current conditions in the securities markets and medical and prescription drug cost trends. The expected rate of return on pension plan assets has been changed from 9.25% in 2002 to 8.50% in 2003 and the expected rate of return on other postretirement benefit plan assets has been changed from 9.10% in 2002 to 8.50% in 2003. The discount rate assumption has been lowered from 7.25% in 2002 to 6.75% in 2003 and the medical cost trend rate assumption has been increased from 10.00% in 2002 to 11.00% in 2003. The overall impact of these assumption changes, combined with the impact of lower than expected actual asset returns over the past three years, reduced pension income, net of postretirement benefit expenses, by $357 million in the third quarter of 2003 and $821 million in the first nine months of 2003 (primarily in cost of services and sales), compared to the similar periods of 2002. In addition, costs of removal in excess of salvage for outside plant assets, resulting from the adoption of SFAS No. 143 effective January 1, 2003, were approximately $42 million in the third quarter and $120 million for year-to-date 2003. Under SFAS No. 143, we began expensing the costs of removal in excess of salvage for outside plant assets as incurred. Previously, we had included costs of removal for these assets in our depreciation rates. Higher costs associated with our growth businesses such as long distance and data services, as well as the impact of annual wage increases, additional overtime pay due to higher weather-related repair volumes and contingency costs to maintain operational readiness during recent labor negotiations further contributed to cost increases in 2003.

Cost increases in both periods of 2003 were partially offset by lower access and transport costs, including a favorable adjustment of approximately $80 million recorded in the first quarter of 2003. As part of our ongoing review of local interconnection expense charged by CLECs, we determined that selected charges from CLECs, previously recorded as expense but not paid, were no longer required and accordingly, we adjusted our first quarter 2003 operating expenses. In addition, effective in 2003, we recognize as local interconnection expense no more than the amount payable under the April 27, 2001 FCC order addressing intercarrier compensation for dial-up connections for Internet-bound traffic. The effects of workforce reductions and disciplined expense controls also offset services and sales cost increases in both periods of 2003. At September 30, 2003, our Domestic Telecom workforce was approximately 155,000, compared to 168,100 at September 30, 2002, a 7.8% reduction from a year ago.

We recorded an additional insurance recovery related to the terrorist attacks on September 11, 2001 of $20 million in the third quarter of 2003 and $245 million year-to-date, primarily offsetting fixed asset losses and expenses incurred in the current and prior years. Of the amounts recorded, approximately $11 million and $122 million relates to operating expenses (primarily cost of services and sales) in the third quarter and year-to-date periods,

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respectively. The costs and estimated insurance recovery were recorded in accordance with Emerging Issues Task Force No. 01-10, “Accounting for the Impact of the Terrorist Attacks of September 11, 2001.”

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

Selling, General and Administrative Expense

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

Our selling, general and administrative expense was positively impacted in both the third quarter and year-to-date periods of 2003 as a result of lower bad debt expense principally due to a reduction in uncollectible accounts receivable (primarily CLECs), improved collections and additional customer deposit requirements. In addition, gross receipts and property taxes were lower in both periods of 2003, as compared to a year ago. These cost reductions were partially offset in both periods by higher net pension and other employee benefit costs in 2003.

Depreciation and Amortization Expense

The decline in depreciation and amortization expense in both the third quarter and year-to-date periods of 2003 was principally attributable to lower rates of depreciation on telephone plant, as well as the favorable impact on depreciation expense of adopting SFAS No. 143, effective January 1, 2003. These expense reductions were partially offset in both periods by higher software amortization costs.

Segment Income

Segment income decreased by $328 million, or 31.8% in the third quarter of 2003 and $687 million, or 20.7% year-to-date compared to the similar periods in 2002, primarily as a result of the after-tax impact of operating revenues and operating expenses described above. Special and non-recurring items not included in Domestic Telecom’s segment income totaled $79 million and $(1,448) million for the three months ended September 30, 2003 and 2002, respectively. Special and non-recurring items included in the third quarter of 2003 primarily related to pension settlements for employees that received lump-sum distributions during the quarter under voluntary separation plans. Special items in the similar period of 2002 were primarily related to the gain on the sale of the non-strategic access lines, partially offset by severance and other benefit charges. Special items totaling $(1,491) million and $(563) million for the nine months ended September 30, 2003 and 2002, respectively, were primarily impacted by third quarter special items described above, as well as the adoption of SFAS No. 143 in 2003 and SFAS No. 142 in 2002. Additional charges in the nine-month period of 2002 related to our financial statement exposure to WorldCom Inc. and the settlement of a litigation matter. Also, 2002 special items include the results of operations of the access lines sold in the third quarter of 2002.

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 $913 million, or 18.2% in the third quarter of 2003 and $2,255 million, or 15.8% for the nine months ended September 30, 2003 compared to the similar periods in 2002. Service revenue of $5,299 million for the third quarter of 2003 was $686 million, or 14.9% higher than the

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similar period in 2002, and service revenue of $14,970 million for the nine months ended September 30, 2003 was $1,936 million, or 14.9% higher than the similar period in 2002. These increases in service revenues were primarily due to a 14.3% increase in subscribers as well as an increase in average service revenue per subscriber.

We ended the third quarter of 2003 with more than 36 million subscribers, compared to 31.5 million subscribers at the end of the third quarter of 2002, an increase of 14.3%. Approximately 33.5 million, or 93% of these customers, subscribe to digital service, compared to 85% in the third quarter of 2002. Approximately 1.4 million net customers were added during the third quarter of 2003. Retail net additions accounted for approximately 1.3 million, or 90% of the total net adds. The overall composition of our customer base as of September 30, 2003 was 91% retail postpaid, 5% retail prepaid and 4% resellers. In addition, our average monthly churn rate, the rate at which customers disconnect service, decreased to 1.85% in the third quarter 2003 and decreased to 1.88% for the nine months ended September 30, 2003, compared to 2.33% in the third quarter of 2002 and 2.41% for the nine months ended September 30, 2002. Postpaid churn decreased to 1.42% in the third quarter 2003 and decreased to 1.47% for the nine months ended September 30, 2003, compared to 2.1% in the third quarter of 2002 and the nine months ended September 30, 2002. We added approximately 3.5 million net customers during the nine months ended September 30, 2003 compared to 2.1 million during the similar period in 2002.

Average service revenue per subscriber increased by .9% to $50.03 for the third quarter of 2003 and by 1.7% to $48.85 for the nine months ended September 30, 2003 compared to the similar periods in 2002, primarily due to a larger number of subscribers choosing higher access price plan offerings. Average MOUs per subscriber increased to 481, or 31.1% during the third quarter of 2003 and to 445, or 32.8% for the nine months ended September 30, 2003 compared to the similar periods in 2002. This increase was partially offset by decreased roaming revenue as a result of rate reductions with third-party carriers and decreased long distance revenue due to bundled pricing.

Operating Expenses

Cost of services and sales, which are costs to operate the wireless network as well as the cost of roaming, long distance and equipment sales, grew by $323 million, or 23.2% for the third quarter of 2003 and $755 million, or 19.0% for the nine months ended September 30, 2003 compared to the similar periods in 2002. Cost of services increased primarily due to an increase in direct telecom charges which were caused by increased minutes of use on the network for the third quarter of 2003 compared to the similar period in 2002, offset by lower roaming, local interconnection and long distance rates. Cost of equipment sales grew by 31.9% in the third quarter of 2003 and 26.3% for the nine months ended September 30, 2003 compared to similar periods in 2002. The increase was primarily due to an increase in handsets sold, caused by growth in gross activations and an increase in equipment upgrades for the third quarter and the nine months ended September 30, 2003 compared to the similar periods in 2002.

Selling, General and Administrative Expense

Selling, general and administrative expenses grew by $264 million, or 14.4% in the third quarter of 2003 and $703 million, or 13.4% for the nine months ended September 30, 2003 compared to the similar periods in 2002. This increase was primarily due to an increase in salary and wage expense of $131 million for the third quarter of 2003 and $260 million for the nine months ended September 30, 2003 compared to the similar periods in 2002, caused by an increase in the employee base, primarily in the customer care and sales channels, as well as an increase in employee benefits expense. Also contributing to the increase was higher sales commissions in our direct and indirect channels of $46 million for the third quarter 2003 and $170 million for the nine months ended September 30, 2003 compared to the similar periods in 2002, primarily related to an increase in gross subscriber additions and renewals in those periods. Costs associated with regulatory fees, primarily the universal service fund, increased by $62 million in the third quarter of 2003 and $113 million for the nine months ended September 30, 2003, compared to the similar periods in 2002 due to an April 2003 FCC order requiring a change in the methodology for billing these fees from a flat rate to a percentage rate.

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Depreciation and Amortization Expense

Depreciation and amortization increased by $172 million, or 20.8% in the third quarter of 2003 and $469 million, or 19.6% for the nine months ended September 30, 2003 compared to the similar periods in 2002. This increase was primarily due to increased depreciation expense related to the increase in depreciable assets.

Segment Income

Segment income increased by $33 million, or 12.3% in the third quarter of 2003 and by $71 million, or 10.1% for the nine months ended September 30, 2003 compared to the similar periods in 2002 primarily as a result of the after-tax impact of operating revenues and operating expenses described above, partially offset by an increase in minority interest. Special and non-recurring items not included in Domestic Wireless’s segment income totaled $22 million and $49 million for three- and nine-month periods ended September 30, 2002, respectively, and were related to merger related costs, severance and other charges. There were no special items affecting this segment in 2003.

Our Information Services segment consists of our domestic and international publishing businesses, including print SuperPages® and Internet directory, SuperPages.com™, and electronic commerce services. This segment has operations principally in North America and Latin America.

As announced July 1, 2003, Information Services changed its method of recognizing revenue and expenses from the publication-date method to the amortization method effective January 1, 2003. Under the amortization method, revenue and direct expenses are recognized over the life of the directory, which is usually 12 months.

Operating Revenues

Operating revenue decreased $143 million, or 12.2% in the third quarter and increased $188 million, or 6.5% in the first nine months of 2003 compared to the similar periods in 2002. These changes are primarily attributable to the impact of the accounting change from publication-date to amortization method. Excluding the impact of the accounting change and directories no longer published, revenues from on-going operations remained relatively flat for both the third quarter and the first nine months of 2003. Verizon SuperPages.com™ continues to achieve strong domestic growth as demonstrated by a 31.0% increase in revenue over the third quarter of 2002 and a 37.5% increase in revenue over the first nine months of 2002.

Operating Expenses

Cost of Services and Sales

Cost of services and sales increased $11 million, or 6.5% in the third quarter of 2003, and $36 million, or 7.8% for the first nine months of 2003 compared to the similar periods in 2002. These changes for both the third quarter and the first nine months of 2003 were primarily due to the change in accounting from publication-date to amortization method.

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Selling, General and Administrative Expense

Selling, general and administrative expenses decreased $40 million, or 9.7% in the third quarter of 2003 and increased $43 million, or 4.2% for the first nine months of 2003 compared to the similar periods in 2002. These changes for both the third quarter and the first nine months of 2003 were primarily due to the change in accounting from publication-date to amortization method. Comparing both periods under the amortization method, selling, general and administrative expenses were relatively flat for the third quarter and first nine months of 2003 compared to the similar periods in 2002. Increases in employee benefit costs were largely offset by cost reductions through system and process improvements.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $14 million, or 26.9% for the first nine months of 2003 compared to the similar period in 2002. The increase is primarily the result of software amortization of new systems placed into service in late 2002.

Sales of Businesses, Net

On July 24, 2003, Information Services completed the sale of its directory businesses in Europe, which consisted of publishing operations in Austria, the Czech Republic, Gibraltar, Hungary, Poland and Slovakia.

Segment Income

Segment income increased $13 million, or 3.7% in the third quarter 2003 and $139 million, or 17.0% in the first nine months of 2003 compared to the similar periods in 2002. The increases are primarily a result of the after-tax impact of the operating revenue and operating expense items described above. Special and non-recurring items not included in Information Services’ segment income were $32 million for the quarter ended September 30, 2002 primarily related to severance charges and merger-related costs. Special items totaling $1,584 million and $75 million for the nine months ended September 30, 2003 and 2002, respectively, were primarily related to the same types of charges described above, as well as the cumulative effect of the accounting change for directories in 2003.

Our International segment includes international wireline and wireless telecommunication operations and investments primarily in the Americas and Europe. Our consolidated international investments as of September 30, 2003 included CODETEL, C. por A. (Codetel) in the Dominican Republic, Telecomunicaciones de Puerto Rico, Inc. (TELPRI) in Puerto Rico and Micronesian Telecommunications Corporation in the Northern Mariana Islands. Either the cost or the equity method is applied to those investments in which we have less than a controlling interest.

On June 13, 2003, we announced our decision to sell our 39.4% consolidated interest in Iusacell. We reclassified our investment and the results of operations of Iusacell in the current and prior years as discontinued operations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We subsequently sold our shares in Iusacell on July 29, 2003. Discontinued operations are excluded from International’s segment income.

The total number of wireless subscribers served by Verizon’s International investments in the third quarter of 2003 was approximately 32 million, an increase of almost 3 million compared to the similar period in 2002. Total access lines served by International’s investments in the third quarter of 2003 was 9.4 million, consistent with the third quarter of 2002.

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Operating Revenues

Revenues generated by our international businesses decreased $92 million, or 17.1% in the third quarter of 2003 and $198 million, or 11.9% in the first nine months of 2003 compared to the similar periods in 2002. These decreases are primarily due to declining foreign exchange rates in the Dominican Republic, reduced software sales as well as an adjustment to carrier access revenues at TELPRI.

Operating Expenses

Cost of services and sales increased $20 million, or 16.1% in the third quarter of 2003 compared to the similar period in 2002. The increase reflects higher operating costs partially offset by declining foreign exchange rates in the Dominican Republic.

Selling, General and Administrative Expense

Selling, general and administrative expense increased $106 million, or 91.4% in the third quarter of 2003 and $101 million, or 21.4% in the first nine months of 2003 compared to the similar periods in 2002. The third quarter increase is primarily due to a charge recorded by TELPRI in the third quarter of 2003 as a result of an adverse Puerto Rico Circuit Court of Appeals ruling regarding access rates for intra-island long distance service and a contract settlement in the third quarter of 2002, offset by the replacement of a revenue-based operating tax in the Dominican Republic with an income tax and declining foreign exchange rates in the Dominican Republic. The increase for the first nine months of 2003 also includes an asset write-off recorded in the second quarter of 2003.

Depreciation and Amortization Expense

Depreciation and amortization expense decreased $17 million, or 17.5% in the third quarter of 2003 and $36 million, or 12.5% in the first nine months of 2003 compared to the similar periods in 2002. These decreases are due to declining foreign exchange rates in the Dominican Republic and the adoption of SFAS No. 143, offset in part by increased depreciation generated from ongoing network capital expenditures.

Segment Income

Segment income increased $146 million, or 44.9% in the third quarter of 2003 and $193 million, or 22.5% in the first nine months of 2003 compared to the similar periods in 2002. The 2003 increase in segment income was primarily the result of the after-tax impact of operating revenues and operating expenses described above as well as the year-over-year change in earnings from unconsolidated businesses.

Equity in earnings of unconsolidated businesses increased $187 million, or 89.0% in the third quarter of 2003 and $324 million, or 69.7% in the first nine months of 2003 compared to the similar periods in 2002. These increases are driven by additional tax benefits arising from a reorganization at our Italian investment Omnitel, continued operational growth of Verizon’s equity investments and favorable foreign currency impacts. Income from other unconsolidated businesses increased $64 million, or 400.0% in the third quarter of 2003 and decreased $43 million, or 20.3% in the first nine months of 2003 compared to the similar periods in 2002. The third quarter increase is

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primarily related to sales of interests in unconsolidated investments, including Taiwan Cellular Corporation. The decrease for the first nine months of 2003 is due to lower gains on sales of investments in 2003.

Special and non-recurring items not included in International’s segment income totaled $(211) million for the three months ended September 30, 2002 and was primarily related to the gain on a sale of an interest in TCNZ. Special items totaling $900 million and $2,470 million for the nine months ended September 30, 2003 and 2002, respectively, and were primarily related to investment losses.

Discontinued Operations

During the second quarter of 2003, we announced our decision to sell our 39.4% consolidated interest in Iusacell into the tender offer launched by Movil Access, a Mexican company. Verizon tendered its shares shortly after the tender offer commenced, and the tender offer closed on July 29, 2003. In accordance with SFAS No. 144, we have classified the results of operations of Iusacell into discontinued operations. In connection with the decision to sell our interest in Iusacell and a comparison of expected sale proceeds, less cost to sell, to the net book value of our investment in Iusacell (including the foreign currency translation balance), we recorded a pretax loss of $957 million ($931 million after-tax, or $.33 per diluted share) in the second quarter of 2003.

Sales of Businesses, Net

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

In the third quarter of 2002, we sold nearly all of our investment in TCNZ for net cash proceeds of $769 million, which resulted in a pretax gain of $383 million ($229 million after-tax, or $.08 per diluted share) recorded in Income (Loss) from Other Unconsolidated Businesses.

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 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).

We continually evaluate our investments in unconsolidated businesses and other long-lived assets for impairment. As of September 30, 2003, no impairments were determined to exist.

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

During the second quarter of 2002, we recorded pretax losses of $3,558 million ($3,305 million after-tax, or $1.21 per diluted share), including a loss of $2,443 million ($2,443 million after-tax, or $.90 per diluted share) related to our interest in Genuity Inc. (Genuity), a loss of $580 million ($430 million after-tax, or $.16 per diluted share) to the market value of our investment in TELUS Corporation (TELUS), a loss of $303 million ($201 million after-tax, or $.07 per diluted share) to the market value of our investment in C&W and a loss of $232 million ($231 million after-tax, or $.08 per diluted share) relating to several other investments. We determined that market value declines in these investments were considered other than temporary.

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

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

During the first quarter of 2002, we recorded a pretax loss of $230 million ($190 million after-tax, or $.07 per diluted share) to fair value due to the other than temporary decline in the fair value of our remaining investment in CTI Holdings, S.A. (CTI) as a result of the impact of the deterioration of the Argentinean economy and the devaluation of the Argentinean peso on CTI’s financial position. 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.

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

Severance, Pension and Benefit Charges

During the third quarter of 2003, we recorded pretax pension settlement losses of $131 million ($81 million after-tax, or $.03 per diluted share) related to employees that received lump-sum distributions during the quarter in connection with previously announced employee separations. During the third quarter of 2002, we recorded a pretax charge of $294 million ($185 million after-tax, or $.07 per diluted share) related to settlement losses incurred in connection with previously announced employee separations.

During the second quarter of 2003, we recorded a special charge of $235 million ($150 million after-tax, or $.05 per diluted share) primarily associated with employee severance costs and severance-related activities in connection with the voluntary separation of approximately 4,000 employees. As of September 30, 2003, nearly all of the separations under the year-to-date 2003 severance activity have occurred. 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. Nearly all of the separations under prior year severance activity have occurred. The remaining severance liability relating to previous severance activity is $605 million, which principally includes future payments to employees separated as of September 30, 2003. We expect to complete the severance activities within a year of when the respective charges were recorded. We continually evaluate employee levels, and accordingly, may incur future severance costs.

In the second quarter of 2003, we recorded a special charge of $463 million ($286 million after-tax, or $.10 per diluted share) in connection with enhanced pension benefits granted to employees retiring in the first half of 2003, estimated costs associated with the July 10, 2003 Verizon-New York arbitration ruling and pension settlement losses related to lump-sum pay-outs in 2003. On July 10, 2003, an arbitrator ruled that Verizon-New York’s termination of 2,300 employees in 2002 was not permitted under a union contract; similar cases were pending impacting an additional 1,100 employees. Verizon offered to reinstate all 3,400 impacted employees, and accordingly, recorded a charge in the second quarter of 2003 representing estimated payments to employees and other related company-paid costs.

Merger Transition Costs

We announced at the time of the Bell Atlantic—GTE merger that we expected to incur a total of approximately $2 billion of transition costs related to the merger and the formation of the wireless joint venture. These costs were incurred to integrate systems, consolidate real estate and relocate employees. They also included approximately

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$500 million for advertising and other costs to establish the Verizon brand. Transition activities were complete at December 31, 2002 and totaled $2,243 million. Transition costs for the three and nine months ended September 30, 2002 were $94 million and $292 million ($50 million and $159 million after taxes and minority interest, or $.02 and $.06 per diluted share), respectively.

Other Special Items

During the second quarter of 2003, we recorded pretax charges of $258 million ($204 million after-tax, or $.07 per diluted share) primarily related to a pretax impairment charge of $125 million ($125 million after-tax, or $.04 per diluted share) pertaining to our leasing operations for airplanes leased to airlines experiencing financial difficulties and for power generating facilities. These second quarter 2003 charges also include pretax charges of $61 million ($38 million after-tax, or $.01 per diluted share) related to the early retirement of debt and other pretax charges of $72 million ($41 million after-tax, or $.01 per diluted share). During the third quarter of 2002, we recorded a pretax impairment charge of $249 million ($156 million after-tax, or $.06 per dilute share) primarily pertaining to Verizon’s leasing operations related to airplanes leased to airlines experiencing financial difficulties.

During the second quarter of 2002, we recorded pretax charges of $398 million ($259 million after-tax, or $.10 per diluted share) primarily resulting from a pretax impairment charge in connection with our financial statement exposure to WorldCom of $300 million ($183 million after-tax, or $.07 per diluted share) and other pretax charges of $98 million ($76 million after-tax, or $.03 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 settlement of a litigation matter that arose from our decision to terminate an agreement with NorthPoint Communications Group, Inc. to combine the two companies’ DSL businesses. The nine-month period ended September 30, 2002 also includes other pretax charges of $18 million ($12 million after-tax, or less than $.01 per diluted share).

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 exceed current assets, our sources of funds, primarily from operations and, to the extent necessary, from readily available external financing arrangements, are sufficient to meet ongoing operating and investing requirements. We expect that capital spending requirements will continue to be financed primarily through internally generated funds. Additional debt or equity financing may be needed to fund additional development activities or to maintain our capital structure to ensure our financial flexibility.

Our primary source of funds continues to be cash generated from operations. The increase in cash from operations in the nine months ended September 30, 2003 compared to the similar period of 2002 was primarily driven by favorable results of operations, partially offset by higher dividends paid by Verizon Wireless to Vodafone in the current year.

Capital expenditures continue to be our primary use of capital resources and facilitate the introduction of new products and services, enhance responsiveness to competitive challenges and increase the operating efficiency and productivity of our networks. Including capitalized network and non-network software, we invested $4,765 million in our Domestic Telecom business in the first nine months of 2003, compared to $5,334 million in the first nine months of 2002. The decrease in Domestic Telecom capital spending is primarily due to the effective management of our capital expenditure budget. We also invested $3,079 million in our Domestic Wireless business in the first nine months of 2003, compared to $3,026 million in the first nine months of 2002. The steady capital investment

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represents our continuing effort to invest in high growth areas. We expect total capital expenditures, including capitalized network and non-network software, in 2003 to be approximately $12.0 billion to $12.5 billion.

We invested $1,097 million in acquisitions and investments in businesses during the first nine months of 2003, including $762 million to acquire 50 Personal Communications Services (PCS) licenses and related network assets from Northcoast Communications LLC (Northcoast) and $157 million for other wireless properties. In the first nine months of 2002, we invested $1,012 million in acquisitions and investments in businesses including $556 million to acquire some of the cellular properties of Dobson Communications Corporation and $218 million for other wireless properties. We also received a $1,479 million refund from the FCC in the first nine months of 2002 in connection with our wireless auction deposit.

In the third quarter of 2003, we received cash proceeds of $229 million from the sale of our directory publication operations in Austria, the Czech Republic, Gibraltar, Hungary, Poland and Slovakia. In the first nine months of 2002, we received cash proceeds of $4,638 million, consisting of $3,868 million from the sale of non-strategic access lines and $770 million in connection with the sale of TSI.

Other, net investing activities for the first nine months of 2003 includes net cash proceeds of $415 million in connection with sales of our shares in various investments, primarily Taiwan Cellular Corporation and Crown Castle International Corp., while the similar period of 2002 includes net cash proceeds of $769 million in connection with the sale of our investment in TCNZ.

Under the terms of an investment agreement relating to our wireless joint venture, Vodafone may require Verizon Wireless to purchase up to an aggregate of $20 billion worth of Vodafone’s interest in Verizon Wireless at designated times between 2003 and 2007 at its then fair market value. We have the right, exercisable at our sole discretion, to purchase up to $12.5 billion of Vodafone’s interest instead of Verizon Wireless for cash or Verizon stock at our option. Vodafone may require the purchase of up to $10 billion during a 61-day period opening on June 10 and closing on August 9 in 2003 or 2004, and the remainder, which may not exceed $10 billion in any one year, during a 61-day period opening on June 10 and closing on August 9 in 2005 through 2007. Vodafone also may require that Verizon Wireless pay for up to $7.5 billion of the required repurchase through the assumption or incurrence of debt. Vodafone did not exercise its put rights during the 61-day period that ended on August 9, 2003.

Cash of $7,313 million was used to reduce our total debt during the first nine months of 2003. We repaid $5,646 million of Verizon Global Funding Corp., $2,015 million of Domestic Telecom and $1,116 million of other corporate long-term debt, and reduced our short-term borrowings by $1,274 million with cash from operations and the issuance of Verizon Global Funding and Domestic Telecom long-term debt. Verizon Global Funding and Domestic Telecom issued long-term debt with principal amounts of $1,500 million and $1,350 million, respectively, resulting in total cash proceeds of $2,766 million, net of discounts, costs and a payment related to a hedge on the interest rate for an anticipated financing.

Cash of $8,029 million was used to reduce our total debt during the first nine months of 2002. We repaid $2,081 million of Verizon Global Funding Corp., $2,073 million of Domestic Telecom and $1,013 million of Domestic Wireless long-term debt (including $585 million of net debt assumed in connection with the Price transaction), and reduced our short-term borrowings by $9,633 million primarily with cash and the issuance of Domestic Telecom and Verizon Global Funding long-term debt. Domestic Telecom and Verizon Global Funding issued $3,430 million and $3,816 million of long-term debt, respectively.

Our ratio of debt to debt combined with shareowners’ equity was 56.4% at September 30, 2003, compared to 64.0% at September 30, 2002.

As of September 30, 2003, we had $212 million in bank borrowings outstanding. In addition, we had approximately $5.9 billion of unused bank lines of credit and our telephone and financing subsidiaries had shelf registrations for the issuance of up to $12.8 billion of unsecured debt securities. The debt securities of our telephone and financing subsidiaries continue to be accorded high ratings by primary rating agencies. In December 2002, Moody’s Investors Service downgraded our senior unsecured debt rating from A1 to A2, and changed our credit rating outlook from negative to stable. The short term rating of Prime-1 was maintained. In February 2003, Standard & Poor’s upgraded our credit rating outlook from negative to stable, citing debt reduction efforts over the past year. We have adopted a debt portfolio strategy that continues our overall debt reduction efforts through the remainder of the year.

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

Our cash and cash equivalents at September 30, 2003 totaled $746 million, a $676 million decrease over cash and cash equivalents at December 31, 2002 of $1,422 million. The decrease in cash and cash equivalents in the current nine-month period was primarily driven by significant reduction in our outstanding borrowings and capital expenditures and dividends paid, partially offset by favorable results of operations.

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. We do not expect that our net income, liquidity and cash flows will be materially affected by these risk management strategies.

In 1998, Verizon Global Funding issued notes exchangeable into shares of TCNZ and into shares of Cable & Wireless Communications plc (subsequently C&W and NTL Incorporated) as described in Note 7 to the condensed consolidated financial statements. These financial instruments exposed us to market risk, including (i) equity price risk, because the notes were exchangeable into shares that are traded on the open market and routinely fluctuate in value, (ii) foreign exchange rate risk, because the notes were exchangeable into shares that are denominated in a foreign currency, and (iii) interest rate risk, because the notes carried fixed interest rates.

On April 1, 2003, all of the outstanding $2,455 million principal amount of the 5.75% notes that were exchangeable into shares of TCNZ were redeemed at maturity. On March 15, 2003, Verizon Global Funding, the issuer of the 4.25% notes that were exchangeable into shares of C&W and a combination of shares and warrants in the reorganized NTL entities, redeemed all of the outstanding 4.25% notes. The cash redemption price for the 4.25% notes was $1,048.29 for each $1,000 principal amount of the notes. The principal amount of the 4.25% notes outstanding, before unamortized discount, at the time of redemption, was $2,839 million.

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 $401 million at September 30, 2003.

A sensitivity analysis of our cost investments and equity price sensitive derivatives recorded at fair value indicated that a 10% increase or decrease in the fair value of the underlying common stock equity prices would result in a $12 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 $8 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, consisting of several long-term call options on our common stock, do not qualify for hedge accounting under SFAS No. 133, “Accounting for

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Derivative Instruments and Hedging Activities.” As such, a change of approximately $4 million in the fair value of our equity price sensitive derivatives would be recognized in our condensed consolidated balance sheets and in current earnings.

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

Labor and Employee Benefit Issues

On September 4, 2003, we announced that we reached agreement on five-year contracts with the Communications Workers of America and the International Brotherhood of Electrical Workers covering nearly 79,000 employees in 13 Northeastern and mid-Atlantic states. We will record a lump-sum payment of approximately 3 cents per diluted share, which will be included in Verizon’s fourth quarter 2003 results of operations. In addition, as a result of extending and increasing limits (caps) on company payments toward retiree health care costs in connection with the ratified union contracts, effective in the fourth quarter of 2003 we will begin recording retiree health care costs as if there were no caps. The fourth quarter 2003 expense is expected to be approximately 4 cents per diluted share and the 2004 impact is expected to be approximately 16 cents per diluted share.

In September and October 2003, we announced management and union voluntary separation offers that include enhanced severance, pension and health care provisions. The election periods for both the management and union offers end no later than November 16, 2003. Consequently, the financial statement impact of these offers, which will be recorded in the fourth quarter 2003, cannot be reasonably estimated but is expected to be significant.

Verizon Wireless

In May 2003, Verizon Wireless acquired 50 PCS licenses and related network assets from Northcoast for approximately $762 million in cash. The licenses provide Verizon Wireless with additional growth capacity over large portions of the East Coast and Midwest. The total population served by the licenses is approximately 47 million.

WorldCom/MCI Settlement

An agreement has been reached with WorldCom/MCI, settling claims between the two companies for services provided prior to WorldCom/MCI’s bankruptcy. Under the terms of the agreement, Verizon will receive $60 million in cash and will not be obligated to pay $377 million in pre-petition amounts owed to WorldCom/MCI. The agreement has been approved by the bankruptcy court, and is subject to WorldCom/MCI emerging from bankruptcy.

Telecommunications Act of 1996

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

In-Region Long Distance

Under the 1996 Act, our ability to offer in-region long distance services in the regions where the former Bell Atlantic telephone subsidiaries operate as local exchange carriers was largely dependent on satisfying specified requirements. These requirements included a 14-point “competitive checklist” of steps which we must take to help competitors offer local services through resale, through purchase of UNEs, or by interconnecting their own networks to ours. We were required to demonstrate to the FCC that our entry into the in-region long distance market would be in the public interest.

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We now have authority from the FCC to offer in-region long distance service in all 14 of the former Bell Atlantic jurisdictions. The United States Court of Appeals for the District of Columbia has affirmed the FCC’s Pennsylvania decision and has remanded the Massachusetts order to the FCC for further explanation on one issue, but left our long distance authority in effect.

FCC Regulation and Interstate Rates

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

Access Charges and Universal Service

On May 31, 2000, the FCC adopted the Coalition for Affordable Local and Long Distance Services (CALLS) plan as a comprehensive five-year plan for regulation of interstate access charges. The CALLS plan has three main components. First, it establishes a portable interstate access universal service support of $650 million for the industry. This explicit support replaces implicit support embedded in interstate access charges. Second, the plan simplifies the patchwork of common line charges into one subscriber line charge (SLC) and provides for de-averaging of the SLC by zones and class of customers in a manner that will not undermine comparable and affordable universal service. Third, the plan sets into place a mechanism to transition to a set target of $.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 continued in effect pending the FCC’s further consideration of its justification of these components. On July 10, 2003, the FCC released an order on remand reaffirming these aspects of its plan.

As a result of tariff adjustments which became effective in July 2003, virtually all of our access lines reached the $.0055 benchmark.

The FCC has adopted rules for special access services that provide for pricing flexibility and ultimately the removal of services from price regulation when prescribed competitive thresholds are met. In order to use these rules, carriers must forego the ability to take advantage of provisions in the current rules that provide relief in the event earnings fall below prescribed thresholds. We have been authorized to remove special access and dedicated transport services from price caps in 56 Metropolitan Statistical Areas (MSAs). In addition, the FCC has found that in 24 MSAs we have met the stricter standards to remove special access connections to end-user customers from price caps. Approximately 55% of special access revenues are now removed from price regulation.

In November 1999, the FCC adopted a new mechanism for providing universal service support to high cost areas served by large local telephone companies. This funding mechanism provides additional support for local telephone services in several states served by our telephone operations. This system has been supplemented by the new FCC access charge plan described above. On July 31, 2001, the U.S. Court of Appeals for the Tenth Circuit reversed and remanded to the FCC for further proceedings. The court concluded that the FCC had failed to adequately explain some aspects of its decision and had failed to address any need for a state universal service mechanism. On October 16, 2003, the FCC announced a decision providing additional justification for its non-rural high-cost universal support mechanism and modifying it in part. The FCC also has proceedings underway to evaluate possible changes to its current rules for assessing contributions to the universal service fund. Any change in the current assessment mechanism could result in a change in the contribution that local telephone companies must make and that would have to be collected from customers.

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Unbundling of Network Elements

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

In addition to the unbundling requirements released in November 1999, the FCC released an order in a separate proceeding in December 1999, requiring incumbent local exchange companies also to unbundle and provide to competitors the higher frequency portion of their local loop. This provides competitors with the ability to provision data services on top of incumbent carriers’ voice services.

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

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

Prior to the issuance of these orders from the U.S. Court of Appeals for the D.C. Circuit, the FCC had already begun a review of the scope of its unbundling requirement through a rulemaking referred to as the triennial review of UNEs. This rulemaking reopened the question of what network elements must be made available on an unbundled basis under the 1996 Act, and will address the impact of the order by the U.S. Court of Appeals for the D.C. Circuit overturning its previous rules, as well as other pending issues relating to unbundled elements, including the question of whether competing carriers may substitute combinations of unbundled loops and transport for already competitive special access services. On February 20, 2003, the FCC announced a decision in its triennial review. The order was released on August 21, 2003. With respect to broadband services, that order generally removed section 251 unbundling obligations. With respect to narrowband services, the order generally left unbundling obligations in place, and delegated to state regulatory proceedings a further review. The order also provided a new set of criteria relating to when carriers may purchase EELs. Multiple parties, including Verizon, have appealed various aspects of the decision.

The FCC’s February 2003 order significantly increases arbitrage opportunities by making it easier for carriers to use EELs for non-local service at regulated prices set using the pricing formula that applies to UNEs rather than competitive special access prices. In addition, the FCC’s order eliminates important safeguards that protected against this kind of arbitrage, including the FCC’s previous rule against co-mingling unbundled elements and other services. As a result, we estimate the impact on earnings related to this portion of the FCC’s order to be less than 1 cent per diluted share this year; however, we estimate the impact to be potentially 4 cents to 6 cents per diluted share in 2004.

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 $.0015 to $.0007 over a three-year period. The FCC order also sets caps on the total minutes of this traffic that may be subject to any intercarrier compensation and requires that incumbent local exchange carriers must offer to both bill and pay reciprocal compensation for local traffic at the same rate as they are required to pay on Internet-bound traffic. On May 3, 2002, the U.S. Court of Appeals for the D.C. Circuit rejected part of the FCC’s rationale for its April 27, 2001 order, but declined to vacate the order while it is on remand.

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

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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:

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the duration and extent of the current economic downturn;

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materially adverse changes in economic and industry conditions and labor matters, including workforce levels and labor negotiations, and any resulting financial and/or operational impact, in the markets served by us or by companies in which we have substantial investments;

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material changes in available technology;

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technology substitution;

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

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

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the effects of competition in our markets;

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our ability to satisfy regulatory merger conditions;

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

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

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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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

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(a) Evaluation of Disclosure Controls and Procedures

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

(b) Changes in Internal Control Over Financial Reporting

There were no significant changes in the registrant’s internal control over financial reporting during the period covered by this quarterly report, nor were there any significant deficiencies or material weaknesses in these controls requiring corrective actions.

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Item 6. Exhibits and Reports on Form 8-K

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(a) Exhibits:

(b) Reports on Form 8-K filed or furnished during the quarter ended September 30, 2003:

A Current Report on Form 8-K, filed July 1, 2003, announcing Verizon Communications Inc. decisions to change the method for recognizing revenues and expenses in its directory business and to sell and reclassify its consolidated interest in Grupo Iusacell S. A. de C.V. (Iusacell) as a discontinued operation.

A Current Report on Form 8-K, furnished on July 29, 2003, containing a press release announcing earnings for the second quarter ended June 30, 2003.

A Current Report on Form 8-K, furnished on September 4, 2003, containing a press release announcing the agreement between Verizon Communications Inc. and two labor unions in the Northeast on new contracts.

A Current Report on Form 8-K, furnished on September 23, 2003, containing a press release providing our revised financial outlook for 2003.

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Signature

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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.

UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 5, 2003.

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