UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2002

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

For the transition period from to

Commission file number 2-33059

VERIZON HAWAII INC.

A Hawaii Corporation

I.R.S. Employer Identification
No. 99-0049500

1095 Avenue of the Americas, Room 3868, New York, New York 10036

Telephone Number (212) 395-2121

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).

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 ¨

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

VERIZON HAWAII INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2002			2001			2002		2001
OPERATING REVENUES (including $7.3, $11.8, $20.6 and $27.1 from affiliates)	$	134.9		$	135.4		$	397.2	$	420.8

Operations and support expense (exclusive of items shown below) (including $28.5, $23.8, $79.2 and $63.0 to affiliates)		105.1			67.3			257.0		222.5
Depreciation and amortization		27.5			28.8			80.4		86.1

		132.6			96.1			337.4		308.6

OPERATING INCOME		2.3			39.3			59.8		112.2
OTHER INCOME AND (EXPENSE), NET (including $0, $(.7), $(.1) and $(1.3) from affiliates)		.4			(.7	)		1.2		(1.2	)
INTEREST EXPENSE (including $1.1, $2.0, $3.4 and $6.2 to affiliate)		8.5			9.4			25.6		28.2

INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES		(5.8	)		29.2			35.4		82.8
PROVISION (BENEFIT) FOR INCOME TAXES		(3.0	)		11.5			11.8		32.5

NET INCOME (LOSS)	$	(2.8	)	$	17.7		$	23.6	$	50.3

See Notes to Condensed Consolidated Financial Statements.

VERIZON HAWAII INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Millions)	September 30, 2002		December 31, 2001
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash	$	.3	$	.3
Short-term investments		17.1		40.5
Accounts receivable:
Trade and other, net of allowances for uncollectibles of $12.7 and $6.2		100.4		110.2
Affiliates		24.3		10.7
Material and supplies		19.2		11.0
Prepaid expenses		4.8		1.3
Deferred income taxes		6.0		4.0
Other		9.5		10.5

		181.6		188.5

PLANT, PROPERTY AND EQUIPMENT		1,956.1		1,924.3
Less accumulated depreciation		1,269.7		1,226.8

		686.4		697.5

PREPAID PENSION ASSET		494.3		470.9

INVESTMENTS IN UNCONSOLIDATED BUSINESSES		36.5		39.6

OTHER ASSETS		25.0		24.7

TOTAL ASSETS	$	1,423.8	$	1,421.2

See Notes to Condensed Consolidated Financial Statements.

VERIZON HAWAII INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Millions, Except Per Share Amount)	September 30, 2002			December 31, 2001
	(Unaudited)
LIABILITIES AND SHAREOWNER’S INVESTMENT
CURRENT LIABILITIES
Debt maturing within one year:
Note payable to affiliate	$	193.1		$	201.8
Accounts payable and accrued liabilities:
Affiliates		46.0			19.5
Other		49.9			69.0
Other liabilities		36.2			36.3

		325.2			326.6

LONG-TERM DEBT		428.2			428.6

EMPLOYEE BENEFIT OBLIGATIONS		37.2			41.2

DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes		248.9			233.4
Unamortized investment tax credits		28.8			31.8
Other		32.1			31.9

		309.8			297.1

SHAREOWNER’S INVESTMENT
Common stock $25 par value per share		250.0			250.0
Authorized shares: 18,000,000
Outstanding shares: 10,000,000
Contributed capital		102.0			99.9
Accumulated deficit		(28.6	)		(22.2	)

		323.4			327.7

TOTAL LIABILITIES AND SHAREOWNER’S INVESTMENT	$	1,423.8		$	1,421.2

See Notes to Condensed Consolidated Financial Statements.

VERIZON HAWAII INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
(Dollars in Millions) (Unaudited)	2002			2001

NET CASH PROVIDED BY OPERATING ACTIVITIES	$	73.5		$	43.1


CASH FLOWS FROM INVESTING ACTIVITIES
Net change in short-term investments		23.4			14.3
Capital expenditures		(58.2	)		(53.3	)
Investment in unconsolidated business		(2.1	)		—
Other, net		—			(.4	)

Net cash used in investing activities		(36.9	)		(39.4	)


CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments of capital lease obligations		—			(.6	)
Change in note payable to affiliate		(8.7	)		82.0
Dividends paid		(30.0	)		(86.0	)
Capital contribution from parent		2.1			—

Net cash used in financing activities		(36.6	)		(4.6	)


NET CHANGE IN CASH		—			(.9	)

CASH, BEGINNING OF PERIOD		.3			1.5


CASH, END OF PERIOD	$	.3		$	.6

See Notes to Condensed Consolidated Financial Statements.

VERIZON HAWAII INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Verizon Hawaii Inc. is a wholly owned subsidiary of GTE Corporation (GTE), which is a wholly owned subsidiary of Verizon Communications Inc. (Verizon Communications). The accompanying unaudited condensed consolidated financial statements have been prepared based upon Securities and Exchange Commission 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 position for the interim periods shown including normal recurring accruals. The results for the interim periods are not necessarily indicative of results for the full year. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For a more complete discussion of significant accounting policies and certain other information, you should refer to the financial statements included in our 2001 Annual Report on Form 10-K.

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

2. Adoption of New Accounting Standards

Goodwill and Other Intangible Assets

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under prescribed conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The goodwill impairment test under SFAS No. 142 requires a two-step approach, which is performed at the reporting unit level, as defined in SFAS No. 142. Step one identifies potential impairments by comparing the fair value of the reporting unit to its carrying amount. Step two, which is only performed if there is a potential impairment, compares the carrying amount of the reporting unit’s goodwill to its implied value, as defined in SFAS No. 142. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for an amount equal to that excess. 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 adoption of SFAS No. 142 did not impact our results of operations or financial position because we had no goodwill or other intangible assets at December 31, 2001 and 2000.

Impairment or Disposal of Long-Lived Assets

Effective January 1, 2002, we adopted SFAS No. 144. This standard supersedes SFAS No. 121 and the provisions of Accounting Principles Board (APB) Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” with regard to reporting the effects of a disposal of a segment of a business. SFAS No. 144 establishes a single accounting model for assets to be disposed of by sale and addresses several SFAS No. 121 implementation issues. The adoption of SFAS No. 144 did not have a material effect on our results of operations or financial position.

3. Recent Accounting Pronouncements

Asset Retirement Obligations

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

VERIZON HAWAII INC.

Debt Extinguishment

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other things, eliminates the requirement that all gains and losses on the extinguishment of debt must be classified as extraordinary items on the income statement, thereby permitting the classification of such gains and losses as extraordinary items only if the criteria of APB No. 30 are met. We are required to adopt this provision of SFAS No. 145 effective January 1, 2003 and, upon adoption, we will reclassify in our statements of income previously reported extraordinary charges for the early extinguishment of debt to income from continuing operations.

Exit or Disposal Activities

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

4. Dividend

On November 1, 2002, we declared and paid a dividend in the amount of $8.0 million to GTE.

5. Shareowner’s Investment

	Common Stock		Contributed Capital		Accumulated Deficit
	(Dollars in Millions)
Balance at December 31, 2001	$	250.0	$	99.9	$	(22.2	)
Net income						23.6
Dividends declared to GTE						(30.0	)
Capital contribution from GTE				2.1

Balance at September 30, 2002	$	250.0	$	102.0	$	(28.6	)

Net income and comprehensive income were the same for the nine months ended September 30, 2002 and 2001.

6. Commitments and Contingencies

Various legal actions and regulatory proceedings are 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 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.

Several regulatory matters may require us to refund to customers a portion of the revenues collected in the current and prior periods. The outcome of each pending matter, as well as the time frame within which each matter will be resolved, is not presently determinable.

Regulatory conditions to the Bell Atlantic – GTE merger include commitments to, among other things, promote competition and the widespread deployment of advanced services, while helping to ensure that consumers continue to receive high-quality, low cost telephone services. In some cases, there are significant penalties associated with not meeting these commitments. The cost of satisfying these commitments could have a significant impact on net income in future periods.

VERIZON HAWAII INC.

7. Investment in Verizon Ventures III Inc.

In May 2001, we transferred certain advanced data assets to an affiliated company, Verizon Ventures III Inc. (Ventures III) in exchange for common stock of Ventures III. This transfer was done to satisfy a condition of the Federal Communications Commission’s (FCC) approval of the Bell Atlantic – GTE merger, which required the provision of advanced data services through a separate affiliate. Throughout 2001, we continued to invest in Ventures III through the transfer of additional assets. As a result of the transfers, we acquired an ownership interest in Ventures III, which we accounted for under the equity method of accounting.

In September 2001, the FCC issued an order eliminating this merger condition. Following the FCC order, we made necessary filings with our state regulatory commission for approval of the transfer of these assets back to us. On February 1, 2002, after required state regulatory approvals were obtained, Ventures III transferred assets back to us with an aggregate net book value of $4.9 million. In consideration of the transfer of these assets, we have surrendered our common stock in Ventures III and remitted cash compensation.

In connection with this reintegration, we received a capital contribution from our parent of $2.1 million in the first quarter of 2002. This equity was immediately contributed to Ventures III. No gain or loss was recognized as a result of the reintegration of the advanced data assets to us. This reintegration did not have a material effect on our results of operations or financial condition.

8. Employee Severance and Other

In connection with the Bell Atlantic – GTE merger on June 30, 2000, we incurred charges associated with employee severance of $10.6 million. These costs, as recorded under SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” represent the benefit costs for the separation of management employees who were entitled to benefits under pre-existing separation plans, as well as an accrual of ongoing SFAS No. 112 obligations for GTE employees. The severances in connection with the Bell Atlantic – GTE merger are complete.

During the fourth quarter of 2001, we recorded a charge of $1.8 million for the voluntary and involuntary separation of employees in accordance with SFAS No. 112. During the second quarter of 2002, we recorded a charge of $1.2 million in accordance with SFAS No. 112 associated with employee severance. As of September 30, 2002, a total of approximately 60 management and associate employees have been separated under the 2001 and 2002 severance programs. The remaining severance liability relating to these programs is $1.8 million, which includes future payments to employees separated as of September 30, 2002. We expect to complete the severance programs within a year of when the respective charges were recorded. During the nine months ended September 30, 2002, we recorded a pension settlement loss of $20.8 million in connection with previously announced employee separations. SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Pension Plans and for Termination Benefits” requires that settlement gains and losses be recorded once prescribed payment thresholds have been reached. Employee benefit costs are recorded in Operations and Support Expense in our Statement of Income.

In addition, during the second quarter of 2002, we recorded an impairment charge of $3.4 million driven by our financial statement exposure to WorldCom Inc.

VERIZON HAWAII INC.

Item 2. Management’s Discussion and Analysis of Results of Operations (Abbreviated pursuant to General Instruction H(2).)

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Condensed Consolidated Notes to Financial Statements.

RESULTS OF OPERATIONS

We reported net income of $23.6 million for the nine month period ended September 30, 2002, compared to net income of $50.3 million for the same period in 2001. Our reported results included the following special items:

Employee Severance

During the second quarter of 2002, we recorded a charge of $1.2 million in accordance with Statement of Financial Accounting Standards (SFAS) No. 112, “Employers’ Accounting for Postemployment Benefits,” associated with employee severance.

During the nine months ended September 30, 2002, we recorded a pension settlement loss of $20.8 million in connection with previously announced employee separations. SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Pension Plans and for Termination Benefits” requires that settlement gains and losses be recorded once prescribed payment thresholds have been reached.

WorldCom Inc.

During the second quarter of 2002, we recorded an impairment charge of $3.4 million driven by our financial statement exposure to WorldCom Inc. (WorldCom).

WorldCom, including its affiliates, purchases dedicated local exchange capacity from us to support its private networks and we also charge WorldCom for access to our local network. In addition, we sell local wholesale interconnection services and provide billing and collection services to WorldCom. We purchase long distance and related services from WorldCom. On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection.

During the third quarter of 2002, we recorded revenues earned from the provision of primarily network access services to WorldCom of $5.2 million. If WorldCom terminates contracts with us for the provision of services, our operating revenues would be lower in future periods. Lower revenues as a result of canceling contracts for the provision of services could be partially offset, in some cases, by the migration of customers on the terminated facilities to us or other carriers who purchase capacity and/or interconnection services from us.

At September 30, 2002, accounts receivable from WorldCom, net of a provision for uncollectibles, was $1.5 million. We continue to closely monitor our collections on WorldCom account balances. WorldCom is current with respect to its post-bankruptcy obligations. We believe that we are adequately reserved for the potential risk of non-payment of pre-bankruptcy receivables from WorldCom.

Transfer of Assets

On March 2, 2001, we declared and transferred, as a dividend of $29.5 million, 100% of our ownership in Verizon Hawaii International Inc. to our parent, GTE Corporation. The transfer was valued at cost, which was the net book value of the Verizon Hawaii International Inc. shares at March 2, 2001. Operating revenues and operating expenses contributed by Verizon Hawaii International Inc. were approximately $7.0 million and $2.9 million, respectively, for the three months ended March 31, 2001. No gain or loss was realized from this transaction.

As a result of this transaction, past operating results are no longer indicative of future operating results.

VERIZON HAWAII INC.

OPERATING REVENUES

(Dollars in Millions)

	Nine Months Ended September 30,
	2002		2001
Local services	$	205.0	$	226.9
Network access services		132.1		123.6
Long distance services		5.2		12.3
Other services		54.9		58.0

Total	$	397.2	$	420.8

We recognize service revenues based upon usage of our local exchange network and facilities and contract fees. We recognize product and other service revenues when the products are delivered and accepted by the customers and when services are provided in accordance with contract terms.

LOCAL SERVICES

2002—2001		(Decrease)
Nine Months		$	(21.9	)		(9.7	)%

Local service revenues are earned 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 revenues, but also includes local wholesale revenues from unbundled network elements (UNEs), interconnection revenues from competitive local exchange carriers (CLECs), certain data transport revenues and wireless interconnection revenues.

Local service revenues decreased in the first nine months of 2002 primarily due to the effect of lower demand and usage of some basic wireline services. Our switched access lines in service declined 1.5% from September 30, 2001 primarily reflecting the impact of the economic slowdown and competition. Technology substitution has also affected local service revenue growth, as indicated by lower demand for residential access lines. Lower billings to CLECs for interconnection of their network with our network further contributed to the decrease in local service revenues.

NETWORK ACCESS SERVICES

2002—2001		Increase
Nine Months		$	8.5		6.9	%

Network access service revenues are earned from end-user subscribers and from 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.

The increase in network access revenues in the first nine months of 2002 was mainly attributable to higher customer demand for special access services. This growth primarily reflects a strong demand in the business market for high-capacity, high-speed digital services.

VERIZON HAWAII INC.

LONG DISTANCE SERVICES

2002—2001		(Decrease)
Nine Months		$	(7.1	)		(57.7	)%

Long distance revenues are earned primarily from calls made from international calls and from calls made to points outside a customer’s local calling area, but within our service area (intraLATA toll). IntraLATA toll calls originate and terminate within the same LATA, but generally cover a greater distance than a local call. These services are regulated by the Public Service Commission of the State of Hawaii except where they cross state lines. Other long distance services that we provide include 800 services and Wide Area Telephone Services (WATS). We also earn revenue from private line and operator services associated with long distance calls.

Long distance service revenues declined in the first nine months of 2002 primarily due to the effect of the aforementioned transfer of assets in 2001.

OTHER SERVICES

2002—2001		(Decrease)
Nine Months		$	(3.1	)		(5.3	)%

Our other services include such services as billing and collections for long distance carriers and affiliates, facilities rentals to affiliates and nonaffiliates, public (pay) telephone and customer premises equipment (CPE). Other service revenues also include fees paid by customers for non-publication of telephone numbers and multiple white page listings, fees paid by an affiliate for usage of our directory listings and fees paid by an affiliate for the provision of sales agent services.

Other service revenues decreased in the first nine months of 2002 primarily due to lower revenues from CPE sales.

OPERATING EXPENSES

(Dollars in Millions)

OPERATIONS AND SUPPORT

2002—2001		Increase
Nine Months		$	34.5		15.5	%

Operations and support expenses consist of employee costs and other operating expenses. Employee costs consist of salaries, wages and other employee compensation, employee benefits and payroll taxes. Other operating expenses consist of contract services including centralized services expenses allocated from affiliates, rent, network software costs, operating taxes other than income, the provision for uncollectible accounts receivable, reciprocal compensation, and other costs.

The increase in operations and support expenses was mainly attributable to higher employee costs driven by higher benefit costs and salary and wage increases, partially offset by the effect of declining workforce levels. In addition, operations and support expenses included an increase in centralized services expenses allocated to us by Verizon Services and higher costs associated with uncollectible accounts receivable. As described earlier, in 2002, we recorded charges of $22.0 million associated with employee severance costs and severance-related activities and a charge of $3.4 million associated with uncollectible accounts receivable from WorldCom. Pension income (excluding settlement gains and losses) was $34.0 million for both nine month periods ended September 30, 2002 and 2001.

These increases were partially offset by the effect of the aforementioned transfer of assets in 2001.

VERIZON HAWAII INC.

DEPRECIATION AND AMORTIZATION

2002—2001		(Decrease)
Nine Months		$	(5.7	)		(6.6	)%

Depreciation expense is principally based on the composite group remaining life method and straight-line composite rates. This method provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated net salvage value, over the remaining asset lives. This method requires the periodic revision of depreciation rates.

Depreciation and amortization expense decreased in the first nine months of 2002 primarily due to the effect of lower rates of depreciation. This decrease was partially offset by growth in depreciable telephone plant.

OTHER RESULTS

(Dollars in Millions)

OTHER INCOME AND (EXPENSE), NET

2002—2001		Increase
Nine Months		$2.4		200.0	%

Other income and (expense), net includes equity income (losses), interest income and other nonoperating income and expense items. As a result of the reintegration of Verizon Ventures III Inc. (Ventures III) completed on February 1, 2002, we no longer recognize equity income (losses) from this investment (See Note 7 to the Condensed Financial Statements).

The increase in other income and (expense), net, was primarily attributable to lower equity losses from our investment in Ventures III in the first nine months of 2002, as compared to the same period in 2001. Additional interest income associated with the settlement of a tax-related matter also contributed to this increase.

INTEREST EXPENSE

2002—2001		(Decrease)
Nine Months		$	(2.6	)		(9.2	)%

Interest expense includes costs associated with borrowing and capital leases, net of capitalized interest costs. We capitalize interest associated with the acquisition or construction of plant assets. Capitalized interest is reported as a cost of plant and a reduction in interest expense.

Interest expense decreased in the first nine months of 2002, as compared to the same period in 2001, primarily due to lower interest rates on short-term debt with an affiliate. This decrease was partially offset by the effect of higher average levels of short-term debt with an affiliate.

EFFECTIVE INCOME TAX RATES

Nine Months Ended September 30,
2002	33.3	%
2001	39.3	%

The effective income tax rate is the provision (benefit) for income taxes as a percentage of income (loss) before provision (benefit) for income taxes. Our effective income tax rate was lower for the nine months ended September 30, 2002, as compared to the same period in 2001, primarily due to a decrease in the effective income tax rate for state income taxes and a decrease in non-recurring income tax expense.

VERIZON HAWAII INC.

OTHER MATTERS

Recent Accounting Pronouncements

Asset Retirement Obligations

Debt Extinguishment

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other things, eliminates the requirement that all gains and losses on the extinguishment of debt must be classified as extraordinary items on the income statement, thereby permitting the classification of such gains and losses as extraordinary items only if the criteria of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” are met. We are required to adopt this provision of SFAS No. 145 effective January 1, 2003 and, upon adoption, we will reclassify in our statements of income previously reported extraordinary charges for the early extinguishment of debt to income from continuing operations.

Exit or Disposal Activities

Compensation for Internet Traffic

We continue to incur expenditures related to reciprocal compensation arrangements with CLECs and other carriers to terminate calls on their network.

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

Several parties requested rehearing, asking the court to vacate the underlying order. Those requests were denied in a series of orders released on September 24, 2002, and September 25, 2002. As a result, the FCC’s underlying order remains in effect.

VERIZON HAWAII INC.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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

(b) Changes in internal controls.

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

VERIZON HAWAII INC.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There were no proceedings reportable under this Item.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit Number

12		Computation of Ratio of Earnings to Fixed Charges.

(b) There were no Current Reports on Form 8-K filed during the quarter ended September 30, 2002.

VERIZON HAWAII INC.

SIGNATURES

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

VERIZON HAWAII INC.

By:		/s/ Edwin F. Hall
		Edwin F. Hall Controller

Date: November 13, 2002

UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF NOVEMBER 6, 2002.

VERIZON HAWAII INC.

CERTIFICATIONS

I, Lawrence T. Babbio, Jr., certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: November 13, 2002

/s/ Lawrence T. Babbio, Jr.

Lawrence T. Babbio, Jr.

Chairman of the Board and

Chief Executive Officer

VERIZON HAWAII INC.

CERTIFICATIONS

I, Lawrence R. Whitman, certify that:

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

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

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

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

Date: November 13, 2002		/s/ Lawrence R. Whitman
		Lawrence R. Whitman
		Chief Financial Officer

VERIZON HAWAII INC.

EXHIBIT INDEX

Exhibit Number

12		Computation of Ratio of Earnings to Fixed Charges.

VERIZON HAWAII INC 10-Q