SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
                               ----------------------
 (Mark One)
[ X ]       ANNUAL  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934

  For the fiscal year ended December 31, 1996

                                      OR

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

For the transition period from            to

                          Commission file number 33-95298

                             GALAXY TELECOM, L.P.

            (Exact name of Registrant as specified in its charter)

                Delaware                                      43-1697125
(States of Other Jurisdictions of                           IRS Employer
 Incorporation or Organization)                          Identification No.)

              1220 North Main
           Sikeston, Missouri                                   63801
(Address of principal executive offices)                     (Zip Code)

Registrant's telephone number, including area code:  (573) 472-8200

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to section 12(g) of the Act: None.

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

          Yes       X                               No

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

Aggregate market value of the voting equity  securities held by non-affiliates
of Galaxy Telecom, L.P.: $0

Aggregate market value of the voting equity  securities held by non-affiliates
of Galaxy Telecom Capital Corp.: $1,000

Number of shares of Galaxy Telecom  Capital Corp.  outstanding as of March 31,
1997: 100

DOCUMENTS  INCORPORATED BY REFERENCE: Not applicable.



<PAGE>


                                GALAXY TELECOM, L.P.
                            GALAXY TELECOM CAPITAL CORP.
                                     FORM 10-K
                            Year Ended December 31, 1996

                                  TABLE OF CONTENTS

Item        Topic                                                   Page

                                       PART I

   1.   Business...................................................... 3
   2.   Properties....................................................25
   3.   Legal Proceedings.............................................25
   4.   Submission of Matters to a Vote of
        Security Holders..............................................25

                                     PART II

   5.   Market for the Registrant's Securities
        and Related Security Holder Matters...........................26
   6.   Selected Financial Data.......................................26
   7.   Management's Discussion and Analysis of
        Financial Condition and Results of Operations.................27
   8.   Financial Statements and Supplementary Data..................F-1
   9.   Changes In and Disagreements with Accountants
        on Accounting and Financial Disclosure....................... 34

                                    PART III

  10.   Directors and Executive Officers of the Registrant............34
  11.   Executive Compensation........................................36
  12.   Security Ownership of Certain Beneficial
        Owners and Management.........................................36
  13.   Certain Relationships and Related Transactions................38

                                    PART IV

  14.   Exhibits, Financial Statement Schedules
        and Reports on Form 8-K.....................................  42

  Signatures........................................................  44

                                       2
<PAGE>

                                    PART I

      Item 1.     Business.

      General

      Galaxy Telecom,  L.P. ("Galaxy") owns, operates and develops classic cable
television systems (the "Systems") primarily in small communities in the Midwest
and  Southeast  United  States.  As of December  31,  1996,  the Systems  passed
approximately  293,000 homes and served  approximately  183,000  subscribers  in
sixteen states, predominantly including Mississippi, Nebraska, Kansas, Missouri,
Illinois, Kentucky, Iowa, Alabama, Georgia and Florida.

      Galaxy  believes  there  are  significant   advantages  to  acquiring  and
operating  classic  cable  television  systems.   Typically,  in  classic  cable
television markets,  cable television service is necessary in order to receive a
full    complement    of    over-the-air    television    stations    (including
network-affiliated  stations). In addition,  these markets generally offer fewer
competing entertainment alternatives than larger urban or suburban markets. As a
result,  classic cable television  systems usually have higher basic penetration
rates and lower churn rates than systems  serving  larger  markets.  As compared
with  urban  and  suburban  systems,   classic  systems  have  more  programming
flexibility  for a given  channel  capacity  because they are generally in areas
with fewer  over-the-air  broadcast stations that must be carried and have fewer
local programming  obligations.  In addition,  Galaxy believes that it and other
classic cable system  operators  have lower capital  costs per  subscriber  than
urban and suburban operators. Based on the generally lower cost of living in its
operating areas,  Galaxy also believes that classic systems have lower labor and
marketing costs than many urban and suburban systems.

      Over  95% of the  plant  in the  Systems  have a  channel  capacity  of 30
channels  or more.  This  compares  favorably  to the  industry-wide  average of
approximately  70% of systems having channel capacity of 30 channels or more. In
addition,  substantially  all of the  Systems  presently  have the  capacity  to
increase  the  number of  channels  offered  to  subscribers  without  having to
increase existing bandwidth.  Galaxy intends to continue to reduce the number of
headends  in the  Systems  over the next two years by  interconnecting  adjacent
headend locations  through the deployment of fiber  technology.  Galaxy believes
that  attaching  these systems onto one master  headend will reduce  maintenance
costs,  increase system reliability and allow the redeployment of the associated
electronic  equipment to remaining  headends within the existing  systems,  thus
enabling  Galaxy to expand the number of channels  it can offer to its  existing
customers  and  increase  average  revenue per  subscriber.  Galaxy  reduced and
redeployed 57 of such headends in 1996.

      The six key  individuals who manage  Galaxy's  day-to-day  operations (the
"Senior Managers") have developed and refined the operating strategy utilized by
Galaxy to efficiently and economically  provide high quality customer service to
classic cable television  systems spread over a wide geographic  area.  Galaxy's
existing  infrastructure  includes  two  customer  service  centers that receive
customer calls at any time through a toll-free  telephone number. At the service
centers,  customer service  representatives can address virtually any request or
problem a customer may have through an on-line  customer support computer system
utilizing advanced software.  The central computer system is integrated with the
Qualcomm OmniTRACS  satellite-based dispatch system, which has been installed in
virtually all of Galaxy's  service  vehicles.  The OmniTRACS system provides the
customer service  representatives  with direct,  real-time,  two-way interactive
communication  with  Galaxy's  field  technicians  and  generates  comprehensive
customer service information on a timely basis. The integration of the OmniTRACS
system with the  centralized  computer  system allows  Galaxy to control  costs,
better manage the customer  service function and provide its customers with high
quality service, generally within a 24-hour period.

                                       3
<PAGE>

      Galaxy believes that consistently high quality  performance from its local
field technicians is important in maintaining good community  relations.  Galaxy
has an ongoing  program of training its field  technicians not only in technical
areas but also in customer service and sales  functions.  Galaxy strives to have
its local field technicians represent Galaxy in each of their respective service
areas as well-trained, responsible and respected members of their communities.

      Background

      The Senior  Managers,  Tommy L. Gleason,  Jr., James M. Gleason,  J. Keith
Davidson, Ronald Voss, Terry M. Cordova and Thomas Morris, have been involved in
the construction,  acquisition,  ownership,  management and operation of classic
cable  television  systems as a team for more than a decade and have  collective
experience  in the cable  television  industry  exceeding  100 years.  From 1987
through  1994,  the Senior  Managers  operated  approximately  100 classic cable
television systems for Galaxy Cablevision, L.P. ("Galaxy Cablevision"), a master
limited  partnership  traded on the  American  Stock  Exchange.  Prior  thereto,
between  1981 and 1987,  the Senior  Managers  constructed  and  operated  cable
television systems in Alabama, Illinois,  Indiana, Tennessee and Texas through a
number of related entities.

      In response to changes in the federal tax laws  regarding  master  limited
partnerships,  Galaxy Cablevision commenced in 1994 the liquidation of its cable
television  holdings.  Thereafter,  the Senior Managers organized Galaxy Systems
Management,  Inc.  ("Galaxy  Management") to acquire  selected cable  television
properties.  Commencing in May 1994, Galaxy  Management  entered into definitive
agreements to acquire selected cable television systems from Galaxy Cablevision,
Vantage Cable Associates,  L.P. ("Vantage Cable"),  Vista Communications Limited
Partnership,  III ("Vista Communications") and Chartwell Cable of Colorado, Inc.
("Chartwell"),  (collectively the "Initial  Systems").  Each of these agreements
was later assigned to, and assumed by, Galaxy prior to the  consummation of each
of the  transactions.  In  order to  facilitate  Galaxy's  acquisition  of these
Systems,  funds managed by TA Associates,  Spectrum  Equity  Investors and Fleet
Equity Partners, (the "Equity Investors") and the Senior Managers, collectively,
invested equity capital of approximately $30 million in Galaxy. A summary of the
acquisitions of each of the Initial Systems is set forth below.

      1994 Acquisitions

      Galaxy Cablevision Acquisitions. On December 23, 1994, Galaxy acquired all
of the operating assets  comprising 27 cable television  systems,  substantially
all of which were located in western Kentucky and southern  Illinois,  that were
owned by Galaxy  Cablevision (the "Galaxy  Cablevision  Systems").  The purchase
price for the Galaxy Cablevision Systems was $18.5 million.  Upon acquisition by
Galaxy, the Galaxy Cablevision  Systems passed  approximately  23,500 homes with
570 miles of plant, resulting in a density of approximately 41.2 homes per mile,
served  approximately  15,400 basic subscribers and had a basic penetration rate
of approximately 65.5%.

      Vantage Cable  Acquisition.  On December 23, 1994,  Galaxy acquired all of
the operating  assets  comprising the 109 cable  television  systems  located in
Colorado, Iowa, Missouri,  Nebraska, South Dakota and Wyoming that were owned by
Vantage Cable (the "Vantage Cable Systems").  The purchase price for the Vantage
Cable Systems was approximately  $38.4 million.  Upon acquisition by Galaxy, the
Vantage Cable Systems passed approximately 44,800 homes with 969 miles of plant,
resulting  in  a  density  of   approximately   46.2  homes  per  mile,   served
approximately  30,000  basic  subscribers  and had a basic  penetration  rate of
approximately 67.0%.

      Vista   Communications   Acquisition.   On  December  23,  1994,  Galaxy
acquired  all of the  operating  assets  comprising  the 85  cable  television


                                       4
<PAGE>

systems located in Alabama,  Florida,  Georgia,  Louisiana and Mississippi  that
were owned by Vista  Communications (the "Vista  Communications  Systems").  The
purchase  price for the Vista  Communications  Systems was  approximately  $36.6
million.  Upon acquisition by Galaxy,  the Vista  Communications  Systems passed
approximately 50,700 homes with 1,420 miles of plant,  resulting in a density of
approximately 35.7 homes per mile, served approximately 31,000 basic subscribers
and had a basic penetration rate of approximately 61.1%.

      Chartwell Cable Acquisition.  On December 23, 1994, Galaxy acquired all of
the operating assets comprising two cable television  systems located in Larimer
and Weld Counties, Colorado and in an apartment complex in Denver, Colorado that
were owned by Chartwell Cable (the "Chartwell Systems").  The purchase price for
the Chartwell  Systems was  approximately  $0.75  million.  Upon  acquisition by
Galaxy, the Chartwell Systems passed  approximately 1,500 homes with 79 miles of
plant,  resulting  in a density of  approximately  19.0  homes per mile,  served
approximately  830  basic  subscribers  and  had a  basic  penetration  rate  of
approximately 55.3%.

      1995 Acquisitions

      On March 31, 1995,  Galaxy acquired all of the operating assets comprising
Galaxy Cablevision's eight Cameron, Texas cable television systems (the "Cameron
Systems").  The Cameron  Systems are located  northeast  of Austin,  Texas.  The
purchase  price for the Cameron  Systems was  approximately  $3.6 million.  Upon
acquisition by Galaxy, the Cameron Systems passed approximately 7,730 homes with
143 miles of plant, resulting in a density of approximately 54.1 homes per mile,
served approximately 3,500 basic subscribers and had a basic penetration rate of
approximately 45.3%.


      Phoenix Cable Acquisition. On November 2, 1995, Galaxy acquired all of the
operating  assets   comprising  the  3  cable  television   systems  located  in
Mississippi that were owned by Phoenix Cable (the "Phoenix Cable Systems").  The
purchase  price for the Phoenix Cable Systems was  approximately  $0.55 million.
Upon acquisition by Galaxy, the Phoenix Cable Systems passed approximately 1,115
homes with 71 miles of plant, resulting in a density of approximately 15.7 homes
per mile, served  approximately 600 basic subscribers and had a penetration rate
of approximately 53.8%.

      Douglas Communications  Acquisition.  On December 1, 1995, Galaxy acquired
all of the operating assets comprising the 226 cable television  systems located
in  Illinois,   Missouri,  Nebraska  and  Kansas  that  were  owned  by  Douglas
Communications (the "Douglas  Communications  Systems").  The purchase price for
the  Douglas  Communications  Systems  was  approximately  $45.8  million.  Upon
acquisition by Galaxy, the Douglas  Communications  Systems passed approximately
72,945 homes, with 1,613 miles of plant, resulting in a density of approximately
45.2 homes per mile, served  approximately  43,000 basic subscribers,  and had a
basic penetration rate of approximately 59.0%.

      Friendship Cable Acquisition. On December 29, 1995, Galaxy acquired all of
the operating  assets  comprising  the 35 cable  television  systems  located in
Florida,  Georgia and South  Carolina that were owned by  Friendship  Cable (the
"Friendship Cable Systems"). The purchase price for the Friendship Cable Systems
was approximately $21 million.  Upon acquisition by Galaxy, the Friendship Cable
Systems  passed  approximately  35,637 homes,  with 1,676 miles of plant,  for a
density of 21.3 homes per mile,  served  approximately  17,500 basic subscribers
and had a basic penetration rate of approximately 49.1%.

      Vista-Narragansett  Acquisition. On December 29, 1995, Galaxy acquired all
of the operating assets  comprising the 18 cable  television  systems located in
Mississippi,   Alabama,   Louisiana  and  Tennessee   (the   "Vista-Narragansett
Systems"). The purchase price for the Vista-Narragansett systems, net of systems
sold,  was  approximately  $13.7  million.   Upon  acquisition  by  Galaxy,  the
Vista-Narragansett systems passed approximately 16,155 homes, with 433 miles of


                                       5
<PAGE>

plant,  resulting  in a density of  approximately  37.3  homes per mile,  served
approximately  11,000  basic  subscribers  and had a basic  penetration  rate of
approximately 68.1%.

      Vista I  Acquisition.  On December  29, 1995,  Galaxy  acquired all of the
operating  assets  comprising  the  18  cable  television   systems  located  in
Mississippi  and Alabama of Vista I (the "Vista I Systems").  The purchase price
for the Vista I Systems was approximately $7.6 million.  Upon acquisition by the
Company, the Vista I Systems passed approximately 9,073 homes, with 323 miles of
plant, resulting in a density of 28.1 homes per mile, served approximately 6,100
basic subscribers and had a basic penetration rate of approximately 67.2%.


      1996 Acquisitions And Trades

      Galaxy acquired  various assets  comprising the cable  television  systems
through purchase and trade throughout the year.  Following is a brief discussion
of each transaction.

      Cablevision of Texas Systems.  On March 29, 1996,  Galaxy acquired certain
assets  comprising  31 cable  television  systems of  Cablevision  of Texas III,
Empire  Communications  and Empire  Cable of Kansas (the  "Cablevision  of Texas
Systems") for a purchase price of approximately $10.2 million. As of the closing
date,  the  Cablevision  of Texas Systems passed 11,771 homes located in Kansas,
with 347 miles of plant,  for a density of 33.9 homes per mile. The  Cablevision
of Texas Systems served  approximately  9,100 basic  subscribers and had a basic
penetration rate of approximately 77.3% as of the closing date.

         High Plains Systems.  On April 1, 1996, Galaxy acquired certain systems
comprising eight cable television systems of High Plains Cable (the "High Plains
Systems") for a purchase price of approximately $0.3 million.  As of the closing
date, the High Plains Systems passed 580 homes located in Kansas,  with 20 miles
of plant,  for a density of 29 homes per mile.  The High Plains  Systems  served
approximately  270  basic  subscribers  and  had a  basic  penetration  rate  of
approximately 46.6% as of the closing date.

         Midcontinent Systems. On April 12, 1996, Galaxy acquired certain assets
comprising  six cable  television  systems of  Midcontinent  Cable  Systems (the
"Midcontinent  Systems") for a purchase price of approximately $1.3 million.  As
of the closing  date,  the  Midcontinent  Systems  passed 1,853 homes located in
Nebraska,  with 32 miles of plant,  for a density  of 57.9  homes per mile.  The
Midcontinent  Systems served 1,328 basic subscribers and had a basic penetration
rate of approximately 71.7% as of the closing date.

         Five  Rivers  Systems.  On November 1, 1996,  Galaxy  acquired  certain
assets  comprising one cable television system of Five Rivers Cable Company (the
"Five Rivers System") for a purchase price of approximately  $.5 million.  As of
the closing date, the Five Rivers System passed  approximately 730 homes located
in Tennessee,  with 24 miles of plant, for a density of 30.4 homes per mile. The
Five Rivers System served 588 basic subscribers and had a basic penetration rate
of approximately 80.5% as of the closing date.

      Hurst  Communications  Systems. On March 29, 1996, Galaxy acquired certain
assets comprising eight cable television  systems of Hurst  Communications  (the
"Hurst Systems") for a purchase price of approximately  $1.1 million.  As of the
closing date,  the Hurst  Systems  passed  approximately  1,830 homes located in
Kansas,  with 50 miles of plant, for a density of 36.6 homes per mile. The Hurst
Systems served 1,371 basic subscribers and had a basic penetration rate of 74.9%
as of the closing date.


                                       6
<PAGE>

      TCI Systems  Trade.  On June 14, 1996,  Galaxy  traded  assets  located in
Shawnee County and Jefferson  County,  Kansas (the "Shawnee  County System") for
assets  comprising  six cable  television  systems  of TCI (the  "TCI  Systems")
located in northern  Mississippi.  At closing,  Galaxy's  Shawnee County Systems
passed  approximately  9,500  homes,  with  approximately  315  miles of  plant,
resulting in a density of 30.2 homes per mile.  The Shawnee County System served
approximately  7,000  basic  subscribers  and  had a basic  penetration  rate of
approximately  73.7% as of the  close  date.  As of the  closing  date,  the TCI
Systems passed approximately 16,900 homes, with 729 miles of plant, resulting in
a density of 23.2 homes per mile.  The TCI Systems served  approximately  10,363
basic subscribers and had a basic penetration rate of approximately  61.3% as of
the close date.

      C-S Cable. On October 30, 1996,  Galaxy acquired certain assets comprising
the cable television systems of CS Cable Services, Inc. (the "CS Cable Systems")
for a purchase price of approximately $2.3 million.  As of the closing date, the
served approximately 3,500 basic equivalent subscribers.

      Mexia  /  Ranburn  Trade.  On  November  1,  1996,  Galaxy  traded  assets
comprising the Ranburn cable system in Ranburn,  Alabama  serving  approximately
110 subscribers for a similar system in Mexia, Alabama serving approximately 230
subscribers.  This  trade  allowed  Galaxy  to  trade  a small  system  out of a
non-targeted  service  area for a similar  system in  proximity  to our targeted
service areas.

      Pending Acquisitions

       TCI Cable of the Midland - Sarpey County  Systems.  On September 1, 1996,
Galaxy entered into an agreement to purchase  certain assets  comprising 6 cable
television systems of TCI Cable of the Midland (The Sarpey County Systems) for a
purchase  price of  approximately  $2.3  million.  Subject to  certain  pro-rate
adjustments.   At  September  1,  1996,   the  Sarpey  County   Systems   passed
approximately  3,000 homes located in Nebraska,  with  approximately 68 miles of
plant,  for a density of 47 homes per mile.  The Sarpey  County  Systems  served
approximately  2,180  basic  subscribers  and  had a basic  penetration  rate of
approximately 57% at September 1, 1996.

      Service, Installation and Repair

      Galaxy believes that providing  exceptional customer service is a critical
element  in  maximizing  the value of  services  provided  to  customers  of the
Systems.  Accordingly,  Galaxy has equipped its  customer  service  centers with
advanced  computer  technology and  communications  systems that allow Galaxy to
efficiently  manage  classic cable  television  systems over a large  geographic
area.  Centralizing  the customer  service  function  enables Galaxy to employ a
smaller number of highly trained customer service representatives than in a more
decentralized  operational  structure.  Galaxy invests significant  resources in
providing its customer service representatives with ongoing telephone,  computer
and sales  training to assure that the  customer  receives a  consistently  high
level of service.

                                       7
<PAGE>

      Galaxy  utilizes  advanced   software  systems  to  facilitate   effective
interaction with its customers. A potential or existing customer can call at any
time Galaxy's  toll-free  telephone  number for  installation,  repairs or other
services.  The call is  automatically  routed to one of  Galaxy's  two  customer
service centers.  At the service centers,  customer service  representatives who
receive the calls can address  virtually  any request or problem a customer  may
have through access to an on-line  customer  support  computer system  utilizing
advanced  software.  If a customer is reporting a service problem,  the customer
service  representative  will  enter a service  call  request  into the  central
computer system,  which prioritizes and schedules the service call. The computer
system automatically prioritizes the call based upon the severity of the problem
reported. If, for example, the customer is experiencing a complete disruption of
service, the call is given the highest priority and is dispatched immediately to
the local field technician. If the customer requests new or additional services,
the customer  service  representative  will enter a work order into the computer
system which  automatically  assigns and schedules the order for the appropriate
field technician.

      Virtually all of Galaxy's  service vehicles are equipped with the Qualcomm
OmniTRACS  satellite-based  dispatch  system,  and Galaxy intends to install the
OmniTRACS  system in all service vehicles of acquired  systems.  Through direct,
real-time access to the field technician and his work schedule via the OmniTRACS
system, the customer service  representative  transmits the service call request
or the work  order  directly  to the field  technician's  service  vehicle.  The
OmniTRACS system,  together with the central computer system utilized by Galaxy,
enables Galaxy to provide the requested service generally within 24 hours of the
customer's  call. When the technician has completed the service call or the work
order, the service or work order  information is entered into the OmniTRACS unit
in the field  technician's  vehicle and transmitted back to the central computer
system. The computer system completes and closes the service call or work order,
updates the customer's account, posts any payments received from the customer by
the  field  technician  and  starts  the  billing  for  any new  services.  This
interactive  system  helps  Galaxy  control its costs and improve its service by
avoiding the  inefficiencies and costs associated with printing service calls or
work orders and using pagers,  facsimile  machines,  two-way radios and cellular
phones to  communicate  with its field  technicians.  The OmniTRACS  system also
provides  regional  managers the ability to determine the exact  location of all
service  vehicles  at any time and keeps a record of all  movements  of  service
vehicles.

      Marketing, Rates and Collections

      Galaxy aggressively markets and promotes its cable television systems with
the  objective of increasing  penetration  and average  revenue per  subscriber.
Galaxy  actively  markets  the  basic and  premium  programming  of the  Systems
primarily  through  door-to-door  selling efforts and  telemarketing,  and, to a
lesser degree,  through media  advertising and direct mail. Each of the Galaxy's
customer  service  centers  has a  Marketing  Director  who  coordinates  direct
door-to-door  campaigns  throughout the  geographic  areas of the Systems and is
responsible  for  internal  incentives  for the customer  service and  technical
staffs.  Each  Marketing  Director  also insures  that Galaxy is providing  high
quality   sales  and  service  by   supervising   and   training   direct  sales
representatives  and assessing picture and service quality within Galaxy's cable
systems.  Customer service  representatives  follow up by telephone contact with
the customer on three separate occasions, generally 10, 30 and 60 days following
a new  installation,  to assess the quality of the  installation and the overall
service the customer is receiving and to assure customer satisfaction.  Customer
service  representatives  are also  trained  to market  upgrades  in  service to
existing  customers.  Each service  center also has a Director of Training,  who
works  closely with the  Marketing  Department  to ensure that all employees are
informed of current rates, programming packages and promotions.


                                       8
<PAGE>

      Galaxy's  current monthly rates for full basic service range from $8.65 to
$29.50 and rates for premium  services  generally range from $6.95 to $12.95 per
service. Because the Systems have been owned and operated by various other cable
television  operators,  differing  strategies  with  regard to channel  lineups,
pricing and security for premium  services  have been  employed.  It is Galaxy's
goal to attempt to standardize its programming,  rates and premium security over
all of the Systems within the next few years.

      In order to better  facilitate  efforts to maximize quality service to its
customers,  Galaxy  converted  its company  billing  system to  Cincinnati  Bell
Information  System's  ("CBIS")  Cablemaster  2000 in November  1996.  This is a
system developed  specifically for the cable television industry.  CBIS operates
the billing system at its service center in Florida, and produces statements for
customers on a monthly basis. Billing statements are printed and mailed directly
to customers, who have 15 days from their cycle billing date to remit payment to
Galaxy's central payment processing center in Sikeston, Mo. If after the 15 days
a customer  has not made a payment,  the customer is charged a late payment fee.
Galaxy  aggressively  pursues  collection of past due amounts by telephoning the
customer at approximately 35 days past the due date. If these measures fail, the
customer is notified and then  disconnected.  A final statement is sent within a
week after  disconnection  and 30 days  thereafter  the account is referred to a
collection  agency.  Galaxy  has  contact  with the CBIS  center  via  phone and
computer  interface and has immediate  access to all of our billing and customer
information, as if the process was done "in-house."

      In addition to monthly and installation fees, additional potential sources
of revenue for cable  operators are the sale of local spot  advertising  time on
locally  originated  and  satellite-delivered  programming.  Cable  systems also
generate  revenue  through  sales of  products  offered  through  home  shopping
programming  and purchased from the systems'  respective  service  areas.  Other
potential  sources of revenue for cable  television  systems include the sale of
programming  featuring  movies and  special  events  (such as  concerts,  sports
programming  and other  entertainment  features) to customers on a  pay-per-view
basis. Galaxy would need to invest in addressable converter equipment to provide
pay-per-view  services  on its  systems.  Galaxy  currently  does  not  generate
significant  revenues from any of these areas but believes that certain of these
areas could become possible sources of revenue in the future.

      Programming

      Galaxy  typically  carries a wide array of basic  programming on its basic
service.  A few systems have been  acquired  that offer two tiers of basic cable
television  programming  service: a broadcast basic programming tier (consisting
generally of network and public television signals available over-the-air in the
franchise community and superstation  signals); and a satellite programming tier
(consisting primarily of satellite-delivered  programming such as CNN, USA, ESPN
and TNT). Substantially all of the customers of these systems subscribed to both
tiers of basic  service  as of  December  31,  1996.  To  enhance  value for its
customers,  the Company  analyzes and selectively  modernizes its cable plant to
increase  the number of channel  offerings  and to  improve  the  quality of the
signal  delivered to its systems.  Galaxy  regularly  evaluates the  programming
offered by its systems and continuously seeks to provide innovative  packages of
premium service in order to assure customer satisfaction. As an example, many of
Galaxy's  systems  carry the Disney  Channel  as part of the basic  subscription
service without charging a separate fee. From time to time,  Galaxy enhances the
value of its basic service by adding additional programming to its basic tier.


                                       9
<PAGE>

      The  Systems  also  offer  premium   programming   services,   both  on  a
per-channel,  or  a la  carte,  basis  and  as  part  of a  variety  of  premium
programming  packages  designed to be attractive to customers while, at the same
time, enabling the Company to enjoy the benefits of programming agreements which
offer  Galaxy  financial  incentives  based upon  premium  service  unit growth.
Premium channels such as HBO,  Cinemax,  Showtime,  The Movie Channel and Encore
are offered  individually  or in value  packages  designed  to increase  premium
penetration.  These packages offer two or more premium services for a discounted
price as compared to the ala carte pricing of individual  services,  and in some
cases offer a "mini-pay," such as Encore or Flix, at no additional charge if the
customer subscribes to two or more services.

      Galaxy  generally  plans to upgrade  the  channel  offerings  of  recently
acquired systems. Galaxy believes that many of the Systems present opportunities
to improve  basic and  premium  penetration  levels  and  average  revenues  per
subscriber. Galaxy believes it has an opportunity to restructure the programming
of the Systems,  including launching The Disney Channel on the basic service and
repackaging  premium channels.  Galaxy intends to utilize  aggressive  marketing
efforts  and focus on high  quality  customer  service to enable it to  increase
penetration of and overall customer satisfaction with the Systems.

       Galaxy has various contracts to obtain basic and premium programming from
program  suppliers  whose  compensation  is  typically  based on a fixed fee per
subscriber.  Galaxy has negotiated  programming  agreements with premium service
suppliers  that offer cost  incentives to Galaxy under which premium unit prices
decline as certain  premium  service  growth  thresholds are met. In addition to
volume pricing  discounts,  some program  suppliers offer  marketing  support to
Galaxy in the form of advertising funds, promotional material, rebates and other
incentives.  Galaxy's programming  contracts are generally for a fixed period of
time, typically three to five years, and are subject to negotiated renewal.

      Galaxy is also a member of the National Cable  Television  Cooperative the
("NCTC"), a purchasing cooperative that negotiates volume discounts on behalf of
its  members,   which  serve  in  the  aggregate   nearly  three  million  cable
subscribers.  As an NCTC member,  Galaxy is able to obtain programming and cable
system hardware discounts available to all members.

      Galaxy has various retransmission  consents with many commercial broadcast
stations.  None of these  consents  require direct payment of fees for carriage;
however,  in some cases Galaxy has entered into agreements with certain stations
to carry  satellite-delivered  cable  programming  which is affiliated  with the
network carried by such stations.  In some cases, Galaxy has agreed to advertise
with the broadcast station on over a three year period.  These agreements are in
effect until December 31, 1999.

      Galaxy's  cable  programming  costs have increased in recent years and are
expected to continue to increase due to additional programming being provided to
customers,  increased  costs to produce or purchase cable  programming and other
factors.  Galaxy  believes  that a  significant  amount of new cable  television
programming  is becoming  available and that Galaxy will be able to identify and
take  advantage of available  incentives  associated  with channel  position and
additional  channels to  selectively  accommodate  such  expanding  programming.
Galaxy expects it will be able to recover  programming  cost  increases  through
rate increases.


                                       10
<PAGE>

      Technology and Engineering

      Over  95% of the  plant  in the  Systems  have a  channel  capacity  of 30
channels or more. Substantially all of the Systems presently have the capability
to  increase  the number of channels  offered to  subscriber  without  having to
increase existing bandwidth.  At December 31, 1996, Galaxy maintained over 7,500
miles of coaxial plant that passed more than 293,000 homes.  The following table
sets forth  certain  information  with regard to the channel  capacities  of the
Systems as of December 31, 1996.

                                Up to 29    30 to 53    54 or more
                                Channels    Channels    Channels      Total
Systems:
   Number of systems                 22           422        26          470
   Percent of total systems        4.7%          89.8%      5.5%       100.0%
   Miles of plant                    90         6,943       552        7,585
   Percent of total plant miles     1.2%         91.5%      7.3%       100.0%

      Galaxy continually  monitors and evaluates new technological  developments
to make optimal use of its existing assets and to anticipate the introduction of
new services and program delivery capabilities.  The use of fiber optic cable as
a  transportation  medium is playing a major role in enhancing  channel capacity
and improving the  performance  and  reliability  of cable  television  systems.
Galaxy has  budgeted  the  implementation  of fiber optic  technology  and, to a
lesser degree,  microwave  technology to  interconnect  headends  throughout its
Systems. By interconnecting headends of adjacent systems with one master headend
facility,  Galaxy can reduce the number of headends, lower maintenance costs and
add new channels more  efficiently.  The Company  generally plans to continue to
reduce the number of headends  through  consolidation in order to take advantage
of these  efficiencies,  including  reducing the number of headends  used in the
Systems by more than 75 over the next two years. Such reduction in the number of
headends is expected to increase system  reliability and allow the  redeployment
of the  associated  electronic  equipment to remaining  headends,  thus enabling
Galaxy to expand the number of channels  offered on the Systems to its customers
and increase average revenue per subscriber.

      Galaxy  plans to deliver  distance  learning and teacher  in-service  type
training video to Kindergarten through Grade 12 schools primarily in those areas
where Galaxy has  implemented  fiber  optics to  interconnect  adjacent  headend
facilities  from  one  master  facility.   The  distance  learning  will  enable
classrooms  of  students  at  several   adjacent  school  districts  to  receive
real-time,  interactive lectures via the fiber optic network from one lecturer's
classroom.  The  in-service  teacher's  training  utilizes  the same  concept of
distance  learning  except its  programming  comes from one in-service  training
facility.  Galaxy is also  continuing  to explore the  possibility  of being the
Internet provider to those schools,  and to its subscribers in those areas where
fiber interconnects will be in place.

      Additionally,  Galaxy is exploring the business  opportunities that may be
available by using its extensive fiber network as a source of transport of voice
and high speed data for both long distance and local exchange  carriers.  Galaxy
currently is in discussions with several telephone companies  concerning the use
of the redundant facilities.

      Galaxy  intends to explore the use of digital  compression  technology  to
enhance the current channel capacities of its cable systems.  This technology is
expected  to allow up to 10  channels  to be  carried in the space of one analog
channel.  Digital  signals  not only  offer the  potential  for  allowing  cable


                                       11
<PAGE>

television  systems to carry more programming but also for improving the quality
and  reliability of the television  signals  carried.  This  technology may also
allow cable systems to offer additional  products and services,  including video
games (such as SEGA).  Galaxy believes that the use of digital technology in the
future offers the potential  for Galaxy to increase  channel  capacity in a more
cost  efficient   manner  than   rebuilding  such  systems  with  high  capacity
distribution  plant.  There  can be no  assurance  as to  whether  or when  such
technology can or will be  implemented by Galaxy and, if it can be  implemented,
whether such technology will result in significant cost savings over alternative
methods of expanding channel capacities of the Systems.

      Community Relations

      Galaxy is  dedicated  to  developing  strong  community  relations  in the
locations  served  by its  cable  television  systems  and  believes  that  good
relations  with its local  franchising  authorities  are  primarily  a result of
effective communications by Galaxy's field management with local authorities.  A
company  representative  is assigned to each  municipality  in which the Systems
operate.  The same representative calls the mayor, city clerk or city manager by
telephone  to determine if any  problems  have arisen or if any  customers  have
complained to municipal officials about their cable service.  Galaxy immediately
addresses  any problems  discovered  during  these  monthly  contacts.  Regional
managers  also  contact  the  state or local  franchising  authorities  at least
quarterly,  and  Galaxy  prepares  a  newsletter  highlighting  any  changes  in
operations or new programming  offerings and introducing any new employees which
it sends semiannually to each of its franchising authorities.

      Galaxy also  believes that  consistent,  high quality  performance  of its
local field technicians is important to maintain good community  relations.  Due
to Galaxy's cable television  systems being spread over a large geographic area,
a local field technician in many cases may be the only company  representative a
customer ever meets. To improve the effectiveness of technician interaction with
Galaxy's  customers,  Galaxy  has an  ongoing  program  of  training  its  field
technicians not only in technical  areas but also in customer  service and sales
functions.  Galaxy strives to have its local field technicians  represent Galaxy
in each of their  respective  service  areas as  well-trained,  responsible  and
respected members of their communities. Through its community communications and
field  technician  training  programs,  Galaxy seeks to maintain good  community
relations in order to position itself to address any problem in a timely manner.

      Centralized Management Functions

      Management functions such as payments processing,  accounting, engineering
and marketing are  centralized at Galaxy's  headquarters  and regional  customer
service centers.  Upon acquiring a system,  Galaxy will also consolidate certain
management  functions at its headquarters and regional  customer service centers
at minimal incremental costs.

      Galaxy is able to process its service calls from customers through the use
of the IBM AS/400  computer  system  owned and  operated by CBIS.  The  computer
operates with advanced  software  which  provides  on-line  access to up-to-date
subscriber,  marketing  and  accounting  information.  The computer  system also
manages  information  flow  to and  from  the  field  technician  staff  via the
OmniTRACS  system.  The system software also allows for many other  applications
that Galaxy may implement in the future including video-on-demand, transactional
billing services and telephony.

      The  computer  system  allows both the Senior  Managers  and the  regional
managers  to  access  subscriber  information  as soon as it is  entered  by the
customer service centers or the field technicians. The centralized nature of the
system allows each of Galaxy's  customer service centers to back up the other if
there is an  interruption  of  telephone  service to such  center.  The customer
service centers also can utilize the centralized  computer system to communicate
with local payment offices,  headquarters, the other customer service center and
the field  technicians,  all of which have  on-line  access  through the central
platform.  Finally, the system provides a centralized reporting location for all
subscriber  billing  information  which enables the accounting  staff to prepare
timely  and  accurate  financial  information.  These  features  of the  central

                                       12
<PAGE>

computer system,  along with the system's integration with the OmniTRACS system,
allow  Galaxy to reduce the  incremental  cost  associated  with  expanding  its
subscriber base while  consolidating many of the management  functions for newly
acquired systems.

      Franchises

      Cable  television  systems are generally  constructed  and operated  under
non-exclusive  franchises  granted  by  local  governmental  authorities.  These
franchises  typically  contain many  conditions,  such as: time  limitations  on
commencement  and completion of construction;  conditions of service,  including
number of  channels,  types of  programming  and  provision  of free  service to
schools and certain other public institutions;  and maintenance of insurance and
indemnity  bonds.  The  provisions  of local  franchises  are subject to federal
regulation  under the Cable  Communications  Policy Act of 1984 (the "1984 Cable
Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act"),  and the  Telecommunications  Act of 1996 (the "1996  Telecom
Act"). See "--Legislation and Regulation - General."

      As of December 31, 1996,  Galaxy held  approximately  688 franchises.  The
non-exclusive  franchises  provide  for  the  payment  of  fees  to the  issuing
authority.  The 1984 Cable Act prohibits  franchising  authorities from imposing
franchise  fees in excess of 5.0% of gross  revenues  and also permits the cable
system operator to seek renegotiation and modification of franchise requirements
if  warranted  by  changed  circumstances.  See  "--Legislation  and  Regulation
General."

      The table below  illustrates the grouping of the franchises of the Systems
by date of expiration.


              Year of                                           Percentages
              Franchise              Number of                    of Total
             Expiration              Franchises                 Franchises

             1997-1999                    193                      28.0%
              2000-2002                    74                      10.8%
             After 2002                   421                      61.2%
                Total                     688                     100.0%


       The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which franchise renewal will not be unreasonably withheld or,
if renewal is withheld,  the franchise authority must pay the operator the "fair
market value" for the system covered by such  franchise.  In addition,  the 1984
Cable Act  establishes  comprehensive  renewal  procedures  that require that an
incumbent  franchisee's renewal application be assessed on its own merit and not
as part of a comparative process with competing applications. See "--Legislation
and Regulation - General."

      Galaxy  believes  that  it  generally  has  good  relationships  with  its
franchising  communities.  As of  December  31,  1996,  no  franchise  of Galaxy
represented  more than 5.0% of total  subscribers  of the Systems.  Galaxy has a
minimal amount of seasonal  subscribers,  the vast majority of which are located
around Kentucky Lake and Central Florida.  As the Kentucky seasonal  subscribers
are  disconnecting  about the same time the Florida  subscribers are connecting,
the effect on Galaxy's monthly total subscriber count is minimal.

      Competition

      Cable  television  competes  for  customers  in local  markets  with other
providers of  entertainment,  news and  information.  The  competitors  in these
markets include broadcast television and radio, newspapers,  magazines and other


                                       13
<PAGE>

printed  sources of  information  and  entertainment,  as well as satellite  and
wireless video  distribution  systems and directly  competitive cable television
operations.   Federal  law  prohibits  cities  from  granting   exclusive  cable
franchises  and from  unreasonably  refusing  to grant  additional,  competitive
franchises.  In  addition,  an  increasing  number of cities are  exploring  the
feasibility   of  owning  their  own  cable  systems  in  a  manner  similar  to
city-provided  utility  services.   The  1996  Telecom  Act  may  initiate  more
competition  with cable service,  because it allows local  exchange  carriers to
provide video services in their local service areas, in direct  competition with
local cable companies.

      Galaxy has no basis upon which to estimate the number of cable  television
companies and other entities with which it competes or may potentially  compete.
There are a large  number of  individual  and multiple  system cable  television
operators  in the United  States.  The full  extent to which other media or home
delivery  services will compete with cable  television  systems may not be known
for some time, and there can be no assurances that existing,  proposed or as yet
undeveloped technologies will not become dominant in the future.


      There are alternative  methods of  distributing  the same or similar video
programming  offered by cable  television  systems,  although  cable  television
systems currently  account for over 90% of total  subscribership to multichannel
video programming distributors ("MVPDs").  Further, these technologies have been
encouraged by Congress and the Federal Communications  Commission (the "FCC") to
offer services in direct competition with existing cable systems. In addition to
broadcast television  stations,  the Company competes in a variety of areas with
other multichannel programming service providers on a direct over-the-air basis.
Multichannel  programming services are distributed by communications  satellites
directly  to  home  satellite  dishes  ("HSDs")  serving   residences,   private
businesses and various nonprofit organizations. Cable programmers have developed
marketing  efforts  directed  to HSD  owners.  Galaxy  estimates  that there are
currently  between 3.5 million and 4 million HSDs in the United States,  most of
which are in the 4 to 8 foot range.

      In 1994, two different Direct Broadcast  Satellite ("DBS") providers began
offering  service.  At the end of 1996,  it was  estimated  that  they  provided
services to approximately 6.7 million subscribers.  There are now at least three
providers of DBS services. DBS services could become a substantial competitor as
developments in technology continue to increase satellite  transmitter power and
decrease the cost and size of equipment needed to receive these transmissions.

      A recent  development,  is the  announced  intention  of one of these  DBS
providers to develop the technology to transmit local channels on their services
for certain areas of the country. If this happens, assuming technology advances,
and the government  allows it, this would effect  approximately  15% of Galaxy's
service area.

      DBS  has  advantages  and   disadvantages  as  an  alternative   means  of
distributing  video  signals to the home.  Among the  advantages  are:  that the
capital  investment  (although  initially  high) for the satellite and uplinking
segment  of a DBS  system  is fixed  and does not  increase  with the  number of
subscribers receiving satellite transmission;  that DBS is not currently subject
to local  regulation of service or required to pay franchise  fees; and that the
capital costs for the ground segment of a DBS system (the  reception  equipment)
are directly related to and limited by the number of service subscribers.  Among
the disadvantages are: limited ability to tailor the programming  package to the
interests of different  geographic markets,  such as providing local news, other
local origination services and local broadcast stations;  signal reception being
subject to line of sight angles; and intermittent  interference from atmospheric


                                       14
<PAGE>

conditions and  terrestrially  generated  radio frequency  noise.  The effect of
competition from these services cannot be predicted.  Galaxy nonetheless assumes
that such competition could be substantial in the near future.

      Prior to  enactment  of the 1996  Telecom  Act,  local  exchange  carriers
("LECs") were prohibited from offering video programming directly to subscribers
in their telephone service areas (except in limited circumstances in rural areas
or as "video-dialtone" providers, which could deliver video services to the home
over telephone-provided circuits without a local franchise).  Elimination of the
former  restrictions  on LECs means that Galaxy may face  increased  competition
from local  telephone  companies  which, in most cases,  have greater  financial
resources  than Galaxy.  All major LECs have  announced  plans to acquire  cable
television  systems or provide  video  services to the home through  fiber optic
technology.

      The 1996 Telecom Act eliminates  the FCC's  video-dialtone  rules,  except
where a video  dial-tone  service is  currently  in  operation.  In place of the
video-dialtone  model,  the 1996 Telecom Act provides LECs with four options for
providing video programming directly to customers in their local exchange areas.
Telephone companies may provide video programming by radio-based systems, common
carrier  systems,  "open video" systems,  or "cable systems." LECs that elect to
provide "open video"  systems must allow others to use up to two-thirds of their
activated  channel  capacity.  They will be  relieved of  regulation  as "common
carriers,"  and are not  required  to  obtain  local  franchises,  but are still
subject to many other regulations applicable to cable systems. LECs operating as
"cable  systems" are subject to all rules  governing  cable  systems,  including
franchising requirements. It is unclear which model LECs will ultimately choose,
but the video distribution  services developed by local telephone  companies are
likely to represent a direct competitive threat to Galaxy.

      The  ability  of local  telephone  companies  to  compete  with  Galaxy by
acquiring an existing cable system is limited.  The 1996 Telecom Act prohibits a
LEC or  its  affiliate  from  acquiring  more  than a 10  percent  financial  or
management  interest  in any  cable  operator  providing  cable  service  in its
telephone  service area. It further  prohibits a cable operator or its affiliate
from  acquiring more than a 10 percent  financial or management  interest in any
LEC providing  telephone exchange service in its franchise area. A LEC and cable
operator that have a telephone service area and cable franchise area in the same
market may not enter into a joint venture to provide telecommunications services
or video  programming.  There  are  exceptions  to these  limitations  for rural
facilities, very small cable systems, and small LECs in non-urban areas.

      Another  alternative  method of video  distribution  is through the use of
multichannel multipoint distribution systems ("MMDS"), which deliver programming
services over microwave channels received by subscribers with a special antenna.
MMDS  systems are less  capital  intensive,  are not  required  to obtain  local
franchises  or  pay  franchise  fees,  and  are  subject  to  fewer   regulatory
requirements  than cable television  systems.  Although there are relatively few
MMDS  systems in the United  States that are  currently  in  operation  or under
construction,  many markets have been licensed or tentatively licensed.  The FCC
has taken a series of actions  intended to facilitate  the  development of these
"wireless cable systems" as alternative means of distributing video programming,
including  reallocating  the use of certain  frequencies  to these  services and
expanding  the  permissible  use of certain  channels  reserved for  educational
purposes.  The FCC's  actions  enable a single  entity to develop an MMDS system
with a potential of up to 35 channels,  and thus compete more  effectively  with
cable  television.  Developments in compression  technology  have  significantly
increased  the  number  of  channels  that  can be  made  available  from  other
over-the-air  technologies.  Subscribership  to MMDS  services is  projected  to
continue over the next several years.

                                       15
<PAGE>

      Galaxy also competes with master antenna  television  ("MATV") systems and
satellite   master  antenna   television   ("SMATV")   systems,   which  provide
multichannel program services directly to hotel, motel,  apartment,  condominium
and similar  multi-unit  complexes within a cable television  system's franchise
area,  generally  free  of  any  regulation  by  state  and  local  governmental
authorities.  The 1996 Telecom Act changes the definition of a "cable system" to
include only systems that cross public rights-of-way.  Therefore,  SMATV systems
that serve  buildings that are not commonly  owned or managed,  but which do not
cross public  rights of way,  are no longer  considered  "cable  systems" and no
longer require a franchise to operate.

      Legislation and Regulation

      The cable  television  industry  currently is  regulated by the FCC,  some
state  governments  and most local  governments.  In addition,  legislative  and
regulatory  proposals under  consideration  by the Congress and federal agencies
may materially affect the cable television industry.  The following is a summary
of federal laws and regulations  affecting the growth and operation of the cable
television industry and a description of certain state and local laws.

      Cable Communications Policy Act of 1984. The 1984 Cable Act, which amended
the  Communications  Act  of  1934  (the  "Communications   Act"),   established
comprehensive  national  standards and  guidelines  for the  regulation of cable
television systems and identified the boundaries of permissible  federal,  state
and local government  regulation.  The FCC was charged with  responsibility  for
adopting  rules to implement the 1984 Cable Act.  Among other  things,  the 1984
Cable  Act  affirmed  the  right of  franchising  authorities  (state  or local,
depending on the practice in individual  states) to award one or more franchises
within  their  jurisdictions.   It  also  prohibited   non-grandfathered   cable
television systems from operating without a franchise in such jurisdictions. The
1984 Cable Act  provides  that in granting or renewing  franchises,  franchising
authorities  may  establish   requirements  for  cable-related   facilities  and
equipment,  but may not establish or enforce  requirements for video programming
or information services other than in broad categories.

      The Cable Television  Consumer  Protection and Competition Act of 1992. In
October 1992,  Congress enacted the 1992 Cable Act. The 1992 Cable Act permitted
a greater  degree of  regulation  of the cable  industry  with respect to, among
other  things;  (i)  cable  system  rates  for  both  basic  and  certain  cable
programming  services;  (ii)  programming  access and exclusivity  arrangements;
(iii) access to cable channels by unaffiliated programming services; (iv) leased
access terms and  conditions;  (v)  horizontal  and vertical  ownership of cable
systems;  (vi) customer and service  requirements;  (vii)  television  broadcast
signal carriage and retransmission consent; (viii) technical standards; and (ix)
cable  equipment   compatibility.   Additionally,   the  legislation  encouraged
competition with existing cable television systems by allowing municipalities to
own and  operate  their  own  cable  television  systems  without  a  franchise,
preventing  franchising   authorities  from  granting  exclusive  franchises  or
unreasonably  refusing to award additional franchises covering an existing cable
system's service area, and prohibiting the common ownership of cable systems and
co-located  MMDS or SMATV  systems.  The 1992  Cable  Act also  precluded  video
programmers  affiliated  with cable  television  companies  from favoring  cable
operators  over   competitors  and  required  such  programmers  to  sell  their
programming to other multichannel video distributors.  The legislation  required
the FCC to initiate a number of  rule-making  proceedings  to implement  various
provisions of the statute, the majority of which have been completed.

      Various cable operators have challenged the  constitutionality  of several
sections of the 1992 Cable Act,  although  the courts  have  disposed of most of
these  challenges.  In April  1993,  a  three-judge  panel of the United  States


                                       16
<PAGE>

District Court for the District of Columbia upheld the  constitutional  validity
of the  must-carry  provisions of the 1992 Cable Act. That decision was appealed
directly to the United States Supreme Court,  which vacated the decision in June
1994  and  remanded  it to  the  three-judge  panel  to  determine  whether  the
must-carry  rules  were  necessary  to  preserve  the  economic  health  of  the
broadcasting  industry.  The  three-judge  panel found in December 1995 that the
must-carry  rules  were  necessary  to  preserve  the  economic  health  of  the
broadcasting  industry,  and  upheld the  must-carry  rules.  The United  States
Supreme  Court agreed to review the District  Court's  decision.  This review is
still pending before the United States Supreme Court.

      In June 1995,  the United  States  Court of Appeals  for the  District  of
Columbia  Circuit  determined  that the  provision  of the 1992  Cable Act which
allows cable television operators to prohibit indecent or obscene programming on
leased access channels and public, educational, and governmental access channels
does not violate the First  Amendment.  The United States  Supreme Court granted
certiorari and heard oral arguments in February 1996.

      Telecommunications  Act of 1996. On February 8, 1996, the 1996 Telecom Act
was enacted.  Some of the  provisions  of the 1996 Telecom Act became  effective
immediately,   but  other  provisions  will  not  take  effect  until  they  are
implemented  by the  FCC.  This  legislation  reverses  much of the  cable  rate
regulation established by the 1992 Cable Act over a three-year period. The rates
for cable  programming  service  ("CPS" or  "non-basic")  tiers offered by small
cable  operators in small cable systems are deregulated  immediately.  The FCC's
authority  to  regulate  the CPS tier rates of all other  cable  operators  will
expire on March 31, 1999. The legislation  also: (i) eliminates the uniform rate
requirements  of the 1992 Cable Act where  effective  competition  exists;  (ii)
repeals the anti-trafficking  provisions of the 1992 Cable Act; (iii) limits the
rights of franchising  authorities to require certain technology and prohibit or
condition the provision of  telecommunications  services by the cable  operator;
(iv)  requires  cable  operators  to fully block or scramble  both the audio and
video  on  sexually-explicit  or  indecent  programming  or  channels  primarily
dedicated to sexually-oriented programming; (v) allows cable operators to refuse
to carry access  programs  containing  "obscenity,  indecency  or nudity";  (vi)
adjusts the pole  attachment  laws;  and (vii) allows  cable  operators to enter
telecommunications  markets which  historically  have been closed to them, while
also allowing some  telecommunications  providers to begin providing competitive
cable service in their local service areas.

      Cable programmers have challenged the  constitutionality  of the provision
of the 1996 Telecom Act requiring cable operators to scramble  sexually-explicit
or  indecent  adult  programming  in the  United  States  District  Court of the
District of Delaware. On March 7, 1996, the Court issued a temporary restraining
order against  enforcement of the provisions until the challenge can be heard by
a three-judge panel.

      Federal Regulation

      The FCC is the principal federal  regulatory agency with jurisdiction over
cable television.  The FCC has promulgated  regulations covering a broad variety
of areas,  and is required to adopt  additional  regulations or repeal or modify
existing  regulations to implement the 1996 Telecom Act. The FCC may enforce its
regulations  through the  imposition of fines,  the issuance of cease and desist
orders and/or the  imposition  of other  administrative  sanctions,  such as the
revocation of FCC licenses  needed to operate  certain  transmission  facilities
often used in  connection  with  cable  operations.  A brief  summary of certain
federal regulations follows.

      Rate Regulation. Prior to implementation of the 1992 Cable Act, most cable
systems were largely free to adjust cable  service  rates  without  governmental
approval.  The 1992 Cable Act  authorized  rate  regulation  for  certain  cable
communications  services and  equipment in  communities  that are not subject to


                                       17
<PAGE>

"effective  competition."  The  1992  Cable  Act  requires  the  FCC to  resolve
complaints  about rates for non-basic cable  programming  services and to reduce
any such rates  found to be  unreasonable.  It also  limits the  ability of many
cable systems to raise rates for basic and certain  non-basic cable  programming
services (collectively,  the "Regulated Services").  Cable services offered on a
per channel or on a per  program  basis are not  subject to rate  regulation  by
either franchising  authorities or the FCC.  Notwithstanding the above, the 1996
Telecom Act immediately deregulates the CPS rates of "small cable operators" and
will deregulate the CPS rates of all other cable operators by March 31, 1999.

      The 1992 Cable Act  requires  communities  to certify  with the FCC before
regulating basic cable rates.  Upon  certification,  the local community obtains
the right to approve basic rates.  Certified  franchising  authorities  are also
empowered  to  regulate  rates  charged  for  additional  outlets  and  for  the
installation, lease and sale of equipment used by customers to receive the basic
service tier, such as converters and remote control units. These equipment rates
must be based on actual cost plus a  reasonable  profit,  as defined by the FCC.
Cable operators may be required to refund  overcharges  with interest.  The 1992
Cable Act permits  communities  to certify at any time,  so it is possible  that
Galaxy's franchising authorities may choose in the future to certify to regulate
Galaxy's  basic  rates.  FCC  review of CPS rates is  triggered  by  franchising
authority complaints filed within 45 days of a rate increase.

      The  FCC's  rate   regulations   do  not  apply  where  a  cable  operator
demonstrates that it is subject to "effective competition." Under the 1992 Cable
Act, a system is subject to effective  competition  where: (i) fewer than 30% of
the  households in the franchise  area subscribe to the cable service of a cable
system;  (ii)  the  franchise  area  is  served  by at  least  two  unaffiliated
comparable video  programming to at least 50% of the households in the franchise
area and the number of households subscribing to programming services offered by
the MVPDs  other than the largest  MVPD  exceeds  15% of the  households  in the
franchise  area; or (iii) a MVPD operated by the  franchising  authority  offers
video  programming to at least 50% of the households in the franchise  area. The
1996 Telecom Act also  provides  that  effective  competition  exists if a local
exchange carrier provides video programming in the franchise area.

      In  implementing   the  1992  Cable  Act,  the  FCC  adopted  a  benchmark
methodology as the principal method of regulating rates for Regulated  Services.
Cable  operators with rates above the allowable  level under the FCC's benchmark
methodology   may  attempt  to  justify  such  rates  using  a   cost-of-service
methodology. The FCC has instituted rate relief for small cable operators. Cable
operators with fewer than 400,000 nationwide  subscribers are eligible to file a
streamlined cost-of service analysis to justify their per-channel rates in those
systems serving 15,000 or fewer subscribers. Per-channel rates that fall below a
prescribed benchmark are presumed reasonable.

      The 1992 Cable Act also  requires  cable  systems to permit  customers  to
purchase  video  programming  offered by the  operator on a per channel or a per
program basis without the necessity of subscribing to any tier of service, other
than the basic service tier,  unless the system's lack of addressable  converter
boxes or  other  technological  limitations  does not  permit  it to do so.  The
statutory  exemption  for  cable  systems  that do not  have  the  technological
capability  to offer  programming  in the  manner  required  by the  statute  is
available  until a system obtains such  capability,  but not later than December
2002.  Systems  facing  effective  competition  are  not  subject  to  the  tier
buy-through prohibition.

      The 1996  Telecom Act  deregulates  immediately  CPS rates for small cable
operators that have less than 50,000 subscribers in the franchise area. A "small
operator" is an operator that, with its  affiliates,  serves less than 1% of all


                                       18
<PAGE>

subscribers  in  the  United  States  (about  600,000  subscribers)  and  is not
affiliated with entities with annual  aggregate gross revenues of more than $250
million. Rates for basic service continue to be regulated,  however,  unless the
system had a single  regulated tier as of December 31, 1994. For all other cable
systems,  the FCC's rate  regulation  authority  for CPS tiers expires March 31,
1999. Rates for basic tiers will continue to be subject to regulation.

      The 1996 Telecom Act allows cable operators to pass through franchise fees
and regulatory  fees to subscribers  without any prior notice.  Notices of other
rate  changes  may be  given  by any  reasonable  written  means,  at the  cable
operator's "sole discretion." Bulk discounts for multi-dwelling  units no longer
must meet any uniform  rate  requirement.  A cable  operator  need not  maintain
uniform rates throughout a franchise area where there is effective  competition.
In addition, franchising authorities may not file complaints with the FCC unless
they have actually received subscriber complaints.

      Carriage of Broadcast  Television Signals.  The 1992 Cable Act established
new signal carriage requirements. These requirements allow commercial television
broadcast  stations  which are "local" to a cable  system,  to elect every three
years  whether  to require  the cable  system to carry the  station,  subject to
certain  exceptions,  or whether to require the cable  system to  negotiate  for
"retransmission     consent"    to    carry    the     station.     The    first
must-carry/retransmission  consent  elections  were made in June  1993,  and the
second  elections were made in October 1996. The next election,  will be made in
October,  1999. Stations are generally  considered local to a cable system where
the system is located in the station's Area of Dominant  Influence  ("ADI"),  as
determined by Arbitron.  This method for determining  whether a station is local
to a cable  system may change  because  Arbitron no longer  updates ADIs and the
1996 Telecom Act requires the FCC to use commercial publications which delineate
markets  based on viewing  patterns.  Cable  systems must obtain  retransmission
consent for the carriage of all "distant" commercial broadcast stations,  except
for certain  "superstations" (i.e., commercial  satellite-delivered  independent
stations such as WTBS).  All  commercial  stations  entitled to carriage were to
have been  carried by June 1993,  and any  non-must-carry  stations  (other than
superstations) for which  retransmission  consent had not been obtained could no
longer be carried after October 5, 1993. The  retransmission/must-carry  consent
agreements were  re-negotiated  for a three-year period as of December 31, 1996.
Galaxy  carries some  stations  pursuant to  must-carry  and others  pursuant to
retransmission  consent  agreements.  In some  cases,  Galaxy  agreed  to  carry
additional services, like FX, pursuant to retransmission consent agreements.

      Local non-commercial television stations are also given mandatory carriage
rights,  subject  to  certain  exceptions,  within  the larger of: (i) a 50-mile
radius of the station's city of license; or (ii) the station's Grade B contour(a
measure of signal strength). Non-commercial stations are not given the option to
negotiate for retransmission  consent.  All non-commercial  stations entitled to
carriage were to have been carried by December 1992.

      Non-duplication of Network Programming. Cable television systems that have
1,000 or more customers must, upon the appropriate request of a local television
station,  delete or "black  out" the  simultaneous  or  nonsimultaneous  network
programming of a distant  station when the local station also has contracted for
such programming on an exclusive basis.

      Deletion of Syndicated  Programming.  Cable  television  systems that have
1,000  or  more  subscribers  must,  upon  the  appropriate  request  of a local
television  station,  delete or "black out" the simultaneous or  nonsimultaneous
syndicated  programming  of a distant  station  when the local  station also has
contracted for such programming on an exclusive basis.

                                       19
<PAGE>

      Registration  Procedures and Reporting  Requirements.  Prior to commencing
operation in a particular  community,  all cable television  systems must file a
registration  statement  with the FCC listing the  broadcast  signals  they will
carry and certain other information.  Additionally, cable operators periodically
are required to file various informational reports with the FCC. Cable operators
that operate in certain  frequency bands are required on an annual basis to file
the results of their periodic cumulative leakage testing measurements. Operators
that  fail to make this  filing or who  exceed  the FCC's  allowable  cumulative
leakage index risk being  prohibited  from operating in those frequency bands in
addition to other sanctions.

      Technical  Requirements.  Historically,  the  FCC  has  imposed  technical
standards  applicable  to the cable  channels on which  broadcast  stations  are
carried,  and has prohibited  franchising  authorities  from adopting  standards
which were in conflict with or more  restrictive  than those  established by the
FCC. The FCC has applied its  standards  to all classes of channels  which carry
downstream National Television System Committee ("NTSC") video programming.  The
FCC also has adopted  standards  applicable  to cable  television  systems using
frequencies in the 108-137 MHZ and 225-400 MHZ bands in order to prevent harmful
interference  with cable system signal leakage.  The 1992 Cable Act requires the
FCC to  update  periodically  its  technical  standards.  The 1996  Telecom  Act
requires regulations to assure  compatibility among televisions,  VCRs and cable
systems,  leaving  all  features,  functions,  protocols  and other  product and
service options for selection  through open competition in the market.  The 1996
Telecom Act also prohibits States or franchising  authorities from  prohibiting,
conditioning  or  restricting  a cable  system's  use of any type of  subscriber
equipment or transmission technology.

      Franchise Authority.  The 1984 Cable Act affirmed the right of franchising
authorities  (the cities in which Galaxy provides cable service) to award one or
more  franchises  within their  jurisdictions  and prohibited  non-grandfathered
cable systems from operating without a franchise in such jurisdictions. Galaxy's
affiliates  hold cable  franchises  in all areas in which they  provide  service
where cable franchises are required.  The 1992 Cable Act encouraged  competition
with existing cable systems by:(i) allowing  municipalities to operate their own
cable systems without franchises;  (ii) preventing franchising  authorities from
granting exclusive franchises or from unreasonably  refusing to award additional
franchises   covering  an  existing  cable  system's  service  area;  and  (iii)
prohibiting (with limited  exceptions) the common ownership of cable systems and
co-located  multichannel  multipoint  distribution service ("MMDS") or satellite
master antenna  television  ("SMATV") systems (a prohibition which is limited by
the 1996  Telecom  Act to cases in which the cable  operator  is not  subject to
effective competition).

      The  1996  Telecom  Act  exempts   from   franchise   requirements   those
telecommunications  services  provided  by a cable  operator  or its  affiliate.
Franchise   authorities   may  not   require  a  cable   operator   to   provide
telecommunications service or facilities,  other than institutional networks, as
a condition  of  franchise  grant,  renewal or  transfer.  Similarly,  franchise
authorities may not impose any conditions on the provision of such service.

      Franchise Fees. Although franchising authorities may impose franchise fees
under the 1984 Cable Act, as modified by the 1996  Telecom  Act,  such  payments
cannot  exceed 5% of a cable  system's  annual gross  revenues  derived from the
operation of the cable system to provide cable  services.  Franchise  fees apply
only to revenues for cable  services.  Franchising  authorities are permitted to
charge a fee for any telecommunications providers' use of public right-of-way.

      Franchise Renewal.  The 1984 Cable Act established  renewal procedures and
criteria designed to protect incumbent  franchises  against arbitrary denials of
renewal.  These formal procedures are mandatory only if timely invoked by either


                                       20
<PAGE>

the cable operator or the franchising  authority.  Even after the formal renewal
procedures are invoked,  franchising authorities and cable operators remain free
to  negotiate a renewal  outside the formal  process.  Although  the  procedures
provide substantial protection to incumbent franchisees,  renewal is by no means
assured,  as the franchisee  must meet certain  statutory  standards.  Even if a
franchise is renewed,  a  franchising  authority may impose new and more onerous
requirements   such  as  upgrading   facilities  and  equipment,   although  the
municipality must take into account the cost of meeting such requirements.

      The 1992 Cable Act made several  changes to the process  which may make it
easier in some cases for a  franchising  authority  to deny  renewal.  The cable
operator's timely request to commence renewal proceedings must be in writing and
the franchising  authority must commence renewal  proceedings not later than six
months after receipt of such notice.  Within a four-month  period beginning with
the submission of the renewal  proposal the franchising  authority must grant or
deny  the  renewal.   Franchising   authorities  may  consider  the  "level"  of
programming  service  provided by a cable operator in deciding whether to renew.
Franchising  authorities  are no longer  precluded from denying renewal based on
failure to  substantially  comply with the material terms of the franchise where
the franchising authority has "effectively  acquiesced" to such past violations.
Rather,  the  franchising  authority is estopped only if, after giving the cable
operator  notice and  opportunity to cure,  the authority  fails to respond to a
written  notice from the cable  operator of its  failure or  inability  to cure.
Courts may not reverse a denial of renewal based on procedural  violations found
to be "harmless error."

      Channel   Set-Asides.   The  1984  Cable  Act  permits  local  franchising
authorities to require cable operators to set aside certain channels for public,
educational  and  governmental  access  programming.  The 1984 Cable Act further
requires  cable  television  systems  with  36 or  more  activated  channels  to
designate a portion of their channel  capacity for  commercial  leased access by
unaffiliated  third parties.  The 1992 Cable Act requires leased access rates to
be set according to an FCC-prescribed  formula.  The 1996 Telecom Act explicitly
gives cable  operators  the right to refuse to carry any public access or leased
access program containing "obscenity, indecency or nudity."

      Ownership.  The 1996 Telecom Act  eliminates the 1984 Cable Act provisions
prohibiting  local exchange  carriers  ("LECs") from providing video programming
directly to  customers  within their local  exchange  telephone  service  areas,
except in rural areas or by specific  waiver.  Under the 1996 Telecom Act,  LECs
may provide video  programming by radio-based  systems,  common carrier systems,
"open video" systems or "cable systems." LECs that elect to provide "open video"
systems must allow others to use up to  two-thirds  of their  activated  channel
capacity.  These LECs are relieved of regulation as "common  carriers,"  and are
not required to obtain  local  franchises,  but are still  subject to many other
regulations  applicable to cable systems.  LECs operating as "cable systems" are
subject  to  all  rules   governing   cable   systems,   including   franchising
requirements.

      The 1996 Telecom Act prohibits a LEC or its affiliate  from acquiring more
than a 10  percent  financial  or  management  interest  in any  cable  operator
providing cable service in its telephone service area. It also prohibits a cable
operator or its affiliate  from  acquiring  more than a 10 percent  financial or
management  interest  in any LEC  providing  telephone  exchange  service in its
franchise area. A LEC and cable operator whose telephone  service area and cable
franchise  area are in the same  market  may not enter  into a joint  venture to
provide telecommunications  services or video programming.  There are exceptions
to these limitations for rural facilities,  very small cable systems,  and small
LECs in non-urban areas.

                                       21
<PAGE>

      The 1984 Cable Act and the FCC's  rules  prohibit  the  common  ownership,
operation,  control  or  interest  in a  cable  system  and a  local  television
broadcast  station  whose  predicted  Grade B contour  covers any portion of the
community  served  by the  cable  system.  The 1996  Telecom  Act  repeals  this
statutory restriction on broadcast-cable  cross-ownership,  but does not require
the FCC to repeal its cross-ownership rule. The 1996 Telecom Act also eliminates
the FCC's  restriction  against  the  ownership  or control of both a  broadcast
network and cable system,  but it authorizes the FCC to adopt  regulations which
will ensure carriage,  channel  positioning and  nondiscriminatory  treatment of
non-affiliated  broadcast  stations  by  cable  systems  which  are  owned  by a
broadcast network.

      The 1992 Cable Act prohibits the common ownership, affiliation, control or
interest in cable  television  systems and MMDS facilities or SMATV systems with
overlapping  service  areas.  However,  a cable  system may acquire a co-located
SMATV system if it provides cable service to the SMATV system in accordance with
the terms of its cable television franchise.  The 1996 Telecom Act provides that
these  rules shall not apply  where the cable  operator is subject to  effective
competition.

      Pursuant to the 1992 Cable Act,  the FCC has imposed  limits on the number
of cable systems a single cable operator may own. In general,  no cable operator
may hold an  attributable  interest in cable systems which pass more than 30% of
all homes nationwide.  Attributable  interests for these purposes include voting
interests of 5% or more (unless there is another  single holder of more than 50%
of the  voting  stock),  officerships,  directorships  and  general  partnership
interests.

      Equal Employment  Opportunity.  The 1984 Cable Act includes  provisions to
ensure that  minorities  and women are provided Equal  Employment  Opportunities
("EEO") within the cable television industry.  The FCC has adopted reporting and
certification rules that apply to all cable system operators with more than five
full-time  employees.  Failure to comply with the EEO requirements can result in
the  imposition  of fines  and/or  other  administrative  sanctions,  or may, in
certain  circumstances,  be cited by a  franchising  authority  as a reason  for
denying a franchisee's renewal request.

      Privacy. The 1984 Cable Act imposes a number of restrictions on the manner
in which cable system  operators can collect and disclose data about  individual
system   customers.   The  statute  also  requires  that  the  system   operator
periodically  provide all customers with written  information about its policies
regarding the  collection  and handling of data about  customers,  their privacy
rights under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer  privacy  provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy  requirements  are strengthened to require
that cable operators take such actions as are necessary to prevent  unauthorized
access to personally identifiable information.

      Anti-Trafficking.   The   1996   Telecom   Act   repeals   most   of   the
anti-trafficking  restrictions  imposed by the 1992 Cable Act, which prevented a
cable operator from selling or  transferring  ownership of a cable system within
36 months of  acquisition.  However,  a local  franchise may still require prior
approval  of a  transfer  or  sale.  The 1992  Cable  Act  requires  franchising
authorities to act on a franchise transfer request within 120 days after receipt
of all information  required by FCC  regulations and the franchising  authority.
Approval is deemed granted if the franchising authority fails to act within such
period.

      Copyright.  Cable  television  systems  are  subject to federal  copyright
licensing  covering  carriage  of  broadcast  signals.  In  exchange  for making
semi-annual  payments to a federal  copyright  royalty pool and meeting  certain


                                       22
<PAGE>

other  obligations,  cable  operators  obtain a statutory  license to retransmit
broadcast  signals.  The amount of the royalty payment varies,  depending on the
amount of system  revenues from certain  sources,  the number of distant signals
carried,  and the  location  of the cable  system with  respect to  over-the-air
television  stations.  Cable  operators are liable for interest on underpaid and
unpaid  royalty  fees,  but are not  entitled  to  collect  interest  on refunds
received for  overpayment of copyright  fees.  Adjustments in copyright  royalty
rates are now made through an arbitration process supervised by the U.S.
Copyright Office.

      Various  bills have been  introduced in Congress in the past several years
that would eliminate or modify the cable television compulsory license.  Without
the compulsory license,  cable operators might need to negotiate rights from the
copyright  owners  for each  program  carried on each  broadcast  station in the
channel line-up.

       Copyright  music  performed in programming  supplied to cable  television
systems by pay cable networks (such as HBO) and cable programming networks (such
as USA Network) has  generally  been  licensed by the networks  through  private
agreements with the American  Society of Composers and Publishers  ("ASCAP") and
BMI, Inc. ("BMI"),  the two major performing rights  organizations in the United
States.  ASCAP and BMI  offer  "through  to the  viewer"  licenses  to the cable
networks which cover the  retransmission  of the cable networks'  programming by
cable television systems to their subscribers.

      Regulatory  Fees and Other  Matters.  The FCC  requires  payment of annual
"regulatory  fees" by the various  industries it regulates,  including the cable
television  industry.  In 1996,  cable  television  systems were required to pay
regulatory fees of $0.55 per subscriber.  Per-subscriber  regulatory fees may be
passed on to subscribers as "external cost" adjustments to rates for basic cable
service.  Fees are also assessed for other FCC licenses,  including licenses for
business  radio,  cable  television  relay systems  ("CARS") and earth stations.
These fees,  however,  may not be collected directly from subscribers as long as
the FCC's rate regulations remain applicable to the cable system.

      In  December  1994,  the FCC adopted new cable  television  and  broadcast
technical  standards to support a new Emergency  Alert System.  Cable  operators
must install and activate  equipment  necessary to implement  the new  Emergency
Broadcast  System by July 1, 1997.  At the  present  time,  industry  groups and
attorneys think the FCC is poised to delay this date.

      FCC regulations  also address:  the carriage of local sports  programming;
restrictions  on  origination  and  cablecasting  by  cable  system   operators;
application  of the  rules  governing  political  broadcasts;  customer  service
standards; home wiring; and limitations on advertising contained in nonbroadcast
children's programming.

      Telecommunications  Regulation.  The 1996  Telecom  Act has  substantially
revised  communications  regulation in the United  States.  The  legislation  is
intended  to  allow  providers  to  enter   communications   markets  that  have
historically been closed to them as a result of legal  restrictions,  as well as
practical and economic considerations.  At the same time,  implementation of the
1996 Telecom Act may leave  incumbent  providers in  previously  closed  markets
sufficiently free from regulation that they will be able to defend their markets
aggressively.  Galaxy is unable to predict the outcome of the  proceedings  that
will implement the legislation.

      For example,  the 1996 Telecom Act establishes local exchange  competition
as a national policy by preempting  laws that prohibit  competition in the local
exchange  and  by   establishing   uniform   requirements   and   standards  for
interconnection,  unbundling and resale.  These  standards will be developed and


                                       23
<PAGE>

implemented  by the FCC in conjunction  with the states in numerous  proceedings
and through a process of negotiation and arbitration.  By establishing  national
standards  for  interconnection,  unbundling,  and resale of  competitive  local
exchange  services,   the  1996  Telecom  Act  significantly  enhances  Galaxy's
opportunity to enter this market.

      At the same time, Galaxy's ability to compete in offering certain services
may be  adversely  affected,  depending  on the  degree  and form of  regulatory
flexibility  ultimately  afforded LECs by the FCC and the states,  as well as on
the pricing scope and applicability of these  interconnection  requirements.  In
addition,  if Galaxy offers local  exchange  services  within the meaning of the
1996  Telecom  Act,   other  service   providers  may  take   advantage  of  the
interconnection  duty to require Galaxy to use its local exchange  facilities to
carry their customer traffic.

      The 1996  Telecom  Act also  opens  the way for Bell  operating  companies
("BOCs")  and their  affiliates  to  provide  long  distance  telecommunications
services between a local access and transport area and points outside that area.
Prior to the 1996 Telecom Act, BOCs were generally prohibited from offering such
"interLATA"  services.  Under the 1996 Telecom Act such  services may be offered
outside of a BOC's local  exchange  service states  immediately.  BOCs may offer
interLATA services inside such states (in-region) when the FCC determines either
that the BOC is providing  access and  interconnection  to a competent  exchange
service provider under a  state-approved  agreement or that no such provider has
requested such access and interconnection within ten months after enactment, and
the state has approved the BOC's  general  terms for  providing  such access and
interconnection.  In either case,  the FCC also must  conclude  that the BOC has
satisfied a "competitive  checklist" of  interconnection  and other requirements
specified in the 1996 Telecom Act. If Galaxy decides itself to provide interLATA
service, it will likely face vigorous competition from BOC entrants,  as well as
from existing long distance carriers.

      Telecommunications  common carriers subject to the jurisdiction of the FCC
generally  must file tariffs  detailing  the prices and terms and  conditions of
services,  and whether the terms offered by the carrier are just, reasonable and
nondiscriminatory.  The 1996 Telecom Act provides that the FCC, in response to a
petition from a carrier,  shall forbear from  enforcing  regulations,  including
those  requiring  tariffs,  if the FCC determines  that: (1)  enforcement of the
regulations is not necessary to ensure that  carriers'  terms are reasonable and
nondiscriminatory;  (2)  enforcement of the regulations is not necessary for the
protection of consumers;  and (3)  forbearance  from applying the regulations is
consistent  with the public interest and, in particular,  that such  forbearance
would promote competition. The FCC may take action under these provisions of the
Act to reduce or eliminate  tariff filing and other  requirements.  Such actions
could free Galaxy from regulatory  burdens,  but might also increase the pricing
flexibility of its competitors.

      State and Local  Regulation.  Cable systems are subject to state and local
regulation,  typically  imposed through the franchising  process because a cable
television   system   uses   local   streets   and   rights-of-way.   Regulatory
responsibility  for  essentially  local  aspects of the cable  business  such as
franchisee  selection,  billing practices,  system design and construction,  and
safety and consumer protection remains with either state or local officials and,
in some jurisdictions, with both.

      Cable television  systems  generally are operated pursuant to nonexclusive
franchises,  permits or  licenses  granted by a  municipality  or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable for noncompliance with material provisions.  The terms
and conditions of franchises vary materially from  jurisdiction to jurisdiction.
Each franchise  generally  contains  provisions  governing  cable service rates,


                                       24
<PAGE>

franchise fees, franchise term, system construction and maintenance obligations,
system channel  capacity,  design and technical  performance,  customer  service
standards,  franchise renewal,  sale or transfer of the franchise,  territory of
the franchisee,  indemnification of the franchising authority, use and occupancy
of  public  streets  and  types of cable  services  provided.  State  and  local
franchising jurisdiction must be exercised consistently with federal law.

      Employees

      Galaxy  increased  its work force during the year to increase its presence
in the communities and to meet its customer needs more efficiently.  At December
31, 1996,  Galaxy had  approximately  472  full-time  employees and 59 part-time
employees, none of whom are subject to a collective bargaining agreement. Galaxy
considers its relations with its employees to be excellent. In addition,  Galaxy
Management employs 41 people who are dedicated primarily to servicing Galaxy.

      Item 2.  Properties.

      Galaxy owns or leases parcels of real property for signal  reception sites
(antenna towers and headends),  microwave  facilities and business offices,  and
owns most of its service  vehicles.  Galaxy believes that its  properties,  both
owned and leased,  are in good  condition  and are  suitable  and  adequate  for
Galaxy's business operations.

      Galaxy's cables  generally are attached to utility poles under pole rental
agreements with local public utilities,  although in some areas the distribution
cable is buried in  underground  ducts or trenches.  The physical  components of
Galaxy's  systems require  maintenance and periodic  upgrading to keep pace with
technological advances.

      Item 3.  Legal Proceedings.

      There are no material pending legal  proceedings to which either Galaxy or
Galaxy Telecom  Capital  Corp.,  its wholly owned  subsidiary,  is a party or to
which any of its properties are subject.

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

      Not applicable.

      Item 4(a) Executive Officers.

      See Part 3, Item 10.


                                       25
<PAGE>

                                      PART II

      Item 5. Market for  Registrant's  Common Equity and Related  Stockholder
               Matters.

      There is no  established  public  trading  market for Galaxy's  classes of
common equity.

      Item 6.  Selected Financial Data.

      The combined  statement of operations data for the periods from January 1,
1992 to December 22, 1994 set forth below have been  derived from the  unaudited
financial statements of the cable television systems acquired from Vantage Cable
and Vista  Communications  and the Western  Kentucky  Region  ("Wickliffe")  and
Cameron,  Texas ("Cameron") cable television systems of Galaxy Cablevision,  and
the cable systems of Chartwell Cable (collectively,  the "Initial Systems"). The
combined  statement of operations  data for the period from December 23, 1994 to
December 31, 1994,  calendar years 1995 and 1996, and the balance sheets data as
of December  31, 1995 and  December  31, 1996 set forth below have been  derived
from  Galaxy's  audited  financial  statements,   and  the  unaudited  financial
statements  of  Cameron  and  Chartwell  Cable.  The  data  should  be  read  in
conjunction with the historical financial statements,  the notes related thereto
and the other  financial  information  included in the  exhibits  and  elsewhere
herein.
 <TABLE>
 <CAPTION>

                                       Initial Systems (Combined)                   Company
                                       --------------------------      -------------------------------
                                                      Period from    Period from
                                                         Jan. 1        Dec. 23     Year        Year
                                                         1994 to       1994 to   Ended        Ended
                                   Year Ended Dec. 31    Dec. 22       Dec. 31   Dec. 31     Dec. 31
                                   1992         1993       1994          1994      1995       1996 (b)
<S>                            <C>          <C>        <C>        <C>        <C>          <C>
                                   ----         ----       ----      --------   --------      --------
         (Dollars in thousands)

        Statement of Operations Data:

Revenues                         $ 25,919    $ 27,285    $ 27,117    $    577    $ 29,995    $ 62,337
                                 --------    --------    --------    --------    --------    --------
Operating Expenses:
  Systems operations                9,518       9,938      10,338         260      13,219      28,353
  Selling, general &
     administrative                 4,951       4,722       5,272          99       3,681       6,439
  Management fees to affiliate      1,334       1,320       1,316          32       1,605       2,804
  Depreciation &
     amortization                  16,232      15,681      14,541         214      10,206      21,739
                                 --------    --------    --------    --------    --------    --------
    Total operating expenses       32,035      31,661      31,467         605      28,711      59,335

Operating income (loss)            (6,116)     (4,376)     (4,350)        (28)      1,284       3,002
  Interest expense                 (8,657)     (6,229)     (6,015)       (153)    (10,442)    (20,133)
  Other income (expense)           (1,090)         37        (248)          6         608         219
                                 --------    --------    --------    --------    --------    --------
Net loss                         $(15,863)   $ 10,568)   $(10,613)   $   (175)   $ (8,550)   $(16,912)
                                 ========    ========    ========    ========    ========    ========

EBITDA (a)                       $ 10,116    $ 11,305    $ 10,191    $    186    $ 11,490      24,741
</TABLE>
<TABLE>
<S>                                                                          <C>       <C>

        Balance Sheet Data (at end of period):
        Total assets                                                             $199,913  $217,498
        Total long-term debt and other                                            145,527   169,738
        Partners' capital                                                          42,171    25,259
<FN>

                                       26
<PAGE>

(a)   EBITDA  represents  income (loss) before interest  expense,  income taxes,
      depreciation and amortization,  and other income (expense).  EBITDA is not
      presented  in  accordance  with  GAAP  and  should  not be  considered  an
      alternative to, or more  meaningful  than,  operating  income or operating
      cash flows as an indicator of Galaxy's operating performance.

(b)     In December 1995,  except for the Cameron  systems which were acquired
      in  March  1995,  Galaxy  acquired  certain  cable  television  systems,
      recorded  under the  purchase  method of  accounting.  As a result,  the
      Consolidated   Statement  of   Operations   of  Galaxy  for  the  period
      subsequent to the  acquisitions  are not  comparative  to prior periods.
      In addition,  Galaxy acquired  various cable systems during fiscal 1996,
      which  were   insignificant  in  the  aggregate  to  Galaxy's   on-going
      operations. (See "Business-1996 Acquisitions and Trades".
</FN>
</TABLE>

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

      Introduction

      On December 23, 1994, Galaxy commenced operations. Galaxy acquired certain
cable  television   systems  of  Galaxy   Cablevision,   Vantage  Cable,   Vista
Communications and Chartwell Cable on December 23, 1994, and certain other cable
systems  of  Galaxy   Cablevision,   L.P.  on  March  31,  1995,  for  aggregate
consideration  of $98.8 million.  See "Business -- Background" for a description
of the Initial  Systems.  The following  discussion of results of operations for
the years ended  December 31, 1994 and 1995 is based on the combined  historical
financial data for the Systems  adjusted to give historical  pro-forma effect to
management fees, depreciation and amortization,  interest expense and debt issue
costs that would have been incurred if the Initial  Systems had been acquired as
of January 1, 1994.  The  discussion of results of operations for the year ended
December  31, 1996  reflects the actual  financial  data for the Systems for the
year then  ended.  The  combined  results of  operations  of the Systems and the
historical  pro-forma results of operations of Galaxy do not reflect any changes
in the operation or management of the Systems that Galaxy has made or intends to
make and are not necessarily  indicative of the results of operations that would
have been  achieved had the Systems been owned and operated by Galaxy during the
periods presented.

Results of Operations

Overview

      In each of the past  three  years,  the  Initial  Systems  have  generated
substantially  all of their  revenues  from  monthly  customer  fees for  basic,
premium and other  services (such as the rental of converters and remote control
devices)  and  from  installation  charges.  Minimal  additional  revenues  were
generated from the sale of advertising and from home shopping networks.

      The Systems have generated increases in revenues in each of the past three
fiscal years. This growth was accomplished primarily through internal subscriber
growth.  Except for fiscal year 1994,  total  systems  operations  expenses  and
selling,  general and  administrative  expenses have increased,  but at a lesser
amount  than  revenues.  Although  Galaxy  expects to  experience  increases  in
programming expenses for the foreseeable future, the Company believes it will be
able, under the FCC's existing cable rate regulations, to increase its rates for
cable  services to recover  increases in the costs of  programming to the extent
such  increases  exceed  the  general  rate of  inflation.  The  high  level  of
depreciation  and  amortization  associated  with the  acquisitions  and capital
expenditures  related to continued  construction  and  upgrading of the Systems,
together with interest costs related to Galaxy's and the prior owners' financing
activities, have caused the prior owners of the Systems and Galaxy to report net
losses.  Galaxy  believes  that such net losses are common for cable  television
companies.

                                       27
<PAGE>

      The following table sets forth for the periods indicated certain statement
of operations  items expressed in dollar amounts (in thousands) and a percentage
of total revenues from continuing operations on a combined historical basis.


<TABLE>
<CAPTION>
                                                1994(a)             1995(a)             1996 (b)
                                            ------------------  ------------------  ------------------
                                             % of                           % of                % of
                                           Amount     Revenues  Amount    Revenues   Amount   Revenues
                                           ------     --------  ------    --------   ------   --------
<S>                                      <C>         <C>       <C>         <C>       <C>      <C>
Statement of Operations Data:

Revenues                                $ 55,438      100.0%  $ 57,459      100.0%    62,337      100.0%

Operating Expenses:
  System Operations                       21,791       39.3%    24,531       42.7%    28,353       45.5%
  Selling, general and administrative      9,283       16.7%     7,546       13.1%     6,439       10.3%
  Management fees to affiliate             2,492        4.5%     2,582        4.5%     2,804        4.5%
  Depreciation and  amortization          18,702       33.7%    19,105       33.3%    21,739       34.9%
                                        --------    -------   --------    -------  --------    -------
   Total operating  expenses              52,268       94.2%    53,764       93.6%    59,335       95.2%
                                        --------    -------   --------    -------   --------    -------
Operating income (loss)                    3,170        5.8%     3,695        6.4%     3,002        4.8%

  Interest expense                       (18,718)     (33.8%)  (18,813)     (32.7%)  (20,133)     (32.3%)
  Other income  (expense)                   (263)      (0.5%)      (10)      (0.0%)      219        0.4%
                                        --------    -------   --------    -------   --------    -------
Net loss                                $(15,811)     (28.5%) $(15,128)     (26.3%) $(16,912)     (27.1%)
                                        ========    =======   ========    =======   ========    =======

EBITDA                                  $ 21,872       39.5%  $ 22,800       39.7%    24,741       39.7%
<FN>

 (a)  Reflects the combined  historical  financial data for the Systems adjusted
      to give historical pro forma effect to management  fees,  depreciation and
      amortization,  interest  expense and debt issue costs that would have been
      incurred if the  acquisitions  during the fiscal years ended 1994 and 1995
      had occurred as of January 1, 1994.

 (b)       Reflects  the actual  financial  data for the  Systems
      for the year ended December 31, 1996.

      Fiscal 1996 Compared to Pro-Forma Fiscal 1995
</FN>
</TABLE>

      Revenues increased 8.5%, or approximately  $4.9 million,  from fiscal 1995
to fiscal  1996.  This is a result of:  (1) basic  subscribers  increasing  from
162,412 to 182,552  at  December  31,  1995 and 1996,  respectively,  and (2) an
increase in basic rates of some Systems during the year.

      System operations expenses increased 15.6%, or approximately $3.8 million,
from fiscal 1995 to fiscal 1996. Systems operations expenses, as a percentage of
revenues,  increased from 42.7% in 1995 to 45.5% in 1996.  These  increases were
due primarily to an increase in programming fees from 1995 to 1996.

      Selling,   general  and   administrative   expenses  decreased  14.7%,  or
approximately $1.1 million,  from fiscal 1995 to fiscal 1996.  Selling,  general
and administrative  expenses, as a percentage of revenues,  decreased from 13.1%
in 1995 to 10.3% in 1996. These decreases were due primarily to Galaxy's ability
to streamline administrative operations through its call centers.

                                       28
<PAGE>

      Management  fees  to  affiliate  increased  8.6%,  or  approximately  $0.2
million,  from fiscal 1995 to fiscal 1996. Management fees were 4.5% of revenues
in 1995 and 1996.  The  increase is a direct  result of the  increase in revenue
during the year.

      Depreciation  and amortization  expense  increased 13.8%, or approximately
$2.6  million,  from fiscal 1995 to fiscal 1996.  As a  percentage  of revenues,
depreciation  and  amortization  increased  from 33.3% in 1995 to 34.9% in 1996.
These  increases  were a result of capital  expenditures  during the year in the
amount of $21.9 million, along with $16.1 million of additions to cable systems,
net of trades, through acquisitions during the year.

      Interest  expense  increased  7.0%, or  approximately  $1.3 million,  from
fiscal 1995 to fiscal 1996. This increase was a result of additional  borrowings
under  Galaxy's  Revolving  and Term Loan during the year.  As a  percentage  of
revenues,  interest expense  decreased from 32.7% in 1995 to 32.3% in 1996. This
decrease was achieved by placing a greater  percentage of the Revolving and Term
Loan under LIBOR.

      Other income (expense) increased by approximately $0.2 million, from a net
expense of approximately  $10,000, or less than 0.1% of revenues in fiscal 1995,
to other income of approximately  $219,000,  or 0.4% of revenues in fiscal 1996.
This  increase  is  primarily  attributable  to a gain on sale of  assets in the
amount of $183,095.

      The prior  owners of the Systems and Galaxy as separate  entities  paid no
income  taxes,  although they were required to file federal and state income tax
returns for  informational  purposes  only. All income or loss flowed through to
the  partners  of  such  entities  as  specified  in the  governing  partnership
agreements.

      As a combined  result of the items  discussed  above,  net loss  increased
11.8%,  or  approximately  $1.8  million,  from fiscal 1995 to fiscal 1996. As a
percentage of revenues, net loss increased from 26.3% in 1995 to 27.1% in 1996.

      EBITDA increased  approximately $1.8 million, or 8.5%, from fiscal 1995 to
fiscal 1996, and, as a percentage of revenues, EBITDA remained constant at 39.7%
over such periods.  EBITDA  represents  income (loss) before  interest  expense,
income taxes, depreciation and amortization,  and other income (expense). EBITDA
is not  presented  in  accordance  with GAAP and  should  not be  considered  an
alternative  to, or more  meaningful  than,  operating  income or operating cash
flows as an indicator of Galaxy's operating performance.

      Pro Forma Fiscal 1995 Compared to Pro Forma Fiscal 1994

      Revenues increased 3.6%, or approximately  $2.0 million,  from fiscal 1994
to fiscal 1995. The increase in revenues  resulted  primarily from  inflationary
rate increases in the Friendship systems and a few of the Douglas systems. Rates
were also increased in the Initial  Systems that requested The Disney Channel be
placed on basic service.

      Systems  operations   expenses  increased  12.6%,  or  approximately  $2.7
million,  from  fiscal  1994 to fiscal  1995.  The  growth in  expenses  was due
primarily to increases in  programming  and other  subscriber  related  expenses
which typically vary with revenues and the increased number of channels carried.
Systems operations expenses,  as a percentage of revenues,  increased from 39.3%
in 1994 to 42.7% in 1995.

      Selling,   general  and   administrative   expenses  decreased  18.7%,  or
approximately $1.7 million, from fiscal 1994 to fiscal 1995. Selling general and
administrative expenses, as a percentage of revenues, decreased to 13.1% in 1995
from 16.7% in 1994.  The  decrease was due  primarily to reduced  administrative
costs  due to the  closing  of  certain  offices  of  acquired  systems  and the
economies of scale that  resulted  from folding the  acquisitions  into existing
operating management and facilities.

                                       29
<PAGE>

      Management fees increased 3.6%, or approximately $0.1 million, from fiscal
1994 to fiscal 1995. The increase was proportionate to the increase in revenue.

      Depreciation  and  amortization  expense  increased 2.2%, or approximately
$0.4 million,  from fiscal 1994 to fiscal 1995.  Depreciation  and  amortization
decreased from 33.7% of revenues in 1994 to 33.3% of revenues in 1995.

      Interest  expense  increased  0.5%, or  approximately  $0.1 million,  from
fiscal 1994 to fiscal  1995.  Interest  expense,  as a  percentage  of revenues,
decreased  from 33.8% in 1994 to 32.7% in 1995 because of lower  interest  rates
for Bank Debt in the last half of 1995.

      Other  income  (expense)  varied by  $253,000  between  fiscal  1994 and
fiscal 1995.

      The prior  owners of the  Current  Systems as  separate  entities  paid no
income  taxes,  although they were required to file federal and state income tax
returns for  informational  purposes  only. All income or loss flowed through to
the  partners  of  such  entities  as  specified  in the  governing  partnership
agreements.

      Net loss decreased 4.3%, or approximately  $0.7 million,  from fiscal 1994
to fiscal 1995,  primarily as a result of the  increases in revenues and changes
in expenses as described above. As a percentage of revenues,  net loss decreased
from 28.5% in 1994 to 26.3% in 1995.

      EBITDA increased 4.2%, or approximately $0.9 million,  from fiscal 1994 to
fiscal 1995,  due  primarily to the  increase in  revenues.  As a percentage  of
revenues,  EBITDA increased from 39.5% in 1995 to 39.7% in 1996,  primarily as a
result of the decrease in selling,  general and administrative expense offset by
the increase of systems operations expense as a percentage of revenues.

      1996 Acquisitions and Trades

      Cablevision of Texas Systems.  On March 29, 1996,  Galaxy acquired certain
assets  comprising  31 cable  television  systems of  Cablevision  of Texas III,
Empire  Communications  and Empire  Cable of Kansas (the  "Cablevision  of Texas
Systems") for a purchase price of approximately $10.2 million. As of the closing
date,  the  Cablevision  of Texas Systems passed 11,771 homes located in Kansas,
with 347 miles of plant,  for a density of 33.9 homes per mile. The  Cablevision
of Texas Systems served  approximately  9,100 basic  subscribers and had a basic
penetration rate of approximately 77.3% as of the closing date.

         High Plains Systems.  On April 1, 1996, Galaxy acquired certain systems
comprising eight cable television systems of High Plains Cable (the "High Plains
Systems") for a purchase price of approximately $0.3 million.  As of the closing
date, the High Plains Systems passed 580 homes located in Kansas,  with 20 miles
of plant,  for a density of 29 homes per mile.  The High Plains  Systems  served
approximately  270  basic  subscribers  and  had a  basic  penetration  rate  of
approximately 46.6% as of the closing date.

         Midcontinent Systems. On April 12, 1996, Galaxy acquired certain assets
comprising  six cable  television  systems of  Midcontinent  Cable  Systems (the
"Midcontinent  Systems") for a purchase price of approximately $1.3 million.  As
of the closing  date,  the  Midcontinent  Systems  passed 1,853 homes located in
Nebraska,  with 32 miles of plant,  for a density  of 57.9  homes per mile.  The
Midcontinent  Systems served 1,328 basic subscribers and had a basic penetration
rate of approximately 71.7% as of the closing date.

                                       30
<PAGE>

         Five  Rivers  Systems.  On November 1, 1996,  Galaxy  acquired  certain
assets  comprising one cable television system of Five Rivers Cable Company (the
"Five Rivers System") for a purchase price of approximately  $.5 million.  As of
the closing date, the Five Rivers System passed  approximately 730 homes located
in Tennessee,  with 24 miles of plant, for a density of 30.4 homes per mile. The
Five Rivers System served 588 basic subscribers and had a basic penetration rate
of approximately 80.5% as of the closing date.

      Hurst  Communications  Systems. On March 29, 1996, Galaxy acquired certain
assets comprising eight cable television  systems of Hurst  Communications  (the
"Hurst Systems") for a purchase price of approximately  $1.1 million.  As of the
closing date,  the Hurst  Systems  passed  approximately  1,830 homes located in
Kansas,  with 50 miles of plant, for a density of 36.6 homes per mile. The Hurst
Systems served 1,371 basic subscribers and had a basic penetration rate of 74.9%
as of the closing date.

      TCI Systems  Trade.  On June 14, 1996,  Galaxy  traded  assets  located in
Shawnee County and Jefferson  County,  Kansas (the "Shawnee  County System") for
assets  comprising  six cable  television  systems  of TCI (the  "TCI  Systems")
located in northern  Mississippi.  At closing,  Galaxy's  Shawnee County Systems
passed  approximately  9,500  homes,  with  approximately  315  miles of  plant,
resulting in a density of 30.2 homes per mile.  The Shawnee County System served
approximately  7,000  basic  subscribers  and  had a basic  penetration  rate of
approximately  73.7% as of the  close  date.  As of the  closing  date,  the TCI
Systems passed approximately 16,900 homes, with 729 miles of plant, resulting in
a density of 23.2 homes per mile.  The TCI Systems served  approximately  10,363
basic subscribers and had a basic penetration rate of approximately  61.3% as of
the close date.

      C-S Cable. On October 30, 1996,  Galaxy acquired certain assets comprising
the cable television systems of CS Cable Services, Inc. (the "CS Cable Systems")
for a purchase price of approximately $2.3 million.  As of the closing date, the
served approximately 3,500 basic equivalent subscribers.

      Mexia  /  Ranburn  Trade.  On  November  1,  1996,  Galaxy  traded  assets
comprising the Ranburn cable system in Ranburn,  Alabama  serving  approximately
110 subscribers for a similar system in Mexia, Alabama serving approximately 230
subscribers.  This  trade  allowed  Galaxy  to  trade  a small  system  out of a
non-targeted  service  area for a similar  system in  proximity  to our targeted
service areas.

      Pending Acquisitions

       TCI Cable of the Midland - Sarpey County  Systems.  On September 1, 1996,
Galaxy entered into an agreement to purchase  certain assets  comprising 6 cable
television systems of TCI Cable of the Midland (The Sarpey County Systems) for a
purchase  price of  approximately  $2.3  million.  Subject to  certain  pro-rate
adjustments.   At  September  1,  1996,   the  Sarpey  County   Systems   passed
approximately  3,000 homes located in Nebraska,  with  approximately 68 miles of
plant,  for a density of 47 homes per mile.  The Sarpey  County  Systems  served
approximately  2,180  basic  subscribers  and  had a basic  penetration  rate of
approximately 57% at September 1, 1996.

      Liquidity and Capital Resources

      The  cable  television   business  requires   substantial   financing  for
construction,  expansion and  maintenance  of plant.  Galaxy intends to continue
pursuit of a business  strategy  which  includes  elective  acquisitions.  Since
December of 1994 Galaxy  received  cash equity  contributions  of  approximately
$44.6  million from the Equity  Investors and the Senior  Managers.  Galaxy also


                                       31
<PAGE>

received equity from Vantage Cable totaling  approximately $6.4 million.  Galaxy
had an  aggregate  of $169.7  million of  indebtedness  as of December 31, 1996,
representing  $119.5 million of senior  subordinated  notes, $49.9 million drawn
under Galaxy's  revolving line of credit (See "The Revolving Credit Facility and
Term Loan"), and $.3 million in various other  obligations.  Net borrowings were
made under Galaxy's revolving line of credit of approximately $23 million during
fiscal  1996.  Galaxy  anticipates  that  operating  cash flows,  along with its
ability to borrow under its revolving  line of credit,  will provide  sufficient
funds necessary to meet debt service,  working  capital and capital  expenditure
needs.

      Capital Expenditures

      During  1996,   Galaxy's   capital   expenditures   (exclusive  of  system
acquisitions)  were approximately $22 million.  These capital  expenditures were
used to upgrade  existing  systems  through channel  additions and  interconnect
traditional  copper cable systems with new fiber optic cable, and purchasing new
computer  equipment  and  software to enhance  communications  and data  traffic
between   employees  and  Galaxy   subscribers.   Galaxy   anticipates   capital
expenditures over the next two years to total  approximately $27 million.  These
capital  expenditures  will be used  primarily to continue the  installation  of
fiber  optic cable and to allow for the  reduction  in the number of headends by
more than 75 through  headend  consolidation.  These  expenditures  also include
expansion and replacement of headend buildings, rewires of associated electronic
equipment  and for the purchase of new  vehicles,  test  equipment  and computer
equipment.  The  remaining  capital  items  include  the  expenses  and  capital
expenditures  required to add new  subscribers  and the expansion and upgrade of
the cable  television  facilities.  Galaxy  expects to finance  the  anticipated
capital expenditures  described above with cash flows generated from operations,
borrowings under the Revolving Credit Facility, and other debt as necessary.

      The Revolving Credit Facility and Term Loan

      The Term Loan  Agreement  was  amended in  September  1995 to a  Revolving
Credit Facility under which Galaxy may make revolving  borrowings of up to $58.5
million until December 31, 1997, subject to compliance with certain  conditions,
including certain financial covenants. Outstanding balances on December 31, 1997
will  convert to a term loan  amortizing  quarterly  until a final  maturity  on
December 31, 2002. The Revolving Credit Facility will require Galaxy to maintain
compliance  with certain  financial  ratios and other  covenants.  The financial
covenants in the Revolving  Credit  Facility may  significantly  limit  Galaxy's
ability to borrow under the Revolving Credit Facility.

      Senior Subordinated Notes

      Pursuant  to an  indenture  dated  September  28,  1995 (the  "Indenture")
between  Galaxy and Capital Corp.,  and the Boatmen's  Trust Company as trustee,
Galaxy issued $120.0 million aggregate  principal amount of senior  subordinated
obligations  (the "Notes")  maturing in October 2005. The Notes bear an interest
rate of  12.375%  per  annum  payable  semiannually  on April 1 and  October  1,
commencing April 1, 1996.

      The payment of  principal  and  interest on the Notes is  subordinated  in
right of payment to the Revolving  Credit Facility and Term Loan Agreement.  The
Notes will rank pari passu with all other senior  subordinated  indebtedness  of
Galaxy, if any, and is senior to all subordinated debt of Galaxy.

      The  Indenture   contains   various   restrictive   covenants,   including
limitations  on  indebtedness,   certain   restricted   payments  and  affiliate
transactions  as defined,  purchases,  asset sales and capital  expenditures  in
addition to reporting requirements.

                                       32
<PAGE>

      Safe Harbor Under The Private Securities Litigation Reform Act Of 1995

      The statements  contained in the Form 10-K relating to Galaxy's  operating
results, and plans and objectives of management for future operations, including
plans or  objectives  relating to Galaxy's  products  and  services,  constitute
forward  looking  statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act of 1995.  Actual results of Galaxy may differ  materially
from those in the forward looking  statements and may be affected by a number of
factors  including the receipt of  regulatory  approvals,  the success  Galaxy's
implementation of digital technology,  subscriber equipment availability,  tower
space  availability,  and the absence of interference,  as well as other factors
contained herein and in Galaxy's securities filings.

      Galaxy's future revenues and profitability are difficult to predict due to
a variety of risks and  uncertainties,  including  (i) business  conditions  and
growth in Galaxy's existing  markets,  (ii) the successful launch of systems and
technologies in new and existing markets,  (iii) Galaxy's existing  indebtedness
and the need for additional  financing to fund subscriber  growth and system and
technological   development,   (iv)   government   regulation,   including   FCC
regulations,  (v) Galaxy's  dependence on channel  leases,  (vi) the  successful
integration  of future  acquisitions  and (vii)  numerous  competitive  factors,
including alternative methods of distributing and receiving video transmissions.

      Galaxy  expects to continue its  subscriber  growth and launch  additional
systems. Moderate increases in revenues and subscribers are anticipated in 1997;
however,  the rate of increase  cannot be estimated with precision or certainty.
Galaxy believes that general and  administrative  expenses and  depreciation and
amortization expense will continue to increase to support overall growth.

      Because of the foregoing uncertainties affecting Galaxy's future operating
results, past performance should not be considered to be a reliable indicator of
future performance, and investors should not use historical results or trends as
determinative   of  Galaxy's   future   performance.   In   addition,   Galaxy's
participation in a developing  industry  employing  rapidly changing  technology
will result in significant volatility in the market value of the Notes.

      In addition to the matters noted above,  certain other  statements made in
this Form 10-K are forward  looking.  Such statements are based on an assessment
of a variety of factors,  contingencies  and  uncertainties  deemed  relevant by
management,  including technological changes,  competitive products and services
and management  issues. As a result, the actual results realized by Galaxy could
differ materially from the statements made herein. Readers of this Form 10-K are
cautioned not to place undue reliance on the forward looking  statements made in
this Form 10-K or in Galaxy's other securities filings.

      Inflation

      The Company does not believe that inflation in the United States in recent
years has had a significant effect on results on operations.

                                       33
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE



<TABLE>
<S>                                                                                         <C>

                                                                                                  Page

Consolidated Financial Statements:

     Report of Independent Accountants                                                             F-2

     Consolidated Balance Sheets as of December 31, 1996 and 1995                                  F-3

     Consolidated Statements of Operations for the Years Ended December 31, 1996
       and 1995 and for the Period From December 23, 1994
       (Inception) to December 31, 1994                                                            F-4

     Consolidated Statements of Changes in Partners' Capital for the Years Ended
       December 31, 1996 and 1995 and for the Period From
       December 23, 1994 (Inception) to December 31, 1994                                          F-5

     Consolidated  Statements of Cash Flows for the Year Ended December 31, 1996
       and 1995 and for the Period From December 23, 1994
       (Inception) to December 31, 1994                                                            F-6

     Notes to Consolidated Financial Statements                                                F-7 to F-23


Financial Statement Schedule:

     Report of Independent Accountants                                                             S-1

     Schedule II - Valuation and Qualifying Accounts                                               S-2
</TABLE>

     All  other  schedules  are  omitted  as  the  required  information  is not
applicable  or  the  information  is  presented  in the  consolidated  financial
statements, related notes or other schedule.

                                      F-1
<PAGE>







                                             Report of Independent Accountants




To the Partners
Galaxy Telecom, L.P.

We have audited the accompanying  consolidated balance sheets of Galaxy Telecom,
L.P.  and  Subsidiary  as of  December  31,  1996  and  1995,  and  the  related
consolidated  statements of operations,  changes in partners' capital,  and cash
flows for the years  then  ended,  and for the period  from  December  23,  1994
("inception")  to  December  31,  1994.  These  financial   statements  are  the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial position of Galaxy Telecom,
L.P.  and  Subsidiary  as of  December  31,  1996 and 1995 and the  consolidated
results of their  operations and their cash flows for the years then ended,  and
for the period from inception to December 31, 1994 in conformity  with generally
accepted accounting principles.



                                                      COOPERS & LYBRAND L.L.P.


Austin, Texas
March 14, 1997


                                      F-2
<PAGE>


                                           GALAXY TELECOM, L.P. AND SUDSIDIARY
                                                CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                                                       December 31,
                                                                                -----------------------
                                 ASSETS                                               1996           1995
                                                                              ------------   ------------
<S>                                                                           <C>            <C>
Cash and cash equivalents                                                     $  2,338,345   $  3,430,835
Subscriber receivables, net of allowance for doubtful accounts of
     $411,950 and $834,425, respectively                                         5,998,127      3,512,141

Systems and equipment, net                                                     144,822,616    126,312,055
Intangible assets, net                                                          62,330,153     65,047,002
Prepaids and other                                                               2,008,767      1,611,158
                                                                              ------------   ------------


      Total assets                                                            $217,498,008   $199,913,191
                                                                              ============   ============


                          LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses                                         $ 17,738,261   $  9,569,072
Subscriber deposits and deferred revenue                                         4,763,327      2,646,413

Long-term debt and other obligations                                           169,737,608    145,526,955
                                                                              ------------   ------------

      Total liabilities                                                        192,239,196    157,742,440

Commitments and contingencies

Partners' Capital:
      General partners                                                          18,257,812     35,169,751
      Limited partners                                                           7,001,000      7,001,000
                                                                              ------------   ------------


      Total partners' capital                                                   25,258,812     42,170,751

      Total liabilities and partners' capital                                 $217,498,008   $199,913,191
                                                                              ============   ============









<FN>

                         The  accompanying  notes  are an  integral  part of the financial statements.
</FN>
</TABLE>

                                      F-3
<PAGE>



                                           GALAXY TELECOM, L.P. AND SUDSIDIARY
                                          CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                      December 23,
                                                          Year            Year     1994 (Inception)
                                                         Ended           Ended            To
                                                      December 31,     December 31,   December 31,
                                                          1996            1995            1994
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>
 Revenues                                            $ 62,337,218    $ 29,995,187    $    576,922

Operating expenses:
      Systems operations                               28,353,154      13,219,170         260,352
      Selling, general and administrative expenses      6,439,308       3,680,945          98,517
      Management fee to affiliate                       2,804,374       1,605,404          31,731
      Depreciation and amortization                    21,738,425      10,205,635         214,139
                                                     ------------    ------------    ------------

               Total operating expenses                59,335,261      28,711,154         604,739
                                                     ------------    ------------    ------------
Operating income                                        3,001,957       1,284,033         (27,817)

Interest expense                                      (20,132,735)    (10,442,205)       (153,425)
Interest income and other                                 218,839         608,405           5,931
                                                     ------------    ------------    ------------
      Net loss                                       $(16,911,939)   $ (8,549,767)   $   (175,311)
                                                     ============    ============    ============




<FN>


                        The  accompanying  notes  are an  integral  part  of the financial statements.
</FN>
</TABLE>

                                      F-4

<PAGE>



                       GALAXY TELECOM, L.P. AND SUDSIDIARY
             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

<TABLE>
<CAPTION>


                                                       Limited Partners
                             General     -----------------------------------------------------------------------
                            Partners          Class B        Class C        Class D        Class E          Total           Total
                          ------------    ------------   ------------   ------------   ------------   ------------    ------------
<S>                       <C>             <C>            <C>            <C>            <C>            <C>             <C>
Contributions             $ 29,625,000    $      1,000   $    416,000   $  6,384,000   $       --     $  6,801,000    $ 36,426,000

                                                                                                                      ------------

Syndication and trans-
      action costs            (730,171)           --             --             --             --         (730,171)

Net loss for period         28,894,829           1,000        416,000      6,384,000           --        6,801,000      35,695,829
                          ------------    ------------   ------------   ------------   ------------   ------------    ------------

Balance, December 31,
  1994
                                            28,719,518          1,000        416,000           --        6,801,000      35,520,518

Contributions
                            15,000,000            --             --             --          200,000        200,000      15,200,000

Net loss for year           (8,549,767)           --             --             --             --             --        (8,549,767)
                          ------------    ------------   ------------   ------------   ------------   ------------    ------------

Balance, December 31,
  1995
                            35,169,751           1,000        416,000      6,384,000        200,000      7,001,000      42,170,751

Net loss for year          (16,911,939)           --             --             --             --             --       (16,911,939)
                          ------------    ------------   ------------   ------------   ------------   ------------    ------------

Balance, December 31,
  1996                    $ 18,257,812    $      1,000   $    416,000   $  6,384,000   $    200,000   $  7,001,000    $ 25,258,812
                          ============    ============   ============   ============   ============   ============    ============

<FN>

                         The  accompanying  notes  are an  integral  part of the financial statements.
</FN>
</TABLE>

                                      F-5

<PAGE>




                       GALAXY TELECOM, L.P. AND SUDSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 Year             Year      1994 (Inception)
                                                                Ended             Ended           To
                                                             December 31,      December 31,  December 31,
                                                                   1996             1995         1994
                                                          -------------    -------------    -------------
<S>                                                       <C>               <C>             <C>
Cash flows from operating activities:
     Net loss                                             $ (16,911,939)   $  (8,549,767)   $    (175,311)
     Adjustments to reconcile net loss to net cash
        provided by operating activities:
        Depreciation expense                                 17,646,095        7,020,550          147,000
        Amortization expense                                  4,092,330        3,185,085           53,000
        Amortization included in interest expense             1,294,650          801,058           14,139
        Financeable  interest                                   597,849          446,046             --
        Provision for doubtful accounts receivable            1,229,536          383,547            8,219
        (Gain)/loss on sale of assets                          (183,095)          72,587             --
     Changes in assets and liabilities:
        Subscriber receivables                               (3,715,522)      (2,023,046)        (499,816)
        Prepaids and other                                     (397,609)        (258,916)        (236,482)
        Accounts payable and accrued expenses                 7,751,279        5,241,429          553,509
        Subscriber deposits and deferred revenue              2,116,914        1,328,391          211,478
                                                          -------------    -------------    -------------

             Net cash provided by operating activities       13,520,488        7,646,964           75,736
                                                          -------------    -------------    -------------

Cash flows from investing activities:
     Acquisition of cable systems-net of trades             (16,009,136)     (95,614,673)     (86,980,136)
     Proceeds from sale of assets                               683,171        2,101,345             --
     Capital expenditures                                   (21,397,549)      (4,815,014)            --
     Other intangible assets                                   (873,882)        (164,248)            --
                                                          -------------    -------------    -------------
              Net cash used in investing activities         (37,597,396)     (98,492,590)     (86,980,136)
                                                          -------------    -------------    -------------

Cash flows from financing activities:
     Borrowings under term debt and revolver                 38,226,377       20,850,000       63,650,000
     Payments under term debt and revolver                  (14,893,894)     (59,000,000)            --
     Net borrowings on other debt                                60,738            5,215             --
     Proceeds from bond issue                                      --        119,400,000             --
     Payment of debt issue costs                               (408,803)      (4,869,164)      (2,831,314)
     Partners' contributions                                       --         15,000,000       28,976,124
                                                          -------------    -------------    -------------

             Net cash provided by financing activities:      22,984,418       91,386,051       89,794,810
                                                          -------------    -------------    -------------
     Increase (decrease) in cash and cash equivalents        (1,092,490)         540,425        2,890,410

Cash and cash equivalents, beginning of period                3,430,835        2,890,410             --
                                                          -------------    -------------    -------------
Cash and cash equivalents, end of period                  $   2,338,345    $   3,430,835    $   2,890,410
                                                          =============    =============    =============

<FN>
                          The  accompanying  notes are an  integral  part of the financial statements.

</FN>
</TABLE>
                                      F-6
<PAGE>



                       GALAXY TELECOM, L.P. AND SUBSIDIARY
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS




1.     Organization:

       Galaxy Telecom, L.P. (the "Partnership"), a Delaware limited partnership,
       was  formed  in  December  1994  to  acquire,   develop,  hold,  improve,
       construct,  manage,  operate and use cable television systems and related
       businesses.  The  Partnership  commenced  operations on December 23, 1994
       ("inception")   with  the  initial   funding  of  term  debt,   partners'
       contributions and acquisition of certain cable television systems.

       Principles of Consolidation

       The  consolidated  financial  statements  include  the  accounts  of  the
       Partnership and its wholly-owned subsidiary, Galaxy Telecom Capital Corp.
       ("Capital Corp."). All intercompany  transactions have been eliminated in
       consolidation.  Capital  Corp.  was formed in July 1995 and  maintains  a
       capitalization   of  $1,000  for  the  purpose  of  co-issuing  with  the
       Partnership the Senior Subordinated Notes.  Capital Corp. does not and is
       not expected to have  operations  other than that which is related to its
       purpose as co-issuer.

       Partners

       General  Partners include Galaxy Telecom  Investments,  L.L.C. and Galaxy
       Telecom, Inc. with 99% and 1% interests,  respectively.  Limited Partners
       include Galaxy Telecom  Investments,  L.L.C.,  Galaxy Telecom,  Inc., and
       Vantage  Cable  Associates,  L.P.  as Class B, C and D Limited  Partners,
       respectively.  A Class E Limited Partner interest was issued upon closing
       of the Partnership's  Cameron,  Texas cable television system acquisition
       in March 1995. Class C, D and E Limited Partnership interests are subject
       to  reductions  resulting  from  potential  set-off  adjustments  to  the
       respective cable television system acquisitions.

       Priority Returns

       The Partnership  agreement  establishes  priority returns for the General
       and  certain  Limited  Partners  compounded  annually  on the  respective
       partner's  unreturned  contributions.  Limited Partner  priority  returns
       range from 9% to 10% through 1999 with General Partner  priority  returns
       of up to  35%.  The  cumulative  priority  return  totaled  approximately
       $31,290,847,  $11,696,000  and $235,000 at December  31,  1996,  1995 and
       1994, respectively.

       Distributions

       First,  to Class  C, D and E  Limited  Partners  in  proportion  to their
       respective   capital   contributions   to  the  extent  of  such  capital
       contributions and priority returns.

       Second,  to General and Class B Limited  Partners in  proportion to their
       respective   capital   contributions   to  the  extent  of  such  capital
       contributions.

                                      F-7

<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




1.     Organization, continued:

       Distributions, continued

       Third, to General Partners in proportion to their percentage  interest to
       the extent all  distributions  to the  General  Partners  equal the first
       priority return.

       Fourth,  94.05% to General  Partners in  proportion  to their  percentage
       interest  and  5.95%  to  Class  B  Limited  Partner  to the  extent  all
       distributions  to the  General  Partners  equal  to the  second  priority
       return.

       Thereafter,  88.10%  to the  General  Partners  in  proportion  to  their
       percentage interest and 11.90% to the Class B Limited Partner.

       Distributions  are  restricted by the Senior  Subordinated  Notes and the
       Revolving  Credit Facility and Term Loan agreement to those amounts which
       are  necessary  for the  partners'  federal  and state  income  taxes and
       certain fees.

       Allocations

       Partnership losses are allocated to the General Partners in proportion to
       their percentage interest, while Partnership profits are allocated to the
       General  Partners  and the Class B Limited  Partner in the same manner as
       the third, fourth and subsequent distributions.  Profits are allocated to
       the Class C, D and E Limited  Partners to the extent of  priority  return
       distributions to such partners.



2.     Summary of Significant Accounting Policies:

       Cash and Cash Equivalents

       Cash  equivalents  include  highly liquid  investments  purchased with an
       original  maturity of three months or less.  At December  31, 1995,  cash
       equivalents  totaled  $1,038,000 and consisted  primarily of money market
       funds,  reported at cost which approximates fair market value. There were
       no cash equivalents at December 31, 1996.

                                      F-8

<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




2.     Summary of Significant Accounting Policies, continued:

       Concentrations of Credit Risk

       Financial  instruments  which  potentially  subject  the  Partnership  to
       concentrations   of  credit  risk  are  cash  and  cash  equivalents  and
       subscriber and other receivables.  The Partnership invests excess cash in
       short-term  liquid  money  instruments  issued by  significant  financial
       institutions.  Cash  balances  in excess of FDIC  coverage  totaled  $3.5
       million  at  December  31,  1996.   Though  limited  primarily  to  cable
       television subscribers,  the concentration of credit risk with respect to
       receivables is minimized by geographical dispersion through approximately
       407   individual   cable   television   systems   ranging  in  size  from
       approximately 10 subscribers to approximately  3,400 subscribers  located
       in small communities in the Midwest and Southeast United States,  and the
       large  number of  customers  with  individually  small  balances on short
       payment terms.

       Fair Value of Financial Instruments

       Statement of Financial Accounting  Standards No. 107,  "Disclosures about
       Fair  Value  of  Financial  Instruments,"  requires  certain  disclosures
       regarding  the  fair  value  of  financial  instruments.  Cash  and  cash
       equivalents,   subscriber  receivables,   accounts  payable  and  accrued
       expenses are reflected in the financial  statements at fair value because
       of the short-term  maturity of these  instruments.  The fixed rate Senior
       Subordinated Notes (Note 6) are valued using the closing bid price market
       quotes, as a result, the fair value of the Notes were $129,588,000. Based
       on borrowing  rates  currently  available to Galaxy for similar debt, the
       fair value of the revolver debt closely approximates its carrying value.

       Revenue Recognition

       Revenues  from  subscribers  are  recognized in the month that service is
       provided.  Installation  revenues are recognized  upon  completion of the
       service provided to the subscriber.

       Marketing Costs

       Marketing costs are charged to operations in the period incurred totaling
       approximately $569,000 and $243,000 for the years ended December 31, 1995
       and 1996. No marketing  costs were incurred for the period from inception
       to December 31, 1994.

       Federal Income Taxes

       The  Partnership  as an  entity  pays no  income  taxes,  although  it is
       required to file federal and state  income tax returns for  informational
       purposes  only.  All income or loss  "flows  through"  to the  individual
       partners as specified in the Partnership agreement.

                                      F-9

<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




2.     Summary of Significant Accounting Policies, continued:

       Federal Income Taxes, continued

       The  differences  between the results of  operations  presented  in these
       financial  statements  and taxable loss for Federal  income tax reporting
       purposes  result  primarily  from  the  use of  accelerated  methods  for
       computing tax depreciation.

       Systems and Equipment

       Systems  and  equipment   obtained   through  the  acquisition  of  cable
       television  systems  are  recorded  at  estimated  fair value while other
       additions are recorded at cost including  amounts for material and labor.
       Direct costs, including labor, associated with installations in homes not
       previously  served by cable  television  are  capitalized  as  subscriber
       drops.  Expenditures for maintenance and repairs are charged to income as
       incurred and equipment replacements and betterments are capitalized. When
       assets are sold or retired, the related cost and accumulated depreciation
       are removed from the respective accounts,  and any resulting gain or loss
       is credited or charged to income.

       Intangible Assets

       Goodwill  related  to  the  acquisition  of  cable   television   systems
       represents  the excess of purchase  price plus related  direct costs over
       the fair  value  of the net  assets  acquired.  Other  intangible  assets
       consist  primarily  of debt  issuance  costs.  Debt  issuance  costs  and
       original  issue  discounts  are  amortized to interest  expense using the
       interest method.

       The  Partnership  reviews  goodwill  for  impairment  from  time to time,
       measuring  impairment based upon expected future  undiscounted cash flows
       from operations.

       Impairment of Long-Lived Assets

       In the event  that  facts  and  circumstances  indicate  that the cost of
       long-lived  assets other than financial  instruments may be impaired,  an
       evaluation  of  recoverability  would be  performed.  If an evaluation of
       impairment is required,  the  estimated  future  undiscounted  cash flows
       associated  with the asset  would be  compared  to the  asset's  carrying
       amount to determine if a write-down  to market value or  discounted  cash
       flow value is required.

       Use of Estimates

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the reported  amounts of assets and  liabilities
       and  disclosure of contingent  assets and  liabilities at the date of the
       financial  statements  and the reported  amounts of revenues and expenses
       during the  reporting  period.  Actual  results  could  differ from those
       estimates.

                                      F-10

<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




2.     Summary of Significant Accounting Policies, continued:

       Reclassifications

       Certain  prior year  balances  have been  reclassified  to conform to the
current year's presentation.



3.     Acquisition of Cable Television Systems:

       1995 Acquisitions

       In December 1995,  except for the Cameron  systems which were acquired in
       March 1995, the Partnership  acquired certain cable  television  systems,
       recorded under the purchase  method of accounting in accordance  with APB
       Opinion 16, as follows:

       Purchase consideration consisted of the following:


<TABLE>

                                            Douglas           Vista
                           Cameron       Communications  Narragansett         Vista I      Friendship       Phoenix          Total
                          ------------   ------------    ------------    ------------    ------------    ----------   ------------
<S>                       <C>            <C>            <C>             <C>    <C>        <C>             <C>         <C>
 Cash to seller by
   the Partnership        $  3,350,000   $ 45,837,979    $ 16,057,020    $  7,295,174    $ 20,874,519    $  534,732   $ 93,949,424

 Cash to escrow                   --             --              --
                                                                              300,000         380,000       100,000        780,000
 Due to escrow                    --             --              --              --              --
                                                                                                            100,000        100,000
 Notes Payable by
   Limited Partner
                               200,000           --              --              --              --            --          200,000
 Cash for acquisition
   expenses paid or
   accrued by the
   Partnership
                                  --          514,081         121,019         127,283         202,023         3,068        967,474
 Cash proceeds from
   resale of Vista
   Narragansett
   systems
                                  --             --        (2,101,345)           --              --            --       (2,101,345)
 Receivable from
   resale of Vista
   Narragansett
   systems
                                  --             --          (594,000)           --              --            --         (594,000)
 Net (assets)
liabilities
   assumed
                                  --          500,581         (46,825)        (65,174)        (76,519)       15,493        327,556
                          ------------   ------------    ------------    ------------    ------------    ----------   ------------

         Total            $  3,550,000   $ 46,852,641    $ 13,835,869    $  7,737,283    $ 21,100,023    $  553,293   $ 93,629,109
                          ============   ============    ============    ============    ============    ==========   ============
</TABLE>

                                     F-11
<PAGE>


                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




3.     Acquisition of Cable Television Systems, continued:

       1995 Acquisitions, continued

       The aggregate purchase price is allocated as follows:

                  Systems and equipment                          $ 69,539,127
                  Intangible assets                                24,089,982
                                                                -------------

                                                                 $ 93,629,109


       The  operating  results for each  acquired  cable  television  system are
       included  in net  loss  from  the  date  of  acquisition.  The  following
       unaudited pro forma results of  operations  for the years ended  December
       31, 1995 and 1994  presents all  acquisitions  as if they had occurred on
       January 1,  1994.  The pro forma  results  give  effect to a decrease  in
       depreciation and amortization, increase in interest expense, and decrease
       in management fees.

                    Unaudited Pro Forma Results of Operations

                                                             December 31,
                                                                1995

                  Revenues                                  $ 57,459,000
                  Net loss                                    15,128,000

       The above pro forma financial  statements do not purport to be indicative
       of the  financial  results  which  actually  would have  occurred had the
       acquisitions been made on January 1, 1995 or subsequent to that date.

                                      F-12

<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




3.     Acquisition of Cable Television Systems, continued:

       During 1996, the Partnership  acquired certain cable  television  systems
       recorded under the purchase  method of accounting in accordance  with ABP
       Opinion 16 as follows:

       1996 Acquisitions and Trades

       Purchase consideration consisted of the following:

<TABLE>


            Cablevision
                 of
                 Texas        High        Mid
                   III          Plains    Continent         Hurst           TCI     5 Rivers    C-S Cable        Mexia   Purchases
                   ---          ------    ---------         -----           ---     --------    ---------        -----   ---------
<S>            <C>           <C>          <C>          <C>           <C>          <C>          <C>          <C>         <C>
 Cash to
seller
   paid by
   the
Partnership    $9,663,590   $  271,553   $1,271,856    $1,034,594    $     --     $  440,900   $2,197,482   $  107,500  $14,987,475


 Cash to
escrow            500,000       25,000       75,000        21,080          --           --         75,000         --       696,080

 Cable
systems
   traded:
   Shawnee
      County         --           --           --            --       5,713,903         --           --           --     5,713,903
   Ranburne
                     --           --           --            --            --           --           --        279,702      279,702

 Cash for
acqui-
   sition
expenses
   paid or
accrued
   by the
   Partnership
                   76,542        3,489       12,385          --         112,309        2,875       52,180         --       259,780

 Net (assets)
   liabilities
   assumed
                    1,766        1,047        3,144        (1,674)         --         59,100        2,417         --        65,800
               ----------   ----------   ----------    ----------    ----------   ----------   ----------   ----------  ----------

 Total         10,241,898      301,089    1,362,385     1,054,000     5,826,212      502,875    2,327,079      387,202  22,002,740
               ==========   ==========   ==========    ==========    ==========   ==========   ==========   ==========  ==========
</TABLE>


   The aggregate purchase price is allocated as follows:


       Systems and equipment                                     $ 18,682,694
       Intangible assets                                            3,320,046
                                                                -------------
                                                                 $ 22,002,740
                                    F-13

<PAGE>



                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued


3.     Acquisition of Cable Television Systems, continued:

       1996 Acquisitions and Trades, continued

       The  operating  results for each  acquired  cable  television  system are
       included in net loss from the date of  acquisition.  The  current  fiscal
       year 1996  acquisitions  are not  presented  in a proforma  format as the
       acquisitions,  individually  and in the aggregate,  are immaterial to the
       financial statements taken as whole.

       Pending Acquisitions

       On  September  1, 1996,  Galaxy  entered  into an  agreement  to purchase
       certain assets  comprising six cable  television  systems of TCI Cable of
       the  Midland  (the  "Sarpey  County  Systems")  for a  purchase  price of
       approximately $2.3 million, subject to certain pro-rata adjustments.

4.     Systems and Equipment:

       Systems and equipment consist of the following:
<TABLE>

                                                                             December 31,     December 31,
                                                    Term         Method          1996             1995
                                                -------------   --------   -------------    -------------
<S>                                             <C>             <C>        <C>              <C>

Cable television distribution
      systems:
       Head-end                                 Straight-Line   7 years    $  34,398,590    $  28,212,203
       Distribution plant                       Straight-Line   12 years      99,852,377       81,553,565

       Subscriber drops                         Straight-Line   5 years       24,282,076       19,172,625
       Inventories                                       --         --           889,917          943,825
                                                                           -------------    -------------

                                                                             159,422,960      129,882,218

   Other
       Vehicles                                 Straight-Line   5 years        4,684,292        1,956,175
       Buildings                                Straight-Line   5 years        1,538,367          954,282
       Furniture, fixture and equipment         Straight-Line   5 years        4,301,075        1,348,301
       Land                                                                         --               --
                                                                                  95,000           95,000
                                                                           -------------    -------------

                                                                             170,041,694      134,235,976

       Accumulated depreciation                                              (25,219,078)      (7,923,921)
                                                                           -------------    -------------

      Systems and equipment, net                                           $ 144,822,616    $ 126,312,055
                                                                           =============    =============
</TABLE>

                                      F-14

<PAGE>

                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued


5.     Intangible Assets:

       Intangible assets consist of the following:

<TABLE>

                                                                                    December 31,        December 31,
                                                           Method           Term         1996            1995
<S>                                            <C>                    <C>        <C>            <C>
                                                     ------------------   --------   ------------    ------------
  Goodwill, franchise costs and
    subscriber lists                                 Straight-Line        15 years   $ 61,532,820    $ 59,814,225
Debt issued costs:
    Senior Subordinated Notes                        Effective interest   10 years      5,399,954       5,150,409
    Revolver and Term Loan                           Effective interest    8 years      2,678,212       2,518,955
    Interest rate-cap                                Effective interest    2 years           --           746,814

Organization costs and other                         Straight-Line        15 years        476,271          98,510
                                                                                     ------------    ------------



                                                                                       70,087,257      68,328,913

    Accumulated amortization                                                           (7,757,105)     (3,281,911)
                                                                                     ------------    ------------


    Intangible assets, net                                                           $ 62,330,152    $ 65,047,002
                                                                                     ============    ============
</TABLE>



6.     Long-Term Debt:

       Outstanding long-term debt is as follows:

                                             December 31,          December 31,
                                               1996                     1995
                                                ----                     ----
       Revolving Credit Facility            $ 49,876,377          $17,500,000
       Term Loan                               -                    8,000,000
         Financeable interest                  -                      446,046
       Senior Subordinated Notes             120,000,000          120,000,000
         Unamortized Discount                   (525,000)            (585,000)
       Other                                     386,231              165,909
                                           -------------      ---------------
                           Total            $169,737,608         $145,526,955
                                           =============      ===============
                                      F-15
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




6.     Long-Term Debt, continued:

       Senior Subordinated Notes

       Pursuant to an  indenture  dated  September  28,  1995 (the  "Indenture")
       between the Partnership and Capital Corp., (together, the "Issuers"), and
       the Boatmen's Trust Company as trustee (the  "Trustee"),  the Partnership
       issued $120.0 million aggregate  principal amount of senior  subordinated
       obligations  (the  "Notes")  maturing  in  October  2005.  The Notes bear
       interest  rate of 12.375% per annum payable  semiannually  on April 1 and
       October 1, commencing April 1, 1996.

       Pursuant to a pledge  agreement,  $48.2  million of the proceeds from the
       sale of the  Notes  were  deposited  with the  Trustee.  All  amounts  so
       deposited  were held by the Trustee  pursuant to the pledge  agreement as
       collateral   on  the  Notes  until  such  time  as  they  were   released
       concurrently  with  the  consummation  of  certain  acquisitions.  As  of
       December 31, 1995, the required  acquisitions  were  consummated,  and as
       such, no funds remained on deposit with the Trustee.  Interest  earned on
       such amounts  deposited  totaling  $438,190 was restricted for payment of
       interest due on the Notes.

       There are no mandatory sinking fund requirements for the Notes.  However,
       the Partnership  may be obligated,  under certain  circumstances,  to (a)
       make an offer to purchase all outstanding  Notes at a redemption price of
       101% of the principal amount thereof, plus accrued interest upon a change
       of control,  as defined,  and (b) make an offer to purchase  Notes with a
       portion of the net cash  proceeds of assets  sales,  as  defined.  To the
       extent that the principal amount is not reduced to less than $78 million,
       the Partnership may redeem up to a maximum of 35% of the principal amount
       at  redemption  price of 112.375%  prior to October  1998 in the event of
       public equity offerings or strategic  equity  investments of at least $25
       million, as defined.  Subsequent to September 2000, the Notes are subject
       to  optional  redemption  in  whole  or in  part at  annually  decreasing
       redemption  prices  ranging  from  106.15%  in 2000  to 100% in 2003  and
       thereafter.  Subject to certain  conditions,  the  Partnership may at any
       time defease the Notes.

       The payment of  principal  and interest on the Notes is  subordinated  in
       right  of  payment  to  the  Revolving  Credit  Facility  and  Term  Loan
       Agreement.  The  Notes  will  rank  pari  passu  with  all  other  senior
       subordinated  indebtedness of the  Partnership,  if any, and is senior to
       all subordinated debt of the Partnership.

       The  Indenture   contains  various   restrictive   covenants,   including
       limitations on indebtedness,  certain  restricted  payments and affiliate
       transactions as defined,  purchases, asset sales and capital expenditures
       in addition to reporting  requirements.  The Indenture  requires  certain
       equity  contributions  ranging from $5 million to $15 million  based upon
       the consummation of certain cable television system acquisitions. General
       partner contributions totaling $15 million in December 1995 were received
       accordingly. No such contributions were required in December 1996.
                                      F-16
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




6.     Long-Term Debt, continued:

       Revolving Credit Facility

       Effective  September  28,  1995,  Loan  A of  the  Term  Debt  (the  Loan
       Agreement) was amended into a Revolving  Credit  Facility under which the
       Partnership  may borrow up to $58.5 million until  December 1997 when the
       outstanding  balance  converts  to  a  term  loan  payable  in  quarterly
       installments  escalating annually from 6% to 30% of the converted balance
       through  December  2002. The Revolving  Credit  Facility is senior to all
       other indebtedness of the Partnership.

       The Revolving  Credit Facility bears interest at prime (8.25% at December
       31, 1996) plus 1.75%  payable  quarterly,  subject to reductions of up to
       .75% upon achievement of certain  financial  tests. At the  Partnership's
       option,  all or a specified  portion of the Revolving Credit Facility may
       be converted to an adjusted  LIBOR rate also subject to  reductions of up
       to .75% upon  achievement  of certain  financial  tests.  At December 31,
       1996,  $38,685,000 of the Revolving Credit Facility had been converted to
       an adjusted  LIBOR rate at 8.75%.  The  Partnership  is required to pay a
       .50% per annum  commitment  fee on the unfunded  portion of the Revolving
       Credit Facility.

       Term Loan

       The Term Loan bears  interest on the same terms as the  Revolving  Credit
       Facility.  In  addition  to the  stated  interest,  the Term  Loan  bears
       additional  interest such that its  aggregate  interest rate is 15%. This
       additional interest is financeable as additional principal under the Term
       Loan. At December 31, 1996, both the Term Loan and  financeable  interest
       balance were paid in full.
                                      F-17
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




6.     Long-Term Debt, continued:

       While the Partnership may elect to reduce amounts due under the Revolving
       Credit Facility through  payments of not less than $100,000,  a mandatory
       prepayment  is required  annually  before  each May 1 beginning  in 1998,
       equal to 70% of the  Partnership's  prior year ended  December  31 excess
       cash flow  (defined  as net  income  before  interest,  depreciation  and
       amortization,  management  fees  and  other  non-cash  expenses,  if any,
       reduced  by  required  and  voluntary  debt  service  payments,   capital
       expenditures excluding that relating to capital leases and purchase money
       debt,  and permitted  restricted  payments,  including  distributions  to
       partners,  during the period).  Mandatory  prepayments which would reduce
       the  Partnership's  cash balance below $250,000 may be deferred,  bearing
       annualized  interest  at 3.75%  above the  prime  rate,  payable  monthly
       thereafter to the extent available cash exceeds  $250,000.  Additionally,
       mandatory  prepayments  are required in the event of asset sales with net
       proceeds  exceeding $5 million,  asset sales when such net sales proceeds
       are less than $5 million to the extent such  proceeds are not  reinvested
       in permitted cable systems within eight months or are not comprised of at
       least 95% cash,  and to the  extent of  insurance  proceeds  if the total
       exceeds $500,000.

       The Revolving  Credit Facility and Term Loan Agreement sets forth certain
       financial  covenants including a maximum total leverage ratio (total debt
       to operating cash flow as defined), a maximum senior debt leverage ratio,
       a  maximum  senior  debt to  basic  subscriber  ratio,  minimum  interest
       coverage,  debt  service  coverage  and  fixed  charge  coverage  ratios.
       Borrowings  under the Revolving  Credit Facility to finance  acquisitions
       are  limited by the  Partnership's  incurrance  ratio  (total debt to pro
       forma annualized operating cash flow, as defined).

       The Revolving Credit Facility and Term Loan Agreement are  collateralized
       by the Partnership's  assets.  In the event of default,  the lenders have
       the right to offset deposits against the balance due.

       In  December  1994,  the  Partnership   entered  into  an  interest  rate
       protection agreement as required by the Loan Agreement, whereby the LIBOR
       base rate applicable to a notional amount totaling  $40,020,000 is capped
       at 7.50% for a two year period ending December 1996. The Revolving Credit
       Facility and Term Loan  Agreement  were  subject to this rate  protection
       agreement.


                                      F-18
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




6.     Long-Term Debt, continued:

       Five Year Maturities

       The  required  principal  payments  on the  Company's  long-term  debt at
       December 31, 1996, assuming no additional borrowings, is as follows:


             1997                                       $     156,175
             1998                                           3,116,216
             1999                                           8,086,643
             2000                                          10,972,803
             2001                                          12,967,858
             Thereafter                                   134,962,913
                                                          -----------
                                                         $170,262,608


7.     Supplemental Disclosure of Cash Flow Information:

       No interest  payments were made in the period from  inception to December
       31, 1994.  Interest  payments  for the years ended  December 31, 1996 and
       1995 were approximated $20 million, and $4.9 million respectively.

       Noncash  transactions  for the  year  ended  December  31,  1996  were as
follows:

           Capital  expenditures of approximately  $417,910 included in accounts
payable.

           Acquisition of equipment  through  issuance of capital leases payable
totaling $159,585.

           Acquisition of cable systems  totaling  $5,993,604  through trades of
current systems.


       Noncash  transactions  for the  year  ended  December  31,  1995  were as
follows:

           Issuance of $200,000 Class E limited partner  interest in acquisition
of cable system.

           Capital  expenditures of approximately  $415,327 included in accounts
payable.

           Financeable   interest  payable  totaling  $446,046,   added  to  the
principal of the Term Loan.

           Receivable  from  purchaser  of  resold  Vista  Narragansett  systems
totaling $594,000.

           Original issue discount on Senior Subordinated Notes of $600,000.

           Accrued cable systems acquisition costs $82,225.

                                      F-19
<PAGE>

                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued


7.     Supplemental Disclosure of Cash Flow Information, continued:

           Revolving  Credit Facility  issuance,  and Senior  Subordinated  Note
issuance costs totaling $720,512.

           Acquisition of equipment  through  issuance of capital leases payable
totaling $160,694.

       Noncash  transactions  for the period  ended  December  31,  1994 were as
follows:

           Cable systems  acquisition  price and related costs paid by a general
           partner on behalf of the Partnership totaling $650,000 as a component
           of the general partner's contribution.

           Issuance of $6,834,000  Class D limited partner interest to seller of
an acquired cable system.

           Note payable totaling  $416,000 issued by a general partner on behalf
           of the  Partnership  in  purchasing a cable  system,  in exchange for
           Class C limited partner interests.

           Accrued  general  partner   syndication   transaction  fees  totaling
$730,171 borne by the Partnership.

           Accrued   cable   systems   acquisition,   term  debt   issuance  and
organization costs totaling $466,865.



8.     Commitments and Contingencies:

       Management Fee to Affiliate

       The Partnership incurs management fees and expenses pursuant to the terms
       of a  management  agreement  with Galaxy  Systems  Management,  Inc.,  an
       affiliate of a general partner,  under which it manages the Partnership's
       business.  In addition to reimbursing  expenses,  the Partnership  pays a
       management  fee monthly,  in arrears based upon 5.5% of gross revenues as
       defined in the management  agreement  through  November  1995,  whereupon
       systems  acquisitions  trigger  a  reduction  in the fee to 4.5% of gross
       revenues.   Management   fees  and   reimbursed   expenses   approximated
       $3,071,000, $1,888,000 and $39,000 for the years ended December 31, 1996,
       1995  and  for  the  period  from   inception   to  December   31,  1994,
       respectively.  The  management  fee rate is subject  to further  pro rata
       reductions  to a  minimum  of 3.5% in the event  the  management  company
       acquires or controls other  entertainment or  telecommunications  assets.
       The management  agreement's initial term through December 31, 1999 may be
       extended annually thereafter and is subject to early termination upon the
       Partnership's  sale  or  disposition  of the  acquired  cable  television
       systems.  Partnership  obligations  under the  management  agreement  are
       subordinate  to the  Partnership's  long-term  debt.  The  management fee
       payable at December 31, 1996 was $291,000.  The Partnership also provides
       and receives  certain  operational  services from affiliates of a general
       partner.  Included in prepaids and other are advances to such  affiliates
       approximating  $265,542,  $475,000  and $313,000 as of December 31, 1996,
       1995 and 1994,  respectively,  of which approximately $265,542,  $216,000
       and  $188,000  as of  December  31,  1996,  1995 and  1994,  respectively
       represent receivables from Galaxy Systems Management, Inc.


                                      F-20
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued


8.     Commitments and Contingencies, continued:

       Capital Leases

       The  Partnership  leases  certain  assets under capital lease  agreements
       which  expire  at  various  dates  through  1999.  The  lease  agreements
       generally  provide  purchase  options at the end of the  original  lease.
       Future minimum lease payments under  noncancelable  leases consist of the
       following:

           Year Ending
           December 31,                                    Amount

              1997                                     $   81,960
              1998                                         54,175
              1999                                         25,368
                                                      -------------

    Total minimum lease payment                           161,503
    Less amounts representing interest                    (17,062)

       Obligations under capital leases                $  144,441
                                                       ==========


       Operating Leases

       The Partnership is obligated under certain  operating leases for head-end
       and  transmission   facility  real  estate  as  well  as   administrative
       facilities.  Rent  expense  incurred  in  conjunction  with these  leases
       approximated  $298,000,  $100,000 and $3,700 for the years ended December
       31,  1996,  1995 and for the period from  inception to December 31, 1994,
       respectively.

       Future minimum lease payments under such leases are as follows:

                  Year Ending
                  December 31,                           Amount
                  ------------                           ------
                    1997                             $  337,175
                    1998                                290,970
                    1999                                240,290
                    2000                                209,571
                    2001                                199,187


       In  addition,  the  Partnership,   as  an  integral  part  of  its  cable
       operations,  has entered into  short-term  lease  contracts for pole use.
       Rent expense approximated $1,177,000,  $433,000 and $23,000 for the years
       ended  December  31,  1996,  1995 and for the period  from  inception  to
       December 31, 1994,  respectively,  under such  contracts.  Future  annual
       minimum  aggregate  rentals  under such  leases  amount to  approximately
       $1,161,000 at December 31, 1996.


                                      F-21
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




8.     Commitments and Contingencies, continued:

       Employee Benefits

       The  Partnership  sponsors  a defined  contribution  retirement  plan for
       eligible  employees  with  a  minimum  six-months  of  service  with  the
       Partnership or certain affiliates. The Partnership makes contributions on
       behalf of each employee of a matching amount not to exceed the employee's
       contribution or 8% of such employee's salary. The Partnership contributed
       $150,480 and $41,000 to the plan during 1996 and 1995,  respectively.  No
       such contributions were made in the period from inception to December 31,
       1994.

       Franchises and Programming

       Cable  television  systems are generally  constructed  and operated under
       non-exclusive franchises granted by local governmental authorities, which
       in addition to imposing certain  operating  conditions,  impose franchise
       fees not to exceed 5% of gross  revenues.  While such  franchises are not
       perpetual,  renewal may not be unreasonably withheld without compensation
       to the cable system  operator.  The  Partnership  has not experienced nor
       does it anticipate nonrenewal of existing franchise agreements.

       The  Partnership  has  various  contracts  to obtain  basic  and  premium
       programming from program suppliers whose  compensation is typically based
       on a fixed fee per subscriber. The Partnership has negotiated programming
       agreements with premium  service  suppliers that offer cost incentives to
       the  Partnership  under  which  premium  unit  prices  decline as certain
       premium service growth  thresholds are met. In addition to volume pricing
       discounts,  some  program  suppliers  offering  marketing  support to the
       Partnership  in the form of  advertising  funds,  promotional  materials,
       rebates and other incentives. The Partnership's programming contracts are
       generally for a fixed period of time,  typically three to five years, and
       are subject to negotiated renewal.

       Cable Service Rate Regulation

       On  October 5,  1992,  Congress  enacted  the Cable  Television  Consumer
       Protection and  Competition  Act 1992 (the "1992 Cable Act"). In 1993 and
       1994,  the FCC  adopted  certain  rate  increases.  As a  result  of such
       actions,  Galaxy's  basic and tier service  rates and its  equipment  and
       installation  charges  (the  "Regulated  Services")  are  subject  to the
       jurisdiction of local franchising authorities and the FCC. Basic and tier
       service  rates  are  evaluated  against  competitive  benchmark  rates as
       published by FCC, and  equipment  and  installation  charges are based on
       actual costs.  The rate  regulations  do not apply to the  relatively few
       systems  which are  subject to  "effective  competition"  or to  services
       offered  on an  individual  service  basis,  such as  premium  movie  and
       pay-per-view services.


                                      F-22
<PAGE>




                       GALAXY TELECOM, L.P. AND SUBSIDIARY
            NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, Continued




8.     Commitments and Contingencies, continued:

       Cable Service Rate Regulation, continued

       The  Partnership  believes that it has complied in all material  respects
       with the  provisions  of the 1992 Cable Act,  including  its rate setting
       provisions.  However,  the Partnership's rates for Regulated Services are
       subject to review by the FCC, if a complaint has been filed, or review by
       the  appropriate   franchise  authority,   if  such  authority  has  been
       certified.  If,  as a result  of the  review  process,  a  system  cannot
       substantiate its rates, it could be required to retroactively  reduce its
       rates to the appropriate benchmark and refund the excess portion of rates
       received.  Any refunds of the excess  portion of tier service rates would
       be  retroactive  to the date of  complaint.  Any  refunds  of the  excess
       portion of all other Regulated  Service rates would be retroactive to one
       year prior to the implementation of the rate reductions.

       In February 1996, a  telecommunications  bill was signed into federal law
       which significantly  impacts the cable industry.  Most notably,  the bill
       allows  cable  system  operators to provide  telephony  services,  allows
       telephone   companies   to  offer  video   services,   and  provides  for
       deregulation  of cable  programming  service rates by 1999. The impact of
       the new bill cannot be determined at this time, but it is not expected to
       have a significant adverse impact on the financial position or results of
       operations of the Partnership.



9.     Quarterly Data, Unaudited:

       The  results  of  operations  for each  quarter  in 1996 were as  follows
(dollars in thousands):



                               First         Second       Third       Fourth
                              Quarter        Quarter     Quarter      Quarter
                              -------        -------     -------      -------

       Revenue              $  14,475      $  15,545  $  15,889      $ 16,428

       Operating income         1,374            760        503           365

       Net loss                (3,433)        (4,009)    (4,834)       (4,636)



       The results of operations for the quarters  include  certain  adjustments
       primarily  related to  depreciation  and  amortization  on  current  year
       acquisitions.  The adjustments to net loss, in thousands,  are $209, $257
       and $454, for the first, second and third quarter, respectively.



                                      F-23

<PAGE>



                        Report of Independent Accountants




To the Partners
Galaxy Telecom, L.P.

Our report on the consolidated  financial statements of Galaxy Telecom, L.P. and
Subsidiary  is included on page F-2 of this Form 10-K.  In  connection  with our
audits of such financial statements,  we have also audited the related financial
statement schedule listed in the index on page F-1 on this Form 10-K.

In our  opinion,  the  financial  statement  schedule  referred  to above,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents  fairly,  in all  material  respects,  the  information  required to be
included therein.





                                                       COOPERS & LYBRAND L.L.P.


Austin, Texas
March 14, 1997







                                      S-1

<PAGE>



                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                              GALAXY TELECOM, L.P.

<TABLE>
<CAPTION>

             Column A                        Column B                Column C                   Column D          Column E
             --------                        --------   ---------------------------------       --------          --------
                                                                      Additions
                                            Balance at       Charged to          Charged to                      Balance at
                                             Beginning        Cost and        Other Accounts   Deductions          End of
            Description                      of Period        Expenses           -Describe      -Describe          Period
            -----------                      ---------        --------           ---------      ---------          ------
<S>                                   <C>                <C>                <C>             <C>             <C>

Year ended December 31, 1996:
 Reserve and allowance deducted
    from asset accounts-allowance
      for uncollectible accounts           $  834,425        $ 1,229,536        $ 186,791 (1)   $1,838,802 (2)  $  411,950

Year ended December 31, 1995:
 Reserve and allowance deducted
    from asset accounts-allowance
      for uncollectible accounts              320,605            383,547          359,385 (1)      229,112 (2)     834,425

Period from  December  24, 1994
(inception)  to December  31, 1994
  Reserve and allowance deducted
    from asset accounts-allowance
      for uncollectible accounts              --                   8,219          312,386 (1)        --            320,605

</TABLE>

(1) Allowance for uncollectible  purchased  accounts (2) Uncollectible  accounts
written off.


                                      S-2
<PAGE>


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

      None.


                                      PART III

      Item 10.    Directors and Executive Officers of the Registrants.

      The general  partners of Galaxy,  Galaxy Telecom,  Inc.  ("Galaxy GP") and
Galaxy Telecom Investments,  L.L.C. ("Galaxy  Investments")  (collectively,  the
"General  Partners"),  have designated Galaxy GP as the Managing General Partner
of Galaxy,  and as such Galaxy GP has  responsibility for the overall management
of the business and operations of Galaxy.  Galaxy Investments  retains the right
to become the Managing General Partner at any time upon written notice to Galaxy
GP. The directors of Galaxy GP are also the managers of Galaxy Investments.

      Galaxy is party to a Management  Agreement with Galaxy Management  Limited
("Galaxy Management") with respect to the day-to-day management and operation of
Galaxy's cable systems.

       The executive  officers of Galaxy  Management and the directors of Galaxy
GP are:

    Tommy L. Gleason, Jr.....51  President,   Chief   Executive   Officer  and
                   Director of Galaxy Management and Galaxy GP
    J. Keith Davidson........41   Vice   President   -   Finance,   Treasurer,
                                   Secretary    and    Director    of   Galaxy
                                   Management and Galaxy GP
    James M. Gleason.........33   Chief    Operating    Officer    of   Galaxy
                                   Management and Galaxy GP
    Terry M. Cordova.........35  Vice   President  -  Engineering   of  Galaxy
                                   Management
    Thomas Morris............52  Vice   President  -   Operations   of  Galaxy
                                   Management
    Ronald Voss..............53 Vice  President  -  Corporate  Development  of
                                   Galaxy Management
    William P. Collatos......42    Director of Galaxy GP
    Kenneth T. Schiciano.....34    Director of Galaxy GP
    Richard D. Tadler........40    Director of Galaxy GP

      Tommy L. Gleason,  Jr. has served as President,  Chief Executive Officer
and  a  director  of  Galaxy  Management  and  Galaxy  GP,  and a  manager  of
Galaxy  Investments  since  December  1994.  Mr.  Gleason is past President of
CableMaxx,   Inc.,  a  wireless  cable  television  company.  Since  1987,  he
has served as president and director of Galaxy Cablevision  Management,  Inc.,
a general  partner of the  managing  general  partner  of Galaxy  Cablevision,
L.P.  from which the  Company  acquired  the Galaxy  Cablevision  Systems.  He
was   formerly  a   director   of  Capital   Bancorporation,   Inc.   of  Cape
Girardeau,   Missouri,   and  an  individual   general  partner  of  Community
Investment  Partners,  a venture  capital  fund in St.  Louis,  Missouri.  Mr.
Gleason began his cable  television  career in 1964,  and from then until 1971
he  was  a  field  engineer  responsible  for  the  operation  of  45  headend
facilities  in 11  states.  From 1971  through  1976,  he was a product  sales
manager for Essex Wire Corp.  of Chicago,  Illinois.  From 1976 through  1982,
he  was  President  of  Galaxy  Communications   Systems,  which  operated  29
cable  television  systems in four states.  Prior to 1979, he  engineered  and
built  eight  cable  television  systems in  Illinois.  In 1988 and 1989,  Mr.
Gleason  served as  Secretary  and  Director  of the  NCTC.  Mr.  Gleason  was
inducted into the Cable TV Pioneers in 1989.

                                       34
<PAGE>

      J. Keith  Davidson  has served as Vice  President  - Finance,  Treasurer
and  Secretary  of Galaxy  Management  and  Galaxy GP and a manager  of Galaxy
Investments  since  December  1994.  From 1988 to 1994,  Mr.  Davidson was the
Chief  Financial  Officer  and  Assistant   Secretary  of  Galaxy  Cablevision
Management,  Inc.  Mr.  Davidson  has 14  years  of  experience  in the  cable
television industry.

      James  M.  Gleason  has  served  as  Chief   Operating   Officer  and  a
director  of  Galaxy   Management   since  December  1994.  Mr.  Gleason  also
presently  serves  as Chief  Operating  Officer  of  Galaxy  GP.  From 1988 to
1994,  he served  as Vice  President  -  Administrative  Operations  of Galaxy
Cablevision  Management,  Inc.  Mr.  Gleason is  responsible  for field office
administration   and   customer   service,   computer   operations,   and  was
responsible  for  implementing  Galaxy  Management's  MIS  operations.  He has
prior experience in cable television system construction,  mapping,  marketing
and  operations.  In 1992,  Mr.  Gleason  served as  Chairman  of the Board of
the   NCTC.   Mr.   Gleason   has  13  years  of   experience   in  the  cable
television industry and is the brother of Tommy L. Gleason, Jr.

      Terry  M.  Cordova  has  served  as  Vice  President  -  Engineering  of
Galaxy  Management  since  December  1994.  From  1988 to  1994,  he was  Vice
President  of  Engineering  of  Galaxy  Cablevision  Management,   Inc.  Prior
thereto,  Mr.  Cordova  was a field  engineer  for  Cable  Services,  Inc.  in
Junction  City,  Kansas.  He is a member  of the  Cable  Television  Interface
Practices  Committee  of the  Society  of  Cable  Television  Engineers  and a
member  of  the  Institute  of  Electrical  and  Electronic   Engineers.   Mr.
Cordova  has 13 years of  experience  in the  cable television industry.

      Thomas  Morris  has  served  as Vice  president  -  Operations  of  Galaxy
Management  since December 1994.  From 1989 to 1994, he served as Vice President
of Operations of Galaxy Cablevision  Management,  Inc. Prior thereto, Mr. Morris
was an area manager for Simmons Communications in Maryland and a system and area
manager for Continental Cablevision in Quincy, Illinois. Mr. Morris has 17 years
of experience in the cable television industry.

      Ronald  Voss has served as Vice  President -  Corporate  Development  of
Galaxy  Management  since  December  1994.  From  1986 to  1994,  he was  Vice
President of Corporate  Development  of Galaxy  Cablevision  Management,  Inc.
Mr.  Voss  is a past  director  of  CableMaxx,  Inc.  and the  Wireless  Cable
Association   International.   Mr.   Voss  is   responsible   for   initiating
acquisitions   and  dispositions  and  is  involved  in  the  franchising  and
licensing  process.  Mr.  Voss  has  14  years  of  experience  in  the  cable
television industry.

       William P.  Collatos  has served as a director of Galaxy GP and a manager
of Galaxy  Investments  since December 1994 and currently is a managing  general
partner of  Spectrum  Equity  Investors  L.P.,  a private  equity  firm which he
co-founded in May 1994.  From 1990 to 1994,  Mr.  Collatos was a private  equity
investor.  Mr. Collatos was an Associate and General Partner of funds managed by
Media Communications Partners and TA Associates,  Inc., a private equity capital
firm ("TA Associates") from 1980 to 1990. From 1976 to 1980, Mr. Collatos worked
in and subsequently ran the media lending group at Fleet National Bank. Mr.
Collatos is a director of Saga Communications, Inc.

      Kenneth T.  Schiciano  has served as a director of Galaxy GP and a manager
of  Galaxy  Investments  since  December  1994  and has been a  Principal  of TA
Associates  since  January  1995.  Mr.  Schiciano  was a  Vice  President  of TA
Associates from August, 1989 to December 1994.

      Richard  D.  Tadler has  served as  director  of Galaxy GP and a manager
of Galaxy  Investments  since  December  1994.  Mr. Tadler has been a Managing
Director of TA Associates  since January 1994. From 1987 to December 1995, Mr.
Tadler was a general  partner of TA  Associates.  Mr.  Tadler is a director of
TechForce Corporation.

                                       35
<PAGE>

      Item 11.  Executive Compensation.

      Management Agreement

      Pursuant to the Management Agreement between Galaxy Management and Galaxy,
Galaxy Management,  including Messrs.  Tommy L. Gleason,  Jr.,  Davidson,  James
Gleason, Cordova, Morris and Voss, who are employed by Galaxy Management and are
otherwise  referred  to as the  Senior  Managers,  manages  all  aspects  of the
day-to-day  business  and  operations  of  Galaxy  and in  connection  therewith
undertakes  those  activities  and  services  that are  customary  in the  cable
television industry for the account and on behalf of Galaxy. For a more detailed
description of the Management Agreement,  see Item 13 of this Part III ("Certain
Relationships and Related Transactions -- Management Agreement").

      Executive Compensation

      None of the  employees  of Galaxy are deemed to be  executive  officers of
Galaxy.  The Senior Managers are employees of Galaxy Management and the services
of such  individuals  are  provided to Galaxy,  for which  services  Galaxy pays
Galaxy  Management  a fee  pursuant  to the  Management  Agreement.  The  Senior
Managers  are  compensated  in their  capacity as  executive  officers of Galaxy
Management and therefore receive no compensation  from the Company.  The general
partners of Galaxy receive no compensation  for their services to Galaxy in such
capacity.

      Director Compensation

      Galaxy GP pays an annual retainer of $15,000 to its directors,  other than
those who are salaried employees or executive officers of Galaxy Management.  In
addition, Galaxy pays to such directors the ordinary and necessary out-of-pocket
expenses incurred by them to attend meetings of the Board of Directors of Galaxy
GP and committees thereof.

      Item 12. Security Ownership of Certain Beneficial Owners and Management.

      The  following  table sets forth certain  information,  as of December 31,
1996,   concerning  the  beneficial  ownership  of  (i)  the  units  of  general
partnership  interests and limited partnership interests of Galaxy owned by each
person  known by  Galaxy  to own  beneficially  more  than  5.0% of any class of
Galaxy's partnership  interests,  (ii) equity securities of and member interests
in  Galaxy  GP and  Galaxy  Investments,  respectively,  owned by all  executive
officers  and  directors  of Galaxy GP and the  managers of Galaxy  Investments,
respectively, owned by all executive officers and directors of Galaxy GP and the
managers of Galaxy  Investments as a group, and (iii) member interests in Galaxy
Management owned by the Senior Managers.
<TABLE>
<CAPTION>

    Name and Address                                                                         No. of Units/   % of
   Of Beneficial Owner                              Type of Interest                           Shares(1)      Class
   -------------------                              ----------------                           ---------      -----
<S>                                    <C>                                                <C>           <C>
Galaxy Telecom, Inc.                      Class A General Partnership Units of Company           133,333        *
  1220 North Main Street                  Class C Limited Partnership Units of Company           416,000     100.0
  Sikeston, Missouri   63801              Class E Limited Partnership Units of Company           200,000     100.0

Galaxy Telecom Investments, L.L.C.        Class A General Partnership Units of Company        44,491,667      99.7
  1220 North Main Street                  Class B  Limited Partnership Units of Company            1,000     100.0
  Sikeston, Missouri  63801

Vantage Cable Associates, L.P.            Class D Limited Partnership Units of Company         6,384,000     100.0
  c/o Farm Bureau Life Insurance Company
  5400 University Avenue
  W. Des Moines, Iowa  50266

                                       36
<PAGE>

Galaxy Telecom Management, L.L.C.        Class A Voting Common Stock of Galaxy GP                 20,000      16.9
  1220 North Main Street                  Common Interests in Galaxy Investments                     990      99.0
  Sikeston, Missouri  63801               Voting Preferred Interests in Galaxy Investments       288,549       7.3

TA Associates Group (2)                   Class A Voting Common Stock of Galaxy GP                63,281      53.3
  c/o TA Associates, Inc.                 Common Interests in Galaxy Investments                       6        *
  125 High Street, Suite 2500             Voting Preferred Interests in Galaxy Investments     3,452,523      87.8
  Boston, Massachusetts  02110

Spectrum Equity Investors, L.P.           Class A Voting Common Stock of Galaxy GP                24,615      20.7
  125 High Street, Suite 2600             Common Interests in Galaxy Investments                       2       *
  Boston, Massachusetts  02110

Fleet Equity Partners(3)                  Class A Voting Common Stock of Galaxy GP                 5,810       4.9
  111 Westminster Street                  Class B Nonvoting Common Stock of Galaxy GP             14,703     100.0
  Providence, Rhode Island  02903         Common Interests in Galaxy Investments                       2       *
                                          Voting Preferred Interests in Galaxy Investments       192,646       4.9
                                          Nonvoting Preferred Interests in Galaxy Investments    570,368     100.0

Tommy L. Gleason, Jr.                     Common Interests of Galaxy Management Limited          770,000      38.5

Tommy L. Gleason, Sr.                     Common Interests of Galaxy Management Limited          485,000      24.3

James M. Gleason                          Common Interests of Galaxy Management Limited          675,000      33.8

J. Keith Davidson                         Common Interests of Galaxy Management Limited           40,000       2.0

Terry M. Cordova                          Common Interests of Galaxy Management Limited           25,000       1.3

Ronald Voss                               Common Interests of Galaxy Management Limited            5,000        *

All executive officers and directors of   Class A Voting Common Stock of Galaxy GP
  Galaxy GP as a group (6 persons) (4)                                                           107,896      91.0

All managers of Galaxy Investments as     Common Interests in Galaxy Investments                     998      99.8
  a group (5 persons) (5)                 Voting Preferred Interests in Galaxy Investments     3,740,995      95.1

</TABLE>

* Less than one percent.

      (1) Share and unit  ownership  amounts  have been  rounded to the  nearest
whole number.

      (2)  Includes  19,524  shares of Class A Voting  Common Stock of Galaxy GP
("Class A Stock") owned by Advent Atlantic and Pacific II L.P.,  7,040 shares of
Class A Stock owned by Advent  Industrial II L.P.,  3,282 Class A Stock owned by
Advent New York, L.P.,  32,820 shares of Class A Stock owned by Advent VII L.P.,
and  615  shares  of  Class  A  Stock  owned  by TA  Venture  Investors  Limited
Partnership. Includes 6 units of Common Interests in Galaxy Investments ("Common
Interests")  owned by Advent VII  Investor  Corp.  Includes  3,452,523  units of
Voting Preferred Interests in Galaxy Investments ("Voting Preferred  Interests")
owned by Advent VII Investor Corp. All of the above  beneficial  owners are part
of an affiliated  group of investment  partnerships  and companies  referred to,
collectively,  as  the  TA  Associates  Group.  Messrs.  Tadler  and  Schiciano,
Directors  of  Galaxy GP and  managers  of Galaxy  Investments,  are a  Managing
Director and a Principal,  respectively,  of TA Associates,  Inc.,  which is the
sole general  partner of TA  Associates  VII L.P.,  TA Associates VI L.P. and TA


                                       37
<PAGE>

Associates  AAP II Partners  L.P.  TA  Associates  VII L.P. is the sole  general
partner of Advent VII L.P. TA Associates  is the sole general  partner of Advent
New York L.P. and Advent  Industrial II L.P. TA Associates  AAP II Partners L.P.
is the  sole  general  partner  of  Advent  Atlantic  and  Pacific  II  L.P.  TA
Associates,  Inc. exercises sole voting and investment power with respect to all
of the  shares  or  units,  as the  case may be,  held of  record  by the  named
investment  partnerships,  with the  exception  of those shares of Class A Stock
held by TA Venture Investors Limited Partnership. Principals and employees of TA
Associates,  Inc. (including Messrs.  Tadler and Schiciano) comprise the general
partners of TA Venture Investors Limited Partnership.  In such capacity, each of
Messrs.  Tadler and Schiciano may be deemed to share voting and investment power
with  respect  to 615  shares  of Class A Stock  held of  record  by TA  Venture
Investors  Limited  Partnership.  Messrs.  Tadler and  Schiciano  each  disclaim
beneficial  ownership of such shares,  except to the extent of their  respective
pecuniary interests.

      (3)  Includes  581  shares of Class A Stock  and  1,470  shares of Class B
Nonvoting Common Stock of Galaxy GP ("Class B Stock") owned by Chisholm Partners
II L.P.,  and 5,229 shares and 13,233 shares of Class A Stock and Class B Stock,
respectively,  owned by Fleet Growth Resources, Inc. Also includes 0.18 units of
Common Interests,  15,460 units of Voting Preferred Interests,  and 45,775 units
of Nonvoting  Preferred  Interests in Galaxy Investments  ("Nonvoting  Preferred
Interests")  owned by Chisholm Partners II L.P., 1.14 units of Common Interests,
124,030  units of Voting  Preferred  Interests  and 367,215  units of  Nonvoting
Preferred  Interests  owned by Fleet Growth  Resources,  Inc., and 0.49 units of
Common Interests,  53,156 units of Voting Preferred  Interests and 157,378 units
of Nonvoting Preferred Interests owned by Fleet Equity Partners VII, L.P.

      (4)  Includes  (i)  20,000  shares  owned of record  by Galaxy  Management
Limited as to which Tommy L Gleason,  Jr. and J. Keith Davidson may be deemed to
have shared voting and investment  power,  (ii) 63,281 shares owned of record by
TA  Associates  Group as to which shares  Messrs.  Tadler and  Schiciano  may be
deemed to have shared voting and investment  power and (iii) 24,615 shares owned
of record by Spectrum Equity Investors, L.P. ("Spectrum") as to which shares Mr.
Collatos may be deemed to have shared voting and investment power.

      (5)  Includes  (i) 990  Common  Interests  and  288,459  Voting  Preferred
Interests  owned of record  by  Galaxy  Management  Limited  as to which  shares
Messrs.  Gleason,  Jr.  and  Davidson  may be deemed to have  shared  voting and
investment  power,  (ii) 6  Common  Interests  and  2,494,591  Voting  Preferred
Interests  owned of record by TA  Associates  Group as to which  shares  Messrs.
Tadler and Schiciano may be deemed to have shared  voting and  investment  power
and (iii) 2 Common  Interests and 915,583 Voting  Preferred  Interests  owned of
record by Spectrum as to which shares Mr.  Collatos may be deemed to have shared
voting and investment power.

      Item 13.  Certain Relationships and Related Transactions.

      Management Agreement

      Galaxy  Management,  which is owned by the  Senior  Managers  and Tommy L.
Gleason,  the father of Tommy L. Gleason,  Jr. and James M.  Gleason,  currently
manages all aspects of the day-to-day business and operations of Galaxy pursuant
to the  Management  Agreement.  The  term of the  Management  Agreement  expires
December 31, 1999, but provides for automatic  renewal for  successive  one-year
terms.  Galaxy may  terminate  the  Management  Agreement  with 90 days' written
notice prior to the  expiration of the initial or any renewal term.  The Company


                                       38
<PAGE>

also has the option to terminate the Management  Agreement in the event (i) of a
material breach of the Management  Agreement by Galaxy Management and failure to
cure same or commence  cure within 30 days after  receipt of notice from Galaxy,
(ii) of an unwaived and uncured  default by Galaxy of any  substantive  covenant
contained in its financing documents, (iii) of a 10% reduction in Galaxy's gross
revenues or operating  cash flow over the prior fiscal year or (iv) that none of
Tommy L. Gleason,  Jr.,  Tommy L. Gleason or James M. Gleason is involved in the
management of Galaxy Management.  The Management  Agreement also will terminate,
with respect to any of Galaxy's cable  systems,  upon the sale of such system by
Galaxy and will terminate in its entirety upon the sale or other distribution of
all of Galaxy's  systems or upon the dissolution or winding up of Galaxy,  which
may be effected by the Equity Investors in certain circumstances pursuant to the
terms of the Equity Holders Agreement described below.

      The Management  Agreement provides that Galaxy Management is authorized to
perform management services including, among other things: operation and control
of the physical assets of the Systems;  engineering and supervision of expansion
and construction activities relating to the Systems; negotiation, administration
and extension of franchise and pole  attachment  agreements and agreements  with
utility companies; management of programming agreements;  marketing; purchasing;
budgeting;  billing,  record-keeping,  accounting and financial  reporting;  tax
return  preparation;   and  hiring,   supervision  and  termination  of  Company
employees.  Galaxy  Management is also authorized to establish and maintain bank
accounts for Galaxy ("System Operating Accounts") to deposit all funds collected
by each system and to make  withdrawals  therefrom  for  purposes of payment and
reimbursement of expenses incurred by or on behalf of Galaxy.  Galaxy Management
is entitled to  reimbursement  from the System  Operating  Accounts on a monthly
basis of various  expenses  allocable  to its  management  and  operation of the
Systems and Galaxy,  including truck and automobile  expenses,  travel expenses,
meals and  entertainment,  and third-party  professional  fees. For fiscal 1996,
Galaxy paid Galaxy Management approximately $266,669 in reimbursed expenses.

      In return  for its  management  services,  Galaxy  Management  receives  a
management  fee,  payable  monthly,  equal to a percentage of the gross revenues
derived by Galaxy from the Systems,  excluding revenues from the sale of Systems
or franchises.  The Management Agreement also provides that, prior to January 1,
1998,  the dollar amount of the  management  fee may not increase as a result of
revenues  attributable to acquired cable  television  systems until such time as
the gross revenues of Galaxy reach a certain  minimum level.  The management fee
is currently  4.5% of  revenues.  For the year ended  December 31, 1996,  Galaxy
incurred a management fee of approximately $2,804,374. There can be no assurance
that such amounts are  representative of the amount of annual fees to be paid to
Galaxy Management in the future.

      The  management fee may be reduced (but not below 3.5%) in the event other
entities  controlled by Tommy L. Gleason,  Jr., James M. Gleason and/or J. Keith
Davidson acquire other entertainment or telecommunications business assets, with
the calculation to determine any such reduction in the management fee based upon
the percentage of the gross revenues of such other assets  compared to the gross
revenues of Galaxy.  None of such persons presently intends, or intends to cause
any such entities,  to make any such  acquisitions.  The Loan  Agreement  limits
Galaxy's ability to pay any accrued management fee and Galaxy management's right
to such fee and  reimbursement  of  expenses is  restricted  by the terms of the
Affiliate Subordination Agreement as defined below.

      Galaxy   believes  that  the  terms  of  the   Management   Agreement  are
substantially  the same terms as could be obtained in arm's-length  arrangements
with unaffiliated third parties.

      Affiliate Subordination Agreement

      Galaxy, Galaxy GP, Galaxy Investments,  certain investors in Galaxy GP and
Galaxy  Investments,  Galaxy  Telecom  Management,  L.L.C.  ("Galaxy  Management
Limited"),  Tommy L. Gleason, Jr., James M. Gleason,  Tommy L. Gleason, J. Keith
Davidson,  Ronald  Voss,  Terry  M.  Cordova,  and  the  sellers  of the  Galaxy


                                       39
<PAGE>

Cablevision  Systems,  Vista  Communications  Systems and Vantage  Cable Systems
(collectively,   the  "Subordinated   Parties")  are  parties  to  an  Affiliate
Subordination  Agreement  dated as of  December  23,  1994  (the  "Subordination
Agreement")  with  Fleet  National  Bank and the  Lenders  under  Galaxy's  Loan
Agreement  (the  "Senior  Parties").   Under  the  terms  of  the  Subordination
Agreement,  all  obligations  and  liabilities  of Galaxy,  Galaxy GP and Galaxy
Investments  to make any payments of cash or other  property to any of the other
Subordinated  parties are  subordinated  in right of payment and remedies to the
prior final payment in full of the obligations and liabilities of Galaxy, Galaxy
GP and Galaxy Investments to the Senior Parties under the Loan Agreement and the
financing documents related thereto.

      Equity Holders Agreement

      Galaxy,  Galaxy GP, Galaxy  Investments,  the Senior Managers,  the Equity
Investors  and Vantage  Cable have  entered  into the Equity  Holders  Agreement
relating  to the  management  of Galaxy GP and Galaxy  Investments,  the general
partners  of  Galaxy,  and  certain  other  matters.  Under the  Equity  Holders
Agreement,  each stockholder of Galaxy GP and each member of Galaxy  Investments
has  agreed  to elect  as  directors  or  managers,  as the  case may be,  three
designees of the Equity Investors and Tommy Gleason,  Jr. and one other designee
of the Senior  Managers.  The  current  designees  of the Equity  Investors  are
William P.  Collatos,  Kenneth T.  Schiciano  and  Richard D.  Tadler.  J. Keith
Davidson  is the current  second  designee  of the Senior  Managers.  The Equity
Holders  Agreement  provides that James M. Gleason shall serve as a director and
manager if Tommy Gleason, Jr. is unable to serve.

      The Equity Holders  Agreement also restricts  transfer of equity interests
in Galaxy GP and Galaxy  Investments  by the Senior  Managers  and  provides the
Equity  Investors with piggyback  registration  rights and, on or after December
23, 1998, demand registration rights with respect to interest in Galaxy,  Galaxy
GP and Galaxy  Investments.  The Equity  Investors  have  agreed to waive  their
registration  rights with respect to the  registration of the Notes. On or after
(i) December 23, 1998 or (ii) a default by Galaxy in the payment of principal or
interest on the indebtedness  outstanding  under the Loan Agreement,  the Equity
Investors have the right to require (a) the reorganization of Galaxy,  Galaxy GP
and Galaxy  Investment to facilitate  the  registration  and public  offering of
securities  of the successor  entity or (b) the sale of the Company,  Galaxy GP,
Galaxy  Investments  or the  assets,  stock  or  other  securities  of any  such
entities.

      The Equity Holders  Agreement  also provides that the Senior  Managers and
their   affiliates   will   first   offer  any   opportunity   to  invest  in  a
telecommunications  or  entertainment  business  to Galaxy  before  making  such
investment.  If Galaxy elects not to make such  investment,  the Senior Managers
and the Equity  Investors,  if they so elect, may make such investments  through
another  entity.  The  decision  of  Galaxy  as to  whether  or not to make such
investment  will be made by the  board  of  directors  of the  Managing  General
Partner.  Although the directors and executive  officers of the Managing General
Partner have certain fiduciary  obligations to its shareholders under applicable
corporate law and the Managing General Partner has fiduciary duties to the other
partners  of  Galaxy,  there can be no  assurance  that a conflict  of  interest
relating to any such investment will be resolved in favor of Galaxy. The Company
presently does not have any agreements or policies  governing possible conflicts
of interest.

      Limited Partnership Interests in Galaxy

      Galaxy Investments owns 100% of the Class B Limited Partnership  Interests
in Galaxy,  which it received in connection  with the  organization  and initial
capitalization  of Galaxy in December 1994. Galaxy GP received 100% of the Class
C and Class E  Limited  Partnership  Interests  in  Galaxy  in  connection  with
Galaxy's  acquisitions  of the  Vista  Communications  Systems  and  the  Galaxy
Cablevision  Systems,  respectively.  In connection  with its acquisition of the
Vantage Cable Systems,  Galaxy issued  approximately $6.4 million in the form of


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Class D Limited Partnership  Interests in Galaxy, out of the total consideration
of  approximately  $38.4  million  paid for such  Systems.  Galaxy's  ability to
declare or pay any dividend or make any other  distributions  to its general and
limited partners is restricted by the terms of the Indenture dated September 28,
1995.

      Subject  to  such  restrictions  and at  such  time  as  Galaxy  may  make
distributions  under the Loan  Agreement,  Galaxy  GP may  cause  Galaxy to make
distributions  to its Class C Limited  Partners,  Class D Limited  Partners  and
Class E Limited Partners prior to making  distributions to other partners of the
Company in accordance with the Limited Partnership  Agreement dated December 23,
1994, as amended,  by and among Galaxy GP, Galaxy  Investments and Vantage Cable
(the  "Partnership  Agreement").  Galaxy may make such  distributions  until the
aggregate of such distributions  equals the amount of the capital  contributions
of each such class of limited  partners,  plus certain priority rates of return.
Under the Partnership Agreement, Class C Limited Partners are entitled to a rate
of  return of 9%,  compounded  annually  on the  previously  unreturned  capital
contribution.  The Partnership  Agreement provides that Class D Limited Partners
are  entitled to an annually  compounded  rate of return of 10.0% per annum from
December 23, 1994 until December 31, 1999,  which rate of return  increases each
year thereafter in increments of 2.0%, up to a maximum of 18.0%. Class E Limited
Partners  are entitled  under the  Partnership  Agreement to a priority  rate of
return of 9% until December 31, 1999,  which then increases 2.0% each year up to
a maximum of 17%.  Class B Limited  Partners are entitled to up to 11.90% of any
distribution  remaining  after  allocation of the capital  contributions  of and
priority  rates of return to the  Class C, D and E Limited  Partners  and to the
Class A General  Partners.  To date,  Galaxy has made no distributions to any of
the general or limited partners of Galaxy.  The interests of each of the general
and limited  partners of Galaxy are also  subject to the terms of the  Affiliate
Subordination Agreement and the Equity Holders Agreement.

Relationship of Agent with Equity Investor

      Fleet National Bank, the Agent under the Revolving Credit  Facility,  is a
wholly owned subsidiary of Fleet Financial  Group,  Inc., a bank holding company
("Fleet Financial").  Fleet Equity Partners,  one of the Equity Investors,  is a
marketing name for Fleet Growth  Resources,  Inc., a wholly owned  subsidiary of
Fleet Private Equity Company, Inc., which, in turn, is a wholly owned subsidiary
of Fleet Financial.





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                                      PART IV

      ITEM 14. Exhibits,  Financial Statements,  Financial Statement Schedules
               and Reports on Form 8-K.

      (a)(1)  Financial  Statements.  Reference  is made to the  Index on Page
               F-1 for a list of all  financial  statements  filed  as part of
               this Report.

      (a)(2)  Financial  Statement  Schedules.  Reference is made to the Index
               on Page  F-1 for a list of all  financial  statement  schedules
               filed as part of this Report.

      (a)(3)   Exhibits.  See Exhibit Index.

      (b)      Reports on Form 8-K. No reports on Form 8-K were filed during the
               last quarter of the period covered by this report.


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                                     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.




                                 GALAXY TELECOM, L.P.
                          By:    Galaxy Telecom Inc.
                                 As General Partner







      March 31, 1997               /s/ Tommy L. Gleason, Jr.
                          By:    Tommy L. Gleason, Jr.
                      President and Chief Executive Officer







      March 31, 1997               /s/ J. Keith Davidson
                          By:    J. Keith Davidson
                                 Vice President-Finance (Principle
                                 Financial Officer)


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