<PAGE>
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            (X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997
                                             -----------------
                                       or

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

                        For the transition period from to
                                                         -------
                           Commission File No. 0-5890

                                    GCI, INC.
                               -------------------
             (Exact name of registrant as specified in its charter)

                      ALASKA                        91-1820757
         -------------------------------       -------------------
         (State or other jurisdiction of       (I.R.S. Employer
         incorporation or organization)        Identification No.)

  2550 Denali Street Suite 1000  Anchorage, Alaska                  99503
  ------------------------------------------------               -----------
      (Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (907) 265-5600
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                 $180,000,000 9.75% Senior Notes due August 2007
                 -----------------------------------------------

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, and (2) has been subject to such filing requirements
for the past 90 days. Yes /x/  No  .

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

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


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                                       -1-

<PAGE>


                                    GCI, INC.

            A Wholly Owned Subsidiary of General Communication, Inc.

                         1997 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                        Page
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<S>                                                                                                     <C>
PART I....................................................................................................3

   Item 1.  Business......................................................................................3
      General Background and Description of Business......................................................3
      Industries..........................................................................................4
      Geographic Concentration and Alaska Economy.........................................................6
      Products............................................................................................7
      Seasonality........................................................................................11
      Customer-Sponsored Research........................................................................11
      Facilities.........................................................................................11
      Customers..........................................................................................12
      Alaska Voice, Video and Data Markets...............................................................14
      Competition........................................................................................16
      Financial Information About Industry Segments......................................................20
      Recent Developments................................................................................20
      Employees..........................................................................................23
      Environmental Regulations..........................................................................23
      Foreign and Domestic Operations and Export Sales...................................................24
      Backlog of Orders and Inventory....................................................................24
      Patents, Trademarks, Licenses, Certificates........................................................24
      Regulation, Franchise Authorizations and Tariffs...................................................24
      Other..............................................................................................27

   Item 2.  Properties...................................................................................27

   Item 3.  Legal Proceedings............................................................................29

   Item 4.  Submission of Matters to a Vote Of Security Holders..........................................29

PART II..................................................................................................29

   Item 5.  Market for the Registrant's Common Equity and Related Stockholder Matters....................29
      Market Information for Common Stock and Holders....................................................29
      Dividends..........................................................................................29

   Item 6.  Selected Financial Data......................................................................30

   Item 7.  Management's Discussion and Analysis of Financial Condition  and Results of Operations.......32

   Item 7A.  Quantitative and Qualitative Disclosures About Market Risk..................................47

   Item 8.  Consolidated Financial Statements  and Supplementary Data....................................47

   Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........47

PART III.................................................................................................48

   Item 10. Directors and Executive Officers of the Registrant...........................................48

   Item 11. Executive Compensation.......................................................................48

   Item 12. Security Ownership of Certain Beneficial Owners and Management...............................48

   Item 13. Certain Relationships and Related Transactions...............................................48

PART IV..................................................................................................86

   Item 14.  Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K...............86
</TABLE>

                                      -2-

<PAGE>

                                     PART I

Item 1.  BUSINESS

General Background and Description of Business

     GCI, Inc. ("Successor") was incorporated in 1997 to effect the issuance of
Senior Notes as further described in note 6 to the accompanying Consolidated
Financial Statements included in Part II of this Report. GCI, Inc., as a wholly
owned subsidiary of General Communication, Inc. ("GCI" or "Predecessor"),
received through its initial capitalization all ownership interests in
subsidiaries previously held by GCI. GCI, Inc. is primarily a holding company
and together with its subsidiaries (collectively the "Company"), is a
diversified telecommunications provider with a leading position in
facilities-based long distance service in the State of Alaska and is Alaska's
leading cable television service provider. The Company seeks to become the first
significant provider in Alaska of an integrated package of long distance, local
and wireless telecommunications services, cable television services and Internet
services.

     Complementing its long distance, cable, and cellular resale operations, the
Company introduced facilities based competitive local exchange services in
Anchorage, Alaska in 1997. The Company has announced plans to provide similar
competitive local exchange services in Alaska's other major population centers.
The Company also acquired a state-wide 30 MHz B block personal communication
service ("PCS") license in June 1995 and is currently evaluating various
technologies for a proposed wireless PCS network. The Company has obtained
financing and has begun construction of an undersea fiber optic cable linking
Alaska with the lower 48 states. The Company plans to offer retail Internet
services in 1998.

     Telecommunication Services. The Company supplies a full range of
common-carrier long-distance and other telecommunication products and services
to residential, commercial and government users. The Company operates a
state-of-the-art, competitive telecommunications network employing the latest
digital transmission technology based upon fiber optic and digital microwave
facilities within and between Anchorage, Fairbanks and Juneau, a digital fiber
optic cable linking Alaska to the networks of other carriers in the lower 49
states and the use of satellite transmission to remote areas of Alaska (and for
certain interstate traffic as well). The Company also offers data communication
equipment sales and technical services. Telecommunication services that the
Company provides are carried over facilities that are owned by the Company or
are leased from other companies.

     Cable Services. As a result of acquisitions completed effective October 31,
1996, the Company has become Alaska's leading cable television service provider
to residential, commercial and government users in the State of Alaska. The
Company's cable systems serve 26 communities and areas in Alaska, including the
state's three largest urban areas, Anchorage, Fairbanks, and Juneau. The Company
cable systems consist of approximately 1,820 miles of installed cable plant
having 300 to 450 MHz of channel capacity.

     Local Services. The Company's local services division entered the local
services market in Anchorage in 1997, providing services to residential,
commercial, and government users. The Company can access approximately 95% of
Anchorage area local loops from its colocated remote



                                      -3-
<PAGE>

digital facilities and digital line carrier installations. The Company offers
resale of its competitor's local service where the Company does not have access
to loop facilities.

Industries

     General. The Company's management believes that the size and growth
potential of the voice, video and data market, the increasing deregulation of
telecommunications services, and the increased convergence of telephony,
wireless and cable services offer the Company considerable opportunities to
integrate its telecommunications and cable services and expand into
communications markets both within and, longer-term, outside of Alaska. The
Company's management expects the rate of growth in industry-wide
telecommunications revenues to increase as the historical dominance of monopoly
providers is challenged as a result of deregulation. Considerable deregulation
has already taken place in the United States as a result of the Federal
Telecommunications Act of 1996 (the "1996 Telecom Act") with the barriers to
competition between telecommunications, local exchange and cable providers being
lowered. The Company's management believes that its acquisition of cable
television systems and its development of local exchange service and ultimately,
PCS leave it well positioned to take advantage of this deregulation of
telecommunications markets.

     The telecommunications and cable television industries have been
characterized by rapid technological change, frequent new service introductions
and evolving industry standards. The U.S. telecommunication industry remains in
a state of flux, with companies faced with the challenges of new technologies
and rapid changes in the competitive and regulatory environment. Growing
competition has resulted in lower prices, which could stimulate ongoing volume
gains, even in the heavily saturated U.S. market. The 1996 Telecom Act, emerging
technologies, and a blurring of distinctions among industry sectors all portend
new revenue possibilities for the industry. Where the focus was once on
regulation of a closely guarded monopoly, regulators are now ushering the
telecommunication industry into an era of competition and reduced regulation.
Decisions made now will influence the industry's future in ways difficult to
foresee, as technology continues to catapult the industry forward.

     The impact of deregulation will continue to affect the telecommunications
industry going forward. The participation of interexchange carriers ("IXCs") in
the local market should eventually exert downward pressure on pricing. In the
short-run, however, some analysts expect the reduction in access fees to reduce
the subsidy to local services, and local rates may increase. At the same time,
growing use of the Internet and computer networking, and the continuing
transformation to an information-based economy, are expected to stimulate demand
for new facilities and higher usage levels. In addition, the growing number of
teenagers in the home, stemming from the rise in births that began in the 1980s,
are expected to generate an added demand for access lines in the home.

     Deregulation is expected to drive access rates down, but lower long
distance rates should lead to increased long distance volume, which should help
offset the drop in rates. Currently, Internet service providers ("ISPs") are
exempt from paying access fees, a key factor in allowing them to offer flat-rate
pricing which has helped drive Internet usage. The Regional Bell Operating
Companies ("RBOCs") have petitioned the Federal Communications Commissions
("FCC") to require the ISPs to pay access fees. Access revenue growth is
expected to trend downward over the remainder of the decade, but total revenues
are expected increase to $35.0 billion in 2000.


                                      -4-
<PAGE>

     The size of the competitive local marketplace has doubled in the year and a
half since passage of the 1996 Telecom Act. Many companies now compete with
incumbent providers. Many of the facilities-based competitive local exchange
carriers ("CLECs") have begun to deploy digital switches to compete head-to-head
with incumbents in the switched dial tone arena. Still other CLECs have begun to
offer high-speed data services including Internet access for ISPs, Intranets for
corporate customers, and frame relay over state-of-the-art asynchronous transfer
mode network backbones.

      The confluence of new technology and consumer response is forcing
competition among telephone, computer, and entertainment industries just as each
industry converges on similar digital technologies. As opportunities for new
wireless and video services arise and competitors expand beyond their
traditional markets, competition between existing telephone companies and these
major industries will likely intensify. To survive in this competitive
environment, the Company must respond to this technologically driven change with
services that its customers demand.

     Telecommunication Services. Among telecommunications services, toll service
revenues represented the largest component, spurred by double-digit increases in
international toll calls, an outgrowth of the expansion in international trade,
and volume gains in domestic long distance service that more than offset price
declines. Industry analysts believe that declining access fees resulting from
deregulation, along with increased competition as local exchange carriers
("LECs") enter the interLATA market, will lower the cost of long distance
service, which should further boost volume, as will continued economic
expansion. Growth in Internet usage is expected to increase demand as
Internet-access providers lease lines in order to facilitate Internet traffic.

     Cable Services. The programmed video services industry includes traditional
broadcast television, cable television, wireless cable, and direct broadcast
satellite ("DBS") systems. Cable television providers have added non-broadcast
programming utilized improved technology to increase channel capacity and
expanded service markets to include more densely populated areas and those
communities in which off-air reception is not problematic. Broadcast television
stations including network affiliates and independent stations generally serve
the urban centers. One or more local television stations may serve smaller
communities. Rural communities may not receive local broadcasting or have cable
systems but may receive direct broadcast programming via a satellite dish.

     In Alaska, cable television was introduced in the 1970s to provide
television signals to communities with few or no available off-air television
signals and to communities with poor reception or other reception difficulties
caused by terrain interference. Since that time, as on the national level, the
cable television providers in Alaska have added non-broadcast programming.

     Local Services. 1997 was distinguished by its lack of progress in opening
the local access market up to significant competition on an industry-wide basis.
While the most lucrative business customers have benefited from increased choice
and lower prices, residential customers in most areas will have to wait as long
distance companies and competitive local exchange carriers drive to lower access
costs through regulatory relief, development of their own local access solutions
or the use of third party suppliers.

      Use of the Internet and expansion in the use of local areas networks
("LANs") and wide area networks ("WANs") generated an increased demand for
access lines. In the home, the growing use


                                      -5-
<PAGE>

of computers, faxes, and the Internet led to increases in access lines and
usage. The emergence of new services, including digital cellular radio, personal
communications services, interactive TV, and video dial tone, has created
opportunities for significant growth in local loop services. These opportunities
are also laying the foundation for a restructuring of the newly competitive
local loop services market. Not only are competitors entering the core business
of the local telephone companies, but they are beginning to pursue the
fast-growing markets that previously were closed to them, such as consumer
video.

     Wireless Services. Wireless communications services have posted annual
growth rates in excess of 20 percent over the last decade. Declining prices and
the increased productivity that mobile communications provides for both
businesses and consumers have stimulated usage and spending. Declining prices
have been an important factor in generating penetration growth for both the
cellular and paging industries. Increased competition is prompting many cellular
carriers to consider adopting dual branding strategies, segmenting the market
into early adopter and mass market audiences and targeting each with a different
branded level of service.

     The FCC adopted a broad set of rules for the licensing of PCS in September
1993. The FCC concluded an auction of spectrum to be used for the provision of
PCS in March 1995. The FCC's efforts are expected to encourage reduction of
communication prices and put the technology within financial reach of most
American homes and businesses. PCS licensees will be required to offer service
to at least one-third of their market population within five years or risk
losing their licenses. Service must be extended to two-thirds of the population
within 10 years. Industry analysts predict that PCS will grow rapidly, reaching
17.9 million subscribers by 2005. PCS's success is expected to occur even with
competition from other wireless services such as cellular, paging and enhanced
specialized mobile radio. Increases in services are expected to be fueled by
declining rates and expanded coverage. All wireless communications services are
expected to continue to expand at double-digit rates over the remainder of the
decade.

     New and Emerging Services. Communication sectors not traditionally
competitive with telephone companies, such as cable and wireless services, are
projected to grow an average of 10.9% per year. This compares with the projected
3% average per year growth in revenue for traditional local telephone services
through 1998. Cable TV companies may gain a competitive advantage through
marketing of cable modems. Computer-based services likely will be a strong
market for cable TV firms. Cable modems may enable them to offer a competitive
alternative to the second telephone line into the home, providing high-speed
access to data services. Content is expected to be the ultimate driver of Cable
TV profits and may determine which companies gain the most market share.

     Unlicensed PCS is an emerging area for on-site or campus-wide use. The
unlicensed spectrum, previously occupied by microwave users, is in the process
of being cleared for PCS by the FCC-endorsed industry coalition given this
charter. Analysts believe the expansion of unlicensed PCS should lead to a jump
in spending on in-building wireless communications equipment.

  Geographic Concentration and Alaska Economy

     The Company offers telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration, the
Company's growth and operations depend upon economic conditions in Alaska. The
economy of Alaska is dependent upon the natural


                                      -6-
<PAGE>

resource industries, and in particular oil production, as well as tourism,
government, and United States military spending. Any deterioration in these
markets could have an adverse impact on the Company. Oil revenues over the past
several years have contributed in excess of 75% of the revenues from all
segments of the Alaska economy and are projected to account for 77% in 1998.

     The volume of oil transported by the TransAlaska Oil Pipeline System over
the past 20 years has been as high as 2.0 million barrels per day in 1988. Over
the past several years, it has begun to decline. The two largest producers of
oil in Alaska (the primary users of the TransAlaska Oil Pipeline System)
continue to explore, develop and produce new oil fields and to enhance recovery
from existing fields to offset the decline in production from the Prudhoe Bay
field. Both companies have invested large sums of money in developing and
implementing oil recovery techniques at the Prudhoe Bay field and other nearby
fields. New oil field development is expected to result in an increase in oil
production in 2000 and 2001. Oil production is projected to decline over the
long term at approximately 6 percent per year.

     Effective March 1997, the State of Alaska passed new legislation relaxing
state oil royalties with respect to marginal oil fields that the oil companies
claim would not be economic to develop otherwise. No assurance can be given that
these two oil companies or other oil companies doing business in Alaska will be
successful in discovering new fields or further developing existing fields which
are economic to develop and produce oil with access to the pipeline or other
means of transport to market, even with the reduced level of royalties. Should
the oil companies not be successful in these discoveries or developments, the
long term trend of continued decline in oil production from the Prudhoe Bay
field area is inevitable with a corresponding adverse impact on the economy of
the state, in general, and on demand for telecommunications and cable television
services, and, therefore, on the Company, in particular.

     Market prices for North Slope oil have declined to below $11 per barrel in
March 1998, below the average price of approximately $18 per barrel used by the
State of Alaska to budget its oil related revenues. The State of Alaska
maintains surplus accounts that are intended to fund budgetary shortfalls and
would be expected to fund all or a portion of the revenue shortfall. The Company
is not able to predict the effect of declines in the price of North Slope oil on
the State of Alaska's economy or on the Company.

     The Company has, since its entry into the telecommunication marketplace
aggressively marketed its services to seek a larger share of the available
market. However, with a small population of approximately 600,000 people,
one-half of whom are located in the Anchorage area and the rest of whom are
spread out over the vast reaches of Alaska, the customer base in Alaska is
limited. No assurance can be given that the driving forces in the Alaska
economy, and in particular, oil production, will continue at levels to provide
an environment for expanded economic activity.

Products

     The Company operates in three industry segments and offers five primary
product lines. The telecommunication services industry segment offers
long-distance message toll services, private line and private network services,
the cable services industry segment offers cable television services, and the
local services industry segment offers local telecommunication services.


                                      -7-
<PAGE>

     Telecommunication Services. The Company offers a broad spectrum of
telecommunication services to residential, commercial and government customers
primarily throughout Alaska.

     The Company's long-distance services industry segment is engaged in the
transmission of interstate and intrastate switched MTS and private line and
private network communication service between the major communities in Alaska,
and the remaining United States and foreign countries. The Company's message
toll services include intrastate, interstate and international direct dial, 800
and 888, calling and debit card, operator and enhanced conference calling, as
well as termination of northbound toll service for MCI, U. S. Sprint ("Sprint")
and several large resellers who do not have facilities of their own in Alaska.
The Company also provides origination of southbound calling card and 800 and 888
toll services for MCI and Sprint customers. Regulated telephone relay services
for the deaf, hard-of-hearing and speech impaired are provided through the
Company's operator service center. The Company offers its message services to
commercial, residential, and government subscribers. Subscribers may generally
cancel service at any time. Toll related services account for approximately
70.0%, 86.5%, and 92.8% of the Company's 1997, 1996, and 1995 total revenues,
respectively. Private line and private network services utilize voice and data
transmission circuits, dedicated to particular subscribers, which link a device
in one location to another in a different location.

     The Company has positioned itself as a price and customer service leader in
the Alaska telecommunication market. Rates charged for the Company's
telecommunication services are designed to be equal to or below those for
comparable services provided by its competitors.

     In addition to providing communication services, the Company designs,
sells, services and operates, on behalf of certain customers, dedicated
communication and computer networking equipment and provides field/depot, third
party, technical support, consulting and outsourcing services through its
systems sales and service business. The Company also supplies integrated voice
and data communication systems incorporating interstate and intrastate digital
private lines, point-to-point and multipoint private network and small earth
station services. The Company's equipment sales and services revenue totaled
$10.2 million in the year ended December 31, 1997, or approximately 4.6% of
total revenues. Presently, there are five companies in Alaska that actively sell
and maintain data and voice communication systems.

     The Company's ability to integrate telecommunications networks and data
communication equipment has allowed it to maintain its market position on the
basis of "value added" support rather than price competition. The Company has
expanded its technical services business to include outsourcing, onsite
technical contract services and telecommunications consulting. The Company has
consolidated its technical services business into a new department, Enterprise
Services. This department provides a number of technical operating and
engineering services directly to commercial customers. These services are
blended with other transport products into unique customer solutions, including
managed services and outsourcing.

      The Company, using its new demand assigned multiple access ("DAMA")
facilities, expanded its network to 56 additional locations within the State of
Alaska in 1996. The digital DAMA system allows calls to be made between remote
villages using only one satellite hop thereby reducing satellite delay and
capacity requirements while improving quality. The Company obtained the
necessary Alaska Public Utilities Commission ("APUC") and FCC approvals waiving
current prohibitions against construction of competitive facilities in rural
Alaska, allowing for deployment

                                      -8-
<PAGE>

of DAMA technology in 56 sites in rural Alaska on a demonstration basis.
Construction and partial deployment occurred in 1996, with deployment completed
in 1997. At December 31, 1997 all but four sites were operating. The remaining
sites are expected to begin operations in 1998. Construction, deployment and
upgrade costs totaled $23.0 million through December 31, 1997.

     The FCC concluded an auction of spectrum to be used for the provision of
PCS in March 1995. The FCC named the Company as the high bidder for one of the
two 30 megahertz blocks of spectrum, with Alaska statewide coverage. Acquisition
of the license for a cost of $1.7 million is anticipated to allow the Company to
introduce new PCS services in Alaska.

     Cable Services. The programming services offered to subscribers of the
Company's cable television systems differ by system (all information as of
December 31, 1997).

     Anchorage, Bethel, Kenai and Soldotna systems. Each system offered a basic
service. In addition, Anchorage and Bethel offer a cable programming service
("CPS"). A new product tier ("NPT") is only offered in the Anchorage cable
system. The Anchorage system, which is located in the urban center for Alaska,
is fully addressable, with all optional services scrambled, aside from the
broadcast basic. Kenai, Soldotna, and Bethel had fewer channels, less service
options and less an urban orientation, and use traps for program control. As a
result, these smaller systems do not have access to pay-per-view services. These
systems are expected to be upgraded in 1998, which will provide additional
channel capacity and capabilities that will allow for new services such as
pay-per-view and two-way transmissions.

     The composition and rates of the levels of service vary between the
systems. The Anchorage cable system offers a basic service that includes
18-channels. The Anchorage cable system offers a CPS that includes 26 channels
at an additional cost. Subscribers, for an additional cost, receive the six
channel NPT service which includes TNT, CNN, Discovery, MSNBC, Outdoor Life and
the Sci-/Fi Channel. The Bethel cable system offers a basic service and a CPS of
13 channels for an additional cost per month. The basic service for the
Kenai/Soldotna cable system consisted of 32 channels. Pay TV services are
available either individually or as part of a discounted value package.
Commercial subscribers such as hospitals, hotels and motels were charged
negotiated monthly service fees. Apartment and other multi-unit dwelling
complexes received basic services at a negotiated bulk rate.

     Fairbanks, Juneau, Ketchikan and Sitka systems. The programming services
currently offered to subscribers are structured so that each cable system
offered a basic service and a CPS. Each of the cable systems has different basic
service packages at different rates. Fairbanks, the second largest city in
Alaska, has a fully addressable system and offers a 12-channel basic and 33
channel CPS tier. Two channels of pay-per-view are available to basic and CPS
subscribers. Fairbanks, North Pole, Fort Wainwright, and Eielson Air Force Base
are all served by the Fairbanks headend and have the same lineup. Fort Greely, a
remote military post, is a stand-alone system, which is fully addressable. Fort
Greely has 8 basic channels, a 21-channel CPS tier, and 1 pay-per-view channel
available to all subscribers. The Juneau cable system offered an 11-channel
basic service package and a Tier 1 that included the basic service plus an
additional 4 channels. The system also offered a CPS Tier 2 that consisted of
the basic service plus Tier 1 service and additional 34 channels. The Ketchikan
system offered an 8-channel basic service and a CPS Tier 1 that consisted of the
basic service plus 33 additional channels. The system also offered a NPT Tier 2
that consisted of the basic service, the


                                      -9-
<PAGE>

CPS Tier 1 and an additional 5 channels. The Sitka system offered an 8 channel
basic service. An expanded basic service included the basic service plus 38
additional channels.

     The Juneau, Ketchikan and Sitka systems are expected to be upgraded in
1998. When complete, the systems will have the capacity to add an additional 16
channels. The Juneau and Ketchikan systems are expected to become addressable in
1998 allowing the introduction of additional pay-per-view channels.

     Kodiak, Valdez, Cordova, Petersburg, Wrangell, Kotzebue and Nome systems.
These systems offered up to 30 channels of the most popular basic cable
channels, as well as the major broadcast networks, packaged into three levels of
service. The basic service consisted of three channels, one of which was a PBS
channel. The CPS Tier 1 (which included the basic service) had either 24 or 25
channels. The CPS Tier 2 had between 8 and 14 cable channels. In addition, each
system offered 4 or 5 channels of premium pay services, except for Kodiak, which
offered 8 channels of premium pay services and 3 channels of pay-per-view
programming. In 1994, the Kodiak cable system was rebuilt to allow added channel
capacity. At that time, addressability was added to the system in order to add
the 3 channels of pay-per-view movies. In 1998 Kodiak, Kotzebue, Nome, Valdez
and Cordova plant upgrades are expected to be completed allowing for additional
services and new technology.

     Seward system. The Seward cable system was upgraded in 1997. Total channels
were increased to 49 channels offered, packaged into two levels of service.
Basic service was expanded from 3 to 8 channels. CPS had 30 channels (including
the basic service) and was expanded to 44. All of the channels, with the
exception of local origination programming and a single translator channel
licensed to the City of Seward, were received via satellite. In addition there
were five channels of premium pay services. The system is fully addressable. The
system provides 12 channels to 300 outlets in a State of Alaska correction
facility through a separate receive and headend site.

     Homer system. The Homer cable system was upgraded in 1997. Total channels
were increased to 50 packaged into two levels of service. Basic service was
expanded from 8 channels to 12. CPS had 36 channels (including the basic service
channels) and was expanded to 45 channels. All of the channels, with the
exception of four local translator channels and local origination programming,
are received via satellite. In addition, five channels of premium pay services
are offered. The system is fully addressable.

      Local Services. The Company began offering local exchange services
initially in Anchorage during late September 1997. The Company's digital loop
carrier ("DLC") system allows the Company to offer its own full featured,
switched-based local service products to both residential and commercial
customers. The Company can gain access to approximately 95% of the Anchorage
area local loops from colocated remote facilities and DLC installations. In
areas where the company does not have access to loop facilities, it offers
resale of the Anchorage Telephone Utility's ("ATU") local service. ATU is a
public utility owned by the Municipality of Anchorage.


                                      -10-
<PAGE>

Seasonality

      Long distance revenues have historically been highest in the summer months
as a result of temporary population increases attributable to tourism and
increased seasonal economic activity such as construction, commercial fishing,
and oil and gas activities. Cable television revenues, on the other hand, are
higher in the winter months because consumers tend to watch more television, and
spend more time at home, during these months. Local service operations are not
expected to exhibit significant seasonality. The Company's ability to implement
construction projects is also reduced during the winter months because of cold
temperatures, snow and short daylight hours.

Customer-sponsored research.

     The Company has not expended material amounts during the last three fiscal
years on customer-sponsored research activities.

Facilities

     Telecommunication Services. Currently, the Company's telecommunication
facilities comprise earth stations at Eagle River, Fairbanks, Juneau, Prudhoe
Bay, Valdez, Kodiak, Sitka, Ketchikan, Unalaska and Cordova, all in Alaska and
at Issaquah, Washington, serving the communities in their vicinity. The Eagle
River and Fairbanks earth stations are linked by digital microwave facilities to
distribution centers in Anchorage and Fairbanks, respectively. The Issaquah
earth station is connected with the Seattle distribution center by means of
diversely routed fiber optic cable transmission systems, each having the
capability to restore the other in the event of failure. The Juneau earth
station and distribution centers are co-located. The Ketchikan, Prudhoe Bay,
Valdez, Kodiak, Sitka, Unalaska and Cordova installations consist only of an
earth station. The Company constructed microwave facilities serving the Kenai
Peninsula communities and owns a 49 percent interest in an earth station located
on Adak Island in Alaska. The Company maintains an operator service center in
Wasilla, Alaska. Each of the distribution centers contains electronic switches
to route calls to and from local exchange companies and, in Seattle, to obtain
access to MCI and other facilities to distribute the Company's southbound
traffic to the remaining 49 states and international destinations. During 1996,
the Company expanded its network by constructing DAMA earth station facilities
in 56 additional communities in rural Alaska.

     Leasing Company owns a portion of an undersea fiber optic cable which
allows the Company to carry its Anchorage, Eagle River, Wasilla, Palmer, Kenai
Peninsula, Glenallen and approximately one-half of its Fairbanks area traffic to
and from the contiguous lower 48 states over a terrestrial circuit, eliminating
the one-quarter second delay associated with a satellite circuit. The Company's
preferred routing for this traffic is via the undersea fiber optic cable, which
makes available satellite capacity to carry the Company's intrastate traffic.

     The Company employs satellite transmission for certain other major routes
and uses advanced digital transmission technology throughout its system.
Pursuant to a purchase and lease-purchase option agreement entered into in
August 1995 the Company leases C-band transponders on Hughes Communications
Galaxy, Inc. ("Hughes") Galaxy IX satellite and has agreed to acquire satellite
transponders on Hughes Galaxy X satellite to meet its long-term satellite
capacity requirements. The Galaxy X satellite is expected to be placed in
service during the third quarter of 1998. The Company


                                      -11-
<PAGE>

paid a $9.1 million deposit to Hughes during 1996. The balance payable upon
expected delivery of the transponders in 1998 is not expected to exceed $41
million.

     The Company employs advanced transmission technologies to carry as many
voice circuits as possible through a satellite transponder without sacrificing
voice quality. Other technologies such as terrestrial microwave systems,
metallic cable, and fiber optics tend to be favored more for point-to-point
applications where the volume of traffic is substantial. With a sparse
population spread over a wide geographic area, neither terrestrial microwave or
fiber optic transmission technology will be economically feasible in rural
Alaska in the foreseeable future.

     Cable Services. The Company's cable television businesses are located in
Anchorage, Eagle River, Chugiak, Peters Creek, Kenai, Soldotna, Bethel, Fort
Richardson, Elmendorf Air Force Base, Fairbanks, Fort Wainwright, North Pole,
Fort Greely, Eielson Air Force Base, Juneau, Sitka, Ketchikan, Petersburg,
Wrangell, Cordova, Homer, Sitka, Valdez, Kodiak, Kotzebue, and Nome, Alaska.
Company facilities include cable plant and head-end distribution equipment.
Certain of the head-end distribution centers are co-located with customer
service and administrative offices.

     Local Telecommunication Services. During 1997 the Company installed a host
5ESS switching system. Additionally the Company colocated beside or within ATU's
local switching offices six (6) remote facilities to access unbundled loop
network elements. In February 1998 the Company installed a digital loop carrier
system beside a smaller, seventh ATU wire center. These remote and DLC
facilities are interconnected to the host switch via Company-owned diversely
routed fiber optic links.

Customers

     Telecommunication Services. The Company had approximately 89,000, 93,900
and 85,600 active Alaska subscribers to its message telephone service at
December 31, 1997, 1996 and 1995, respectively. Approximately 11,500, 11,000 and
9,500 of these were business and government users at December 31, 1997, 1996 and
1995, respectively, and the remainder were residential customers. MTS revenues
averaged approximately $10.9 million per month during 1997.

     Substantially all service areas, in which the Company has facilities,
except Bethel, Alaska and most locations serviced by DAMA facilities, have
completed the equal access balloting process. The Company estimates it carries
33% to 49% of the southbound interstate MTS traffic and 21% to 48% of the
intrastate MTS traffic originating in those service areas.


                                      -12-
<PAGE>

A summary of switched MTS traffic minutes follows:

<TABLE>
<CAPTION>

                                                Interstate Minutes
                                      -----------------------------------
                                                                                           Combined
                                                                              Inter-    Interstate and
                                        South-      North-       Calling      national   International   Intrastate
For Quarter ended                       bound       bound         Card        Minutes        Minutes       Minutes
-------------------------------------------------------------------------------------------------------------------
                                                                (amounts in thousands)
<S>                                     <C>         <C>         <C>           <C>       <C>              <C>
March 31, 1995                          58,759      41,600        4,351         1,381         106,091       21,208
June 30, 1995                           63,475      43,721        4,113         1,556         112,865       23,051
September 30, 1995                      70,219      45,027        4,233         1,699         121,178       23,883
December 31, 1995                       70,570      46,545        5,518         1,749         124,382       25,228
                                       -------     -------       ------         -----         -------      -------

    Total 1995                         263,023     176,893       18,215         6,385         464,516       93,370

                                       -------     -------       ------         -----         -------      -------
                                       -------     -------       ------         -----         -------      -------
March 31, 1996                          76,369      49,158        6,094         1,890         133,511       28,910
June 30, 1996                           81,753      51,465        6,049         1,964         141,231       30,671
September 30, 1996                      86,094      52,856        6,453         1,896         147,299       31,253
December 31, 1996                       82,255      55,675        7,863         1,774         147,567       30,374
                                       -------     -------       ------         -----         -------      -------

    Total 1996                         326,471     209,154       26,459         7,524         569,608      121,208

                                       -------     -------       ------         -----         -------      -------
                                       -------     -------       ------         -----         -------      -------
March 31, 1997                          83,284      56,588        8,110         1,741         149,723       32,020
June 30, 1997                           85,933      58,420        7,189         1,795         153,337       34,405
September 30, 1997                      93,510      60,390        5,530         1,842         161,272       34,755
December 31, 1997                       87,657      61,992        5,157         1,703         156,509       31,962
                                       -------     -------       ------         -----         -------      -------

    Total 1997                         350,384     237,390       25,986         7,081         620,841      133,142

                                       -------     -------       ------         -----         -------      -------
                                       -------     -------       ------         -----         -------      -------
</TABLE>
------------------

     All minutes data were taken from the Company's billing statistics reports.

     In 1993, the Company entered into a significant business relationship
with MCI which includes the following agreements: (1) the Company agreed to
terminate all Alaska-bound MCI long distance traffic and MCI agreed to
terminate all of the Company's long distance traffic terminating in the lower
49 states excluding Washington, Oregon and Hawaii; (2) MCI licensed certain
service marks to the Company for use in Alaska; (3) MCI, in connection with
providing to the Company credit enhancement to permit the Company to purchase
an undersea cable linking Seward, Alaska, with Pacific City, Oregon, leased
from the Company all of the capacity owned by the Company on the undersea
fiber optic cable and the Company leased such capacity back from MCI; (4) MCI
purchased certain service marks of the Company; and (5) the parties agreed to
share some communications network resources and various marketing,
engineering and operating resources. The Company also handles MCI's 800 and
888 traffic originating in Alaska and terminating in the lower 49 states and
handles traffic for MCI's calling card customers when they are in Alaska.
Concurrently with these agreements, MCI purchased approximately 31% (19.3% as
of December 31, 1997) of General Communication, Inc.'s Common Stock and
presently controls nominations to two seats on the Board. In conjunction with
the Cable Acquisition Transactions, MCI purchased an additional two million
shares at a premium to the then current market price for $13 million or $6.50
per share.

                                      -13-

<PAGE>

     Revenues attributed to the MCI Agreement in 1997, 1996, and 1995 totaled
$34.3 million, $29.2 million and $23.9 million, or 15.3%, 17.7% and 18.5% of
total revenues, respectively. The contract was amended in March 1996
extending its term three years to March 31, 2001. The amendment also reduced
the rate in dollars to be charged by the Company for certain MCI traffic for
the period April 1, 1996 through July 1, 1999 and thereafter. With the
amendments, the Company is assured that MCI, the Company's largest customer,
will continue to make use of the Company's service during the extended term.

     In 1993 the Company entered into a long-term agreement with Sprint,
pursuant to which the Company agreed to terminate all Alaska-bound Sprint
long-distance traffic and Sprint agreed to handle substantially all of the
Company's international traffic. Services provided pursuant to the contract
with Sprint resulted in revenues in 1997, 1996 and 1995 of approximately
$24.4 million, $18.8 million and $14.9 million, or approximately 10.9%, 11.4%
and 11.5% of total revenues, respectively.

     Both MCI and Sprint are major customers of the Company in its
telecommunication services industry segment. Loss of one or both of these
customers would have a significant detrimental effect on the Company's
revenues and contribution. There are no other individual customers, the loss
of which would have a material impact on the Company's revenues or gross
profit.

      The Company provided private line and private network communication
products and services to approximately 781 commercial and government accounts
in 1997. Private lines and private network communication products and
services generated approximately 7.1% of total long-distance revenues in the
year ended December 31, 1997.

     Although the Company has several agreements to facilitate the
origination and termination of international toll traffic, it has neither
foreign operations nor export sales (see--Foreign and Domestic Operations and
Export Sales).

     Cable Services. As of December 31, 1997 the Company cable systems passed
approximately 167,500 homes or approximately 78% of all households in Alaska,
and served approximately 108,000 subscribers. 1997 revenues derived from
cable television services totaled $55.2 million.

     Local Services. The Company had approximately 3,300 active Anchorage
subscribers to its local telecommunication service at December 31, 1997. 1997
revenues derived from local services totaled $610,000.

Alaska Voice, Video and Data Markets

     The Alaskan voice, video and data markets are unique within the United
States. Alaska is physically distant from the rest of the United States and
is characterized by large geographical size and relatively small, dense
population clusters (with the exception of population centers such as
Anchorage, Fairbanks and Juneau). It lacks a well-developed terrestrial
transportation infrastructure, and the majority of Alaska's communities are
accessible only by air or water. As a result, Alaska's telecommunications
networks are different from those found in the lower 49 states.

     Alaska today relies extensively on satellite-based long distance
transmission for intrastate calling between remote communities where
investment in a terrestrial network would be uneconomic or

                                      -14-

<PAGE>

impractical. Also, given the remoteness of Alaska's communities and lack, in
many cases, of major civic institutions such as hospitals, libraries and
universities, Alaskans are dependent on telecommunications to access the
resources and information of large metropolitan areas in the rest of the U.S.
and elsewhere. In addition to satellite-based communications, the
telecommunications infrastructure in Alaska includes traditional copper wire,
digital microwave links between Anchorage and Fairbanks and Juneau and fiber
optic cable. For interstate and international communication, Alaska is
currently connected to the lower 49 states by undersea fiber optic cable with
a capacity of nine DS3s and is backed-up by additional satellite capacity.

     Prior to 1982, Alascom was the sole long distance carrier in Alaska.
Under an agreement with the State of Alaska, Alascom was required to maintain
a number of low bandwidth links and expand service to remote or less
developed areas of the state. Interstate rates initially charged for Alaska
telecommunications services had been substantially higher than interstate
rates in the contiguous 48 states. In 1972, the FCC established a policy of
rate integration intended to equalize all domestic interstate rates based on
distances of calls. This policy was used to support a subsidy mechanism to
help Alascom cover higher costs associated with rural operations. When the
Company began providing interstate long distance service in 1982, AT&T Corp.
("AT&T") provided almost all of the telecommunications services in the lower
49 states, and Alascom provided almost all of the long distance
telecommunications services in Alaska and between Alaska and the lower 49
states and foreign countries. Although Alascom's business was highly
subsidized, the Company competed against Alascom without the advantage of a
subsidy. In 1983, the State of Alaska petitioned the FCC to initiate a
rulemaking to determine how to rationalize the policies of rate integration
and competition in the Alaska market in light of the rapid changes in the
telecommunications industry brought on by the AT&T divestiture and changing
FCC competition policies. This action ultimately led to a negotiated purchase
of Alascom from Pacific Telecom, Inc. ("PTI") by AT&T in August 1995 for
consideration of approximately $350 million. After the purchase, Alascom
changed its name to AT&T Alascom.

     The Alaskan telecommunications business today comprises three distinct
markets: long distance services (interstate and intrastate), local exchange
services and wireless communications services (cellular and eventually PCS).
In the local exchange market, the Company will compete against various
incumbent local exchange carriers including ATU in Anchorage and PTI in
Juneau. PTI acquired the local exchange portion of the Fairbanks Municipal
Utilities System in 1997 and now provides local exchange services in
Fairbanks. In the wireless communications services market, the Company's PCS
business expects to compete against the cellular subsidiaries of AT&T and ATU
in the Anchorage market and the cellular subsidiaries of PTI and others
outside of Anchorage. In the long distance market, the Company competes
against AT&T Alascom, ATU and the Matanuska Telephone Cooperative and may in
the future compete against new market entrants. For calendar year 1997, the
Company estimates that the aggregate telecommunications market in Alaska
generated revenues of approximately $758 million. Of this amount,
approximately $433 million was attributable to interstate and intrastate long
distance service, $289 million was attributable to local exchange services,
and $36 million was attributable to wireless communications services.

     The market for programmed video services in Alaska includes traditional
broadcast television, cable television, wireless cable, and DBS systems.
Broadcast television stations including network affiliates and independent
stations serve the urban centers in Alaska. Seven, four and two broadcast
stations serve Anchorage, Fairbanks and Juneau, respectively. In addition,
several smaller communities such as Bethel are served by one local television
station. In addition, other rural

                                      -15-

<PAGE>

communities without cable systems receive a single state sponsored channel of
television by a satellite dish and a low power transmitter.

     In Alaska, cable television was introduced in the 1970s to provide
television signals to communities with few or no available off-air television
signals and to communities with poor reception or other reception
difficulties caused by terrain interference. Since that time, as on the
national level, the cable television providers in Alaska have added
non-broadcast programming, utilized improved technology to increase channel
capacity and expanded service markets to include more densely populated areas
and those communities in which off-air reception is not problematic.

     At present 26 communities and areas in Alaska, including the state's
three largest urban areas (Anchorage, Fairbanks and Juneau) are served by the
Company's cable systems. A number of cable operators other than the Company
provide cable service in Alaska. All of these companies are relatively small,
with the largest having fewer than 6,500 subscribers.

Competition

     The Company is one of Alaska's leading providers of telecommunication
and cable television services and maintains a strong competitive position.
There is active competition in the sale of substantially all products and
services offered by the Company.

     The principal methods of competition in the Company's services are
customer service, product innovation, quality and price. The Company believes
that its competitive strength rests on its customer service capabilities, its
state-of-the-art facilities, its ability to develop new and improved products
and services in response to the needs of its customers, and the consistent
high quality of its products and services.

     Telecommunication Services. The telecommunications industry is intensely
competitive, rapidly evolving and subject to constant technological change.
Competition is based upon price and pricing plans, the types of services
offered, customer service, billing services, perceived quality, reliability
and availability. Certain of the Company's competitors are substantially
larger and have greater financial, technical and marketing resources than the
Company. Although the Company believes it has the human and technical
resources to pursue its strategy and compete effectively in this competitive
environment, its success will depend upon its ability to profitably provide
high quality, high value services at prices generally competitive with, or
lower than, those charged by its competitors.

     The Company's principal competitor in long distance services, AT&T
Alascom, has substantially greater resources than the Company. This
competitor's interstate rates are integrated with those of AT&T Corp. and are
regulated in part by the FCC. While the Company initially competed based upon
offering substantial discounts, those discounts have been eroded in recent
years due to lowering of prices by AT&T Alascom. Under the terms of AT&T's
acquisition of Alascom, AT&T Alascom rates and services must "mirror" those
offered by AT&T, so changes in AT&T prices indirectly affect the rates and
services of the Company. AT&T's and AT&T Alascom's interstate prices are
regulated under a price cap plan whereby their rate of return is no longer
regulated or restricted. Price increases by AT&T and AT&T Alascom generally
improve the Company's ability to raise its prices while price decreases
pressure the Company to follow. The Company has, so far, successfully
adjusted its pricing and marketing strategies to respond to AT&T pricing
practices.

                                      -16-

<PAGE>

However, if AT&T Alascom significantly lowers its rates, the Company may be
forced to reduce its rates, which could have a material adverse effect on the
Company.

     As allowed under the 1996 Telecom Act, ATU and other LECs entered the
interstate and international long distance market and pursuant to APUC
authorization entered the intrastate long distance market in 1997. ATU and
other LECs resell other carriers' services in the provision of their
interstate and intrastate long distance services.

     Cable Services. Cable television systems face competition from
alternative methods of receiving and distributing television signals and from
other sources of news, information and entertainment such as off-air
television broadcast programming, newspapers, movie theaters, live sporting
events, interactive computer services and home video products, including
videotape cassette and video disks. The extent to which a cable television
system is competitive depends, in part, upon the cable system's ability to
provide quality programming and other services at competitive prices.

     The 1996 Telecom Act authorizes LECs and others to provide a wide
variety of video services competitive with services provided by cable systems
and to provide cable services directly to subscribers. Certain LECs in Alaska
may seek to provide video services within their telephone service areas
through a variety of distribution methods. Cable systems could be placed at a
competitive disadvantage if the delivery of video services by LECs becomes
widespread since LECs may not be required, under certain circumstances, to
obtain local franchises to deliver such video services or to comply with the
variety of obligations imposed upon cable systems under such franchises.
Issues of cross-subsidization by LECs of video and telephony services also
pose strategic disadvantages for cable operators seeking to compete with LECs
who provide video services.

     Cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis. The 1992 Cable Act gives local franchising
authorities jurisdiction over basic cable service rates and equipment in the
absence of "effective competition," prohibits franchising authorities from
unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable systems. Well-financed businesses
from outside the cable industry (such as the public utilities that own
certain of the poles on which cable is attached) may become competitors for
franchises or providers of competing services.

     The Cable Systems face limited additional competition from private
satellite master antenna television ("SMATV") systems that serve
condominiums, apartment and office complexes and private residential
developments. The operators of these SMATV systems often enter into exclusive
agreements with building owners or homeowners' associations. Due to the
widespread availability of reasonably priced earth stations, SMATV systems
now can offer both improved reception of local television stations and many
of the same satellite-delivered program services offered by franchised cable
systems. The ability of the Cable Systems to compete for subscribers in
residential and commercial developments served by SMATV operators is
uncertain. The 1996 Telecom Act gives cable operators greater flexibility
with respect to pricing of cable television services provided to subscribers
in multi-dwelling unit residential and commercial developments. It also
broadens the definition of SMATV systems not subject to regulation as a
franchised cable television service.

                                      -17-

<PAGE>

     The availability of reasonably-priced home satellite dish earth stations
("HSDs") enables individual households to receive many of the
satellite-delivered program services formerly available only to cable
subscribers. Furthermore, the 1992 Cable Act contains provisions, which the
FCC has implemented with regulations, to enhance the ability of cable
competitors to purchase and make available to HSD owners certain
satellite-delivered cable programs at competitive costs.

     In recent years, the FCC and the Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable systems. These technologies include, among others, DBS
services that transmit signals by satellite to receiving facilities located
on the premises of subscribers. Programming is currently available to the
owners of DBS facilities through conventional, medium and high-powered
satellites.

     DBS systems are expected to use video compression technology to increase
the channel capacity of their systems to provide movies, broadcast stations
and other program services competitive with those of cable systems. The
extent to which DBS systems are competitive with the service provided by
cable systems depends, among other things, on the availability of reception
equipment at reasonable prices and on the ability of DBS operators to provide
competitive programming. DBS services do not currently provide local
programming and DBS signals are subject to degradation from atmospheric
conditions such as rain and snow. The receipt of DBS signals in Alaska
currently has the disadvantage of requiring subscribers to install larger
satellite dishes (generally three to six feet in diameter) because of the
weaker satellite signals currently available in northern latitudes. In
addition, existing satellites have a relatively low altitude above the
horizon when viewed from Alaska, making their signals subject to interference
from mountains, buildings and other structures.

     Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS")
providers which use low-power microwave frequencies to transmit video
programming over-the-air to subscribers. There are MMDS operators who are
authorized to provide or are providing broadcast and satellite programming to
subscribers in areas served by several of the Company's cable systems,
including Anchorage, Fairbanks and Juneau. Additionally, the FCC has
allocated frequencies in the 28 gHz band for a new multichannel wireless
video service similar to MMDS. MMDS operations have the disadvantage of
requiring line-of-sight access, making their signals subject to interference
from mountains, buildings and other structures, and are subject to
interference from rain, snow and wind. In 1997 ATU purchased a minority
interest in a MMDS provider that currently provides service in some portions
of Anchorage and Fairbanks. At this time, the MMDS service has not been
integrated with ATU's telecommunications services. The Company is unable to
predict whether wireless video services will have a material impact on its
operations.

     Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information
useful both to consumers and businesses. The FCC also permits commercial and
non-commercial FM stations to use their subcarrier frequencies to provide
non-broadcast services including data transmissions. The FCC established an
over-the-air interactive video and data service that will permit two-way
interaction with commercial and educational programming along with
informational and data services. LECs and other common carriers also provide
facilities for the transmission and distribution to homes and businesses of
interactive computer-based services, including the Internet, as well as data
and other non-video services. The

                                      -18-

<PAGE>

FCC has conducted spectrum auctions for licenses to provide PCS. PCS will
enable license holders, including cable operators, to provide voice and data
services. The Company acquired a license to provide PCS services in Alaska.

     Advances in communications technology as well as changes in the
marketplace are constantly occurring. The Company cannot predict the effect
that ongoing or future developments might have on the telecommunications and
cable television industries or on the Company specifically.

     Local Services. In the local exchange services market, the Company
believes that the 1996 Telecom Act and state legislative regulatory
initiatives and developments, as well as a recent series of transactions and
proposed transactions between telephone companies, long distance carriers and
cable companies, increase the likelihood that barriers to local exchange
competition will be substantially reduced or removed. These initiatives
include requirements that local exchange carriers negotiate with entities
such as the Company to provide interconnection to the existing local
telephone network, to allow the purchase, at cost-based rates, of access to
unbundled network elements, to establish dialing parity, to obtain access to
rights-of-way and to resell services offered by the incumbent local exchange
carriers.

     Local exchange carriers in Alaska outside of Anchorage have a "rural
exemption" from some of their obligations until and unless the exemption is
terminated by the APUC. Certain pricing provisions of the Interconnection
Decision implementing the interconnection portions of the 1996 Telecom Act
have been challenged and are currently stayed by the U.S. Court of Appeals
for the Eighth Circuit, on a jurisdictional basis. In addition the 1996
Telecom Act expressly prohibits any legal barriers to competition in
intrastate or interstate communications service under state and local laws.
The 1996 Telecom Act further empowers the FCC, after notice and an
opportunity for comment, to preempt the enforcement of any statute,
regulation or legal requirement that prohibits, or has the effect of
prohibiting, the ability of any entity to provide any intrastate or
interstate telecommunications service.

     In early 1997 the Company received approval from the APUC to provide
local exchange services throughout ATU's existing service area. The APUC also
approved an interconnection agreement negotiated and arbitrated between the
Company and ATU pursuant to the terms of the 1996 Telecom Act. By early 1998,
the Company has positioned itself to offer local exchange services to
substantially all consumers in the ATU service area, primarily through its
own facilities and unbundled local loops leased from ATU.

     The 1996 Telecom Act also provides incumbent local exchange carriers
with new competitive opportunities. The Company believes that it has certain
advantages over these companies in providing its telecommunications services,
including the Company's brand awareness by Alaskan customers, its facilities
based telecommunications network, and management's prior experience in, and
knowledge of, the Alaskan market. The 1996 Telecom Act provides that rates
charged by incumbent local exchange carriers for interconnection to the
incumbent carrier's network are to be nondiscriminatory and based upon the
cost of providing such interconnection, and may include a "reasonable
profit," which terms are subject to interpretation by regulatory authorities.
If the incumbent local exchange carriers charge alternative providers such as
the Company unreasonably high fees for interconnection to the local exchange
carriers' networks, or significantly lower their retail rates for local
exchange services, the Company's local service business could be placed at a
significant competitive disadvantage.

                                      -19-

<PAGE>

     Wireless Services. Competition for the Company's proposed PCS services
will come primarily from traditional cellular providers and new PCS entrants.
Anchorage has mature cellular systems in both the wireline (ATU) and
non-wireline (AT&T Wireless) license blocks that together have achieved an
estimated 20% penetration of potential subscribers based on the number of
existing wireline access lines. Fairbanks and Juneau have not achieved the
cellular penetration that has occurred in Anchorage. Cellular pricing has
been high in Alaska compared to the lower 48 states, but rates in Anchorage
have become more competitive since the Company entered the cellular resale
market three years ago.

     Of the five other PCS licensees, the Alaska A block PCS license owner
has announced plans for service in Alaska as early as 1998. The high cost per
POP of a PCS system infrastructure may deter some license owners from
building a system. PCS has the potential disadvantage when compared to
cellular service of requiring the licensee to enter into interconnection
agreements with cellular providers in order to permit PCS subscribers with
dual mode handsets to continue to receive service once they stray from the
PCS service area. However, the Company believes that the portion of the
Alaska population, which will need to operate outside the Company's planned
PCS service areas, is small.

Financial Information About Industry Segments

      For financial information with respect to industry segments of the
Company, reference is made to the information set forth in note 9 of the
Notes   to Consolidated Financial Statements included in Part II of this
Report.

Recent Developments

     Financing Completed. The Company completed a major financing effort in
August 1997 which raised $550 million through a combination of the issuance
of 7 million shares of General Communication, Inc. class A common stock, sale
of senior notes totaling $180 million, and refinancing its credit agreements.
More than $350 million of these proceeds will be invested in new
telecommunication facilities in Alaska over the next five years. Part of this
investment will be the Company's $125 million fiber optic project called
Alaska United. The balance will complete a major upgrade and expansion of the
Company's telecommunications and cable systems throughout the state and the
purchase of new satellite transponders. These systems will be connected to
each other and the lower 48 by the Alaska United fiber and the Company's
satellite systems.

     Alaska United Project. The Alaska United project will provide a high
capacity fiber optic link between Fairbanks, Anchorage, Valdez, and Juneau,
Alaska, and the lower 48 states through Seattle, Washington. Its initial
capacity will be more than five times the maximum capacity of Alaska's
current undersea fiber to the lower 48. After a preliminary route survey was
completed and initial cost components determined, a detailed sea floor survey
was commissioned and completed in 1996. The results of this survey pinpointed
the exact route that the Alaska United fiber would take. The Company entered
into a contract with Tyco Submarine Systems, Ltd. ("TSS"), one of the world's
leading submarine cable vendor which has installed more than 150,000 miles of
undersea cable. TSS is to design, engineer, manufacture and install the
undersea cable. On August 1, 1997 the Company issued a down payment to TSS to
begin construction. Manufacturing of the cable and its electronics has been
underway since that time. The cable is expected to be laid from August to

                                      -20-

<PAGE>

October 1998. Testing will occur after that, and services are expected to
commence in December 1998.

     Alaska United will land in Whittier, Valdez and Juneau, Alaska. From
Whittier, the fiber will follow the railroad, highway, and over-land
rights-of-ways to Anchorage. Between Whittier and Valdez, the Company will
construct a second undersea fiber optic cable. The cable will connect in
Valdez with a fiber being constructed by Kanas Telecom, Inc. ("Kanas") as
described below. In Juneau and Seattle, Alaska United will connect to the
Company's existing network.

     The Alaska United fiber will be 2,331 miles long (1,995 miles undersea
and 336 over land). It will have a total design capacity of 10 billion bits
per second (22 times what is currently available); it can route traffic in
different directions in the event of equipment failures; and, once paired
with the Company's existing capacity on the North Pacific Cable, users can
achieve route diversity to achieve multiple fiber paths for back-up purposes.
It will deliver a minimum of 32,256 simultaneous clear channel voice or data
circuits at transmission speeds of 2.5 billion bits per second. As demand
increases, capacity can be quadrupled to support a minimum of 129,024
simultaneous clear channel voice or data circuits at speeds of 10 billion
bits per second. Currently, the only fiber optic cable connecting Alaska with
the contiguous United States is nearing its capacity limit of 6,048
simultaneous voice or data circuits at transmission speeds of 420 million
bits per second.

     Financing for the Alaska United undersea fiber project includes $75
million available through a new bank credit agreement dated January 27, 1998
and $50 million from funds raised through the issuance of senior notes
described above.

     Fiber Capacity Exchange. The Company and Kanas signed a contract
November 21, 1997 that provides for an exchange of fiber optic cable capacity
between Anchorage and Fairbanks via Valdez. The Company and Kanas will trade
"dark fiber" capacity connecting Fairbanks, Valdez, Whittier and Anchorage.
Dark fiber is fiber optic line capacity without the electronic equipment
needed to repeat the signal. Each company will provide their own electronic
equipment to place their fiber into service. The Company will provide Kanas
with dark fiber from Valdez to Anchorage. Kanas will provide the Company with
dark fiber between Valdez and Fairbanks. Demand for bandwidth capacity is
expected to grow sharply in the coming years to accommodate faster Internet
access, ISDN, new data services and higher transmission rates.

     The Company plans to build an underwater fiberoptic cable connecting
Valdez with Whittier, and will construct a new fiberoptic link from Whittier
to tie into the Company's Anchorage fiber network, all part of the Alaska
United Project described above. Kanas' fiber optic system will follow the
Trans-Alaska Pipeline from Valdez to Fairbanks, continuing north to Prudhoe
Bay. The system is expected to be available for commercial service during
December of 1998.

     Acquisition. Effective December 2, 1997, the Company purchased all of
the outstanding shares of Astrolabe Group, Inc. ("Astrolabe"). Astrolabe was
founded in 1995 as a technology management-consulting firm helping Alaska
based clients effectively plan, implement and operationally manage their
network and information system investments. Astrolabe helps clients
throughout Alaska manage their rural telecommunication networks, distributed
information systems and distance delivery of health care educational
services. Astrolabe has been an integral part of the Company's School Access
project, providing the Internet software infrastructure central to the value
of the Company's distance education product offerings. Following the
acquisition, Astrolabe was

                                      -21-

<PAGE>

merged into GCI Communication Corp. and operates as a distinct division named
GCI Network Solutions. The $1,324,000 purchase was accounted for using the
purchase method. The purchase price consisted of a payment of $600,000 and
the issuance of options to purchase 100,000 shares of General Communication,
Inc.'s Class A common stock for $.01 per share.

     Local Services. PTI, the company providing local telephone services in
Fairbanks and Juneau, Alaska, petitioned the APUC to exempt them from local
service competition under the 1996 Telecom Act. PTI is owned by Century
Telephone Company of Louisiana, one of the largest independent telephone
companies in the Nation. The Company requested that the "rural exemption" be
terminated. In January 1998, the APUC denied the Company's request to
terminate the rural exemption. The basis of the APUC's decision was primarily
that various rulemaking proceedings (including Universal Service, local
competition, access charge reform, and rate restructuring) must be completed
before the exemption would be revoked. Those rulemaking proceedings are now
underway. Other legislative and judicial efforts are also underway to achieve
a change in the APUC ruling. The Company may, however, provide local service
on its own facilities to a limited number of consumers in Juneau and
Fairbanks.

     The Company believes local services competition is in the best interests
of consumers and intends to vigorously contest the APUC decision. The Company
cannot predict the effect that ongoing or future regulatory developments
might have on competitive local services markets in Alaska or on the Company
specifically.

     Expansion in Rural Alaska. Both the APUC and the FCC maintain a
restriction that prevents the Company from constructing duplicative satellite
earth stations to provide interexchange services to approximately 200 of the
smallest villages in Alaska. In 1995, the Company obtained a waiver to build
facilities in 50 of those villages. In the Company's opinion, the APUC
restriction has been preempted by section 253 of the 1996 Telecom Act, which
prevents any state from maintaining any rule that prohibits any entity from
providing any telecommunications service. The Company has requested the FCC
to preempt the APUC's restriction and the Company is also seeking a removal
of the federal restriction. Removal of both restrictions will enable the
Company to construct facilities throughout Alaska. Until that time, the
Company relies on the facilities of AT&T Alascom for the termination of
traffic.

     Cable Services Expansion. The Company completed construction of 109
miles of a planned 160 mile fiber optic Metropolitan Area Network ("MAN") in
Anchorage during 1996 and 1997, over which it began offering facilities-based
local service to selected major customers in those cases where it was
economically feasible to directly connect them to the network. Additionally,
the Metropolitan Area Network will provide supplemental capacity and
connectivity for cable television services and will improve the quality and
reliability of services. The Company plans to upgrade cable television
systems across the state with the installation of fiber optics and two-way
capability. This will allow the Company to add more channels, develop new
services and install cable modems that will provide high-speed access to the
Internet.

     Customer Service Integration. Customer service groups were consolidated
in the Company's call centers during 1997 and new customer service
representatives and support personnel were added throughout the state.
Consolidation of customer service across product lines allows customers to
access and change information and service from any of the Company's statewide
offices. Customer service hours were expanded to 24 hours a day 7 days a week
throughout the state.

                                      -22-
<PAGE>

Employees

     The Company and its subsidiaries employ approximately 950 persons as of
February 28, 1998. The Company and its subsidiaries are not parties to any
union contracts with their employees. The Company believes that its future
success will depend upon its continued ability to attract and retain highly
skilled and qualified employees. The Company believes that its relations with
its employees are satisfactory.

Environmental Regulations

     The Company and its subsidiaries may undertake activities that, under
certain circumstances may affect the environment. Accordingly, they are
subject to federal, state, and local regulations designed to preserve or
protect the environment. The FCC, the Bureau of Land Management, the U.S.
Forest Service, and the National Park Service are required by the National
Environmental Policy Act of 1969 to consider the environmental impact prior
to the commencement of facility construction. Management believes that
compliance with such regulations has no material effect on the Company's
consolidated operations. The principal effect of Company facilities on the
environment would be in the form of construction of facilities at various
locations in Alaska. Company facilities have been constructed in accordance
with federal, state and local building codes and zoning regulations whenever
and wherever applicable. Some facilities may be on lands that may be subject
to state and federal wetland regulation.

     Uncertainty as to the applicability of environmental regulations is
caused in major part by the federal government's decision to consider a
change in the definition of wetlands, however, none of the Company's
facilities has been constructed in areas which are subject to flooding,
tsunami's, etc. and as such are most likely to fall outside any new wetland
designation. Most of the Company's facilities are on lands leased by the
Company, and, with respect to all of these facilities, the Company is unaware
of any violations of lease terms or federal, state or local regulations
pertaining to preservation or protection of the environment.

     The Company's Alaska United project consists, in part, of deploying
fiber optic cable facilities between Anchorage, Whittier, Valdez, and Juneau,
Alaska and Seattle, Washington. The engineered route passes over wetlands and
other environmentally sensitive areas. The Company believes its construction
methods used for buried cable have a very minimal impact on the environment.
The agencies, among others, that are involved in permitting and oversight of
the Company's cable deployment efforts are the US Army Corps of Engineers,
The National Marine Fisheries Service, US Fish & Wildlife, US Coast Guard,
NOAA, Alaska Department of Natural Resources, and the Alaska Dept. of
Government Coordination. The Company is unaware of any violations of federal,
state or local regulations or permits pertaining to preservation or
protection of the environment.

     In the course of operating the cable television systems, the Company has
used various materials defined as hazardous by applicable governmental
regulations. These materials have been used for insect repellent, locate
paint and pole treatment, and as heating fuel, transformer oil, cable
cleaner, batteries, and in various other ways in the operation of those
systems. Management of the Company does not believe that these materials,
when used in accordance with manufacturer instructions, pose an unreasonable
hazard to those who use them or to the environment.

                                      -23-
<PAGE>

Foreign and Domestic Operations and Export Sales

      Although the Company has several agreements to facilitate the
origination and termination of international toll traffic, it has neither
foreign operations nor export sales. The Company conducts operations
throughout the western contiguous United States, Alaska and Hawaii and
believes that any subdivision of its operations into distinct geographic
areas would not be meaningful. Revenues associated with international toll
traffic were $7.6 million, $8.3 million and $7.1 million for the years ended
December 31, 1997, 1996 and 1995, respectively.

Backlog of Orders and Inventory

      As of December 31, 1997 and 1996, the Company's long distance services
 segment had a backlog of equipment sales orders of approximately $104,000
and $364,000, respectively. The decrease in backlog as of December 31, 1997
can be attributed primarily to faster completion of outstanding sales orders
in 1997 as compared to 1996. The Company expects that all of the orders in
backlog at the end of 1997 will be delivered during 1998.

Patents, Trademarks, Licenses, Certificates of Public Convenience and
Necessity, and Military Franchises

     Telecommunication and Local Services. Neither the Company nor its
affiliates hold patents, trademarks, franchises or concessions for
telecommunications services or local services. The Communications Act of 1934
gives the FCC the authority to license and regulate the use of the
electromagnetic spectrum for radio communication. The Company through its
long distance services industry segment holds licenses for its satellite and
microwave transmission facilities for provision of its telecommunication
services. The Company acquired a license for use of a 30-megahertz block of
spectrum for providing PCS services in Alaska. The PCS license has an initial
duration of 10 years. The Company expects to renew the PCS license for an
additional 10-year term under FCC rules. The Company's operations may require
additional licenses in the future.

     Cable Services. Applications for transfer of control of 15 certificates
of public convenience and necessity held by the acquired cable companies to
the Company were approved in an APUC order dated September 23, 1996, with
transfers to be effective on October 31, 1996. Such transfer of control
allowed the Company to take control and operate the cable systems of the
acquired cable companies located in Alaska.

     The approval of the transfer of the 15 certificates of public
convenience and necessity to the Company by the FCC is not required under
federal law, with one area of limited exception. The Cable Companies operate
in part through the use of several radio-band frequencies licensed through
the FCC. These licenses were transferred to the Company prior to October 31,
1996.

     The Company obtained consent of the military commanders at the military
bases serviced by the acquired cable systems to the assignment of the
respective franchises for those bases.

Regulation, Franchise Authorizations and Tariffs

     The following summary of regulatory developments and legislation does not
purport to



                                      -24-
<PAGE>

describe all present and proposed federal, state, and local regulation and
legislation affecting the telecommunications and cable television industries.
Other existing federal and state regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degrees, the manner in which these industries
operate. Neither the outcome of these proceedings nor their impact upon the
telecommunications and cable television industries or the Company can be
predicted at this time. This section also sets forth a brief description of
regulatory, environmental, and tariff issues pertaining to the operations of
the Company.

     The Company is subject to regulation by the FCC and by the APUC as a
non-dominant provider of long distance services. Among other regulatory
requirements, the Company is required to file tariffs with the FCC for
interstate and international service, and with the APUC for intrastate
service but such tariffs routinely become effective without intervention by
the FCC, APUC or other third parties since the Company is a non-dominant
carrier. The Company received approval from the APUC in February 1997 to
permit the Company to provide local exchange services throughout ATU's
existing service area. Military franchise requirements also affect the
Company in its provision of telecommunications and cable television services
to military bases.

     1996 Telecom Act. A key industry development was passage of the 1996
Telecom Act which was signed into law February 8, 1996. The Act is intended
by Congress to open up the marketplace to competition and is expected to have
a dramatic impact on the telecommunications industry. The legislation breaks
down the old barriers that prevented three groups of companies, the LECs,
including the RBOCs, the long distance carriers, and the cable TV operators,
from competing head-to-head with each other. The Act requires LECs to let new
competitors into their business. It also requires the LECs to open up their
networks to ensure that new market entrants have a fair chance of competing.
The bulk of the legislation is devoted to establishing the terms under which
the LECs, and more specifically the RBOCs, must open up their networks.

     Enactment of the bill affects local exchange service markets almost
immediately by requiring states to authorize local exchange service resale.
Resellers will be able to market new bundled service packages to attract
customers. Over the long term, the requirement that local exchange carriers
unbundle access to their networks may lead to increased price competition.
Local exchange service competition may not take hold immediately because
interconnection arrangements are not in place in most areas.

     The 1996 Telecom Act substantially changed the competitive and
regulatory environment for telecommunications providers by significantly
amending The Communications Act of 1934 including certain of the rate
regulation provisions previously imposed by the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). The 1996
Telecom Act provides that rate regulation of the cable programming service
tier will be phased out altogether in 1999. Further, the regulatory
environment will continue to change pending, among other things, the outcome
of legal challenges and FCC rulemaking and enforcement activity in respect of
the 1992 Cable Act and the completion of a significant number of FCC
rulemakings under the 1996 Telecom Act.

      The FCC adopted detailed rules in 1996 to govern interconnection to
incumbent local networks by new market entrants. Some LECs and state public
utility commissions appealed these rules to the U.S. Court of Appeals, which
prevented most of the pricing rules from taking effect, pending a full review
by the court.

                                      -25-
<PAGE>

      In 1997, the court struck down the FCC's pricing rules. It ruled that
the Telecom Act left jurisdiction over pricing matters to the states. The
court also struck down certain other FCC rules on jurisdictional or
substantive grounds. The U.S. Supreme Court has agreed to review the appeals
court decision.

      In 1997, the FCC issued important decisions on the structure and level
of access charges and universal service. These decisions will impact the
industry in several ways, including the following:

         -      An additional subsidy was created to support telecommunications
                services for schools, libraries and rural health care providers.
                All carriers providing telecommunications services will be
                required to fund this program, which is capped at $2.7 billion
                per year. However, LECs can pass their portion of these costs on
                to long distance carriers.

         -      Per-minute interstate access rates charged by LECs will decline
                over time to become cost-based, beginning in July 1997.

         -      Certain monthly flat-rate charges paid by some local telephone
                customers will increase beginning in 1998.

         -      Certain per-minute access charges paid by long distance
                companies were converted to flat monthly charges based on
                pre-subscribed lines.

         -      A basis has been established for replacing implicit access
                subsidies with an explicit interstate universal service fund
                beginning in 1999.

      A number of LECs, long distance companies and others have appealed some
or all of the FCC's orders. The effective date of the orders has not been
delayed, but the appeals are expected to take a year or more to conclude. The
impact of these FCC decisions on the Company is difficult to determine, but
is not expected to be material.

     Some BOCs have also challenged the Telecom Act restrictions on their
entry into long distance markets as unconstitutional. A federal district
court in Wichita Falls, Texas, ruled the restrictions unlawful because they
constituted a legislative act that imposed punishment without a judicial
proceeding. The United States government and others filed appeals of this
decision. The federal district court delayed implementing its decision
pending resolution of the appeals. The Company is unable to predict the
outcome of such rulemakings or litigation or the substantive effect
(financial or otherwise) of the 1996 Telecom Act and the rulemakings on the
Company.

     The Company is also subject to federal and state regulation as a cable
television operator pursuant to the Cable Communications Policy Act of 1984
(the "1984 Cable Act") and 1992 Cable Act, both amended by the 1996 Telecom
Act. The 1992 Cable Act significantly expanded the scope of cable television
regulation on an industry-wide basis by imposing rate regulation, carriage
requirements for local broadcast stations, customer service obligations and
other requirements. The 1992 Cable Act and the FCC's rules implementing that
Act generally have increased the administrative and operational expenses and
in certain instances required rate reductions for cable television systems
and have resulted in additional regulatory oversight by the FCC and state or
local (depending on the regulatory scheme) authorities.

     Because the Company is authorized to offer local exchange services in
Anchorage, it will be regulated as a CLEC by the APUC. In addition, the
Company will be subject to other regulatory requirements, including certain
requirements imposed by the 1996 Telecom Act on all LECs, which requirements
include permitting resale of LEC services, number portability, dialing
parity, and reciprocal compensation.

                                      -26-
<PAGE>

     As a PCS licensee, the Company is subject to regulation by the FCC, and
must comply with certain buildout and other conditions of the license, as
well as with the FCC's regulations governing the PCS service. On a more
limited basis, the Company may be subject to certain regulatory oversight by
the APUC (e.g., in the areas of consumer protection), although states are not
permitted to regulate the rates of PCS and other commercial mobile service
providers. PCS licensees may also be subject to regulatory requirements of
local jurisdictions pertaining to, among other things, the siting of tower
facilities.

Other

       No material portion of the businesses of the Company is subject to
renegotiation of profits or termination of contracts at the election of the
federal government.

Item 2.  PROPERTIES

     General. The Company's property, plant and equipment totaled $224.4
million at December 31, 1997, of which $131.3 relates to telecommunications
services, $74.5 relates to cable services, and $18.6 relates to local
services. These properties consist primarily of switching equipment,
satellite earth stations, fiber-optic networks, microwave radio and cable and
wire facilities, cable head-end equipment, coaxial distribution networks,
transportation equipment, computer equipment and general office equipment.
Substantially all of the Company's properties secure its credit agreement and
senior loan. See note 6 to the Notes to Consolidated Financial Statements
included in Part II of this Report for further discussion.

     Telecommunication Services. The Company operates a state-of-the-art,
competitive telecommunications network employing the latest digital
transmission technology based upon fiber optic and digital microwave
facilities within and between Anchorage, Fairbanks and Juneau. The Company's
network includes a digital fiber optic cable linking Alaska to the contiguous
48 states and providing access to other carriers' networks for communications
around the world. The Company uses satellite transmission to remote areas of
Alaska and for certain interstate traffic.

     The Company's long distance services segment owns properties and
facilities including satellite earth stations, and distribution,
transportation and office equipment. Additionally, the Company acquired in
December 1992, access to capacity on an undersea fiber optic cable from
Seward, Alaska to Pacific City, Oregon. The undersea fiber optic cable
capacity is owned subject to an outstanding mortgage.

     The Company entered into a purchase and lease-purchase option agreement
in August 1995 for the acquisition of satellite transponders on the Hughes
Galaxy X satellite to meet its long-term satellite capacity requirements. The
balance payable upon expected delivery of the transponders in the third
quarter of 1998 is not expected to exceed $41 million. The Company's
remaining commitment will likely be funded from its senior credit agreement.
The purchase and lease-purchase option agreement provides for the interim
lease of transponder capacity on the Hughes Galaxy IX satellite from June
1996 through the delivery of the purchased transponders.

     The Company leases its long distance services industry segment's executive,
corporate and administrative facilities in Anchorage, Fairbanks and Juneau,
Alaska. The Company's operating,



                                      -27-
<PAGE>

executive, corporate and administrative properties are in good condition. The
Company considers its properties suitable and adequate for its present needs and
are being fully utilized.

     Cable Services. The Cable Systems serve 26 communities and areas in Alaska
including Anchorage, Fairbanks and Juneau, the state's three largest urban
areas. As of December 31, 1997 the Cable Systems consisted of approximately
1,820 miles of installed cable plant having between 300 to 450 MHz of channel
capacity (or enough capacity to carry from 70 to 130 channels). The Company
leases its cable services industry segment's operating facilities in
substantially all locations. Such properties are in good condition. The Company
considers its properties suitable and adequate for its present and anticipated
future needs.

     Local Services. The Company operates a state-of-the-art, competitive
telecommunications network employing the latest digital transmission technology
based upon fiber optic facilities within Anchorage. The Company leases its local
services industry segment's operating facilities in Anchorage. Such properties
are in good condition. The Company considers its properties suitable and
adequate for its present and anticipated future needs.



                                      -28-
<PAGE>

Item 3.  LEGAL PROCEEDINGS

      Except as set forth in this item, neither the Company, its property nor
any of its subsidiaries or their property is a party to or subject to any
material pending legal proceedings. The Company and its subsidiaries are
parties to various claims and pending litigation as part of the normal course
of business. The Company is also involved in several administrative
proceedings and filings with the FCC and state regulatory authorities. In the
opinion of management, the nature and disposition of these matters are
considered routine and arising in the ordinary course of business which
management believes, even if resolved unfavorably to the Company, would not
have a materially adverse affect on the Company's business or financial
statements.

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

      Omitted per General Instruction J(1)(a) and (b) of Form 10-K .

                             PART II

Item 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

Market Information for Common Stock and Holders

      All issued and outstanding shares of GCI, Inc.'s Class A common stock
are held by General Communication, Inc. and are not publicly traded. General
Communication, Inc.'s Class A and Class B common stock are publicly traded.

Dividends

     GCI and GCI, Inc. have never paid cash dividends on their common stock
and have no present intention of doing so. Payment of cash dividends in the
future, if any, will be determined by the Company's Board of Directors in
light of the Company's earnings, financial condition and other relevant
considerations. The Company's existing bank loan agreements contain
provisions that prohibit payment of dividends, other than stock dividends
(see note 6 to the Consolidated Financial Statements included in Part II of
this Report).

                                      -29-

<PAGE>


Item 6. SELECTED FINANCIAL DATA

      The Successor was incorporated in 1997 and is a wholly owned subsidiary of
the Predecessor. The Successor received through its initial capitalization all
ownership interests in subsidiaries previously held by the Predecessor. The
following table presents selected historical information relating to financial
condition and results of operations of the Successor in 1997 and the Predecessor
in 1996, 1995, 1994 and 1993, except as noted in footnote 7 below.

<TABLE>
<CAPTION>
                                                                (Successor)      (Predecessor)             (Predecessor)
                                                                                     Years ended December 31,
                                                                ---------------------------------------------------------------
                                                                   1997          1996        1995        1994           1993
                                                                  ------        ------      ------      ------         ------
                                                                          (Amounts in thousands except per share amounts)

<S>                                                               <C>           <C>         <C>         <C>           <C>
     Revenues 1                                                   $223,809      164,894     129,279     116,981       102,213
     Net earnings (loss) before income taxes and
         extraordinary item 2                                     $ (2,235)      12,690      12,601      11,681         6,715
     Loss on early extinguishment of debt, net of income tax
         benefit of $180                                          $    521            0           0           0             0
     Net earnings (loss)                                          $ (2,183)       7,462       7,502       7,134         3,951
     Basic net earnings (loss) per common share 7                 $  (0.05)        0.28        0.32        0.30          0.19
     Diluted net earnings (loss) per common share 7               $  (0.05)        0.27        0.31        0.30          0.18
     Basic net earnings (loss) per common share 8                 $(21,830)         n/a         n/a         n/a           n/a
     Diluted net earnings (loss) per common share 8               $(21,830)         n/a         n/a         n/a           n/a
     Total assets 3                                               $ 545,302     447,335      84,765      74,249        71,610
     Long-term debt, including current portion 3                  $ 250,084     223,242       9,980      12,554        20,823
     Obligations under capital leases, including current          $   1,188         746       1,047       1,297         1,522
         portion
     Total stockholders' equity 3, 4                              $ 204,439     149,554      43,016      35,093        27,210
     Dividends declared per Common share 5                        $    0.00        0.00        0.00        0.00          0.00
     Dividends declared per Preferred share 6                     $    0.00        0.00        0.00        0.00          0.44
</TABLE>

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

1    The 1997 revenue increase is primarily attributed to the Company's
     reporting 12 months of cable television service revenues as compared to two
     months reported in 1996.

2    The Company's net loss in 1997 is attributed to additional depreciation,
     amortization and interest expense resulting from the cable company
     acquisitions in October 1996 and startup losses from the Company's entry
     into the local services segment.

3    Increases in the Company's Predecessor's total assets, long-term debt and
     stockholders' equity in 1996 as compared to 1995 result in part from the
     cable company acquisitions and MCI stock issuance described in notes (2)
     and (8) to the Consolidated Financial Statements included in Part II of
     this Report.

4    The 1997 increase in stockholders' equity is primarily attributed to the
     Company's Predecessor's equity offering in August 1997, described in note
     (8) to the accompanying Consolidated Financial Statements included in Part
     II of this Report.

5    The Company and its Predecessor have never paid a cash dividend on their
     common stock and do not anticipate paying any dividends in the foreseeable
     future. The Company intends to retain its earnings, if any, for the
     development of its business. Payment of cash dividends in the future, if
     any, will be determined by the board of directors of the Company in light
     of the Company's earnings, financial condition, credit agreements and other
     relevant considerations. The Company's existing bank loan agreements
     contain provisions that prohibit payment of dividends, other than stock
     dividends, as further described in note (6) to the Consolidated Financial
     Statements included in Part II of this Report.

6    The Company's Predecessor declared and issued stock dividends of
     approximately 304,000 shares of Class B Common Stock in 1992, and paid
     dividends totaling $153,000 in 1993 on its non-voting Series A 15%
     Convertible Cumulative Preferred Stock. The Preferred Stock was acquired
     and retired in 1993.

7    Basic and diluted earnings (loss) per common share are computed using the
     Predecessor's weighted average outstanding shares of common stock and
     common stock equivalents in all years presented.



                                      -30-
<PAGE>

8    Basic and diluted earnings (loss) per common share are computed using the
     Successor's weighted average outstanding shares of common stock in 1997.
     The Successor was incorporated in 1997 therefore basic and diluted earnings
     (loss) per share computations for 1996, 1995, 1994 and 1993 are not
     applicable. The Successor had no outstanding common stock equivalents in
     1997.



                                      -31-
<PAGE>

Item 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS

      The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the notes thereto
and the other financial data appearing elsewhere. As used herein, EBITDA
consists of earnings before interest (net), income taxes, depreciation,
amortization and other income (expense). EBITDA is a measure commonly used in
the telecommunications and cable television industries to analyze companies
on the basis of operating performance. It is not a measure of financial
performance under generally accepted accounting principles and should not be
considered as an alternative to net income as a measure of performance nor as
an alternative to cash flow as a measure of liquidity.

                      FACTORS AFFECTING FUTURE PERFORMANCE

    Future operating results of the Company will depend upon many factors and
will be subject to various risks and uncertainties, including those set forth
in this and other sections of Form 10-K. The information contained in Form
10-K includes forward-looking statements regarding the Company's future
performance. Future results of the Company may differ materially from any
forward-looking statement due to such assumptions and risks. Future
performance cannot be ensured.

                                    OVERVIEW

      GCI, Inc. ("Successor") was incorporated in 1997 to effect the issuance
of Senior Notes as further described in note 6 to the accompanying
Consolidated Financial Statements. GCI, Inc., a wholly owned subsidiary of
General Communication, Inc. ("GCI" or "Predecessor"), received through its
initial capitalization all ownership interests in subsidiaries previously
held by GCI. Shares of GCI's Class A common stock are traded on the Nasdaq
National Market tier of the Nasdaq Stock Market under the symbol GNCMA.
Shares of the GCI's Class B common stock are traded on the Over-the-Counter
market. Proceeds from the GCI's August 1, 1997 class A common stock offering
were used in part to capitalize GCI, Inc. The following discussion and
analysis of financial condition and results of operations includes the 1995,
1996 and 1997 operating activities and balances of GCI and its subsidiaries,
which operating activities and balances not conducted or owned through its
subsidiaries were not material to GCI, Inc. "The Company" as used herein for
1995, 1996 and 1997 results of operations and balances refers to General
Communication, Inc., GCI, Inc. and GCI Inc.'s wholly owned subsidiaries. All
assets, liabilities and operating activities of GCI not conducted through its
subsidiaries were transferred to GCI, Inc. effective January 1, 1998.

      Long Distance Telecommunications Services. The Company has historically
reported revenues principally from the provision of interstate and intrastate
long distance telecommunications services to residential, commercial and
governmental customers and to other common carriers (principally MCI
Telecommunications, Inc. ("MCI") and U.S. Sprint ("Sprint")). These services
accounted for approximately 93.3% of the Company's telecommunications
services revenues during 1997. The balance of telecommunications services
revenues have been attributable to corporate network management contracts,
telecommunications equipment sales and service and other miscellaneous
revenues (including revenues from prepaid and debit calling cards, the
installation and leasing of customers' very small aperture terminal ("Vsat")
equipment and fees charged to MCI and Sprint for certain billing services).
Factors that have the greatest impact on year-to-year changes in
telecommunications services revenues include the rate per minute charged to
customers and usage

                                      -32-
<PAGE>

volumes, usually expressed as minutes of use. These factors in turn depend in
part upon economic conditions in Alaska. The economy of Alaska is dependent
upon the natural resource industries, in particular oil production, as well
as tourism, government and United States military spending.

      The Company's telecommunications cost of sales and services has
consisted principally of the direct costs of providing services, including
local access charges paid to LECs for the origination and termination of long
distance calls in Alaska, fees paid to other long distance carriers to carry
calls that terminate in areas not served by the Company's network
(principally the lower 49 states, most of which calls are carried over MCI's
network, and international locations, which calls are carried principally
over Sprint's network), and the cost of equipment sold to the Company's
customers. During 1997, local access charges accounted for 46.3% of
telecommunications cost of sales and services, fees paid to other long
distance carriers represented 37.9%, satellite transponder lease and undersea
fiber maintenance costs represented 9.2%, telecommunications equipment
accounted for 3.4%, and enterprise services and outsourcing costs represented
2.1% of telecommunications cost of sales and services.

      The Company's telecommunications selling, general, and administrative
expenses have consisted of operating and engineering, service, sales and
communications, management information systems, general and administrative,
legal and regulatory expenses. Most of these expenses consist of salaries,
wages and benefits of personnel and certain other indirect costs (such as
rent, travel, utilities and certain equipment costs). A significant portion
of telecommunications selling, general, and administrative expenses, 28.7%
during 1997, represents the cost of the Company's advertising, promotion and
market analysis programs.

      Cable Services. Following the cable system acquisitions effective
October 31, 1996, the Company now reports a significant level of revenues and
EBITDA from the provision of cable services. During 1997, cable revenues and
EBITDA represented 24.7% and 60.6%, respectively, of consolidated revenues
and EBITDA. The cable systems serve 26 communities and areas in Alaska,
including the state's three largest population centers, Anchorage, Fairbanks
and Juneau.

      The Company generates cable services revenues from three primary
sources: (1) programming services, including monthly basic or premium
subscriptions and pay-per-view movies or other one-time events, such as
sporting events; (2) equipment rentals or installation; and (3) advertising
sales. During 1997 programming services generated 86.8% of total cable
services revenues, equipment rental and installation fees accounted for 7.7%
of such revenues, advertising sales accounted for 3.9% of such revenues, and
other services accounted for the remaining 1.6% of total cable services
revenues. The primary factors that contribute to year-to-year changes in
cable services revenues are average monthly subscription and pay-per-view
rates, the mix among basic, premium and pay-per-view services, and the
average number of subscribers during a given reporting period.

      The cable systems' cost of sales and selling, general and
administrative expenses have consisted principally of programming and
copyright expenses, labor, maintenance and repairs, marketing and
advertising, rental expense, and property taxes. During 1997 programming and
copyright expenses represented approximately 40.1% of total cable cost of
sales and selling, general and administrative expenses. Marketing and
advertising costs represented approximately 6.0% of such total expenses.

      Local Services. The Company began offering local exchange services in
Anchorage during late September 1997. Local exchange services revenues
totaled $610,000 representing less than 1.0% of

                                      -33-
<PAGE>

total revenues in 1997. The Company expects local services revenues to
represent less than 6.0% of total revenues in 1998. During 1997 operating and
engineering expenses represented approximately 12.0% of total local services
cost of sales and selling, general and administrative expenses. Marketing and
advertising costs represented approximately 6.0% of such total expenses,
customer service, and general and administrative costs represented
approximately 75.9% of such total expenses. The Company expects that it will
generate operating losses and negative EBITDA from local exchange services
during 1998.

      PCS Services. The Company began developing plans for PCS wireless
communications service deployment in 1995 and is currently evaluating various
vendors for a proposed PCS network. In 1997 the Company conducted a technical
trial of its candidate technology. The Company currently expects to launch
PCS service in Anchorage in 1999, although it may be deferred beyond that
date.

      Depreciation and amortization and interest expense on a consolidated
basis is expected to be higher in 1998 as compared to 1997 resulting
primarily from additional depreciation on 1997 and 1998 capital expenditures.
As a result, the Company anticipates recording a net loss in 1998.

      RESULTS OF OPERATIONS

      The following table sets forth selected Statement of Operations data as a
percentage of total revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                          Year Ended December 31,                  Percentage Change
                                                      ----------------------------------          -------------------
                                                                                                   1996          1997
                                                      (Successor)       (Predecessor)               vs.           vs.
                                                         1997         1996          1995           1995          1996
                                                      ----------    --------      -------        -------       --------
<S>                                                   <C>           <C>           <C>            <C>           <C>
             Statement of Operations Data:
               Revenues:
                  Telecommunications services           100.0%         94.3%         75.1%         20.2%            8.1%
                  Cable services                         --             5.7%         24.6%         --             482.2%
                  Local services                         --            --             0.3%         --             --
                                                        ------        ------        ------        ------         ------
               Total revenues                           100.0%        100.0%        100.0%         27.5%           35.7%
                  Cost of sales and services             55.8%         56.2%         49.6%         28.5%           19.9%
                  Selling, general and
                     administrative
                     expenses                            29.2%         28.1%         32.9%         23.1%           58.5%
                  Depreciation and
                     amortization                         4.6%          5.7%         10.6%         57.0%          152.6%
                                                        ------        ------        ------        ------         ------
               Operating income                          10.4%         10.0%          6.9%         21.5%          (6.3)%
                                                        ------        ------        ------        ------         ------
               Net earnings (loss) before income
                  taxes and extraordinary item            9.7%          7.7%         (1.0)%         0.7%        (117.6)%
               Extraordinary item                        --            --            (0.2)%        --             --
                                                        ------        ------        ------        ------         ------
               Net earnings (loss)                        5.8%          4.5%         (1.0)%        (0.5)%       (129.3)%
                                                        ------        ------        ------        ------         ------
                                                        ------        ------        ------        ------         ------
             Other Operating Data:
               Cable operating income (1)                --            23.2%          18.9%         --            374.6%
               Cable EBITDA  (1)                         --            46.6%          43.0%         --            437.7%
               Local operating loss (2)                  --            --          (708.5)%        --             396.8%
               Local EBITDA  (2)                         --            --          (622.5)%        --             336.4%
</TABLE>




                                      -34-
<PAGE>

<TABLE>
<CAPTION>
                                                          Year Ended December 31,                  Percentage Change
                                                      ----------------------------------          -------------------
                                                                                                   1996          1997
                                                      (Successor)       (Predecessor)               vs.           vs.
                                                         1997         1996          1995           1995          1996
                                                      ----------    --------      -------        -------       --------
<S>                                                   <C>           <C>           <C>            <C>           <C>
      Statement of Operations Data:
               Consolidated EBITDA                       15.1%         15.7%         17.5%         63.9%          51.6%
</TABLE>

      ---------------------
      (1)  Computed as a percentage of total cable services revenues.

      (2)  Computed as a percentage of total local services revenues.

      Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.

      Revenues

      Total revenues increased 35.7% from $164.9 million in 1996 to $223.8
million in 1997. The Company reported two months' of cable services revenues
in 1996 following its acquisition of the Cable Systems effective October 31,
1996. Cable revenues increased $45.7 million to $55.2 million resulting from
12 months' of activity being recorded in 1997. Long distance transmission
revenues from commercial, residential, governmental, and other common carrier
customers increased 9.8% from $142.6 million in 1996 to $156.6 million in
1997. This increase reflected a 9.0% increase in interstate minutes of use to
620.8 million minutes and a 9.8% increase in intrastate minutes of use to
133.1 million minutes. Long distance revenue growth in 1997 was largely due
to a 22.3% increase in revenues from other common carriers (principally MCI
and Sprint), from $48.0 million in 1996 to $58.7 million in 1997 and a 12.7%
increase in private line and private network transmission services revenues,
from $14.1 million in 1996 to $15.9 million in 1997.

      The above increases in revenues were offset in part by a 1.1% reduction
in the Company's average rate per minute on long distance traffic from $0.179
per minute in 1996 to $0.177 per minute in 1997. The decrease in rates
resulted from the Company's promotion of and customers' enrollment in new
calling plans offering discounted rates and length of service rebates, such
new plans being prompted in part by the Company's primary long distance
competitor, AT&T Alascom, reducing its rates and entry of local exchange
carriers into long distance markets served by the Company. Systems sales and
services revenues decreased 6.4% from $10.9 million in 1996 to $10.2 million
in 1997, primarily due to a reduced number of large equipment sales
transactions in 1997 as compared to 1996. Other long distance revenues
decreased $0.7 million to $1.1 million due primarily to reduced revenues from
short term Vsat leases.

      Cost of Sales and Services

      Cost of sales and services totaled $92.7 million in 1996 and $111.1
million in 1997. As a percentage of total revenues, cost of sales and
services decreased from 56.2% in 1996 to 49.6% in 1997. The decrease in cost
of sales and services as a percentage of revenues is primarily attributed to
changes in the Company's product mix. The Company reported 12 months of cable
operations in 1997 as compared to two months in 1996. Cable cost of sales and
services as a percentage of sales are less than long distance and local
services cost of sales and services as a percentage of sales. The increase in
cable revenues as a percentage of total revenues (5.8% in 1996 to 24.7% in
1997) resulted in an overall decrease in the Company's cost of sales and
services as a percentage of sales.

      Additionally, cost of sales and services as a percentage of revenues were
reduced in part by



                                      -35-
<PAGE>

reductions in the rate per minute billed to the Company for the local access
and interstate termination services it obtains from third parties. Decreases
in 1997 cost of sales and services as compared to 1996 were offset in part by
refunds in the first two quarters of 1996 aggregating approximately $960,000
from a local exchange carrier and the National Exchange Carriers Association
in respect of earnings by them which exceeded regulatory requirements.

      Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased 58.6% from $46.4
million in 1996 to $73.6 million in 1997, and, as a percentage of revenues,
increased from 28.1% in 1996 to 32.9% in 1997. This increase resulted from:

           1.   The Company's reporting 12 months' of cable television selling,
                general and administrative expenses in 1997 ($18.8 million) as
                compared to two months' in 1996 ($3.0 million).

           2.   Operating, engineering, sales, customer service and
                administrative costs totaling $4.1 million as compared to
                $870,000 in 1996 associated with the Company's local services
                segment which initiated service in September 1997.

          3.   Increased telecommunication general and administrative expenses
               of $5.1 million in 1997 due to increased personnel and other
               costs in customer service, engineering, operations, accounting,
               human resources, legal and regulatory, and management information
               services. Cost increases were associated with the development,
               introduction, or planned introduction, and support of new
               products and services including cable television services, rural
               message and data telephone services, PCS services, and Internet
               services. Increased customer service expenses were associated
               with support of increased sales volumes and expenditures
               necessary to integrate customer service operations across product
               lines.

          4.   Bad debt expense totaling $3.0 million for 1997 compared to $1.7
               million in 1996 (directly associated with increased revenues).

          5.   Increased telecommunication segment sales, advertising and
               telemarketing costs totaling $13.0 million in 1996 compared to
               $14.8 million in 1997. Increased selling costs were associated
               with the introduction of various marketing plans and other
               proprietary rate plans and cross promotion of products and
               services.

      Depreciation and Amortization

      Depreciation and amortization expense increased 153.2% from $9.4 million
in 1996 to $23.8 million in 1997. Of this increase, $13.3 million resulted from
the Company's acquisition of the cable systems effective October 31, 1996, with
the balance of the increase attributable to the Company's $38.6 million
investment in facilities during 1996 for which a full year of depreciation was
recorded during the year ending December 31, 1997 and the 1997 investment of
$73.7 million in facilities for which a partial year of depreciation was
recorded during 1997.

      Interest Expense, Net

      Interest expense, net of interest income, increased 375.7% from $3.7
million in 1996 to $17.6 million in 1997. This increase resulted primarily from
increases in the Company's average outstanding indebtedness resulting primarily
from its acquisition of the Cable Systems, construction



                                      -36-
<PAGE>

of new facilities in rural Alaska, expansion and upgrades of cable television
facilities, and investment in local services equipment and facilities. Such
increases were offset in part by increases in the amount of interest capitalized
during 1997.

      Loss on Extinguishment of Debt

      The Company recorded a net loss on extinguishment of debt of $521,000 in
1997 resulting from refinancing its previously outstanding Senior Credit
Facility effective August 1, 1997. The loss resulted from the write-off of
unamortized deferred debt issuance costs. The loss is reported in the
accompanying Consolidated Financial Statements net of an income tax benefit of
$180,000.

      Income Tax Expense

      GCI, Inc., as a wholly owned subsidiary and member of the GCI controlled
group of corporations, files its income tax returns as part of the consolidated
group of corporations under GCI. Accordingly, the following discussions of
income tax expense and net operating loss carryforwards reflect the consolidated
group's activity and balances.

      Income tax expense decreased from $5.2 million in 1996 to a benefit of
$0.6 million in 1997 due to the Company incurring a net loss before income taxes
and extraordinary item in 1997 as compared to net earnings in 1996. The
Company's effective income tax rate decreased from 41.2% in 1996 to 25.6% in
1997 due to the net loss and the proportional amount of items that are
nondeductible for income tax purposes.

      The amount of deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward periods are reduced. The Company estimates that its effective
income tax rate for financial statement purposes will be approximately 25% in
1998. The Company expects that its operations will generate net income before
income taxes during the carryforward periods to allow utilization of loss
carryforwards for which no allowance has been established.

      A deferred tax asset was established related to these carryforwards. The
amount of deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
periods are reduced.

      Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.

      Revenues

      Total revenues increased 27.5% from $129.3 million in 1995 to $164.9
million in 1996. Long distance transmission revenues from commercial,
residential, governmental, and other common carrier customers increased 18.8%
from $120.0 million in 1995 to $142.6 million in 1996. This increase reflected a
22.6% increase in interstate minutes of use to 569.6 million minutes and a 29.8%
increase in intrastate minutes of use to 121.2 million minutes, principally due
to a new marketing program which the Company launched during the third quarter
of 1995. This program consisted of the introduction of a new flat-rate calling
plan ("Great Rate") coupled with telemarketing, direct sales, and the promotion
of a $1 million sweepstakes. Revenue growth in 1996 was also due to a 23.7%
increase in revenues from other common carriers (principally MCI and Sprint),
from $38.8



                                      -37-
<PAGE>

million in 1995 to $48.0 million in 1996 and a 23.7% increase in private line
and private network transmission services revenues, from $11.4 million in
1995 to $14.1 million in 1996. Systems sales and services revenues increased
47.3% from $7.4 million in 1995 to $10.9 million in 1996, primarily due to
the commencement in the second quarter of 1996 of services provided under a
new outsourcing contract with National Bank of Alaska. The Company also
reported two months' of cable services revenues in 1996 following its
acquisition of the Cable Systems effective October 31, 1996.

      The above increases in revenues were offset in part by a 6.3% reduction
in the Company's average rate per minute on long distance traffic from $0.191
per minute in 1995 to $0.179 per minute in 1996. The decrease in rates
resulted from the Company's promotion of and customers' enrollment in new
calling plans offering discounted rates and length of service rebates, such
new plans being prompted in part by the Company's primary long distance
competitor, AT&T Alascom, reducing its rates.

      Cost of Sales and Services

      Cost of sales and services was $72.1 million in 1995 and $92.7 million
in 1996. As a percentage of total revenues, cost of sales and services
increased from 55.8% in 1995 to 56.2% in 1996. The increase in cost of sales
and services as a percentage of revenues during 1996 as compared to 1995
resulted primarily from the reduced average rate per minute billed to
customers in 1996 as compared to 1995 without an offsetting reduction in the
rate per minute billed to the Company for the local access and interstate
termination services it obtains from third parties. These increases were
offset in part by refunds in the first two quarters of 1996 aggregating
approximately $960,000 from a local exchange carrier and the National
Exchange Carriers Association in respect of earnings by them that exceeded
regulatory requirements.

      Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased 23.1% from $37.7
million in 1995 to $46.4 million in 1996, and, as a percentage of revenues,
decreased from 29.2% in 1995 to 28.1% in 1996. Selling, general and
administrative expenses increased as a result of increased sales and customer
service volumes, bad debt expense totaling $1.7 million for 1996 compared to
$1.5 million in 1995 (directly associated with increased revenues), and
increased sales, advertising and telemarketing costs totaling $9.9 million in
1995 compared to $13.3 million in 1996 due to the introduction of various
marketing plans and other proprietary rate plans. Additionally, selling,
general and administrative expenses increased in 1996 due to increased
personnel and other costs totaling $2.7 million in sales, engineering,
operations, accounting, human resources, legal and regulatory, and management
information services. Such costs were associated with the development and
introduction, or planned introduction, of new products and services including
local services, cable television services, rural message and data telephone
services, PCS services, and Internet services.

      Depreciation and Amortization

      Depreciation and amortization expense increased 56.7% from $6.0 million
in 1995 to $9.4 million in 1996 resulting primarily from the Company's
acquisition of the cable systems effective October 31, 1996 and the Company's
$8.9 million investment in facilities during 1995 for which a

                                      -38-
<PAGE>

full year of depreciation was recorded during the year ending December 31,
1996 and the 1996 investment of $38.6 million in facilities for which a
partial year of depreciation was recorded during 1996.

      Interest Expense, Net

      Interest expense, net of interest income, increased 311.1% from $0.9
million in 1995 to $3.7 million in 1996. This increase resulted primarily
from increases in the Company's average outstanding indebtedness resulting
primarily from its acquisition of the Cable Systems and capital expenditures.
Such increases were offset in part by increases in the amount of interest
capitalized during 1996.

      Income Tax Expense

      Income tax expense increased 2.0% from $5.1 million in 1995 to $5.2
million in 1996 due to an increase in net earnings before income taxes and a
higher effective income tax rate from 40.5% in 1995 to 41.2% in 1996.

          SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS

      The following chart provides selected unaudited statement of operations
data from the Company's quarterly results of operations during 1996 and 1997:

<TABLE>
<CAPTION>
                                                      (Dollars in thousands, except per share amounts)
                                          First            Second           Third           Fourth             Total
                                         Quarter           Quarter          Quarter         Quarter            Year
                                        -----------------------------------------------------------------------------
        1996                                                             (Predecessor)
       -----
<S>                                      <C>               <C>              <C>              <C>              <C>
Revenues
   Telecommunications services           $ 37,969           39,199           38,664           39,587          155,419
   Cable services                            --               --               --              9,475            9,475
                                        ----------         --------         --------         -------         ---------
Total revenues                             37,969           39,199           38,664           49,062          164,894
Operating income                            3,947            3,970            4,017            4,475           16,409

Net earnings                             $  2,137            2,150            2,140            1,035            7,462
                                        ----------         --------         --------         -------         ---------
                                        ----------         --------         --------         -------         ---------

Basic net earnings per share             $   0.09             0.09             0.08             0.03             0.28
                                        ----------         --------         --------         -------         ---------
                                        ----------         --------         --------         -------         ---------

Diluted net earnings per share           $   0.08             0.08             0.08             0.03             0.27
                                        ----------         --------         --------         -------         ---------
                                        ----------         --------         --------         -------         ---------
Other financial data:

     Cable EBITDA                        $   --               --                --             4,416            4,416
                                        ----------         --------         --------         -------         ---------
                                        ----------         --------         --------         -------         ---------
     Consolidated EBITDA                 $  5,834            5,888            5,829            8,267           25,818
                                        ----------         --------         --------         -------         ---------
                                        ----------         --------         --------         -------         ---------
</TABLE>



                                      -39-
<PAGE>

<TABLE>
<CAPTION>
                                                      (Dollars in thousands, except per share amounts)
                                          First            Second           Third           Fourth             Total
                                         Quarter           Quarter          Quarter         Quarter            Year
                                        -----------------------------------------------------------------------------
1997                                                                      (Successor)
----
<S>                                     <C>               <C>             <C>               <C>              <C>
Revenues
   Telecommunications services           $ 39,225           42,131           44,407           42,271          168,034
   Cable services                          13,656           14,055           13,294           14,160           55,165
   Local services                            --               --                255              355              610
                                       ------------   ---------------   ----------------   ----------       ----------
Total revenues                             52,881           56,186           57,956           56,786          223,809

Operating income                            3,292            2,786            3,786            5,518           15,382
Extraordinary item, net of income
     tax benefit                             --               --                433               88              521

Net income (loss)                        $   (525)            (832)            (928)             102           (2,183)
                                       ------------   ---------------   ----------------   ----------        ---------
                                       ------------   ---------------   ----------------   ----------        ---------

Basic net earnings (loss) per
     share                               $ (5,250)          (8,320)          (9,280)           1,020          (21,830)
                                       ------------   ---------------   ----------------   ----------        ---------
                                       ------------   ---------------   ----------------   ----------        ---------
Diluted net earnings (loss) per
     share                               $ (5,250)          (8,320)          (9,280)           1,020          (21,830)
                                       ------------   ---------------   ----------------   ----------        ---------
                                       ------------   ---------------   ----------------   ----------        ---------
Other financial data:

     Cable EBITDA                        $  6,025            5,863            5,687            6,168           23,743
                                       ------------   ---------------   ----------------   ----------        ---------
                                       ------------   ---------------   ----------------   ----------        ---------
     Local EBITDA                        $   (634)           (814)            (540)          (2,443)          (3,797)
                                       ------------   ---------------   ----------------   ----------        ---------
                                       ------------   ---------------   ----------------   ----------        ---------
     Consolidated EBITDA                 $  9,412            8,394            9,553           11,790           39,149
                                       ------------   ---------------   ----------------   ----------        ---------
                                       ------------   ---------------   ----------------   ----------        ---------

</TABLE>

     ------------------
     Basic and diluted earnings per share are computed using the Predecessor's
     weighted average outstanding shares of common stock and common stock
     equivalents in 1996. 1997 loss per share calculations are based on the
     Successor's outstanding shares of common stock which are not publicly
     traded. The Successor has no outstanding common stock equivalents.

     Total revenues for the quarter ended December 31, 1997 were $56.8
million, representing a 2.1% decrease from total revenues in the third
quarter of 1997 of $58.0 million. This decrease in revenues resulted in part
from (1) a 4.7% decrease in telecommunications services revenues to $42.3
million in the fourth quarter of 1997 from $44.4 million during the third
quarter of 1997. This decrease is attributable in part to a decrease in
minutes of traffic carried during the fourth quarter of 1997 of approximately
7.6 million minutes as compared to the third quarter of 1997 (a 3.9%
decrease), and (2) a decrease in the average rate per minute billed during
the fourth quarter of 1997 of approximately $0.005 as compared to the third
quarter of 1997 (a 2.7% decrease). Long distance telecommunications revenues
are generally lower during the winter months as compared to the summer
months. In addition, entry of two local exchange carriers into the Anchorage
area long distance market contributed to the reductions in revenue and
minutes of use. Partially offsetting this decrease was an increase in cable
services revenues to $14.2 million in the fourth quarter of 1997 from $13.3
million in the third quarter of 1997. As further described below, cable
revenues are generally higher during the winter months as compared to the
summer months.

                                      -40-
<PAGE>

     Cost of sales and services for the quarter ended December 31, 1997 were
$25.3 million, representing a 12.5% decrease from total cost of sales and
services in the third quarter of 1997 of $28.9 million. Reduced cost of sales
resulted from reduced revenues during the fourth quarter as previously
described and cost reductions as a percentage of revenues in the fourth
quarter as compared to the third quarter of 1997.

      Selling, general and administrative expenses increased $198,000 during
the fourth quarter of 1997 as compared to the third quarter of 1997
principally as a result of personnel, sales, engineering, operations,
customer service, management information systems, accounting, human
resources, legal and regulatory expenses associated with the development and
introduction, or planned introduction, of new products and services including
local services, PCS services and Internet services.

      The Company reported a net income of $102,000 for the fourth quarter of
1997 as compared to a net loss of $928,000 during the third quarter of 1997.
The reduced net loss was primarily attributable to (1) fourth quarter cost of
sales and services reductions that exceeded the reduction in revenues as
compared to the third quarter, and (2) the write-off of $701,000 in deferred
debt issuance costs during the third quarter of 1997.

      Long distance revenues have historically been highest in the summer
months as a result of temporary population increases attributable to tourism
and increased seasonal economic activity such as construction, commercial
fishing, and oil and gas activities. Cable television revenues, on the other
hand, are higher in the winter months because consumers spend more time at
home and tend to watch more television during these months. Local service
operations are not expected to exhibit significant seasonality. The Company's
ability to implement construction projects is also reduced during the winter
months because of cold temperatures, snow and short daylight hours.

                            ACCOUNTING PRONOUNCEMENTS

      In June 1997, the Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income includes
all changes in equity during a period except those due to owner investments
and distributions. It includes items such as foreign currency translation
adjustments, and unrealized gains and losses on available-for-sale
securities. This standard does not change the display or components of
present-day net income. Statement 130 is applicable to all entities that
provide a full set of financial statements consisting of a statement of
financial position, results of operations and cash flows. SFAS No. 130 is
effective for interim and annual periods beginning after December 15, 1997.
Management of the Company expects that adoption of SFAS No. 130 in the first
quarter of 1998 will not have a material impact on the Company's financial
statement disclosures.

      In June 1997, the Accounting Standards Board issued SFAS No. 131,
"Financial Reporting for Segments of a Business Enterprise" which applies to
all public business enterprises. This new standard requires companies to
disclose segment data based on how management makes decisions about
allocating resources to segments and how it measures segment performance.
SFAS 131 requires companies to disclose a measure of segment profit or loss,
segment assets, and reconciliations to consolidated totals It also requires
entity-wide disclosures about a company's products and services, its major
customers and the material countries in which it holds assets and

                                      -41-
<PAGE>

reports revenues. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. Management of the Company expects
that adoption of SFAS No. 131 will not have a material impact on the
Company's year-end 1998 financial statement disclosures.

      In February 1998, the Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits."
SFAS 132 standardizes the disclosure requirements for pensions and
postretirement benefits where practical. It also eliminates certain
disclosures and requires additional information on changes in benefit
obligations and fair values of plan assets. The Company will adopt SFAS 132
in its 1998 year-end financial statements. SFAS 132 is not expected to have a
significant effect on the Company's pension and postretirement benefit plan
disclosures.

                         LIQUIDITY AND CAPITAL RESOURCES

      The Company's 1997 cash flows from operating activities totaled $30.8
million, net of changes in the components of working capital. Additional
sources of cash during 1997 included long-term borrowings of $268.3 million
and class A common stock offering proceeds totaling $50.8 million as further
described below. The Company's expenditures for property and equipment,
including construction in progress, totaled $38.6 million and $64.6 million
in 1996 and 1997, respectively. Uses of cash during 1997 included repayment
of $231.0 million of long-term borrowings and capital lease obligations,
payment of deferred debt issuance costs, underwriting fees and commissions
totaling $13.3 million, investment of $39.4 million in restricted cash,
payment of undersea fiberoptic cable construction deposits totaling $9.1
million, and an increase in notes receivable of $698,000.

      Net receivables increased $5.3 million from December 31, 1996 to
December 31, 1997 resulting from increased revenues in 1997 as compared to
1996 and an increase in refundable income taxes in 1997 of $3.7 million.

      The Company reported a working capital deficit of $22.8 million as of
December 31, 1996. The Company's then existing credit facility matured within
the following twelve-month period resulting in the outstanding balance as of
December 31, 1996 being included in current maturities of long-term debt.
Except for the classification of the Company's senior indebtedness as
current, working capital at December 31, 1996 totaled $4.6 million. Working
capital at December 31, 1997 totaled $5.0 million, a $0.4 million increase
from working capital recomputed at December 31, 1996.

      GCI issued 7.0 million shares of its class A common stock on August 1,
1997 for $7.25 per share, before deducting underwriting discounts and
commissions. Net proceeds totaled $47,959,100 that were used in part to
capitalize GCI, Inc. Concurrently with the stock offering, GCI, Inc. issued
$180.0 million of 9.75% senior notes due 2007 to the public. Net proceeds to
GCI, Inc. after deducting underwriting discounts and commissions totaled
$174.6 million.

      Concurrently with the public offerings described above, GCI Holdings,
Inc. ("Holdings", a newly created wholly-owned subsidiary of GCI, Inc.)
entered into new $200,000,000 and $50,000,000 credit facilities effective
August 1, 1997. The new facilities mature June 30, 2005 and bear interest at
either Libor plus 0.75% to 2.5%, depending on the leverage

                                      -42-
<PAGE>

ratio of Holdings and certain of its subsidiaries, or at the greater of the
prime rate or the federal funds effective rate (as defined) plus 0.05%, in
each case plus an additional 0.0% to 1.375%, depending on the leverage ratio
of Holdings and certain of its subsidiaries. $64.7 million was drawn on the
credit facilities as of December 31, 1997.

      The new credit facilities and the public notes impose restrictions on
the operations and activities of the Company, including requirements that the
Company comply with certain financial covenants and financial ratios. Under
the credit facility, Holdings may not permit the ratio of senior debt to
annualized operating cash flow of Holdings and certain of its subsidiaries to
exceed 3.5 to 1.0, total debt to annualized operating cash flow to exceed 7.0
to 1.0, and annualized operating cash flow to interest expense to exceed 1.5
to 1.0. Each of the foregoing ratios decreases in specified increments during
the life of the credit facility. The credit facility will also require
Holdings to maintain a ratio of annualized operating cash flow to debt
service of Holdings and certain of its subsidiaries of at least 1.25 to 1.0,
and annualized operating cash flow to fixed charges of at least 1.0 to 1.0
(which adjusts to 1.05 to 1.0 in April, 2003 and thereafter). The credit
facility will also limit capital expenditures of Holdings and certain of its
subsidiaries to no more than $55.0 million (post-closing), $90.0 million, and
$65.0 million in 1997, 1998 and 1999, respectively. The public notes impose a
requirement that the leverage ratio of GCI, Inc. and certain of its
subsidiaries will not exceed 7.5 to 1.0 prior to December 31, 1999 and 6.0 to
1.0 thereafter, subject to the ability of GCI, Inc. and certain of its
subsidiaries to incur specified permitted indebtedness without regard to such
ratios.

      Net proceeds from the public offerings and new credit facility were
used to retire amounts owing under the Company's then existing credit
agreements, fund $50 million in capital for use in constructing an undersea
fiberoptic cable, and for working capital requirements.

      On January 27, 1998 Alaska United closed a $75 million project finance
facility ("Fiber Facility") to construct a fiber optic cable system
connecting Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle (see
notes 13 and 14 to the accompanying Notes to Consolidated Financial
Statements). The Fiber Facility provides up to $75 million in construction
financing and will bear interest at either Libor plus 3.0%, or at the
lender's prime rate plus 1.75%. The interest rate will decline to Libor plus
2.5%-2.75%, or the lender's prime rate plus 1.25%-1.5% after the project
completion date and when the loan balance is $40.0 million to $60.0 million
or less. $1.0 million was borrowed under the facility at closing. The Fiber
Facility is a 10-year term loan that is interest only for the first 5 years.
The facility can be extended to a 12 year term loan at any time between the
second and fifth anniversary of closing the facility if the Company can
demonstrate projected revenues from certain capacity commitments will be
sufficient to pay all operating costs, interest and principal installments
based on the extended maturity.

      The Fiber Facility contains, among others, covenants requiring certain
intercompany loans and advances in order to maintain specific levels of cash
flow necessary to pay operating costs, interest and principal installments.
The Fiber Facility also contains a guarantee that requires, among other terms
and conditions, Alaska United complete the project by the completion date and
pay any non-budgeted costs of the project.

      The Fiber Facility is collateralized by all of Alaska United's assets,
as well as a pledge of the partnership interests' owning Alaska United.

      The Company's expenditures for property and equipment, including
construction in progress, totaled $65.5 million and $38.6 million during 1997
and 1996, respectively. The Company anticipates that its capital expenditures
in 1998 may total as much as $225.0 million, including

                                      -43-
<PAGE>

approximately $40.0 million for satellite transponders and approximately $125.0
million for new undersea fiber optic cable facilities which have been financed
by the Alaska United Fiber System Partnership ("Alaska United"). Planned capital
expenditures over the next five years include $50.0 million to $70.0 million to
fund expansion of long distance facilities, between $120.0 million and $140.0
million to fund development, construction and operating costs of its local
exchange and PCS networks and businesses; and between $55.0 million and $65.0
million to upgrade its cable television plant and to purchase equipment for new
cable television services. Sources of funds for these planned capital
expenditures include net proceeds of the public offerings described above,
internally generated cash flows and borrowings under the Company's new credit
facilities described above and borrowings on GCI Transport Co., Inc.'s new $75
million project financing described above. All such funds will be necessary to
complete the Company's planned capital expenditures.

     The Alaska United project will provide a high capacity fiber optic link
between Fairbanks, Anchorage, Valdez, and Juneau, Alaska, and the lower 48
states through Seattle, Washington. Its initial capacity will be more than five
times the capacity of Alaska's current undersea fiber to the lower 48. After a
preliminary route survey was completed and initial cost components determined, a
detailed sea floor survey was commissioned. In November 1996, the Company paid
$1 million to conduct the sub-sea mapping. On August 1, 1997 the Company issued
a down payment to TSS to begin construction. Manufacturing of the cable and its
electronics has been underway since that time. The cable is expected to be laid
from August to October 1998. Testing will occur after that, and services are
expected to commence in December 1998.

     Financing for Alaska United includes up to $75 million through bank
financing obtained January 1, 1998 as previously described and $50 million from
funds raised through the issuance of senior notes described above.

      The Company's ability to invest in discretionary capital and other
projects will depend upon its future cash flows and access to borrowings under
its credit facilities. Management anticipates that cash flow generated by the
Company and borrowings under its credit facilities will be sufficient to meet
its planned capital expenditures and working capital requirements

     Effective December 2, 1997, the Company purchased all of the outstanding
shares of Astrolabe Group, Inc. Astrolabe was founded in 1995 as a technology
management consulting firm helping Alaska based clients effectively plan,
implement and operationally manage their network and information system
investments. Astrolabe helps clients throughout Alaska manage their rural
telecommunication networks, distributed information systems and distance
delivery of health care educational services. Astrolabe has been an integral
part of the Company's School Access project, providing the Internet software
infrastructure central to the value of the Company's distance education product
offerings. Following the acquisition, Astrolabe was merged into GCI
Communication Corp. and operates as a distinct division named GCI Network
Solutions. The $1.3 million purchase was accounted for using the purchase
method. The purchase price consisted of a payment of $600,000 and the issuance
of options to purchase 100,000 shares of General Communication, Inc.'s Class A
common stock for $.01 per share.

      The Company entered into a purchase and lease-purchase option agreement in
August 1995 for the acquisition of satellite transponders to meet its long-term
satellite capacity requirements. The amount payable upon expected delivery of
the transponders during the third quarter of 1998 is not expected to exceed $41
million.



                                      -44-



<PAGE>

                                 ALASKA ECONOMY

     The Company offers telecommunication and video services to customers
primarily throughout Alaska. As a result of this geographic concentration,
the Company's growth and operations depend upon economic conditions in
Alaska. The economy of Alaska is dependent upon the natural resource
industries, and in particular oil production, as well as tourism, government,
and United States military spending. Any deterioration in these markets could
have an adverse impact on the Company. Oil revenues over the past several
years have contributed in excess of 75% of the revenues from all segments of
the Alaska economy and are expected to account for 77% in 1998.

     The volume of oil transported by the TransAlaska Oil Pipeline System
over the past 20 years has been as high as 2.0 million barrels per day in
1988. Over the past several years, it has begun to decline. The two largest
producers of oil in Alaska (the primary users of the TransAlaska Oil Pipeline
System) continue to explore, develop and produce new oil fields and to
enhance recovery from existing fields to offset the decline in production
from the Prudhoe Bay field. Both companies have invested large sums of money
in developing and implementing oil recovery techniques at the Prudhoe Bay
field and other nearby fields. New oil field development is expected to
result in an increase in oil production in 2000 and 2001. Oil production is
projected to decline over the long term at approximately 6 percent per year.

     Effective March 1997, the State of Alaska passed new legislation
relaxing state oil royalties with respect to marginal oil fields that the oil
companies claim would not be economic to develop otherwise. No assurance can
be given that these two oil companies or other oil companies doing business
in Alaska will be successful in discovering new fields or further developing
existing fields which are economic to develop and produce oil with access to
the pipeline or other means of transport to market, even with the reduced
level of royalties. Should the oil companies not be successful in these
discoveries or developments, the long term trend of continued decline in oil
production from the Prudhoe Bay field area is inevitable with a corresponding
adverse impact on the economy of the state, in general, and on demand for
telecommunications and cable television services.

     Market prices for North Slope oil have declined to below $11 per barrel
in March 1998, below the average price of approximately $18 per barrel used
by the State of Alaska to budget its oil related revenues. The State of
Alaska maintains surplus accounts that are intended to fund budgetary
shortfalls and would be expected to fund all or a portion of the revenue
shortfall. The Company is not able to predict the effect of declines in the
price of North Slope oil on Alaska's economy or on the Company.

                                   SEASONALITY

      Long distance revenues have historically been highest in the summer
months as a result of temporary population increases attributable to tourism
and increased seasonal economic activity such as construction, commercial
fishing, and oil and gas activities. Cable television revenues, on the other
hand, are higher in the winter months because consumers tend to watch more
television, and spend more time at home, during these months. The Company's
local services revenues are not expected to exhibit significant seasonality.
The Company's ability to implement construction projects is also reduced
during the winter months because of cold temperatures, snow and short

                                      -45-
<PAGE>

daylight hours.

                                 YEAR 2000 COSTS

      The "Year 2000" issue affects the Company's installed computer systems,
network elements, software applications, and other business systems that have
time-sensitive programs that may not properly reflect or recognize the year
2000. Because many computers and computer applications define dates by the
last two digits of the year, "00" may not be properly identified as the year
2000. This error could result in miscalculations or system failures.

      The Company has established a year 2000 task force to coordinate the
identification, evaluation, and implementation of changes to financial and
operating computer systems and applications necessary to achieve a year 2000
date conversion with no effect on customers or disruption to business
operations. These actions are necessary to insure that the systems and
applications will recognize and process the year 2000 and beyond. Major areas
of potential business impact have been identified and are being assessed, and
initial conversion efforts are underway using both internal and external
resources.

      The Year 2000 issue may also affect the systems and applications of the
Company's customers and vendors. The Company is also contacting others with
whom it conducts business to receive the appropriate warranties and
assurances that those third parties are, or will be, Year 2000 compliant.

      The total cost of modifications and conversions is not known at this
time. The Company's management estimates that the incremental cost of
compliance over the cost of normal software upgrades and replacements and its
effect on the Company's future results of operations totals approximately $3
million in each of 1998 and 1999, subject to further review as part of the
detailed conversion planning. The cost of modifications and conversions is
being expensed as incurred.

      If compliance is not achieved in a timely manner, the Year 2000 issue
could have a material effect on the Company's operations. However, the
Company is focusing on identifying and addressing all aspects of its
operations that may be affected by the Year 2000 issue and is addressing the
most critical applications first. As a result, the Company's management does
not believe its operations will be materially adversely affected.

      Funds for year 2000 costs are expected to be provided from the
Company's operating activities and credit facilities. Management must balance
the requirements for funding discretionary capital expenditures with required
year 2000 efforts given its limited resources.

                             REGULATORY DEVELOPMENTS

      See Part I, Item 1, Recent Developments and Regulation, Franchise
Authorizations and Tariffs for regulatory developments affecting the Company.

                                    INFLATION

      The Company does not believe that inflation has a significant effect on
its operations.

                                      -46-
<PAGE>

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company's exposure to market risk - through derivative financial
instruments and other financial instruments, such as investments in marketable
securities and long-term debt - is not material.

Item 8.   CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The consolidated financial statements of the Company are filed under this
Item, beginning on Page 49. The financial statement schedules required under
Regulation S-X are filed pursuant to Item 14 of this Report.

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE.

            None.



                                      -47-
<PAGE>

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

          Omitted per General Instruction J(1)(a) and (b) of Form 10-K .

Item 11.  EXECUTIVE COMPENSATION.

          Omitted per General Instruction J(1)(a) and (b) of Form 10-K .

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          Omitted per General Instruction J(1)(a) and (b) of Form 10-K .

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          Omitted per General Instruction J(1)(a) and (b) of Form 10-K .



                                      -48-
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
GCI, Inc.:

    We have audited the accompanying consolidated balance sheets of GCI, Inc.
and Subsidiaries and its predecessor General Communication, Inc. as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

    We conducted our audits in accordance with 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 and the report of the other auditors provide a
reasonable basis for our opinion.

    In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GCI, Inc.
and Subsidiaries and its predecessor General Communication, Inc. as of
December 31, 1997 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.


                                                           /s/
                                                           KPMG PEAT MARWICK LLP

Anchorage, Alaska
March 4, 1998



                                      -49-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                               (Successor)   (Predecessor)
                   ASSETS                                           1997           1996
------------------------------------------------------         -----------     ----------
                                                                 (Amounts in thousands)
<S>                                                            <C>            <C>
Current assets:
   Cash and cash equivalents                                     $  3,048          13,349
                                                                 --------        --------
   Receivables:
        Trade                                                      29,599          28,015
        Income tax receivable (note 7)                              4,752           1,026
        Other                                                         649             228
                                                                 --------        --------
                                                                   35,000          29,269
   Less allowance for doubtful receivables                          1,070             597
                                                                 --------        --------
        Net receivables                                            33,930          28,672
                                                                 --------        --------
   Prepaid and other current assets                                 2,520           2,236
   Deferred income taxes, net (note 7)                              1,675             835
   Inventories                                                      2,164           1,589
   Notes receivable (note 4)                                          897             421
                                                                 --------        --------
        Total current assets                                       44,234          47,102
                                                                 --------        --------
Restricted cash (note 13)                                          39,406               0
                                                                 --------        --------
Property and equipment, at cost (notes 6, 9, 10 and 11)
   Land and buildings                                                 981             692
   Telephony distribution systems                                 116,016          81,414
   Cable television distribution systems                           69,445          52,284
   Transportation equipment                                         2,643           1,064
   Support equipment                                               32,596          19,994
   Property and equipment under capital leases                      2,718           2,030
                                                                 --------        --------
                                                                  224,399         157,478
   Less amortization and accumulated depreciation                  58,406          41,497
                                                                 --------        --------
        Net property and equipment in service                     165,993         115,981
   Construction in progress                                        18,513          20,770
                                                                 --------        --------
        Net property and equipment                                184,506         136,751

Intangible assets, net of amortization (notes 2 and 5)            246,534         250,920
Transponder deposit (note 13)                                       9,100           9,100
Undersea fiber optic cable deposit (note 13)                        9,094               0
Deferred loan and Senior Notes costs, net of amortization           9,379             900
Notes receivable (note 4)                                           1,331           1,016
Other assets, at cost, net of amortization                          1,718           1,546
                                                                 --------        --------
        Total assets                                             $545,302         447,335
                                                                 --------        --------
                                                                 --------        --------
</TABLE>

                See accompanying notes to consolidated financial statements.



                                      -50-
<PAGE>


                           GCI, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                   (Continued)

<TABLE>
<CAPTION>
                                                                                (Successor)       (Predecessor)
      LIABILITIES AND STOCKHOLDERS' EQUITY                                          1997               1996
-------------------------------------------------------------------             ------------      ------------
                                                                                     (Amounts in thousands)
<S>                                                                             <C>               <C>
Current liabilities:
   Current maturities of long-term debt (note 6)                                  $   1,634            31,969
   Current maturities of obligations under capital leases
      (note 11)                                                                         198                71
   Accounts payable                                                                  25,107            23,677
   Accrued payroll and payroll related obligations                                    4,630             3,830
   Accrued liabilities                                                                6,019             4,173
   Accrued interest                                                                   7,649             2,708
   Subscriber deposits and deferred revenues                                          3,898             3,449
   Accrued income taxes (note 7)                                                        111                 0
                                                                                  ---------         ---------
      Total current liabilities                                                      49,246            69,877

   Long-term debt, excluding current maturities (note 6)                            248,450           191,273
   Obligations under capital leases, excluding
      current maturities (note 11)                                                      400                 0
   Obligations  under  capital  leases due to  related  parties,
      excluding current maturities (notes 10 and 11)                                    590               675
   Deferred income taxes, net (note 7)                                               38,904            33,720
   Other liabilities                                                                  3,273             2,236
                                                                                  ---------         ---------
      Total liabilities                                                             340,863           297,781
                                                                                  ---------         ---------
Stockholders' equity (notes 2, 3, 6, 7 and 8):
Common stock (no par):
   Class A. Authorized 10,000 shares; issued and outstanding
      100 shares at December 31, 1997                                               206,622                 0

   Class A. Authorized 100,000,000 shares; issued and
      outstanding 36,586,973 shares at December 31,
      1996                                                                                0           113,421


   Class B. Authorized 10,000,000 shares; issued and outstanding 4,074,028
      shares at December 31, 1996; convertible on a share-per-share basis
      into Class A common stock                                                           0             3,432

   Less cost of 199,081 Class A common shares held in treasury
      at December 31, 1996                                                                0            (1,010)

Paid-in capital                                                                           0             4,229
Retained earnings (deficit)                                                          (2,183)           29,482
                                                                                  ---------         ---------
      Total stockholders' equity                                                    204,439           149,554
                                                                                  ---------         ---------
Commitments and contingencies (notes 11 and 13)
           Total liabilities and stockholders' equity                             $ 545,302           447,335
                                                                                  ---------         ---------
                                                                                  ---------         ---------
</TABLE>

See accompanying notes to consolidated financial statements.




                                      -51-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                  Years ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                                                (Successor)              (Predecessor)
                                                                    1997             1996               1995
                                                               -------------    -------------     ------------
                                                                      (Amounts in thousands except per share amounts)
<S>                                                            <C>               <C>              <C>
Revenues (notes 9 and 10):
   Telecommunication services                                    $ 168,644           155,419          129,279
   Cable services                                                   55,165             9,475                0
                                                                 ---------         ---------        ---------
        Total revenues                                             223,809           164,894          129,279

Cost of sales and services                                         111,077            92,664           72,091
Selling, general and administrative expenses                        73,583            46,412           37,691
Depreciation and amortization                                       23,767             9,409            5,993
                                                                 ---------         ---------        ---------
        Operating income (note 9)                                   15,382            16,409           13,504

Interest expense, net (notes 3 and 6)                               17,617             3,719              903
                                                                 ---------         ---------        ---------
        Net  earnings  (loss)  before  income  taxes  and
           extraordinary item                                       (2,235)           12,690           12,601

Income tax expense (benefit) (notes 3 and 7)                          (573)            5,228            5,099
                                                                 ---------         ---------        ---------
        Net earnings (loss) before  extraordinary loss on
           early extinguishment of debt                             (1,662)            7,462            7,502

Loss on early  extinguishment  of debt, net of income tax
   benefit of $180 (note 6)                                            521                 0                0
                                                                 ---------         ---------        ---------
        Net earnings (loss)                                      $  (2,183)            7,462            7,502
                                                                 ---------         ---------        ---------
                                                                 ---------         ---------        ---------
Basic earnings (loss) per common share:
   Net earnings (loss) before extraordinary loss                 $ (16,620)             0.28             0.32
   Extraordinary loss                                               (5,210)             0.00             0.00
                                                                 ---------         ---------        ---------
        Net earnings (loss)                                      $ (21,830)             0.28             0.32
                                                                 ---------         ---------        ---------
                                                                 ---------         ---------        ---------
Diluted earnings (loss) per common share:
   Net earnings (loss) before extraordinary loss                 $ (16,620)             0.27             0.31
   Extraordinary loss                                               (5,210)             0.00             0.00
                                                                 ---------         ---------        ---------
        Net earnings (loss)                                      $ (21,830)             0.27             0.31
                                                                 ---------         ---------        ---------
                                                                 ---------         ---------        ---------
</TABLE>

See accompanying notes to consolidated financial statements.



                                      -52-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                               Class A
                                                  Shares of              Class A    Class B     Shares
                                              Common      Stock           Common     Common     Held in     Paid-in     Retained
(Amounts in thousands)                        Class A     Class B         Stock      Stock     Treasury     Capital     Earnings
                                             -----------------------------------------------------------------------------------
<S>                                          <C>          <C>           <C>         <C>        <C>          <C>         <C>
Predecessor  balances  at
  December 31, 1994                            19,617       4,179       $ 13,830      3,432        (328)      3,641       14,518

Net earnings                                     --          --             --         --          --          --          7,502
Class B shares converted to Class A                 3          (3)          --         --          --          --           --
Tax effect of excess stock
   compensation expense for tax
   purposes over amounts
   recognized for financial
   reporting purposes (note 7)                   --          --             --         --          --           397         --
Shares purchased and held in
   Treasury                                      --          --             --         --           (61)       --           --
Shares issued under stock option
   plan                                            40        --               82       --          --          --           --
Shares issued and issuable under
   officer stock option agreements                 20        --             --         --          --             3         --
                                             --------     -------      ---------    --------    ------     ---------    --------
Predecessor balances at December
   31, 1995                                    19,680       4,176         13,912      3,432        (389)      4,041       22,020
Net earnings                                     --          --             --         --          --          --          7,462
Class B shares converted to Class A               102        (102)          --         --          --          --           --

Tax effect of excess stock
   compensation expense for tax
   purposes over amounts
   recognized for financial
   reporting purposes (note 7)                   --          --             --         --          --           187         --

Shares issued to MCI (notes 2 and 8)            2,000        --           13,000       --          --          --           --

Shares issued pursuant to
   acquisitions,  net of costs
   totaling $432 (note 2)                      14,723        --           86,278       --          --          --           --

Shares purchased and held in
   Treasury                                      --          --             --         --          (621)       --           --
Shares issued under stock option
   plan                                            82        --              231       --          --          --           --
Shares issued and issuable under
   officer stock option agreements               --          --             --         --          --             1         --
                                             --------     -------      ---------    --------    ------     ---------    --------
Predecessor balances at December 31,
   1996                                        36,587       4,074        113,421      3,432      (1,010)      4,229       29,482
                                             --------     -------      ---------    --------    ------     ---------    --------
                                             --------     -------      ---------    --------    ------     ---------    --------
Successor  balances at December 31,
    1996                                           --          --         $   --         --          --          --
Shares issued to predecessor
    General Communication, Inc.                   100        --          206,622       --          --          --           --
Net loss                                         --          --             --         --          --          --         (2,183)
                                             --------     -------      ---------    --------    ------     ---------    --------
Successor  balances at December 31,
  1997                                            100        --         $206,622       --          --          --         (2,183)
                                             --------     -------      ---------    --------    ------     ---------    --------
                                             --------     -------      ---------    --------    ------     ---------    --------
</TABLE>

See accompanying notes to consolidated financial statements.



                                      -53-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                 (Successor)          (Predecessor)
                                                                    1997           1996            1995
                                                                 -----------    -----------    -----------
                                                                           (Amounts in thousands)
<S>                                                               <C>            <C>           <C>
 Cash flows from operating activities:
    Net earnings (loss)                                           $  (2,183)         7,462         7,502
    Adjustments to reconcile net earnings
    to net cash provided by operating activities:
        Depreciation and amortization                                23,191          9,346         5,763
        Amortization of deferred loan costs                             576             63           230
        Deferred income tax expense                                   4,410          2,252         1,017
        Deferred compensation and compensatory stock
          options                                                       477            507           433
        Disposals of property and equipment                              71             30           170
        Loss on early extinguishment of debt                            701              0             0
        Bad debt expense, net of write-offs                             473            (34)         (114)
        Other noncash income and expense items                         (125)           (42)          354
        Change in operating assets and liabilities (note 3)           3,202          2,724        (1,307)
                                                                  ---------       --------       -------
 Net cash provided by operating activities                           30,793         22,308        14,048
                                                                  ---------       --------       -------
 Cash flows from investing activities:
    Acquisitions of businesses, net of cash acquired (notes
        2 and 3)                                                       (547)       (72,818)            0
    Purchases of property and equipment                             (64,644)       (38,642)       (8,938)
    Restricted cash investments                                     (39,406)             0             0
    Purchases of other assets, including long-term
      deposits                                                       (1,292)       (10,959)         (510)
    Payment of undersea fiber optic cable deposits                   (9,094)             0             0
    Proceeds from the sale of investment security                         0              0           832
    Notes receivable issued                                            (698)          (515)         (251)
    Payments received on notes receivable                                32            288           184
                                                                  ---------       --------       -------
 Net cash used in investing activities                             (115,649)      (122,646)       (8,683)
                                                                  ---------       --------       -------
 Cash flows from financing activities:
    Long-term borrowings- senior notes                              180,000              0             0
    Long-term borrowings- bank debt and leases                       88,305        208,000             0
    Repayments of long-term borrowings and capital lease
        obligations                                                (231,021)        (5,039)       (2,824)
    Retirement of bank debt assumed                                       0       (105,200)            0
    Capital contribution from Predecessor                            47,027              0             0
    Proceeds from common stock issuance                                   0         13,231            82
    Purchase of treasury stock                                            0           (621)          (61)
    Payment of debt and stock issuance costs                         (9,756)          (701)         (194)
                                                                  ---------       --------       -------
 Net cash provided (used) by financing activities                    74,555        109,670        (2,997)
                                                                  ---------       --------       -------
Net increase (decrease) in cash and cash equivalents                (10,301)         9,332         2,368

Cash and cash equivalents at beginning of year                       13,349          4,017         1,649
                                                                  ---------       --------       -------
    Cash and cash equivalents at end of year                      $   3,048         13,349         4,017
                                                                  ---------       --------       -------
                                                                  ---------       --------       -------
</TABLE>

 See accompanying notes to consolidated financial statements.



                                      -54-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     (l)   Organization and summary of Significant Accounting Principles

           Basis of Presentation

                  GCI, Inc. ("Successor") was incorporated in 1997 to effect the
           issuance of Senior Notes as further described in note 6. GCI, Inc.,
           as a wholly owned subsidiary of General Communication, Inc. ("GCI" or
           "Predecessor"), received through its initial capitalization all
           ownership interests in subsidiaries previously held by GCI.

                 The accompanying financial statements for the year ended and as
           of December 31, 1997 include the operating activities and balances of
           GCI, Inc. and its subsidiaries and include the 1997 operating
           activities and remaining balances of its predecessor GCI. The
           accompanying financial statements as of December 31, 1996 include the
           balances of the Predecessor and for the periods ended December 31,
           1996 and 1995 include the operating activities of the Predecessor as
           reported in previous filings with the Securities and Exchange
           Commission. The Predecessor's 1997, 1996 and 1995 operating
           activities and balances not conducted or owned through its
           subsidiaries were not material to GCI, Inc.

           (a)  Organization

           GCI, an Alaska corporation, was incorporated in 1979. GCI, Inc., an
           Alaska corporation, was incorporated in 1997 and is a wholly owned
           subsidiary of GCI. GCI Holding, Inc. ("Holdings") is a wholly owned
           subsidiary of GCI, Inc. and was incorporated in 1997. GCI
           Communication Corp. ("GCC"), an Alaska corporation, is a wholly owned
           subsidiary of Holdings and was incorporated in 1990. GCI
           Communication Services, Inc. ("Communication Services"), an Alaska
           corporation, is a wholly owned subsidiary of Holdings and was
           incorporated in 1992. GCI Leasing Co., Inc. ("Leasing Company"), an
           Alaska corporation, is a wholly owned subsidiary of Communication
           Services and was incorporated in 1992. GCI, GCI, Inc., Holdings and
           GCC are engaged in the transmission of interstate and intrastate
           private line and switched message long distance telephone service
           between Anchorage, Fairbanks, Juneau, and other communities in Alaska
           and the remaining United States and foreign countries. GCC also
           provides northbound services to certain common carriers terminating
           traffic in Alaska and sells and services dedicated communications
           systems and related equipment. Communication Services provides
           private network point-to-point data and voice transmission services
           between Alaska, Hawaii and the western contiguous United States.
           Leasing Company owns and leases capacity on an undersea fiber optic
           cable used in the transmission of interstate private line and
           switched message long distance services between Alaska and the
           remaining United States and foreign countries.

           Cable television services are provided through GCI Cable, Inc. and
           through its ownership in Prime Cable of Alaska L.P. ("Prime"), and
           through GCI Cable, Inc.'s wholly owned subsidiaries GCI
           Cable/Fairbanks, Inc., and GCI Cable/Juneau, Inc. (collectively "GCI
           Cable" or "Cable Companies"). GCI Cable, Inc. and its subsidiaries
           are Alaska corporations and were incorporated in 1996. GCI Cable,
           Inc. is a wholly owned subsidiary

                                                                     (Continued)

                                      -55-

<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           of Holdings. Prime is a limited partnership organized under the laws
           of the State of Delaware whose partnership interests are wholly owned
           by GCI Cable, Inc.

           GCI Transport Co., Inc., Fiber Hold Co., Inc., GCI Fiber Co., Inc.,
           and GCI Satellite Co., Inc., all Alaska corporations, were
           incorporated in 1997 to finance the acquisition of satellite
           transponders and to construct and deploy the fiber optic cable system
           further described in note 13. GCI Transport Co., Inc. is a wholly
           owned subsidiary of Holdings. Fiber Hold Co., Inc., GCI Fiber Co.,
           Inc., and GCI Satellite Co., Inc. are wholly-owned subsidiaries of
           GCI Transport Co., Inc. Alaska United Fiber System Partnership
           ("Alaska United") was organized in 1997 to construct, own and operate
           the fiber optic cable system described above and in note 13. Alaska
           United is a partnership wholly owned by the Company through GCI Fiber
           Co., Inc. and Fiber Hold Co., Inc.

            (b)  Principles of Consolidation

           The consolidated financial statements include the accounts of GCI,
           Inc., its wholly-owned subsidiary Holdings, Holdings' wholly-owned
           subsidiaries GCC, Communication Services, GCI Cable, Communication
           Services' wholly-owned subsidiary Leasing Company, GCI Transport Co.,
           Inc, GCI Transport Co., Inc.'s wholly-owned subsidiaries GCI Fiber
           Co., Inc. and Fiber Hold Co., Inc. and GCI Fiber Co., Inc.'s and
           Fiber Hold Co., Inc.'s wholly owned partnership Alaska United
           (collectively "the Company"). All significant intercompany balances
           and transactions have been eliminated in consolidation.

                                                                     (Continued)

                                      -56-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (c)  Net Earnings (Loss) Per Common Share

           In February 1997 the Financial Accounting Standards Board (FASB)
           issued SFAS 128, "Earnings per Share" ("SFAS 128"). This new standard
           simplifies the earnings per share ("EPS") calculation and makes the
           U.S. standard for computing EPS more consistent with international
           accounting standards. The Company adopted SFAS 128 in 1997. EPS for
           prior years has been restated to comply with SFAS 128.

           Under SFAS 128, primary EPS was replaced with a more simple
           calculation called basic EPS. Basic EPS is calculated by dividing
           income available to common shareholders by the weighted average
           common shares outstanding. Previously, primary EPS was based on the
           weighted average of both outstanding and issuable shares assuming all
           dilutive options had been exercised. Under SFAS 128, fully diluted
           EPS has not changed significantly, but has been renamed diluted EPS.
           Diluted EPS includes the effect of all potentially dilutive
           securities, such as options and convertible preferred stock.

           Shares used to calculate EPS consist of the following (amounts in
           thousands):

<TABLE>
<CAPTION>
                                                         (Successor)    (Predecessor)
                                                             1997      1996       1995
                                                           -------   --------    --------
<S>                                                      <C>         <C>         <C>
           Weighted average common shares outstanding         100      26,498      23,600

            Common equivalent shares outstanding                0         802         389
                                                           -------   --------    --------
                                                              100      27,300      23,989
                                                           -------   --------    --------
                                                           -------   --------    --------
</TABLE>

           Basic and diluted earnings per share are computed using GCI's
           weighted average outstanding shares of common stock and common
           stock equivalents in 1996 and 1995. 1997 basic and diluted loss
           per share calculations are based on GCI, Inc.'s outstanding shares
           of common stock which are not publicly traded.  The Successor has
           no outstanding common stock equivalents.

           (d)  Cash and Cash Equivalents

           Cash equivalents consist of short-term, highly liquid investments
           that are readily convertible into cash.

           (e)  Inventories

           Inventory of merchandise for resale and parts is stated at the lower
           of cost or market. Cost is determined using the first-in, first-out
           method for parts and the specific identification method for equipment
           held for resale.

           Cable television inventories are carried at the lower of cost
           (weighted average unit cost) or market.

                                                                     (Continued)

                                      -57-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (f)  Property and Equipment

           Telecommunications Property and Equipment

           Telecommunications property and equipment is stated at cost.
           Construction costs of transmission facilities are capitalized.
           Equipment financed under capital leases is recorded at the lower of
           fair market value or the present value of future minimum lease
           payments. Construction in progress represents distribution systems
           and support equipment not placed in service on December 31, 1997;
           management intends to place this equipment in service during 1998 and
           1999.

           The Company's investment in jointly owned earth station assets on
           Adak Island, Alaska is stated at cost and is depreciated on a
           straight-line basis over lives ranging from 10 to 12 years. Revenues
           derived from customers whose service transits the joint facilities
           are recognized based upon the level of service and supporting
           facilities that are provided by each owner.

           Depreciation and amortization is computed on a straight-line basis
           based upon the shorter of the lease term or the estimated useful
           lives of the assets ranging from 3 to 20 years for distribution
           systems and 5 to 10 years for support equipment. Amortization of
           equipment financed under capitalized leases is included in
           depreciation expense.

           Repairs and maintenance are charged to operations, and renewals and
           additions are capitalized. Gains or losses are recognized at the time
           of ordinary retirements, sales or other dispositions of property.

           Cable Television Property and Equipment

           Cable television property and equipment is stated at cost. Cable
           television equipment depreciation is computed by the straight-line
           method over the estimated useful lives of the assets. The composite
           method and a 10-year life are used for cable television distribution
           systems. Under the composite method, proceeds from the retirement of
           cable television distribution system assets are credited to the
           allowance for depreciation. Gains or losses on disposition of
           property, plant and equipment (other than cable television
           distribution systems) are credited or charged to income. Maintenance
           and repairs are charged to expense as incurred. Expenditures for
           major renewals and betterments are capitalized.

           (g)  Intangible Assets

           Intangible assets are valued at unamortized cost. Management reviews
           the valuation and amortization of intangible assets on a periodic
           basis, taking into consideration any events or circumstances that
           might indicate diminished value. The assessment of the recoverability
           is based on whether the asset can be recovered through undiscounted
           future cash flows.

           Goodwill represents the excess of cost over fair value of net assets
           acquired and is being amortized on a straight-line basis over periods
           of 20 to 40 years. Goodwill and certificates

                                                                     (Continued)

                                      -58-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           of operating rights arising from the 1996 acquisition of the Cable
           Companies are amortized using the straight line method over forty
           years.

           The cost of the Company's PCS license and related financing costs
           have been capitalized as an intangible asset. Once the associated
           assets are placed into service, the recorded cost of the license will
           begin being amortized over a 40-year period using the straight-line
           method.

           (h)  Deferred Loan and Senior Notes Costs

           Debt and Senior Notes issuance costs are deferred and amortized using
           the straight-line method, which approximates the interest method,
           over the term of the related debt and notes.

           (i)  Other Assets

           Other assets are recorded at cost and are amortized on a
           straight-line basis over periods of 8-10 years.

           (j)  Revenue from Services and Products

           Revenues generated from long distance telecommunication services are
           recognized when the services are provided. Revenues from the sale of
           equipment are recognized at the time the equipment is delivered or
           installed. Service revenues are derived primarily from maintenance
           contracts on equipment and are recognized on a prorated basis over
           the term of the contract.

           Cable television, local service and private line telecommunication
           revenues are generally billed in advance and are recognized as the
           associated service is provided.

           Other revenues are recognized when the service is provided.

           (k)  Research and Development and Advertising Expense

           The Company expenses advertising and research and development costs
           as incurred. Advertising expenses were approximately $2,897,000,
           $2,411,000 and $1,924,000 for 1997, 1996 and 1995, respectively.

           (l)  Interest Expense

           Interest costs incurred during the construction period of significant
           capital projects are capitalized. Interest capitalized by the Company
           totaled $1,886,000, $1,034,000, and $112,000 during the years ended
           December 31, 1997, 1996, and 1995.

           (m)  Income Taxes

           Income taxes are accounted for using the asset and liability method.
           Deferred tax assets and liabilities be recognized for the future tax
           consequences attributable to differences

                                                                     (Continued)

                                      -59-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           between the financial statement carrying amounts of existing assets
           and liabilities and their respective tax bases. Deferred tax assets
           and liabilities are measured using enacted tax rates expected to
           apply to taxable earnings in the years in which those temporary
           differences are expected to be recovered or settled. Deferred tax
           assets are recognized to the extent that the benefits are more likely
           to be realized than not. GCI, Inc. and its wholly owned subsidiaries
           file corporate income tax returns as part of the GCI consolidated
           group of companies.

           (n)  Stock Option Plan

           The Company accounts for its stock option plan in accordance with the
           provisions of Accounting Principles Board ("APB") Opinion No. 25,
           "Accounting for Stock Issued to Employees," and related
           interpretations. As such, compensation expense would be recorded on
           the date of grant only if the current market price of the underlying
           stock exceeded the exercise price. On January 1, 1996, the Company
           adopted SFAS 123, "Accounting for Stock-Based Compensation," ("SFAS
           123") which permits entities to recognize as expense over the vesting
           period the fair value of all stock-based awards on the date of grant.
           Alternatively, SFAS 123 also allows entities to continue to apply the
           provisions of APB Opinion No. 25 and provide pro forma net income and
           pro forma earnings per share disclosures for employee stock option
           grants made in 1995 and future years as if the fair-value-based
           method defined in SFAS 123 had been applied. The Company has elected
           to continue to apply the provisions of APB Opinion No. 25 and provide
           the pro forma disclosure provisions of SFAS 123.

            (o)  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.

            (p)  Concentrations of Credit Risk

            Financial instruments that potentially subject the Company to
            concentrations of credit risk are primarily cash, temporary
            investments, and accounts receivable. Excess cash is invested in
            high quality short-term liquid money instruments issued by highly
            rated financial institutions. At December 31, 1997, substantially
            all of the Company's cash and restricted cash balances were invested
            in short-term liquid money instruments. The Company's customers are
            located primarily throughout Alaska. As a result of this geographic
            concentration, the Company's growth and operations depend upon
            economic conditions in Alaska. The economy of Alaska is dependent
            upon the natural resource industries, and in particular oil
            production, as well as tourism, government, and United States
            military spending. Though limited to one geographical area, the
            concentration of credit risk with respect to the Company's
            receivables is minimized due to the large number of customers,
            individually small balances, short payment terms and required
            deposits.

                                                                     (Continued)

                                      -60-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

            (q)  Impairment of Long-Lived Assets and Long-Lived Assets to Be
                 Disposed Of

            The Company adopted the provisions of SFAS No. 121, "Accounting for
            the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
            Disposed Of," on January 1, 1996. This Statement requires that
            long-lived assets and certain identifiable intangibles be reviewed
            for impairment whenever events or changes in circumstances indicate
            that the carrying amount of an asset may not be recoverable.
            Recoverability of assets to be held and used is measured by a
            comparison of the carrying amount of an asset to future net cash
            flows expected to be generated by the asset. If such assets are
            considered to be impaired, the impairment to be recognized is
            measured by the amount by which the carrying amount of the assets
            exceeds the fair value of the assets. Assets to be disposed of are
            reported at the lower of the carrying amount or fair value less
            costs to sell. Adoption of this Statement did not have a material
            impact on the Company's financial position, results of operations,
            or liquidity.

           (r)  Reclassifications

           Reclassifications have been made to the 1995 and 1996 financial
           statements to make them comparable with the 1997 presentation.

     (2)   Acquisitions

           Cable Television Systems

           Effective October 31, 1996, following shareholder and regulatory
           approvals, the Company completed the acquisition of seven Alaska
           cable television companies ("Cable Systems"). Under the terms of the
           transactions, accounted for using the purchase method, the final
           purchase price was $280.1 million, which was the aggregate value for
           all the Cable Systems and included certain transaction and financing
           costs. The purchase price included issuance of 14.7 million shares of
           GCI's class A common stock and cash, debt assumption and issuance of
           subordinated notes. Financing for the transactions resulted from
           borrowings under a new $205 million bank credit facility and from
           additional capital provided from the sale of two million shares of
           GCI's Class A common stock to MCI Telecommunications Corporation for
           $6.50 per share.

           Acquisition costs totaling $304.4 million were allocated to tangible
           and identifiable intangible assets and liabilities based upon fair
           market values. Approximately $206.5 million was allocated to the
           certificate of operating rights and approximately $42.4 was allocated
           to goodwill.

           Various tax attributes of Prime gave rise to a deferred tax liability
           (see note 7) of $24.4 million recorded by the Company as a result of
           the acquisition.

           During January 1997, holders of the GCI subordinated notes exercised
           a conversion option which allowed them to exchange their notes for
           GCI Class A common shares at a predetermined conversion price of
           $6.50 per share. As a result, the note holders received a total of
           1,538,457 shares of GCI Class A common stock.

                                                                     (Continued)

                                      -61-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           The final closing required approval of the Alaska Public Utilities
           Commission (APUC), which was granted on September 23, 1996. The APUC
           approval included several conditions placed on the transfer, such as
           continuing the existing conditions requiring provision of public
           access channels and requiring the cable operations to file annual
           income and operating statements.

            Astrolabe Group, Inc.

            Effective December 2, 1997, the Company purchased all of the
            outstanding shares of Astrolabe Group, Inc. The $1,324,000 purchase
            was accounted for using the purchase method. The purchase price
            consisted of a payment of $600,000 and the issuance of options to
            purchase 100,000 shares of GCI's Class A common stock for $.01 per
            share.

     (3)   Consolidated Statements of Cash Flows Supplemental Disclosures

           Changes in operating assets and liabilities consist of (amounts in
             thousands):

<TABLE>
<CAPTION>
                                                                        (Successor)          (Predecessor)
                        Year ended December 31,                           1997           1996            1995
                                                                        -----------    -----------    ------------
<S>                                                                     <C>              <C>             <C>
                   (Increase) in trade receivables                       $ (1,119)         (4,604)         (4,701)
                   (Increase) in income tax receivable                     (3,726)         (1,026)              0
                   (Increase) in other receivables                           (421)           (134)            (32)
                   (Increase) in prepaid and other current assets            (274)           (467)           (222)
                   (Increase) decrease in inventories                        (575)            412            (317)
                   Increase in accounts payable                             1,192           5,517           5,020
                   Increase in accrued liabilities                          1,846             914             423
                   Increase (decrease) in accrued payroll and
                       payroll related obligations                            800           1,723          (1,928)
                   Increase (decrease) in accrued income taxes                111            (547)            330
                   Increase in accrued interest                             4,941           2,188              31
                   Increase (decrease) in subscriber deposits
                       and deferred revenues                                  449              (4)            220
                   Increase (decrease) in components of other
                       liabilities                                            (22)         (1,248)           (131)
                                                                        -----------    -----------    ------------
                                                                        $   3,202           2,724          (1,307)
                                                                        -----------    -----------    ------------
                                                                        -----------    -----------    ------------
</TABLE>

                                                                     (Continued)

                                      -62-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           Acquisitions of businesses, net of cash acquired consists of (amounts
             in thousands):
<TABLE>
<CAPTION>

                                                                                       (Successor)       (Predecessor)
                        Year ended December 31,                                            1997              1996
                                                                                       --------------     -------------
<S>                                                                                    <C>                  <C>
                   Fair value of assets acquired, net of liabilities assumed           $      1,259           304,441
                   Bank debt and net working capital deficit assumed                              0          (110,538)
                   Common stock issued to sellers                                                 0           (86,710)
                   Convertible, subordinated debt issued to sellers                               0           (10,000)
                   Net deferred income tax liability                                              0           (24,375)
                   Deferred credit                                                             (712)                0
                                                                                       --------------     -------------

                        Net cash used to acquire businesses                            $        547            72,818
                                                                                       --------------     -------------
                                                                                       --------------     -------------

</TABLE>

           The holders of $10 million of convertible subordinated notes
           exercised their conversion rights in January 1997 resulting in the
           exchange of such notes for 1,538,457 shares of GCI's Class A common
           stock.

           Net income tax refunds received totaled $1,546,000 during 1997 and
           income taxes paid totaled $4,361,000 and $3,752,000 during 1996 and
           1995, respectively.

           Interest paid totaled approximately $17,732,000, $2,657,000 and
           $1,227,000 during 1997, 1996 and 1995, respectively.

           GCI recorded $65,000, $187,000 and $397,000 in 1997, 1996 and 1995,
           respectively, in paid-in capital in recognition of the income tax
           effect of excess stock compensation expense for tax purposes over
           amounts recognized for financial reporting purposes.

                                                                     (Continued)

                                      -63-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     (4)   Notes Receivable

           Notes receivable consist of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                              (Successor)  (Predecessor)
                                                                                      December 31,
                                                                               -------------------------
                                                                                   1997         1996
                                                                               -----------  ------------
          <S>                                                                  <C>          <C>
           Note receivable from officer bearing interest at the rate paid
               by the Company on its senior indebtedness, secured by GCI
               Class A common stock, due on the 90th day after
               termination of employment or July 30, 1998, whichever is
               earlier                                                          $    500          500

           Note receivable from officer bearing interest at 10%, secured
               by Company stock; payable in equal annual installments of
               $36,513 through August 26, 2004                                       224          224

           Notes receivable from officers and others bearing interest at
               7% to 10%, unsecured and secured by Company common stock,
               shares of other common stock and equipment; due on demand
               and through August 26, 2004. (1)                                    1,155          493

           Interest receivable                                                       349          220
                                                                               -----------  ------------
           Total notes receivable                                                  2,228        1,437

           Less current portion, including current interest
               receivable                                                           (897)        (421)
                                                                               -----------  ------------

           Long-term portion, including long-term interest
               receivable                                                       $  1,331        1,016
                                                                               -----------  ------------
                                                                               -----------  ------------
</TABLE>

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

           (1) The Company has no current plans to call the notes due on
               demand during 1998.

                                                                     (Continued)

                                      -64-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

      (5)  Intangible Assets

           Intangible assets consist of the following (amounts in thousands):
<TABLE>
<CAPTION>

                                                                    (Successor)            (Predecessor)
                                                                                December 31,
                                                                    ------------------------------------
                                                                        1997                  1996
                                                                    -------------        ---------------
                      <S>                                          <C>                    <C>
                      Certificates of operating rights               $  206,492               206,492
                      Goodwill                                           45,922                44,347
                      PCS license and related costs                       2,051                 1,913
                      Other intangibles                                     260                   121
                                                                    -------------        ---------------
                                                                        254,725               252,873
                      Less amortization                                   8,191                 1,953
                                                                    -------------        ---------------

                      Intangible assets, net                         $  246,534               250,920
                                                                    -------------        ---------------
                                                                    -------------        ---------------
</TABLE>


     (6)   Long-term Debt

           Long-term debt consists of the following (amounts in thousands):


<TABLE>
<CAPTION>
                                                                    (Successor)            (Predecessor)
                                                                                December 31,
                                                                    ------------------------------------
                                                                        1997                  1996
                                                                    -------------        ---------------
                <S>                                                 <C>                 <C>
                 Senior notes (a)                                  $    180,000                      0
                 Senior GCI Holdings loan (b)                            64,700                      0
                 Senior GCI Cable loan (c)                                    0                175,900
                 Credit Agreement (d)                                         0                 30,100
                 Convertible, subordinated notes (e)                          0                 10,000
                 Undersea Fiber and Equipment Loan Agreement(f)           5,384                  6,886
                 Financing Obligation (g)                                     0                    356
                                                                  ---------------         --------------
                                                                        250,084                223,242

                 Less current maturities                                  1,634                 31,969
                                                                  ---------------         --------------

                 Long-term debt, excluding current maturities     $      248,450                191,273
                                                                  ---------------         --------------
                                                                  ---------------         --------------
</TABLE>



           (a)      On August 1, 1997 GCI, Inc. issued $180,000,000 of 9.75%
                    senior notes due 2007 ("Senior Notes"). The Senior Notes
                    were issued at face value. Net proceeds to GCI, Inc. after
                    deducting underwriting discounts and commissions totaled
                    $174,600,000. Issuance costs will be amortized to interest
                    expense over the term of the Senior Notes.

                    The Senior Notes are not redeemable prior to August 1, 2002.
                    After August 1, 2002 the Senior Notes are redeemable at the
                    option of GCI, Inc. under certain conditions and at stated
                    redemption prices. The Senior Notes include limitations on
                    additional

                                                                     (Continued)

                                      -65-
<PAGE>

                                   GCI, INC. AND SUBSIDIARIES

                           Notes to Consolidated Financial Statements

                    indebtedness and prohibit payment of dividends, payments for
                    the purchase, redemption, acquisition or retirement of GCI,
                    Inc.'s stock, payments for early retirement of debt
                    subordinate to the note, liens on property, and asset sales.
                    GCI, Inc. was in compliance with all covenants during the
                    period commencing August 1, 1997 (date of the notes) through
                    December 31, 1997.

                    Net proceeds from the stock (see note 8) and Senior Note
                    offerings and initial draws on the new Senior Holdings Loan
                    (see note 6(b)) facilities were used to repay borrowings
                    outstanding under the Company's then existing credit
                    facilities and to provide initial funding for construction
                    of the Alaska United undersea fiber optic cable (see note
                    13). The Company expects to borrow funds under its new
                    credit facilities in the future to fund capital expenditures
                    and for other general corporate purposes.

           (b)      The Company, through Holdings, entered into new $200,000,000
                    and $50,000,000 credit facilities ("Senior Holdings Loan")
                    effective August 1, 1997 that mature on June 30, 2005 and
                    bear interest at either Libor plus 0.75% to 2.25%, depending
                    on the leverage ratio of Holdings and certain of its
                    subsidiaries, or at the greater of the prime rate or the
                    federal funds effective rate (as defined) plus 0.05%, in
                    each case plus an additional 0.0% to 1.125%, depending on
                    the leverage ratio of Holdings and certain of its
                    subsidiaries. Borrowings under the Senior Holdings Loan
                    facilities totaled $64,700,000 at December 31, 1997. The
                    Company is required to pay a commitment fee equal to 0.375%
                    per annum on the unused portion of the commitment.
                    Commitment fee expense on the Senior Holdings Loan totaled
                    $240,000 in 1997.

                                                                     (Continued)

                                      -66-
<PAGE>
                                   GCI, INC. AND SUBSIDIARIES

                            Notes to Consolidated Financial Statements

                    While Holdings may elect at any time to reduce amounts due
                    and available under the Senior Loan facilities, a mandatory
                    prepayment is required each quarter, beginning September 30,
                    2000 as follows:
<TABLE>
<CAPTION>
                                                   Percentage of Reduction of
                     Date of Payment                 Outstanding Facilities
               ----------------------------     ---------------------------------
<S>                 <C>                                       <C>
                     September 30, 2000                        3.750%
                     December 31, 2000                         3.750%

                     March 31, 2001                            3.750%
                     June 30, 2001                             3.750%
                     September 30, 2001                        3.750%
                     December 31, 2001                         3.750%

                     March 31, 2002                            5.000%
                     June 30, 2002                             5.000%
                     September 30, 2002                        5.000%
                     December 31, 2002                         5.000%

                     March 31, 2003                            5.000%
                     June 30, 2003                             5.000%
                     September 30, 2003                        5.000%
                     December 31, 2003                         5.000%

                     March 31, 2004                            5.625%
                     June 30, 2004                             5.625%
                     September 30, 2004                        5.625%
                     December 31, 2004                         5.625%

                     September 30, 2005                        7.500%
                     December 31, 2005                         7.500% and all remaining
                                                               outstanding balances
</TABLE>

                    The Senior Holdings Loan facilities contain, among others,
                    covenants requiring maintenance of specific levels of
                    operating cash flow to indebtedness and to interest expense.
                    The Senior Holdings Loan facilities include limitations on
                    acquisitions and additional indebtedness, and prohibit any
                    direct or indirect distribution, dividend, redemption or
                    other payment to any person on account of any general or
                    limited partnership interest in, or shares of capital stock
                    or other securities of Holdings or any of its subsidiaries.
                    Holdings was in compliance with all Senior Holdings Loan
                    facilities covenants during the period commencing August 1,
                    1997 (date of the loans) through December 31, 1997.

                    Essentially all of Holdings' assets as well as a pledge of
                    Holdings' stock by GCI, Inc. collateralize the Senior
                    Holdings Loan facilities.

                    $3.4 million of the Senior Holdings Loan facilities have
                    been used to provide a letter of credit to secure payment of
                    certain access charges associated with the Company's
                    provision of telecommunications services within the State of
                    Alaska.

                                                                     (Continued)
                                      -67-

<PAGE>

                                GCI, INC. AND SUBSIDIARIES

                        Notes to Consolidated Financial Statements

                 In connection with the funding of the Senior Holdings Loan
                 facilities, Holdings paid bank fees and other expenses of
                 approximately $2,916,000, which will be amortized to
                 interest expense over the life of the agreement.

           (c)   GCI Cable entered into a credit facility totaling $205
                 million ("Senior GCI Cable Loan") effective October 31,
                 1996, associated with the acquisition of the cable companies
                 as described in note 2. In August 1997 the Senior GCI Cable
                 Loan was repaid using proceeds from the Senior Notes (see
                 note 6(a)) and the Senior Holdings Loan (see note 6(b)).

                 In connection with the funding of the loan agreement, GCI
                 Cable Inc. paid bank fees and other expenses of
                 approximately $764,000 in 1996. The unamortized portion of
                 these bank fees and other expenses (net of an income tax
                 benefit of $180,000) was recognized as an extraordinary loss
                 on the early extinguishment of debt in 1997.

           (d)   The Company entered into a $62,500,000 interim telephony
                 credit facility with its senior lender during April 1996. In
                 August 1997, the Credit Agreement was repaid using proceeds
                 from the Senior Notes (see note 6(a)) and the Senior GCI
                 Holdings Loan (see note 6(b)).

           (e)   The Company issued convertible subordinated notes totaling
                 $10,000,000 in connection with the cable acquisitions
                 described in note 2. During January 1997, the holders of the
                 subordinated notes exercised a conversion option which
                 allowed them to exchange their notes for GCI Class A common
                 shares at a predetermined conversion price of $6.50 per
                 share. As a result, the former note holders received
                 1,538,457 shares of GCI Class A common stock.

           (f)   On December 31, 1992, Leasing Company entered into a
                 $12,000,000 loan agreement, of which approximately
                 $9,000,000 of the proceeds were used to acquire capacity on
                 the undersea fiber optic cable linking Seward, Alaska and
                 Pacific City, Oregon. Concurrently, Leasing Company leased
                 the capacity under a ten year all events, take or pay,
                 contract with MCI, who subleased the capacity back to the
                 Company. The lease and sublease agreements provide for
                 equivalent terms of 10 years and identical monthly payments
                 of $200,000. The proceeds of the lease agreement with MCI
                 were pledged as primary security for the financing. The loan
                 agreement provides for monthly payments of $170,000
                 including principal and interest through the earlier of
                 January 1, 2003, or until repaid. The loan agreement
                 provides for interest at the prime rate plus one-quarter
                 percent. Additional collateral includes substantially all of
                 the assets of Leasing Company including the fiber capacity
                 and a security interest in all of its outstanding stock. MCI
                 has a second position security interest in the assets of
                 Leasing Company.

           (g)   As consideration for MCI's role in enabling Leasing Company
                 to finance and acquire the undersea fiber optic cable
                 capacity described at note 6(d) above, Leasing Company
                 agreed to pay MCI $2,040,000 in sixty monthly payments of
                 $34,000. For

                                                                     (Continued)

                                      -68-

<PAGE>
                                   GCI, INC. AND SUBSIDIARIES

                           Notes to Consolidated Financial Statements


                    financial statement reporting purposes, the obligation was
                    recorded at its remaining present value, using a discount
                    rate of 10% per annum. The agreement was secured by a second
                    position security interest in the assets of Leasing Company.
                    The obligation was fully paid at December 31, 1997.

           As of December 31, 1997 maturities of long-term debt were as follows
             (amounts in thousands):
<TABLE>
<CAPTION>
                    Year ending December 31,
                        <S>                                       <C>
                        1998                                   $       1,634
                        1999                                           1,782
                        2000                                           1,945
                        2001                                              23
                        2002                                               0
                        2003 and thereafter                          244,700
                                                                  -----------
                                                               $     250,084
                                                                  -----------
                                                                  -----------
</TABLE>

      (7)  Income Taxes

           Total income tax expense (benefit) were allocated as follows:
<TABLE>
<CAPTION>

                                                                           (Successor)      (Predecessor)
                                                                                        Years ended
                                                                                        December 31,
                                                                           -----------------------------------
                                                                               1997        1996        1995
                                                                           ----------- ----------- -----------
                                                                                  (Amounts in thousands)
<S>                                                                        <C>            <C>       <C>
                     Earnings (loss) from continuing operations             $   (573)       5,228       5,099

                     Extraordinary item                                         (180)           0           0

                     Stockholders' equity, for stock option
                         compensation expense for tax purposes in
                         excess of amounts recognized for financial
                         reporting purposes                                      (65)        (187)       (397)
                                                                             --------       ------     -------

                                                                             $  (818)       5,041       4,702
                                                                             --------       ------     -------
                                                                             --------       ------     -------
</TABLE>

                                                                     (Continued)

                                      -69-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Income tax expense consists of the following:

<TABLE>
<CAPTION>
                                                                           (Successor)      (Predecessor)
                                                                                       Years ended
                                                                                       December 31,
                                                                           -----------------------------------
                                                                               1997        1996        1995
                                                                           ----------- ----------- -----------
                                                                                  (Amounts in thousands)
                    <S>                                                   <C>               <C>       <C>
                     Current tax expense:
                         Federal taxes                                      $  (4,267)       2,292     3,077
                         State taxes                                             (830)         684     1,005
                                                                           ----------- ----------- -----------
                                                                               (5,097)       2,976     4,082
                                                                           ----------- ----------- -----------

                     Deferred tax expense:
                         Federal taxes                                          3,734        1,734       780
                         State taxes                                              610          518       237
                                                                           ----------- ----------- -----------
                                                                                4,344        2,252     1,017
                                                                           ----------- ----------- -----------

                                                                           $     (753)       5,228     5,099
                                                                           ----------- ----------- -----------
                                                                           ----------- ----------- -----------
</TABLE>

           Total income tax expense differed from the "expected" income tax
           expense determined by applying the statutory federal income tax rate
           of 34% as follows:

<TABLE>
<CAPTION>
                                                                           (Successor)      (Predecessor)
                                                                                       Years ended
                                                                                       December 31,
                                                                           -----------------------------------
                                                                              1997        1996         1995
                                                                           ----------- ----------- -----------
                                                                                  (Amounts in thousands)
<S>                                                                              <C>         <C>       <C>
                     "Expected" statutory tax expense                      $     (997)       4,314     4,284
                     State income taxes, net of federal benefit                  (181)         793       820
                     Income tax effect of goodwill amortization,
                        nondeductible expenditures and other items, net           107           55        41
                     Change in valuation allowance                                  0         (225)     (200)
                     Other                                                        318          291       154
                                                                           -----------  ----------- -----------

                                                                           $     (753)       5,228     5,099
                                                                           -----------  ----------- -----------
                                                                           -----------  ----------- -----------
</TABLE>

                                                                     (Continued)

                                      -70-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           The tax effects of temporary differences that give rise to
           significant portions of the deferred tax assets and deferred tax
           liabilities at December 31, 1997 and 1996 are presented below.

<TABLE>
<CAPTION>
                                                                                (Successor)   (Predecessor)
                                                                                      December 31,
                                                                              ------------------------------
                                                                                   1997           1996
                                                                              --------------- --------------
                                                                                   (Amounts in thousands)
                    <S>                                                       <C>                    <C>
                     Net current deferred tax assets:
                        Accounts receivable, principally due to allowance
                           for doubtful accounts                               $         430             98
                        Compensated absences, accrued for financial
                           reporting purposes                                            566            380
                        Workers compensation and self insurance health
                           reserves, principally due to accrual for
                           financial reporting purposes                                  266            243
                        Other                                                            413            114
                                                                              --------------- --------------
                           Total gross current deferred tax assets                     1,675            835
                           Less valuation allowance                                        0              0
                                                                              --------------- --------------
                           Net current deferred tax assets                    $        1,675            835
                                                                              --------------- --------------
                                                                              --------------- --------------
                      Net long-term deferred tax assets:
                        Net operating loss carryforwards                      $       15,378         15,378
                        Alternative minimum tax credits                                  751              0
                        Deferred compensation expense for financial
                           reporting purposes in excess of amounts
                           recognized for tax purposes                                   966            617
                        Employee stock option compensation expense for
                           financial reporting purposes in excess of
                           amounts recognized for tax purposes                           198            198
                        Sweepstakes award in excess of amounts recognized
                           for tax purposes                                              206            211
                        Other                                                             75            197
                                                                              --------------- --------------
                           Total long-term deferred tax assets                        17,574         16,601
                                                                              --------------- --------------
                     Net long-term deferred tax liabilities:
                        Plant and equipment, principally due to
                           differences in depreciation                                51,643         50,163
                        Amortizable assets                                             3,898              0
                        Other                                                            937            158
                                                                              --------------- --------------
                           Total gross long-term deferred tax liabilities             56,478         50,321
                                                                              --------------- --------------
                        Net combined long-term deferred tax liabilities       $       38,904         33,720
                                                                              --------------- --------------
                                                                              --------------- --------------
</TABLE>


           In conjunction with the acquisition of the Cable Companies in 1996
           the Company incurred a net deferred income tax liability of
           $24,375,000.

                                                                     (Continued)
                                      -71-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           Tax benefits associated with recorded deferred tax assets, net of
           valuation allowances, are considered to be more likely than not
           realizable through taxable income earned in carryback years, future
           reversals of existing taxable temporary differences, and future
           taxable income exclusive of reversing temporary differences and
           carryforwards. The amount of deferred tax asset considered
           realizable, however, could be reduced in the near term if estimates
           of future taxable income during the carryforward period are reduced.

           At December 31, 1997, the Company has acquired tax net operating loss
           carryforwards of approximately $37,616,000 that will begin expiring
           in 2004 if not utilized. The Company's utilization of these
           carryforwards is subject to certain limitations pursuant to section
           382 of the Internal Revenue Code.

     (8)   Stockholders' Equity

           Common Stock

           GCI, Inc. was incorporated in 1997 and in its initial capitalization
           issued to GCI 100 shares of its no par Class A common stock. GCI,
           Inc. received all ownership interests in subsidiaries previously held
           by GCI and proceeds from GCI's August 1, 1997 common stock offering.
           GCI recorded $206,622,000 associated with its initial capitalization.
           All of GCI, Inc.'s issued and outstanding Class A common stock is
           owned by GCI.

           GCI's Class A common stock and Class B common stock are identical in
           all respects, except that each share of Class A common stock has one
           vote per share and each share of Class B common stock has ten votes
           per share. In addition, each share of Class B common stock
           outstanding is convertible, at the option of the holder, into one
           share of Class A common stock.

           After the transaction described in note 2, MCI owns a total of
           8,251,509 shares of GCI's Class A and 1,275,791 shares of GCI's Class
           B common stock which represented approximately 18 and 31 percent and
           23 and 31 percent of the issued and outstanding shares of the
           respective class at December 31, 1997 and 1996, respectively.

           After the transaction described in note 2, the owners of the cable
           television properties acquired in 1996 owned a total of 14,723,077
           shares of GCI's Class A common stock representing approximately 40
           percent of the issued and outstanding Class A common shares at
           December 31, 1996.

           As described in note 2, the holders of subordinated notes exercised a
           conversion option in January 1997. As a result the noteholders
           received 1,538,457 shares of GCI's Class A common stock.

           GCI issued 7,000,000 shares of its Class A common stock on August 1,
           1997 for $7.25 per share, before deducting underwriting discounts and
           commissions. Net proceeds totaled $47,959,000. Other costs associated
           with the stock issuance totaled $1,233,000.
                                                                     (Continued)

                                      -72-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           Stock Option Plan

           In December 1986, GCI adopted a Stock Option Plan (the "Option Plan")
           in order to provide a special incentive to GCI and affiliated company
           officers, non-employee directors, and employees by offering them an
           opportunity to acquire an equity interest in GCI. The Option Plan, as
           amended in 1998, provides for the grant of options for a maximum of
           5,700,000 shares of GCI Class A common stock, subject to adjustment
           upon the occurrence of stock dividends, stock splits, mergers,
           consolidations or certain other changes in corporate structure or
           capitalization. If an option expires or terminates, the shares
           subject to the option will be available for further grants of options
           under the Option Plan. The Option Plan is administered by the Option
           Committee of GCI's Board of Directors.

           The Option Plan provides that all options granted under the Option
           Plan must expire not later than ten years after the date of grant. If
           at the time an option is granted the exercise price is less than the
           market value of the underlying common stock, the "in the money"
           amount at the time of grant is expensed ratably over the vesting
           period of the option. Options granted pursuant to the Option Plan are
           only exercisable if at the time of exercise the option holder is an
           employee or non-employee director of the Company.

           Information for the years 1995, 1996 and 1997 with respect to the GCI
             Plan follows:
<TABLE>
<CAPTION>

                                                                                      Weighted
                                                                                       Average
                                                                                      Exercise             Range of
                                                                   Shares               Price          Exercise Prices
                                                                ---------------      -------------     ------------------
                <S>                                             <C>                 <C>               <C>
                Outstanding at December 31, 1994                      1,729,699         $2.88          $0.75-$4.00

                    Granted                                             610,000         $4.00          $4.00
                    Exercised                                           (40,000)        $2.06          $1.87-$2.25
                    Forfeited                                           (11,500)        $4.00          $4.00
                                                                ---------------

                Outstanding at December 31, 1995                      2,288,199         $3.19          $0.75-$4.00

                    Granted                                             321,000         $5.79          $3.75-$6.50
                    Exercised                                           (82,291)        $2.80          $0.75-$4.00
                    Forfeited                                           (79,785)        $3.11          $0.75-$4.50
                                                                ---------------

</TABLE>
                                                                     (Continued)

                                      -73-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>

                                                                                      Weighted
                                                                                       Average
                                                                                      Exercise             Range of
                                                                   Shares               Price          Exercise Prices
                                                                ---------------      -------------     ------------------
                <S>                                             <C>                 <C>               <C>

                Outstanding at December 31, 1996                      2,447,123         $3.54          $0.75-$6.50

                    Granted                                           1,051,000         $6.36          $0.01-$7.63
                    Exercised                                           (57,285)        $3.37          $0.75-$4.00
                    Forfeited                                           (65,938)        $4.82          $0.75-$6.50
                                                                ---------------

                Outstanding at December 31, 1997                      3,374,900         $4.39          $0.01-$7.63
                                                                ---------------
                                                                ---------------

                Available for grant at December 31, 1997              1,623,276
                                                                ---------------
                                                                ---------------
</TABLE>

           The options expire at various dates through December 2007. At
           December 31, 1997, 1996 and 1995, the weighted-average remaining
           contractual lives of options outstanding were 6.82, 6.73 and 7.15
           years, respectively.

           At December 31, 1997, 1996 and 1995, the number of options
           exercisable was 1,664,015, 1,275,903 and 986,999, respectively, and
           the weighted-average exercise price of those options was $3.15, $2.85
           and $2.56, respectively.

           The per share weighted-average fair value of stock options granted
           during 1997 was $6.71 for compensatory options and $6.50 for
           non-compensatory options; for 1996, $6.94 per share for compensatory
           options and $4.40 for non-compensatory options; for 1995, the per
           share weighted-average fair value of non-compensatory stock options
           granted was $3.87. The amounts were determined as of the options'
           grant dates using a qualified Black-Scholes option-pricing model with
           the following weighted-average assumptions: 1997 - risk-free interest
           rate of 5.46%, volatility of 1.8558 and an expected life of 5.5
           years; 1996 - risk-free interest rate of 5.48%, volatility of 1.8558
           and an expected life of 5.7 years; 1995 - risk-free interest rate of
           5.49%, volatility of 1.8558 and an expected life of 5.9 years.

           Had compensation cost for the Company's 1995, 1996 and 1997 grants
           for stock-based compensation plans been determined consistent with
           SFAS 123, the Company's net income (loss) and net income (loss) per
           common share would approximate the pro forma amounts below (in
           thousands except per share data):
<TABLE>
<CAPTION>

                                                                             As Reported       Pro Forma
                                                                           ---------------   --------------
                       <S>                                                <C>                <C>
                        1995: (Predecessor)
                        Net earnings                                       $       7,502           7,484
                        Basic net earnings per common share                $        0.32            0.32
                        Diluted net earnings per common share              $        0.31            0.31

                        1996: (Predecessor)
                        Net earnings                                       $       7,462           7,212
                        Basic net earnings per common share                $        0.28            0.27
                        Diluted net earnings per common share              $        0.27            0.26
</TABLE>
                                                                     (Continued)

                                      -74-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>

                                                                             As Reported       Pro Forma
                                                                           ---------------   --------------
                      <S>                                                 <C>                <C>
                        1997: (Successor)
                        Net loss                                            $    (2,183)         (3,387)
                        Basic net loss per common share                     $   (21,830)        (33,870)
                        Diluted net loss per common share                   $   (21,830)        (33,870)
</TABLE>

           Pro forma net income (loss) reflects options granted in 1997, 1996
           and 1995. Therefore, the full impact of calculating compensation cost
           for stock options under SFAS 123 is not reflected in the pro forma
           net income amounts presented above since compensation cost is
           reflected over the options' vesting period of 5 years and
           compensation cost for options granted prior to January 1, 1995 is not
           considered.

           Stock Options Not Pursuant to a Plan

           In June 1989, an officer was granted options to acquire 100,000
           shares of GCI Class A common shares at $.75 per share. The options
           vested in equal annual increments over a five-year period and expire
           February 1999.

           The Company entered into an incentive agreement in June 1989 with an
           officer providing for the acquisition of 85,190 remaining shares of
           GCI Class A common stock for $.001 per share exercisable through June
           1997. The shares under the incentive agreement vested in equal annual
           increments over a three-year period and were exercised in June 1997.

           Class A Common Shares Held in Treasury

           GCI acquired 105,111 shares of its Class A common stock in 1989 for
           approximately $328,000 to fund a deferred bonus agreement with an
           officer of the Company. The agreement provides that the balance is
           payable after the later of termination of employment or six months
           after the effective date of the agreement. In September 1995, July
           1996 and March 1997, GCI acquired a total of 97,657 additional shares
           of Class A common stock for approximately $711,000 to fund additional
           deferred compensation agreements for two of its officers.

           Employee Stock Purchase Plan

           In December 1986, the Company adopted an Employee Stock Purchase Plan
           (the "Plan") qualified under Section 401 of the Internal Revenue Code
           of 1986 (the "Code"). The Plan provides for acquisition of GCI's
           Class A and Class B common stock at market value. The Plan permits
           each employee of the Company and affiliated companies who has
           completed one year of service to elect to participate in the Plan.
           Eligible employees may elect to reduce their compensation in any even
           dollar amount up to 10 percent of such compensation up to a maximum
           of $9,500 in 1997; they may contribute up to 10 percent of their
           compensation with after-tax dollars, or they may elect a combination
           of salary reductions and after-tax contributions.

           The Company may match employee salary reductions and after tax
           contributions in any amount, elected by the Company each year, but
           not more than 10 percent of any one employee's compensation will be
           matched in any year. The combination of salary
                                                                     (Continued)

                                      -75-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           reductions, after tax contributions and employer matching
           contributions cannot exceed 25 percent of any employee's compensation
           (determined after salary reduction) for any year. The employer's
           contributions vest over six years. Prior to July 1, 1995 employee and
           employer contributions were invested in GCI common stock and employee
           contributions received up to 100% matching, as determined by the
           Company each year, in GCI common stock. Beginning July 1, 1995
           employee contributions may be invested in GCI common stock, MCI
           common stock, Tele-Communications, Inc. common stock or various
           mutual funds. Such employee contributions invested in GCI common
           stock receive up to 100% matching, as determined by the Company each
           year, in GCI common stock. Employee contributions invested in other
           than GCI common stock receive up to 50% matching, as determined by
           the Company each year, in GCI common stock. The Company's matching
           contributions allocated to participant accounts totaled approximately
           $1,800,000, $1,013,000 and $864,000 for the years ended December 31,
           1997, 1996, and 1995, respectively. The Plan may, at its discretion,
           purchase shares of common stock from the Company at market value or
           may purchase GCI common stock on the open market. In 1998 the Company
           expects to fund employer matching contributions through the issuance
           of new shares of common stock rather than market purchases.

     (9)   Industry Segments Data

            The Company is engaged in the provision or sale of services and
            products in three principal industries: (1) long-distance
            telecommunication services ("long-distance services"), (2) cable
            television services, and, on a pre-operating basis until September
            1997, (3) local telecommunication services ("local services").
<TABLE>
<CAPTION>

                                                                               (Successor)       (Predecessor)
                                                                           --------------------------------------
                                                                                        December 31,
                                                                           --------------------------------------
                                                                               1997         1996         1995
                                                                           ------------- ----------- ------------
                                                                                   (Amounts in thousands)
              <S>                                                         <C>             <C>         <C>
                Net sales
                     Long-distance services                                $     168,034     155,419    129,279
                     Cable television services                                    55,165       9,475          0
                     Local services                                                  610           0          0
                                                                           ------------- ----------- ------------
                        Total net sales                                    $     223,809     164,894    129,279
                                                                           ------------- ----------- ------------
                                                                           ------------- ----------- ------------

                Operating income
                     Long-distance services                                $       9,281      15,083     13,504
                     Cable television services                                    10,423       2,196          0
                     Local services                                               (4,322)       (870)         0
                                                                           ------------- ----------- ------------
                        Total operating income                             $      15,382      16,409     13,504
                                                                           ------------- ----------- ------------
                                                                           ------------- ----------- ------------

                Identifiable assets

                     Long-distance services                                $     198,091     133,780     81,377
                     Cable television services                                    71,073      62,039          0
                     Local services                                               20,224           0          0
                                                                           ------------- ----------- ------------
                        Total identifiable assets                          $     289,388     195,819     81,377
                                                                           ------------- ----------- ------------
                                                                           ------------- ----------- ------------

</TABLE>

                                                                    (Continued)
                                      -76-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>

                                                                            (Successor)       (Predecessor)
                                                                           --------------------------------------
                                                                                        December 31,
                                                                           --------------------------------------
                                                                               1997         1996         1995
                                                                           ------------- ----------- ------------
                                                                                   (Amounts in thousands)
              <S>                                                         <C>             <C>          <C>
                Capital expenditures
                     Long-distance services                                $      30,088      37,793      8,938
                     Cable television services                                    18,226         849          0
                     Local services                                               16,330           0          0
                                                                           ------------- ----------- ------------
                        Total capital expenditures                         $      64,644      38,642      8,938
                                                                           ------------- ----------- ------------
                                                                           ------------- ----------- ------------

                Depreciation and amortization expense

                     Long-distance services                                $       9,922       7,189      5,993
                     Cable television services                                    13,320       2,220          0
                     Local services                                                  525           0          0
                                                                           ------------- ----------- ------------
                        Total depreciation and amortization expense
                                                                           $      23,767       9,409      5,993
                                                                           ------------- ----------- ------------
                                                                           ------------- ----------- ------------
</TABLE>

           Intersegment sales approximate market and are not significant.
           Identifiable assets are assets associated with a specific industry
           segment. Revenues derived from leasing operations are allocated to
           the message and data transmission services segment. Long-distance
           services include equipment sales and service that were previously
           reported as a separate segment.

           The Company provides message telephone service to MCI (see note 10)
           and Sprint, major customers. The Company earned revenues pursuant to
           a contract with Sprint totaling approximately $24,357,000,
           $18,781,000 and $14,885,000 for the years ended December 31, 1997,
           1996 and 1995 respectively. As a percentage of total revenues, Sprint
           revenues totaled 10.9%, 11.4% and 11.5% for the years ended December
           31, 1997, 1996 and 1995 respectively.

     (10)  Related Party Transactions

           Pursuant to the terms of a contract with MCI, a major shareholder of
           GCI (see note 8), the Company earned revenues of approximately
           $34,315,000, $29,208,000 and $23,939,000 for the years ended December
           31, 1997, 1996 and 1995, respectively. As a percentage of total
           revenues, MCI revenues totaled 15.3%, 17.7% and 18.5% for the years
           ended December 31, 1997, 1996 and 1995 respectively. Net amounts
           receivable from MCI totaled $3,933,000 and $2,028,000 at December 31,
           1997 and 1996, respectively. The Company paid MCI for distribution of
           its traffic in the lower 49 states amounts totaling approximately
           $14,319,000, $12,224,000 and $12,556,000 for the years ended December
           31, 1997, 1996 and 1995, respectively.

           The Company entered into a long-term capital lease agreement in 1991
           with the wife of the Company's president for property occupied by the
           Company. The lease is guaranteed by the Company. The lease term is 15
           years with monthly payments increasing in $800 increments at each
           two-year anniversary of the lease. Monthly lease costs will increase
           to $17,600 effective October 1999. If the owner sells the premises
           prior to the end of the tenth year of the lease, the owner will
           rebate to the Company one-half of the net sales price

                                                                    (Continued)
                                      -77-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           received in excess of $900,000. If the property is not sold prior to
           the tenth year of the lease, the owner will pay the Company the
           greater of one-half of the appreciated value of the property over
           $900,000, or $500,000. The leased asset was capitalized in 1991 at
           the owner's cost of $900,000 and the related obligation was recorded
           in the accompanying financial statements.

           The Cable Company is a party to a Management Agreement with Prime II
           Management, L.P. ("PMLP"). Certain of the Prime sellers are
           affiliated with PMLP. The Management Agreement expires on October 31,
           2005, however, it can be terminated earlier upon loss of a license to
           operate the systems, sale of the systems, breach of contract, or upon
           exercise of an option to terminate the Management Agreement by PMLP
           or GCI Cable any time after October 31, 1998. Under the terms of the
           Management Agreement, PMLP manages the operations of the acquired
           cable television systems for fees of $1,000,000 in the first year,
           $750,000 in the second year, and $500,000 thereafter (unless the
           agreement is terminated as outlined above) and reimbursement for
           certain expenses. The fees and reimbursed expenses are payable on a
           monthly basis. In connection with the agreement, the Cable Company
           incurred approximately $1,040,000 and $197,000 in management fees and
           reimbursable expenses for the period ended December 31, 1997 and
           1996, respectively.

     (11)  Leases

           The Company leases business offices, has entered into site lease
           agreements and uses certain equipment and satellite transponder
           capacity pursuant to operating lease arrangements. Rental costs under
           such arrangements amounted to approximately $11,574,000, $7,364,000
           and $4,353,000 for the years ended December 31, 1997, 1996 and 1995,
           respectively.
                                                                    (Continued)
                                      -78-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           A summary of future minimum lease payments for all leases as of
           December 31, 1997 follows:
<TABLE>
<CAPTION>

                 Year ending December 31:                                        Operating        Capital
                 ------------------------                                     --------------- ---------------
                                                                                   (Amounts in thousands)

                         <S>                                                       <C>          <C>
                           1998                                                 $    8,541          354
                           1999                                                      5,839          357
                           2000                                                      5,524          352
                           2001                                                      3,913          337
                           2002                                                      2,409          240
                           2003 and thereafter                                      11,105          866
                                                                              --------------- ---------------
                           Total minimum lease payments                         $   37,331        2,506
                                                                              ---------------
                                                                              ---------------
                           Less amount representing interest                                     (1,318)
                     Less current maturities of obligations under
                        capital leases                                                             (198)
                                                                                              ---------------
                     Subtotal - long-term obligations under capital
                        leases                                                                      990
                     Less long-term obligations under capital leases
                        due to related parties, excluding current
                        maturities                                                                 (590)
                                                                                              ---------------
                     Long-term obligations under capital leases,
                        excluding current maturities                                            $   400
                                                                                              ---------------
                                                                                              ---------------
</TABLE>

           The leases generally provide that the Company pay the taxes,
           insurance and maintenance expenses related to the leased assets.

           It is expected that in the normal course of business, except for
           satellite transponder capacity, leases that expire will be renewed or
           replaced by leases on other properties.

     (12)  Disclosure about Fair Value of Financial Instruments

           Statement of Financial Standards No. 107, "Disclosures about Fair
           Value of Financial Instruments" ("SFAS 107") requires disclosure of
           the fair value of financial instruments for which it is practicable
           to estimate that value. SFAS 107 specifically excludes certain items
           from its disclosure requirements. The fair value of a financial
           instrument is the amount at which the instrument could be exchanged
           in a current transaction between willing parties, other than in a
           forced sale or liquidation. The carrying amounts at December 31, 1997
           and 1996 for the Company's financial assets and liabilities
           approximate their fair values.

     (13)  Commitments and Contingencies

           Deferred Compensation Plan

           During 1995, the Company adopted a non-qualified, unfunded deferred
           compensation plan to provide a means by which certain employees may
           elect to defer receipt of designated percentages or amounts of their
           compensation and to provide a means for certain other

                                                                    (Continued)
                                      -79-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


           deferrals of compensation. The Company may, at its discretion,
           contribute matching deferrals equal to the rate of matching selected
           by the Company. Participants immediately vest in all elective
           deferrals and all income and gain attributable thereto. Matching
           contributions and all income and gain attributable thereto vest over
           a six-year period. Participants may elect to be paid in either a
           single lump sum payment or annual installments over a period not to
           exceed 10 years. Vested balances are payable upon termination of
           employment, unforeseen emergencies, death and total disability.
           Participants are general creditors of the Company with respect to
           deferred compensation plan benefits. Compensation deferred pursuant
           to the plan totaled approximately $58,000, $167,000 and $90,000 as of
           December 31, 1997, 1996 and 1995, respectively.

           Satellite Transponders

           The Company entered into a purchase and lease-purchase option
           agreement in August 1995 for the acquisition of satellite
           transponders to meet its long-term satellite capacity requirements.
           The balance payable upon expected delivery of the transponders
           during the third quarter of 1998 in addition to the $9.1 million
           deposit previously paid is not expected to exceed $41 million.

           Self-Insurance

           The Company is self-insured for losses and liabilities related
           primarily to health and welfare claims up to predetermined amounts
           above which third party insurance applies. A reserve of $500,000 was
           recorded at December 31, 1997 to cover estimated reported losses,
           estimated unreported losses based on past experience modified for
           current trends, and estimated expenses for investigating and
           settling claims. Actual losses will vary from the recorded reserve.
           While management uses what it believes is pertinent information and
           factors in determining the amount of reserves, future additions to
           the reserves may be necessary due to changes in the information and
           factors used.

           Litigation

           The Company is involved in various lawsuits and legal proceedings
           that have arisen in the normal course of business. While the ultimate
           results of these matters cannot be predicted with certainty,
           management does not expect them to have a material adverse effect on
           the financial position, results of operations and liquidity of the
           Company.

                                                                    (Continued)
                                      -80-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           Cable Service Rate Reregulation

           Beginning in April 1993, the Federal Communications Commission
           ("FCC") adopted regulations implementing the Cable Television
           Consumer Protection and Competition Act of 1992 ("The Cable Act of
           1992"). Included are rules governing rates charged by cable
           operators for the basic service tier, the installation, lease and
           maintenance of equipment (such as converter boxes and remote control
           units) used by subscribers to receive this tier and for cable
           programming services other than programming offered on a per-channel
           or per-program basis (the "regulated services"). Generally, the
           regulations require affected cable systems to charge rates for
           regulated services that have been reduced to prescribed benchmark
           levels, or alternatively, to support rates using costs-of-service
           methodology.

           The regulated services rates charged by the Company may be reviewed
           by the State of Alaska, operating through the Alaska Public Utilities
           Commission ("APUC") for basic service, or by the FCC for cable
           programming service. Refund liability for basic service rates is
           limited to a one-year period. Refund liability for cable programming
           service rates may be calculated from the date a complaint is filed
           with the FCC until the rate reduction is implemented.

           In order for the State of Alaska to exercise rate regulation
           authority over the Company's basic service rates, 25% of a systems'
           subscribers must request such regulation by filing a petition with
           the APUC. At December 31, 1997, the State of Alaska has rate
           regulation authority over the Juneau system's basic service rates.
           (The Juneau system serves 9% of the Company's total basic service
           subscribers at December 31, 1997.) Juneau's current rates have been
           approved by the APUC and there are no other pending filings with the
           APUC, therefore, there is no refund liability for basic service at
           this time.

           Complaints by subscribers relating to cable programming service rates
           were filed with, and accepted by, the FCC for certain franchise
           areas, however, filings made in response to those complaints related
           to the period prior to July 15, 1994 were approved by the FCC.
           Therefore, the potential liability for cable programming service
           refunds would be limited to the period subsequent to July 15, 1994
           for these areas. Management of the Company believes that it has
           complied in all material respects with the provisions of the FCC
           rules and regulations and that the Company is, therefore, not liable
           for any refunds. Accordingly, no provision has been made in the
           financial statements for any potential refunds. The FCC rules and
           regulations are, however, subject to judgmental interpretations, and
           the impact of potential rate changes or refunds ordered by the FCC
           could cause the Company to make refunds and/or to be in default of
           certain debt covenants.

           In February 1996, a telecommunications bill was signed into federal
           law that 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. Management
           of the Company believes the bill will not have a significant adverse
           impact on the financial position or results of operations of the
           Company.
                                                                    (Continued)
                                      -81-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           Undersea Fiber Optic Cable Contract Commitment

           The Company signed a contract in July 1997 for construction of the
           undersea portion of a $125 million fiber optic cable system
           connecting the cities of Anchorage, Juneau, and Seattle via a subsea
           route. Subsea and terrestrial connections will extend the fiber optic
           cable to Fairbanks via Whittier and Valdez. Construction efforts will
           begin during the late summer of 1998 with commercial services
           expected to commence in December 1998. Pursuant to the contract, the
           Company paid $9.1 million in 1997 and will pay the remaining balance
           in installments through December 1998 based on completion of certain
           key milestones. Approximately $39.4 million of proceeds from the
           public offerings (see note 8), net of the $9.1 million paid in 1997,
           were contributed to Alaska United. The use of such proceeds is
           restricted to funding the construction and deployment of the fiber
           optic cable system and is reported as Restricted Cash in the
           accompanying Consolidated Financial Statements. The Company has
           secured up to $75 million in bank financing to fund the remaining
           cost of construction and deployment (see note 14).

     (14)  Subsequent Event

           On January 27, 1998 Alaska United closed a $75 million project
           finance facility ("Fiber Facility") to construct a fiber optic cable
           system connecting Anchorage, Fairbanks, Valdez, Whittier, Juneau and
           Seattle as further described in note 13. The Fiber Facility provides
           up to $75 million in construction financing and will bear interest at
           either Libor plus 3.0%, or at the lender's prime rate plus 1.75%. The
           interest rate will decline to Libor plus 2.5%-2.75%, or the lender's
           prime rate plus 1.25%-1.5% after the project completion date and when
           the loan balance is $40,000,000-60,000,000 or less. $1,018,750 was
           borrowed under the facility at closing. Alaska United is required to
           pay a commitment fee equal to 0.375% per annum on the unused portion
           of the commitment. The Fiber Facility is a 10-year term loan that is
           interest only for the first 5 years. The facility can be extended to
           a 12 year term loan at any time between the second and fifth
           anniversary of closing the facility if the Company can demonstrate
           projected revenues from certain capacity commitments will be
           sufficient to pay all operating costs, interest and principal
           installments based on the extended maturity.

           The Fiber Facility contains, among others, covenants requiring
           certain intercompany loans and advances in order to maintain specific
           levels of cash flow necessary to pay operating costs, interest and
           principal installments. The Fiber Facility also a contains a
           guarantee that requires, among other terms and conditions, Alaska
           United complete the project by the completion date and pay any
           non-budgeted costs of the project.

           The Fiber Facility is collateralized by all of Alaska United's
           assets, as well as a pledge of the partnership interests' owning
           Alaska United.
                                                                    (Continued)
                                      -82-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     (15)  Supplementary Financial Data

           The following is a summary of unaudited quarterly results of
           operations for the years ended December 31, 1997 and 1996.

           (Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                           (Successor)
                                                First         Second          Third           Fourth         Total
               1997                            Quarter        Quarter         Quarter         Quarter         Year
               ----                            -------        -------         -------         -------       --------
<S>                                             <C>           <C>             <C>              <C>           <C>
               Total revenues                  $52,881        56,186          57,956           56,786        223,809
               Net earnings (loss)             $  (525)         (832)           (928)             102         (2,183)
               Basic earnings (loss) per
                common share:
                 Net earnings (loss)
                   before extraordinary
                   item                        $(5,250)       (8,320)         (4,950)           1,900        (16,620)
                 Extraordinary loss            $     0             0          (4,330)            (880)        (5,210)
                 Net earnings (loss)           $(5,250)       (8,320)         (9,280)           1,020        (21,830)

               Diluted earnings (loss)
                per common share:
                 Net earnings (loss)
                   before extraordinary
                   item                        $(5,250)       (8,320)         (4,950)           1,900        (16,620)
                 Extraordinary loss            $     0             0          (4,330)            (880)        (5,210)
                 Net earnings (loss)           $(5,250)       (8,320)         (9,280)           1,020        (21,830)
</TABLE>

<TABLE>
<CAPTION>


                                                                           (Predecessor)
                                                First         Second          Third           Fourth         Total
               1996                            Quarter        Quarter         Quarter         Quarter         Year
               ----                            -------        -------         -------         -------       --------
                                               <C>            <C>             <C>              <C>           <C>
               Total revenues                  $37,969        39,199          38,664           49,062        164,894
               Net earnings                    $ 2,137         2,150           2,140            1,035          7,462
               Basic earnings per share        $  0.09          0.09            0.09             0.03           0.28
               Diluted earnings per share      $  0.09          0.09            0.09             0.03           0.27
</TABLE>
                                                                    (Continued)
                                      -83-
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

      (16) Supplemental Financial Information
           (Amounts in thousands)
<TABLE>
<CAPTION>

                                                                                  (Successor)
                                                                                      1997
                                                             -------------------------------------------------------
                                                                Long-
                                                               Distance        Cable         Local       Combined
                                                             ------------- ------------- ------------ -------------
               <S>                                          <C>             <C>          <C>           <C>
               Revenues:
                  Telecommunication revenues                $    168,034              0          610     168,644
                  Cable revenues                                       0         55,165            0      55,165
                                                             ------------- ------------- ------------- ------------
                    Total revenues                               168,034         55,165          610     223,809
                                                             ------------- ------------- ------------- ------------
               Cost of sales and services:
                  Distribution costs and costs of
                    services                                      98,200              0          267      98,467
                  Programming and copyright costs                      0         12,610            0      12,610
                                                             ------------- ------------- ------------- ------------
                    Total cost of sales and services              98,200         12,610          267     111,077
                                                             ------------- ------------- ------------- ------------
                    Contribution                                  69,834         42,555          343     112,732
                                                             ------------- ------------- ------------- ------------
               Selling, general and administrative
                  expenses:
                  Telephony operating and engineering             11,006              0          530      11,536
                  Cable television, including
                      management fees of $1,040                        0         18,427            0      18,427
                  Sales and communications                        14,508              0          264      14,772
                  General and administrative                      22,477              0        3,346      25,823
                  Bad debts                                        2,640            385            0       3,025
               Depreciation and amortization                       9,922         13,320          525      23,767
                                                             ------------- ------------- ------------- -------------

                    Operating income (loss)                 $      9,281         10,423       (4,322)     15,382
                                                             ------------- ------------- ------------- -------------
                                                             ------------- ------------- ------------- -------------
</TABLE>
                                                                    (Continued)

                                      -84-
<PAGE>

                           GCI, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>


                            (Predecessor)                                             1996                              1995
                                                             ------------------------------------------------------- ------------

                                                             Long-Distance   Cable        Local        Combined      Long-Distance
                                                             -------------- ----------- ------------- -------------- -------------
               <S>                                          <C>             <C>         <C>            <C>           <C>
               Revenues:
                  Telecommunication revenues                $    155,419             0            0      155,419        129,279
                  Cable revenues                                       0         9,475            0        9,475              0
                                                             ------------- ------------ ------------- -------------- ------------
                    Total revenues                               155,419         9,475            0      164,894        129,279
                                                             ------------- ------------ ------------- -------------- ------------
               Cost of sales and services:
                  Distribution costs and costs of
                    services                                      90,597             0            0       90,597         72,091
                  Programming and copyright costs                      0         2,067            0        2,067              0
                                                             ------------- ------------ ------------- -------------- ------------
                    Total cost of sales and services              90,597         2,067            0       92,664         72,091
                                                             ------------- ------------ ------------- -------------- ------------
                    Contribution                                  64,822         7,408            0       72,230         57,188
               Selling, general and administrative
                  expenses:
                  Telephony operating and engineering              9,095             0           92        9,187          9,182
                  Cable television, including
                      management fees of $197                          0         2,992            0        2,992              0
                  Sales and communications                        13,013             0           28       13,041          9,865
                  General and administrative                      17,349             0          316       17,665         15,645
                  Legal and regulatory                             1,357             0          434        1,791          1,540
                  Bad debts                                        1,718             0            0        1,736          1,459
               Depreciation and amortization                       7,189         2,220            0        9,409          5,993
                                                             ------------- ------------ ------------- -------------- ------------

                    Operating income (loss)                 $     15,083         2,196         (870)      16,409         13,504
                                                             ------------- ------------ ------------- -------------- ------------
                                                             ------------- ------------ ------------- -------------- ------------
</TABLE>



                                      -85-
<PAGE>




                                     PART IV

Item 14.      EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND
              REPORTS ON FORM 8-K
<TABLE>
<CAPTION>

      (a)(l)  Consolidated Financial Statements                                          Page No.
                                                                                         --------
           <S>                                                                           <C>
           Included in Part II of this Report:

                  Independent Auditor's Report.............................................49

                  Consolidated Balance Sheets, December 31, 1997 and 1996..................50 -- 51

                  Consolidated Statements of Operations,
                     Years ended December 31, 1997, 1996 and 1995..........................52

                  Consolidated Statements of Stockholders' Equity,
                     Years ended December 31, 1997, 1996 and 1995..........................53

                  Consolidated Statements of Cash Flows,
                     Years ended December 31, 1997, 1996 and 1995..........................54

                  Notes to Consolidated Financial Statements...............................55 -- 85

      (a)(2)  Consolidated Financial Statement Schedules

           Included in Part IV of this Report:

                  Independent Auditors' Report ............................................93

                  Schedule VIII - Valuation and Qualifying Accounts,
                     Years ended December 31, 1997, 1996 and 1995..........................94
</TABLE>

      Other schedules are omitted as they are not required or are not
      applicable, or the required information is shown in the applicable
      financial statements or notes thereto.


                                      -86-
<PAGE>



      (b)  Exhibits

           Listed below are the exhibits that are filed as a part of this Report
           (according to the number assigned to them in Item 601 of Regulation
           S-K):

<TABLE>
<CAPTION>

        Exhibit
         No.        Description
     -----------    ------------
<S>                 <C>
            3.1     Articles of Incorporation of the Issuer (18)
            3.2     Bylaws of the Issuer (18)
            4.1     1997 Amendment No. 1 to Voting Agreement dated October 31,
                    1996, among Prime II Management L.P., as agent for the
                    Voting Prime Sellers, MCI Telecommunications Corporation,
                    Ronald A. Duncan, Robert M. Walp and TCI GCI, Inc. *
           10.1     Registration Rights Agreement, dated as of January 18, 1991,
                    between General Communication, Inc. and WestMarc
                    Communications, Inc (2)
           10.2     Employee stock option agreements issued to individuals
                    Spradling, O'Hara, Strid, Behnke, Lewkowski and Snyder (3)
           10.3     Registration Rights Agreement, dated October 31, 1996,
                    between General Communication, Inc. and the Prime Sellers
                    (12)
           10.4     Registration Rights Agreement, dated October 31, 1996,
                    between General Communication, Inc., and Alaskan Cable
                    Network/Fairbanks, Inc. ("ACNFI"), Alaskan Cable
                    Network/Juneau, Inc. ("ACNJI"), Alaskan Cable Network/
                    Ketchikan-Sitka, Inc. ("ACNKSI") and Jack Kent Cooke, Inc.
                    (12)
           10.5     Registration Rights Agreement, dated October 31, 1996,
                    between General Communication, Inc., and the owners of
                    Alaska Cablevision, Inc. ("ACI") (12)
           10.6     Lease agreement between GCI Communication Services, Inc. and
                    National Bank of Alaska Leasing Corporation dated January
                    15, 1992 (4)
           10.7     Westin Building Lease (5)
           10.8     Duncan and Hughes Deferred Bonus Agreements (6)
           10.9     Compensation Agreement between General Communication, Inc.
                    and William C. Behnke dated January 1, 1997 (19)
           10.10    Order approving Application for a Certificate of Public
                    Convenience and Necessity to operate as a Telecommunications
                    (Intrastate Interexchange Carrier) Public Utility within
                    Alaska (3)
           10.11    1986 Stock Option Plan, as amended (21)
           10.12    Loan agreement between National Bank of Alaska and GCI Leasing Co.,
                    Inc. dated December 31, 1992 (4)
           10.13    Pledge and Security Agreement between National Bank of Alaska and GCI
                    Communication Services, Inc. dated December 31, 1992 (4)
           10.14    Lease Agreement between MCI Telecommunications Corporation
                    and GCI Leasing Co., Inc. dated December 31, 1992 (4)
           10.15    Sublease Agreement between MCI Telecommunications
                    Corporation and General Communication, Inc. dated December
                    31, 1992 (4)
           10.16    Financial Assistance Agreement between MCI
                    Telecommunications Corporation and GCI Leasing Co., Inc.
                    dated December 31, 1992 (4)
           10.17    Letter of intent between MCI Telecommunications Corporation
                    and General Communication, Inc. dated December 31, 1992 (7)

</TABLE>
                                      -87-
<PAGE>

<TABLE>
<S>                 <C>

            10.18   MCI Carrier Agreement between MCI Telecommunications
                    Corporation and General Communication, Inc. dated January 1,
                    1993 (8)
            10.19   Contract for Alaska Access Services Agreement between MCI
                    Telecommunications Corporation and General Communication,
                    Inc. dated January 1, 1993 (8)
            10.20   Promissory Note Agreement between General Communication,
                    Inc. and Ronald A. Duncan, dated August 13, 1993 (9)
            10.21   Deferred Compensation Agreement between General
                    Communication, Inc. and Ronald A. Duncan, dated August 13,
                    1993 (9)
            10.22   Pledge Agreement between General Communication, Inc. and
                    Ronald A. Duncan, dated August 13, 1993 (9)
            10.23   Revised Qualified Employee Stock Purchase Plan of General
                    Communication, Inc. (10)
            10.24   Summary Plan Description pertaining to the Revised Qualified
                    Employee Stock Purchase Plan of General Communication, Inc.
                    (10)
            10.25   The GCI Special Non-Qualified Deferred Compensation Plan
                    (11)
            10.26   Transponder Purchase Agreement for Galaxy X between Hughes
                    Communications Galaxy, Inc. and GCI Communication Corp. (11)
            10.27   Equipment Purchase Agreement between GCI Communication
                    Corporation and Scientific-Atlanta, Inc. (11) 10.28
                    Management Agreement, between Prime II Management, L.P., and
                    GCI Cable, Inc., dated October 31, 1996 (12)
            10.29   Third Amended and Restated Credit Agreement, dated as of
                    October 31, 1996, between GCI Communication Corp., and
                    NationsBank of Texas, N.A. (13)
            10.30   Loan Agreement among GCI Cable, Inc., as Borrower and
                    Toronto-Dominion (Texas), Inc., et al., as of October 31,
                    1996 (13)
            10.31   Licenses (5)
                     10.31.1    214 Authorization
                     10.31.2    International Resale Authorization
                     10.31.3    Digital Electronic Message Service Authorization
                     10.31.4    Fairbanks Earth Station License
                     10.31.5    Fairbanks (Esro) Construction Permit for P-T-P
                                Microwave Service
                     10.31.6    Fairbanks (Polaris) Construction Permit for
                                P-T-P Microwave Service
                     10.31.7    Anchorage Earth Station Construction Permit
                     10.31.8    License for Eagle River P-T-P Microwave Service
                     10.31.9    License for Juneau Earth Station
                     10.31.10   Issaquah Earth Station Construction Permit
            10.32   ATU Interconnection Agreement between GCI Communication
                    Corp. and Municipality of Anchorage, executed January 15,
                    1997 (18)
            10.33   First Amendment to Third Amended and Restated Credit
                    Agreement entered into among GCI Communication Corp.,
                    NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc.,
                    Credit Lyonnais New York Branch, and National Bank of Alaska
                    (15)
            10.34   Second Amendment to Third Amended and Restated Credit
                    Agreement entered into among GCI Communication Corp.,
                    NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc.,
                    Credit Lyonnais New York Branch, and National Bank of Alaska
                    (20)
            10.35   Securities Purchase and Sale Agreement, dated May 2, 1996,
                    among General Communication, Inc., and the Prime Sellers
                    (12)
            10.36   Agreement and Plan of Merger of ACI with and into GCI Cable,
                    Inc., dated October 31, 1996 (12)

</TABLE>
                                      -88-
<PAGE>

<TABLE>
<S>                 <C>

            10.37   Certificate of Merger Merging ACI into GCI Cable, Inc.
                    (filed in Delaware on October 31, 1996) (12)
            10.38   Articles of Merger between GCI Cable Inc., and ACI (filed in
                    Delaware on October 31, 1996) (12)
            10.39   Agreement and Plan of Merger of PCFI with and into GCI
                    Cable, Inc., dated October 31, 1996 (12)
            10.40   Certificate of Merger Merging PCFI into GCI Cable, Inc.,
                    (filed in Delaware on October 31, 1996) (12)
            10.41   Articles of Merger between GCI Cable, Inc., and PCFI (for
                    filing in Alaska) (12)
            10.42   Asset Purchase Agreement, dated April 15, 1996, among
                    General Communication, Inc., ACNFI, ACNJI and ACNKSI (12)
            10.43   Asset Purchase Agreement, dated May 10, 1996, among General
                    Communication, Inc., and Alaska Cablevision, Inc. (12)
            10.44   Asset Purchase Agreement, dated May 10, 1996, among General
                    Communication, Inc., and McCaw/Rock Homer Cable System, J.V.
                    (12)
            10.45   Asset Purchase Agreement, dated May 10, 1996, between
                    General Communication, Inc., and McCaw/Rock Seward Cable
                    System, J.V. (12)
            10.46   Amendment No. 1 to Securities Purchase and Sale Agreement,
                    dated October 31, 1996, among General Communication, Inc.,
                    and the Prime Sellers Agent (13)
            10.47   First Amendment to Asset Purchase Agreement, dated October
                    30, 1996, among General Communication, Inc., ACNFI, ACNJI
                    and ACNKSI (13)
            10.48   Amendment to Revised Qualified Employee Stock Purchase Plan
                    of General Communication, Inc. (18)
            10.49   Form of Agreement Waiving Right to Exercise Stock Options
                    (18)
            10.50   Order Approving Arbitrated Interconnection Agreement as
                    Resolved and Modified by Order U-96-89(8)
                    dated January 14, 1997 (18)
            10.51   First Amendment to Loan Agreement among GCI Cable, Inc., as
                    Borrower, and Toronto-Dominion (Texas), Inc., et al., as of
                    October 31, 1996 (20)
            10.52   Amendment to the MCI Carrier Agreement executed April 20,
                    1994 (18)
            10.53   Amendment No. 1 to MCI Carrier Agreement executed July 26,
                    1994 (16)
            10.54   MCI Carrier Addendum--MCI 800 DAL Service effective February
                    1, 1994 (16)
            10.55   Third Amendment to MCI Carrier Agreement dated as of October
                    1, 1994 (16)
            10.56   Fourth Amendment to MCI Carrier Agreement dated as of
                    September 25, 1995 (16)
            10.57   Fifth Amendment to the MCI Carrier Agreement executed April
                    19, 1996 (18)
            10.58   Sixth Amendment to MCI Carrier Agreement dated as of March
                    1, 1996 (16)
            10.59   Seventh Amendment to MCI Carrier Agreement dated November
                    27, 1996 (20)
            10.60   First Amendment to Contract for Alaska Access Services
                    between General Communication, Inc. and MCI
                    Telecommunications Corporation dated April 1, 1996 (20)
            10.61   Letter of Intent between General Communication, Inc. and MCI
                    Telecorp dated August 6, 1993 (19)
            10.62   Service Mark License Agreement between MCI Communications
                    Corporation and General Communication, Inc. dated April 13,
                    1994 (19)
            10.63   Radio Station Authorization (Personal Communications Service
                    License), Issue Date June 23, 1995 (19)
            10.64   Framework Agreement between National Bank of Alaska (NBA)
                    and General Communication, Inc. dated October 31, 1995 (17)
            10.65   1997 Call-Off Contract between National Bank of Alaska (NBA)
                    and General Communication, Inc. (GCI) dated November 1, 1996
                    (20)

</TABLE>
                                      -89-
<PAGE>

<TABLE>
<S>                 <C>

            10.66   Contract No. 92MR067A Telecommunications Services between BP
                    Exploration (Alaska), Inc. and GCI Network Systems dated
                    April 1, 1992 (20)
            10.67   Amendment No. 03 to BP Exploration (Alaska) Inc. Contract
                    No. 92MRO67A effective August 1, 1996 (20)
            10.68   Lease Agreement dated September 30, 1991 between RDB Company
                    and General Communication, Inc. (3)
            10.69   Certificate of Public Convenience and Necessity No. 436 for
                    Telecommunications Service (Relay Services) (19)
            10.70   Order Approving Transfer Upon Closing, Subject to
                    Conditions, and Requiring Filings dated September 23, 1996
                    (19)
            10.71   Order Granting Extension of Time and Clarifying Order dated
                    October 21, 1996 (19)
            10.72   Contract for Alaska Access Services among General
                    Communication, Inc. and GCI Communication Corp., and Sprint
                    Communications Company L.P. dated June 1, 1993 (20)
            10.73   First Amendment to Contract for Alaska Access Services
                    between General Communication, Inc. and Sprint
                    Communications Company L.P. dated as of August 7, 1996 (20)
            10.74   Employment and Deferred Compensation Agreement between
                    General Communication, Inc. and John M. Lowber dated July
                    1992 (19)
            10.75   Deferred Compensation Agreement between GCI Communication
                    Corp. and Dana L. Tindall dated August 15, 1994 (19)
            10.76   Transponder Lease Agreement between General Communication
                    Incorporated and Hughes Communications Satellite Services,
                    Inc., executed August 8, 1989 (9)
            10.77   Addendum to Galaxy X Transponder Purchase Agreement between
                    GCI Communication Corp. and Hughes Communications Galaxy,
                    Inc. dated August 24, 1995 (19)
            10.78   Order Approving Application, Subject to Conditions;
                    Requiring Filing; and Approving Proposed Tariff on an
                    Inception Basis, dated February 4, 1997 (19)
            10.79   Resale Solutions Switched Services Agreement between Sprint
                    Communications Company L.P. and GCI Communications, Inc.
                    dated May 31, 1996 (20)
            10.80   Commitment Letter from Credit Lyonnais New York Branch,
                    NationsBank of Texas, N.A. and TD Securities (USA) Inc. for
                    Fiber Facility dated as of July 3, 1997 (19)
            10.81   Commitment Letter from NationsBank for Credit Facility dated
                    July 2, 1997 (19)
            10.82   Supply Contract Between Submarine Systems International Ltd.
                    And GCI Communication Corp. dated as of July 11, 1997. *
            10.83   Supply Contract Between Tyco Submarine Systems Ltd. And
                    Alaska United Fiber System Partnership Contract Variation
                    No. 1 dated as of December 1, 1997. *
            10.84   $200,000,000 Amended and Restated Credit Agreement between
                    GCI Holdings, Inc. and NationsBank of Texas, N.A., as
                    administrative agent, Credit Lyonnais New York Branch, as
                    documentation agent, and TD Securities (USA), Inc. as
                    syndication agent, dated as of November 14, 1997. *
            10.85   $50,000,000 Amended and Restated Credit Agreement between
                    GCI Holdings, Inc. and NationsBank of Texas, N.A., as
                    administrative agent, Credit Lyonnais New York Branch, as
                    documentation agent, and TD Securities (USA), Inc. as
                    syndication agent, dated as of November 14, 1997. *
            21.1    Subsidiaries of the Registrant *
            27.1    Financial data schedule *
            27.2    Restated Financial Data Schedule December 31, 1996. *
            27.3    Restated Financial Data Schedule December 31, 1995. *
            99.1    Additional Exhibits
                    99.1    The Articles of Incorporation of GCI Communication
                            Corp. (2)
                    99.2    The By-laws of GCI Communication Corp. (2)

</TABLE>
                                      -90-
<PAGE>

<TABLE>
<S>                 <C>

            99.3    The Articles of Incorporation of GCI Communication Services,
                    Inc. (4)
            99.4    The By-laws of GCI Communication Services, Inc. (4)
            99.5    The Articles of Incorporation of GCI Leasing Co., Inc. (4)
            99.6    The By-laws of GCI Leasing Co., Inc. (4)
            99.7    The By-laws of GCI Cable, Inc. (14)
            99.8    The Articles of Incorporation of GCI Cable, Inc. (14)
            99.9    The By-laws of GCI Cable / Fairbanks, Inc. (14)
            99.10   The Articles of Incorporation of GCI Cable / Fairbanks, Inc.
                    (14)
            99.11   The By-laws of GCI Cable / Juneau, Inc. (14)
            99.12   The Articles of Incorporation of GCI Cable / Juneau, Inc.
                    (14)
            99.13   The By-laws of GCI Cable Holdings, Inc. (14)
            99.14   The Articles of Incorporation of GCI Cable Holdings, Inc.
                    (14)
            99.15   The By-laws of GCI Holdings, Inc. (19)
            99.16   The Articles of Incorporation of GCI Holdings, Inc. (19)
            99.17   The By-laws of GCI Transport, Inc. *
            99.18   The Articles of Incorporation of GCI Transport, Inc. *
            99.19   The By-laws of Fiber Hold Co., Inc. *
            99.20   The Articles of Incorporation of Fiber Hold Co., Inc. *
            99.21   The By-laws of GCI Fiber Co., Inc. *
            99.22   The Articles of Incorporation of GCI Fiber Co., Inc. *
            99.23   The By-laws of GCI Satellite Co., Inc. *
            99.24   The Articles of Incorporation of GCI Satellite Co., Inc. *
            99.25   The Partnership Agreement of Alaska United Fiber System *
</TABLE>

      -------------------------
      *    Filed herewith.

     1     Incorporated by reference to GCI's Quarterly Report on Form 10-Q for
           the period ended March 31, 1994
     2     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1990
     3     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1991
     4     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1992
     5     Incorporated by reference to GCI's Registration Statement on Form 10
           (File No. 0-15279), mailed to the Securities and Exchange Commission
           on December 30, 1986
     6     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1989.
     7     Incorporated by reference to GCI's Current Report on Form 8-K dated
           January 13, 1993.
     8     Incorporated by reference to GCI's Current Report on Form 8-K dated
           June 4, 1993.
     9     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1993.
    10     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1994.
    11     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1995.
    12     Incorporated by reference to GCI's Form S-4 Registration Statement
           dated October 4, 1996.
    13     Incorporated by reference to GCI's Current Report on Form 8-K dated
           November 13, 1996.
    14     Incorporated by reference to GCI's Annual Report on Form 10-K for the
           year ended December 31, 1996.
    15     Incorporated by reference to GCI's Quarterly Report on Form 10-Q for
           the period ended March 31, 1997.
    16     Incorporated by reference to GCI's Current Report on Form 8-K dated
           March 14, 1996, filed March 28, 1996.
    17     Incorporated by reference to GCI's Amendment to Annual Report dated
           December 31, 1995 on Form 10-K/A as amended on August 6, 1996.

                                      -91-
<PAGE>

    18     Incorporated herein by reference to the Company's Form S-1
           Registration Statement (File No. 333-29189) dated May 29, 1997.
    19     Incorporated herein by reference to the Company's Amendment No. 1 to
           Form S-1/A Registration Statement (File No. 333-29189) dated July 8,
           1997.
    20     Incorporated herein by reference to the Company's Amendment No. 2 to
           Form S-1/A Registration Statement (File No. 333-29189) dated July 21,
           1997.
    21     Incorporated herein by reference to the Company's Amendment No. 3 to
           Form S-1/A Registration Statement (File No. 333-29189) dated July 22,
           1997.
    22     Incorporated herein by reference to GCI's Form S-8 POS Registration
           Statement (File No. 33-60222) dated February 20, 1998.

    (c)    Reports on Form 8-K

            None.

                                      -92-
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
GCI, Inc.:

    Under date of March 4, 1998, we reported on the consolidated balance
sheets of GCI, Inc. and Subsidiaries and its predecessor General
Communication, Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1997, which
are included in the Company's 1997 Annual Report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial statements, we
also audited the related consolidated financial statement schedule in the
consolidated financial statements, which is listed in the index in Item
14(a)(2) of the Company's 1997 Annual Report on Form 10-K. This consolidated
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this consolidated
financial statement schedule based on our audits.

    In our opinion this consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects the information set
forth therein.


                                       /s/
                                       KPMG PEAT MARWICK LLP



Anchorage, Alaska
March 4, 1998


                                      -93-
<PAGE>


                                  Schedule VIII

                           GCI, INC. AND SUBSIDIARIES

                        Valuation and Qualifying Accounts

                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                    Additions         Deductions
                                                             --------------------     ----------
                                                Balance at    Charged                 Write-offs      Balance
                                                 beginning   to profit                  net of        at end
        Description                               of year    and loss       Other     recoveries      of year
------------------------------                  ----------   ---------    ---------   ----------     ---------
                                                                    (Amounts in thousands)
<S>                                             <C>          <C>          <C>         <C>            <C>
Year ended December 31, 1997:
 Allowance for doubtful receivables                 $  597     3,025          --           2,552       1,070
                                                    ------    ------       -----          ------       ------
                                                    ------    ------       -----          ------       ------
Year ended December 31, 1996:
 Allowance for doubtful receivables                 $  295     1,736       354(1)          1,788         597
                                                    ------    ------       -----          ------       ------
                                                    ------    ------       -----          ------       ------
Year ended December 31, 1995:
 Allowance for doubtful receivables                 $  409     1,459          --           1,573         295
                                                    ------    ------       -----          ------       ------
                                                    ------    ------       -----          ------       ------

</TABLE>

(1)  Allowance for doubtful receivables acquired pursuant to the Cable Company
     acquisitions described in Note 2 to the Company's consolidated financial
     statements.

                                      -94-
<PAGE>


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                       GCI, INC.

                                       By: /s/ Ronald A. Duncan
                                           --------------------------
                                           Ronald A. Duncan, President
                                           (Chief Executive Officer)

Date:  March 25, 1998

      Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

       Signature                    Title                           Date
-----------------------      -----------------------       ---------------------

/s/ Ronald A. Duncan         President and Director          March 25, 1998
-----------------------      (Chief Executive Officer)     ---------------------
Ronald A. Duncan

/s/ G. Wilson Hughes         Vice President and Director     March 25, 1998
-----------------------                                    ---------------------
G. Wilson Hughes
                                                             March 25, 1998
/s/ John M. Lowber           Secretary, Treasurer and      ---------------------
-----------------------      Director (Chief Financial
John M. Lowber               and Accounting Officer)

                                      -95-