FORM 10-K
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                   For the fiscal year ended December 31, 1998

                                       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                                                 92-0072737 
(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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<PAGE>
<TABLE>

                                                          GCI, INC.
                                  A WHOLLY OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.
                                               1998 ANNUAL REPORT ON FORM 10-K
                                                      TABLE OF CONTENTS
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<S>                                                                                                                   <C> 
Glossary................................................................................................................3


Cautionary statement regarding forward looking statements..............................................................10


Part I.................................................................................................................11

   Item 1.  Business...................................................................................................11
      General..........................................................................................................11
      Financial information about the Company's industry segments......................................................11
      Historical development of the Company's business during the past fiscal year.....................................12
      Narrative description of the business done and intended to be done by the Company................................14
      Alaska voice, video and data markets.............................................................................15
        Long Distance Telecommunication services.......................................................................15
        Cable services.................................................................................................21
        Local access services..........................................................................................26
        Internet services..............................................................................................28
      Environmental regulations........................................................................................31
      Patents, trademarks, licenses, certificates of public convenience and necessity, and military franchises.........31
      Regulation, franchise authorizations and tariffs.................................................................32
      Financial information about the Company's foreign and domestic operations and export sales.......................43
      Seasonality......................................................................................................43
      Customer sponsored research......................................................................................43
      Backlog of orders and inventory..................................................................................43
      Geographic concentration and Alaska economy......................................................................43
      Employees........................................................................................................45
      Other............................................................................................................45
   Item 2.  Properties.................................................................................................45
   Item 3.  Legal Proceedings..........................................................................................46
   Item 4.  Submission of matters to a vote of security holders........................................................46

Part II................................................................................................................46

   Item 5.  Market for the registrant's common equity and related stockholder matters..................................46
   Item 6.  Selected Financial Data....................................................................................47
   Item 7.  Management's discussion and analysis of financial condition and results of operations......................48
   Item 7A.  Quantitative and qualitative disclosures about market risk................................................66
   Item 8.  Consolidated financial statements and supplementary data...................................................66
   Item 9.  Changes in and disagreements with accountants on accounting and financial disclosure.......................66

Part III...............................................................................................................66


Part IV...............................................................................................................100

   Item 14.  Exhibits, consolidated financial statement schedules, and reports on Form 8-K............................100
</TABLE>


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<PAGE>
                                    GLOSSARY


ACCESS CHARGES -- Expenses incurred by an IXC and paid to LECs for accessing the
local  networks of the LECs in order to originate  and  terminate  long-distance
calls and provide the customer connection for private line services.

ALASKA UNITED -- Alaska United Fiber System  Partnership -- a Alaska partnership
wholly  owned by the Company.  Alaska  United was  organized  to  construct  and
operate a new fiber optic cable connecting  various  locations in Alaska and the
lower 49 states and foreign countries through Seattle, Washington.

APUC -- ALASKA PUBLIC UTILITY COMMISSION -- A state regulatory body empowered to
establish and enforce rules and regulations  governing public utility  companies
and others, such as the Company,  within the state of Alaska (sometimes referred
to as Public Service  Commissions,  or PSCs, or Public Utility  Commissions,  or
PUCs).

ATM  --  Asynchronous   Transfer  Mode  --  An  international  ISDN  high-speed,
high-volume,  packet-switching  transmission protocol standard.  ATM uses short,
uniform,  53-byte cells to divide data into  efficient,  manageable  packets for
very fast  switching  through a  high-performance  communications  network.  The
53-byte cells contain 5-byte destination  address headers and 48 data bytes. ATM
is the first  packet-switched  technology designed from the ground up to support
integrated voice, video, and data communication applications.  It is well-suited
to high-speed WAN transmission bursts. ATM currently  accommodates  transmission
speeds from 64 kilobytes per second to 622 megabits per second.  ATM may support
gigabit speeds in the future.

BASIC SERVICE -- The basic service tier includes,  at a minimum,  all signals of
domestic television  broadcast stations provided to any subscriber,  any public,
educational,  and  governmental  programming  required  by the  franchise  to be
carried on the basic tier, and any additional video programming service added to
the basic tier by the cable operator.

BOC -- BELL SYSTEM OPERATING COMPANY -- A LEC owned by any of the remaining five
Regional  Bell  Operating  Companies,  which are holding  companies  established
following the AT&T Divestiture Decree to serve as parent companies for the BOCs.

BACKBONE  --  A  centralized  high-speed  network  that  interconnects  smaller,
independent networks.

BANDWIDTH  -- The  number  of bits of  information  which  can  move  through  a
communications medium in a given amount of time.

BRI -- Basic Rate Interface -- An ISDN offering that allows two 64 kilobytes per
second "B" channels  and one 16  kilobytes  per second "D" channel to be carried
over one typical single pair of copper wires.  The type of service that would be
used to connect a small branch or home office to a remote  network.  Through the
use of Bonding  (bandwidth on Demand) the two 64 kilobytes  per second  channels
can be combined  to create  more  bandwidth  as it becomes  necessary.  For data
services  such as Internet  access,  these  channels  can be bonded  together to
provide 2B+D transmission at a rate of 128 kilobytes per second.  New technology
increases the bandwidth of ISDN BRI connections to 230 kilobytes per second.

BROADBAND -- A high-capacity  communications  circuit/path,  usually  implying a
speed greater than 1.544 megabits per second.

CAP -- Competitive Access Provider -- A company that provides its customers with
an alternative to the LEC for local transport of private line and special access
telecommunications services.

CENTRAL OFFICES -- The switching centers or central switching  facilities of the
LECs.



                                       3
<PAGE>
CLEC --  Competitive  Local  Exchange  Carrier.  -- A company that  provides its
customers   with  an   alternative   to  the  ILEC  for   local   transport   of
telecommunications services, as allowed under the 1996 Telecom Act.

CO-CARRIER  STATUS -- A  regulatory  scheme  under  which the  incumbent  LEC is
required to integrate new, competing  providers of local exchange service,  into
the  systems  of  traffic  exchange,   inter-carrier  compensation,   and  other
inter-carrier relationships that already exist among LECs in most jurisdictions.

COLLOCATION  -- The ability of a CAP to connect its network to the LEC's central
offices.  Physical  collocation  occurs when a CAP places its network connection
equipment  inside  the  LEC's  central  offices.   Virtual   collocation  is  an
alternative to physical  collocation  pursuant to which the LEC permits a CAP to
connect its  network to the LEC's  central  offices on  comparable  terms,  even
though the CAP's network  connection  equipment is not physically located inside
the central offices.

THE COMPANY - GCI, Inc. and its direct and indirect subsidiaries.

COMPRESSION / DECOMPRESSION -- A method of encoding/decoding signals that allows
transmission  (or storage) of more information than the media would otherwise be
able to support. Both compression and decompression require processing capacity,
but with many products, the time is not noticeable.

CPS -- a Cable  Programming  Service -- (also known as CPST,  Cable  Programming
Service Tier). CPS includes any video programming  provided over a cable system,
regardless of service tier,  including  installation or rental of equipment used
for the  receipt of such  video  programming,  other than (1) video  programming
carried  on  the  basic  service  tier,  (2)  video  programming  offered  on  a
pay-per-channel or  pay-per-programming  basis, or (3) a combination of multiple
channels of pay-per-channel or pay-per-programming basis so long as the combined
service  consists of  commonly-identified  video  programming and is not bundled
with any regulated tier of service.

DAMA -- Demand Assigned Multiple Access -- The Company's digital satellite earth
station  technology  that allow calls to be made between  remote  villages using
only  one  satellite  hop  thereby   reducing   satellite   delay  and  capacity
requirements while improving quality.

DARK FIBER -- An inactive  fiber-optic strand without  electronics or optronics.
Dark fiber is not connected to transmitters, receivers and regenerators.

DBS -- Direct Broadcast  Satellite -- Subscription  television  service obtained
from satellite  transmissions  using  frequency  bands that are  internationally
allocated to the broadcast  satellite services.  Direct-to-home  service such as
DBS has its origins in the large  direct-to-home  satellite  antennas which were
first  introduced  in  the  1970's  for  the  reception  of  video   programming
transmitted  via  satellite.   Because  these  first-generation   direct-to-home
satellites  operated  in the C-band  frequencies  at low  power,  direct-to-home
satellite  antennas,  or dishes, as they are also known,  generally needed to be
seven to ten feet in diameter in order to receive the signals being transmitted.
More recently, licensees have been using the Ku and extended Ku-bands to provide
direct-to-home  services enabling  subscribers to use a receiving home satellite
dish less than one meter in diameter.

DS-3 -- A data  communications  circuit that is equivalent to 28 multiplexed T-1
channels capable of transmitting  data at 44.736 megabits per second  (sometimes
called a T-3).

DEDICATED  --  Telecommunications   lines  dedicated  or  reserved  for  use  by
particular customers.

DIGITAL -- A method of storing,  processing and transmitting information through
the use of  distinct  electronic  or optical  pulses that  represent  the binary
digits  0 and 1.  Digital  transmission  and  switching  technologies  employ  a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess  or snow in the  case of  video  transmission,  or  static  or  other
background distortion in the case of audio transmission).



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<PAGE>
DLC --  Digital  Loop  Carrier -- A digital  transmission  system  designed  for
subscriber  loop plant.  Multiplexes a plurality of circuits onto very few wires
or onto a single fiber pair.

EQUAL  ACCESS --  Connection  provided  by a LEC  permitting  a  customer  to be
automatically  connected to the IXC of the  customer's  choice when the customer
dials "1".  Also refers to a generic  concept  under which the BOCs must provide
access services to AT&T's  competitors  that are equivalent to those provided to
AT&T.

FCC -- Federal Communications  Commission -- A federal regulatory body empowered
to  establish  and  enforce  rules  and  regulations  governing  public  utility
companies and others, such as the Company.

FDDI -- Fiber Distributed Data Interface -- Based on fiber optics, FDDI is a 100
megabit  per second LAN  technology  used to connect  computers,  printers,  and
workstations  at very high speeds.  FDDI is also used as backbone  technology to
interconnect other LANs.

FRAME RELAY -- A wideband (64 kilobits per second to 1.544  megabits per second)
packet-based  data interface  standard that transmits  bursts of data over WANs.
Frame-relay  packets vary in length from 7 to 1024 bytes.  Data oriented,  it is
generally not used for voice or video.

GCC -- GCI  Communication  Corp.,  an  Alaska  corporation  and a  wholly  owned
subsidiary of Holdings

GCI -- General Communication,  Inc., an Alaska corporation and parent company of
GCI, Inc.

GCI,  Inc.  - the  Registrant,  a wholly  owned  subsidiary  of GCI,  an  Alaska
corporation and issuer of $180 million of publicly traded bonds.

HOLDINGS -- a wholly owned  subsidiary of GCI, Inc., an Alaska  corporation  and
party to the Company's Senior Holdings Loan.

HSD -- Home Satellite Dish - see DBS.

INBOUND  "800"  or  "888"  Service  -- A  service  that  assesses  long-distance
telephone charges to the called party.

ILEC -- Incumbent  Local  Exchange  Carrier -- with respect to an area,  the LEC
that -- (A) on the  date of  enactment  of the  Telecommunications  Act of 1996,
provided  telephone  exchange  service in such area;  and (B)(i) on such date of
enactment,  was  deemed  to be a  member  of the  exchange  carrier  association
pursuant to section 69.601(b) of the FCC's regulations (47 C.F.R. 69.601(b)); or
(ii) is a person or entity that,  on or after such date of  enactment,  became a
successor or assign of a member described in clause (i).

INTEREXCHANGE -- Communication between two different LATAs.

ISDN  --  Integrated  Services  Digital  Network  --  A  set  of  standards  for
transmission  of  simultaneous  voice,  data and video  information  over  fewer
channels  than  would  otherwise  be  needed,  through  the  use of  out-of-band
signalling. The most common ISDN system provides one data and two voice circuits
over a traditional  copper wire pair,  but can represent as many as 30 channels.
Broadband ISDN extends the ISDN  capabilities  to services in the Gigabit range.
(See BRI and PRI)

ISP -- Internet Service Provider -- a company  providing retail and/or wholesale
Internet services.

INTERNET -- A global  collection of  interconnected  computer networks which use
TCP/IP, a common communications protocol.

IXC --  Interexchange  Carrier -- A  long-distance  carrier  providing  services
between local exchanges.



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<PAGE>
LAN -- Local Area Network -- The interconnection of computers for the purpose of
sharing  files,  programs and various  devices  such as printers and  high-speed
modems.  LANs may include  dedicated  computers  or file  servers that provide a
centralized source of shared files and programs.

LATA -- Local Access And  Transport  Area -- The  approximately  200  geographic
areas defined  pursuant to the AT&T Divestiture  Decree.  The BOCs are generally
prohibited from providing  long-distance  service between the LATA in which they
provide local exchange services, and any other LATA.

LEC -- Local Exchange Carrier -- A company  providing local telephone  services.
Each BOC is a LEC.

LINE  COSTS --  Primarily  includes  the sum of  access  charges  and  transport
charges.

LMDS -- Local  Multipoint  Distribution  System -- LMDS uses  microwave  signals
(millimeterwave  signals) in the 28 gHz spectrum to transmit voice,  video,  and
data  signals  within small cells 3-10 miles in  diameter.  LMDS allows  license
holders to control up to 1.3 gHz of wireless spectrum in the 28 gHz Ka-band. The
1.3 gHz can be used to carry digital data at speeds in excess of one gigabit per
second. LMDS uses a specific band in the microwave spectrum, known as millimeter
waves  or  the  28  gHz  "Ka-band."  More  tangibly,  if  LMDS  were  used  on a
point-to-point  basis the beam would be about as wide as a pencil  lead (about a
millimeter)  and would have a frequency of  approximately  28 billion cycles per
second.  The extremely  high frequency used and the need for point to multipoint
transmissions  limits the distance  that a receiver  can be from a  transmitter.
This  means  that  LMDS  will be a  "cellular"  technology,  based on  multiple,
contiguous,  or overlapping  cells.  LMDS is expected to provide  customers with
multichannel video programming,  telephony,  video  communications,  and two-way
data services.  Incumbent LECs and cable  companies may not obtain the in-region
1150 MHz license for three years. Within 10 years,  licenses will be required to
provide 'substantial service' in their service regions.

LOCAL  EXCHANGE -- A geographic  area  generally  determined  by a PUC, in which
calls  generally are  transmitted  without toll charges to the calling or called
party.

LOCAL NUMBER  PORTABILITY -- The ability of an end user to change Local Exchange
Carriers while retaining the same telephone number.

LOWER 48 STATES or LOWER 48 -- refers to the 48  contiguous  states  south of or
below Alaska.

LOWER 49 STATES OR LOWER 49 -- refers to the 48  contiguous  states  south of or
below Alaska and Hawaii.

MAN -- Metropolitan Area Network -- LANs interconnected within roughly a 50 mile
radius.  MANs  typically  use fiber  optic cable to connect  various  wire LANs.
Transmission speeds may vary from 2 to 100 Megabits per second.

MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such as
apartment and condominium complexes.

MMDS -- Multichannel  Multipoint  Distribution  Service - also known as wireless
cable. The Multipoint  Distribution  Service (MDS) was established by the FCC in
1972.  Originally the Commission thought MDS would be used primarily to transmit
business data. However,  the service became increasingly popular in transmitting
entertainment   programming.   Unlike  conventional   broadcast  stations  whose
transmissions  are received  universally,  MDS  programming is designed to reach
only a  subscriber  based  audience.  In 1983 the  Commission  reassigned  eight
channels from the  Instructional  Television  Fixed Service (ITFS) to MDS. These
eight channels make up the MMDS.  Frequently,  MDS and MMDS channels are used in
combination  with ITFS channels to provide video  entertainment  programming  to
subscribers.



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NARROWBAND -- A voice grade low-capacity communications circuit/path. It usually
implies a speed of 56 kilobits per second or less.

NETWORK  SWITCHING  CENTER -- A location  where  installed  switching  equipment
routes long-distance calls and records information with respect to calls such as
the  length of the call and the  telephone  numbers  of the  calling  and called
parties.

NETWORK   SYSTEMS    INTEGRATION   --   Involves   the   creation   of   turnkey
telecommunications networks and systems including: (i) route and site selection;
(ii) rights of way and legal authorizations and/or acquisition; (iii) design and
engineering  of the  system,  including  technology  and vendor  assessment  and
selection,   determining   fiber  optic  circuit   capacity,   and  establishing
reliability/flexibility standards; and (iv) project and construction management,
including contract negotiations,  purchasing and logistics, installation as well
as testing.

NPT -- a New  Product  Tier -- a  cable  programming  service  tier  offered  to
subscribers at prices set by the cable operator.

OCC -- Other Common Carrier -- A long-distance carrier other than the Company.

PCS -- Personal  Communication  Services -- PCS  encompasses a range of advanced
wireless mobile technologies and services.  It promises to permit communications
to   anyone,   anyplace   and   anytime   while  on  the  move.   The   Cellular
Telecommunications  Industry  Association (CTIA) defines PCS as a "wide range of
wireless  mobile  technologies,   chiefly  cellular,  paging,  cordless,  voice,
personal communications networks,  mobile data, wireless PBX, specialized mobile
radio, and satellite-based  systems." The FCC defines PCS as a "family of mobile
or portable radio communications  services that encompasses mobile and ancillary
fixed  communications   services  to  individuals  and  businesses  and  can  be
integrated with a variety of competing networks."

PBX -- Private Branch Exchange -- A customer premise  communication  switch used
to connect  customer  telephones  (and related  equipment) to LEC central office
lines  (trunks),  and to switch  internal calls within the customer's  telephone
system.  Modern PBXs offer  numerous  software-controlled  features such as call
forwarding  and call  pickup.  A PBX uses  technology  similar to that used by a
central office switch (on a smaller  scale).  (The acronym PBX originally  stood
for "Plug Board Exchange.")

POP -- Point of Presence -- The physical access location interface between a LEC
and a IXC  network.  The  point to which  the  telephone  company  terminates  a
subscriber's circuit for long-distance service or leased line communications.

PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T1 (DS-1) speed
(equivalent to 24 voice-grade  channels).  One of the channels ("D") is used for
signaling, leaving 23 ("B") channels for data and voice communication.

PRIVATE LINE -- Uses dedicated circuits to connect customer's  equipment at both
ends of the line. Does not provide any switching capability (unless supported by
customer  premise  equipment).  Usually  includes  two  local  loops  and an IXC
circuit.

PRIVATE NETWORK -- A communications network with restricted (controlled) access,
usually made up of private lines (with some PBX switching).

PUBLIC  SWITCHED  NETWORK -- That  portion of a LEC's  network  available to all
users  generally on a shared basis (i.e.,  not dedicated to a particular  user).
Traffic  along the public  switched  network is generally  switched at the LEC's
central offices.



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RBOC -- Regional Bell  Operating  Company -- Any of the remaining  five regional
Bell holding companies which the AT&T Divestiture Decree established to serve as
parent companies for the BOCs.

RECIPROCAL  COMPENSATION -- The same  compensation of a new CLEC for termination
of a local call by the BOC on its network,  as the new  competitor  pays the BOC
for termination of local calls on the BOC network.

SCHOOLACCESS(TM)  -- the  Company's  Internet and related  services  offering to
schools in Alaska.  The federal  mandate through the 1996 Telecom Act to provide
universal  service  resulted in schools  across  Alaska  qualifying  for varying
levels of discounts to support the provision of Internet services. The Universal
Service  Administrative  Company  through  its Schools  and  Libraries  Division
administers this federal program.

SDN -- Software  Defined  Network -- A switched  long-distance  service for very
large  users with  multiple  locations.  Instead of putting  together  their own
network,  large users can get special  usage rates for calls  carried on regular
switched long-distance lines.

SECURITIES REFORM ACT -- Private Securities Litigation Reform Act of 1996.

SENIOR  HOLDINGS  LOAN  --  Holding's   $200,000,000   and  $50,000,000   credit
facilities.  See note 6(b) to the accompanying  Notes to Consolidated  Financial
Statements included in Part II of this Report.

SETTLEMENT  RATES  -- The  rates  paid to  foreign  carriers  by  United  States
international  carriers to terminate  outbound (from the United States) switched
traffic  and by foreign  carriers  to United  States  international  carriers to
terminate inbound (to the United States) switched traffic.

SMATV -- Satellite  Master  Antenna  Television -- (also known as "private cable
systems") are multichannel  video  programming  distribution  systems that serve
residential,  multiple-dwelling  units ("MDUs"), and various other buildings and
complexes.  A SMATV system  typically  offers the same type of  programming as a
cable system,  and the operation of a SMATV system  largely  resembles that of a
cable system -- a satellite  dish receives the  programming  signals,  equipment
processes  the signals,  and wires  distribute  the  programming  to  individual
dwelling units.  The primary  difference  between the two is that a SMATV system
typically is an unfranchised,  stand-alone  system that serves a single building
or complex,  or a small number of buildings  or  complexes in  relatively  close
proximity to each other.

SONET --  Synchronous  Optical  Network -- A 1984  standard  for  optical  fiber
transmission on the public network. 52 megabits per second to 13.22 Gigabits per
second, effective for ISDN services including ATM.

TCP/IP -- Transmission Control Protocol/Internet  Protocol -- A suite of network
protocols  that allows  computers  with  different  architectures  and operating
system software to communicate with other computers on the Internet.

T-1 -- A  data  communications  circuit  capable  of  transmitting  data  at 1.5
megabits per second.

TARIFF -- The schedule of rates and  regulations  set by  communications  common
carriers and filed with the appropriate  federal and state regulatory  agencies;
the published official list of charges, terms and conditions governing provision
of a specific  communications service or facility,  which functions in lieu of a
contract between the subscriber or user and the supplier or carrier.

TOKEN RING -- A local area  network  technology  used to  interconnect  personal
computers, file servers,  printers, and other devices. Token Ring LANs typically
operate at either 4 megabits per second or 16 megabits per second.

TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for transmission
between or within LATAs.



                                       8
<PAGE>
TRS  SERVICES  --   Telecommunications   Relay  Services  --  Enables  telephone
conversations  between people with and without  hearing or speech  disabilities.
TRS relies on  communications  assistants  ("CA") to relay the  content of calls
between  users of text  telephones  ("TTYs") and users of  traditional  handsets
(voice users).  For example,  a TTY user may telephone a voice user by calling a
TRS  provider  where a CA will  place the call to the  voice  user and relay the
conversation  by  transcribing  spoken content for the TTY user and reading text
aloud for the voice user.

WAN -- Wide Area Network -- Remote computer  communications  system.  WANs allow
file sharing among geographically  distributed  workgroups  (typically at higher
cost and slower speed than LANs or MANs).  WANs  typically use common  carriers'
circuits and  networks.  WANs may serve as a customized  communication  backbone
that interconnects all of an organization's  local networks with  communications
trunks that are designed to be appropriate for anticipated  communication  rates
and volumes between nodes.

WORLD  WIDE  WEB  or  WEB -- A  collection  of  computer  systems  supporting  a
communications  protocol that permits  multi-media  presentation  of information
over the Internet.

1984 CABLE ACT -- The Cable Communications Policy Act of 1984.

1992 CABLE ACT -- The Cable Television  Consumer  Protection and Competition Act
of 1992.

1996  TELECOM ACT -- The  Telecommunications  Act of 1996 - The 1996 Telecom Act
was signed into law February 8, 1996. Under its provisions, BOCs can immediately
begin  manufacturing,  research and  development;  GTE Corp. can begin providing
interexchange  services through its telephone companies  nationwide;  laws in 27
states that foreclose  competition are knocked down; co-carrier status for CLECs
is ratified; and the concept of physical collocation of competitors'  facilities
in LECs central offices, which an appeals court rejected, is resurrected.

The  legislation  breaks down the old barriers  that  prevented  three groups of
companies,  the LECs,  including the BOCs, 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 BOCs, must open up their
networks.

The 1996  Telecom Act  substantially  changed  the  competitive  and  regulatory
environment  for  telecommunications  providers  by  significantly  amending the
Communications   Act  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.



                                       9
<PAGE>
            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Except for the historical statements and discussions  contained herein,  certain
statements  in this  annual  report  on  Form  10-K  constitute  forward-looking
statements  within the  meaning of the  Securities  Reform  Act.  Any Form 10-K,
Annual Report to Shareholders,  Form 10-Q or Form 8-K of the Company may include
forward looking statements.  In addition, other written or oral statements which
constitute  forward  looking  statements have been made and may in the future be
made by or on behalf of the  Company,  including  statements  concerning  future
operating  performance,  the Company's  share of new and existing  markets,  the
Company's  short- and long-term  revenue and earnings growth rates,  and general
industry  growth rates and the Company's  performance  relative  thereto.  These
forward  looking  statements rely on a number of assumptions  concerning  future
events, including the outcome of litigation,  the adoption and implementation of
balanced and  effective  rules and  regulations  by the FCC and the state public
regulatory  agencies,  and the Company's ability to achieve a significant market
penetration in new markets.  These forward  looking  statements are subject to a
number  of  uncertainties  and other  factors,  many of which  are  outside  the
Company's  control,  that could cause actual results to differ  materially  from
such statements.

These  statements  may be  preceded  by,  followed  by,  or  include  the  words
"believes,"  "expects,  "  "anticipates,"  or  similar  expressions.  For  those
statements, the Company claims protection of the safe-harbor for forward-looking
statements  contained in the Securities Reform Act. The reader is cautioned that
important  factors,  such  as the  following  risks,  uncertainties,  and  other
factors, in addition to those contained elsewhere in this document, could affect
future  results  of  the  Company,  its  long-distance  services,  local  access
services,  Internet  services,  cable services,  and wireless services and could
cause  those  results  to  differ   materially   from  those  expressed  in  the
forward-looking statements:

     -    Material  adverse  changes in the economic  conditions  in the markets
          served by the Company;
     -    The efficacy of the rules and regulations to be adopted by the FCC and
          state public  regulatory  agencies to implement the  provisions of the
          1996 Telecom Act; the outcome of litigation relative thereto;  and the
          impact of regulatory changes relating to access reform;
     -    The Company's responses to competitive products, services and pricing,
          including pricing pressures,  technological developments,  alternative
          routing  developments,  and the  ability  to  offer  combined  service
          packages that include local, cable and Internet  services;  the extent
          and pace at which different competitive  environments develop for each
          segment of the Company's  business;  the extent and duration for which
          competitors from each segment of the  telecommunications  industry are
          able to offer  combined or full service  packages prior to the Company
          being  able to do so;  the  degree  to which the  Company  experiences
          material  competitive  impacts to its  traditional  service  offerings
          prior to  achieving  adequate  local  service  entry;  and  competitor
          responses to the  Company's  products and services and overall  market
          acceptance of such products and services;
     -    The  outcome  of   negotiations   with  ILECs  and  state   regulatory
          arbitrations and approvals with respect to interconnection agreements;
          and the ability to purchase  unbundled  network  elements or wholesale
          services  from ILECs at a price  sufficient  to permit the  profitable
          offering of local exchange service at competitive rates;
     -    Success and market  acceptance for new initiatives,  many of which are
          untested;  the level and timing of the growth and profitability of new
          initiatives,  particularly  local access services,  Internet (consumer
          and  business)   services  and  wireless   services;   start-up  costs
          associated  with  entering  new  markets,  including  advertising  and
          promotional  efforts;   successful   deployment  of  new  systems  and
          applications  to support new  initiatives;  and local  conditions  and
          obstacles;
     -    Uncertainties  inherent  in  new  business  strategies,   new  product
          launches and  development  plans,  including  local  access  services,
          Internet services,  wireless services,  digital video services,  cable
          modem services, and transmission services;



                                       10
<PAGE>
     -    Rapid technological changes;
     -    Development   and  financing  of   telecommunication,   local  access,
          wireless, Internet and cable networks and services;
     -    Future financial  performance,  including the availability,  terms and
          deployment  of  capital;  the  impact of  regulatory  and  competitive
          developments  on capital  outlays,  and the  ability  to achieve  cost
          savings and realize productivity improvements;
     -    Availability of qualified personnel;
     -    Changes in, or  failure,  or  inability,  to comply  with,  government
          regulations, including, without limitation, regulations of the Federal
          Communications Commission, the Alaska Public Utilities Commission, and
          adverse outcomes from regulatory proceedings;
     -    The cost of the Company's year 2000 compliance efforts;
     -    Uncertainties  in federal  military  spending levels and military base
          closures in markets in which the Company operates.
     -    Other  risks  detailed  from  time to time in the  Company's  periodic
          reports filed with the Securities and Exchange Commission.

These  forward-looking  statements  (and  such  risks,  uncertainties  and other
factors)  are made only as of the date of this report and the Company  expressly
disclaims any obligation or undertaking to disseminate  any updates or revisions
to any  forward-looking  statement  contained  in this  document  to reflect any
change in the  Company's  expectations  with regard to those  statements  or any
other change in events,  conditions or circumstances on which any such statement
is based.  Readers  are  cautioned  not to put undue  reliance  on such  forward
looking statements.

                                     PART I

Item 1.  BUSINESS.

General
GCI,  Inc.  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"), received through its initial
capitalization all ownership  interests in subsidiaries  previously held by GCI.
GCI, Inc. has its principal executive offices at 2550 Denali Street, Suite 1000,
Anchorage,  AK 99503 (telephone number 907-265-5600).  Internet users can access
information  about the  Company  and its  services  at  http://www.gci.com/  and
http://www.alaskaunited.com/.  Internet  services  are hosted by the  Company at
http://www.gci.net/.

GCI,  Inc. is  primarily  a holding  company  and  together  with its direct and
indirect  subsidiaries,  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 and Internet services 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 that would be well
positioned to take advantage of growth opportunities in the communications, data
and entertainment markets.

Financial information about the Company's industry segments
The  Company  has  four  reportable  segments:   long-distance  services,  cable
services, local access services and Internet services.

A  full  range  of  common-carrier  long-distance  and  other  telecommunication
services are offered to business, government, other telecommunications companies
and  consumer  customers,  through its networks of fiber optic  cables,  digital
microwave,  and fixed and transportable  satellite earth stations.  Individually
insignificant  business 


                                       11
<PAGE>
units  including  Network  Solutions,  cellular  resale  and  product  sales are
included in the "other" industry segment. None of these business units have ever
met the quantitative thresholds for determining reportable segments.

The Company  provides cable television  services 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.  Anchorage cable plant upgrades in 1998
enabled the Company to offer digital cable television  services and retail cable
modem service  (through its Internet  segment) in Anchorage,  complementing  its
existing service offerings. The Company plans to expand its product offerings as
plant upgrades in other communities in Alaska are completed.

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,
as access is allowed by the APUC.

The Company  began  offering  wholesale  and retail  Internet  services in 1998.
Deployment of the new undersea fiber optic cable  described below will allow the
Company to offer enhanced services with high-bandwidth requirements.

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

Historical development of the Company's business during the past fiscal year
Alaska  United  Project.  The  Company  undertook a major  construction  project
(referred to as Alaska  United) with the goal of  significantly  increasing  its
communications bandwidth to and from locations in Alaska and the lower 49 states
and  through   interconnection   agreements  with  other  carriers,  to  foreign
locations.  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 was
engaged to design,  engineer,  manufacture and install the undersea  cable.  The
cable was laid during the period from August to December 1998.  Testing occurred
after that and services  commenced  in late  January  1999 for the  Anchorage to
Fairbanks  segment  and  early  February  1999  for the  complete  system.  With
construction of Alaska United complete,  the Company began to transition traffic
from leased  satellite,  terrestrial  and microwave  facilities to Alaska United
facilities in early February 1999.

The Alaska  United  project  provides a high  capacity  fiber optic link between
points in Alaska and the lower 48 states  through  Seattle,  Washington.  Alaska
United lands at cable terminal stations in Whittier,  Valdez and Juneau, Alaska.
From Whittier,  the fiber follows the Alaska  railroad,  highway,  and over-land
rights-of-ways   to  Anchorage.   Between  Whittier  and  Valdez,   the  Company
constructed a second  undersea  fiber optic cable.  The cable connects in Valdez
with a fiber constructed by Kanas Telecom, Inc. ("Kanas"). The Company exchanged
Dark Fiber with Kanas to obtain  facilities from Valdez to Fairbanks.  In Juneau
and Seattle,  Alaska United connects through terminal  stations to the Company's
existing  network.  The cable  terminal  stations house the power feed equipment
necessary to power the undersea fiber optic cable system and the SONET equipment
which  transports  data across the  terrestrial  network and the undersea  fiber
network.

The Alaska United system is 2,331 miles long (1,995 miles  undersea and 336 over
land) and has a total  design  capacity of 10 billion  bits per second (22 times
what was 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.  The only other fiber 


                                       12
<PAGE>
optic cable connecting  Alaska with the contiguous United States had reached 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  included $75 million
through a separate bank credit  agreement dated January 27, 1998 and $50 million
from funds raised  through the 1997 issuance of senior notes.  See note 6 to the
accompanying Notes to Consolidated  Financial  Statements included in Part II of
this Report.

Local Access  Services.  The Company began offering  local exchange  services in
Anchorage in September  1997 and provided  service to  approximately  28,300 and
3,300 lines at December 31, 1998 and 1997, respectively.

The  Company's  local access  services  face  significant  competition  from the
municipally owned utility Anchorage  Telephone Utility ("ATU") and AT&T Alascom,
Inc.  In  October   1998  the   Municipality   of  Anchorage   approved   Alaska
Communications  Systems,  Inc.'s ("ACS") offer to acquire the operations of ATU.
ACS is an  entity  formed  by Fox  Paine &  Company,  LLC  ("Fox  Paine")  and a
management team led by former executives of Pacific Telecom,  Inc. ("PTI").  The
sale of ATU was  approved  by the  citizens of the  Municipality  in April 1998.
Consummation  of the  transaction  is subject to  regulatory  approval and other
conditions.

Century Telephone Enterprises,  Inc. ("CenturyTel") reported in August 1998 that
it  entered  into a  definitive  agreement  to  sell  the  stock  of its  Alaska
operations  to ALEC  Acquisition  Corporation  ("ALEC").  ALEC is led by  former
executives of PTI and Fox Paine.  It is anticipated  that the  transaction  will
close in the second quarter 1999, subject to regulatory  approvals and customary
closing conditions. CenturyTel acquired the Alaska properties as part of the PTI
acquisition completed in December 1997.

Due  to  uncertainties   surrounding   regulatory  approvals  and  possible  new
requirements that may be imposed by regulatory  authorities,  the Company is not
able to determine if the sale of ATU or the  CenturyTel  properties  will have a
material effect on the Company's  financial  position,  results of operations or
liquidity.

PTI,  through  subsidiary  companies,   provides  local  telephone  services  in
Fairbanks and Juneau,  Alaska.  Although the PTI  subsidiaries are classified as
Rural Telephone  Companies under the 1996 Telecom Act, PTI is currently owned by
Century Telephone Company of Louisiana, one of the largest independent telephone
companies in the Nation.  PTI  subsidiaries'  legal status  entitles  them to an
exemption  of certain  material  interconnection  terms of the 1996 Telecom Act,
until  such  "rural  exemption"  is lifted by the State of Alaska.  The  Company
requested that  continuation  of the "rural  exemption" of the PTI  subsidiaries
relating to the Fairbanks and Juneau  markets be examined.  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  and  access  charge  reform)  must be  completed  before the
exemption  would be revoked.  Those  rulemaking  proceedings  have been  largely
completed.  Further,  in March 1999 the Company received a favorable decision on
its appeal of the APUC  decision,  and the issues have been remanded to the APUC
for  proceedings  leading  to a  decision  on or  before  July  2,  1999.  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 access services  competition is in the best interests
of consumers  and intends to  vigorously  pursue before the APUC in the remanded
proceedings  that the "rural  exemption"  not be continued for the Fairbanks and
Juneau markets. The Company cannot, however,  predict the effect that ongoing or
future regulatory  developments  might have on competitive local access services
markets in Alaska or on the Company specifically.  See Part I, Item 1. Business,
Regulation, Franchise Authority and Tariffs.

Cable Services Expansion.  The Company completed an $11.5 million upgrade to its
Anchorage cable infrastructure in 1998 that significantly increased the capacity
and reliability of the system, made it possible to support two-way  applications
such as cable modems (as further  described  below) and digital cable television
programming, and provides the capacity for additional program offerings.



                                       13
<PAGE>
Digital cable  television  services were offered in Anchorage in 1998,  offering
enhanced picture and audio quality,  over 100 channels of programs,  40 channels
of digital music, and many channels of premium and pay-per-view products.

Internet Services. The Company's statewide  SchoolAccess(TM)  services (Internet
access and related products and services for Alaska schools)  commenced  January
1998.

GCI began a limited rollout of its dial-up Internet service in April 1998, which
allowed  the Company to test its new  state-of-the-art  Internet  platform.  The
Company  began its broad based  offering in October  1998 and  initiated a major
promotion in February  1999.  Services  were  initially  offered to residents of
Anchorage,  Fairbanks,  Kodiak,  Juneau,  Kenai,  Soldotna,  Palmer and Wasilla,
Alaska.  Other Alaska  communities  were added over the next several  months and
continue to be added.  GCI.net  service  supports 56 kilobit per second  dial-up
connections  with  support  for both V.90 and Kflex  technologies.  The  Company
believes its service has one of the best first-try connect rates and the fastest
speeds  available  of any  provider in Alaska.  The Company  plans to  introduce
additional service upgrades and promotional offerings in the future.

The  Company  began a limited  introduction  of cable  modem  services  in 1998,
providing high-speed, dedicated access to the Internet.

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 launch of the satellite
in August 1998 failed. The Company did not assume launch risk and the launch has
been  rescheduled  for the fourth  quarter of 1999. The Company will continue to
lease  transponder  capacity  until  the  delivery  of the  transponders  on the
replacement satellite.

Rural Equal Access.  In 1996 the Company  constructed  56 new earth  stations in
Western  and  Northern  Alaska.  As  construction  of those DAMA  stations  were
completed,  the  Company  requested  Equal  Access from the LECs  serving  those
communities.  Under Federal Communications  Commission rules,  substantially all
LECs have three years to comply  with an equal  access  request.  The three year
time  period  is  expiring  for  many  of  those   locations  and  LECs  started
implementing the equal access conversion  process in late 1998 and will continue
to convert  locations  though March 1999.  As a result,  approximately  34 rural
DAMA-served  communities  will be  converted  during this period to equal access
enabling the  Company's  customers to access its network  without  dialing extra
digits.

PCS and LMDS  licenses.  The Company  began  developing  plans for PCS  wireless
communications service deployment in 1995 and subsequently conducted a technical
trial of its candidate technology.  The Company has invested  approximately $2.2
million in its PCS license at December 31, 1998.  PCS  licensees are 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. The Company invested  approximately  $275,000 in its
LMDS  license in 1998.  LMDS  licensees  are  required  to provide  'substantial
service' in their  service  regions  within 10 years.  The Company is  currently
evaluating its wireless  strategy and expects to complete such evaluation within
the next six months.  The Company expects that its wireless  strategy will allow
retention of the PCS and LMDS licenses pursuant to their terms.

Narrative  description  of the  business  done  and  intended  to be done by the
Company
General
The  Company  operates a  broadband  communications  network  that  permits  the
delivery of a seamless  integrated bundle of  communications,  entertainment and
information services. The Company offers a wide array of consumer communications
and  entertainment   services--including  local  telephone,   long-distance  and
wireless  communications,  cable television,  consulting  services,  network and
desktop  computing  outsourced  services,  and dial-up and cable modem  Internet
access services at a wide range of speeds--all under the GCI brand name.



                                       14
<PAGE>
The  Company's  management  believes  that the size and growth  potential of the
voice, video and data market, the increasing  deregulation of  telecommunication
services,  and the  increased  convergence  of  telephony,  wireless,  and cable
services  offer  the  Company   considerable   opportunities  to  integrate  its
telecommunication,  Internet 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  telecommunication
revenues  to  continue  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 1996 Telecom Act
with the barriers to competition between long-distance, 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,
Internet  services,  and  wireless  services  leave it well  positioned  to take
advantage of deregulated markets.

The Company is one of Alaska's leading providers of telecommunication,  Internet
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.

For   calendar   year  1998,   the   Company   estimates   that  the   aggregate
telecommunications,  cable television,  and Internet markets in Alaska generated
revenues of  approximately  $931  million.  Of this amount,  approximately  $475
million was  attributable  to interstate and intrastate  long-distance  service,
$327  million  was  attributable  to local  exchange  services,  $72 million was
attributed  to cable  television,  $38  million  was  attributable  to  wireless
communications services, and $19 million was attributable to Internet services.

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  telecommunication  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  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 two
undersea fiber optic cables with a current  capacity of 57 DS3s (can be upgraded
to 201 DS3s) and is backed-up by additional satellite capacity.

Fiber optics is the preferred method of carrying Internet, voice, video and data
communications,  eliminating the delay commonly found in satellite  connections.
Widespread use of high capacity fiber optic  facilities  will allow expansion of
business, government and educational infrastructure in Alaska.

Long-Distance Services
Industry.   With  the  Communications  Act  of  1934,   telecommunications   was
established  as a  regulated  industry.  The main  objective  of this act was to
create an affordable and universal telephone service for the American people. As
a result,  AT&T was  granted  exclusive  rights to serve the  telecommunications
industry.   The  next  several  decades  brought  significant   improvements  in
technology.  New advances  created  opportunities  for  providers of  lower-cost
services to enter the market,  and in order to facilitate the entry of these new
competitors,  regulatory policies were changed.  The government stepped into the
market on January 1, 1984, and broke-up AT&T's near monopoly.  The  government's
objective  was to provide  for  greater  competition  in the  telecommunications
industry, as well as make room for the creation of more diversified products.



                                       15
<PAGE>
The Federal  Communications  Commission  set price caps in 1989 to regulate  the
prices that AT&T could  charge for their  services.  Yet, by 1991 the market had
become so much more  competitive  with regards to both  long-distance  and local
calls, that the FCC decided to deregulate most of AT&T's services.

The United States  Congress passed the 1996 Telecom Act that permitted the local
phone companies,  the  long-distance  companies,  and the cable service firms to
penetrate each other's market. This has provided the telecommunications industry
with new  capabilities  resulting in an industry that is more  competitive  than
ever  before.  To reduce  the  burden  and  facilitate  competitive  advantages,
companies are merging and acquiring other telecommunication and cable television
firms.

The long-distance telephone services market according to the Standard and Poor's
telecommunication survey is worth over $68 billion. AT&T is the main contributor
to this sum, contributing over 50% of the total revenues.  The rest of the share
of the revenues is contributed  by MCI WorldCom,  Sprint Corp.  ("Sprint"),  and
over 400 smaller firms. Under new regulations,  BOCs and ILECs are able to enter
the long-distance  market,  providing  additional  competitive  pressures on the
industry. To retain customers, as in the case of the long-distance carriers, and
to win customers for the new competitors, rates may continue to be reduced.

Advancements within the next few years are expected to combine services directed
toward voice communication with other activities such as data sharing, on-screen
collaboration, faxing, and game playing, among many other things.

The  Company  believes  that the  telecommunications  industry  in 1999  will be
significantly impacted by federal and state regulators.  Consummation of mergers
between  long-distance  companies,  local access services  companies,  and cable
television  companies  is  expected  continue  to blur the  distinction  between
product  lines  and  competitors.   Synergies   developed  through  mergers  and
acquisitions and obtaining end-to-end connectivity with customers is expected to
drive  profitability  and success in penetrating new markets.  Industry analysts
believe that  successful  competitors  will be the  companies  that can minimize
regulatory  battles  and begin to offer a full suite of  integrated  services to
their customers, using a network that is largely under their control.

Growth in data is expected to be a key component of continuing  industry revenue
growth.  ISPs have become major customers and many long-distance  companies have
acquired ISPs and web-hosting companies.

General.  The Company supplies a full range of common-carrier  long-distance and
other   telecommunication   products  and  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,  including a
self-constructed  and financed  digital fiber optic cable and  additional  owned
capacity on another  undersea  fiber optic  cable,  both  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  inter-state  traffic as
well).  Virtually  all  switched  services are  computer  controlled,  digitally
switched, and interconnected by a packet switched signaling network.

The Company provides interstate and intrastate long-distance services throughout
Alaska using its own facilities or facilities  leased from other  carriers.  The
Company   also   provides   (or  joins  in   providing   with  other   carriers)
telecommunication  services to and from Alaska, Hawaii, the lower 48 states, and
many foreign nations and territories.

The Company offers  cellular  services by reselling  other  cellular  providers'
services.   The  Company  expects  to  offer  wireless  services  over  its  own
facilities,  and has purchased in FCC auctions PCS and LMDS  wireless  broadband
licenses  covering  markets in Alaska.  The  Company is  required  by the FCC to
provide  adequate  broadband PCS service to at least one-third of the population
in its licensed  areas within five years of being licensed and two-thirds of the
population in its licensed areas within ten years of being licensed. The Company
is required by the FCC to provide  `substantial  service' in its service  region
within 10 years to retain its LMDS  


                                       16
<PAGE>
license.  The licenses are granted for ten year terms from the original  date of
issuance and may be renewed by the Company by meeting the FCC's renewal criteria
and upon compliance with the FCC's renewal procedures.

Products.  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,
toll-free 800, 888 and 877 services, 900 services, GCI calling card, debit card,
operator and enhanced  conference  calling,  frame relay,  SDN, ISDN  technology
based  services,  as well as  termination  of  northbound  toll  service for MCI
WorldCom, 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  toll-free  800,  888 and 877 toll  services  for MCI  WorldCom  and Sprint.
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  65.0%,  70.0%,  and 86.0% of the Company's
1998,  1997, and 1996 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 long-distance
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  also  designs,
sells,  services  and  operates,  on  behalf  of  certain  customers,  dedicated
communication and computer networking equipment and provides field/depot,  third
party, technical support, telecommunications consulting and outsourcing services
through its Network  Solutions  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  Network  Solutions  sales and services
revenue  totaled $13.3,  $10.2 and $10.8 million in the years ended December 31,
1998, 1997 and 1996, respectively, or approximately 5.4%, 4.5% and 6.6% of total
revenues,  respectively.  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  services  rather than price  competition.  These
services  are  blended  with  other  transport  products  into  unique  customer
solutions, including managed services and outsourcing.

Facilities. Currently, the Company's telecommunication facilities comprise major
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 colocated.  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 WorldCom,  Sprint and other facilities to distribute the Company's
southbound traffic to the remaining 49 states and international destinations.

The Company,  using its 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 


                                       17
<PAGE>
satellite hop thereby reducing  satellite delay and capacity  requirements while
improving  quality.  The Company  obtained the necessary  APUC and FCC approvals
waiving current prohibitions  against construction of competitive  facilities in
rural Alaska,  allowing for  deployment 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. All sites were operational at December
31, 1998.

As described  previously,  the Company  completed  construction  and placed into
service in February  1999 a fiber optic cable  connecting  Anchorage,  Whittier,
Valdez,  Fairbanks and Juneau,  Alaska and Seattle Washington.  The Company also
owns a portion of an  additional  undersea  fiber optic  cable.  The fiber optic
cables allow the Company to carry its Anchorage,  Eagle River, Wasilla,  Palmer,
Kenai Peninsula, Valdez, Whittier, Glenallen, Fairbanks, and Juneau area traffic
to  and  from  the  contiguous  lower  48  states  over  terrestrial   circuits,
eliminating the one-quarter second delay associated with satellite circuits. The
Company's  preferred routing for this traffic is via undersea fiber optic cable,
which makes available satellite capacity to carry the Company's rural interstate
and intrastate traffic.

The Company employs  satellite  transmission  for rural  intrastate  traffic and
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.  (now PanAmSat  Corporation  ("PanAmSat"))
Galaxy IX satellite and has agreed to acquire satellite transponders on PanAmSat
Galaxy XR satellite to meet its long-term satellite capacity  requirements.  The
Galaxy XR  satellite  is  expected  to be placed in  service  during  the fourth
quarter of 1999.

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.

Customers. The Company had approximately 82,000, 89,000 and 93,900 active Alaska
subscribers  to its message  telephone  service at December 31,  1998,  1997 and
1996,  respectively.  Approximately  12,100,  11,500  and  11,000 of these  were
business and government users at December 31, 1998, 1997 and 1996, respectively,
and the remainder were residential customers. Reductions in residential customer
counts are primarily  attributed to new  competitive  pressures in Anchorage and
other markets served by the Company.  MTS revenues averaged  approximately $11.1
million per month during 1998.

Equal access  conversions  have been  completed in all  communities  served with
Company  owned  facilities.  The Company  estimates  that it carries over 40% of
business  MTS  traffic and  approximately  35% of  residential  MTS traffic as a
statewide average for both originating interstate and intrastate traffic.



                                       18
<PAGE>
<TABLE>
The following  table  presents a summary of switched MTS traffic of GCI, Inc. in
1998 and 1997 and of GCI in 1996.
<CAPTION>
                                       Interstate Minutes            
                             ---------------------------------------
                                                                                  Combined
                                                                                 Interstate
                                                                       Inter-    and Inter-     Intra-
                                   South-        North-      Calling  national    national       state       Total
For Quarter ended                  bound         bound        Card    Minutes     Minutes       Minutes     Minutes
----------------------------------------------------------------------------------------------------------------------
                                                              (amounts in thousands)
 <S>                              <C>           <C>          <C>       <C>        <C>           <C>         <C>
 March 31, 1996                    76,369        49,158       6,094    1,890      133,511        28,910     162,421
 June 30, 1996                     81,753        51,465       6,049    1,964      141,231        30,671     171,902
 September 30, 1996                86,094        52,856       6,453    1,896      147,299        31,253     178,552
 December 31, 1996                 82,255        55,675       7,863    1,774      147,567        30,374     177,941
                             -----------------------------------------------------------------------------------------

     Total 1996                   326,471       209,154      26,459    7,524      569,608       121,208     690,816
                             =========================================================================================

 March 31, 1997                    83,284        56,588       8,110    1,741      149,723        32,020     181,743
 June 30, 1997                     85,933        58,420       7,189    1,795      153,337        34,405     187,742
 September 30, 1997                93,510        60,390       5,530    1,842      161,272        34,755     196,027
 December 31, 1997                 87,657        61,992       5,157    1,703      156,509        31,962     188,471
                             -----------------------------------------------------------------------------------------

     Total 1997                   350,384       237,390      25,986    7,081      620,841       133,142     753,983
                             =========================================================================================

 March 31, 1998                    86,899        64,116       4,810    1,889      157,714        33,082     190,796   
 June 30, 1998                     93,817        67,296       4,353    1,910      167,376        34,890     202,266 
 September 30, 1998               103,423        61,690       4,227    1,940      171,280        35,748     207,028 
 December 31, 1998                 90,792        61,514       4,197    1,706      158,209        33,598     191,807  
                             -----------------------------------------------------------------------------------------

     Total 1998                   374,931       254,616      17,587    7,445      654,579       137,318     791,897   
                             =========================================================================================
</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
(now MCI WorldCom) which includes the following agreements:

     -    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;
     -    MCI licensed certain service marks to the Company for use in Alaska;
     -    MCI, in connection with providing to the Company credit enhancement to
          permit the Company to purchase a portion of 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;
     -    MCI purchased certain service marks of the Company; and
     -    the parties agreed to share some communications  network resources and
          various marketing,  engineering and operating  resources.  The Company
          also handles MCI's 800, 888 and 877 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%  (19.1%  as  of
          December  31,  1998) of GCI'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.



                                       19
<PAGE>
Revenues  attributed  to MCI WorldCom in 1998,  and MCI in 1997 and 1996 totaled
$35.9  million,  $34.3 million and $29.2 million,  or 14.5%,  15.3% and 17.7% 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  WorldCom  traffic for the
period April 1, 1996 through July 1, 1999 and thereafter.

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 1998,  1997 and 1996 of  approximately  $25.4  million,
$24.4 million and $18.8  million,  or  approximately  10.3%,  10.9% and 11.4% of
total revenues, respectively.

With the contracts and amendment  described  above,  the Company is assured that
MCI WorldCom and Sprint, the Company's two largest  customers,  will continue to
make use of the Company's  service during the extended  term.  Both MCI WorldCom
and Sprint are major  customers  of the  Company in its  long-distance  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.

Other common carriers traffic routed to the Company for termination in Alaska is
largely  dependent  on  traffic  routed  to MCI  WorldCom  and  Sprint  by their
customers.  Pricing  pressures,  new program offerings and market  consolidation
continue to evolve in the markets  served by MCI WorldCom  and Sprint.  If, as a
result, their traffic is reduced, or if their competitors' costs to terminate or
originate traffic in Alaska are reduced,  the Company's traffic will also likely
be reduced,  and the Company's  pricing may be reduced to respond to competitive
pressures.  The  Company is unable to predict  the effect on the Company of such
changes,  however given the materiality of other common carriers revenues to the
Company,  a  significant  reduction in traffic or pricing  could have a material
adverse effect on the Company's  financial  position,  results of operations and
liquidity.

The Company provided private line and private network communication products and
services,  including  SchoolAccess(TM) private line facilities, to approximately
1,269 commercial and government  accounts in 1998.  Approximately 7.9%, 7.1% and
8.5% of total revenues were generated by these products and services  during the
years ended December 31, 1998, 1997 and 1996, respectively.

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 Part I, Item 1. Business,  Foreign and Domestic Operations and
Export Sales).

Competition.  The  long-distance  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.

In the long-distance market, the Company competes against AT&T Alascom, ATU, the
Matanuska Telephone  Cooperative,  certain smaller rural affiliates,  and may in
the future  compete  against new market  entrants.  AT&T Alascom,  the Company's
principal  competitor  in  long-distance  services,  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 and
entry of other competitors into the long-distance markets served by the Company.
Under the terms of AT&T's acquisition of


                                       20
<PAGE>
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 believes it has, so far, successfully adjusted its pricing and marketing
strategies to respond to AT&T and other competitors' pricing practices. However,
if  competitors  significantly  lower their 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

A carrier has publicly  announced that it has begun  construction of fiber optic
facilities  connecting  points in Alaska to the lower 48  states,  with  service
expected to commence in 1999.  An additional  fiber system would provide  direct
competition  to the  Company's  provision  of service on its owned  fiber  optic
facilities.  The Company believes it can successfully  compete with products and
services offered by the competing carrier.

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.

Cable Services
Industry.  The programmed video services industry includes traditional broadcast
television, cable television,  wireless cable, and 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.

Advancements in technology,  facility  upgrades and network  expansion to enable
migration to digital  programming  are expected to have a significant  impact on
cable  services in the future.  The  industry  is expected to be  challenged  by
changing  federal,  state  and  local  regulations,   intense  competition,  and
uncertain technologies and standards.

Acquisitions  and  mergers are  shaping  the cable  industry in a  technological
convergence  similar to what is  happening in the  telecommunications  industry.
AT&T has  received  stockholder  and  regulatory  approvals  and  closed its $48
billion  takeover  of cable  television  provider  Tele-Communications  Inc.  in
February  1999,  gaining the last mile  connection to homeowners  with fiber and
coaxial cable over which it is expected to sell online access and Internet phone
service. AT&T is also negotiating with other cable companies for access to their
lines.

Convergence  of TV and the  Internet  isn't  expected  to  become  a  widespread
phenomenon until at least 2000.  Analysts expect that as many as 5 million cable
subscribers may sign up in 1999 for high-speed  cable modems that will give them
access to the Internet.  The Company is currently offering such high-speed cable
modem access in the Anchorage area.



                                       21
<PAGE>
Basic  cable  pricing  is  expected  to be  impacted  by  two  forces;  possible
reimposition of rate regulations and additional  competition from wireless cable
providers.  After  averaging  3.4%  growth  for the last  five  years,  industry
analysts project that cable subscriber  growth in 1999 may slow to 1.8%, or 66.6
million homes. Industry analysts predict that cable providers may see a 12% hike
in ad revenues, to $6.9 billion.

Direct-broadcast   satellite   operators   increased  their   subscriptions   by
approximately 39% in 1998, to 8.9 million,  according to industry analysts.  The
industry  is  expected  to add 2.6 million  subscribers  in 1999.  With  digital
transmissions  and  compression,  cable  operators  are  better  able to offer a
variety and quality of channels to rival DBS, with pay-per-view choices that can
approximate video-on-demand.

Digital  video is  projected to grow  significantly  over the next three to four
years as cable  network  upgrade  efforts are  completed and the cost of digital
set-top  technology  decreases.  Margins  related  to  digital  programming  are
expected  to  climb  due  to  the  ability  to  reuse  programming  at low or no
incremental cost.

Analysts  believe data  services  will be an  additional  opportunity  for cable
providers in the next three to five years and that cable will be the most widely
available,  most cost  efficient  way to access the Internet at very high speeds
and with high video quality. The incremental opportunity for cable from data may
rival  that  of  digital  video  according  to  industry  analysts.   Additional
opportunities  are expected in  voice-over  cable  applications  that will allow
cable providers to offer local telephone service to cable subscribers.

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.  Other rural  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.

General.  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  television  systems serve 26 communities  and areas in Alaska,
including  the state's  three largest  urban areas,  Anchorage,  Fairbanks,  and
Juneau.  The state-wide  Company cable systems  consist of  approximately  1,806
miles of installed cable plant having 300 to 550 MHz of channel capacity.

The  Company  completed  a $12.5  million  upgrade  in 1998  that  significantly
increased  the  capacity  and  reliability  of the  Anchorage  and Juneau  cable
systems.  The Company laid more than 200 miles of fiber optic cable in Anchorage
and increased the carrying  capacity of 900 miles of cable  television line from
450 MHz to 550 MHz.

The  result of such  upgrades  is an  increase  in channel  capacity  and system
reliability,  facilitating the delivery of additional video  programming and new
services such as enhanced video,  high-speed Internet access and telephony,  and
the capability to support two-way  applications such as cable modems and digital
cable.  The Company  completed field testing and deployed its digital  converter
cable service in Anchorage in 1998. Digital  compression has enabled the Company
to increase the channel capacity of its Anchorage cable  communications  systems
to more than 100 channels,  provide digital audio  channels,  as well as improve
picture and sound quality.



                                       22
<PAGE>
Products. The programming services offered to subscribers of the Company's cable
television systems differ by system (all information as of December 31, 1998).

Anchorage,  Bethel,  Kenai and  Soldotna  systems.  Each  system  offers a basic
service. In addition, Anchorage and Bethel offer a CPS. A 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.

The composition and rates of the levels of service vary between the systems. The
Anchorage  cable system offers a basic  service that  includes 21 channels.  The
Anchorage  cable system  offers a CPS that includes 29 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.  Basic service for the  Kenai/Soldotna  cable system
consisted of 32 channels.  Pay TV services are available either  individually or
as part of a 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 offers
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.
Three  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 offers a 13 channel basic
service  package and a Tier 1 that  includes  basic service plus an additional 4
channels.  The system  also offers a CPS Tier 2 that  consists of basic  service
plus Tier 1 service and additional 40 channels.  The Ketchikan system offers a 9
channel  basic  service and a CPS Tier 1 that  consists of basic service plus 33
additional channels.  The system also offers a NPT Tier 2 that consists of basic
service, the CPS Tier 1 and an additional 5 channels. The Sitka system offers an
8 channel basic service.  Expanded basic service  includes basic service plus 40
additional channels.

The Juneau  system was upgraded in 1998.  The  Ketchikan  and Sitka  systems are
expected to be upgraded in 2000. The Juneau  upgrade  consisted of extending the
bandwidth to 550Mhz,  activating the reverse and introducing advanced analog set
top boxes. The new set tops allowed Juneau subscribers access to impulse pay per
view including highly secured 24 hour adult products,  30 channels of CD quality
music and a new on screen navigator.

Kodiak, Valdez, Cordova, Petersburg,  Wrangell, Kotzebue and Nome systems. These
systems  offer up to 30 channels of the most popular  basic cable  channels,  as
well as the major broadcast networks,  packaged into three levels of service. In
Nome,  Kotzebue and Cordova,  basic service  consists of three channels,  one of
which is a PBS  channel.  PBS service is also  included  with the 10 channels of
basic service in Kodiak,  7 in Valdez and 5 each in Wrangell and Petersburg.  In
addition,  Wrangell and  Petersburg  have matching  line-ups with 30 channel CPS
tiers, 10 channel NPT tiers and 5 channels of premium service.  Nome offers a 23
channel  CPS Tier 1, 9 channel  CPS Tier 2 and 5 channels  of  premium  service.
Kotzebue closely matches Nome with the exception of one less channel in both CPS
Tier 1 and premium offering.  In addition to basic service,  Cordova offers a 22
channel CPS Tier 1, 10 Channel CPS Tier 2 with 4 premium channels available.

In 1998,  system  upgrades  were  completed in Kodiak and Valdez.  In Kodiak,  6
channels  were  added  to  basic  service.  The CPS  tier  added 8 new  channels
including Disney which was formally a premium service.  The NPT tier was reduced
to 11 channels with 2 new networks.  Premium services were repackaged for better
value.  The total available  channels are now 47. Nome and Kotzebue  systems are
being  upgraded with  completion  expected 


                                       23
<PAGE>
in March 1999. The upgrade will allow the launch of additional  programming  and
the shift of Disney from premium to tier service. The Cordova system is expected
to be upgraded in 2000.

Seward system. The Seward cable system was upgraded in 1997. Total channels were
increased to 49,  packaged in two levels of service.  Basic service was expanded
from 3 to 8 channels.  CPS had 30 channels  (including  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  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.

Facilities.  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  colocated  with customer  service and  administrative
offices.

Customers.   As  of  December  31,  1998  the  Company  cable   systems   passed
approximately  171,000 homes or  approximately  77% of all households in Alaska,
and served approximately  112,000 subscribers.  1998 revenues derived from cable
television  services totaled $57.6 million,  or 23.4% of total revenues in 1998.
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, or 24.7% of total revenues.

Competition.  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.  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,   Internet  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  Company's  Fairbanks,  Alaska  system faces  significant  competition  from
alternative  cable  television  providers.  Upgrades to the Company's  Fairbanks
facilities,  expanded  product  offerings  and increased  marketing  efforts are
expected to increase  market  penetration  from 45.6% at December 31, 1998.  The
Company's average market  penetration rate for all systems was 61.4% at December
31, 1998.

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.



                                       24
<PAGE>
The Cable Systems face limited additional competition from private 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.

The  availability of  reasonably-priced  HSD earth stations  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.  This could
change in the future as more transponder  space becomes available in the western
arc through consolidation of DBS operators.

Cable  television  systems  also  compete  with  wireless  program  distribution
services such as 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  


                                       25
<PAGE>
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 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.

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.

Local Access Services
Industry. 1998 was distinguished by a continuing lack of significant progress in
opening the local access market up to  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 CLECs drive to lower access costs through regulatory
relief,  development of their own local access  solutions such as telephony over
cable, LMDS wireless access, or the use of third party suppliers.

Use of the Internet and expansion in the use of LANs and WANs have  generated an
increased  demand for access lines.  In the home,  the growing use of computers,
faxes,  and the  Internet  led to  increases  in  access  lines and  usage.  The
emergence of new services,  including digital cellular,  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.

General. The Company's local access services division entered the local services
market in Anchorage in 1997, providing services to residential,  commercial, and
government  users.  The Company can access  approximately  93% of Anchorage area
local loops from its collocated remote digital facilities and DLC installations.

The Company has experienced  significant  difficulty in successfully  converting
customers from the ILEC,  due to, among other  factors,  a lack of access to the
ILEC's  operational  support  systems that would allow the Company to access its
customer's   information  held  by  the  ILEC,  lack  of  adequate   state-level
regulations  supporting  local  competition,  and  disputes  with the ILEC  over
interpretation of interconnection and arbitration agreements. In spite of strong
demand,  in the third and fourth  quarters  of 1998 the Company  delayed  active
marketing to residential local service customers in Anchorage.  The Company will
continue to pursue resolution of these existing  operational and interconnection
issues while continuing to develop alternative methods of local entry.

Products.  The Company  began  offering  local  exchange  services  initially in
Anchorage  during late  September  1997.  The  Company's DLC system allows it to
offer full featured,  switched-based  local service products to both residential
and  commercial  customers.  In areas where the Company  does not have access to
loop facilities, it offers resale of the ILEC's local service.

The Company offers a number of specially priced package offerings and offers the
only local customer service representatives in Alaska who are available 24 hours
a day.  Features offered include enhanced call waiting,  caller ID, caller ID on
call waiting,  free caller ID box,  anonymous call rejection,  call  forwarding,
call forward busy,  call forward no answer,  enhanced  call waiting,  fixed call
forwarding, follow me call, intercom service 


                                       26
<PAGE>
forwarding,   multi-distinctive   ring,  per  line   blocking,   selective  call
forwarding,  selective  call  acceptance,  selective call  rejection,  selective
distinctive  alert,  speed calling,  three way calling,  voice mail, inside wire
repair plan, non-listed number, and non-published number.

Facilities.  During 1997 the Company  installed  a host 5ESS  switching  system.
Additionally the Company  collocated six remote  facilities beside or within the
ILEC's local  switching  offices to access  unbundled loop network  elements and
installed a DLC system beside a smaller,  seventh ILEC wire center. These remote
and DLC  facilities  are  interconnected  to the host  switch via  Company-owned
diversely  routed  fiber optic  links.  During  1998,  the Company  expanded its
capacity  at each of the  remote  facilities  to allow  access to  approximately
79,000   Anchorage   loops.   Additionally,   the  Company   provided   its  own
facilities-based  services to over 80 of Anchorage's  larger business  customers
through further expansion and deployment of SONET fiber transmission facilities,
leased and HDSL T-1 facilities, and DLC facilities.

Customers.  The  Company  had  approximately  28,300 and 3,300  active  lines in
service from Anchorage  subscribers to its local access services at December 31,
1998 and 1997,  respectively.  1998 and 1997 revenues  derived from local access
services   totaled  $9.9  million  and  $610,000,   respectively,   representing
approximately  4.0% and 0.3% of the Company's  total  revenues in 1998 and 1997,
respectively.  Approximately  1,000  additional  lines  were  sold and  awaiting
connection at December 31, 1998.

Competition.  In the local exchange  services market,  the Company believes that
the 1996 Telecom Act, judicial  decisions,  and state legislative and regulatory
developments  will  increase  the  likelihood  that  barriers to local  exchange
competition will be substantially reduced or removed.  These initiatives include
requirements  that LECs  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 ILECs.

LECs in Alaska outside of Anchorage have a "rural  exemption" from some of their
obligations  until and unless the exemption is examined and not continued by the
APUC.  Certain  pricing  provisions  of  the  FCC's   Interconnection   Decision
implementing  the  interconnection  portions  of the 1996  Telecom Act have been
challenged and were stayed by the U.S. Court of Appeals for the Eighth  Circuit,
on a  jurisdictional  basis.  The United States Supreme Court, in February 1999,
upheld the  jurisdictional  basis of the FCC's  decisions,  and has remanded the
proceeding back to the Eighth Circuit for further  proceedings.  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. See
Part I, Item 1. Business,  Regulation,  franchise authorizations and tariffs for
more information.

In the local exchange  market,  the Company will compete  against  various ILECs
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.  The ACS acquisition of ATU is expected to
close in 1999. ACS management  includes former  executives of PTI. See - Part I,
Item 1. Business,  Historical  development of the Company's  business during the
past fiscal year Local Access Services for more information.

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. The Company now offers 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 Company  intends to enter new markets,  particularly  Juneau and  Fairbanks,
with its local  access  services.  Full  competitive  entry into new  markets is
subject to approval by the APUC. See -Regulation,  Franchise  Authorizations and
Tariffs, Telecommunications Operations for more information.



                                       27
<PAGE>
The 1996 Telecom Act also provides ILECs 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 ILECs 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 ILECs charge
alternative   providers  (such  as  the  Company)  unreasonably  high  fees  for
interconnection to the LECs' networks, or significantly lower their retail rates
for local exchange services,  the alternative  provider's local service business
could be placed at a significant competitive disadvantage.

Internet Services
Industry.  The Internet  continues  to expand at a  significant  rate,  with the
number of sites almost doubling each year. In February 1998 there were more than
29  million  sites  on the  Internet  worldwide,  with a  projected  90  million
connected  by the turn of the  century.  The  signs are that the  Internet  will
become as commonplace as the TV in a few years. Analysts predict that the amount
of Internet  traffic will likely continue to rise as fast as capacity allows for
the  foreseeable  future.  Voice over the  Internet  may have a major  impact on
business and the entire telecommunications industry in the future.

The use of Intranets  has  significantly  increased,  with an estimated 60 to 70
percent of US corporations using an Intranet.  Current growth rates suggest that
138 million  people  worldwide will be connected from their desks to an in-house
Intranet by 2001.

An Intranet allows  information to be decentralized in an organization.  It uses
Internet-compatible  standards, available on virtually any computer. An Intranet
is also - by mainframe computer standards - fast and inexpensive to set up. This
adds to its appeal,  particularly  for larger companies with complex legacy data
systems.

Industry analysts believe that one of the key tools for business  advantage over
the next two years will be the Extranet. This is an Intranet (internal,  secure,
full  of  sensitive  data)   connected  to  trusted   customers  and  suppliers.
Implementing an Extranet creates the concept of the virtual enterprise, in which
all the  organizations in a supply chain integrate their systems and operations.
This concept is not new, but has been  achieved in the past using EDI on private
networks. Extranets promise to remove many of the obstacles which have prevented
firms from  sharing  their data  (stock  levels,  production  schedules,  demand
forecasts) with customers and suppliers. However, there are issues of standards,
lack of consumer confidence and security.

Music sits  perfectly  in the  digital  stream so it comes as no  surprise  that
leading  record  companies  and music  retailers  are  selling  direct  over the
Internet.  According  to  industry  analysts,  CD sales to date are  small - $47
million in 1997 - but are predicted to grow fast.  Technology  may turn products
into a service, delivered over the Internet.

Concerns about Internet-based commerce remain. One serious preoccupation is that
an overloaded Internet might crash. However,  capacity on the Internet continues
to increase.  Technology  enables fiber to carry more data,  and more cables and
satellite  channels are being  introduced.  In 1995,  the world's entire telecom
traffic  amounted  to a data rate of a terabit  a  second.  Currently,  a single
optical fiber strand can carry three times that data.

While more viewers are tuning out television networks,  they're logging onto the
Internet.  In 1999,  43.9 million  American  households are expected by industry
analysts  to  be  able  to  go  online,  roughly  43%  of  the  country  raising
online-shopping revenues by a projected 69%, to $11.9 billion, while advertising
revenues will increase by a projected 62%, to $3.3 billion.



                                       28
<PAGE>
Major court decisions and legislative action are expected to shape the worldwide
Internet in 1999, including
     -    the impact of the U.S. vs. Microsoft antitrust trial,
     -    possible  recognition  that  traditional   encryption   regulation  is
          obsolete,
     -    minimum-regulation approaches to information privacy as a new consumer
          movement  tries  to  use  international  privacy  law to  rein  in the
          behavior of large corporations in the U.S. economy,
     -    the  potential for  continuing  increases in  inexperienced  investors
          investing  through online brokers and increased  instances of investor
          losses that lead to arbitration claims against the brokers,
     -    the  impact of more  Internet  patents  preventing  others  from doing
          certain things, such as designing and maintaining certain types of Web
          sites,
     -    the legality of hyperlinking without permission,
     -    pending re-introduction of database legislation in Congress that would
          create a new form of intellectual property in databases,
     -    decisions  regarding  whether   cryptographic  source  code  is  First
          Amendment speech, and hence exportable,  or that no program is covered
          by the First Amendment,
     -    renewed  calls  by  the  FBI  and  others  for  domestic  controls  of
          obscenity-related cryptography, and
     -    the  development  of rating and filtering  systems  outside the United
          States.

General.  The Company's Internet services division entered the Internet services
market in 1998,  providing  retail  services  to  residential,  commercial,  and
government users and providing  wholesale  carrier services to other ISPs. Cable
network  upgrades  in the  Anchorage  area have  allowed  the  Company  to offer
high-speed cable modem Internet access, the first of its kind in Alaska.

Products.  The  Company  currently  offers  two  types of  Internet  access  for
residential  use: dial up Internet  access and  high-speed  cable modem Internet
access.  The  Company's  initial  residential  high-speed  cable modem  Internet
service  offers 256 kilobits per second  access speed as compared  with up to 56
kilobits per second  access  through  standard  copper wire modem  access.  Free
24-hour  customer  service and  technical  support via  telephone  or online are
provided.  The service also offers free data  transfer up to five  gigabytes per
month and can be left connected  24-hours-a-day,  365-days-a-year,  allowing for
real-time information and e-mail access.

The  Company  believes  cable  modem  services  will be the next  generation  of
Internet access.  This service is expected to appeal to families,  professionals
who work-at-home,  educators,  those involved in electronic  commerce and people
who  enjoy  interactive   computer  games.  Cable  modem  access  overcomes  the
limitations of slower dial-up service and the higher cost of dedicated  Internet
services and provides always-available, high-speed access to the Internet. Cable
modems use Company owned coaxial cable that provides cable  television  service,
instead of the traditional  copper wire from the ILEC.  Coaxial cable has a much
greater carrying  capacity than telephone wire and can be used to simultaneously
deliver both cable television and Internet access services.

The Company  currently  offers several  Internet service packages for commercial
use: Dial up access, frame relay and high-speed cable modem Internet access. The
Company's business  high-speed cable modem Internet service offers access speeds
ranging from 128  kilobits  per second to 512 kilobits per second,  free monthly
data  transfers of up to 25  gigabytes  and free  24-hour  customer  service and
technical  support.  Business services also include dedicated Internet access, a
personalized web page and e-mail addressing.

Significant  new marketing  campaigns were introduced in February and March 1999
featuring  bundled  residential  and commercial  Internet  products.  Additional
bandwidth was made available to the Company's  Internet  segment  resulting from
completion  of the  Alaska  United  Project  as  previously  described.  The new
Internet  offerings  are  coupled  with the  Company's  long-distance  and local
services   offerings  and  provide  free  basic  Internet  services  if  certain
long-distance  or  local  services  plans  are  selected.  Value-added  Internet
features are available for additional charges.



                                       29
<PAGE>
The  Company  provides  Internet  access  for  Alaska  schools  using a platform
including many of the latest advancements in technology.  Services are delivered
through a locally available circuit,  existing Company lines, or satellite earth
stations.

Facilities.  The Internet is an interconnected global public computer network of
tens of thousands of packet-switched  networks using the Internet protocol.  The
Internet is effectively a network of networks routing data throughout the world.
Access to the  Internet is provided  by the Company  using a platform  including
many  of the  latest  advancements  in  technology.  The  physical  platform  is
concentrated  in Anchorage  and is extended into many remote areas of the state.
The Company's Internet platform includes:

     -    A frame relay trunk connecting the Anchorage POP to an Internet access
          point in Seattle.
     -    Routers on each end of the frame  relay  trunk to control  the flow of
          data over the trunk.
     -    The  Anchorage  POP consists of a main router,  a bank of servers that
          perform  proxy  and  cache  functions,   database  servers   providing
          authentication  and user demographic data, and access servers for dial
          in users.

SchoolAccess(TM)  Internet  service delivery to over 152 schools in rural Alaska
is accomplished by three variations on primary delivery systems:

     -    In  communities  where the Company has  terrestrial  interconnects  or
          existing  service  over  regional  earth  stations,  the  Company  has
          configured  intermediate  distribution  POPs.  Schools that are within
          these service boundaries are connected locally to one of those POPs.
     -    In  communities  where the  Company  has  extended  telecommunications
          services  via its DAMA  earth  station  program,  SchoolAccess(TM)  is
          provided via a satellite trunk circuit to an intermediate distribution
          POP at the Eagle River Earth Station.
     -    In communities or remote  locations where the Company has not extended
          telecommunications  services,   SchoolAccess(TM)  is  provided  via  a
          dedicated (usually on premise) DAMA VSAT satellite  station.  The DAMA
          connects to an intermediate distribution POP located in Anchorage.

In all cases,  Internet  access is delivered to a router  located at the service
point.  The Company's  Internet  management  platform  constantly  monitors this
demarcation  router;  continual  communication  is  maintained  with  all of the
routers in the  network.  The  availability  and quality of service,  as well as
statistical  information  on traffic  loading,  are  continuously  monitored for
quality assurance. The management platform has the capability to remotely access
the  routers,  permitting  changes in router  configuration  without the need to
physically be at the service point.

GCI.net offers a unique  combination of innovative network design and aggressive
performance  management.  The new Internet platform has received a certification
of Cisco  Powered  Network  status,  placing  it in the top one  percent  of all
service providers worldwide and the only ISP in Alaska with such designation.

The  Company  operates  and  maintains  what it believes  is the  largest,  most
reliable, and highest performance Internet network in the State of Alaska.

Customers. The Company had approximately 7,200 active residential subscribers to
its Internet  service at February 9, 1999.  1998 revenues  derived from Internet
services totaled $4.6 million,  representing approximately 1.9% of the Company's
total revenues.

Competition.  The Internet 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.  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 bundled services
at prices  generally  competitive  with,  or lower  than,  those  charged by its
competitors.



                                       30
<PAGE>
As of December 31,  1998,  the Company  competed  with more than 25 Alaska based
Internet providers, and competed with other domestic, non-Alaska based providers
that  provide  national  service   coverage.   Several  of  the  providers  have
substantially  greater  financial,  technical and marketing  resources  than the
Company.  The  Company  has,  so far,  successfully  adjusted  its  pricing  and
marketing strategies to respond to competitors' pricing practices.

Environmental Regulations
The Company and its subsidiaries may undertake  activities which,  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  and  networks at various  locations  in Alaska and
between Alaska and Seattle Washington.  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.  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  land-based
and undersea 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,  National Oceanic and Atmospheric  Administration,  Alaska  Department of
Natural  Resources,  and  the  Alaska  Office  of the  Governor  -  Governmental
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.

Patents, Trademarks, Licenses, Certificates of Public Convenience and Necessity,
and Military Franchises
Neither the Company nor its affiliates  hold patents,  franchises or concessions
for  telecommunications  services or local access  services.  The Company  holds
registered  service  marks  for the terms  SchoolAccess(TM),  Free  Fridays  for
Business(TM) and Unlimited  Weekends(TM).  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 long-distance  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 acquired a LMDS license in 1998 for use of a 150-megahertz  block of
spectrum in the 28 gigahertz Ka-band for providing wireless  services.  The LMDS
license has an initial duration of 10 years. Within 10 years,  licensees 


                                       31
<PAGE>
will be required to provide 'substantial  service' in their service regions. The
Company's operations may require additional licenses in the future.

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  describe  all  present  and  proposed  federal,  state,  and  local
regulation and legislation  affecting the Company's  businesses.  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  industries  in which the Company
operates or the Company itself can be predicted at this time.

Telecommunications  Operations.  The  following  is a summary of  federal  laws,
regulations  and  tariffs,  and a  description  of certain  state and local laws
pertaining to the telecommunications  operations of the Company  (long-distance,
local access and wireless).

General.  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  access  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.

Because the Company is authorized  to offer local access  services in Anchorage,
it is 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.

As a PCS and LMDS 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 and LMDS  services.  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,  LMDS and other  commercial  wireless
service  providers.  PCS and LMDS  licensees  may also be subject to  regulatory
requirements  of local  jurisdictions  pertaining  to, among other  things,  the
siting of tower facilities.

1996 Telecom Act and Related Rulings. A key industry  development was passage of
the 1996  Telecom  Act that was signed  into law  February  8, 1996.  The Act is
intended by Congress to open up the  marketplace  to  competition  and has had 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 


                                       32
<PAGE>
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 must open up their networks.

Enactment of the bill affected local exchange service markets almost immediately
by  requiring   states  to  authorize   local  exchange   service   competition.
Competitors, including resellers are able to market new bundled service packages
to attract  customers.  Over the long term, the  requirement  that LECs 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.

In August 1996, the FCC adopted rules and regulations,  including  pricing rules
(the "Pricing Rules") to implement the local competition  provisions of the 1996
Telecom  Act,   including   with  respect  to  the  terms  and   conditions   of
interconnection  with LEC networks and the  standards  governing the purchase of
unbundled network elements and wholesale  services from LECs. These implementing
rules rely on state public  utilities  commissions to develop the specific rates
and procedures  applicable to particular states within the framework  prescribed
by the FCC.

On July 18,  1997,  the United  States  Court of Appeals for the Eighth  Circuit
issued a decision  holding that the FCC lacks  authority  to  establish  pricing
rules to implement the sections of the local competition  provisions of the 1996
Telecom Act applicable to interconnection  with LEC networks and the purchase of
unbundled network elements and wholesale  services from LECs.  Accordingly,  the
Court  vacated the rules that the FCC had adopted in August 1996,  and which had
been  stayed by the Court  since  September  1996.  However,  since the stay was
issued,  most states have used the Pricing Rules as  guidelines in  establishing
permanent  rates, or interim rates that will apply pending the  determination of
permanent rates in subsequent state proceedings.  Nevertheless,  there can be no
assurance  that the prices and other  conditions  established in each state will
provide for effective local service entry and competition or provide the Company
with new market opportunities.

On October 14, 1997,  the Eighth  Circuit  Court of Appeals  vacated an FCC Rule
that had prohibited ILECs from separating  network elements that are combined in
the LEC's  network,  except at the  request  of the  competitor  purchasing  the
elements.  This  decision  increased  the  difficulty  and  costs  of  providing
competitive  local access services through the use of unbundled network elements
purchased from the ILECs.

On January 25, 1999, the United States Supreme Court issued a decision reversing
in material part the decisions of the Eighth Circuit, and specifically upholding
the  authority  of  the  FCC to  establish  pricing  rules  and  preventing  the
separation  of network  elements  that are already  combined.  The Supreme Court
remanded the cases to the Eighth circuit for further proceedings consistent with
its 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 are 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.
     -    Certain  monthly  flat-rate  charges  paid  by  some  local  telephone
          customers increased 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.



                                       33
<PAGE>
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 1996 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.

On January  26,  1998,  the United  States  Supreme  Court  agreed to review the
aforementioned  decisions  of the Eighth  Circuit  Court of  Appeals.  Under the
normal procedures of the Court,  arguments were heard and a decision is expected
in 1999.

In February 1999 the U.S. Supreme Court lifted a court order that barred the FCC
from  imposing  local phone  competition  rules on the five Bell  companies as a
condition for allowing  them to offer  long-distance  service.  The decision was
widely expected. The justices,  without comment,  voided a second Eighth Circuit
Court of Appeals opinion. The lower court had barred the FCC from imposing those
same pricing rules as requirements for approval of long-distance applications.

The BOCs continue to challenge the substance of the FCC rules,  arguing that the
rules do not allow them to fully  recover  the money they spent  building  their
networks. The Eighth Circuit Court of Appeals may rule on this issue in 1999.

On March 4, 1999, an Alaska Superior Court Judge  determined that the APUC erred
in reaching  its  decision to deny the  Company's  request to provide full local
telephone  service in  Fairbanks  and  Juneau,  Alaska.  This  service  would be
provided in competition  against PTI, the existing monopoly provider.  The Court
remanded the case back to the APUC for  proceedings  leading to a decision on or
before July 2, 1999.  Among other things,  the Court has  instructed the APUC to
correctly  assign  the burden of proof to PTI rather  than the  Company,  and to
decide on the Company's  specific  requests to provide  service in Fairbanks and
Juneau based on criteria  established  in the 1996 Telecom Act. The Court stated
that   "this   must   be   accomplished   cognizant   of  the   intent   of  the
Telecommunications  Act to promote competition in the local market." The Company
believes this  decision is important to bring about the benefits of  competition
to other communities in Alaska.

Reciprocal  Compensation.  In response  to  requests  by  carriers  that the FCC
clarify  how  local  telephone  companies  should  compensate  one  another  for
delivering traffic to Internet service providers,  the FCC concluded on February
25, 1999 that long-distance carriers are bound by their existing interconnection
agreements,  as  interpreted  by state  commissions,  and thus  are  subject  to
reciprocal compensation obligations to the extent provided by such agreements or
as determined by state  commissions.  The FCC declared that Internet  traffic is
jurisdictionally  mixed and appears to be largely  interstate in nature. But the
decision  preserves  the rule that exempts the  Internet  and other  information
services from  interstate  access  charges.  This means that those consumers who
continue to access the Internet by dialing a  seven-digit  number will not incur
long-distance  charges when they do so. In a notice of proposed rulemaking,  the
FCC also asked for  comment on  proposals  governing  future  carrier-to-carrier
compensation for handling this traffic.

Specifically,  the FCC had been  asked by  parties to  determine  whether  local
telephone  companies  are  entitled  to  receive  reciprocal   compensation  for
delivering  calls to their  customers that are  information  service  providers,
particularly  ISPs.  Generally,  new  entrants to the local  telephone  business
contend  that  calls  to ISPs are  local  traffic  and,  therefore,  subject  to
reciprocal compensation. Incumbent local telephone companies, on the other hand,
generally  contend  that  calls  to ISPs are  beyond  the  scope  of  reciprocal
compensation agreements.



                                       34
<PAGE>
The FCC,  in its  decision,  noted  that it  traditionally  has  determined  the
jurisdictional  nature of communications by the end points of the communication.
Accordingly, the FCC concluded that the calls at issue in that proceeding do not
terminate  at  the  ISPs'  local   servers,   but  continue  to  their  ultimate
destinations, specifically at websites that are often located in other states or
countries.  As a result,  the FCC found that,  although some Internet traffic is
intrastate,  a  substantial  portion  of  Internet  traffic  is  interstate  and
therefore subject to federal jurisdiction.

This jurisdictional decision does not, however,  determine whether calls to ISPs
are subject to reciprocal compensation in any particular instance. The FCC noted
that  parties  may have  agreed  that  ISP-bound  traffic  should be  subject to
reciprocal compensation, or a state commission, in the exercise of its statutory
authority to arbitrate  interconnection  disputes,  may have imposed  reciprocal
compensation  obligations  for this traffic.  In either case, the FCC noted that
carriers are bound by their existing  interconnection  contracts, as interpreted
by state commissions.

The  FCC  also  stated  that  adopting  a  federal  rule  to  govern  reciprocal
compensation in the future would serve the public interest. As a general matter,
the FCC tentatively  concluded that commercial  negotiations are the ideal means
of  establishing  the  terms  of  interconnection   contracts,   and  reciprocal
compensation agreements in particular.  The FCC, therefore, asked for comment on
two alternative proposals for implementing such a regime in the future.

The  FCC  tentatively   concluded  that  inter-carrier   compensation  for  this
interstate   traffic  should  be  governed   prospectively  by   interconnection
agreements  negotiated  and  arbitrated  under  sections 251 and 252 of the Act.
Resolution  of failures to reach  agreement on  inter-carrier  compensation  for
interstate ISP-bound traffic then would occur through arbitrations  conducted by
state commissions, which are appealable to federal district courts. The FCC also
asked  for  comment  on  an  alternative  proposal,  under  which  inter-carrier
compensation  would be governed by a set of federal rules, and disputes would be
resolved by federal, state, or third-party arbitrators.

Cable  Services.  The  following  is a summary of federal  laws and  regulations
materially affecting the growth and operation of the cable services industry and
a description of certain state and local laws.

General.  The  Company is subject to  federal  and state  regulation  as a cable
television  operator  pursuant  to 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 authorities.

Principal  responsibility  for  implementing  the policies of the 1934, 1984 and
1992 Cable Acts and the 1996 Telecom Act is allocated  between the FCC and state
or local  franchising  authorities.  The FCC and state  regulatory  agencies are
required to conduct numerous rulemaking and regulatory  proceedings to implement
the 1996 Telecom  Act,  and such  proceedings  may  materially  affect the cable
industry.

Rate  Regulation.  The 1992  Cable  Act  authorized  rate  regulation  for cable
communications  services and  equipment in  communities  that are not subject to
"effective  competition,"  as defined by federal law. Most cable  communications
systems are now subject to rate regulation for basic cable service and equipment
by local officials under the oversight of the FCC, which has prescribed detailed
criteria for such rate  regulation.  The 1992 Cable Act also requires the FCC to
resolve  complaints about rates for CPSTs (other than  programming  offered on a
per  channel or per  program  basis,  which  programming  is not subject to rate
regulation)  and to reduce any such  rates  found to be  unreasonable.  The 1996
Telecom Act eliminates  the right of  individuals  to file CPST rate  complaints
with the FCC and  requires  the FCC to issue a final order  within 90 days after
receipt of CPST rate  complaints  filed by any franchising  authority.  The 1992
Cable Act limits  the  ability of cable  television  systems to raise  rates for
basic and certain  cable  programming  services  (collectively,  the  "Regulated
Services").



                                       35
<PAGE>
FCC  regulations  govern rates that may be charged to subscribers  for Regulated
Services.  The FCC uses a  benchmark  methodology  as the  principal  method  of
regulating rates for Regulated  Services.  Cable operators are also permitted to
justify rates using a cost-of-service  methodology,  which contains a rebuttable
presumption of an industry-wide 11.25% after tax rate of return on an operator's
allowable rate base. Franchising authorities are empowered to regulate the rates
charged  for  monthly  basic  service,   for  additional  outlets  and  for  the
installation,  lease and sale of equipment  used by  subscribers  to receive the
basic cable service tier, such as converter boxes and remote control units.  The
FCC's rules require franchising authorities to regulate these rates on the basis
of actual cost plus a reasonable  profit, as defined by the FCC. Cable operators
required  to  reduce  rates may also be  required  to  refund  overcharges  with
interest.  The FCC has also adopted  comprehensive  and restrictive  regulations
allowing  operators  to modify  their  regulated  rates on a quarterly or annual
basis  using  various  methodologies  that  account for changes in the number of
regulated  channels,  inflation and increases in certain external costs, such as
franchise and other  governmental  fees,  copyright and  retransmission  consent
fees, taxes,  programming fees and  franchise-related  obligations.  The Company
cannot predict whether the FCC will modify these "going forward"  regulations in
the future.

The 1996  Telecom Act  provides  for rate  deregulation  of CPSTs by March 1999,
although  legislation  has  been  proposed  to  extend  the  regulatory  period.
Deregulation  may occur  sooner for systems in markets  where  comparable  video
programming services,  other than DBS, are offered by local telephone companies,
or their  affiliates,  or by third parties using the local  telephone  company's
facilities, or where "effective competition" is established under the 1992 Cable
Act. The 1996 Telecom Act also  modifies the uniform rate  provision of the 1992
Cable Act by prohibiting  regulation of nonpredatory bulk discount rates offered
to subscribers in commercial and residential  developments and permits regulated
equipment  rates to be  computed by  aggregating  costs of broad  categories  of
equipment at the franchise, system, regional or company level.

Anti-Buy Through Provisions. The 1992 Cable Act requires cable systems to permit
subscribers  to  purchase  video  programming  offered by the  operator on a per
channel or a per program basis without the necessity of  subscribing to any tier
of service, other than the basic cable service tier, unless the system's lack of
addressable  converter boxes or other technological  limitations does not permit
it to do so. The  statutory  exemption  for cable  systems  that do not have the
technological  capability  to offer  programming  in the manner  required by the
statute is available until a system obtains such capability,  but not later than
December 2002. The FCC may waive such time periods, if deemed necessary. Many of
the  Company's  systems  do not  have  the  technological  capability  to  offer
programming in the manner  required by the statute and thus currently are exempt
from complying with the requirement.

Must Carry/Retransmission  Consent. The 1992 Cable Act contains broadcast signal
carriage  requirements that allow local commercial television broadcast stations
to elect once every three years to require a cable  system to carry the station,
subject to certain exceptions,  or to negotiate for "retransmission  consent" to
carry  the  station.  A cable  system  generally  is  required  to  devote up to
one-third of its activated channel capacity for the carriage of local commercial
television stations whether pursuant to the mandatory carriage or retransmission
consent  requirements  of the 1992 Cable Act.  Local  non-commercial  television
stations are also given mandatory  carriage rights;  however,  such stations are
not given the option to  negotiate  retransmission  consent for the  carriage of
their  signals by cable  systems.  Additionally,  cable  systems are required to
obtain  retransmission  consent for all distant commercial  television  stations
(except for commercial  satellite-delivered  independent "superstations" such as
WGN),  commercial  radio  stations  and certain  low-power  television  stations
carried  by such  systems.  In March  1997,  the US  Supreme  Court  upheld  the
constitutional  validity  of the 1992  Cable  Act's  mandatory  signal  carriage
requirements.  The FCC will conduct a  rulemaking  in the future to consider the
requirements, if any, for mandatory carriage of digital television signals.

Designated Channels.  The Communications Act permits franchising  authorities to
require cable  operators to set aside certain  channels for public,  educational
and governmental  access  programming.  The 1984 Cable Act also requires a cable
system with 36 or more  channels to designate a portion of its channel  capacity
for commercial  leased access by third parties to provide  programming  that may
compete with services  offered by the cable operator.  The FCC has adopted rules
regulating:  (i) the maximum  reasonable  rate a cable  operator  may charge 


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for  commercial  use of the  designated  channel  capacity;  (ii) the  terms and
conditions for commercial use of such channels; and (iii) the procedures for the
expedited  resolution  of disputes  concerning  rates or  commercial  use of the
designated channel capacity.

Franchise  Procedures.  The 1984  Cable Act  affirms  the  right of  franchising
authorities (state or local,  depending on the practice in individual states) to
award  one  or  more  franchises   within  their   jurisdictions  and  prohibits
non-grandfathered  cable  systems  from  operating  without a franchise  in such
jurisdictions.  The 1992 Cable Act  encourages  competition  with existing cable
systems  by (i)  allowing  municipalities  to  operate  their own cable  systems
without  franchises;  (ii)  preventing  franchising  authorities  from  granting
exclusive   franchises  or  from  unreasonably   refusing  to  award  additional
franchises   covering  an  existing  cable  system's  service  area;  and  (iii)
prohibiting (with limited  exceptions) the common ownership of cable systems and
colocated  MMDS or  SMATV  systems.  The FCC has  relaxed  its  restrictions  on
ownership of SMATV  systems to permit a cable  operator to acquire SMATV systems
in the operator's  existing  franchise area so long as the programming  services
provided  through  the  SMATV  system  are  offered  according  to the terms and
conditions of the cable operator's local franchise  agreement.  The 1996 Telecom
Act provides that the  cable/SMATV and cable/MMDS  cross-ownership  rules do not
apply in any franchise area where the operator faces "effective  competition" as
defined by federal law.

The Cable Acts also  provide  that in  granting or  renewing  franchises,  local
authorities  may  establish   requirements  for  cable-related   facilities  and
equipment,  but not for video programming or information  services other than in
broad  categories.  The Cable Acts limit the payment of franchise  fees to 5% of
revenues  derived from cable  operations and permit the cable operator to obtain
modification of franchise  requirements  by the franchise  authority or judicial
action if warranted by changed  circumstances.  A federal  appellate  court held
that a cable  operator's  gross  revenue  includes  all  revenue  received  from
subscribers,  without deduction, and overturned an FCC order which had held that
a  cable  operator's  gross  revenue  does  not  include  money  collected  from
subscribers  that is allocated to pay local  franchise  fees. The Company cannot
predict the ultimate resolution of these matters. The 1996 Telecom Act generally
prohibits  franchising  authorities from (i) imposing  requirements in the cable
franchising  process  that  require,  prohibit  or  restrict  the  provision  of
telecommunications  services by an operator,  (ii)  imposing  franchise  fees on
revenues derived by the operator from providing telecommunications services over
its  cable  system,  or  (iii)  restricting  an  operator's  use of any  type of
subscriber equipment or transmission technology.

The 1984 Cable Act contains  renewal  procedures  designed to protect  incumbent
franchisees  against  arbitrary  denials  of  renewal.  The 1992  Cable Act made
several  changes  to the  renewal  process  which  could  make it  easier  for a
franchising  authority  to deny  renewal.  Moreover,  even if the  franchise  is
renewed,  the  franchising  authority  may seek to impose  new and more  onerous
requirements  such  as  significant  upgrades  in  facilities  and  services  or
increased franchise fees as a condition of renewal.  Similarly, if a franchising
authority's  consent is required  for the  purchase or sale of a cable system or
franchise,  such  authority  may  attempt to impose more  burdensome  or onerous
franchise   requirements   in  connection  with  a  request  for  such  consent.
Historically,  franchises  have  been  renewed  for  cable  operators  that have
provided  satisfactory  services  and  have  complied  with  the  terms of their
franchises.  The Company  believes  that it has  generally  met the terms of its
franchises and has provided quality levels of service.  The Company  anticipates
that its future franchise renewal prospects generally will be favorable.

Various courts have considered  whether  franchising  authorities have the legal
right to limit the number of franchises awarded within a community and to impose
certain  substantive  franchise  requirements (e. g. access channels,  universal
service  and  other   technical   requirements).   These   decisions  have  been
inconsistent and, until the US Supreme Court rules  definitively on the scope of
cable  operators' First Amendment  protections,  the legality of the franchising
process generally and of various specific franchise requirements is likely to be
in a state of flux.

Ownership  Limitations.  Pursuant to the 1992 Cable Act,  the FCC adopted  rules
prescribing national subscriber limits and limits on the number of channels that
can be occupied on a cable  system by a video  programmer  in 


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which the operator has an attributable  interest. The effectiveness of these FCC
horizontal  ownership  limits has been stayed  because a federal  district court
found  the  statutory  limitation  to be  unconstitutional.  An  appeal  of that
decision has been  consolidated  with appeals  challenging the FCC's  regulatory
ownership  restrictions  and is pending.  The 1996  Telecom Act  eliminates  the
statutory  prohibition on the common ownership,  operation or control of a cable
system and a television  broadcast  station in the same service area and directs
the FCC to review its broadcast-cable  ownership  restrictions.  Pursuant to the
mandate of the 1996 Telecom Act, the FCC eliminated  its regulatory  restriction
on cross-ownership of cable systems and national broadcasting networks.

LEC Ownership of Cable Systems.  The 1996 Telecom Act made far-reaching  changes
in the  regulation  of LECs that provide  cable  services.  The 1996 Telecom Act
eliminated  federal legal  barriers to  competition  in the local  telephone and
cable  communications  businesses,  preempted legal barriers to competition that
previously  existed  in state  and  local  laws and  regulations,  and set basic
standards  for  relationships  between  telecommunications  providers.  The 1996
Telecom  Act  eliminated  the  statutory  telephone   company/cable   television
cross-ownership  prohibition,  thereby  allowing LECs to offer video services in
their telephone  service areas.  LECs may provide  service as traditional  cable
operators  with local  franchises or they may opt to provide  their  programming
over  unfranchised   "open  video  systems,"  subject  to  certain   conditions,
including, but not limited to, setting aside a portion of their channel capacity
for use by unaffiliated program distributors on a non-discriminatory  basis. The
1996 Telecom Act  generally  limits  acquisitions  and  prohibits  certain joint
ventures between LECs and cable operators in the same market.

Pole Attachment.  The Communications Act requires the FCC to regulate the rates,
terms and  conditions  imposed by public  utilities  for cable  systems'  use of
utility pole and conduit space unless state  authorities  can  demonstrate  that
they  adequately  regulate  pole  attachment  rates.  In the  absence  of  state
regulation,  the FCC administers  pole  attachment  rates on a formula basis. In
some cases,  utility  companies have increased  pole  attachment  fees for cable
systems  that have  installed  fiber optic cables and that are using such cables
for the distribution of non-video  services.  The FCC has concluded that, in the
absence of state  regulation,  it has jurisdiction to determine  whether utility
companies  have justified  their demand for additional  rental fees and that the
Communications  Act does not permit disparate rates based on the type of service
provided over the equipment  attached to the utility's  pole. The FCC's existing
pole  attachment  rate formula,  which may be modified by a pending  rulemaking,
governs charges for utilities for attachments by cable operators  providing only
cable  services.  The 1996  Telecom Act and the FCC's  implementing  regulations
modify the current  pole  attachment  provisions  of the  Communications  Act by
immediately permitting certain providers of telecommunications  services to rely
upon the protections of the current law and by requiring that utilities  provide
cable systems and telecommunications  carriers with nondiscriminatory  access to
any pole, conduit or right-of-way controlled by the utility. The FCC adopted new
regulations  to  govern  the  charges  for pole  attachments  used by  companies
providing telecommunications services, including cable operators. These new pole
attachment  rate  regulations  will  become  effective  in  February  2001.  Any
resulting increase in attachment rates will be phased in equal annual increments
over a period of five years,  beginning in February 2001. The ultimate impact of
any revised FCC rate formula or of any new pole attachment  rate  regulations on
the Company cannot be determined at this time.

Other  Statutory  Provisions.  The 1992 Cable Act,  the 1996 Telecom Act and FCC
regulations  preclude any satellite  video  programmer  affiliated  with a cable
company,  or with a common carrier providing video  programming  directly to its
subscribers,  from favoring an affiliated  company over competitors and requires
such  programmers  to  sell  their  programming  to  other   multichannel  video
distributors. These provisions limit the ability of program suppliers affiliated
with cable companies or with common carriers providing satellite-delivered video
programming  directly  to  their  subscribers  to  offer  exclusive  programming
arrangements  to  their  affiliates.  In  December  1997,  the FCC  initiated  a
rulemaking to address a number of possible  changes to its program access rules.
Among the  issues on which the FCC has sought  comment  is  whether  the FCC has
jurisdiction  to extend  its  program  access  rules to  terrestrially-delivered
programming, and if it does have such jurisdiction, whether it should expand the
rules in this fashion. This rulemaking is pending at the FCC.

The 1992 Cable Act  requires  cable  operators to block fully both the video and
audio portion of sexually explicit or indecent  programming on channels that are
primarily  dedicated to sexually oriented  programming or 


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<PAGE>
alternatively  to carry such  programming  only at "safe  harbor"  time  periods
currently  defined  by the FCC as the  hours  between  10 p.  m. to 6 a. m.  The
Communications Act also includes provisions, among others, concerning horizontal
and vertical ownership of cable systems,  customer service,  subscriber privacy,
marketing  practices,   equal  employment   opportunity,   obscene  or  indecent
programming, regulation of technical standards and equipment compatibility.

Other FCC Regulations.  The FCC revised its cable inside wiring rules to provide
a more specific  procedure  for the  disposition  of internal  cable wiring that
belongs to an incumbent  cable  operator  that is forced to terminate  its cable
services in a MDU building by the building  owner.  The FCC is also  considering
additional   rules  relating  to  MDU  inside  wiring  that,  if  adopted,   may
disadvantage   incumbent  cable  operators.   The  FCC  has  various  rulemaking
proceedings  pending  that will  implement  the 1996  Telecom  Act;  it also has
adopted  regulations  implementing  various provisions of the 1992 Cable Act and
the  1996   Telecom   Act  that  are  the   subject  of   petitions   requesting
reconsideration  of various  aspects of its  rulemaking  proceedings.  Other FCC
regulations  covering  such areas as equal  employment  opportunity,  syndicated
program exclusivity, network program non-duplication, closed captioning of video
programming,  registration of cable systems,  maintenance of various records and
public inspection files, microwave frequency usage, origination cablecasting and
sponsorship   identification,   antenna  structure  notification,   marking  and
lighting,  carriage of local sports broadcast programming,  application of rules
governing  political   broadcasts,   limitations  on  advertising  contained  in
non-broadcast children's programming,  consumer protection and customer service,
indecent   programming,   programmer   access  to  cable  systems,   programming
agreements,  technical standards,  consumer electronics equipment  compatibility
and DBS  implementation.  The FCC has the  authority to enforce its  regulations
through the  imposition of substantial  fines,  the issuance of cease and desist
orders and/or the  imposition  of other  administrative  sanctions,  such as the
revocation of FCC licenses  needed to operate  certain  transmission  facilities
often used in connection with cable operations.

Other bills and administrative proposals pertaining to cable communications have
previously  been  introduced  in Congress or  considered  by other  governmental
bodies over the past several years. It is probable that further attempts will be
made by Congress and other  governmental  bodies  relating to the  regulation of
communications services.

Copyright.  Cable  communications  systems  are  subject  to  federal  copyright
licensing  covering  carriage of  television  and radio  broadcast  signals.  In
exchange for filing  certain  reports and  contributing  a  percentage  of their
revenues to a federal copyright royalty pool, cable operators can obtain blanket
permission to retransmit  copyrighted  material on broadcast signals. The nature
and amount of future payments for broadcast  signal carriage cannot be predicted
at this time. In a report to Congress,  the Copyright  Office  recommended  that
Congress  make  major  revisions  of both the  cable  television  and  satellite
compulsory licenses to make them as simple as possible to administer, to provide
copyright owners with full compensation for the use of their works, and to treat
every  multichannel  video delivery  system the same,  except to the extent that
technological  differences or differences in the regulatory  burdens placed upon
the  delivery  system  justify  different  copyright  treatment.   The  possible
simplification,  modification or elimination of the compulsory copyright license
is the subject of continuing  legislative review. The elimination or substantial
modification  of  the  cable  compulsory  license  could  adversely  affect  the
Company's  ability  to  obtain  suitable  programming  and  could  substantially
increase the cost of programming that remains  available for distribution to the
Company's   subscribers.   The  Company  cannot  predict  the  outcome  of  this
legislative activity.

Cable operators distribute programming and advertising that use music controlled
by  the  two  principal  major  music  performing  rights   organizations,   the
Association  of  Songwriters,  Composers,  Artists and  Producers  ("ASCAP") and
Broadcast Music, Inc. ("BMI"). In October 1989, the special rate court of the US
District  Court for the Southern  District of New York imposed  interim rates on
the cable  industry's use of  ASCAP-controlled  music. The same federal district
court  established  a  special  rate  court  for  BMI.  BMI and  cable  industry
representatives  concluded  negotiations  for  a  standard  licensing  agreement
covering  the  performance  of BMI  music  contained  in  advertising  and other
information  inserted by operators into cable  programming  and on certain local
access  and  origination  channels  carried  on cable  systems.  ASCAP and cable
industry  


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<PAGE>
representatives  have met to discuss  the  development  of a standard  licensing
agreement  covering  ASCAP-controlled  music in  local  origination  and  access
channels and pay-per- view programming.  Although the Company cannot predict the
ultimate  outcome of these  industry  negotiations  or the  amount,  if any,  of
license   fees  it  may  be   required  to  pay  for  past  and  future  use  of
ASCAP-controlled   music,  it  does  not  believe  such  license  fees  will  be
significant  to the  Company's  financial  position,  results of  operations  or
liquidity.

State and Local  Regulation.  Because a cable  communications  system uses local
streets  and  rights-of-way,  cable  systems  are  subject  to state  and  local
regulation.  Cable  communications  systems  generally are operated  pursuant to
non-exclusive franchises, permits or licenses granted by a municipality or other
state or local  government  entity.  Franchises  generally are granted for fixed
terms and in many cases are  terminable if the  franchisee  fails to comply with
material provisions. The terms and conditions of franchises vary materially from
jurisdiction  to  jurisdiction.  Each franchise  generally  contains  provisions
governing  cable  service  rates,   franchise  fees,   franchise  term,   system
construction and maintenance  obligations,  system channel capacity,  design and
technical  performance,  customer service standards,  franchise renewal, sale or
transfer of the franchise,  territory of the franchisee,  indemnification of the
franchising  authority,  use and occupancy of public  streets and types of cable
services  provided.  The 1992 Cable Act immunizes  franchising  authorities from
monetary damage awards arising from regulation of cable  communications  systems
or decisions made on franchise grants, renewals, transfers and amendments.

Internet Operations. The following is a summary of federal laws, regulations and
tariffs,  and a description  of certain  state and local laws  pertaining to the
Internet operations of the Company.

With significant  growth in Internet activity and commerce over the past several
years the FCC and other  regulatory  bodies have been  challenged to develop new
models that allow them to achieve the public  policy  goals of  competition  and
universal  service.  Many aspects of  regulation  and  coordination  of Internet
activities and traffic are evolving and are facing unclear  regulatory  futures.
Changes in  regulations  in the future will have a  significant  impact on ISPs,
Internet commerce and Internet services.

The Internet has been able to grow and develop  outside the existing  regulatory
structure because the FCC has made conscious  decisions to limit the application
of its rules.  The federal  government's  efforts have been  directed  away from
burdening the Internet with regulation. ISPs and other companies in the Internet
industry have not been required to gain  regulatory  approval for their actions.
The 1996 Telecom Act adopts such a position.  The 1996 Act states that it is the
policy of the United States "to preserve the vibrant and competitive free market
that presently exists for the Internet and other interactive  computer services,
unfettered by Federal or State regulation."

Regulatory  policy approaches toward the Internet have focused on several areas:
avoiding  unnecessary  regulation,  questioning the applicability of traditional
rules,   Internet   governance   (such  as  the  allocation  of  domain  names),
intellectual property, network reliability, privacy, spectrum policy, standards,
security, and international regulation.

Government  may influence the evolution of the Internet in many ways,  including
directly regulating, participating in technical standards development, providing
funding,  restricting  anti-competitive behavior by dominant firms, facilitating
industry  cooperation  otherwise  prohibited  by antitrust  laws,  promoting new
technologies,  encouraging cooperation between private parties, representing the
United  States  in  international   intergovernmental  bodies,  and  large-scale
purchasing of services.

There are many ways  Internet  growth  could be  negatively  impacted  which may
require future regulation and oversight.  Moving toward proprietary standards or
closed networks would reduce the degree to which new services could leverage the
existing  infrastructure.  The absence of competition in the ISP market,  or the
telecommunications   infrastructure   market,   could  reduce   incentives   for
innovation.  Excessive or misguided  government  intervention  could distort the
operation of the  marketplace,  and lead companies to expend valuable  resources
working through the regulatory process.  Insufficient government involvement may
also, however, have 


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<PAGE>
negative consequences. Some issues may require a degree of central coordination,
even if only to establish the initial terms of a distributed, locally-controlled
system.  The end result, in the absence of collective  action, may be an outcome
that no one  favors.  In  addition,  the failure of the  federal  government  to
identify  Internet-related areas that should not be subject to regulation leaves
open  opportunities  for  state,  local,  or  international  bodies to  regulate
excessively and/or inconsistently.

There  is no  one  entity  or  organization  that  governs  the  Internet.  Each
facilities-based  network  provider  that  is  interconnected  with  the  global
Internet controls  operational aspects of their own network.  Certain functions,
such as domain  name  routing and the  definition  of the TCP/IP  protocol,  are
coordinated   by  an  array  of   quasi-governmental,   intergovernmental,   and
non-governmental bodies. The United States government, in many cases, has handed
over responsibilities to these bodies through contractual or other arrangements.

In other  cases,  entities  have  emerged to  address  areas of need such as the
Internet Society ("ISOC"),  a non-profit  professional  society founded in 1992.
ISOC  organizes  working groups and  conferences,  and  coordinates  some of the
efforts  of  other  Internet   administrative  bodies.  Internet  standards  and
protocols  are  developed  primarily  by the  Internet  Engineering  Task  Force
("IETF"), an open international body mostly comprised of volunteers. The work of
the IETF is  coordinated by the Internet  Engineering  Steering  Group,  and the
Internet  Architecture  Board,  which are  affiliated  with ISOC.  The  Internet
Assigned Numbers Authority handles Internet  addressing matters under a contract
between the Department of Defense and the Information  Sciences Institute at the
University of Southern California.

The legal  authority of any of these bodies is unclear.  Most of the  underlying
architecture  of the  Internet was  developed  under the  auspices,  directly or
indirectly,  of the United States  government.  The government has not, however,
defined  whether it retains  authority over Internet  management  functions,  or
whether these  responsibilities  have been delegated to the private sector.  The
degree to which any existing  body can lay claim to  representing  "the Internet
community"  is also  unclear.  Membership  in the existing  Internet  governance
entities is drawn primarily from the research and technical communities.

The 1996 Telecom Act provides  little direct  guidance as to whether the FCC has
authority to regulate  Internet-based  services.  Section 223 concerns access by
minors to obscene,  harassing, and indecent material over the Internet and other
interactive computer networks, and sections 254, 706, and 714 address mechanisms
to promote the availability of advanced  telecommunications  services,  possibly
including  Internet  access.  Section 230 states a policy goal "to  preserve the
vibrant and competitive  free market that presently  exists for the Internet and
other interactive computer services, unfettered by Federal or State regulation."
None of these sections, however, specifically addresses the FCC's jurisdiction.

Nothing in the 1996 Telecom Act expressly limits the FCC's authority to regulate
services and facilities connected with the Internet, to the extent that they are
covered by more general language in any section of the Act. Moreover,  it is not
clear  what  such  a  limitation  would  mean  even  if  it  were  adopted.  The
Communications Act directs the FCC to regulate  "interstate and foreign commerce
in  communication  by wire and  radio,"  and the FCC and  state  public  utility
commissions  indisputably  regulate  the rates and  conditions  under which ISPs
purchase services and facilities from telephone companies.  Given the absence of
clear  statutory  guidance,  the FCC must  determine  whether  or not it has the
authority or the obligation to exercise  regulatory  jurisdiction  over specific
Internet-based  activities.  The FCC may also decide  whether to  forebear  from
regulating  certain  Internet-based  services.  Forbearance  allows  the  FCC to
decline to adopt  rules that would  otherwise  be  required  by  statute.  Under
section 401 of the 1996 Telecom Act,  the FCC must forbear if  regulation  would
not be necessary to prevent anticompetitive  practices and to protect consumers,
and forbearance would be consistent with the public interest.  Finally,  the FCC
could  consider  whether to preempt state  regulation of Internet  services that
would be inconsistent with achievement of federal goals.

The FCC has not  attempted to regulate the  companies  that provide the software
and hardware for Internet telephony, or the access providers that transmit their
data, as common carriers or telecommunications service providers. In March 1996,
America's Carriers  Telecommunication  Association ("ACTA"), a trade association



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<PAGE>
primarily  comprised of small and medium-size  interexchange  carriers,  filed a
petition with the FCC asking the FCC to regulate Internet telephony. ACTA argues
that providers of software that enables real-time voice  communications over the
Internet  should be treated as common  carriers  and  subject to the  regulatory
requirements  of Title II. The FCC has sought comment on ACTA's  request.  Other
countries are considering similar issues.

The FCC has not  considered  whether  any of the rules that  relate to radio and
television broadcasters should also apply to analogous  Internet-based services.
The vast majority of Internet traffic today travels over wire facilities, rather
than the radio  spectrum.  As a policy  matter,  however,  a  continuous,  live,
generally-available  music  broadcast  over the Internet may appear similar to a
traditional radio broadcast,  and the same arguments may be made about streaming
video  applications.  The  FCC  will  need to  consider  the  underlying  policy
principles  that, in the language of the Act and in FCC  decisions,  have formed
the basis for regulation of the television and radio broadcast industries.

The FCC does not  regulate  the  prices  charged  by ISPs or  Internet  backbone
providers.  However,  the vast  majority of users  connect to the Internet  over
facilities of existing  telecommunications  carriers.  Those  telecommunications
carriers are subject to varying levels of regulation at both the federal and the
state level. Thus,  regulatory  decisions exercise a significant  influence over
the  economics  of the  Internet  market.  Economics  is  expected  to drive the
development of both the Internet and of other communications technologies.

Internet  access is  understood  to be an  enhanced  service  under  FCC  rules,
therefore ISPs are treated as end users,  rather than carriers,  for purposes of
the FCC's interstate access charge rules. This distinction, created when the FCC
established  the access charge system in 1983, is often  referred to as the "ESP
exemption."  Thus,  when ISPs purchase lines from LECs, the ISPs buy those lines
under the same tariffs that any business  customer would use -- typically  voice
grade measured  business lines or 23 channel ISDN primary rate interface  (PRI).
Although these services  generally involve a per-minute usage charge in addition
to a monthly fee, the usage charge is assessed  only for outbound  calls.  ISPs,
however,  exclusively use these lines to receive calls from their customers, and
thus  effectively  pay flat monthly rates. By contrast,  IXCs that  interconnect
with LECs are  considered  carriers,  and thus are  required  to pay  interstate
access charges for the services they  purchase.  Most of the access charges that
carriers pay are  usage-sensitive  in both  directions.  Thus, IXCs are assessed
per-minute charges for both originating and terminating calls. The FCC concluded
in the Local  Competition Order that the rate levels of access charges appear to
significantly  exceed the incremental cost of providing these services.  The FCC
in December 1996 launched a comprehensive proceeding to reform access charges in
a manner  consistent  with  economic  efficiency  and the  development  of local
competition.

The revenue  effects of Internet  usage today depend to a significant  extent on
the structure of state tariffs.  Internet usage  generates less revenue for LECs
in states where flat local service  rates have been set low,  with  compensating
revenues in the form of per-minute  intrastate  toll charges.  Because ISPs only
receive  local calls,  they do not incur these usage  charges.  By contrast,  in
states where flat charges make up a higher percentage of LEC revenues, ISPs will
have a less  significant  revenue  effect.  ISP  usage is also  affected  by the
relative  pricing of services such as ISDN Primary Rate Interface  (PRI),  frame
relay, and fractional T-1 connections, which are alternatives to analog business
lines.   The  prices  for  these  services,   and  the  price  difference  on  a
per-voice-channel  basis  between the options  available to ISPs,  varies widely
across  different  states.  In many  cases,  tariffs  for these  and other  data
services  are based on  assumptions  that do not  reflect the  realities  of the
Internet access market today.  The scope of local calling areas also affects the
architecture of Internet access services. In states with larger unmeasured local
calling areas, ISPs need fewer POPs in order to serve the same customers through
a local call.

The  Company is  presently  unable to  determine  what the  impact of  potential
Internet  regulatory  actions and decisions will be on the Company's  liquidity,
results of operations and cash flows.



                                       42
<PAGE>
Financial  information about the Company's  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 $7.0 million,  $7.6 million and
$8.3 million for the years ended December 31, 1998, 1997 and 1996, respectively.

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 and Internet 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.

Backlog of Orders and Inventory
As of December 31, 1998 and 1997, the Company's  long-distance  services segment
had a backlog of equipment sales orders of approximately  $202,000 and $104,000,
respectively.  The increase in backlog as of December 31, 1998 can be attributed
primarily to sales growth in 1998 as compared to 1997. The Company  expects that
all of the orders in backlog at the end of 1998 will be delivered during 1999.

Geographic Concentration and Alaska Economy
The  Company  offers  voice and data  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.  Almost $4 of every $10
produced in Alaska comes from the oil  industry.  73 percent  ($1.5  billion) of
core Alaska state  treasury  receipts came from the oil industry in 1998 through
production taxes, ad valorem taxes,  corporate income taxes, royalties and lease
payments.

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.
Production  has begun to decline in recent years and is presently  down 40% from
the 1988 levels.  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.

Market prices for North Slope oil declined to below $10 per barrel in 1998, well
below the  average  price used by the State of Alaska to budget its oil  related
revenues.  Oil  companies  and service  providers  have  announced  cost cutting
measures to offset a portion of the declining revenues.  Oil company and related
oil field service company  layoffs  reportedly will result in a reduction of oil
industry jobs by at least 39 percent in 1999.

BP Alaska  Exploration  ("BP") announced that it would cut costs in Alaska by 30
percent, including layoffs of approximately 600 employees and other cost-cutting
measures such as decreased production and delayed 


                                       43
<PAGE>
exploration  efforts.  Projects that are underway are reportedly not affected by
the  cutbacks,  however BP did notify  state  officials  that it would delay its
exploration of the Genesee test site east of Prudhoe.

Atlantic  Richfield Company ("ARCO") announced that it would cut 80 Alaska jobs,
which reportedly amounts to five percent of its workforce in the state. ARCO has
also indicated that the cost cuts will not affect the  development of the Alpine
field west of Prudhoe Bay.

BP Amoco  announced  in April  1999 its  intention  to  purchase  ARCO for $26.8
billion.  BP Amoco and ARCO together reportedly hold approximately 75 percent of
the  ownership  of the Alaska  North  Slope oil fields and in the  company  that
operates the Trans-Alaska  Pipeline System. Alaska law stipulates that no single
company can hold drilling leases to more than 500,000 onshore state-owned acres.

The BP Amoco-ARCO  combination  would control about 860,000  acres,  however the
companies  have  reportedly  said they will give up 360,000 acres to comply with
Alaska laws. Realignment of operations following the acquisition reportedly will
result in the  layoff of 400  personnel  in Alaska.  The  Company is not able to
predict the effect of the acquisition of ARCO by BP Amoco on Alaska's economy or
on the Company.

The effects of low oil prices will impact the state of Alaska's economy,  and is
expected  to  particularly  hurt  state and  local  government  and oil  service
companies.  As much as half of the  drilling  fleet that  worked on the slope in
1998 could be idle during 1999. Oil field service and drilling  contractors  cut
operating  costs to  adjust  for  decreasing  production  and  exploration.  The
Company,  as an outsourcing  services provider to the oil industry,  reduced its
outsourcing work force by 8 employees in February 1999.

The state of Alaska  December 1998 forecast for future oil  production and state
revenues  indicates  that  analysts  do not expect  oil  prices to  recover  for
approximately two years. As a result,  the Alaska Department of Revenue forecast
anticipates  that production will fall from 1.28 million barrels a day in Fiscal
Year 1998 to 1.18 million in Fiscal Year 1999.

Since actual revenues to the state of Alaska are expected to fall  significantly
short of budgeted  revenues,  (an estimated $1.04 billion deficit for the coming
budget year), the Governor of the state of Alaska has announced his intention to
implement  cost-cutting  and  revenue  enhancing  measures.  The state of Alaska
maintains  surplus  accounts that are intended to fund budgetary  shortfalls and
would be expected to fund a portion of the revenue shortfall.

Although the depressed  oil prices are expected to have a substantial  effect on
Alaska's economy,  analysts believe that tourism, air cargo, and service sectors
are strong enough to offset a portion of the  downturn.  These  industries  have
helped  offset  the  prevailing  pattern  of oil  industry  downsizing  that has
occurred during much of the last several years. Three other factors that support
Alaska's economy are the healthy national  economy,  low interest rates, and low
inflation.  Construction  is expected to remain  strong over the next few years;
$315  million of federal  money is  expected to be  distributed  to the state of
Alaska for highways and other federally supported projects.

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 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 oil companies not be successful in these discoveries or developments,  or
the price of oil remain at its current depressed levels,  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.  The  Company is 


                                       44
<PAGE>
not able to predict the effect of declining  production  and prices 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.

Employees
The Company and its direct and indirect  subsidiaries  employ  approximately 972
persons as of  February  19,  1999.  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.

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 in service totaled $282.8
million at December 31, 1998, of which $148.0 relates to long-distance services,
$95.6 relates to cable  services,  $27.9 relates to local access  services,  and
$11.3  relates to Internet  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,  routers,  servers,  transportation  equipment,  computer
equipment  and general  office  equipment.  Substantially  all of the  Company's
properties secure its Senior Holdings Loan and Fiber Facility. See note 6 to the
Notes to Consolidated  Financial  Statements  included in Part II of this Report
for further discussion.

The Company's  construction  in progress  totaled $119.6 million at December 31,
1998, of which $114.9 relates to Alaska United fiber-optic facilities connecting
Anchorage, Juneau, Fairbanks, Valdez and Whittier, Alaska to Seattle Washington,
and $4.7 relates to  telecommunications  and Internet construction projects that
were not complete at December 31, 1998.

Long-Distance  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 digital fiber
optic cables 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 completed construction of an additional fiber
optic cable facility  linking Alaska to Seattle,  Washington in February,  1999,
which 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 PanAmSat Galaxy
XR satellite to meet its long-term satellite capacity requirements.  The balance
payable upon expected delivery of the transponders  during the fourth quarter of
1999  in  addition  to  


                                       45
<PAGE>
the $9.1 million deposit previously paid totals approximately $43.5 million. The
Company's  remaining  commitment  will likely be funded from its Senior Holdings
Loan. The purchase and lease-purchase  option agreement provides for the interim
lease of transponder  capacity on the PanAmSat  Galaxy IX satellite  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,   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, 1998 the Cable  Systems  consisted  of  approximately
1,806 miles of installed  cable plant  having  between 300 to 550 MHz of channel
capacity.  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 Access  Services.  The Company  operates a  state-of-the-art,  competitive
local  access   telecommunications   network   employing   the  latest   digital
transmission technology based upon fiber optic facilities within Anchorage.  The
Company leases its local access 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.

Internet Services. The Company operates a state-of-the-art, competitive Internet
network  employing  the latest  available  technology.  The  Company  leases its
Internet services industry segment's operating facilities,  located primarily in
Anchorage.  Such  properties are in good  condition.  The Company  considers its
properties suitable and adequate for its present and anticipated future needs.

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,  Department  of Labor and  state  regulatory  authorities.  In the
opinion of  management,  except as noted below,  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 its
financial position, results of operations or liquidity.

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.



                                       46
<PAGE>
Dividends.  GCI and GCI, Inc. have never paid cash dividends on its 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).

Item 6.  SELECTED FINANCIAL DATA
<TABLE>
GCI, Inc. was  incorporated  in 1997,  is a wholly owned  subsidiary of GCI, and
received  through  its  initial   capitalization  all  ownership   interests  in
subsidiaries  previously  held by GCI. The  following  table  presents  selected
historical information relating to financial condition and results of operations
of GCI,  Inc.  in 1998 and 1997,  and of GCI in 1996,  1995 and 1994,  except as
disclosed in note 3 below.
<CAPTION>
                                                                    GCI, Inc.                      GCI
                                                             ----------------------  -------------------------------
                                                                            Years ended December 31,
                                                             -------------------------------------------------------
                                                                  1998        1997      1996      1995       1994
                                                                  ----        ----      ----      ----       ----
                                                                  (Amounts in thousands except per share amounts)
     <S>                                                    <C>             <C>        <C>       <C>        <C> 
     Revenues (1)                                           $    246,795     223,809   164,894   129,279    116,981
     Net earnings (loss) before income taxes and
     extraordinary item (2)                                 $   (10,920)     (2,235)    12,690    12,601     11,681
     Loss on early extinguishment of debt, net of
     income tax benefit of $180                             $          0         521         0         0          0
     Net earnings (loss)                                    $    (6,797)     (2,183)     7,462     7,502      7,134
     Basic net earnings (loss) per common share (3)         $   (67,970)    (21,830)    74,620    75,020     71,340
     Diluted net earnings (loss) per common share (3)       $   (67,970)    (21,830)    74,620    75,020     71,340
     Total assets (4)                                       $    646,684     545,302   447,335    84,765     74,249
     Long-term debt, including current portion (4)          $    351,657     250,084   223,242     9,980     12,554
     Obligations under capital leases, including
     current portion                                        $      2,186       1,188       746     1,047      1,297
     Total stockholders' equity (4, 5)                      $    200,575     204,439   149,554    43,016     35,093
     Dividends declared per Common share (6)                $       0.00        0.00      0.00      0.00       0.00

<FN>
     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 losses in 1998 and 1997 are primarily  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 local  access  services  and  Internet
         services markets.
     3   Basic and diluted  earnings  (loss) per common share are computed using
         GCI Inc.'s weighted average  outstanding  shares of common stock in all
         years  presented.  GCI,  Inc.  has  had  no  outstanding  common  stock
         equivalents.



                                       47
<PAGE>
     4   Increases in the GCI'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  (now  MCI  WorldCom)  stock  issuance
         described  in  notes 2 and 8 to the  Notes  to  Consolidated  Financial
         Statements included in Part II of this Report. Increases in GCI, Inc.'s
         assets and long-term debt in 1998 as compared to 1997 result  primarily
         from the  Company's  construction  of a fiber-optic  system  connecting
         points in Alaska with Seattle  Washington as further  described in note
         11 to the  accompanying  Notes  to  Consolidated  Financial  Statements
         included in Part II of this Report.
     5   The 1997 increase in  stockholders'  equity is primarily  attributed to
         the GCI's equity  offering in August  1997,  described in note 8 to the
         accompanying  Notes to Consolidated  Financial  Statements  included in
         Part II of this Report.
     6   GCI,  Inc. and GCI have never paid a cash  dividend on its common stock
         and does 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 Notes to Consolidated
         Financial Statements included in Part II of this Report.
</FN>
</TABLE>
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 other
financial data appearing  elsewhere in this Report on Form 10-K. See -Cautionary
Statement Regarding Forward-Looking Statements.

GCI,  Inc.  was  incorporated  in 1997 to effect the issuance of Senior Notes as
further described in note 6 to the accompanying Notes to Consolidated  Financial
Statements. GCI, Inc., a wholly-owned subsidiary of General Communication,  Inc.
("GCI"),  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  GCI's  class  B  common  stock  are  traded  on  the
Over-the-Counter market. Proceeds from 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 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
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.

                                    Overview

The Company has  experienced  significant  growth in recent  years  through both
strategic  acquisitions and growth in its existing  businesses.  The Company has
historically  met its cash  needs for  operations  through  its cash  flows from
operating   activities.   Cash   requirements   for   acquisitions  and  capital
expenditures have been provided through the Company's financing  activities,  as
well as its existing cash and cash equivalents.

Long-distance   services.   The  Company  has  historically   reported  revenues
principally  from the  provision  of  interstate  and  intrastate  long-distance
services to  residential,  commercial  and  governmental  customers and to other
common carriers (principally MCI, now MCI WorldCom,  and Sprint). These services
accounted  for  approximately  91.9%  of the  Company's  long-distance  services
revenues  during 1998.  Factors that have the  greatest  impact on  year-to-year
changes in  telecommunications  services  revenues  include  the rate per minute



                                       48
<PAGE>
charged to customers  and usage  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  telecommunication  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 1998,  local access
charges  accounted for 42.6% of  telecommunications  cost of sales and services,
fees  paid  to  other  long-distance   carriers  represented  33.2%,   satellite
transponder  lease and  undersea  fiber  maintenance  costs  represented  10.0%,
telecommunications  equipment  accounted  for 4.8%,  and network  solutions  and
outsourcing  costs  represented  7.0% of  telecommunications  cost of sales  and
services.

The Company's  long-distance selling,  general, and administrative expenses have
consisted  of  operating   and   engineering,   customer   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,  insurance and property  taxes).  A  significant  portion of
long-distance selling,  general, and administrative expenses, 30.9% during 1998,
represents the cost of the Company's advertising,  promotion and market analysis
programs.

Long-distance  telecommunication services face significant competition from AT&T
Alascom, Inc.,  long-distance resellers, and from local telephone companies that
have  entered  the  long-distance  market.  The  number of active  long-distance
customers  billed by the Company has decreased  approximately  7.9% during 1998.
Gains in the number of commercial and small business  customers billed were more
than  offset by a  reduction  in the  number of  residential  customers  billed.
Increased  usage  volumes and traffic  carried for other  common  carriers  have
generally  offset usage  reductions  attributed to the decrease in the number of
active  residential  customers  billed.  The Company  believes  its  approach to
developing, pricing, and providing long-distance services and bundling different
business  segment  services  will  continue  to  allow it to be  competitive  in
providing those services.

Other common carrier  traffic routed to the Company for termination in Alaska is
largely  dependent  on  traffic  routed  to MCI  WorldCom  and  Sprint  by their
customers.  Pricing  pressures,  new program offerings and market  consolidation
continue to evolve in the markets  served by MCI WorldCom  and Sprint.  If, as a
result, their traffic is reduced, or if their competitors' costs to terminate or
originate traffic in Alaska are reduced,  the Company's traffic will also likely
be reduced,  and the Company's  pricing may be reduced to respond to competitive
pressures.  The  Company is unable to predict  the effect on the Company of such
changes,  however given the materiality of other common carrier  revenues to the
Company,  a  significant  reduction in traffic or pricing  could have a material
adverse effect on the Company's  financial  position,  results of operations and
liquidity.

Services  included  in  the  Other  segment  as  described  in  note  9  to  the
accompanying consolidated financial statements are included in the Long-Distance
Services segment for purposes of this Management's Discussion and Analysis.

See Part I, Item 1. Business, Long-distance Services, Competition for additional
information regarding long-distance services competition.

Cable services.  Following the cable system  acquisitions  effective October 31,
1996, the Company now reports a significant level of revenues from the provision
of cable services. During 1998, cable revenues represented 23.4% of consolidated
revenues. The cable systems serve 26 communities and areas in Alaska,  including
the state's three largest population centers, Anchorage, Fairbanks and Juneau.



                                       49
<PAGE>
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  1998
programming services generated 85.7% of total cable services revenues, equipment
rental and  installation  fees accounted for 7.9% of such revenues,  advertising
sales accounted for 5.0% of such revenues,  and other services accounted for the
remaining  1.4% 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 1998  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 9.5% of such total expenses.

Cable  services  face  competition  from  alternative  methods of receiving  and
distributing  television signals and from other sources of news, information and
entertainment.  The Company believes its cable television services will continue
to be competitive based on providing, at reasonable prices, a greater variety of
programming  and other  communication  services  than are  available  off-air or
through  other  alternative   delivery  sources  and  upon  superior   technical
performance and customer service. See Part I, Item 1. Business,  Cable Services,
Competition for additional information regarding cable services competition.

Local access  services.  The Company began offering  local exchange  services in
Anchorage  during late  September  1997.  The  Company  generates  local  access
services revenues from four primary sources:  (1) business and residential basic
dial tone revenues;  (2) business private line and special access revenues;  (3)
reciprocal  access  revenues  from  the  incumbent  LEC;  and (4)  business  and
residential  feature  and  other  charges,  including  voice  mail,  caller  ID,
distinctive  ring,  inside wiring and  subscriber  line charges.  Local exchange
services  revenues totaled $9.9 million  representing  4.0% of total revenues in
1998.  The primary  factors that  contribute  to  year-to-year  changes in local
access  services  revenues are the average  number of business  and  residential
subscribers  during a given  reporting  period  and the  average  monthly  rates
charged for non-traffic sensitive services.

Operating and engineering expenses represented approximately 8.8% of total local
access services cost of sales and selling,  general and administrative  expenses
during 1998.  Marketing and advertising costs represented  approximately 4.7% of
such total  expenses,  customer  service and general  and  administrative  costs
represented approximately 53.4% of such total expenses, and local access cost of
sales  represented  approximately  33.1% of such  total  expenses.  The  Company
expects that it will  generate  operating  losses from local  exchange  services
during 1999.

The Company's local access services face  significant  competition  from ATU and
AT&T Alascom, Inc. The Company believes its approach to developing, pricing, and
providing  local access  services will continue to allow it to be competitive in
providing those services.  See Part I, Item 1. Business,  Local Access Services,
Competition  and  Part  I,  Item  1.  Business,  Historical  development  of the
Company's  business  during the past fiscal  year,  Local  Access  Services  for
additional information regarding local access services competition.

Internet  services.  The Company  began  offering  Internet  services in several
markets in Alaska during 1998. The Company generates  Internet services revenues
from three primary sources:  (1) access product services,  including  commercial
DIAS, ISP DIAS, and retail dial-up service revenues;  (2) SchoolAccess(TM)  DIAS
and server revenues;  and (3) network  management  services.  Internet  services
revenues totaled $4.6 million  representing  1.9% of total revenues in 1998. The
primary  factors that contribute to  year-to-year  changes in 


                                       50
<PAGE>
Internet services revenues are average monthly subscription rates, the number of
customers selecting added features, and the average number of subscribers during
a given reporting period.

Operating  and general and  administrative  expenses  represented  approximately
17.4%  of total  Internet  services  cost of  sales  and  selling,  general  and
administrative expenses during 1998.

Significant  new marketing  campaigns were introduced in February and March 1999
featuring  bundled  residential  and commercial  Internet  products.  Additional
bandwidth was made available to the Company's  Internet  segment  resulting from
completion of the Alaska United Project.  The new Internet offerings are coupled
with the Company's  long-distance and local services  offerings and provide free
basic  Internet  services if certain  long-distance  or local services plans are
selected. Value-added Internet features are available for additional charges.

The Company competes with a number of Internet service providers in its markets.
The Company believes its approach to developing, pricing, and providing Internet
services  will  continue  to  allow  it to be  competitive  in  providing  those
services.  See Part I., Item 1. Business,  Internet  Services,  Competition  for
information regarding Internet services competition.

Other  services,  other  expenses  and  net  loss.  Telecommunications  services
revenues  reported in the "Other"  segment have been  attributable  to corporate
network management  contracts,  telecommunications  equipment sales and service,
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  WorldCom  and Sprint for certain
billing  services),  and  costs  associated  with  PCS  wireless  communications
services.  The Company began developing plans for PCS service deployment in 1995
and subsequently  conducted a technical trial of its candidate  technology.  The
Company has invested  approximately  $2.1 million in its PCS license at December
31, 1998.  PCS licensees are 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. The Company is
currently  reevaluating  its  wireless  strategy  and expects to  complete  such
reevaluation  within the next six months.  The Company expects that its wireless
strategy will allow retention of the PCS license pursuant to its terms.

Depreciation and  amortization  and interest expense on a consolidated  basis is
expected  to be higher in 1999 as  compared  to 1998  resulting  primarily  from
additional  depreciation  on 1998 and 1999 capital  expenditures  and additional
outstanding  long-term debt. As a result, the Company anticipates  recording net
losses in 1999.



                                       51
<PAGE>
                              Results of Operations
<TABLE>
The  following  table sets forth  selected  Statement  of  Operations  data as a
percentage of total revenues for the periods indicated  (underlying data rounded
to the nearest thousands):
<CAPTION>
                                                        GCI, Inc.              GCI    
                                               ------------------------      ------- 
                                                        Year Ended December 31,           Percentage Change
                                                        -----------------------           -----------------
                                                                                          1998         1997
                                                                                           vs.          vs.
                                                     1998         1997          1996      1997         1996
                                                     ----         ----          ----      ----         ----
<S>                                               <C>          <C>             <C>      <C>          <C> 
Statement of Operations Data:
    Revenues:
           Long-distance services                    70.7%        75.0%         94.3%       4.1%         8.0%
           Cable services                            23.4%        24.6%          5.7%       4.5%       482.2%
           Local services                             4.0%         0.3%           ---   1,524.3%           NA
           Internet services                          1.9%         0.1%           ---   2,422.5%           NA
                                               ----------------------------------------------------------------
           Total revenues                           100.0%       100.0%        100.0%      10.3%        35.7%
    Cost of sales and services                       47.0%        49.6%         56.2%       4.5%        19.9%
    Selling, general and administrative
       expenses                                      36.1%        32.9%         28.1%      21.2%        58.5%
    Depreciation and amortization                    13.0%        10.6%          5.7%      34.8%       152.6%
                                               ----------------------------------------------------------------
           Operating income                           3.9%         6.9%         10.0%    (37.9%)       (6.1%)
           Net earnings (loss) before income
              taxes                                 (4.4%)       (1.0%)          7.7%   (388.6%)     (117.6%)
           Net earnings (loss)                      (2.8%)       (1.0%)          4.5%   (211.4%)     (129.3%)
Other Operating Data:
    Cable operating income (1)                       12.4%        18.9%         23.2%    (31.7%)       374.6%
    Local operating loss (2)                      (112.2%)     (581.8%)            NA   (213.3%)       307.9%
    Internet operating (loss) income (3)              0.1%      (13.4%)            NA     106.1%           NA
<FN>
-----------------------------------------------
(1) Computed as a percentage of total cable services revenues. 
(2) Computed as a percentage  of total local  services  revenues.  
(3) Computed as a percentage of total Internet services revenues.
</FN>
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.

Revenues.  Total revenues  increased 10.3% from $223.8 million in 1997 to $246.8
million  in  1998.   Long-distance   transmission   revenues  from   commercial,
residential,  governmental,  and other common carrier  customers  increased 2.6%
from $156.6 million in 1997 to $160.6 million in 1998. This increase reflected a
5.3% increase in interstate  minutes of use to 654.0 million  minutes and a 4.6%
increase in intrastate  minutes of use to 137.3 million  minutes.  Long-distance
revenue growth in 1998 was largely due to a 4.4% increase in revenues from other
common  carriers  (principally  MCI WorldCom and Sprint),  from $58.7 million in
1997 to $61.3  million in 1998.  Private line and private  network  transmission
services  revenues  increased 22.0%, from $15.9 million in 1997 to $19.4 million
in 1998.

The above increases in long-distance  transmission  revenues were offset in part
by a 5.1%  reduction in the Company's  average rate per minute on  long-distance
traffic  from  $0.177  per  minute in 1997 to  $0.168  per  minute in 1998.  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 LECs
into  long-distance  markets served by the Company.  Operator  services revenues
decreased  14.3%  from $7.0  million in 1997 to $6.0  million  in 1998.  Traffic
carried  by the  Company's  operator  service  center  


                                       52
<PAGE>
decreased in part from  increased  usage of prepaid  calling  cards and cellular
telephones by tourists visiting the state of Alaska.

Systems sales and services revenues (included in long-distance segment revenues)
increased  30.7% from $10.2 million in 1997 to $13.3 million in 1998,  primarily
due to an increase in the number of large equipment  sales  transactions in 1998
as compared to 1997 and increased revenues derived from outsourcing services.

Cable  revenues  increased  4.5% from $55.2  million in 1997 to $57.6 million in
1998.  Programming  services  revenues  increased  3.1% to $49.4 million in 1998
resulting from an increase of 3,900 basic subscribers  served by the Company and
an increase of $0.47 in revenue per average  basic  subscriber,  per month.  New
facility  construction efforts in 1998 resulted in additional homes passed which
contributed  to  additional  subscribers  and revenues.  Other factors  included
facility  upgrades which allowed the  introduction  of digital cable services in
Anchorage,  increased promotional and advertising efforts and increases in basic
and premium service rates in certain areas. Advertising sales revenues increased
31.9%  to $2.9  million  in 1998 due to  increased  promotion  of the  Company's
advertising and ad insertion  capabilities.  Equipment  rental and  installation
revenues  increased  6.2% to $4.5  million  in 1998 due to  increased  equipment
rentals and  installation  services  provided by the Company.  Offsetting  these
increases were reductions in pay-per-view and premium service revenues.

Local access services  revenues  increased from $610,000 in 1997 to $9.9 million
in 1998. 1998 revenues reflect a full 12 months of local services operations and
growth as  compared  to  start-up  operations  in 1997.  At  December  31,  1998
approximately  28,000 lines were in service and  approximately  1,000 additional
lines were awaiting connection.

Internet  services  revenues  increased from $182,000 in 1997 to $4.6 million in
1998. 1998 revenues reflect a full 12 months of Internet services operations and
growth as compared to start-up operations in 1997. The Company had approximately
7,200 active  residential  subscribers  to its  Internet  service at February 9,
1999.

Cost of sales and services. Cost of sales and services totaled $111.1 million in
1997 and $116.1  million in 1998.  As a percentage  of total  revenues,  cost of
sales and services  decreased  from 49.6% in 1997 to 47.0% in 1998. The decrease
in cost  of  sales  and  services  as a  percentage  of  revenues  is  primarily
attributed  to changes in the  Company's  product mix due to the addition of new
product  lines  for a  full  year  of  operations  (local  access  services  and
Internet),   and  reduced  long-distance  cost  of  sales  as  a  percentage  of
long-distance revenues. The margin improvement was partially offset by increased
cable services cost of sales as a percentage of cable services revenues.

The decrease in  long-distance  cost of sales and  services as a  percentage  of
revenues is primarily  attributed to: 1) a refund  received in the first quarter
of  1998  totaling  approximately  $1.1  million  from a LEC in  respect  of its
earnings that exceeded regulatory requirements,  2) reductions in access charges
paid by the Company to other carriers for  distribution  of its traffic,  and 3)
avoidance  of access  charges  resulting  from the  Company's  distribution  and
termination  of its traffic on its own network  instead of paying other carriers
to distribute and terminate its traffic. The Company expects margins to widen as
increasing amounts of traffic are carried on its own facilities.

Cable  cost of sales and  services  as a  percentage  of  revenues  is less as a
percentage  of  revenues  than are  long-distance,  local  access  and  Internet
services cost of sales and services.  Cable services rate increases did not keep
pace with  increases in  programming  and copyright  costs in 1998.  Programming
costs  increased on most of the  Company's  offerings  and the Company  incurred
additional costs on new programming introduced in 1998.

Local access  services  cost of sales and services  totaled 61.7% and 43.8% as a
percentage  of 1998 and  1997  local  access  services  revenues,  respectively.
Internet  services  cost of sales and  services  totaled  74.1% and  132.4% as a
percentage  of 1998 and  1997  Internet  services  revenues,  respectively.  The
Company's  local  


                                       53
<PAGE>
access and Internet services operations commenced in 1997.  Fluctuations in cost
of sales and  services  as a  percentage  of revenues  are  expected to occur as
start-up products develop into mature product lines.

Selling,   general   and   administrative   expenses.   Selling,   general   and
administrative  expenses  increased  22.0% from  $73.6  million in 1997 to $89.8
million in 1998, and, as a percentage of revenues,  increased from 32.9% in 1997
to 36.4% in 1998. This increase resulted from:

     -    Local access services operating,  engineering, sales, customer service
          and  administrative  cost  increases,  from  $3.4  million  in 1997 as
          compared to $12.3 million in 1998. The Company  initiated local access
          services in September  1997. The increase was necessary to provide the
          operations,  engineering,  customer service and support infrastructure
          necessary to accommodate expected growth in the Company's local access
          services customer base.
     -    Increased  long-distance  general and administrative  expenses of $3.2
          million in 1998 due to increased personnel and other costs in customer
          service, engineering,  operations,  accounting, human resources, legal
          and  regulatory,   and  management  information  services.   Increased
          customer  service  expenses were  associated with support of increased
          sales volumes and expenditures necessary to integrate customer service
          operations across product lines.
     -    Increased  long-distance sales,  advertising,  telemarketing,  carrier
          relations,  business  development  and rural  services  costs totaling
          $15.3  million in 1997  compared to $17.6  million in 1998.  Increased
          selling  costs  were  associated  with  the  introduction  of  various
          marketing plans and other  proprietary  rate plans and cross promotion
          of products and services.
     -    Cable services  operating,  engineering,  sales,  customer service and
          administrative cost increases,  from $18.8 million in 1997 as compared
          to $19.8  million in 1998.  The  increase  was  primarily  incurred to
          promote and market the Company's cable services.
     -    Internet services operating,  engineering, sales, customer service and
          administrative  cost  increases,  from  $27,000 in 1997 as compared to
          $715,000 in 1998. The Company initiated its Internet services in 1998.
          The increase was  necessary  to provide the  operations,  engineering,
          customer service and support  infrastructure  necessary to accommodate
          expected growth in the Company's Internet services customer base.

Depreciation and amortization.  Depreciation and amortization  expense increased
34.5% from $23.8  million in 1997 to $32.0  million  in 1998.  The  increase  is
attributable  to the Company's  $64.6 million of facilities  placed into service
during 1997 for which a full year of  depreciation  was recorded during the year
ending December 31, 1998 and the $58.4 million of facilities placed into service
in 1998 for which a partial year of  depreciation  was  recorded  during 1998 on
equipment and facilities placed into service in 1998.

Interest expense, net. Interest expense, net of interest income, increased 12.5%
from $17.6  million in 1997 to $19.8  million in 1998.  This  increase  resulted
primarily  from  increases in the  Company's  average  outstanding  indebtedness
resulting   primarily  from  construction  of  new  long-distance  and  Internet
facilities,   expansion  and  upgrades  of  cable  television  facilities,   and
investment in local access  services  equipment and  facilities.  Such increases
were offset in part by  increases in the amount of interest  capitalized  during
1998.

Income tax benefit.  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 benefit  increased
from $0.6 million in 1997 to $4.1 million in 1998 due to the Company incurring a
larger net loss before income taxes and  extraordinary  item in 1998 as compared
to 1997. The Company's effective income tax rate increased from 25.6% in 1997 to
37.8% in 1998 due to the net loss and the proportional  amount of items that are
nondeductible for income tax purposes.

In conjunction with the 1996 Cable Companies acquisition, the Company incurred a
net deferred  income tax  liability of $24.4  million and acquired net operating
losses totaling $57.6 million.  The Company  determined 


                                       54
<PAGE>
that approximately $20 million of the acquired net operating losses would not be
utilized for income tax purposes,  and elected with its December 31, 1996 income
tax returns to forego utilization of such acquired losses under Internal Revenue
Code section  1.1502-32(b)(4).  Deferred tax assets were not recorded associated
with the foregone losses and, accordingly,  no valuation allowance was provided.
At December 31, 1998, the Company has (1) tax net operating  loss  carryforwards
of approximately $51.0 million that will begin expiring in 2008 if not utilized,
and (2)  alternative  minimum tax credit  carryforwards  of  approximately  $2.0
million  available to offset regular  income taxes payable in future years.  The
Company's  utilization of remaining net operating loss  carryforwards is subject
to certain limitations pursuant to Internal Revenue Code section 382.

Tax benefits  associated with recorded  deferred tax assets 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. The Company estimates that its effective income
tax rate for financial statement purposes will be approximately 38% in 1999. 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.

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 affected 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 LECs 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.



                                       55
<PAGE>
Additionally,  cost of sales and  services  as a  percentage  of  revenues  were
affected in part by  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 LEC and the National Exchange Carriers Association
in respect of earnings by them that exceeded regulatory requirements.

Local access  services cost of sales and services  totaled 43.8% as a percentage
of 1997 local access  services  revenues.  Internet  services  cost of sales and
services totaled 132.4% as a percentage of 1997 Internet services revenues.  The
Company's  local  access and  Internet  services  operations  commenced in 1997.
Fluctuations  in cost of sales and  services as a  percentage  of  revenues  are
expected to occur as start-up products develop into mature product lines.

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:

     -    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).
     -    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.
     -    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.
     -    Bad debt  expense  totaling  $3.0  million  for 1997  compared to $1.7
          million in 1996 (directly associated with increased revenues).
     -    Increased  long-distance  segment sales,  advertising,  telemarketing,
          carrier  relations,  business  development  and rural  services  costs
          totaling  $13.0  million in 1996  compared  to $15.3  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 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. 


                                       56
<PAGE>
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.  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.

SEASONALITY; FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
<TABLE>
The following  chart provides  selected  unaudited  statement of operations data
from the Company's quarterly results of operations during 1998 and 1997:
<CAPTION>
                                                            (Amounts in thousands, except per share amounts)
                                                      -------------------------------------------------------------
                                                          First      Second      Third       Fourth       Total 
                                                         Quarter     Quarter     Quarter     Quarter       Year
                                                      -------------------------------------------------------------
     <S>                                           <C>              <C>         <C>         <C>          <C> 
     1998
     ----
     Revenues
         Long-distance services                    $      42,034      45,838      44,478      42,306      174,656
         Cable services                            $      14,201      14,041      14,484      14,914       57,640
         Local access services                     $       1,014       2,048       2,744       4,102        9,908
         Internet services                         $         903       1,014       1,060       1,614        4,591
                                                      -------------------------------------------------------------
     Total revenues                                $      58,152      62,941      62,766      62,936      246,795
     Operating income                              $       2,437       1,447       1,730       3,230        8,844
     Net income (loss)                             $     (1,616)     (2,066)     (2,076)     (1,039)      (6,797)
     Basic net loss per share                      $    (16,160)    (20,660)    (20,760)    (10,390)     (67,970)
     Diluted net loss per share                    $    (16,160)    (20,660)    (20,760)    (10,390)     (67,970)

     1997
     ----
     Revenues
         Telecommunications services               $      39,201      42,097      44,378      42,176      167,852
         Cable services                            $      13,656      14,055      13,294      14,160       55,165
         Local access services                     $         ---         ---         255         355          610
         Internet services                         $          24          34          29          95          182
                                                      -------------------------------------------------------------
     Total revenues                                $      52,881      56,186      57,956      56,786      223,809
     Operating income                              $       3,292       2,786       3,786       5,518       15,382
     Loss on debt extinguishment                   $         ---         ---         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)
</TABLE>
Total revenues for the quarter ended  December 31, 1998 ("fourth  quarter") were
$62.9  million,  representing  a 0.2% increase from total  revenues in the third
quarter of 1998 ("third quarter") of $62.8 million.  Increased new business line
revenues (local access services and Internet  services) were offset by decreased
long-distance services revenues. The decrease in long-distance services revenues
resulted in part from a 7.4% decrease in minutes of traffic  carried  during the
fourth  quarter  (approximately  15.3 million  minutes) as compared to the third
quarter and a decrease in the average rate per minute  billed  during the fourth
quarter  (approximately  $0.004)  as  compared  to the  third  quarter  (a  2.2%
decrease).  Entry  of two LECs  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 $14.9
million  in the fourth  quarter  from $14.5  million  in the third  quarter.  As
further  described below,  cable revenues are generally higher during the winter
months as compared to the summer months.



                                       57
<PAGE>
Cost of sales and services for the third and fourth  quarters were consistent at
approximately $29.7 million. As a percentage of revenues, fourth quarter cost of
sales and services was 47.2% as compared to 47.3 % for the third quarter.

Selling,  general and administrative  expenses for the third and fourth quarters
were consistent at approximately $23.0 million. As a percentage of sales, fourth
quarter selling,  general and administrative  expenses were 36.5% as compared to
36.7 % for the third quarter.

The  Company  reported  a net loss of $1.1  million  for the  fourth  quarter as
compared to a net loss of $2.1 million during the third quarter. The reduced net
loss was  primarily  attributable  to reduced  depreciation  expense  during the
fourth quarter as compared to the third quarter.  The Company  forecasts  annual
capital expenditures and computes  depreciation expense during the year based on
such forecasts.  The actual amount of capital  additions  placed into service in
1998 was less than the estimates  used to compute  depreciation  expense  during
prior quarters of 1998,  resulting in reduced depreciation expense in the fourth
quarter.

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.

                         Liquidity and Capital Resources

The Company's 1998 cash flows from operating  activities  totaled $21.8 million,
net of changes in the components of working capital.  Additional sources of cash
during 1998  included  long-term  borrowings of $103.2  million,  release to the
Company  of $39.4  million  of cash  restricted  to fund  capital  expenditures,
repayments  of notes  receivable  totaling  $1.8  million,  proceeds  from GCI's
issuance of a stock warrant  totaling  $708,000,  and GCI's class A common stock
issuance proceeds totaling $190,000. The Company's expenditures for property and
equipment,  including construction in progress, totaled $149.0 million and $64.6
million  in 1998 and  1997,  respectively.  Uses of cash  during  1998  included
repayment of $2.0 million of long-term borrowings and capital lease obligations,
purchases of other assets  totaling $3.1  million,  payment of deferred debt and
GCI stock issuance costs totaling $1.7 million,  an increase in notes receivable
of  $1.7  million,   and  purchase  of  GCI's  common  stock  to  fund  deferred
compensation agreements totaling $568,000.

Net  receivables  increased  $8.7 million from December 31, 1997 to December 31,
1998  resulting  from  increased  revenues in 1998 as compared to 1997, and from
receivables  associated  with the  Company's  provision of its  SchoolAccess(TM)
services  which  totaled  $4.5  million at  December  31,  1998.  The Company is
processing  reimbursement  requests  for  each  of  the  schools  utilizing  its
SchoolAccess(TM)  services for funding from the new federal School and Libraries
Corporation.  The Company  expects  payment of outstanding  balances  during the
second and third quarters of 1999.

Working  capital  totaled $8.3  million at December  31,  1998, a $13.3  million
increase  from the working  capital  deficit of $5.0  million as of December 31,
1997. The increase in working capital is primarily  attributed to increased cash
balances from 1998 operating  activities  including  increases in trade accounts
receivable, and cash obtained through the Company's credit agreements, GCI stock
option, and GCI stock warrant transactions.

The  Holdings  $200,000,000  ($150,000,000  as amended) and  $50,000,000  credit
facilities  mature June 30, 2005. The Holdings Loan  facilities  were amended in
1999 (see below) and bear  interest,  as amended,  at 


                                       58
<PAGE>
either Libor plus 1.00% to 2.50%,  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  0.00% to 1.375%,  depending  on the  leverage  ratio of Holdings and
certain of its subsidiaries.  $106.7 million and $64.7 million were drawn on the
credit facilities as of December 31, 1998 and 1997, respectively.  Amounts drawn
on the credit  agreements  during 1998 were used to fund  property and equipment
expansions and upgrades and provided  working capital  necessary for new product
lines (local access services and Internet services).

On April 13, 1999,  the Company  obtained  amendments  from its lenders that are
parties to its Holdings credit facilities (see note 6 to the Accompanying  Notes
to Consolidated  Financial  Statements).  These amendments contain,  among other
things,  provisions  for  payment  of a one-time  amendment  fee of 0.25% of the
aggregate  commitment,  an increase in the commitment fee by 0.125% per annum on
the unused  portion of the  commitment,  and an increase in the interest rate by
0.25%. The amended facilities reduce the aggregate  commitment by $50 million to
$200 million, and limit capital expenditures to $35 million in 1999, $35 million
in 2000 with no limits  thereafter  (excluding  amounts to be paid for purchased
satellite transponder facilities).  The amended facilities require that Holdings
receive $20 million in proceeds from a GCI preferred  stock  issuance by May 31,
1999 (see below).

The amended Holding's credit facilities and GCI, Inc.'s public notes (see note 6
to  the  accompanying  Notes  to  Consolidated   Financial  Statements)  contain
restrictions  on  the  operations  and  activities  of  the  Company,  including
requirements  that the  Company  comply with  certain  financial  covenants  and
financial ratios. Under the amended Holding's 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 through March 31, 1999 (3.0
to 1.0 from April 1, 1999 through  December 31, 1999),  total debt to annualized
operating  cash flow to exceed 7.0 to 1.0 from closing of the amendments to June
30, 1999 (6.25 to 1.00 from July 1, 1999 through March 31, 2000), and annualized
operating cash flow to interest expense to exceed 1.5 to 1.0 from closing of the
amendments to September 30, 1999 (1.75 to 1.0 from October 1, 1999 through March
31, 2000). Each of the foregoing ratios decreases in specified increments during
the life of the  credit  facility.  The credit  facility  requires  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  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.

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 note 11 to the accompanying
Notes to Consolidated Financial  Statements).  The Fiber Facility provides up to
$75 million in  construction  financing and bears  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, at the Company's option,  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.  Alaska  United is required to pay a commitment
fee equal to 0.375% per annum on the unused  portion  of the  commitment.  $61.2
million was borrowed under the facility at December 31, 1998. The Fiber Facility
is a 10-year term loan that is interest only for the first 5 years. The facility
can be extended an additional two years 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.
Additional  covenants  pertain  to the  timely  completion  of  certain  project
construction  milestones.  The Fiber  Facility  also  contains a guarantee  that
requires,  among other terms and conditions,  


                                       59
<PAGE>
Alaska  United  complete  the  project  by  the  completion  date  and  pay  any
non-budgeted  costs of the project.  All of Alaska United's assets, as well as a
pledge of the partnership  interests'  owning Alaska United,  collateralize  the
Fiber  Facility.  Construction  of the  fiber  facility  was  completed  and the
facility was placed into service on February 4, 1999.  The project was completed
on-budget.

The  Company  will use  approximately  half the  capacity  of the Alaska  United
project to carry its own traffic,  in addition to its existing  owned and leased
facilities. One of the Company's large commercial customers signed agreements in
February and March 1999 for the immediate  lease of three DS3 circuits on Alaska
United facilities within Alaska, and between Alaska and the lower 48 states. The
lease  agreements  provide  for three  year  terms,  with  renewal  options  for
additional  terms.  The  Company  continues  to  pursue  opportunities  to lease
capacity on its system.

The Company's expenditures for property and equipment, including construction in
progress,  totaled  $149.0  million  and  $65.5  million  during  1998 and 1997,
respectively.  The Company anticipates that its capital expenditures in 1999 may
total  as much as $68.5  million,  including  approximately  $43.5  million  for
satellite  transponders.  Planned capital  expenditures over the next five years
include those necessary for continued expansion of the Company's  long-distance,
local exchange and Internet  facilities,  the development and  construction of a
PCS network,  and continued  upgrades to its cable television plant.  Sources of
funds for these planned capital  expenditures are expected to include internally
generated  cash  flows and  borrowings  under the  Company's  credit  facilities
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 fund  capital
expenditures  and  its  working  capital  requirements.  Should  cash  flows  be
insufficient  to  support  additional  borrowings,  such  investment  in capital
expenditures will likely be reduced.

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 launch of the  satellite  in August 1998
failed.  The  Company  did not  assume  launch  risk  and the  launch  has  been
rescheduled  for the fourth  quarter of 1999. The Company will continue to lease
transponder  capacity until the delivery of the  transponders on the replacement
satellite. The balance payable upon expected delivery of the transponders during
the fourth  quarter of 1999 in addition to the $9.1 million  deposit  previously
paid totals approximately $43.5 million.

On April 2, 1999 the Company  received  commitments  for the  issuance of 20,000
shares of convertible  redeemable accreting preferred stock ("Preferred Stock").
Proceeds  totaling $20 million  (before  payment of costs and expenses)  will be
used for general corporate  purposes and to provide  additional  liquidity.  The
Company's  amended Senior  Holdings Loan  facilities  limit use of such proceeds
(see note 6 to the accompanying Notes to Consolidated Financial Statements). The
Preferred Stock contains a $1,000 per share liquidation preference, plus accrued
but unpaid  dividends and fees.  Dividends will be payable  semi-annually at the
rate of 8.5% of the liquidation  preference.  Prior to the five-year anniversary
following closing, dividends are payable, at the Company's option, in cash or in
additional  fully-paid shares of Preferred Stock.  Dividends are payable only in
cash  following the five-year  anniversary of closing.  Mandatory  redemption is
required  12 years from the date of  closing.  The  Company  and  Holders of the
Preferred  Stock will have the right after the four-year  anniversary of closing
(or occurrence of a triggering  event,  as defined) to convert the stated value,
in whole or in part,  into  registered  shares of GCI class A common stock.  The
conversion  price  will be the  lesser of $6.00 or 120% of the  average  closing
price of GCI's class A common stock for the 10 trading days prior to closing.

At any time subsequent to the third anniversary  following closing, and assuming
the stock is trading at two times the conversion  price, the Company may require
immediate  conversion at a price equal to two times the  conversion  price.  The
Preferred Stock, subject to lender approval, will be exchangeable in whole or in
part, 


                                       60
<PAGE>
at the  Company's  option,  into  subordinated  debt with  terms and  conditions
comparable to those governing the Preferred  Stock.  The Preferred Stock will be
senior to all other classes of the Company's  equity  securities,  and will have
voting  rights  equal to that number of shares of common stock into which it can
be converted.  The holders of the Preferred  Stock will, as a class, be entitled
to elect one GCI director.  Closing is expected to take place prior to April 30,
1999.

The  long-distance  services,  local access services,  cable services,  Internet
services  and  wireless   services   industries  are   experiencing   increasing
competition and rapid  technological  changes.  The Company's  future results of
operations  will  be  affected  by  its  ability  to  react  to  changes  in the
competitive  environment and by its ability to implement new  technologies.  The
Company is unable to determine how  competition,  technological  changes and its
net operating losses will affect its ability to obtain financing.

The Company  believes  that it will be able to meet its  current  and  long-term
liquidity and capital  requirements,  including fixed charges,  through its cash
flows from operating  activities,  existing cash, cash  equivalents,  short-term
investments, credit facilities, and other external financing and equity sources.

                          NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Accounting  Standards  Board issued SFAS No. 133,  "Accounting
for  Derivative   Instruments  and  Hedging  Activities,"  effective  for  years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards  requiring  that  every  derivative   instrument,   including  certain
derivative  instruments imbedded in other contracts,  be recorded in the balance
sheet as either an asset or liability  measured at its fair value.  SFAS No. 133
requires that changes in the derivative's fair value be recognized  currently in
earnings  unless  specific  hedge  criteria  are  met.  Special  accounting  for
qualifying hedges allow a derivative's gains or losses to offset related results
on the hedged item in the income  statement  and  requires  that a company  must
formally  document,  designate and assess the effectiveness of transactions that
receive hedge  accounting.  Management  of the Company  expects that adoption of
SFAS No.  133 will not have a material  impact on the  Company's  year-end  2000
financial statements.

In April 1998, the American  Institute of Certified Public  Accountants  (AICPA)
issued Statement of Position  ("SOP") 98-5,  "Reporting on the costs of Start-Up
Activities".  SOP 98-5 provides guidance on the financial  reporting of start-up
costs and  organization  costs and  requires  costs of start-up  activities  and
organization  costs  to be  expensed  as  incurred.  SOP 98-5 is  effective  for
financial  statements  for fiscal  years  beginning  after  December  15,  1998.
Management of the Company expects that the adoption of SOP 98-5 will result in a
one-time  expense of  approximately  $365,000  (net of income tax effect) in the
first  quarter of 1999  associated  with the write-off of  unamortized  start-up
costs.

                                 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 73% in 1999.

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.  Market prices for North Slope oil
declined  to below $10 per  barrel in 1998,  well  below the  average  price per
barrel  used by the  State of Alaska to budget  its oil  related  revenues.  Oil
companies and service providers have announced cost cutting measures to offset a
portion of the  declining  revenues.  Oil company and related oil 


                                       61
<PAGE>
field  service  company  layoffs  reportedly  will result in a reduction  of oil
industry jobs by at least 39 percent in 1999.

The effects of low oil prices will impact the state of Alaska's economy,  and is
expected  to  particularly  hurt  state and  local  government  and oil  service
companies.  As much as half of the  drilling  fleet that  worked on the slope in
1998 could be idle during 1999. Oil field service and drilling  contractors  cut
operating  costs to  adjust  for  decreasing  production  and  exploration.  The
Company,  as an outsourcing  services provider to the oil industry,  reduced its
outsourcing work force by 8 employees in February 1999.

Since oil  revenues to the state of Alaska are  expected  to fall  significantly
short of budgeted  revenues,  (estimated  at $1.04 billion for the coming budget
year),  the  Governor  of the state of Alaska has  announced  his  intention  to
implement  cost-cutting  and  revenue  enhancing  measures.  The State of Alaska
maintains  surplus  accounts that are intended to fund budgetary  shortfalls and
would be expected to fund a portion of the revenue shortfall.

BP Amoco  announced  in April  1999 its  intention  to  purchase  ARCO for $26.8
billion.  BP Amoco and ARCO together reportedly hold approximately 75 percent of
the  ownership  of the Alaska  North  Slope oil fields and in the  company  that
operates the Trans-Alaska  Pipeline System. Alaska law stipulates that no single
company can hold drilling leases to more than 500,000 onshore state-owned acres.

The BP Amoco-ARCO  combination  would control about 860,000  acres,  however the
companies  have  reportedly  said they will give up 360,000 acres to comply with
Alaska laws. Realignment of operations following the acquisition reportedly will
result in the layoff of 400 positions in Alaska.

No assurance  can be given that 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.  The
Company is not able to  predict  the  effect of  declines  in the price of North
Slope oil or the  acquisition of ARCO by BP Amoco on Alaska's  economy or on the
Company.  See Part I, Item 1.  Business,  Geographic  Concentration  and  Alaska
Economy.

                                   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 access services revenues
are not expected to exhibit  significant  seasonality.  The  Company's  Internet
access services are expected to reflect  seasonality trends similar to the cable
television segment. The Company's ability to implement  construction projects is
reduced  during the winter months because of cold  temperatures,  snow and short
daylight hours.

                                 YEAR 2000 COSTS

Many financial  information and operational systems in use today may not be able
to interpret  dates after  December 31, 1999 because such systems allow only two
digits to indicate the year in a date.  As a result,  such systems are unable to
distinguish  January  1, 2000 from  January 1, 1900,  which  could have  adverse
consequences  on the  operations of an entity and the  integrity of  information
processing.  This could result in a system  failure or  miscalculations  causing
disruptions  of  operations,  including,  among other  things,  a shut down in a
company's  operations,  a  temporary  inability  to process  transactions,  send
invoices or engage in similar normal business activities. This potential problem
is referred to as the "Year 2000" or "Y2K" issue.



                                       62
<PAGE>
State of readiness.  The Company has undertaken various  initiatives to evaluate
the Year  2000  readiness  of the  products  and  services  sold by the  Company
("Products"),   the  information   technology  systems  used  in  the  Company's
operations ("IT Systems"),  its non-IT systems, such as power to its facilities,
HVAC systems,  building security,  voice mail and other systems,  as well as the
readiness of its customers and suppliers.  The Company has identified eight Year
2000 target areas that cover the entire scope of the Company's  business and has
internally  established  teams  committed  to  completing  an 8-step  Compliance
Validation  Process ("CVP") for each target area. Each team is expected to fully
complete this process on or before September 1, 1999. The table below identifies
the Company's target areas as well as the 8-step CVP with its expected timeline.
Team activity is currently focused towards the process of completing Phase 2.

 <TABLE>
<CAPTION>
        ----------------------------------------------- ---------------------------------------------------------------------
                    Year 2000 Target Areas                               Compliance Validation Process
        ----------------------------------------------- ---------------------------------------------------------------------
        <S>                                             <C>                             <C>    
        1.   Business Computer Systems                         PHASE 1
        2.   Technical Infrastructure                   1. Team Formation               Completed 1st quarter 1997
        3.   End-User Computing                         2. Inventory Assessment         Completed 4th quarter 1998
        4.   Switching and Head-end Equipment           3. Compliance Assessment        Completed 4th quarter 1998
        5.   Logistics                                  4. Risk Assessment              Completed 4th quarter 1998
        6.   Facilities
        7.   Customers                                  ------------------------------- -------------------------------------
        8.   Suppliers/Key Service Providers                   PHASE 2
                                                        5. Resolution/Remediation       Expected completion 2nd quarter 1999
                                                        6. Validation                   Expected completion 3rd quarter 1999
                                                        7. Contingency Plan             Expected completion 3rd quarter 1999
                                                        8. Sign-Off Acceptance          Expected completion 4th quarter 1999
        ----------------------------------------------- ------------------------------- -------------------------------------
</TABLE>

In 1997,  the  Company  established  a  corporate-wide  Year 2000 task  force to
address  Y2K issues.  This effort is  comprehensive  and  encompasses  software,
hardware,  electronic data interchange,  networks,  PC's,  facilities,  embedded
chips,  century  certification,  supplier  and customer  readiness,  contingency
planning, and domestic and international operations. The Company is currently on
schedule and is more than 50% complete as of December 31, 1998.  The Company has
tested,  replaced or upgraded  most of its critical  business  applications  and
systems and has begun the century  testing phase for these  critical  technology
systems.  The target date to repair or replace the remaining  critical  business
information systems is June 30, 1999. The Company is assessing its telephone and
cable  systems  and  equipment  and the target date to  complete  equipment  and
facilities  efforts is also June 30,  1999.  The  Company  has  prioritized  its
third-party relationships as critical, severe or sustainable,  has completed the
assessment  phase for third parties  (except for assessment of its key customers
which is scheduled to be complete in March 1999),  has  requested a Y2K contract
warranty  in many new key  contracts  and is  developing  contingency  plans for
critical  third parties,  including key  customers,  suppliers and other service
providers.

With respect to the  Company's  relationships  with third  parties,  the Company
relies both domestically and internationally upon various vendors,  governmental
agencies,  utility companies,  telecommunications  service  companies,  delivery
service companies and other service providers.  Although these service providers
are outside the Company's control,  the Company has mailed letters to those with
whom it believes its  relationships  are material and has verbally  communicated
with some of its strategic customers to determine the extent to which interfaces
with such entities are  vulnerable to Year 2000 issues and whether  products and
services purchased from or by such entities are Year 2000 ready.

Over 400 companies have been contacted  directly by mail, by telephone,  through
on-site  visits or through  inquiry of their Y2K Internet web sites to determine
their state of readiness.  Responses vary from  confirmation  that the supply of
products or services provided to the Company will continue without  interruption
or delay  through  the year 2000,  to  providing  their  plans for making  their
products or service  


                                       63
<PAGE>
delivery  systems  Y2K  compliant.  The  Company  is  currently  evaluating  the
sufficiency  of the  responses  received from these third  parties.  The Company
intends to  complete  follow-up  activities,  including  but not limited to site
surveys,  phone  surveys  and  mailings,  with  significant  vendors and service
providers as part of the Phase 2 validation.

Costs to address year 2000 issues.  Costs  related to the Y2K issue are expensed
as incurred and are funded  through the Company's  operating  cash flows and its
credit  agreements.   Through  December  31,  1998,  the  Company  has  expensed
incremental  remediation costs totaling $1.1 million, with remaining incremental
remediation  costs  estimated at  approximately  $2.9 million.  Management  must
balance the requirements for funding  discretionary  capital  expenditures  with
required  year 2000  efforts  given its limited  resources.  The Company has not
deferred any critical  information  technology projects because of its Year 2000
program efforts,  which are being addressed  primarily  through a dedicated team
within the Company's information technology group.

Time and cost estimates are based on currently  available  information and could
be affected by the ability to correct all relevant computer codes and equipment,
and the Y2K readiness of the Company's business  partners,  among other factors.
At this time, the Company does not possess information necessary to estimate the
potential  financial  impact  of Year 2000  compliance  issues  relating  to its
vendors, customers and other third parties.

Risk of year 2000 issues.  If necessary  modifications  and  conversions  by the
Company  are not made on a timely  basis,  or if key third  parties  are not Y2K
ready,  Y2K  problems  could have a  material  adverse  effect on the  Company's
financial condition,  results of operations and liquidity.  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.

Although the Company  considers  them  unlikely,  the Company  believes that the
following several situations, not in any particular order, make up the Company's
most reasonably likely worst case Year 2000 scenarios:

     -    Disruption  of  electrical  power  supplies  resulting  from  extended
          regional  power   failure(s).   The  Company's   major  switching  and
          information  systems are  protected  by emergency  standby  electrical
          generators in the event of  short-term  power  outages.  If electrical
          supplies  from  regional  electric  utilities are disrupted for longer
          periods  of time,  the  Company  may be  required  to  power-down  its
          electronic switching,  head-end and computer equipment. The Company is
          closely  monitoring  electrical  utilities that provide service to the
          Company for their Year 2000 readiness. Based on their progress reports
          and completion of assessments, the Company believes that there will be
          no  significant  impact on its  operations  in the  major  communities
          served  by the  Company.  Many  of the  electrical  companies  serving
          smaller  rural   communities   employ  equipment  that  is  manual  or
          controlled  by  non   date-effecting   equipment,   however  they  may
          experience outages if they do not receive fuel from their suppliers.
     -    Disruption of a Significant  Customer's  Ability to Accept Products or
          Pay  Invoices.   The  Company's   significant   customers  are  large,
          well-informed customers,  mostly in the telecommunications and oil and
          gas industries,  who are disclosing  information to their vendors that
          indicates  they are well along the path toward  Year 2000  compliance.
          These  customers have  demonstrated  their  awareness of the Year 2000
          issue by issuing  requirements  of their  suppliers and indicating the
          stages of identification  and remediation which they consider adequate
          for progressive  calendar quarters leading up to the century mark. The
          Company's significant  customers,  moreover, are substantial companies
          that the Company  believes would be able to make  adjustments in their
          processes as required to cause timely payment of invoices.
     -    Disruption of Supplies and Materials.  In early 1998 the Company began
          an ongoing  process of surveying its vendors with regard to their Year
          2000  readiness and is now in the process of assessing and  cataloging
          their  responses  to the survey.  The Company is hopeful of  receiving
          adequate   responses   from  remaining   critical   vendors  and  many
          non-critical  vendors  within  the first  two  quarters  of 1999.  The
          Company  expects to work with vendors that show a need for  assistance
          or that provide inadequate  


                                       64
<PAGE>
          responses,  and in many cases  expects  that  survey  results  will be
          refined significantly by such work. Where ultimate survey results show
          that the need arises,  the Company  will  arrange for back-up  vendors
          before the  changeover  date.  Supplies and  materials  necessary  for
          invoicing  and  other  functions  will be  acquired  in bulk  prior to
          December  31,  1999 to provide an adequate  inventory  to bridge up to
          three months of vendor supply chain disruptions.
     -    Disruption of the Company's administrative and billing IT systems. The
          Company  is  proceeding  with  a  scheduled  upgrade  of  its  current
          financial  software  systems  to  state-of-the-art  systems  and  such
          process has required Year 2000  compliance in the various  invitations
          for proposals. Year 2000 testing is occurring as upgrades proceed and,
          in addition, will occur after all upgrades are completed at the end of
          the first  quarter of 1999.  The  Company's  billing  and  information
          systems continue to be assessed and remediated.  System processes have
          been   prioritized  so  that  critical   date-sensitive   systems  and
          functionality   are  remediated   first.   Non-critical   systems  and
          functionality are remediated following critical systems. The Company's
          efforts are  proceeding  on-target  and  on-budget.  Accordingly,  the
          Company  believes  that,  after  assessment  and  remediation,  if any
          disruptions do occur,  such will be dealt with promptly and will be no
          more  severe  with  respect to  correction  or impact than would be an
          unexpected billing or information system error.
     -    Disruption of the Company's Non-IT Systems.  The Company  continues to
          conduct a comprehensive  assessment of all non-IT  systems,  including
          among other things its switching and head-end  systems and operations,
          with respect to both embedded processors and obvious computer control.
          For some  systems,  upgrades are already  scheduled and it is expected
          that the Phase 1 assessments  will  highlight by the end of the second
          quarter of 1999 any further remediation needs.  Considering the nature
          of the equipment and systems  involved,  the Company  expects that the
          timing of  assessment  to be such that it will be able to complete any
          remediation  efforts on a reasonably  short schedule,  and in any case
          before arrival of the Year 2000. The Company also believes that, after
          such assessment and  remediation,  if any  disruptions do occur,  such
          will be dealt with promptly and will be no more severe with respect to
          correction  or  impact  than  would  be  an  unexpected  breakdown  of
          well-maintained equipment.
     -    De-Listing of Company as a Vendor to Certain Customers. Several of the
          Company's  principal  customers have required  updated  reports in the
          form of answers to extensive  multiple-choice surveys on the Company's
          Year 2000 compliance efforts. According to these customers, failure to
          reply  to the  readiness  survey  would  have led to  de-listing  as a
          service  supplier at the present time,  resulting in possible  current
          inability to bid on  procurements  requiring  service  delivery in the
          future.  The Company has responded to these reports on a timely basis.
          The Company  has not been  de-listed  as a supplier to any  customers.
          Several  significant  customers  have  scheduled  monitoring  meetings
          during 1999.

Contingency  plans.  The  Company  is in  the  process  of  developing  specific
contingency plans for potential Year 2000 disruptions. The aforementioned 8-step
Compliance  Validation  Process includes  contingency  planning by each team and
such plans, as developed, will be carefully reviewed by the Company. The Company
is developing contingency plans for its most critical areas, but details of such
plans will depend on the  Company's  final  assessment of the problem as well as
the evaluation and success of its remediation  efforts.  Future disclosures will
include contingency plans as they become available.

                             REGULATORY DEVELOPMENTS

See Part I, Item 1 Business.,  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.



                                       65
<PAGE>
Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The  Company's  Senior  Holdings  Loan  described  in  note 6 to  the  financial
statements as well as in Management's  Discussion and Analysis  carries interest
rate risk.  Amounts  borrowed under this Agreement 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.  Should the lenders' base rate or the leverage ratios change,  the
Company's interest expense will increase or decrease accordingly. As of December
31, 1998, the Company had borrowed $106.7 million subject to interest rate risk.
On this  amount,  a 1%  increase  in the  interest  rate would cost the  Company
$1,067,000 in additional gross interest cost on an annual basis.

The Company's Fiber Facility described in note 6 to the financial  statements as
well as in  Management's  Discussion  and Analysis  carries  interest rate risk.
Amounts  borrowed  under this Agreement bear interest at either Libor plus 3.0%,
or at the Company's  choice,  the lender's  prime rate plus 1.75%.  The interest
rate will decline to Libor plus  2.5%-2.75%,  or at the  Company's  choice,  the
lender's prime rate plus 1.25%-1.5%  after the project  completion date and when
the loan balance is  $60,000,000  or less.  Should the lenders' base rate or the
leverage ratios change, the Company's interest expense will increase or decrease
accordingly.  As of December 31, 1998,  the Company had borrowed  $61.2  million
subject to interest  rate risk.  On this  amount,  a 1% increase in the interest
rate would cost the Company  $612,000 in  additional  gross  interest cost on an
annual basis.

Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated  financial statements of the Company are filed under this Item,
beginning  on  Page  67.  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.

                                    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 .



                                       66
<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  as of  December  31, 1998 and 1997,  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,  1998.  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 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  as of  December  31,  1998  and  1997,  and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1998 in  conformity  with  generally  accepted  accounting
principles.



                                              /s/

                                              KPMG LLP

Anchorage, Alaska
March 26, 1999, except for notes 6 and 12, which are dated as of April 13, 1999



                                       67
<PAGE>
<TABLE>
                                            GCI, INC. AND SUBSIDIARIES
                                           Consolidated Balance Sheets
<CAPTION>
                                                                                          December 31,
                            ASSETS                                                      1998        1997
---------------------------------------------------------------------------------    ----------- -----------
                                                                                      (Amounts in thousands)
<S>                                                                                <C>               <C>
Current assets:
    Cash and cash equivalents                                                      $     12,008        3,048
                                                                                     ----------- -----------

    Receivables:
        Trade                                                                             38,890      29,599
        Income taxes (note 7)                                                              4,262       4,752
        Other                                                                                412         649
                                                                                     ----------- -----------
                                                                                          43,564      35,000
        Less allowance for doubtful receivables                                              887       1,070
                                                                                     ----------- -----------
           Net receivables                                                                42,677      33,930
                                                                                     ----------- -----------

    Prepaid and other current assets                                                       2,132       2,520
    Deferred income taxes, net (note 7)                                                    1,947       1,675
    Inventories                                                                            1,878       2,164
    Notes receivable (note 4)                                                                650         897
                                                                                     ----------- -----------

           Total current assets                                                           61,292      44,234
                                                                                     ----------- -----------

Restricted cash (note 11)                                                                    ---      39,406
                                                                                     ----------- -----------

Property and equipment in service, at cost (notes 6, 9, 10, and 11):
    Land and buildings                                                                     1,109         981
    Telephony distribution systems                                                       144,896     116,016
    Cable television distribution systems                                                 89,736      69,445
    Support equipment                                                                     42,056      32,596
    Transportation equipment                                                               2,183       2,643
    Property and equipment under capital leases                                            2,819       2,718
                                                                                     ----------- -----------
                                                                                         282,799     224,399
    Less accumulated depreciation                                                         82,972      58,406
                                                                                     ----------- -----------
        Net property and equipment in service                                            199,827     165,993
        Construction in progress                                                         119,645      18,513
                                                                                     ----------- -----------
           Net property and equipment                                                    319,472     184,506
                                                                                     ----------- -----------

Cable  franchise  agreements,  net of  amortization  of  $11,184  and  $6,022 at
   December 31, 1998 and 1997, respectively (note 2)                                     195,308     200,470
Other intangible assets, net of amortization (notes 2 and 5)                              45,874      46,064
Deferred loan and Senior Notes costs, net of amortization                                  9,877       9,379
Transponder deposit (note 11)                                                              9,100       9,100
Undersea fiber optic cable deposit (note 11)                                                 ---       9,094
Notes receivable (note 4)                                                                  1,432       1,331
Other assets, at cost, net of amortization                                                 4,329       1,718
                                                                                     ----------- -----------
           Total other assets                                                            265,352     277,156
                                                                                     ----------- -----------
           Total assets                                                            $     646,684     545,302
                                                                                     =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
                                                                     (Continued)


                                       68
<PAGE>
<TABLE>
                                           GCI, INC. AND SUBSIDIARIES
                                          Consolidated Balance Sheets
                                                  (Continued)
<CAPTION>
                                                                                           December 31,
             LIABILITIES AND STOCKHOLDERS' EQUITY                                       1998         1997
---------------------------------------------------------------------------------    ----------- -----------
                                                                                      (Amounts in Thousands)
<S>                                                                                <C>               <C>
Current liabilities:
    Current maturities of long-term debt (note 6)                                  $       1,799       1,634
    Current maturities of obligations under capital leases (notes 10
       and 11)                                                                               511         198
    Accounts payable                                                                      27,550      24,965
    Accrued interest                                                                       8,072       7,649
    Accrued payroll and payroll related obligations                                        6,555       5,680
    Accrued liabilities                                                                    3,197       5,111
    Subscriber deposits and deferred revenues                                              5,300       3,898
    Accrued income taxes (note 7)                                                            ---         111
                                                                                     ----------- -----------
        Total current liabilities                                                         52,984      49,246

Long-term debt, excluding current maturities (note 6)                                    349,858     248,450
Obligations under capital leases, excluding
   current maturities (note 11)                                                            1,189         400
Obligations under capital leases due to related party, excluding
    current maturities (notes 10 and 11)                                                     486         590
Deferred income taxes, net of deferred income tax benefit (note 7)                        38,275      38,904
Other liabilities                                                                          3,317       3,273
                                                                                     ----------- -----------
        Total liabilities                                                                446,109     340,863
                                                                                     ----------- -----------

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, 1998 and 1997, respectively                             206,622     206,622

    Paid-in capital                                                                        2,933         ---
    Retained deficit                                                                     (8,980)     (2,183)
                                                                                     ----------- -----------

        Total stockholders' equity                                                       200,575     204,439
                                                                                     ----------- -----------
        Commitments and contingencies (notes 10, 11 and 12)
        Total liabilities and stockholders' equity                                 $     646,684     545,302
                                                                                     =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.


                                       69
<PAGE>
<TABLE>
                                                   GCI, INC. AND SUBSIDIARIES
                                              Consolidated Statements of Operations
                                          Years ended December 31, 1998, 1997 and 1996
<CAPTION>

                                                                                 GCI, Inc.                    GCI
                                                                       ------------------------------     -------------
                                                                           1998              1997             1996
                                                                       -------------     ------------     -------------
                                                                        (Amounts in thousands except per share amounts)
<S>                                                                  <C>                    <C>               <C> 
Revenues (notes 9 and 10)                                            $     246,795          223,809           164,894

Cost of sales and services                                                 116,073          111,077            92,664
Selling, general and administrative expenses                                89,833           73,583            46,412
Depreciation and amortization expense (note 9)                              32,045           23,767             9,409
                                                                       -------------     ------------     -------------

        Operating income (note 9)                                            8,844           15,382            16,409

Interest expense, net (notes 3 and 6)                                       19,764           17,617             3,719
                                                                       -------------     ------------     -------------

        Net earnings (loss) before income taxes and
          extraordinary item                                               (10,920)          (2,235)           12,690

Income tax expense (benefit) (notes 3 and 7)                                (4,123)            (573)            5,228
                                                                       -------------     ------------     -------------

        Net earnings (loss) before extraordinary loss on early
          extinguishment of debt                                            (6,797)          (1,662)            7,462

        Loss on early extinguishment of debt, net of income tax
          benefit of $180 (note 6)                                             ---              521               ---
                                                                       -------------     ------------     -------------

        Net earnings (loss)                                          $      (6,797)          (2,183)            7,462
                                                                       =============     ============     =============

Basic earnings (loss) per common share:
    Net earnings (loss) before extraordinary loss                    $     (67,970)         (16,620)           74,620
    Extraordinary loss                                                         ---           (5,210)              ---
                                                                       -------------     ------------     -------------
        Net earnings (loss)                                          $     (67,970)         (21,830)           74,620
                                                                       =============     ============     =============

Diluted earnings (loss) per common share:
    Net earnings (loss) before extraordinary loss                    $     (67,970)         (16,620)           74,620
    Extraordinary loss                                                         ---           (5,210)              ---
                                                                       -------------     ------------     -------------
        Net earnings (loss)                                          $     (67,970)         (21,830)           74,620
                                                                       =============     ============     =============
</TABLE>
See accompanying notes to consolidated financial statements.


                                       70
<PAGE>
<TABLE>
                                                   GCI, INC. AND SUBSIDIARIES
                                        Consolidated Statements of Stockholders' Equity
                                          Years ended December 31, 1998, 1997 and 1996
<CAPTION>
                                                                                                      Class A
                                                                 Shares of        Class A    Class B  Shares            Retained
                                                                 Common Stock     Common     Common   Held in   Paid-in Earnings
(Amounts in thousands)                                         Class A  Class B   Stock      Stock    Treasury  Capital (Deficit)
                                                             --------------------------------------------------------------------
<S>                                                              <C>    <C>     <C>          <C>     <C>        <C>     <C>
General Communication, Inc. 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 shares                          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       ---
                                                             --------------------------------------------------------------------

General Communication, Inc. balances at December 31, 1996        36,587 4,074   $113,421     3,432   (1,010)    4,229    29,482
                                                             ====================================================================

GCI, Inc. balances at December 31, 1996                             ---   ---   $    ---       ---       ---      ---       ---
Net loss                                                            ---   ---        ---       ---       ---      ---   (2,183)
Shares issued to General Communication, Inc.                        100   ---    206,622       ---       ---      ---       ---
                                                             --------------------------------------------------------------------

GCI, Inc. balances at December 31, 1997                             100   ---    206,622       ---       ---      ---   (2,183)

Net loss                                                            ---   ---        ---       ---       ---      ---   (6,797)
Contribution from General Communication, Inc.                       ---   ---        ---       ---       ---    2,933       ---
                                                             --------------------------------------------------------------------

Balances at December 31, 1998                                       100   ---   $206,622       ---       ---    2,933   (8,980)
                                                             ====================================================================
</TABLE>

See accompanying notes to consolidated financial statements.



                                       71
<PAGE>
<TABLE>
                                                  GCI, INC. AND SUBSIDIARIES
                                            Consolidated Statements of Cash Flows
                                         Years ended December 31, 1998, 1997 and 1996
<CAPTION>
                                                                                        GCI, Inc.                  GCI
                                                                            ------------------------------    -------------
                                                                                   1998            1997             1996
                                                                                   ----            ----             ----
<S>                                                                       <C>                    <C>              <C> 
Cash flows from operating activities:
    Net earnings (loss)                                                   $        (6,797)         (2,183)           7,462
    Adjustments to reconcile net earnings (loss) to net cash provided by
       operating activities:
        Depreciation and amortization                                              32,045          23,767            9,409
        Deferred income tax (benefit) expense                                        (744)          4,410            2,252
        Employee Stock Purchase Plan expense funded with GCI stock                  1,574             ---              ---
        Deferred compensation and compensatory stock options                          376             477              507
        Disposals of property and equipment                                            62              71               30
        Loss on early extinguishment of debt                                          ---             701              ---
        Bad debt expense (recovery), net of write-offs                               (183)            473              (34)
        Other noncash income and expense items                                         92            (125)             (42)
        Change in operating assets and liabilities (note 3)                        (4,643)          3,202            2,724
                                                                            -------------    -------------    -------------
           Net cash provided by operating activities                               21,782          30,793           22,308
                                                                            -------------    -------------    -------------
Cash flows from investing activities:
    Acquisitions of businesses, net of cash acquired (notes 2 and 3)                  ---            (547)         (72,818)
    Purchases of property and equipment, including construction period
       interest                                                                  (148,973)        (64,644)         (38,642)
    Restricted cash investment                                                     39,406         (39,406)             ---
    Purchases of other assets and intangible assets                                (3,708)         (1,292)         (10,959)
    Payment of undersea fiber optic cable deposit                                     ---          (9,094)             ---
    Notes receivable issued                                                        (1,715)           (698)            (515)
    Payments received on notes receivable                                           1,769              32              288
                                                                            -------------    -------------    -------------
           Net cash used in investing activities                                 (113,221)       (115,649)        (122,646)
                                                                            -------------    -------------    -------------
Cash flows from financing activities:
    Long-term borrowings - senior notes                                               ---         180,000              ---
    Long-term borrowings - bank debt                                              103,224          88,305          208,000
    Repayments of long-term borrowings and capital lease obligations               (2,017)       (231,021)          (5,039)
    Retirement of bank debt assumed                                                   ---             ---         (105,200)
    Capital contribution from GCI                                                     883          47,027              ---
    Proceeds from common stock issuance                                               ---             ---           13,231
    Payment of debt and stock issuance costs                                       (1,691)         (9,756)            (701)
    Purchase of treasury stock                                                        ---             ---             (621)
                                                                            -------------    -------------    -------------
           Net cash provided by financing activities                              100,399          74,555          109,670
                                                                            -------------    -------------    -------------
           Net increase (decrease) in cash and cash equivalents                     8,960         (10,301)           9,332

           Cash and cash equivalents at beginning of year                           3,048          13,349            4,017
                                                                            -------------    -------------    -------------

           Cash and cash equivalents at end of year                       $        12,008           3,048           13,349
                                                                            =============    =============    =============
</TABLE>
 See accompanying notes to consolidated financial statements.



                                       72
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


(l)     Organization and Summary of Significant Accounting Principles

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

       (a)     Organization and Business
               GCI, Inc. and its direct and indirect subsidiaries (collectively,
               the "Company")  offer  long-distance  telephone  service  between
               Anchorage, Fairbanks, Juneau, and other communities in Alaska and
               the  remaining  United  States  and  foreign   countries.   Cable
               television   services   are   offered   throughout   Alaska   and
               facilities-based competitive local access services are offered in
               Anchorage,  Alaska.  The  Company  provides  services  to certain
               common  carriers  terminating  traffic in Alaska,  interstate and
               intrastate  private line  services,  Internet  services,  managed
               services to certain  commercial  customers and sells and services
               dedicated  communications systems and related equipment.  Private
               network  point-to-point  data  and  voice  transmission  services
               between Alaska,  Hawaii and the western  contiguous United States
               are  offered  and the  Company  owns and leases  capacity  on two
               undersea  fiber  optic  cables  used  in  the   transmission   of
               interstate  private  line,  switched  message  long-distance  and
               Internet  services between Alaska and the remaining United States
               and foreign countries.

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

        (c)    Earnings (Loss) Per Common Share
<TABLE>
               The Company follows the provisions of SFAS No. 128, "Earnings per
               Share." Basic earnings (loss) per share is calculated by dividing
               income (loss)  available to common  shareholders  by the weighted
               average  common  shares  outstanding.  Diluted EPS  includes  the
               effect of all potentially  dilutive  securities,  such as options
               and  convertible   preferred  stock.  Shares  used  to  calculate
               earnings  (loss) per share consist of the  following  (amounts in
               thousands):
<CAPTION>
                                                                             1998           1997           1996
                                                                          -----------    ----------    ----------
                 <S>                                                          <C>            <C>            <C>
                 Weighted average common shares outstanding                   100            100            100
                 Common equivalent shares outstanding                         ---            ---            ---
                                                                          -----------    ----------    ----------
                                                                              100            100            100
                                                                          ===========    ==========    ==========
</TABLE>



                                       73                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


               1998 and 1997 basic and diluted loss per share  calculations  are
               based on GCI,  Inc.'s  weighted  average  outstanding  shares  of
               common  stock which are not  publicly  traded.  Basic and diluted
               earnings per share in 1996 have been  restated  giving  effect to
               GCI,  Inc.'s  1997  incorporation  and  capitalization  using its
               weighted average  outstanding  shares of common stock.  GCI, Inc.
               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 either  the  first-in,  first-out
               method or the specific  identification  method for equipment held
               for resale.

        (f)    Property and Equipment
               Telecommunications Property and Equipment
               Telecommunications  property  and  equipment  is  stated at cost.
               Construction  costs  of  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 telecommunications
               distribution  systems and support equipment not placed in service
               on December 31, 1998;  management intends to place this equipment
               in service during 1999.

               Telecommunications   equipment  depreciation  is  computed  on  a
               straight-line  basis  based  upon the  shorter  of the  estimated
               useful  lives of the  assets or the lease  term,  if  applicable,
               ranging  from 5 to 24  years  for  buildings,  telecommunications
               distribution  equipment  (including switches and earth stations),
               support  equipment,  transportation  equipment  and  property and
               equipment  under  capital  lease.  Maintenance  and  repairs  are
               charged to expense as incurred.  Expenditures  for major renewals
               and betterments 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 on a straight-line
               basis over the estimated  useful lives of the assets ranging from
               5  to  10  years  for  cable  distribution  facilities,  head-end
               systems,   converters,   support  equipment  and   transportation
               equipment.  Maintenance  and  repairs  are  charged to expense as
               incurred.  Expenditures  for major renewals and  betterments  are
               capitalized.  Gains  or  losses  are  recognized  at the  time of
               ordinary retirements, sales or other dispositions of property.

        (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   which  might  indicate   diminished   value.  The
               assessment  of the  recoverability  is based on whether the asset
               can be recovered through undiscounted future cash flows.

               Cable franchise  agreements represent certain perpetual operating
               rights to provide  cable  services  and are being  amortized on a
               straight-line basis over 40 years.

               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.



                                       74                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


               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
               and related  financing  costs 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. Amortization
               of issuance  costs for the Alaska United Fiber Facility (see note
               6)  are  charged  to   Construction   in   Progress   during  the
               construction  period of the undersea  fiber optic cable (see note
               11).

        (i)    Other Assets
               Other  assets  are  recorded  at  cost  and  are  amortized  on a
               straight-line basis over periods of 2-10 years.

        (j)    Revenue from Services and Products
               Revenues  generated  from  long-distance  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,    Internet    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
               $5,028,000,  $2,897,000  and $2,411,000 for the years ended 1998,
               1997 and 1996, respectively.

        (l)    Interest Expense
               Interest  costs  incurred  during  the  construction   period  of
               significant  capital  projects are  capitalized.  Interest  costs
               capitalized by the Company totaled  $7,764,000,  $1,886,000,  and
               $1,034,000  during the years ended  December 31,  1998,  1997 and
               1996.

        (m)    Income Taxes
               Income  taxes are  accounted  for  using the asset and  liability
               method.  Deferred tax assets and  liabilities  are recognized for
               their future tax consequences attributable to differences 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  


                                       75                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


               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  and  cash
               equivalents and accounts  receivable.  Excess cash is invested in
               high quality short-term liquid money instruments issued by highly
               rated financial institutions. At December 31, 1998, substantially
               all of the Company's cash and cash  equivalents  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  resources  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 deposit requirements by certain product lines.

        (q)    Fair Value of Financial Instruments
               SFAS  No.  107,   "Disclosures  about  Fair  Value  of  Financial
               Instruments,"  requires disclosure of the fair value of financial
               instruments  for which it is  practicable to estimate that value.
               SFAS  No.  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,
               1998 and 1997 for the Company's  financial assets and liabilities
               approximate their fair values.

        (r)    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.

        (s)    New Accounting Pronouncements
               In June 1998, the Accounting Standards Board issued SFAS No. 133,
               "Accounting for Derivative  Instruments and Hedging  Activities,"
               effective for years  beginning  after June 15, 1999. SFAS No. 133
               establishes  accounting  and reporting  standards  requiring that
               every  derivative   instrument,   including  certain   derivative
               instruments  imbedded  in other  contracts,  be  recorded  in the
               balance  sheet as either an asset or  liability  measured  at its
               fair  value.   SFAS  No.  133   requires   that  changes  in  the
               derivative's  fair  


                                       76                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


               value be recognized  currently in earnings  unless specific hedge
               criteria are met. Special  accounting for qualifying hedges allow
               a derivative's  gains or losses to offset related  results on the
               hedged item in the income  statement  and requires that a company
               must formally document, designate and assess the effectiveness of
               transactions  that receive  hedge  accounting.  Management of the
               Company  expects  that  adoption  of SFAS No. 133 will not have a
               material   impact  on  the  Company's   year-end  2000  financial
               statements.

               In  April  1998,  the  American  Institute  of  Certified  Public
               Accountants  (AICPA) issued  Statement of Position  ("SOP") 98-5,
               "Reporting  on  the  costs  of  Start-Up  Activities".  SOP  98-5
               provides  guidance on the financial  reporting of start-up  costs
               and organization costs and requires costs of start-up  activities
               and  organization  costs to be expensed as incurred.  SOP 98-5 is
               effective for  financial  statements  for fiscal years  beginning
               after December 15, 1998.  Management of the Company  expects that
               the  adoption  of SOP 98-5 will  result in a one-time  expense of
               approximately  $365,000  (net of income tax  effect) in the first
               quarter of 1999  associated  with the  write-off  of  unamortized
               start-up costs.

        (t)    Year 2000 Costs
               The Company  charges  incremental  Y2K assessment and remediation
               costs to expense as incurred.

        (u)    Reclassifications
               Reclassifications  have been made to the 1996 and 1997  financial
               statements to make them comparable with the 1998 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 was obtained through
        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 (now MCI WorldCom) 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  franchise
        agreements and approximately $42.4 was allocated to goodwill.

        Various tax  attributes of the Cable Systems 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.

        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.



                                       77                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial 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
<TABLE>
        Changes in  operating  assets and  liabilities  consist of  (amounts  in
        thousands):
<CAPTION>
                                                                              GCI, Inc.                   GCI
                                                                     ----------------------------    -------------
          Year ended December 31,                                        1998            1997            1996
                                                                     ------------    ------------    -------------
          <S>                                                      <C>                    <C>              <C>
          (Increase) in accounts receivable                        $      (9,054)         (1,540)          (4,738)
          (Increase) decrease in income tax receivable                       490          (3,726)          (1,026)
          (Increase) decrease in prepaid and other current assets            388            (274)            (467)
          (Increase) decrease in inventories                                 286            (575)             412
          Increase in accounts payable                                     2,585           1,050            5,517
          Increase (decrease) in accrued liabilities                      (1,914)            938              914
          Increase in accrued payroll and payroll related
              obligations                                                    875           1,850            1,723
          Increase (decrease) in accrued income taxes                       (111)            111             (547)
          Increase in accrued interest                                       423           4,941            2,188
          Increase (decrease) in subscriber deposits and
              deferred revenues                                            1,402             449               (4)
           (Decrease) in components of other liabilities                     (13)            (22)          (1,248)
                                                                     ------------    ------------    -------------

                                                                   $      (4,643)          3,202            2,724
                                                                     ============    ============    =============
</TABLE>
<TABLE>
        Acquisitions of businesses, net of cash acquired consists of (amounts in
        thousands):
<CAPTION>
                                                                                       GCI, Inc.          GCI
                                                                                     ----------------------------
          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                                ---         (110,538)
          Common stock issued to sellers                                                   ---          (86,710)
          Convertible, subordinated debt issued to sellers                                 ---          (10,000)
          Net deferred income tax liability                                                ---          (24,375)
          Deferred credit                                                                 (712)             ---
                                                                                     ------------    ------------
              Net cash used to acquire businesses                                  $       547           72,818
                                                                                     ============    ============
          -----------------
          No acquisitions occurred in 1998.
</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 the Company's Class A common stock.



                                       78                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        Net income tax refunds received totaled $4,243,000 and $1,546,000 during
        the years  ended  1998 and 1997,  respectively,  and  income  taxes paid
        totaled $4,361,000 during the year ended 1996.

        Interest  paid  totaled  approximately   $29,630,000,   $17,709,000  and
        $4,572,000 during the years ended 1998, 1997 and 1996, respectively.

        The Company  recorded  $157,000,  $65,000 and $187,000  during the years
        ended  1998,  1997  and  1996,  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.

        During the year ended  December 31, 1998 the Company funded the employer
        matching  portion of  Employee  Stock  Purchase  Plan  contributions  by
        issuing GCI Class A Common Stock valued at $1,574,000.

 (4)    Notes Receivable
<TABLE>
        Notes receivable consist of the following (amounts in thousands):
<CAPTION>
                                                                                              December 31,
                                                                                      ---------------------------
                                                                                          1998           1997
                                                                                      ---------------------------
           <S>                                                                      <C>                   <C>
           Note receivable from officer bearing interest at the rate paid by the
              Company on its senior indebtedness, unsecured, due on November 1,
              2002                                                                  $         600           ---
           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
           Note receivable from officer bearing interest at the rate paid by the
              Company on its senior indebtedness, partially secured by GCI Class
              A and Class B common stock, due on December 31, 2001                            350           ---
           Note receivable from officer bearing interest at 10%, secured by
              Company stock; due in full on August 26, 2004                                   224           224
           Notes receivable from officers and others bearing interest up to 10%
              or at the rate paid by the  Company  on its  senior  indebtedness,
              unsecured  and secured by Company  common  stock,  shares of other
              common stock, property and equipment; due through August 26, 2004             1,289         1,155
           Interest receivable                                                                256           349
                                                                                      ---------------------------
               Total notes receivable                                                       2,719         2,228
               Less notes receivable issued upon stock option exercise,
                 classified as a component of stockholders' equity                            637           ---
               Less current portion, including current interest receivable                    650           897
                                                                                      ---------------------------

               Long-term portion, including long-term interest receivable           $       1,432         1,331
                                                                                      ===========================
</TABLE>


                                       79                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


(5)     Other Intangible Assets
<TABLE>
        Other intangible assets consist of the following (amounts in thousands):
<CAPTION>
                                                                                        December 31,
                                                                               -----------------------------
                                                                                     1998           1997
                                                                               -----------------------------
              <S>                                                            <C>                    <C>
              Goodwill                                                       $       45,954         45,922
              PCS license and related costs                                           2,196          2,051
              Other intangibles                                                       1,181            260
                                                                               -----------------------------
                                                                                     49,331         48,233
              Less accumulated amortization                                           3,457          2,169
                                                                               -----------------------------
                  Other intangible assets, net of amortization               $       45,874         46,064  
                                                                               =============================
</TABLE>
(6)     Long-term Debt
<TABLE>
        Long-term debt consists of the following (amounts in thousands):

                                                                                        December 31,
                                                                                ----------------------------
                                                                                     1998           1997
                                                                                ----------------------------
              <S>                                                            <C>                   <C>
              Senior notes (a)                                               $      180,000        180,000   
              Senior Holdings Loan (b)                                              106,700         64,700
              Fiber Facility (c)                                                     61,224            ---
              Undersea Fiber and Equipment Loan Agreement (d)                         3,733          5,384
                                                                                ----------------------------
                                                                                    351,657        250,084
              Less current maturities                                                 1,799          1,634
                                                                                ----------------------------
              Long-term debt, excluding current maturities                   $      349,858        248,450 
                                                                                ============================
</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 of $5,576,000 are being  amortized to amortization
               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   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 year ending
               December 31, 1998. The Senior Notes are unsecured  obligations of
               the Company.

               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 notes 6 (c) and 11).

        (b)    The  Company,   through   Holdings,   entered  into  $200,000,000
               ($150,000,000  as  amended)  and  $50,000,000  credit  facilities
               ("Senior  Holdings Loan") effective August 1, 1997 that mature on
               June 30, 2005. The Senior  Holdings Loan  facilities,  as amended
               effective  April 13,  1999,  bears  interest at either 


                                       80                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


               Libor plus 1.00% to 2.50%,  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  0.00% to  1.375%,
               depending  on the  leverage  ratio of Holdings and certain of its
               subsidiaries.   Borrowings   under  the  Senior   Holdings   Loan
               facilities  totaled  $106,700,000 and $64,700,000 at December 31,
               1998 and 1997,  respectively.  The  Company is  required to pay a
               commitment  fee equal to 0.50% per annum on the unused portion of
               the  commitment.  Commitment  fee expense on the Senior  Holdings
               Loan  totaled  $512,000  and  $240,000  during  the  years  ended
               December 31, 1998 and 1997, respectively.
<TABLE>
               While  Holdings  may elect at any time to reduce  amounts due and
               available under the Senior Holdings Loan facilities,  a mandatory
               prepayment is required each quarter if the outstanding borrowings
               at the following dates of payment exceed the allowable borrowings
               using the following percentages:
<CAPTION>
                                                                              Percentage of
                                                                               Reduction of
                                                                               Outstanding
                             Date Range of Quarterly Payments                   Facilities
                  -------------------------------------------------------- -------------------
                  <S>                                                            <C> 
                  September 30, 2000 through December 31, 2001                   3.750%
                  March 31, 2002 through December 31, 2003                       5.000%
                  March 31, 2004 through December 31, 2004                       5.625%
                  March 31, 2005                                                 7.500%
                  July 31, 2005                                                  7.500% and all remaining outstanding
                                                                                 balances
</TABLE>
               The  facilities  contain,   among  others,   covenants  requiring
               maintenance  of  specific   levels  of  operating  cash  flow  to
               indebtedness  and  to  interest   expense,   and  limitations  on
               acquisitions and additional indebtedness. The facilities 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.  The amended
               facilities  require that Holdings receive $20 million in proceeds
               from a GCI  preferred  stock  issuance  by May 31, 1999 (see note
               12).  Holdings was in  compliance  with all Senior  Holdings Loan
               facilities covenants during the year ended December 31, 1998.

               The  Senior  Holdings  Loan  facilities  are   collateralized  by
               essentially  all of  Holdings'  assets  as  well as a  pledge  of
               Holdings' stock by GCI, Inc.

               $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.

               In  connection  with the  funding  of the  Senior  Holdings  Loan
               facilities,  Holdings  paid  bank  fees  and  other  expenses  of
               approximately   $2,972,000,   which   is   being   amortized   to
               amortization expense over the life of the agreement.

               In  connection  with the April 13,  1999  amendment,  the Company
               agreed to pay all fees and expenses of its lenders,  including an
               amendment fee of 0.25% of the aggregate commitment.

        (c)    On January 27, 1998, the Company, through Alaska United, closed a
               $75,000,000   project  finance  facility  ("Fiber  Facility")  to
               construct  a  fiber  optic  cable  system  connecting  Anchorage,
               Fairbanks,  


                                       81                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


               Valdez, Whittier, Juneau and Seattle as further described in note
               11.  Borrowings under the Fiber Facility  totaled  $61,224,000 at
               December 31, 1998. The Fiber Facility  provides up to $75 million
               in construction financing and bears interest at either Libor plus
               3.0%, or at the Company's  choice,  the lender's  prime rate plus
               1.75%.  The interest rate will decline to Libor plus  2.5%-2.75%,
               or  at  the  Company's  choice,  the  lender's  prime  rate  plus
               1.25%-1.5%   when  the  loan  balance  is  $60,000,000  or  less.
               Borrowings  under  the  Fiber  Facility  totaled  $61,224,000  at
               December 31, 1998.  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,  and 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 and
               interest and principal installments. Additional covenants pertain
               to  the  timely   completion  of  certain  project   construction
               milestones.  The Fiber  Facility also  contains a guarantee  that
               requires,  among  other  terms  and  conditions,   Alaska  United
               complete the project by the  completion  date (April 1, 1999) and
               pay any non-budgeted  costs of the project.  Alaska United was in
               compliance  with  all  covenants  during  the  period  commencing
               January 27, 1998 (date of the Fiber  Facility)  through  December
               31, 1998.

               All of  Alaska  United's  assets,  as  well  as a  pledge  of the
               partnership  interests'  owning Alaska United,  collateralize the
               Fiber Facility.

               In  connection  with the  funding of the Fiber  Facility,  Alaska
               United paid bank fees and other expenses of $2,019,000  which are
               being   amortized  to   Construction   in  Progress   during  the
               construction  period of the undersea fiber optic cable.  When the
               fiber optic cable is place in service the issuance  costs will be
               amortized to amortization expense over the life of the agreement.

        (d)    On December 31, 1992,  Leasing Company entered into a $12,000,000
               loan agreement  ("Undersea Fiber and Equipment 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 (now MCI  WorldCom),  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  less  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 as a second position security interest
               in the assets of Leasing Company.

        (e)    GCI Cable entered into a credit  facility  totaling  $205,000,000
               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



                                       82                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


               expenses (net of income tax benefit of $180,000)  was  recognized
               as an extraordinary  loss on the early  extinguishment of debt in
               1997.

        (f)    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)).

        (g)    GCI 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 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 former note
               holders received 1,538,457 shares of GCI Class A common stock.

         (h)   As  consideration  for MCI's (now MCI WorldCom)  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  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.
<TABLE>
        As of December 31, 1998  maturities  of  long-term  debt were as follows
        (amounts in thousands):
<CAPTION>
                  Year ending December 31,
                  <S>                                  <C> 
                  1999                                 $        1,799
                  2000                                          1,934
                  2001                                            ---
                  2002                                            ---
                  2003                                         12,950
                  2004 and thereafter                         334,974
                                                         --------------
                                                       $      351,657
                                                         ==============
</TABLE>


                                       83                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


(7)     Income Taxes
<TABLE>
        Total income tax expense (benefit) was allocated as follows:
<CAPTION>
                                                                                   GCI, Inc.            GCI
                                                                             ---------------------- ----------
                                                                                        Years ended
                                                                                        December 31,
                                                                             ---------------------------------
                                                                                1998        1997        1996
                                                                             ---------- ----------- ----------
                                                                                   (Amounts in thousands)
                  <S>                                                        <C>              <C>       <C> 

                  Earnings (loss) from continuing operations                 $  (4,123)       (573)     5,228
                  Extraordinary item                                              ---         (180)       ---
                                                                             ---------- ----------- ----------
                                                                                (4,123)       (753)     5,228
                  Stockholders'  equity, for stock option  compensation  
                     expense for tax  purposes  in  excess  of  amounts  
                     recognized  for financial reporting purposes                 (157)        (65)      (187)
                                                                             ---------- ----------- ----------

                                                                             $  (4,280)       (818)     5,041
                                                                             ========== =========== ==========
</TABLE>
<TABLE>
        Income tax expense (benefit) consists of the following:
<CAPTION>

                                                                                  GCI, Inc.            GCI
                                                                             ---------------------- ----------
                                                                                        Years ended
                                                                                        December 31,
                                                                             ---------------------------------
                                                                                1998        1997        1996
                                                                             ---------- ----------- ----------
                                                                                   (Amounts in thousands)
                  <S>                                                        <C>            <C>         <C> 
                  Current tax expense (benefit):
                      Federal taxes                                          $  (2,858)     (4,333)     2,292
                      State taxes                                                 (521)       (830)       684
                                                                             ---------- ----------- ----------
                                                                                (3,379)     (5,163)     2,976
                                                                             ---------- ----------- ----------

                  Deferred tax expense (benefit):
                      Federal taxes                                               (629)      3,800      1,734
                      State taxes                                                 (115)        610        518
                                                                             ---------- ----------- ----------
                                                                                  (744)      4,410      2,252
                                                                             ---------- ----------- ----------

                                                                             $  (4,123)       (753)     5,228
                                                                             ========== =========== ==========
</TABLE>


                                       84                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


<TABLE>
        Total income tax expense  (benefit)  differed from the "expected" income
        tax expense  (benefit)  determined  by applying  the  statutory  federal
        income tax rate of 34% as follows:
<CAPTION>

                                                                                  GCI, Inc.            GCI
                                                                             ---------------------- ----------
                                                                                        Years ended
                                                                                        December 31,
                                                                             ---------------------------------
                                                                                1998        1997        1996
                                                                             ---------- ----------- ----------
                                                                                   (Amounts in thousands)
                  <S>                                                        <C>              <C>       <C> 

                  "Expected" statutory tax expense (benefit)                 $  (3,713)       (997)     4,314
                  State income taxes, net of federal benefit                      (594)       (181)       793
                  Income tax effect of goodwill amortization, nondeductible
                     expenditures and other items, net                             441         107         55
                  Change in valuation allowance                                    ---         ---       (225)
                  Other                                                           (257)        318        291
                                                                             ------------- -------- ----------

                                                                             $  (4,123)       (753)     5,228
                                                                             ============= ======== ==========
</TABLE>
<TABLE>
        The tax effects of temporary  differences  that give rise to significant
        portions of the  deferred tax assets and  deferred  tax  liabilities  at
        December 31, 1998 and 1997 are presented below.
<CAPTION>
                                                                                        December 31,
                                                                                  --------------------------
                                                                                      1998         1997
                                                                                  --------------------------
                                                                                     (Amounts in thousands)
                  <S>                                                           <C>                   <C> 
                  Net current deferred tax assets:
                      Accounts receivable, principally due to allowance for
                         doubtful accounts                                      $          354          430
                      Compensated absences, accrued for financial reporting
                         purposes                                                          804          566
                      Workers compensation and self insurance health
                         reserves, principally due to accrual for financial
                         reporting purposes                                                244          266
                      Other                                                                545          413
                                                                                  --------------------------
                          Total gross current deferred tax assets                        1,947        1,675
                          Less valuation allowance                                         ---          ---
                                                                                  --------------------------

                             Net current deferred tax assets                    $        1,947        1,675
                                                                                  ==========================
</TABLE>


                                       85                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                  --------------------------
                                                                                      1998         1997
                                                                                  --------------------------
                                                                                     (Amounts in thousands)
                  <S>                                                           <C>                  <C> 

                  Net long-term deferred tax assets:
                      Net operating loss carryforwards                          $       20,871       15,378
                      Alternative minimum tax credits                                    2,081          751
                      Deferred compensation expense for financial reporting
                         purposes in excess of amounts recognized for tax
                         purposes                                                        1,027          966
                      Employee stock option compensation expense for
                         financial reporting purposes in excess of amounts
                         recognized for tax purposes                                       327          198
                      Sweepstakes award in excess of amounts recognized for
                         tax purposes                                                      201          206
                      Other                                                                 99           75
                                                                                  --------------------------
                          Total long-term deferred tax assets                           24,606       17,574
                                                                                  --------------------------

                  Net long-term deferred tax liabilities:
                      Plant and equipment, principally due to differences in
                         depreciation                                                   56,244       51,643
                      Amortizable assets                                                 4,784        3,898
                      Costs recognized for tax purposes in excess of amounts
                         recognized for book purposes                                    1,319          ---
                      Other                                                                534          937
                                                                                  --------------------------
                          Total gross long-term deferred tax liabilities                62,881       56,478
                                                                                  --------------------------
                             Net combined long-term deferred tax liabilities
                                                                                $       38,275       38,904
                                                                                  ==========================
</TABLE>
        In conjunction  with the 1996 Cable Companies  acquisition,  the Company
        incurred  a net  deferred  income tax  liability  of $24.4  million  and
        acquired  net  operating  losses  totaling  $57.6  million.  The Company
        determined that  approximately $20 million of the acquired net operating
        losses would not be utilized for income tax  purposes,  and elected with
        its December 31, 1996 income tax returns to forego  utilization  of such
        acquired  losses under  Internal  Revenue Code section  1.1502-32(b)(4).
        Deferred  tax assets  were not  recorded  associated  with the  foregone
        losses  and,  accordingly,  no  valuation  allowance  was  provided.  At
        December  31,  1998,   the  Company  has  (1)  tax  net  operating  loss
        carryforwards of approximately $51.0 million that will begin expiring in
        2008  if  not  utilized,   and  (2)   alternative   minimum  tax  credit
        carryforwards of approximately  $2.0 million available to offset regular
        income taxes  payable in future  years.  The  Company's  utilization  of
        remaining acquired net operating loss carryforwards is subject to annual
        limitations  pursuant to Internal  Revenue  Code section 382 which could
        reduce or defer the utilization of these losses.

        Tax benefits associated with recorded deferred tax assets 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.



                                       86                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


(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, Inc.
        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.

        Stock Option Plan
        In December 1986, GCI adopted a Stock Option Plan (the "Option Plan") in
        order  to  provide  a  special  incentive  to  the  Company's  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 Committee of
        GCI's Board of Directors administers the Option Plan.

        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 GCI.

        Employees of GCI, Inc. and its  subsidiaries are eligible to participate
        in the Option  Plan.  Expenses  associated  with the grant of options to
        GCI,  Inc. and  subsidiary  employees  are recorded by GCI,  Inc. or its
        subsidiaries   pursuant  to  the   provisions   of  APB  Number  25  and
        Interpretive  Responses 1 and 2 of SAB Topic 1B1, which amounts were not
        material  in 1998,  1997 or 1996.  Management  believes  the  allocation
        method used by GCI, Inc. and its subsidiaries is reasonable.
<TABLE>
        Information for the years 1996, 1997 and 1998 with respect to the Option
        Plan follows:
<CAPTION>
                                                                                        Weighted
                                                                                        Average
                                                                                        Exercise           Range of 
                                                                     Shares              Price          Exercise Prices
                                                                ---------------      -------------     ------------------
                  <S>                                               <C>                  <C>              <C>
                      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
                                                                ---------------

                      Outstanding at December 31, 1996              2,447,123            $3.54            $0.75-$6.50
</TABLE>



                                       87                           (Continued)
<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>

                  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

                  Granted                                           1,150,459            $6.38            $3.25-$7.25
                  Exercised                                          (264,600)           $2.98            $1.00-$4.00
                  Forfeited                                          (181,000)           $6.49            $4.00-$7.00
                                                                ---------------

                      Outstanding at December 31, 1998              4,079,759            $4.95            $0.01-$7.63
                                                                ===============
                      Available for grant at December 
                       31, 1998                                       657,817
                                                                ===============
</TABLE>
        Stock Options Not Pursuant to a Plan
        In June 1989,  an officer  was  granted  options to acquire  100,000 GCI
        Class A common  shares at $.75 per share.  The  options  vested in equal
        annual  increments over a five-year  period,  expiring in February 1999.
        Options to acquire 50,000 shares were exercised during 1998.

        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 of the  Company  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.

        Stock Warrants Not Pursuant to a Plan
        The Company entered into a warrant agreement in December 1998 with Prime
        II  Management,  L.P.  ("PMLP").  In lieu of cash  payments for services
        under the amended  Management  Agreement,  PMLP agreed to accept a stock
        warrant which provides for the purchase of 425,000 shares of GCI class A
        common stock,  with immediate vesting at the option date and an exercise
        price of $3.25 per share. The warrant expires December 2003.

        The Company entered into a warrant agreement in exchange for services in
        December 1998 with certain of its legal  counsel which  provides for the
        purchase  of  16,667  shares  of GCI class A common  stock,  vesting  in
        December 1999,  with an exercise price of $3.00 per share,  and expiring
        December 2003.

        SFAS 123 Disclosures
        The Company's stock options and warrants expire at various dates through
        December 2008. At December 31, 1998, 1997 and 1996, the weighted-average
        remaining  contractual lives of options  outstanding were 6.71, 6.82 and
        6.73 years, respectively.

        At December 31, 1998,  1997 and 1996, the number of  exercisable  shares
        under option was 1,827,130,  1,664,015 and 1,275,903,  respectively, and
        the  weighted-average  exercise price of those options was $3.49,  $3.15
        and $2.85, respectively.



                                       88                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        The per  share  weighted-average  fair  value of stock  options  granted
        during 1998 was $4.08 for compensatory and non-compensatory options; for
        1997, $6.71 per share for  compensatory  options and $6.50 per share for
        non-compensatory options; and for 1996, $6.94 per share for compensatory
        options and $4.40 per share for  non-compensatory  options.  The amounts
        were  determined  as of the  options'  grant  dates  using  a  qualified
        Black-Scholes  option-pricing model with the following  weighted-average
        assumptions:  1998 - risk-free  interest  rate of 4.75%,  volatility  of
        0.6951 and an expected life of 5.7 years; 1997 - risk-free interest rate
        of 5.46%,  volatility of 1.8558 and an expected  life of 5.5 years;  and
        1996 - risk-free  interest  rate of 5.48%,  volatility  of 1.8558 and an
        expected life of 5.7 years.
<TABLE>
        Summary  information  about the  Company's  stock  options and  warrants
        outstanding at December 31, 1998:
<CAPTION>
                          Options and Warrants Outstanding                             Options and Warrants Exercisable
          -----------------------------------------------------------------------   -------------------------------------
                                                   Weighted                        
                                      Number        Average
                                    outstanding    Remaining        Weighted             Number           Weighted 
           Range of Exercise          as of       Contractual       Average          Exercisable as   Average Exercise 
                 Prices              12/31/98        Life        Exercise Price       of 12/31/98           Price
          -----------------------------------------------------------------------   -------------------------------------
             <S>                    <C>              <C>             <C>                <C>                 <C>
             $0.01 - $1.75            406,000        4.15            $1.17                336,000           $1.41
             $3.00 - $3.00            778,667        3.52            $3.00                762,000           $3.00
             $3.25 - $3.75             79,459        9.71            $3.28                  3,330           $3.75
             $4.00 - $4.00            792,300        5.84            $4.00                445,300           $4.00
             $4.50 - $4.50             20,000        7.09            $4.50                 20,000           $4.50
             $6.00 - $6.00            459,500        8.78            $6.00                 91,000           $6.00
             $6.50 - $6.50            430,500        8.73            $6.50                 38,500           $6.50
             $6.63 - $6.94            115,000        9.08            $6.84                      0           $0.00
             $7.00 - $7.00            671,000        8.31            $7.00                 88,000           $7.00
             $7.25 - $7.63            390,000        8.77            $7.39                 43,000           $7.54
                                -------------------------------------------------   -------------------------------------
             $0.01 - $7.63          4,142,426        6.71            $4.89              1,827,130           $3.49
                                =================================================   =====================================
</TABLE>
<TABLE>
        Had  compensation  cost for the Company's 1996, 1997 and 1998 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):
<CAPTION>
                                                                   As Reported        Pro Forma
                                                                 -----------------------------------
          <S>                                                        <C>               <C>  
          1996:
          Net earnings (GCI)                                         $   7,462            7,212
          Basic net earnings per common share                        $  74,620           72,120
          Diluted net earnings per common share                      $  74,620           72,120

          1997:
          Net loss (GCI, Inc.)                                       $ (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>


                                       89                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                   As Reported        Pro Forma
                                                                 -----------------------------------
          <S>                                                        <C>               <C>  
          1998:
          Net loss (GCI, Inc.)                                       $ (6,797)          (8,697)
          Basic net loss per common share                            $(67,970)         (86,970)
          Diluted net loss per common share                          $(67,970)         (86,970)
</TABLE>
        Pro forma net income (loss)  reflects  options granted in 1998, 1997 and
        1996.  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 generally 5 years and  compensation  cost
        for options  granted prior to January 1, 1995 is not  considered.  Basic
        and diluted  earnings per share in 1996 have been computed giving effect
        to GCI, Inc.'s 1997 incorporation and capitalization  using its weighted
        average outstanding shares of common stock.

        Employee Stock Purchase Plan
        In  December  1986,  GCI 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
        GCI, GCI Inc. 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 $10,000 in 1998;  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 GCI's board of directors  each
        year,  but not more than 10 percent of any one  employee's  compensation
        will be matched in any year. The combination of salary reductions, after
        tax contributions and matching contributions cannot exceed 25 percent of
        any employee's compensation  (determined after salary reduction) for any
        year. Matching contributions vest over six years. Employee contributions
        may  be  invested  in GCI  common  stock,  MCI  WorldCom  common  stock,
        Tele-Communications,  Inc. ("TCI") common stock or various mutual funds.
        AT&T's recent  acquisition  of TCI will result in the  conversion of TCI
        shares of common  stock into AT&T  shares of common  stock.  Alternative
        investment choices may be offered by the Plan commencing as early as the
        third or fourth quarter of 1999. Employee  contributions invested in GCI
        common stock receive up to 100%  matching,  as determined by GCI's board
        of directors  each year,  in GCI common  stock.  Employee  contributions
        invested in other than GCI common stock receive up to 50%  matching,  as
        determined  by the GCI's  board of  directors  each year,  in GCI common
        stock.  The Company's  matching  contributions  allocated to participant
        accounts totaled approximately $2,278,000, $1,800,000 and $1,013,000 for
        the years ended  December 31, 1998,  1997, and 1996,  respectively.  The
        Plan may, at its  discretion,  purchase  shares of GCI common stock from
        GCI at  market  value or may  purchase  GCI's  common  stock on the open
        market.  In 1998 the  Company  funded  employer  matching  contributions
        through  the  issuance  of new shares of GCI common  stock  rather  than
        market purchases and expects to continue to do so in 1999.

(9)     Industry Segments Data

        The Company  adopted  SFAS No. 131,  "Disclosures  About  Segments of an
        Enterprise and Related  Information",  in 1998 which changes the way the
        Company  reports   information   about  its  operating   segments.   The
        information  for 1997 and 1996 has been  restated  from the prior year's
        presentation in order to conform to the 1998 presentation.

        The  Company's   reportable  segments  are  business  units  that  offer
        different products.  The reportable segments are each managed separately
        because  they  manage  and  offer   distinct   products  with  different
        production and delivery processes.



                                       90                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        The Company has four reportable segments as follows:

         Long-distance  services.  A full range of common-carrier  long-distance
         services are offered to business,  government, other telecommunications
         companies and consumer  customers,  through its networks of fiber optic
         cables, digital microwave,  and fixed and transportable satellite earth
         stations.

         Cable  services.  The Company  provides  cable  television  services 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.  Anchorage cable plant upgrades in 1998 enabled the Company
         to offer  digital  cable  television  services  and retail  cable modem
         service   (through  its  Internet   Services   segment)  in  Anchorage,
         complementing  its existing  service  offerings.  The Company  plans to
         expand its product  offerings as plant  upgrades are completed in other
         communities in Alaska.

         Local  access  services.   The  Company  introduced   facilities  based
         competitive  local exchange  services in Anchorage in 1997. The Company
         has announced  plans to ultimately  provide similar  competitive  local
         exchange services in Alaska's other major population centers, as access
         is allowed by the APUC.

         Internet  services.  The Company  began  offering  wholesale and retail
         Internet  services in 1998.  Deployment of the new undersea fiber optic
         cable (see note 11) will allow the Company to offer  enhanced  services
         with high-bandwidth requirements.

         Other services.  Services  provided by the Company that are included in
         the other  segment are managed  services,  product  sales and  cellular
         telephone  services.  Included in the other  segment are the results of
         insignificant   business  units  described  above  which  do  meet  the
         quantitative  thresholds for determining  reportable segments.  None of
         these  business  units have ever met the  quantitative  thresholds  for
         determining reportable segments. Also included in the other segment are
         corporate  related  expenses,  including  marketing,  customer service,
         management information systems, accounting, legal and regulatory, human
         resources and other general and administrative expenses.

       The Company  evaluates  performance and allocates  resources based on (1)
       profit  or  loss  from  operations  before  depreciation,   amortization,
       interest  and  income  taxes,  and (2)  operating  income  or  loss.  The
       accounting  policies  of the  reportable  segments  are the same as those
       described in the summary of significant  accounting  policies included in
       note 1.  Intersegment  sales are  recorded  at cost  plus an agreed  upon
       intercompany profit.

       All revenues are earned through sales of services and products within the
       United States of America ("USA").  All of the Company's long-lived assets
       are located within the USA.
<TABLE>
       Summarized  financial  information  concerning  the Company's  reportable
       segments follows (amounts in thousands):
<CAPTION>
                                                       Long-                    Local
                                                      Distance     Cable        Access     Internet
                                                      Services    Services     Services    Services      Other      Total
                                                 --------------------------------------------------------------------------
         <S>                                          <C>          <C>           <C>         <C>         <C>       <C>
                          1998                                                   GCI, Inc.
                          ----                                                   ---------
         Revenues:
           Intersegment                               $  2,716      1,330         1,284        ---          ---      5,330
           External                                    157,350     57,640         9,908      4,591       17,306    246,795
                                                 --------------------------------------------------------------------------
              Total revenues                           160,066     58,970        11,192      4,591       17,306    252,125
                                                 --------------------------------------------------------------------------
</TABLE>


                                       91                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                       Long-                    Local
                                                      Distance     Cable        Access     Internet
                                                      Services    Services     Services    Services      Other      Total
                                                 --------------------------------------------------------------------------
         <S>                                          <C>         <C>           <C>        <C>         <C>         <C>
         Cost of sales and services:
           Intersegment                                  1,284        ---         1,254      2,727          ---      5,265
           External                                     79,323     13,407         6,113      3,402       13,828    116,073
                                                 --------------------------------------------------------------------------
              Total cost of sales and services          80,607     13,407         7,367      6,129       13,828    121,338
                                                 --------------------------------------------------------------------------

         Contribution:
           Intersegment                                  1,432      1,330            30    (2,727)          ---         65
           External                                     78,027     44,233         3,795      1,189        3,478    130,722
                                                 --------------------------------------------------------------------------
              Total contribution                        79,459     45,563         3,825    (1,538)        3,478    130,787

         Selling, general and administrative
           expenses                                     21,019     15,630         8,477        782       43,926     89,833
                                                 --------------------------------------------------------------------------
                                                        58,440     29,933       (4,652)    (2,320)     (40,448)     40,954
         Depreciation and amortization                   6,976     17,281         2,597        501        4,690     32,045
                                                 --------------------------------------------------------------------------
         Operating income (loss)                      $ 51,464     12,652       (7,249)    (2,821)     (45,138)      8,909
                                                 ==========================================================================

         Total assets                                 $231,727    316,976        31,062     16,535       49,816    646,116
                                                 ==========================================================================

         Capital expenditures                         $110,177     20,727         8,104      3,836        6,129    148,973
                                                 ==========================================================================

                          1997                                                   GCI, Inc.
                          ----                                                   ---------
         Revenues:
           Intersegment                               $    ---        516           ---        ---          172        688
           External                                    154,681     55,165           610        182       13,171    223,809
                                                 --------------------------------------------------------------------------
              Total revenues                           154,681     55,681           610        182       13,343    224,497
                                                 --------------------------------------------------------------------------

         Cost of sales and services:
           Intersegment                                    ---        ---           472        ---          ---        472
           External                                     86,346     12,610           739        241       11,141    111,077
                                                 --------------------------------------------------------------------------
              Total cost of sales and services          86,346     12,610         1,211        241       11,141    111,549
                                                 --------------------------------------------------------------------------

         Contribution:
           Intersegment                                    ---        516         (472)        ---          172        216
           External                                     68,335     42,555         (129)       (59)        2,030    112,732
                                                 --------------------------------------------------------------------------
              Total contribution                        68,335     43,071         (601)       (59)        2,202    112,948

         Selling, general and administrative
           expenses                                     18,724     18,812         2,802        26        33,219     73,583
                                                 --------------------------------------------------------------------------
                                                        49,611     24,259       (3,403)       (85)     (31,017)     39,365
         Depreciation and amortization                   6,676     13,320           525          3        3,243     23,767
                                                 --------------------------------------------------------------------------
         Operating income (loss)                      $ 42,935     10,939       (3,928)       (88)     (34,260)     15,598
                                                 ==========================================================================

         Total assets                                 $161,968    311,643        20,357      8,510       42,824    545,302
                                                 ==========================================================================

         Capital expenditures                         $ 23,107     18,199         9,379      7,496        6,463     64,644
                                                 ==========================================================================
</TABLE>


                                       92                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                       Long-                    Local
                                                      Distance     Cable        Access     Internet
                                                      Services    Services     Services    Services      Other      Total
                                                 --------------------------------------------------------------------------
         <S>                                          <C>         <C>             <C>          <C>     <C>         <C>
                          1996                                                      GCI
                          ----                                                      ---
         Revenues:
           Intersegment                               $    ---         40           ---        ---          ---         40
           External                                    141,374      9,475           ---        ---       14,045    164,894
                                                 --------------------------------------------------------------------------
              Total revenues                           141,374      9,515           ---        ---       14,045    164,934
                                                 --------------------------------------------------------------------------

         Cost of sales and services:
           Intersegment                                     40        ---           ---        ---          ---         40
           External                                     80,193      2,067           ---        ---       10,404     92,664
                                                 --------------------------------------------------------------------------
              Total cost of sales and services          80,233      2,067           ---        ---       10,404     92,704
                                                 --------------------------------------------------------------------------

         Contribution:
           Intersegment                                   (40)         40           ---        ---          ---        ---
           External                                     61,181      7,408           ---        ---        3,641     72,230
                                                 --------------------------------------------------------------------------
              Total contribution                        61,141      7,448           ---        ---        3,641     72,230

         Selling, general and administrative
           expenses                                     15,442      2,992           842        ---       27,136     46,412
                                                 --------------------------------------------------------------------------
                                                        45,699      4,456         (842)        ---     (23,495)     25,818
         Depreciation and amortization                   5,025      2,220           ---        ---        2,164      9,409
                                                 --------------------------------------------------------------------------
         Operating income (loss)                      $ 40,674      2,236         (842)        ---     (25,659)     16,409
                                                 ==========================================================================

         Total assets                                 $102,739    306,743         3,475        154       34,224    447,335
                                                 ==========================================================================

         Capital expenditures                         $ 27,765        909         3,475        154        6,339     38,642
                                                 ==========================================================================
</TABLE>
         -----------------------
         Long-distance services,  local access service and Internet services are
         billed  utilizing  a unified  accounts  receivable  system  and are not
         reported  separately by business segment.  All such accounts receivable
         are  included  above  in the  long-distance  services  segment  for all
         periods presented.
<TABLE>
        A  reconciliation  of total segment  revenues to  consolidated  revenues
        follows:
<CAPTION>
                                                                                        GCI, Inc.                GCI
                                                                            ------------------------------- --------------    
         Years ended December 31,                                                   1998            1997           1996
                                                                            --------------- --------------- --------------
         <S>                                                               <C>                     <C>            <C>  
         Total segment revenues                                            $       252,125         224,497        164,934  
         Less intersegment revenues eliminated in consolidation                     (5,330)           (688)           (40)
                                                                            --------------- --------------- --------------
              Consolidated revenues                                        $       246,795         223,809        164,894    
                                                                            =============== =============== ==============
</TABLE>


                                       93                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


<TABLE>
        A reconciliation  of total segment  operating income to consolidated net
        income (loss) before income taxes and extraordinary item follows:
<CAPTION>
                                                                                        GCI, Inc.                GCI
                                                                            ------------------------------- --------------    
         Years ended December 31,                                                    1998            1997          1996
                                                                            --------------- --------------- --------------
         <S>                                                               <C>                     <C>             <C>
         Total segment operating income                                    $         8,909          15,598         16,409  
         Less intersegment contribution eliminated in consolidation                    (65)           (216)           ---
                                                                            --------------- --------------- --------------
              Consolidated operating income                                          8,844          15,382         16,409
         Interest expense, net                                                     (19,764)        (17,617)        (3,719)
                                                                            --------------- --------------- --------------
              Consolidated net income (loss) before income taxes and
                extraordinary item                                         $       (10,920)         (2,235)        12,690  
                                                                            =============== =============== ==============
</TABLE>
        The Company provides message telephone service to MCI WorldCom (see note
        10) and Sprint, major customers.  The Company earned revenues,  included
        in  the  long-distance  segment,  pursuant  to a  contract  with  Sprint
        totaling approximately $25,398,000,  $24,357,000 and $18,781,000 for the
        years  ended  December  31,  1998,  1997  and  1996  respectively.  As a
        percentage of total revenues,  Sprint revenues totaled 10.3%,  10.9% and
        11.4% for the years ended December 31, 1998, 1997 and 1996 respectively.

 (10)   Related Party Transactions

        Pursuant  to  the  terms  of a  contract  with  MCI  WorldCom,  a  major
        shareholder  of GCI  (see  note  8),  the  Company  earned  revenues  of
        approximately  $35,892,000,  $34,315,000  and  $29,208,000 for the years
        ended December 31, 1998, 1997 and 1996, respectively. As a percentage of
        total revenues, MCI WorldCom revenues totaled 14.5%, 15.3% and 17.7% for
        the years ended December 31, 1998, 1997 and 1996  respectively.  Amounts
        receivable,   net  of  accounts  payable,   from  MCI  WorldCom  totaled
        $4,836,000 and  $3,933,000 at December 31, 1998 and 1997,  respectively.
        The Company  paid MCI WorldCom  for  distribution  of its traffic in the
        lower 49 states amounts totaling approximately $12,639,000,  $14,319,000
        and  $12,224,000  for the years ended December 31, 1998,  1997 and 1996,
        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 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.

        GCI Cable, Inc. ("GCI Cable") 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 began on November 1, 1996
        and 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,
        2000. The agreement was amended December 15, 1998.



                                       94                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        Under the  terms of the  amended  Management  Agreement,  PMLP  performs
        certain services for GCI Cable and will be compensated as follows:

             November 01, 1996 through October 31, 1997    $1,000,000
             November 01, 1997 through December 31, 1997   $  125,000
             January 01, 1998 through January 31, 1999     Warrant to purchase 
                                                           425,000 shares of GCI
                                                           stock
             February 01, 1999 through October 31, 1999    $  200,000
             November 01, 1999 through October 31, 2000    $  400,000
             (plus reimbursement for certain expenses)

        In connection with the agreement,  GCI Cable received services valued at
        approximately  $752,000,  $1,040,000 and $197,000 including reimbursable
        expenses  for the  periods  ended  December  31,  1998,  1997 and  1996,
        respectively.

 (11)   Commitments and Contingencies

        Leases

        The Company as Lessee. 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  $11,609,000,
        $11,574,000  and $7,364,000 for the years ended December 31, 1998,  1997
        and 1996, respectively.
<TABLE>
        A summary of future minimum lease payments for all leases as of December
        31, 1998 follows:
<CAPTION>
           Year ending December 31:                                             Operating      Capital
                                                                              ------------- -------------
                                                                                 (Amounts in thousands)
               <S>                                                          <C>            <C> 
               1999                                                         $       13,388           771
               2000                                                                  5,549           767
               2001                                                                  3,937         1,127
               2002                                                                  2,377           466
               2003                                                                  2,204           381
               2004 and thereafter                                                   3,093           643
                                                                              ------------- -------------
                   Total minimum lease payments                             $       30,548         4,155
                                                                              =============
                   Less amount representing interest                                              (1,969)
                   Less current maturities of obligations under capital
                     leases                                                                         (511)
                                                                                            -------------
                  Subtotal - long-term obligations under capital leases                            1,675
                  Less long-term obligations under capital leases due to
                     related party, excluding current maturities                                    (486)
                                                                                            -------------
                  Long-term obligations under capital leases, excluding
                     related party,  excluding current maturities                          $       1,189
                                                                                            =============
</TABLE>



                                       95                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        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.

        The Company as Lessor.  Subsequent  to December  31,  1998,  the Company
        signed  agreements  with a large  commercial  customer for the immediate
        lease of three DS3 circuits on Alaska United  facilities  within Alaska,
        and between Alaska and the lower 48 states. The lease agreements provide
        for three year terms, with renewal options for additional terms.

        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  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  $117,000,  $58,000
        and $167,000 as of December 31, 1998, 1997 and 1996, 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 launch of the satellite
        in August 1998  failed.  The Company did not assume  launch risk and the
        launch has been  rescheduled for the fourth quarter of 1999. The Company
        will  continue  to lease  transponder  capacity  until  delivery  of the
        transponders  on the  replacement  satellite.  The balance  payable upon
        expected delivery of the transponders  during the fourth quarter of 1999
        in  addition  to  the  $9.1  million  deposit   previously  paid  totals
        approximately $43.5 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 $545,000  was recorded at
        December  31,  1998  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 disputes, lawsuits, legal proceedings
        and  regulatory  matters  that  have  arisen  in the  normal  course  of
        business.  While the ultimate results of these items cannot be predicted
        with  certainty,  management does not expect at this time the resolution
        of them to have a material  adverse  effect on the  Company's  financial
        position, results of operations or liquidity.

        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 


                                       96                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        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.

        Until  March 31,  1999,  the  regulated  services  rates  charged by the
        Company may be reviewed  by the State of Alaska,  operating  through the
        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.  Beginning March 31, 1999, the rates for
        cable  programming  services (service tiers above basic service) will no
        longer be regulated.  Only regulation of basic rates,  initially through
        the APUC, will remain.

        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,  1998,  the State of Alaska has rate  regulation  authority
        over the Juneau system's basic service rates.  (The Juneau system serves
        8.3% of the Company's  total basic service  subscribers  at December 31,
        1998.)  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.

        Undersea Fiber Optic Cable Contract Commitment
        The  Company  signed a  contract  in July 1997 for  construction  of the
        undersea portion of a fiber optic cable system  connecting the cities of
        Anchorage,  Juneau,  and Seattle via a subsea route. The total system is
        expected to cost  approximately  $125  million.  Subsea and  terrestrial
        connections extended the fiber optic cable to Fairbanks via Whittier and
        Valdez.  Construction efforts began in September 1998 and were completed
        in early February 1999.  Commercial services commenced in February 1999.
        Pursuant  to the  contract,  the  Company  paid $77.2  million  and $9.1
        million during the years ended December 31, 1998 and 1997, respectively,
        and will pay the remaining  balance in installments  through April 1999.
        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 was  restricted to funding the
        construction  and  deployment  of the fiber optic  cable  system and was
        reported as  Restricted  Cash at December  31, 1997 in the  accompanying
        Consolidated  Financial Statements.  The restricted cash was released to
        Alaska United in 1998 to fund  construction and deployment  efforts.  In
        January 1998, the Company secured up to $75 million in bank financing to
        fund the remaining cost of construction  and deployment,  of which $61.2
        million was outstanding at December 31, 1998 (see note 6 (c)).

        Year 2000
        In 1997, the Company initiated a plan to identify,  assess and remediate
        Year 2000 issues within each of its  significant  computer  programs and
        certain equipment which contain micro-processors. The plan is addressing
        the issue of computer  programs and embedded computer chips being unable
        to distinguish  between the year 1900 and the year 2000, if a program or
        chip uses only two  digits  rather  than four to define  the  applicable
        year. The Company has divided the plan into two major phases.  The first
        phase,  including  team  formation,  inventory  assessment,   compliance
        assessment and risk  assessment,  were completed during 1998. The second
        phase,   including   resolution/remediation,   validation,   contingency
        planning and sign-off acceptance,  was in progress at December 31, 1998.
        Systems  which have been  determined  not to be Year 2000  compliant are
        being either replaced or  reprogrammed,  and thereafter  tested for Year
        2000  compliance.  The plan anticipates that by mid-1999 the conversion,
        implementation and testing phases will be completed.  The current budget
        for the total cost of remediation  (including  replacement  software and
        hardware) and testing,  as set forth in the plan, is approximately  $4.0
        million.



                                       97                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


        The Company is in the process of  identifying  and  contacting  critical
        suppliers and customers whose  computerized  systems  interface with the
        Company's  systems,  regarding  their plans and  progress in  addressing
        their Year 2000  issues.  The Company has received  varying  information
        from  such  third  parties  on  the  state  of  compliance  or  expected
        compliance.  Contingency plans are being developed in the event that any
        critical supplier or customer is not compliant.

        The failure to correct a material  Year 2000 problem  could result in an
        interruption in, or a failure of, certain normal business  activities or
        operations.  Such failures  could  materially  and adversely  affect the
        Company's  operations,  liquidity  and financial  condition.  Due to the
        general uncertainty inherent in the Year 2000 problem, resulting in part
        from the uncertainty of the Year 2000 readiness of third-party suppliers
        and  customers,  the Company is unable to determine at this time whether
        the  consequences  of Year 2000 failures will have a material  impact on
        the Company's operations, liquidity or financial condition.

(12)    Subsequent Event
        On April 2, 1999 the Company  received  commitments  for the issuance of
        20,000  shares  of  convertible  redeemable  accreting  preferred  stock
        ("Preferred  Stock").  Proceeds  totaling $20 million (before payment of
        costs and expenses) will be used for general  corporate  purposes and to
        provide additional liquidity. The Company's amended Senior Holdings Loan
        facilities  limit use of such proceeds (see note 6). The Preferred Stock
        contains a $1,000 per share  liquidation  preference,  plus  accrued but
        unpaid  dividends and fees.  Dividends will be payable  semi-annually at
        the rate of 8.5% of the liquidation  preference.  Prior to the five-year
        anniversary  following closing,  dividends are payable, at the Company's
        option,  in cash or in additional  fully-paid shares of Preferred Stock.
        Dividends are payable only in cash  following the five-year  anniversary
        of closing.  Mandatory  redemption is required 12 years from the date of
        closing.  The Company and Holders of the  Preferred  Stock will have the
        right after the  four-year  anniversary  of closing (or  occurrence of a
        triggering  event,  as defined) to convert the stated value, in whole or
        in  part,  into  registered  shares  of GCI  class A common  stock.  The
        conversion  price  will be the  lesser  of $6.00 or 120% of the  average
        closing  price of GCI's  class A common  stock for the 10  trading  days
        prior to closing.

        At any time subsequent to the third anniversary  following closing,  and
        assuming  the stock is trading at two times the  conversion  price,  the
        Company may require  immediate  conversion at a price equal to two times
        the conversion  price. The Preferred Stock,  subject to lender approval,
        will be exchangeable in whole or in part, at the Company's option,  into
        subordinated  debt  with  terms  and  conditions   comparable  to  those
        governing the Preferred Stock. The Preferred Stock will be senior to all
        other classes of the Company's equity  securities,  and will have voting
        rights  equal to that number of shares of common stock into which it can
        be converted.  The holders of the Preferred  Stock will, as a class,  be
        entitled  to elect one GCI  director.  Closing is expected to take place
        prior to April 30, 1999.



                                       98                           (Continued)
<PAGE>
                           GCI, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements


(13)    Supplementary Financial Data
<TABLE>
        The following is a summary of unaudited  quarterly results of operations
        for the years ended December 31, 1998 and 1997.

        (Amounts in thousands, except per share amounts)
<CAPTION>
                                                             First      Second        Third      Fourth      Total
                                                            Quarter     Quarter      Quarter     Quarter      Year
                                                            -------     -------      -------     -------      ----
       <S>                                            <C>              <C>          <C>         <C>          <C>
       1998
       ----
       Total revenues                                 $     58,152      62,941       62,766      62,936      246,795
       Net loss                                       $     (1,616)     (2,066)      (2,076)     (1,039)      (6,797)
       Basic net loss per common share                $    (16,160)    (20,660)     (20,760)    (10,390)     (67,970)
       Diluted net loss per common share              $    (16,160)    (20,660)     (20,760)    (10,390)     (67,970)

       1997
       ----
       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                           $        ---         ---       (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                           $        ---         ---       (4,330)       (880)      (5,210)
         Net earnings (loss)                          $     (5,250)     (8,320)      (9,280)      1,020      (21,830)
</TABLE>


                                       99                           
<PAGE>
                                                           PART IV

<TABLE>
Item 14.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<CAPTION>
                                                                                                            Page No.
                                                                                                            --------
<S>                                                                                                         <C> 
(a)(l)  Consolidated Financial Statements                                                                   

           Included in Part II of this Report:

                  Independent Auditor's Report..............................................................67

                  Consolidated Balance Sheets, December 31, 1998 and 1997...................................68 -- 69

                  Consolidated Statements of Operations,
                     Years ended December 31, 1998, 1997 and 1996...........................................70

                  Consolidated Statements of Stockholders' Equity,
                     Years ended December 31, 1998, 1997 and 1996...........................................71

                  Consolidated Statements of Cash Flows,
                     Years ended December 31, 1998, 1997 and 1996...........................................72

                  Notes to Consolidated Financial Statements................................................73 - 99

(a)(2)  Consolidated Financial Statement Schedules

           Included in Part IV of this Report:

                  Independent Auditors' Report..............................................................107

                  Schedule VIII - Valuation and Qualifying Accounts,
                     Years ended December 31, 1998, 1997 and 1996...........................................108
</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.



                                       100
<PAGE>
(b)     Exhibits
<TABLE>
        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):
<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. (23)
          10.1           Employee stock option agreements issued to individuals Spradling, O'Hara, Strid, Behnke,
                            Lewkowski and Snyder (3)
          10.2           Lease agreement between GCI Communication Services, Inc. and National Bank of Alaska
                            Leasing Corporation dated January 15, 1992 (4)
          10.3           Westin Building Lease (5)
          10.4           Duncan and Hughes Deferred Bonus Agreements (6)
          10.5           Compensation Agreement between General Communication, Inc. and William C. Behnke dated
                            January 1, 1997 (19)
          10.6           Order approving Application for a Certificate of Public Convenience and Necessity to
                            operate as a Telecommunications (Intrastate Interexchange Carrier) Public Utility
                            within Alaska (3)
          10.7           1986 Stock Option Plan, as amended (21)
          10.8           Loan agreement between National Bank of Alaska and GCI Leasing Co., Inc. dated December
                            31, 1992 (4)
          10.9           Pledge and Security Agreement between National Bank of Alaska and GCI Communication
                            Services, Inc. dated December 31, 1992 (4)
          10.10          Lease Agreement between MCI Telecommunications Corporation and GCI Leasing Co., Inc.
                            dated December 31, 1992 (4)
          10.11          Sublease Agreement between MCI Telecommunications Corporation and General Communication,
                            Inc. dated December 31, 1992 (4)
          10.12          Financial Assistance Agreement between MCI Telecommunications Corporation and GCI
                            Leasing Co., Inc. dated December 31, 1992 (4)
          10.13          MCI Carrier Agreement between MCI Telecommunications Corporation and General
                            Communication, Inc. dated January 1, 1993 (8)
          10.14          Contract for Alaska Access Services Agreement between MCI Telecommunications Corporation
                            and General Communication, Inc. dated January 1, 1993 (8)
          10.15          Promissory Note Agreement between General Communication, Inc. and Ronald A. Duncan,
                            dated August 13, 1993 (9)
          10.16          Deferred Compensation Agreement between General Communication, Inc. and Ronald A.
                            Duncan, dated August 13, 1993 (9)
          10.17          Pledge Agreement between General Communication, Inc. and Ronald A. Duncan, dated August
                            13, 1993 (9)
          10.18          Revised Qualified Employee Stock Purchase Plan of General Communication, Inc. (10)
          10.19          Summary Plan Description pertaining to the Revised Qualified Employee Stock Purchase
                            Plan of General Communication, Inc. (10)
          10.20          The GCI Special Non-Qualified Deferred Compensation Plan (11)
</TABLE>


                                      101
<PAGE>
<TABLE>
<CAPTION>
         Exhibit No.                                          Description
        ------------------------------------------------------------------------------------------------------------
          <S>            <C> 

          10.21          Transponder Purchase Agreement for Galaxy X between Hughes Communications Galaxy, Inc.
                            and GCI Communication Corp. (11)
          10.22          Equipment Purchase Agreement between GCI Communication Corporation and
                            Scientific-Atlanta, Inc. (11)
          10.23          Management Agreement, between Prime II Management, L.P., and GCI Cable, Inc., dated
                            October 31, 1996 (12)
          10.24          Third Amended and Restated Credit Agreement, dated as of October 31, 1996, between GCI
                            Communication Corp., and NationsBank of Texas, N.A. (13)
          10.25          Licenses: (5)
          10.25.1           214 Authorization
          10.25.2           International Resale Authorization
          10.25.3           Digital Electronic Message Service Authorization
          10.25.4           Fairbanks Earth Station License
          10.25.5           Fairbanks (Esro) Construction Permit for P-T-P Microwave Service
          10.25.6           Fairbanks (Polaris) Construction Permit for P-T-P Microwave Service
          10.25.7           Anchorage Earth Station Construction Permit
          10.25.8           License for Eagle River P-T-P Microwave Service
          10.25.9           License for Juneau Earth Station
          10.25.10          Issaquah Earth Station Construction Permit
          10.26          ATU Interconnection Agreement between GCI Communication Corp. and Municipality of
                            Anchorage, executed January 15, 1997 (18)
          10.27          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)
          10.28          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)
          10.29          Asset Purchase Agreement, dated April 15, 1996, among General Communication, Inc.,
                            ACNFI, ACNJI and ACNKSI (12)
          10.30          Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and
                            Alaska Cablevision, Inc. (12)
          10.31          Asset Purchase Agreement, dated May 10, 1996, among General Communication, Inc., and
                            McCaw/Rock Homer Cable System, J.V. (12)
          10.32          Asset Purchase Agreement, dated May 10, 1996, between General Communication, Inc., and
                            McCaw/Rock Seward Cable System, J.V. (12)
          10.33          Amendment No. 1 to Securities Purchase and Sale Agreement, dated October 31, 1996, among
                            General Communication, Inc., and the Prime Sellers Agent (13)
          10.34          First Amendment to Asset Purchase  Agreement,  dated October 30, 1996, among General 
                            Communication, Inc., ACNFI, ACNJI and ACNKSI (13)
          10.35          Amendment to Revised Qualified Employee Stock Purchase Plan of General Communication,
                            Inc.  (18)
          10.36          Order Approving Arbitrated Interconnection Agreement as Resolved and Modified by Order
                            U-96-89(8) dated January 14, 1997 (18)
          10.37          Amendment to the MCI Carrier Agreement executed April 20, 1994 (18)
          10.38          Amendment No. 1 to MCI Carrier Agreement executed July 26, 1994 (16)
          10.39          MCI Carrier Addendum--MCI 800 DAL Service effective February 1, 1994 (16)
          10.40          Third Amendment to MCI Carrier Agreement dated as of October 1, 1994 (16)
          10.41          Fourth Amendment to MCI Carrier Agreement dated as of September 25, 1995 (16)
</TABLE>


                                      102
<PAGE>
<TABLE>
<CAPTION>
         Exhibit No.                                          Description
        ------------------------------------------------------------------------------------------------------------
          <S>            <C> 
          10.42          Fifth Amendment to the MCI Carrier Agreement executed April 19, 1996 (18)
          10.43          Sixth Amendment to MCI Carrier Agreement dated as of March 1, 1996 (16)
          10.44          Seventh Amendment to MCI Carrier Agreement dated November 27, 1996 (20)
          10.45          First Amendment to Contract for Alaska Access Services between General Communication,
                            Inc. and MCI Telecommunications Corporation dated April 1, 1996 (20)
          10.46          Service Mark License Agreement between MCI Communications Corporation and General
                            Communication, Inc. dated April 13, 1994 (19)
          10.47          Radio Station Authorization (Personal Communications Service License), Issue Date June
                            23, 1995 (19)
          10.48          Framework Agreement between National Bank of Alaska (NBA) and General Communication,
                            Inc. dated October 31, 1995 (17)
          10.49          1997 Call-Off Contract between National Bank of Alaska (NBA) and General Communication,
                            Inc. (GCI) dated November 1, 1996 (20)
          10.50          Contract No. 92MR067A Telecommunications Services between BP Exploration (Alaska), Inc.
                            and GCI Network Systems dated April 1, 1992 (20)
          10.51          Amendment No. 03 to BP Exploration (Alaska) Inc. Contract No. 92MRO67A effective August
                            1, 1996 (20)
          10.52          Lease Agreement dated September 30, 1991 between RDB Company and General Communication,
                            Inc. (3)
          10.53          Certificate of Public Convenience and Necessity No. 436 for Telecommunications Service
                            (Relay Services) (19)
          10.54          Order Approving Transfer Upon Closing, Subject to Conditions, and Requiring Filings
                            dated September 23, 1996 (19)
          10.55          Order Granting Extension of Time and Clarifying Order dated October 21, 1996 (19)
          10.56          Contract for Alaska Access Services among General Communication, Inc. and GCI
                            Communication Corp., and Sprint Communications Company L.P. dated June 1, 1993 (20)
          10.57          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)
          10.58          Employment and Deferred Compensation Agreement between General Communication, Inc. and
                            John M. Lowber dated July 1992 (19)
          10.59          Deferred Compensation Agreement between GCI Communication Corp. and Dana L. Tindall
                            dated August 15, 1994 (19)
          10.60          Transponder Lease Agreement between General Communication Incorporated and Hughes
                            Communications Satellite Services, Inc., executed August 8, 1989 (9)
          10.61          Addendum to Galaxy X Transponder Purchase Agreement between GCI Communication Corp. and
                            Hughes Communications Galaxy, Inc. dated August 24, 1995 (19)
          10.62          Order Approving Application, Subject to Conditions; Requiring Filing; and Approving
                            Proposed Tariff on an Inception Basis, dated February 4, 1997 (19)
          10.63          Resale Solutions Switched Services Agreement between Sprint Communications Company L.P.
                            and GCI Communications, Inc. dated May 31, 1996 (20)
          10.64          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)
          10.65          Commitment Letter from NationsBank for Credit Facility dated July 2, 1997 (19)
          10.66          Supply Contract Between Submarine Systems International Ltd. And GCI Communication Corp.
                            dated as of July 11, 1997. (23)
</TABLE>


                                      103
<PAGE>
<TABLE>
<CAPTION>
         Exhibit No.                                          Description
        ------------------------------------------------------------------------------------------------------------
          <S>            <C> 
          10.67          Supply Contract Between Tyco Submarine Systems Ltd. And Alaska United Fiber System
                            Partnership Contract Variation No. 1 dated as of December 1, 1997. (23)
          10.68          $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. (23)
          10.69          $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. (23)
          10.70          Credit and Security Agreement Dated as of January 27, 1998 among Alaska United Fiber
                            System Partnership as Borrower and The Lenders Referred to Herein and Credit Lyonnais
                            New York Branch as Administrative Agent and Nationsbank of Texas, N.A. as Syndication
                            Agent and TD Securities (USA) , Inc. as Documentation Agent. (24)
          10.71          Third Amendment to Contract for Alaska Access Services between General Communication,
                            Inc. and MCI Telecommunications Corporation dated February 27, 1998 *  See note
          21.1           Subsidiaries of the Issuer (23)
          23.1           Consent of KPMG LLP (Accountant for Issuer) *
          27.1           Financial Data Schedule *
          99             Additional Exhibits:
          99.1              The Articles of Incorporation of GCI Communication Corp. (2)
          99.2              The By-laws of GCI Communication Corp. (2)
          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 Articles of Incorporation of GCI, Inc.  (18)
          99.18             The Bylaws of GCI, Inc.  (18)
          99.19             The By-laws of GCI Transport, Inc. (23)
          99.20             The Articles of Incorporation of GCI Transport, Inc. (23)
          99.21             The By-laws of Fiber Hold Co., Inc. (23)
          99.22             The Articles of Incorporation of Fiber Hold Co., Inc. (23)
          99.23             The By-laws of GCI Fiber Co., Inc. (23)
          99.24             The Articles of Incorporation of GCI Fiber Co., Inc. (23)
          99.25             The By-laws of GCI Satellite Co., Inc. (23)
          99.26             The Articles of Incorporation of GCI Satellite Co., Inc. (23)
</TABLE>


                                      104
<PAGE>
<TABLE>
<CAPTION>
         Exhibit No.                                          Description
        ------------------------------------------------------------------------------------------------------------
          <S>            <C> 
          99.27             The Partnership Agreement of Alaska United Fiber System (23)
<FN>
          -------------------------
             *           Filed herewith.
           Note          Certain  information  has been  redacted  from  Exhibit
                            10.71 which the Company desires to keep  undisclosed
                            and a copy of the unredacted document has been filed
                            separately   with  the   Securities   and   Exchange
                            Commission.


            1            Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period
                            ended March 31, 1994
            2            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1990
            3            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1991
            4            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1992
            5            Incorporated by reference to the Company'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 the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1989.
            7            Incorporated by reference to the Company's Current Report on Form 8-K dated January 13,
                            1993.
            8            Incorporated by reference to the Company's Current Report on Form 8-K dated June 4, 1993.
            9            Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1993.
            10           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1994.
            11           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1995.
            12           Incorporated by reference to the Company's Form S-4 Registration Statement dated October
                            4, 1996.
            13           Incorporated by reference to the Company's Current Report on Form 8-K dated November 13,
                            1996.
            14           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1996.
            15           Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period
                            ended March 31, 1997.
            16           Incorporated by reference to the Company's Current Report on Form 8-K dated March 14,
                            1996, filed March 28, 1996.
            17           Incorporated by reference to the Company's Amendment to Annual Report dated December 31,
                            1995 on Form 10-K/A as amended on August 6, 1996.
            18           Incorporated herein by reference to the Company's Form S-3 Registration Statement (File
                            No. 333-28001) dated May 29, 1997.
            19           Incorporated  herein by reference  to the  Company's Amendment No. 1 to Form S-3/A 
                            Registration Statement (File No. 333-28001) dated July 8, 1997.
            20           Incorporated  herein by reference  to the  Company's Amendment No. 2 to Form S-3/A
                            Registration Statement (File No. 333-28001) dated July 21, 1997.



                                      105
<PAGE>
            21           Incorporated  herein by reference  to the  Company's Amendment No. 3 to Form S-3/A 
                            Registration Statement (File No. 333-28001) dated July 22, 1997.
            22           Incorporated herein by reference to the Company's Form S-8 POS Registration Statement
                            (File No. 33-60222) dated February 20, 1998.
            23           Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
                            December 31, 1997.
            24           Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period
                            ended June 30, 1998.
</FN>
(c)     Reports on Form 8-K

        None.
</TABLE>



                                       106
<PAGE>
                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------




The Board of Directors and Stockholders
GCI, Inc.:


Under date of March 26, 1999, we reported on the consolidated  balance sheets of
GCI, Inc. and Subsidiaries  ("Company") as of December 31, 1998 and 1997 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, 1998,
which  are  included  in the  Company's  1998  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  1998  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 LLP





Anchorage, Alaska
March 26, 1999



                                       107
<PAGE>
<TABLE>
                                                        Schedule VIII
                                                        -------------


                                                  GCI, INC. AND SUBSIDIARIES

                                              Valuation and Qualifying Accounts

                                         Years ended December 31, 1998, 1997 and 1996


<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, 1998:
 Allowance for doubtful
  receivables - GCI, Inc.                                  $1,070        2,795         ---           2,978         887
                                                            =====       ======       =====          ======      ======

Year ended December 31, 1997:
 Allowance for doubtful
  receivables - GCI, Inc.                                  $  597        3,025         ---           2,552       1,070
                                                            =====       ======       =====          ======     =======

Year ended December 31, 1996:
 Allowance for doubtful
  receivables - GCI                                        $  295        1,736         354  (1)      1,788         597
                                                            =====        =====       =====          ======       =====



<FN>
(1) Allowance for doubtful  receivables  acquired pursuant to GCI's acquisitions
of  the  Cable  Television   Systems  described  in  Note  2  to  the  Company's
consolidated financial statements.
</FN>
</TABLE>


                                       108
<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 24, 1999
<TABLE>
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.
<CAPTION>
              Signature                                        Title                                 Date
--------------------------------------      ------------------------------------------       -------------------

<S>                                         <C>                                                 <C>
/s/ Ronald A. Duncan                        President and Director                              March 24, 1999
--------------------------------------      (Principal Executive Officer)                    -------------------
Ronald A. Duncan                            

/s/ G. Wilson Hughes                        Vice President and Director                         March 24, 1999
--------------------------------------                                                       -------------------
G. Wilson Hughes

/s/ John M. Lowber                          Secretary, Treasurer and Director                   March 24, 1999
--------------------------------------      (Principal Financial and Accounting              -------------------
John M. Lowber                              Officer)
</TABLE>



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