ELECTRIC LIGHTWAVE, INC.


                                    FORM 10-K




                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


                     OF THE SECURITIES EXCHANGE ACT OF 1934




                      FOR THE YEAR ENDED DECEMBER 31, 1997

<PAGE>


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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


For the fiscal year ended  December 31, 1997    Commission file number 0-23393
                           -----------------                           -------

                                       OR

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


                            ELECTRIC LIGHTWAVE, INC.
             (Exact name of registrant as specified in its charter)

        Delaware                                       93-1035711
    -------------------                           ---------------------
(State or other jurisdiction of             (I.R.S.Employer Identification No.)
incorporation or organization)

                              8100 NE Parkway Drive
                                    Suite 150
                           Vancouver, Washington 98662
                          ----------------------------
               (Address, zip code of principal executive offices)

Registrant's telephone number, including area code:  (360) 892-1000
                                                     --------------

               Securities registered pursuant to Section 12(b) of
                 the Act: None Securities registered pursuant to
                            Section 12(g) of the Act:
                    Common Stock Class A, par value $.01 per
                    ----------------------------------------    
                              (Title of each class)


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 twelve months, (or for such shorter period that the registrant was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past ninety 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  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as  of  March  6,  1998  was  $143,775,000.  The  number  of  shares
outstanding of each of the  registrant's  classes of common stock as of March 6,
1998 were:
                         Common Stock Class A  8,520,000
                                              ----------
                         Common Stock Class B 41,165,000
                                              ----------

                       DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement for the registrant's  1998 Annual Meeting of Stockholders to
be held on May 21, 1998, is incorporated by reference into Part III of this Form
10-K.

<PAGE>



Item 1.   Description of Business
          -----------------------

a.  General development of business
    -------------------------------

         Electric  Lightwave,  Inc.  ("The  Company"),  is  a  fully-integrated,
facilities-based  competitive local exchange carrier ("CLEC")  providing a broad
range of  communications  services in five major market  clusters in the western
United States.  The Company provides voice and data  communications  services to
retail  customers,  primarily large- and  medium-sized  communications-intensive
businesses, and wholesale customers. The Company was incorporated in 1990.

         In November 1997, the Company  completed an ("IPO") of 8,000,000 shares
of its Class A Common Stock at $16 per share. This IPO offering represents 16.1%
of  the  Company's   outstanding   common  stock.   Citizens  Utilities  Company
("Citizens")  owns 82.8% of the outstanding  common stock. The remaining 1.1% is
represented by shares issued pursuant to the Company's stock plans.

         The Company  currently  provides  services in five  markets:  Portland,
Oregon; Seattle,  Washington; Salt Lake City, Utah; Sacramento,  California; and
Phoenix, Arizona ("hub cities") and their respective surrounding areas (together
with the hub cities,  "market clusters" or "clusters").  The Company's  clusters
include an  extensive  fiber  optic  network.  The  Company  currently  provides
switched  services,  including  local dial tone,  utilizing  five Nortel DMS 500
switches,  in all of its  market  clusters  except  Phoenix,  where the  Company
expects to initiate local dial tone service upon installing an additional switch
in the first  half of 1998.  The  Company  serves  its  cluster  cities  with an
extensive  frame  relay  network  which  is  comprised  of  20  state-of-the-art
switches.  This network covers 29 western local access transport areas ("LATAs")
with 52 network-to-network interfaces, and provides the Company's customers with
national and international  coverage through strategic  relationships with other
providers. The Company has also developed an Internet backbone network providing
Internet  connectivity  in  each  of its  markets  which  includes  access  on a
redundant basis to the three largest  Internet  service  providers in the United
States.

         The  Company  offers a  portfolio  of  products  and  services  in four
categories: dedicated services, local dial tone services, long distance services
and enhanced services.  These products and services include:  dedicated services
which include  point-to-point  communications and dedicated DS-1 and DS-3 lines;
local dial tone services which include voice mail and enhanced  features such as
Integrated  Services  Digital  Network  ("ISDN");  long distance  services which
include  toll-free and prepaid  services;  and enhanced  services  which include
frame relay,  high speed  internet  access,  video  conferencing  and local area
network ("LAN")-to-LAN services with very high transport speeds.

b. Financial information about industry segments.
   ----------------------------------------------

         The  Company  operates  in a single  industry  segment,  communications
services.

c.  Narrative description of business
    ---------------------------------

         The  Company's  focus is on MSAs in the western  United States that the
Company  believes have fewer CLEC  competitors,  a relatively high proportion of
communications-dependent  businesses and the prospect of population and economic
growth above  the national average.  The  Company builds  facilities and  offers
services  in market  clusters  which  exist in  and  around a hub  city  in  the
selected  MSA.  Once a  potential market is identified, the Company  establishes
a network in the hub city and then expands the network to  adjacent  cities  and
communities  of  interest.  Clustering enables the  Company  to (i) optimize its
network  switching  capacity through the ability to place switches  anywhere  in
the  cluster,  (ii) offer  services  to smaller markets adjacent to its existing
networks in which the Company  is less  likely to face strong  competition  from
other CLECs, and (iii) achieve improved network reliability due to higher levels
of on-net traffic.

         The Company formed strategic  relationships with utility companies that
enable it to (i) utilize existing rights-of-way and fiber optic facilities, (ii)
leverage their construction  expertise and local permitting experience and (iii)
have  access  to  capital  in  order  for the  Company  to  extend  its  network
infrastructure more quickly and economically.  The Company's strategic alliances
include  agreements for the  utilization of existing  excess  facilities and the
construction of long-haul networks which link the Portland,  Oregon and Seattle,
Washington  clusters and which will link  Portland and Spokane,  Washington  and
Portland  and  Eugene,  Oregon.  Another  agreement  provides  for a fiber optic
network in the Phoenix, Arizona metropolitan area.

                                       1
<PAGE>
         The Company  interconnects  the  Company's  major market  clusters with
facilities-based broadband, long-haul fiber optic networks.  Interconnecting its
market  clusters  enables  the  Company  to  carry  increasing  amounts  of long
distance,   frame  relay,  Internet  and  point-to-point   traffic  on  its  own
facilities.  By carrying  traffic on its own facilities,  the Company is able to
improve the  utilization of its network  facilities and avoid leased  facilities
charges and certain interconnection costs.

         The Company has  constructed  extensive  voice,  frame relay,  Internet
backbone  and  interconnecting  long-haul  networks,  and each of the  Company's
operating   clusters   includes  an  extensive  fiber  optic  network  backbone.
Approximately half of the Company's services provided to customers are currently
on-net.

         The Company has  substantial  business  relationships  with a few large
customers,  including the major long distance  carriers.  In 1997, one customer,
IXC Communications, accounted for approximately 10% of the Company's revenues. A
portion of the Company's services provided to IXC Communications  will no longer
be required when IXC Communications completes construction of its own facilities
in the first quarter of 1998. A  significant  reduction in the level of services
ELI performs for any of these customers could have a material  adverse effect on
the  Company's  results  of  operations  or  financial  condition.  Most  of the
Company's customers have short notice contracts.

Products and Services

         Since  inception,  the  Company's  product  portfolio  has  grown  from
traditional  competitive access provider ("CAP") services such as point-to-point
connectivity for inter-exchange  carriers ("IXC") and businesses to a full array
of  switched  voice  and  data  services  that  target  communications-intensive
companies in both the retail and wholesale markets.

         The Company  provides  facilities-based  products and services over its
switched  broadband digital network platform.  This network platform enables the
Company  to  integrate  high  revenue  generating  products  into  its  existing
portfolio. The product and service offerings are divided into the following four
categories: Dedicated Services, Local Dial Tone Services, Long Distance Services
and Enhanced Services. The following discussion summarizes the Company's primary
product and services offering.

         Dedicated Services

         The Company's dedicated  point-to-point services, which include special
access and digital private line services,  use high capacity digital circuits to
carry  voice,  video  and  data  services.  Services  are  offered  in  flexible
configurations at standardized transmission speeds.

         The  Company's  network  services are grouped  together  under the name
"LightLine."  LightLine is a dedicated interstate and intrastate  point-to-point
transmission  facility (private line) which may require some specific  equipment
on the  customer's  premises on which the  connection  can be  terminated.  This
equipment  can be leased from the Company by the  customer.  In most cases,  the
Company  uses its own  fiber  optic  networks  to  provide  LightLine  services,
although the Company may lease  facilities  from another  carrier if it does not
have the facilities  available.  LightLine is labeled as four separate  products
differentiated by transmission speed: DS-0, DS-1, DS-3 and OC-3.

         Local Dial Tone Services

         The  Company's  Local  Dial Tone  Services  consist of  products  which
involve the switching of local calls.  There are three primary customer segments
for Local Dial Tone Services:  (i) small customers (less than 10 employees) with
multi-key telephone sets; (ii) medium-sized  customers (10-50 employees) who use
a key system;  and (iii)  customers  with more than 50 employees who have either
their own Private Branch Exchange ("PBX"),  have a hybrid key system, or use the
ILEC's Centrex(tm)  product. The Company's Local Dial Tone Services products are
as follows:

         Basic  Business  Lines offer  either  two-way  lines (calls that can be
placed or received) or one-way lines (outgoing calls from the customer) to small
and medium-sized  businesses with certain types of customer  premise  equipment.
Features  such  as  call  forwarding,   three-way   conferencing/call  transfer,
directory  number  hunting,  caller/number  ID and  speed  dialing  can  also be
included.

         PBX/Key  System  Trunk   Interface  is  offered  to  medium  and  large
businesses that have their own PBX or key system that require special  interface
equipment.   The  Company  offers  both  trunk-side  and  line-side  interfaces.
Trunk-side  connections are used when all calls are directed to an attendant and
can  accommodate  features  such  as  three-way  calling/call   transfer,   call
forwarding and hunting.  Line-side  connections are used when calls are directed
to each station line.

                                       2
<PAGE>
         Virtual  Private  Exchange  ("VPX") is an alternative to the customer's
PBX, key system or  Incumbent Local Exchange Carrier  ("ILEC") provided  Centrex
for medium and large  businesses that require the advanced  functionality  of  a
PBX or key system,  such as call park, call pick-up and last number redial.  The
Company's switch provides approximately 28 features for a flat monthly rate with
optional  features  available  for an additional  charge.  Direct inward dialing
is an inherent  feature of VPX. The Company also offers  the  Nortel  electronic
business  sets which are designed to work with VPX,  allowing  customers to  use
features  with the touch of a button.  VPX can be purchased  separately or  with
the electronic  business set, and  voice mail  can be  added for  an  additional
monthly charge.

         Foreign  Exchange  Service ("FEX")  provides  customers local dial tone
service from an exchange  (central  office)  other than the exchange  from which
they would  normally be served.  Therefore,  the customer would obtain access to
the local  calling  area (free  calling  area) of the foreign  exchange  office.
Customers who experience  significant  long distance  calling between  locations
within  the same  LATA are  typical  users of FEX lines in order to pay one flat
rate per month for these calls, rather than usage-based long distance fees.

         Voice Mail offers  customers  the option of using the  Company's  voice
mail product versus buying their own system.  Voice mail is either offered for a
flat additional fee per month or bundled with other  products,  such as Enhanced
Business  Services ("EBS").  EBS is a package for small business users,  usually
with less than 10 lines.

         CustomLink  (Multi-service  Fractional  T-1) is a package  of  services
built around local dial tone services.  It is the bundling of local lines/trunks
with DS-0s used for other  services,  all  delivered on the same T-1.  Since the
Company in many  cases is already  taking a T-1 to the  customer's  premises  to
deliver dial tone, the customer is offered the  opportunity to utilize the empty
DS-0s on the T-1 for access.

         Customer  Premise   Equipment  ("CPE")  which  is  provided  through  a
partnership  with various  equipment  vendors,  makes available to the Company's
customers Nortel telephone sets, "2500"-type sets and electronic business  sets.

         Integrated Service Digital Network: Primary Rate Interface ("ISDN PRI")
provides customers with a high-speed,  flexible digital access connection to the
Company's network for voice, video and data applications.  Applications  include
Internet access,  telecommuting,  video  conferencing and remote access to local
area networks  ("LAN") or mainframes.  The Company offers ISDN PRI in all of its
service areas.

         Long Distance Service

         The  Company's  Long  Distance  Service is comprised of both retail and
wholesale, switched and dedicated, 1+, toll-free and pre-paid services.

         Retail  Switched  1+ and  toll-free  service  is  offered  to  business
customers,   whereby   the   customer   chooses   the   Company   as  its   long
distance/toll-free  carrier and calls are routed to/from the Company through the
public switched network.
Customers can call intrastate, interstate, or internationally.

         Retail  Dedicated  1+ and  toll-free  service is offered to high volume
business customers,  whereby the customer  establishes a point-to-point  circuit
(i.e. DS-1 or DS-3) from their switch/PBX to the Company's switch. Outbound long
distance and toll-free  calls are routed  directly  to/from the Company via this
dedicated path. Customers can call intrastate, interstate, or internationally.

         Wholesale Termination encompasses an array of 1+ and toll-free services
providing  carriers with  LATA-wide  termination  services,  enabling lower cost
access to, or diversity from, the ILEC's facilities. This product aggregates the
termination  traffic of many carriers at the Company's  switch and terminates it
at a lower cost than each of the carriers could obtain individually.

         Prepaid Debit Cards and Travel Cards,  are product  offerings  allowing
travelers  the  ability to make long  distance  calls  from any phone,  anywhere
through  accessing a toll-free number and the pre-paid  switch.  The service can

                                       3
<PAGE>
either  be pre- or  post-paid  and  sold  through  either  retail  or  wholesale
channels.  Callers  can utilize  the  calling  card from  anywhere in the United
States,  Canada, or 18 other countries  worldwide and can make calls anywhere in
the world.





         Enhanced Services

         The  Company  offers  a wide  range  of  switched  and  dedicated  data
connectivity and internetworking  products.  These products are marketed through
both retail and wholesale channels.

         Dedicated   Internet  Services  provides  access  to  Internet  service
providers and large businesses. The Company offers Internet access through frame
relay, dedicated DS-1, dedicated DS-3 and shared Ethernet.

         Frame  Relay  is  a  data  communications  alternative  to  traditional
point-to-point networks for wide area network ("WAN") connectivity.  The service
provides multi-point, wide-area connectivity using frame relay packet technology
that reduces the  connection  costs of distributed  data  networks.  The service
offers a choice of interface speeds with multiple  virtual circuits  possible at
each site. The Company offers worldwide  connectivity to its network through its
frame relay partners.

         LAN/WAN  Services are turn-key data  networking  solutions that connect
two or more  customer  locations  at very  high  speeds,  typically,  10Mbps  to
100Mbps. Included in the transparent LAN service is point-to-point connectivity,
installed  CPE  and  the  monitoring  of  the   customer's   network  to  insure
connectivity.  Through this service,  the Company  provides native LAN protocols
like Ethernet,  Token Ring or Fiber  Distributed  Data  Interface  ("FDDI") in a
variety of configurations.

         Video  conferencing  is a service  whereby the Company  operates  video
conferencing  rooms in five  cities in the  western  United  States:  Vancouver,
Seattle, Salt Lake City, Portland and Sacramento. The Company can connect two or
more  of  its  rooms  together  and  can  tie  in two  other  non-Company  video
conferencing rooms at the same time.

         The Company expects to offer Asynchronous  Transfer Mode ("ATM") during
1998. It is a service that formats,  switches,  and multiplexes various types of
information,  including voice,  video and data at speeds ranging from T-1 (1.544
megabits  per second  ("Mbps"))  to OC-3 (155  Mbps).  ATM  provides  Quality of
Services ("QoS")  parameters based on the type of information being carried in a
statistically  multiplexed  architecture to reduce network costs.  The Company's
ATM service will provide interworking  between frame relay,  transparent LAN and
native ATM locations.

Regulatory Environment

         The  Company's  services  are subject to federal and state  regulation,
which is subject to  continuing  judicial  scrutiny.  In general,  the Company's
interstate  communications  services are regulated by the Federal Communications
Commission  ("FCC").  The  Company's  intrastate  services are  regulated by the
public  utilities  commission  of each  state in  which  the  Company  operates.
Nationally,  the recent  trend has been for  federal and state  legislators  and
regulators  to  permit  and  encourage  additional   competition  in  the  local
communications industry.

         Federal Regulation

         The FCC exercises  regulatory  jurisdiction over all facilities of, and
services  offered  by,  communications  common  carriers  to  the  extent  those
facilities   are   used  to   provide,   originate   or   terminate   interstate
communications.  The FCC has  established  different  levels of  regulation  for
"dominant"  carriers  and  "nondominant"   carriers.   For  domestic  interstate
communications services, only the ILECs are classified as dominant carriers, and
all other carriers are classified as nondominant carriers.  Additionally, to the
extent a Regional Bell Operating  Company  ("RBOC") is engaged in  out-of-region
long  distance  services  it is  also  classified  as  nondominant  as to  those
services.  Non-RBOC  ILEC-affiliated  long distance  services are  classified as
nondominant  regardless of whether  conducted inside or outside the ILEC service
area.  The FCC  regulates  many of the rates,  charges and  services of dominant
carriers to a greater degree than those of nondominant carriers.

         As  a  nondominant   carrier,  the  Company  may  install  and  operate
facilities   for   domestic   interstate   communications   without   prior  FCC
authorization.  The  Company  is  presently  required  to tariff  certain of its

                                       4
<PAGE>
domestic interstate tariff services.  The FCC has promulgated rules to eliminate
tariffing of  interstate  long distance  services.  Those rules have been stayed
during the pendency of judicial  review.  If and when these rules are allowed to
go into  effect,  the Company will no longer be required to file FCC tariffs for
its interstate long distance services.  Additionally,  under a recent FCC order,
CLECs,  including  the  Company,  are no longer  required  to file  tariffs  for
interstate  exchange  access  services.  As a  provider  of  international  long
distance services, the Company obtained FCC operating authority and maintains an
international  tariff.  The Company is also required to submit certain  periodic
reports to the FCC and to pay regulatory fees.

         Telecommunications Act of 1996

         In February  1996,  the  Telecommunications  Act of 1996  ("1996  Act")
became law. The national public policy framework for  communications was changed
dramatically by the 1996 Act. A central focus of this sweeping policy reform was
to open local communications markets to workable competition.

         The 1996 Act  preempts  state and local  laws to the  extent  that they
prevent  competitive  entry into the  provision of any  communications  service.
Under the 1996 Act,  however,  states  retain  authority  to impose on carriers,
including   the   Company,   requirements   necessary   to  preserve   universal
communications  service,  protect  public safety and welfare,  ensure quality of
service and protect  consumers.  States are also  responsible  for mediating and
arbitrating  interconnection  agreements  between  CLECs and ILECs if  voluntary
negotiations fail.

         In order to create  an  environment  in which  local  competition  is a
practical   possibility,   the  1996  Act   imposes  a  number  of  access   and
interconnection  requirements on all local communications  providers.  All local
carriers,  including the Company, must interconnect with other carriers,  permit
resale of their services, provide local telephone number portability and dialing
parity,  provide  access to  poles,  ducts,  conduits,  and  rights-of-way,  and
complete calls originated by competing carriers under reciprocal compensation or
mutual termination arrangements.

         Full  implementation  of the  provisions  of the 1996 Act will  require
further  federal and state rule  makings,  industry  negotiations,  and possible
legal enforcement actions and remedies.

         RBOCs have been barred from  participating  in the market for interLATA
services (which is primarily long distance traffic) in their service territories
since the break up of the Bell System in 1984. The 1996 ACT provides a mechanism
for an RBOC to  enter  interLATA  markets  which  would  increase  the  level of
competition faced by the Company's retail long distance services.  However,  the
provisions  of the Act that  allows  for the  RBOCs to enter  the long  distance
market are still under scrutiny.

         Before  an RBOC can  enter  an  interLATA  market  it must  first  meet
specific criteria set out by section 271 of the Act. These criteria are commonly
referred to as the "14 point check list".  The checklist is meant to ensure that
the RBOCs have opened up their local markets to competition  before they compete
in the long distance  markets in their  regions.  To date, no RBOC has satisfied
the  FCC  that  it  has  met  the  criteria.  In  frustration,   one  RBOC,  SBC
Communications  (which  was later  joined by US West in the  lawsuit),  took the
checklist  provisions  to Court on  constitutional  grounds and won a victory of
sorts.  A US District  judge in the Northern  District of Texas at Wichita Falls
ruled  that the  Section  271  language  constituted  a "bill of  attainder"  by
unfairly  singling out,  presupposing  guilt, and then punishing the RBOCs. This
decision was immediately appealed to the Court of Appeals for the  Fifth Circuit
Court, and the RBOCs continue  to  pursue  checklist  approval,  however  it  is
unclear how or when the RBOCs will actually be competing in in-region  interLATA
markets.

         Interconnection

         On August 8, 1996, the FCC issued an order  containing  rules providing
guidance to the ILECs,  CLECs, long distance  companies and state public utility
commissions  ("PUCs") on several  provisions of the 1996 Act. The rules include,
among other things, FCC guidance on: (i) discounts for end-to-end resale of ILEC
local exchange  services;  (ii)  availability of unbundled local loops and other
unbundled  ILEC  network  elements;  (iii)  the use of  Total  Element  Long Run
Incremental  Costs in the  pricing of these  unbundled  network  elements;  (iv)
average default proxy prices for unbundled local loops in each state; (v) mutual
compensation  proxy rates for termination of ILEC/CLEC local calls; and (vi) the
ability  of  CLECs  and  other   interconnecters   to  opt  into   portions   of
interconnection  agreements  negotiated  by the ILECs with other  parties on the
basis of the ability to "pick and choose"  among the  provisions  of an existing
agreement.

         Various  parties,  including ILECs and state PUCs, filed appeals of the
FCC's August 8, 1996 interconnection  order, many of which were consolidated and
transferred  to the U.S.  Court of Appeals for the Eighth  Circuit.  On July 18,

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<PAGE>
1997, the Eight Circuit rendered its decision,  which held that, in general, the
FCC does not have jurisdiction over prices for interconnection,  resale,  leased
unbundled  network  elements and traffic  termination.  The Eighth  Circuit also
overturned  the FCC's "pick and choose" rules as well as certain other FCC rules
implementing  the 1996 Act's local  competition  provisions.  In  addition,  the
Eighth Circuit decision  substantially limits the FCC's authority to enforce the
local  competition  provisions  of the  1996  Act.  The  FCC and  other  parties
petitioned  for Supreme Court review of the decision,  and the Supreme Court has
granted certiorari.

         In the short term the Company believes that the Eighth Circuit decision
will not have a material  adverse effect on it, because the Company  already has
interconnection  agreements  in place,  or  expects to have such  agreements  in
place,  under the  provisions of the FCC's order and the 1996 Act which were not
invalidated by the Court. The decision does not delay the  implementation of the
1996 Act by the  parties  and by the  state  PUCs,  but  rather  eliminates  the
guidance  on pricing  and pick and choose as well as other  issues  that the FCC
sought to provide to the parties and the state PUCs.

         In the long term,  the Eighth  Circuit's  decision makes it more likely
that the rules governing local  competition will vary from state to state.  Most
states have already  begun to  establish  rules for local  competition  that are
consistent with the FCC rules  overturned by the Eighth Circuit.  If a patchwork
of state  regulations were to develop,  it could increase the Company's costs of
regulatory  compliance  and could make  competitive  entry in some  markets more
difficult and expensive than in others

         Universal Service

         The 1996 Act  requires  the FCC to establish  explicit  mechanisms  for
subsidizing service to rural areas, low-income customers, schools and libraries,
and rural health care providers. On May 8, 1997, the FCC adopted an Order in its
universal  service  proceeding  to implement  this mandate.  All  communications
carriers,  including the Company and other CLECs,  are required under that Order
to contribute to a federal  universal  service fund.  The  availability  of such
support  will assist such  entities in  obtaining  advanced  communications  and
information  services.  Most  states are  expected to  implement  state-specific
universal  service  funds to  supplement  the federal  programs.  All  carriers,
including the Company, will be required to contribute to those state and federal
funds. At this time, the Company is unable to quantify the total amount of these
payments it will be required to make or the effect these required  payments will
have on its financial condition, statements of operations or cash flows.

         Access Charge/Price Cap

         In a  combined  Report  and Order and  Notice  of  Proposed  Rulemaking
released on December 24, 1996, the FCC made changes and proposed further changes
in the  interstate  access charge  structure.  In the Report and Order,  the FCC
removed  restrictions  on the ILECs' ability to lower access prices and proposed
the  relaxation  of the  regulation  of new  switched  access  services in those
markets  where  there  are  other  providers  of  access  services.  If any such
increased  pricing  flexibility is allowed but is not  effectively  monitored by
federal  regulators,  it could have a material  adverse  effect on the Company's
revenues from interstate  access services.  On May 16, 1997, the FCC released an
order  revising its access charge rate  structure.  The new rules  substantially
increase  the costs that ILECs  subject to the FCC's price cap rules  (price cap
local exchange carriers),  recover through monthly, non-traffic sensitive access
charges and substantially decrease the costs that price cap LECs recover through
traffic  sensitive  access charges.  In the May 16 order, the FCC also announced
its plan to bring interstate access rate levels more in line with cost. The plan
will include  rules to be  established  sometime  this year that grant price cap
LECs increased pricing flexibility upon demonstrations of increased  competition
(or  potential  competition)  in relevant  markets.  The manner in which the FCC
implements  this  approach to lowering  access charge levels may have a material
adverse  effect on the  Company's  ability to compete  in  providing  interstate
access services.  Under the FCC's rules, which are the subject of a petition for
reconsideration, the Company will no longer be required to pay a portion of ILEC
access charges (the terminating  interconnection  charge) by connecting directly
to ILEC end offices.  Additionally, the Company may be able to differentiate its
access prices from those of competing  ILECs by  eliminating  certain other rate
elements.  Several  parties have  appealed the May 16 order.  Those appeals have
been  consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.

         As part of the overall plan to lower  interstate  access rates, the FCC
also  released an order on May 21, 1997,  in which the FCC revised its price cap
rules. In the order, the FCC increased the so-called X-Factor (the percentage by
which price cap LECs must lower their interstate  access charges every year, net
of inflation and exogenous cost increases) and made it uniform for all price cap
LECs.  The  results  of  these  rule  changes  will be both a  one-time  overall
reduction  in price cap ILEC  interstate  access  charges and an increase in the
rate at which those charges will be reduced in the future.  Several parties have

                                       6
<PAGE>
appealed the May 21 order.  Those appeals have been consolidated and transferred
to the United  States  Court of  Appeals  for the Tenth  Circuit  where they are
currently pending.

         State Regulation

         Most  state  public  utilities   commissions   require   communications
providers such as the Company to obtain operating  authority prior to initiating
intrastate  services.  Most states  also  require the filing of tariffs or price
lists  and/or  customer-specific  contracts.  In the states in which the Company
currently  operates,  the  Company  is not  subject to  rate-of-return  or price
regulation.  The  Company is  subject,  however,  to  state-specific  quality of
service,   universal   service,   periodic   reporting   and  other   regulatory
requirements,  although the extent of such  requirements  is generally less than
that  applicable  to ILECs.  The  Company  currently  has  intrastate  operating
authority  in the  states of  Arizona,  California,  Idaho,  Minnesota,  Nevada,
Oregon, Utah, and Washington.

         Local Government Authorizations

         The  Company  generally  is  required  to  obtain  street  opening  and
construction  permits from city and county  authorities  prior to  installing or
expanding  its  fiber  optic  network  facilities.  In most  states in which the
Company  currently  operates  as a CLEC,  it must first  obtain a  franchise  or
license from each incorporated city and town, and sometimes from each county, in
which it wishes to  utilize  public  rights of way.  The  franchise  or  license
establishes the overall terms,  conditions and fees for use of the rights of way
in the particular jurisdiction.  In California, the Company and other holders of
certification  from the California Public Utilities  Commission are not required
to obtain municipal franchises nor pay franchise fees.

         The 1996 Act now provides that while local  governments may continue to
manage the public  rights of way,  they may not impose  conditions  on companies
like the  Company  which  constitute  barriers  to  entry in the  communications
market.   Further,   the  1996  Act   requires   that   municipal   right-of-way
authorizations  be  granted  on a  nondiscriminatory  basis and that any fees be
reasonable.

Competition

         ILEC Competition

         In each of its markets, the Company faces significant  competition from
the ILEC, which currently  dominates the local exchange market and is a de facto
monopoly  provider of local switched voice services.  The Company's primary ILEC
competitors   are  U  S  WEST,   PacBell  and  GTE.  ILECs  have   long-standing
relationships  with their  customers,  have  financial and  technical  resources
substantially  greater  than those of the Company and benefit  from  federal and
state laws and regulations that, the Company  believes,  in some instances favor
the ILECs over CLECs.  Under  certain  circumstances,  FCC and state  regulatory
authorities  may  provide  ILECs with  increased  flexibility  to reprice  their
services as competition  develops and as ILECs allow competitors to interconnect
to their networks. In addition,  some new entrants in the local market may price
certain  services to  particular  customers or for  particular  routes below the
prices  charged by the Company  for  services  to those  customers  or for those
routes,  just as the Company may itself  underprice those new entrants for other
services,  customers or routes.  If the ILECs and other  competitors lower their
rates and can sustain  significantly  lower prices over time, this may adversely
affect  revenues of the Company if it is required by market pressure to price at
or below the ILECs' prices.  If regulatory  decisions permit the ILECs to charge
competitive access providers ("CAPs")/CLECs substantial fees for interconnection
to the ILECs' networks or afford ILECs other regulatory  relief,  such decisions
could also have a material adverse effect on the Company.

         Under  the 1996  Act,  ILECs  formerly  subject  to  anti-trust  decree
restrictions on interLATA  (interexchange)  long distance services are no longer
permanently  barred  from  entry  into  these  businesses,  subject  to  certain
requirements in the 1996 Act and rules and policies to be implemented by the FCC
and the states. The FCC may authorize an RBOC to provide interLATA services in a
state when the RBOC enters into a state  utility  commission-approved  agreement
with  one or  more  facilities-based  competitors  which  provide  business  and
residential  local exchange  service and such  agreement  satisfies 14 specified
interconnection  requirements.  In evaluating an RBOC  application for interLATA
entry, the FCC must consult with the U.S. Department of Justice.  Alternatively,
if no such facilities-based  competitors request such interconnection,  the RBOC
may obtain  authority  from the FCC to provide  interLATA  services  if the RBOC
obtains state utility commission  approval of a statement of generally available
terms and conditions of interconnection that satisfies the requirements.  If and
when an RBOC obtains authority to provide interLATA services, it will be able to
offer customers local and long distance telephone services. This will permit the
RBOC to offer a full range of services to  potential  customers  in a new region

                                       7
<PAGE>
and thus eliminate an existing competitive  advantage of the Company.  Given the
resources  and  experience  the RBOCs  currently  possess in the local  exchange
market,  the ability to provide both local and long distance services could make
the RBOCs very strong competitors.

         The  1996  Act  imposes  interconnection   obligations  on  ILECs,  and
generally   requires   that   interconnection    charges   be   cost-based   and
nondiscriminatory.  To the extent  the  Company  interconnects  with and uses an
ILEC's network to service the Company's customers, the Company is dependent upon
the technology and capabilities of the ILEC to meet certain communications needs
of the Company's  customers and to maintain its service  standards.  The Company
will become  increasingly  dependent on  interconnection  with ILECs as switched
services become a greater percentage of the Company's business.  However,  there
can be no  assurance  that the  Company  will be able to obtain the  services it
requires at rates, and on terms and conditions, that permit the Company to offer
switched  services at rates that are both profitable and  competitive.  However,
historically,  the  Company  has been  able to build  new  networks  and  expand
existing  networks in a more timely and economical  manner than most CAP or CLEC
competitors  through  strategic  arrangements  such as leasing fiber optic cable
from others that already possess rights-of-way and have facilities in place.

         CLEC Competition

         The  Company's  facility-based  operational  CLEC  competitors  in  the
markets  in  which  the  Company  operates   include:   MCI  Metro,   Inc.;  MFS
Telecommunications,  Inc.;  Teleport  Communications  Group, Inc.; Brooks Fiber;
NEXTLINK  Communications,  Inc.;  and  GST  Telecommunications,  Inc.  Based  on
management's  experience,  the initial market entrant with an operational  fiber
optic CLEC network  generally  enjoys a competitive  advantage  over other CLECs
that  later  enter the  market.  In each of the  clusters  in which the  Company
operates,  at least one other CLEC, and in some cases several other CLECs, offer
many  of the  same  local  communications  services  provided  by  the  Company,
generally at similar prices.

         Competition From Others

         Potential  and actual new market  entrants in the local  communications
services business include RBOCs entering new geographic markets,  inter-exchange
carriers ("IXCs"), cable television companies, electric utilities, international
carriers, satellite carriers, teleports,  microwave carriers, wireless telephone
system  operators and private  networks built by large end users,  many of which
may have  financial,  personnel and other resources  substantially  greater than
those of the Company.  In addition,  the current trend of business  combinations
and alliances in the communications  industry,  including mergers between RBOCs,
may increase  competition for the Company.  With the passage of the 1996 Act and
the entry of RBOCs into the long distance market, the Company believes that IXCs
may be motivated to construct  their own local  facilities or otherwise  acquire
the right to use local  facilities  and/or  resell  the  local  services  of the
Company's competitors.

         Dedicated Services

         Competition for dedicated services is based on price, quality,  network
reliability,  customer  service,  service  features  and  responsiveness  to the
customer's  needs.  The Company's fiber optic networks will provide both diverse
access routing and redundant  electronics,  design  features not widely deployed
within the ILEC's networks.

         High-Speed Data Service

         The Company's  competitors for high-speed  data services  include major
IXCs, CAPs, other CLECs, and various providers of niche services (e.g., Internet
access  providers,  router  management  services and systems  integrators).  The
interconnectivity  of the Company's  markets may create  additional  competitive
advantages over other data service  providers that must obtain local access from
the  ILEC or  another  CLEC in each  market  or  that  cannot  obtain  intercity
transport rates on as favorable terms as the Company.

         Internet Services

         The  market for  Internet  access and  related  services  in the United
States is extremely  competitive,  with no  substantial  barriers to entry.  The
Company expects that competition will intensify as existing services and network
providers and new entrants  compete for  customers.  The  Company's  current and
future competitors include communications companies,  including the RBOCs, IXCs,
CLECs and CATVs, and other Internet access providers.  Many of these competitors
have greater market  presence and greater  financial,  technical,  marketing and
human  resources,  more  extensive  infrastructure  and  stronger  customer  and
strategic relationships than the Company.

                                       8
<PAGE>
Operations/Information Technology

         The  Company has  implemented  an  integrated  network  management  and
maintenance  system designed to monitor and test the Company's networks 24 hours
a day, seven days a week and is developing a fully integrated  superior customer
care system from three  leading  vendors  which will  automate  the entire order
management  process (i.e.,  order  placement,  design,  provisioning and billing
preparation)  for both  wholesale  and retail  customers.  The order  placement,
design and  provisioning  components  of the order  management  system have been
installed and are operational.  The current billing management system is capable
of producing a single bill  detailing all of the products and services  provided
to both wholesale and retail customers.  The Company is installing a new billing
system, which will allow the Company to bill for incremental services and unique
product  bundles  in  a  more  rapid  and  cost-efficient  manner.  The  Company
anticipates certain enhancements to the billing system may be necessary.

         Impact of Year 2000 Issue

         The Year 2000 issue is the result of computer  programs  being  written
using two  digits  rather  than four to define  the  applicable  year.  Computer
programs  that have  date-sensitive  software may recognize a date using "00" as
the year 1900 rather that the Year 2000.  This could result in a system  failure
or  miscalculation  causing  disruptions of operations,  including,  among other
things, a temporary inability to process  transactions,  send invoices or engage
in similar normal business activities.

         Based upon an assessment, conducted in conjunction with and information
systems  consulting  firm, it has been  determined  that a limited number of the
Company's  software  programs need to be modified so that dates beyond  December
31, 1999,  are properly  recognized.  The Company  presently  believes that with
modifications  to existing  software and  conversions to new software,  the Year
2000  Issue  can  be  mitigated  and  the  anticipated  conversion  cost  to  be
insignificant.  However, if such modifications and conversions are not made in a
timely  fashion,  the Year  2000  Issue  could  have a  material  impact  on the
operations of the Company.

         The Company has  developed a plan to mitigate the Year 2000 Issue.  The
plan includes formal  communications  with all of its  significant  suppliers to
determine the extent to which the Company is vulnerable to those third  parties'
failure  to  remediate  their  own Year  2000  Issue.  However,  there can be no
guarantee  that the  systems  of  suppliers  or  other  companies  on which  the
Company's systems rely will be timely converted, or that a failure to convert by
another  company,  or a  conversion  that is  incompatible  with  the  Company's
systems,  would not have material adverse effect on the Company. The Company has
determined  that is has limited  exposure to  contingencies  related to the Year
2000 Issue for the services marketed.

         The Company is and will  continue  to use both  internal  and  external
resources  to  reprogram  or  replace  and  test  software  for  the  Year  2000
compliance.  The  Company  plans to  complete  its Year 2000  modifications  and
conversions, related to its business operations no later than June 30, 1999. The
total cost of the Year 2000 modifications and conversions has not been estimated
and is anticipated to be insignificant.

Employees

         As of December 31, 1997 the Company  employed 573 persons.  None of the
Company's  employees are represented by a union,  and the Company  considers its
employee relations to be excellent.


d. Financial information about foreign and domestic operations and export sales
   ----------------------------------------------------------------------------

         The Company does not have any foreign operations or export sales.

Item 2.  Description of Property
         -----------------------    

         The Company manages its operations through its corporate  headquarters,
located  at 8100  NE  Parkway  Drive,  Suite  150,  Vancouver,  Washington.  Its
telephone number at that address is (360) 892-1000. In addition, the Company has
local  offices in  Portland,  Seattle,  Sacramento,  Phoenix and Salt Lake City.
Currently,  all of the Company's office space is leased and a warehouse facility
is  maintained  in Portland,  Oregon.  The Company  also leases  network hub and
network  equipment  installation  sites  in  various  locations  throughout  the
metropolitan  areas in which it  provides  products  and  services.  The office,

                                       9
<PAGE>
warehouse and other facilities leases expire on various dates through July 2014.
Additional  facilities  will be needed as the Company  expands its markets.  The
Company owns a 6.6-acre parcel of land in Vancouver,  Washington, on which it is
constructing  its  new  corporate  headquarters  building,   anticipated  to  be
completed April 1998.

          In June 1995 the Company  entered  into  agreements  to lease  certain
equipment to be constructed for the Company (the "Lease"). The lessor has agreed
to  commit  up to a  maximum  of $110  million  of the  cost of  purchasing  and
installing the equipment. Rental obligations for the equipment commenced in June
1995, and, with renewal options, will expire on April 30, 2002. The Company may,
at its option,  purchase the equipment  either at or before the end of the Lease
at a price  approximating  the  amounts  expended  by the lessor to acquire  and
install the leased equipment.  If the Company does not purchase the equipment by
April 30, 2002, it will be sold to a third party and the Company will  guarantee
that the sales price to be received by the lessor will equal the acquisition and
installation  costs,  subject generally to a maximum payment under the guarantee
of 80% of such costs.  Payments under the lease depend on then current  interest
rates, and assuming  continuation of current interest rates and full utilization
of the lease  facility,  payments  would  amount to  approximately  $6.5 million
annually through April 30, 2002 and,  assuming  exercise of the purchase option,
approximately  $110 million in 2002.  Citizens has guaranteed all obligations of
the Company under the Lease and the Company will pay Citizens a guarantee fee at
the rate of 3.25% per annum based on the amount of the  lessor's  investment  in
the leased assets.

          The Company  entered into a 5 year operating  lease for  approximately
43,000  square  foot of space at 8100 NE Parkway  Drive,  Vancouver,  Washington
which   begins   April  1998.   The  office  space  will  be  used  for  certain
administrative functions.

Item 3.   Legal Proceedings
          -----------------

         On June 30, 1997,  the Company  filed an antitrust  action  against U S
WEST,  Communications,  Inc.  (U S West),  in the U.S.  District  Court  for the
Western  District of  Washington.  The Company  alleged  that U S WEST  violated
federal and state  antitrust laws as well as various  federal and state laws and
commission orders by failing to provide to the Company adequate  interconnection
services and facilities to enable the Company to provide quality services to its
customers.  The  Company  is  seeking  an  unspecified  amount of  damages to be
determined  at  trial,  as well  as an  injunction  to  prohibit  U S West  from
discriminating  against  the Company  and its  customers.  U S WEST has filed an
answer  denying all liability  and it seeks to recover its costs and  attorney's
fees.  U S WEST  filed a  motion  to stay the case  pending  arbitration  of the
antitrust  claims.  On  December  29,  1997,  the trial  court  entered an order
requiring  the  antitrust   claims   arising  under  the   now-expired   Interim
Interconnection  Agreements to be  arbitrated.  The court also  invalidated  the
limitations  on the Company's  remedies  that were  contained in the old Interim
Agreements so that the arbitrator  may award treble damages and attorney's  fees
if the Company prevails on its antitrust claims. All damage claims arising after
the  termination of the old Interim  Agreements are not stayed and will continue
to be  prosecuted  in the  federal  court.  U S WEST also filed an appeal to the
Ninth  Circuit  Court of Appeals  from that portion of the trial  court's  order
dated December 29, 1997, denying  arbitration of the Company's  antitrust claims
arising after the termination of the Interim Interconnection Agreements.

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

          Not applicable.

                                       10
<PAGE>
                                     PART II
                                     -------

Executive Officers
------------------

         The  executive  officers of the Company and their  respective  ages and
positions are set forth below.
<TABLE>
<CAPTION>

Name                              Age      Title
----                              ---      -----
<S>                               <C>      <C>
Leonard Tow                       69       Chairman of the Board
Daryl A. Ferguson                 59       Vice Chairman of the Board and Chief Executive Officer
David B. Sharkey                  48       President, Chief Operating Officer and Director
Robert J. DeSantis                42       Chief Financial Officer, Vice President and Treasurer
James Berthot                     54       Vice President - Marketing and Product Development
Todd Hanson                       36       Vice President - Engineering
Randall Lis                       38       Vice President - Staff Operations
Michael J. Miller                 41       Vice President - Planning
Kerry Rea                         39       Vice President and Controller
John Wolff                        51       Vice President - New City Development

</TABLE>

         Leonard Tow has been a director  and  Chairman  of the Board of the
Company since August 1994.  Mr. Tow has been a Director of Citizens since April 
1989. In June 1990, he was elected Chairman of the Board and Chief  Executive  
Officer of Citizens.  He was Chief  Financial  Officer of Citizens from October 
1991 through  November 1997. He has also been a Director and Chief Executive  
Officer of Century  Communications  Corp.  since its  incorporation  in 1973, 
and Chairman of its Board of Directors since October 1989.  He is a Director of 
Hungarian Telephone and Cable Corporation.

         Daryl A.  Ferguson has been a director of the Company  since  September
1995 and Vice Chairman of the Board and Chief  Executive  Officer of the Company
since October 1997. Mr. Ferguson has been President and Chief Operating  Officer
of Citizens  since June 1990.  He is  currently  also a Director  of  Centennial
Cellular Corp.

         David B. Sharkey  joined the Company as President  and Chief  Executive
Officer in August 1994,  has been a director  since  September  1995,  and Chief
Operating Officer since October 1997. Prior to joining the Company,  he was Vice
President  and  General  Manager  of Mobile  Media,  Inc.,  a  wireless  company
headquartered in New Jersey, from August 1989 through July 1994.

         Robert  J.  DeSantis,  Chief  Financial  Officer,  Vice  President  and
Treasurer  of the  Company  since  August  1994,  has been  Vice  President  and
Treasurer of Citizens  since  October  1991 and Chief  Financial  Officer  since
November 1997.

         James  Berthot  joined the Company as Vice  President of Marketing  and
Product  Development  in July 1995.  Prior to joining the Company,  from January
1990 to July 1995,  Mr.  Berthot was Director of Marketing and Public  Relations
for Century Telephone Enterprises, Inc.'s Telephone Group.

         Todd Hanson  joined the Company as Vice  President of  Engineering  in
June 1995.  Prior to joining the Company, from 1993 to 1995, Mr. Hanson served 
as Vice President of Network  Engineering  for MFS Telecom.  Mr. Hanson was 
Senior  Director of Project Management and Access Engineering at AT&T Canada in 
1992 and 1993.


         Randall Lis joined the Company as Vice President-Operations in February
1995 and has served as Vice  President-Staff  Operations since April 1996. Prior
to joining the Company,  from 1993 to 1995,  Mr. Lis was General  Manager of the
Mid-Atlantic  Region of Nextel  Communications.  From 1985 through 1993, Mr. Lis
held several positions with Metromedia and Metromedia Paging, in which he served
as Business Manager, General Manager and Senior Director of Operations.


         Michael J. Miller joined the Company as Director of Accounting in March
1994,  was promoted to Vice President of Finance in October 1995 and became Vice
President-Planning  in  September  1997.  Prior to  joining  the  Company,  from
February 1988 to December 1993, Mr. Miller was Manager of Financial Planning and
Analysis for NERCO, Inc.

                                       11
<PAGE>
         Kerry D. Rea joined the Company as Vice  President and Controller in
October 1997.  Prior to joining the Company, Mr. Rea served as a Controller for 
Mattel,  Inc.  from March 1997 to October 1997, and its predecessor Tyco Toys,  
Inc. from November 1989 to March 1997.


         John Wolff joined the Company as Vice  President-Sales  in October 1994
and became Vice  President-New  City  Development in January 1998. Mr. Wolff was
with Mobil Media from 1992 until 1994, at which time he joined the Company.

                                     PART II
                                     -------

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
        ------------------------------------------------------------------------

                           PRICE RANGE OF COMMON STOCK

          The Company began trading publicly on November 25, 1997, and is traded
on the Nasdaq National Market under the symbol ELIX. The high and low prices per
share as taken from the daily quotations  published in the "Wall Street Journal"
from that date through December 31, 1997 were $16 1/8 and $13 1/8, respectively.

As of March 6, 1998, the approximate  number of record  security  holders of the
Company's  Common Stock Class A was 40. This  information  was obtained from the
Company's transfer agent.

                                    DIVIDENDS

          The Company has no current  intention  to pay  dividends on its common
stock.

    INFORMATION ABOUT RECENT SALES OF UNREGISTERED SECURITIES AND THE USE OF
   PROCEEDS FROM SALES OF REGISTERED SECURITIES IN AN INITIAL PUBLIC OFFERING

         On November 21, 1997, the Company's Registration Statement on Form S-1,
file  number  333-35227,   registering  $207,000,000  aggregate  amount  of  the
Company's Class A Common Stock, par value $.01 per share, became effective under
the Securities Act of 1933. On November 24, 1997, the offering date, the company
sold 8,000,000  shares of the Company's  Class A Common Stock for gross proceeds
of $128,000,000.  The Offering was terminated  before the sale of all securities
registered.  The U.S. managing  underwriters were Lehman Brothers Inc.,  Merrill
Lynch, Pierce,  Fenner & Smith Incorporated,  Morgan Stanley & Co. Incorporated,
and Deutsche Morgan Grenfell,  Inc. The International managing underwriters were
Lehman Brothers  International  (Europe),  Merrill Lynch  International,  Morgan
Stanley & Co.  International  Limited and Morgan  Grenfell & Co.  Limited.  From
November 21, 1997,  the effective  date,  until  December 31, 1997,  the Company
incurred underwriting  discounts and commissions and other expense in connection
with the issuance and  distribution  of the Class A Common Stock of  $9,446,000.
The actual net offering proceeds of the offering after the deduction of expenses
were $118,554,000. On November 25, 1997, the Company drew down $120,000,000 from
its bank credit  facility and  utilized it to pay  outstanding  indebtedness  to
Citizens.  Subsequently,  $80,000,000 of the net offering  proceeds was used for
the repayment of  indebtedness incurred  under the Credit  Facility, $32,023,000
was used for  operating  and capital  expenditures, and  $6,531,000  of  the
offering  proceeds  remains in cash at December  31, 1997 to be used for ongoing
operating and capital expenditures.  On December 30, 1997, the Company drew down
an additional $20,000,000 from the Credit Facility.

                                       12
<PAGE>

<TABLE>
<CAPTION>



Item 6.                 Selected Financial and Operating Data
----------------------------------------------------------------------------------------------------------------
($ in thousands, except per      1997 vs 1996                         Years ended December 31,
<S>                              <C>                <C>          <C>            <C>           <C>         <C> 
share                            % Incr(Decr)       1997         1996           1995          1994        1993
----------------------------------------------------------------------------------------------------------------
Statements of Operations Data
Revenues                            95%         $  61,084     $  31,309      $  15,660     $   8,152    $  3,705
Loss from operations                (16%)         $ (34,095)    $ (29,383)     $ (19,950)    $  (9,541)   $ (2,884)
Net loss                            (16%)         $ (33,945)    $ (29,383)     $ (20,322)    $ (10,414)   $ (3,937)   
Net loss per share (1)              N/A         $    (.80)    $       -      $       -     $       -    $      -
----------------------------------------------------------------------------------------------------------------
Balance Sheet Data                                                       As at December 31,
                                                    1997         1996            1995         1994        1993
                                --------------------------------------------------------------------------------
Total assets                        84%         $ 359,962     $ 195,656      $ 128,901     $ 110,691    $ 47,840
Long-term obligations (2)         (55%)         $  70,511     $ 155,395      $  64,941     $  41,674    $ 31,091
Shareholders' equity             2,197%         $ 213,314     $   9,286      $  38,699     $  55,991    $  9,150
----------------------------------------------------------------------------------------------------------------
Operating Data                                                          Years ended December 31,
                                                    1997         1996            1995         1994        1993
                                --------------------------------------------------------------------------------
EBITDA without operating lease (3)   9%         $ (17,692)    $ (19,468)     $ (12,038)    $  (7,065)   $ (1,317)
Revenue  per employee               37%         $     107     $      78      $      70     $      64    $     49

                                                                         As at December 31,
                                --------------------------------------------------------------------------------
Property, plant & equipment         67%         $ 316,109     $ 189,334      $ 127,297     $ 108,549    $ 45,309
 - under operating lease (4)        53%         $  87,426     $  57,279      $  36,858     $       -    $      -
                                --------------------------------------------------------------------------------
 - Total                            64%         $ 403,535     $ 246,613      $ 164,155     $ 108,549    $ 45,309
                                --------------------------------------------------------------------------------
Route miles (5)                     75%             2,494         1,428            780           601         131
Fiber miles (5)                     44%           140,812        97,665         52,013        37,504       9,796
Buildings connected                 39%               610           438            282           191         104
Access line equivalents            291%            34,328         8,779            N/A           N/A         N/A
Switches installed:
   Voice                             -%                 5             5              2             2           1
   Frame relay                      33%                20            15              5             2           -
   Internet                        113%                17             8              -             -           -
   ATM                              N/A                 8             -              -             -           -
Employees                           43%               573           402            225           127          75

Customers                           53%             1,165           763            402           221           -
----------------------------------------------------------------------------------------------------------------
Information presented above should be read in conjunction with the Company's Financial Statements and 
accompanying Notes.
(1) Net loss per share for years prior to 1997 is not presented because it is not meaningful (see Note 2 of Notes
    to Financial Statements).
(2) Long-term obligations include amounts due to Citizens in the years ended 1993 - 1996, capital lease 
    obligations and long-term debt.
(3) EBITDA consists of Earnings Before Interest, Income Taxes, Depreciation and Amortization and excludes the
    effects of the operating lease and construction agency agreement as described in Note 11 of Notes to Financial
    Statements.  EBITDA is a measure commonly used in the communications industry to analyze companies on the basis
    of operating  performance.  It is not a measure of financial performance under generally accepted accounting
    principles and should not be considered as an alternative to net income as a measure of performance nor as
    an alternative to cash flow as a measure of liquidity.
(4) Facilities under an operating lease agreement under which the Company has the option to purchase the facilities 
    at the end of the lease term (see Note 11 of Notes to Financial Statements).          
(5) Route miles and fiber miles also include those to which the Company has exclusive use pursuant to license and 
    lease arrangements.
</TABLE>

                                       13
<PAGE>
Item 7.   Management's Discussion and Analysis of Financial Condition and 
          ---------------------------------------------------------------
          Results of Operations
          ---------------------

          This annual  report on Form 10-K contains  forward-looking  statements
that are subject to risks and uncertainties  which could cause actual results to
differ  materially from those expressed or implied in the statements.  These and
all  forward-looking   statements  (including  oral  representations)  are  only
predictions or statements of current plans, which are constantly under review by
the  Company.  All  forward-looking  statements  may differ from  actual  future
results due to, but not limited  to,  changes in the local and overall  economy,
the nature and pace of technological  changes,  the number and  effectiveness of
competitors in the Company's  markets,  success in marketing  strategy,  weather
conditions,  changes in legal and regulatory  policy,  the Company's  ability to
identify  future markets and  successfully  expand  existing ones and the mix of
products and services  offered in the Company's  target markets.  Readers should
consider these important  factors in evaluating any statement  contained  herein
and/or made by the Company or on its behalf. The following information should be
read in conjunction with the financial statements and related footnotes included
in this report.

Overview
--------

         The  Company  is a fully  integrated,  facilities-based  communications
provider  operating  in five  major  metropolitan  areas of the  western  United
States.  The  Company  currently  provides  services in the  following  markets:
Portland,  Oregon;  Seattle,  Washington;  Salt  Lake  City,  Utah;  Sacramento,
California; and Phoenix, Arizona ("hub cities") and their respective surrounding
areas (together with the hub cities, "market clusters" or "clusters"). Among its
five current  market  clusters,  the Company has been  operating in Portland and
Seattle since 1991,  Salt Lake City and Sacramento  since 1994 and Phoenix since
1995.  The Company began building its switched data network in 1994. The Company
installed  its  first  local  switch  in the  Seattle  market  in 1994 and began
generating  revenues  in early 1995  followed  by  Portland,  Salt Lake City and
Sacramento in 1996. The Company  intends to install a local switch in Phoenix in
1998.  The Company placed in service its first long haul network from Phoenix to
Las Vegas in 1995 and its second long haul network  from  Portland to Seattle in
early 1997.

         The Company's product portfolio has grown from traditional  competitive
access provider services such as  point-to-point  connectivity for interexchange
carriers and  businesses to a full array of switched  voice,  data and long-haul
services targeted toward communications-intensive  businesses in both the retail
and wholesale markets. The Company offers an extensive portfolio of products and
services in four categories:  dedicated services, local telephone, long distance
and enhanced services as follows:

           -  Dedicated Services - point-to-point services that include special
              access,  digital private line and other dedicated services both in
              metropolitan and long-haul applications.

           -  Local Dial Tone Services - local dial tone and switched  products
              and services that include  lines,  trunks,  ISDN PRI, local access
              and Centrex, among other services.

           -  Long  Distance - wholesale  and retail  services that  include 1+,
              toll-free, pre-paid, originating and terminating access services.

           -  Enhanced   Services - switched  and  dedicated  data  connectivity
              services that includes frame relay,  video  conferencing,  LAN/WAN
              and Internet transport services.

The Company  categorizes  its operating  expenses into the following  four major
groupings:

           -  Network Access - includes all leased  network  facilities and
              resold product expenses.

           -  Sales and  Marketing  - includes  all direct and  indirect   sales
              channel  expenses  and  commissions.  Also  includes  all  product
              development, advertising and promotional expenses.

           -  Depreciation   and    Amortization  -  includes   depreciation  of
              communications network assets including fiber optic cable, network
              electronics, network switching and network data equipment.

           -  Other  Operating - includes  all general and other  operating
              and administrative expenses.

                                       14
<PAGE>
(a)   Liquidity and Capital Resources
      -------------------------------

         The  capital   expenditures   of  the  Company   associated   with  the
installation,  development and expansion of its existing and new  communications
networks  are  substantial,  and a  significant  portion  of these  expenditures
generally  are incurred  before any revenues are realized.  The Company's  gross
property,  plant and  equipment  has grown to $316  million at December 31, 1997
from $189  million at December  31,  1996.  These  expenditures,  together  with
associated initial operating  expenses,  have resulted in negative cash flow and
operating losses and will continue to do so until an adequate  customer base and
revenue stream for these networks have been established.  The Company expects to
incur net losses for the foreseeable future as it continues to install,  develop
and  expand  its new  and  existing  communications  networks.  There  can be no
assurance that an adequate  revenue base will be established or that the Company
will achieve or sustain  profitability or generate sufficient positive cash flow
to fund its operating and capital requirements and/or service debt.

         The  development  and  expansion  of the  Company's  new  and  existing
networks and services will require significant  additional capital expenditures.
The Company's capital  expenditures for 1997 were approximately $130 million and
for 1998 are estimated to be $275 million.  In addition,  the Company expects to
lease an  additional  $22.6  million of network  facilities  through an existing
operating lease agreement.  The Company continues to evaluate  opportunities for
revenue growth and to make  substantial  capital  investments in connection with
the  entry  into new  markets  and the  continued  development  of its  existing
networks.  These  opportunities  include,  but are not limited to,  acquisitions
and/or  joint  ventures  which  are  consistent  with the  Company's  long-range
business  plans.  Additionally,  the Company expects to continue to build on its
existing  relationships with providers and other strategic customers,  suppliers
and communications  carriers.  Such  acquisitions,  investments and/or strategic
arrangements,  if available, could require additional financial resources and/or
reallocation of the Company's financial resources.

         On November 21, 1997, the Company  entered into a $400 million,  5-year
revolving  credit  facility  ("Credit  Facility")  which has been  guaranteed by
Citizens, which expires on November 21, 2002 and has associated facility fees of
1/20 of 1% (0.05%) per annum.  The Company has agreed to pay  Citizens an annual
guarantee  fee at the rate of 3.25% per annum based on the balance  outstanding.
At December 31, 1997, the balance  outstanding  was $60 million and the weighted
average  interest rate was 6.05%.  No principal  payment is due until the end of
the term of the Credit Facility.

         On November 24,  1997,  the Company  sold  8,000,000  shares of Class A
Common Stock in an initial public offering (the "Offering") at a price of $16.00
per share. Gross proceeds from this offering totaled  approximately $128 million
and proceeds net of underwriting discounts and commissions totaled approximately
$120.3 million. Additionally,  535,000 shares of restricted stock were issued to
directors, officers and employees under the equity incentive plan (see Note 9 to
Financial  Statements), 15,000 of  which  were subsequently  canceled.  The
Company has historically been funded by capital  contributions and advances from
Citizens and through lease agreements guaranteed by Citizens.  Citizens owns all
of the Class B Common Stock,  representing  an 82.83%  economic  interest in the
Company.  Citizens  does not  have  any  obligation  to make  additional  equity
investments  in or advances to the Company or to guarantee or otherwise  provide
financial support for the Company,  other than the guarantees  described herein.
In 1997, 1996 and 1995, Citizens had been charging interest on the amount due to
Citizens only to the extent that the Company was allowed to capitalize  interest
under Generally Accepted Accounting Principles.

         The Company  anticipates  that the funds needed for 1998  operating and
capital  expenditures  will be  provided  from  lease  arrangements,  the Credit
Facility and other borrowings.

         During 1995, the Company  entered into an operating  lease agreement in
connection with the construction of certain network facilities. The construction
is  ongoing  and rent is paid on the  facilities  when  completed  and placed in
service.  The Company will have the option to purchase the facilities at the end
of the lease term. In the event the Company chooses not to exercise this option,
the  Company  is  obligated  to  arrange  for the sale of the  facilities  to an
unrelated party and is required to pay the lessor any difference between the net
sales  proceeds and the lessor's  investment  in the  facilities.  However,  any
amount  required to be paid to the lessor is subject  generally  to a maximum of
80% of the lessor's investment, giving effect to lease payments previously made.
The total amount of facilities  leased  through this agreement is expected to be
$110 million by April 30, 1998,  of which  approximately  $87.4 million has been
completed and placed in service as of December 31, 1997. Citizens has guaranteed
all  obligations  of the Company  under this  operating  lease.  The Company has
agreed to pay to Citizens a  guarantee  fee at the rate of 3.25% per annum based
on the amount of the lessor's investment in the leased assets.  

          Citizens also provides certain administrative services to  the Company
including, but not limited to, certain financial management  services,  informa-
tion services, legal and contract services and  human  resources  services.  The
Company entered into an  Administrative  Services  Agreement ("Agreement")  with
Citizens  on  December 1, 1997  for the  continuation of such services  and will
continue to  be billed for  reimbursable  costs as defined in the agreement plus
an administrative charge.

                                       15
<PAGE>
         The Year 2000 issue is the result of computer  programs  being  written
using two  digits  rather  than four to define  the  applicable  year.  Computer
programs  that have  date-sensitive  software may recognize a date using "00" as
the year 1900 rather that the Year 2000.  This could result in a system  failure
or  miscalculation  causing  disruptions of operations,  including,  among other
things, a temporary inability to process  transactions,  send invoices or engage
in similar normal business activities.

         Based upon an assessment, conducted in conjunction  with an information
systems  consulting  firm, it has been  determined  that a limited number of the
Company's  software  programs need to be modified so that dates beyond  December
31, 1999  are properly  recognized.  The Company  presently  believes that  with
modifications  to existing  software and  conversions to new software,  the Year
2000  Issue  can  be  mitigated  and  the  anticipated  conversion  cost  to  be
insignificant.  However, if such modifications and conversions are not made in a
timely  fashion,  the Year  2000  Issue  could  have a  material  impact  on the
operations of the Company.

         The Company has  developed a plan to mitigate the Year 2000 Issue.  The
plan includes formal  communications  with all of its  significant  suppliers to
determine the extent to which the Company is vulnerable to those third  parties'
failure  to  remediate  their  own Year  2000  Issue.  However,  there can be no
guarantee  that the  systems  of  suppliers  or  other  companies  on which  the
Company's systems rely will be timely converted, or that a failure to convert by
another  company,  or a  conversion  that is  incompatible  with  the  Company's
systems,  would not have material adverse effect on the Company. The Company has
determined  that it has limited  exposure to  contingencies  related to the Year
2000 Issue for the services marketed.

         The Company is and will  continue  to use both  internal  and  external
resources  to  reprogram  or  replace  and  test  software  for  the  Year  2000
compliance.  The  Company  plans to  complete  its Year 2000  modifications  and
conversions, related to its business operations no later than June 30, 1999. The
total cost of the Year 2000 modifications and conversions has not been estimated
and is anticipated to be insignificant.

Employees

         As of December 31, 1997, the Company employed 573 persons.  None of the
Company's  employees are represented by a union,  and the Company  considers its
employee relations to be excellent.


(b)   Results of Operations
      ---------------------

                                    REVENUES
                                    --------

Revenues  increased  approximately  $29.8  million,  or 95%,  in 1997 and  $15.6
million or 100% in 1996.  The  increase in revenue  growth over 1996 and 1995 is
due to the build out of the five  market  clusters  in which the  Company  has a
presence. In 1995, the Company was in the process of branching off the major hub
and cluster into the surrounding areas. By 1996, the Company added 156 buildings
(55%  increase  over 1995) and 361  customers  (90%  increase  over  1995).  The
increased revenue in 1997 is due to the continued growth within each of the five
clusters  with the addition of 172  buildings  (39%  increase over 1996) and the
addition of 402 customers (53% increase over 1996).
<TABLE>
<CAPTION>


                                      1997                        1996               1995
                             ---------------------      ------------------------   -----------
                                      Increase Over                Increase Over
                             Amount     Prior Year       Amount    Prior Year        Amount  
                             ------   -------------     --------   -------------     -------- 
                                                    ($ in thousands)
<S>                         <C>            <C>         <C>            <C>          <C>     
Dedicated services          $ 33,522       79%         $ 18,741       54%          $ 12,141
Local dial tone services      10,565      317%            2,533      275%               676    
Long-distance services         8,140       75%            4,661      194%             1,587
Enhanced services              8,857       65%            5,374      328%             1,256
                            --------     -----         --------     -----          --------
                            $ 61,084       95%         $ 31,309      100%          $ 15,660
                            ========     =====         ========     =====          ========                          
</TABLE>

                                       16
<PAGE>
Revenues from dedicated  services  increased $14.8 million in 1997, or 79%, over
1996  primarily due to the Company's  improved  sales of additional  products to
existing customers and increase in route miles of  75% over 1996.  Approximately
$6.8 million of the increase is  associated  with a short-term  contract  with a
significant  customer which expires in early 1998.  Dedicated  services  revenue
increased $6.6 million,  or 54%, in 1996 over 1995 primarily due to the increase
of long-haul transport of DS-3 and DS-1 sales.

Revenues from local dial tone services  increased $8.0 million in 1997, or 317%,
over  1996 due  primarily  to three  local  switch  implementations  for new and
existing  customers in the last half of 1996. The successful  implementation  of
the ISDN PRI product  generated $2.3 million of increased revenue in 1997. Local
dial tone services  revenue  increased $1.9 million,  or 275%, in 1996 over 1995
due primarily to local switch implementations occurring during 1996.

Revenues from long distance services  increased $3.5 million,  or 75%, over 1996
due  to a $1.7 million,  or 423%,  increase  in  Advantage  Long  distance,  the
Company's  long  distance service,  and $1.1 million  increase in  prepaid debit
card services introduced in late 1996. The increases  were partially offset by a
$1.9 million  decrease in  wholesale  long  distance  services.   Long  distance
services  revenue  increased $3.1 million,  or 194%, in 1996 over 1995 primarily
due  to a  short-term contract  for wholesale  long distance  services which has
since expired.

Revenues from enhanced services in 1997 increased $3.5 million, or 65%,over 1996
primarily due to a $2.1 million increase in Internet access services revenue and
a $1.6 million  increase in frame relay, partially offset by a decrease in other
products.  The Internet  access  service and frame relay revenue  increases were
primarily  due  to a 75%  increase  in  Internet  switches  installed.  Enhanced
services  revenue  increased  $4.1 million in 1996, or 328%, over 1995 primarily
due to increases in Internet access service and frame relay services  related to
the initial installation of Internet and 10 additional frame relay switches.


                               OPERATING EXPENSES
                               ------------------

Operating expenses  increased $34.5 million,  or 57%, in 1997 and $25.1, or 70%,
in 1996.  The increase in expenses was due to the  Company's  rapid  network and
customer  growth as reflected in revenues,  offset in part by economies of scale
from infrastructure and network development.
<TABLE>
<CAPTION>

                                               1997                               1996                        1995
                                   -----------------------------     ------------------------------    ------------
                                                   Increase Over                      Increase Over
                                      Amount        Prior Year          Amount          Prior Year          Amount
                                   -----------     -------------     -----------      -------------    ------------          
                                                                        ($ in thousands)
<S>                                <C>                  <C>           <C>                  <C>           <C>       
Network access                     $   29,546           43%           $   20,620           179%          $    7,387
Sales & marketing                      13,905           54%                9,056            35%               6,722
Depreciation & amortization            11,167           55%                7,192             2%               7,064
Other operating                        40,561           70%               23,824            65%              14,437
                                   -----------        ---------       ----------        -------          ----------
                                   $   95,179           57%           $   60,692            70%          $   35,610
                                   ===========        =========       ==========        =======          ==========

</TABLE>

Network  access  expenses  increased $8.9 million in 1997, or 43%, over 1996 due
primarily to the Company's expansion of its frame relay product,  development of
a fully redundant  leased Internet access backbone network with related Internet
access costs,  and other product and customer  growth.  Network access  expenses
increased  $13.2 million,  or 179%, in 1996 as compared to 1995 due primarily to
increased utilization of third party facilities and services associated with the
expansion of the Company's customer base.

                                       17
<PAGE>
Sales and marketing  expenses  increased $4.8 million,  or 54%, in 1997 and $2.3
million,  or 35%,  in  1996.  The  increase  in 1997  was due  primarily  to the
Company's  expanded  focus on direct  retail sales which targets large-to-medium
size communications  intensive  businesses in order to maximize vertical selling
opportunities.  The increase in 1996 was due primarily to costs  associated with
an  introduction  of local  switched  services in  Portland,  Salt Lake City and
Sacramento,  expanded local services in the Seattle  market,  the expanded frame
relay product, and newly introduced Internet access and ISDN products.

Depreciation and amortization expense increased $4.0 million, or 55%,in 1997 due
primarily to higher plant in service balances for newly completed communications
network  facilities  and  electronics.  Depreciation  and  amortization  in 1996
increased $.1 million, or 2%, primarily due to network construction completed in
December 1995.

Other operating expenses increased $16.7 million, or 70%, in 1997 as compared to
a $9.4 million  increase,  or 65%, in 1996.  The increases were due primarily to
increases in general and  administrative  salaries,  payroll  taxes and employee
benefits to support the expanded delivery of services,  new product development,
and an expanded customer service organization. The number of employees increased
43% in 1997 and 79% in 1996 as compared to the previous  year.  Rental and lease
expenses  increased  77% over 1996 and 110% over 1995 related to certain  leases
and expanded  service  coverage.  An increase in the provision of  uncollectible
accounts of $2.9 million in 1996 over 1995  contributed to the increase in other
operating expenses.


                           INTEREST AND OTHER EXPENSES
                           ---------------------------

                                Increase Over             Increase Over
                        Amount    Prior Year     Amount    Prior Year    Amount
                        ------  -------------    ------   -------------  ------
                                            ($ in thousands)
Interest expense, net  $ 1,166       N/A        $  --         N/A        $ 372
                       =======      =====       =======      =====       =====


Interest (net of capitalized  interest)  expense  increased $1.2 million in 1997
due  primarily to the capital lease for the  Company's  long-haul  route between
Portland  and  Seattle,  which  commenced  in February  1997,  and  interest and
guarantee  fees  associated  with the  Company's  borrowings  against its credit
facility which was consummated in November 1997.  Interest expense decreased $.4
million in 1996 as compared to 1995 due to the  repayment in 1995 of  previously
outstanding debt.


Item 8.   Financial Statements and Supplementary Data
          -------------------------------------------

The following documents are filed as part of this Report:

               1. Financial Statements:
                  See Index on page F.

               2. Supplementary Data:
                  Quarterly Financial Data is included in the Financial
                  Statements (see 1. above).


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

None

                                       18
<PAGE>
                                    PART III
                                    --------

The Company intends to file with the Commission a definitive proxy statement for
the 1998 Annual  Meeting of  Stockholders  pursuant to Regulation  14A not later
than 120 days after December 31, 1997. The  information  called for by this Part
III is incorporated by reference to that proxy statement.


                                     PART IV
                                     -------

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

(a)     The exhibits listed below are filed as part of this Report:

Exhibit
  No.             Description
-------           -----------

3.1            Amended and Restated Certificate of Incorporation.
3.2            By-laws of the Company.
10.1           License  Agreement  between the Company and the United  States of
               America Department of Energy acting by and through the Bonneville
               Power Administration dated March 29, 1996.
10.2           License  Agreement  between the Company and the United  States of
               America Department of Energy acting by and through the Bonneville
               Power Administration dated November 11, 1996.
10.3           License  Agreement  between the Company and the United  States of
               America Department of Energy acting by and through the Bonneville
               Power Administration dated July 18, 1997.
10.4           Optical  Fiber  License  Agreement  between  the Company and Salt
               River Project  Agricultural  Improvement and Power District dated
               September 11, 1996.
10.5           Participation   Agreement  between  the  Company,   Shawmut  Bank
               Connecticut,  National  Association,  the Certificate  Purchasers
               named therein,  the Lenders named  therein,  BA Leasing & Capital
               Corporation and Citizens  Utilities Company dated as of April 28,
               1995, and the related operating documents.
10.6           Agreement for Lease of Dark Fiber between the Company and 
               Citizens Utilities Company dated March 24, 1995.
10.7           Administrative Services Agreement between the Company and 
               Citizens Utilities Company dated as of December 1, 1997.
10.8           Tax Sharing Agreement between the Company and Citizens Utilities 
               Company dated as of December 1, 1997.
10.9           Indemnification Agreement between the Company and Citizens 
               Utilities Company dated as of December 1, 1997.
10.10          Registration Rights Agreement between the Company and Citizens 
               Utilities Company dated as of December 1, 1997.
10.11          Customers and Service Agreement between the Company and Citizens 
               Utilities Company dated as of December 1, 1997.
10.12          Guaranty Fee Agreement between the Company and Citizens 
               Utilities Company dated as of December 1, 1997.
10.13          Equity Incentive Plan of Electric Lightwave, Inc.
10.14          Pre-Construction  IRU Agreement between the Company and FTV 
               Communications,  LLC dated October 16, 1997.
10.15          Bank Credit Agreement dated November 21, 1997.
24.1           Powers of Attorney.
27.1           Financial Data Schedule.

Exhibit 10.13 is a management contract or compensatory plan or arrangement. 
Exhibit Nos. 3.1, 3.2, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6 and 10.13 are 
incorporated by reference to the same exhibit designations in the Company's 
Registration Statement on Form S-1, File No. 333-35227.  Exhibit No. 10.14 is 
incorporated by reference to Exhibit No. 10.27 in the Company's Registration 
Statement on Form S-1, File No.333-35227. Exhibit Nos. 10.7, 10.8, 10.9, 10.10,
10.11, 10.12 and 10.15 are incorporated by reference to the Company's  Current 
Report on Form 8-K filed on February 19, 1998.

(b)   A report form 8-K was filed February 19, 1998 providing Exhibits Nos.10.7,
10.8, 10.9, 10.10, 10.11, 10.12 and 10.15.

                                       19
<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.

                            ELECTRIC LIGHTWAVE, INC.
                            ------------------------
                                  (Registrant)

                 By:       /s/  Daryl A. Ferguson
                   ________________________________________
                                Daryl A. Ferguson
          Vice Chairman of the Board, Chief Executive Officer, Member,
                        Executive Committee and Director

                                 March 11, 1998



















                                       20
<PAGE>
         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 indicated on the 11th day of March 1998.

               Signature                            Title
               ---------                            ------

     /S/ Robert J. DeSantis          Chief Financial Officer, Vice President
___________________________          and Treasurer 
        (Robert J. DeSantis)       

         /s/ Kerry D. Rea            Vice President and Controller
_______________________________     
            (Kerry D. Rea)

________________________________     Director
          (Stanley Harfenist)  *

________________________________     Director
          (Robert A. Stanger)  *

________________________________     Director
          (Maggie Wilderotter) *

________________________________     President, Chief Operating Officer, Member,
           (David B. Sharkey)  *     Executive Committee and Director 

________________________________     Chairman of the Board, Member, Executive
          (Leonard Tow)*             Committee and Director



*By:/s/ Robert J. DeSantis
    ______________________
          (Robert J. DeSantis)
           Attorney-in-Fact













                                       21
<PAGE>





                          ELECTRIC LIGHTWAVE, INC
                        INDEX TO FINANCIAL STATEMENTS



<TABLE>
<S>                                                                                                                  <C> 
                                                                                                                     Page

Independent Auditors' Report..........................................................................................F-1
Balance Sheets at December 31, 1997 and 1996 .........................................................................F-2
Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 ........................................F-3
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ........................................F-4
Statements of Changes in Stockholders' Equity for the Years Ended
   December 31, 1997, 1996 and 1995...................................................................................F-5
Notes to Financial Statements.........................................................................................F-6

</TABLE>

<PAGE>

                        INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Electric Lightwave, Inc.

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

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

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

                                        KPMG PEAT MARWICK LLP

New York, New York
March 10, 1998




                                       F-1
<PAGE>

                            ELECTRIC LIGHTWAVE, INC.
                                 Balance Sheets
                           (All amounts in thousands)

                                                       
<TABLE>
                                                            December 31,
<S>                                                    <C>   
                                                            -----------
                                                           1997       1996
                                                       ---------------------
ASSETS
  Current assets:
     Cash                                              $  26,531   $     611
     Trade receivables, net                               12,569       4,610
     Other receivables                                     7,688       8,329
     Other current assets                                    844         224
                                                       ---------------------
       Total current assets                               47,632      13,774
                                                       ---------------------
  Property, plant and equipment                          316,109     189,334
  Less accumulated depreciation and amortization         (25,791)    (17,337)
                                                       ---------------------
     Property, plant and equipment, net                  290,318     171,997
                                                       ---------------------
  Other assets                                            22,012       9,885
                                                       ---------------------    
          Total assets                                 $ 359,962   $ 195,656
                                                       =====================

LIABILITIES AND SHAREHOLDERS' EQUITY
  Current liabilities:
     Accounts payable and accrued liabilities          $  50,237   $  18,892
     Taxes other than income taxes                         3,136       2,329
     Due to Citizens Utilities Company                       944           -
     Other current liabilities                             3,102       2,493
                                                       ---------------------
       Total current liabilities                          57,419      23,714
                                                       ---------------------
  Deferred credits and other                               1,800       1,435
  Deferred income taxes payable                           16,918       5,826
  Capital lease obligation                                10,511           -
  Long-term debt                                          60,000           -
  Due to Citizens Utilities Company                            -     155,395
  Shareholders' equity                                   213,314       9,286
                                                       --------------------- 
          Total liabilities and                        $ 359,962   $ 195,656                                           
           shareholders' equity                        =====================

</TABLE>
                                           
                                        
  
The accompanying Notes are an integral part of these Financial Statements.





                                       F-2
<PAGE>


                            ELECTRIC LIGHTWAVE, INC.
                            Statements of Operations
                  (All amounts in thousands, except share data)


<TABLE>
<S>                                         <C>                  
                                              For the years ended December 31,
                                            ------------------------------------
                                             1997           1996         1995
                                            ------------------------------------
Revenues                                  $  61,084      $  31,309    $  15,660
                                            ------------------------------------
Operating expenses:                          
  Network access expenses                    29,546         20,620        7,387
  Sales and marketing expenses               13,905          9,056        6,722
  Depreciation and amortization              11,167          7,192        7,064
  Other operating expenses                   40,561         23,824       14,437
                                            ------------------------------------
     Total operating expenses                95,179         60,692       35,610
                                            ------------------------------------
  Loss from operations                      (34,095)       (29,383)     (19,950)

Interest expense, net                         1,166               -         372
                                            ------------------------------------
     Net loss before income tax benefit     (35,261)       (29,383)     (20,322)
                                            
Income tax benefit                           (1,316)             -            -
                                            ------------------------------------
     Net loss                             $ (33,945)    $  (29,383)   $ (20,322)
                                            ====================================

Weighted average shares outstanding          42,352
Net loss per share
     Basic                                $   (0.80)                                                     
     Diluted                              $   (0.80)

</TABLE>

EPS for years prior to 1997 are not presented because the amounts are not
meaningful.








The accompanying Notes are an integral part of these Financial Statements.









                                       F-3

<PAGE>


                            ELECTRIC LIGHTWAVE, INC.
                            Statements of Cash Flows
                           (All amounts in thousands)


<TABLE>
<S>                                         <C>    
                                              For the years ended December 31,
                                            ------------------------------------
                                             1997           1996         1995
                                            ------------------------------------
Cash flows from operating activities:     $ (33,945)     $ (29,383)   $ (20,322)
  Net loss                    
  Adjustments to reconcile net loss
     to net cash used for operating
     activities:
       Depreciation and amortization         11,167          7,192        7,064
       Amortization of restricted stock         219              -            -
     Changes in operating assets
     and liabilities:
       Receivables                           (7,318)        (9,797)      (1,698)
       Accounts payable and other
         accrued liabilities                  5,359         (2,802)      10,444
       Taxes other than income taxes            807            765          967
       Other                                  6,522          2,035        1,975
                                            ------------------------------------
          Net cash used for
           operating activities             (17,189)       (31,990)      (1,570)
                                            ------------------------------------

Cash flows used for investing activities:
  Capital expenditures                     (103,984)       (56,072)     (16,129)
                                            ------------------------------------

Cash flows from financing activities:
  Debt borrowings                            60,000               -      (9,111)
  Citizens fundings (repayments)            (31,461)        88,530       26,862
  Issuance of common stock                  118,554              -            -
                                            ------------------------------------
          Net cash provided by
           financing activities             147,093         88,530       17,751
                                            ------------------------------------
Net increase in cash                         25,920            468           52

Cash at beginning of period                     611            143           91
                                            ------------------------------------
Cash at end of period                     $  26,531      $     611    $     143
                                            ====================================

Supplemental cash flow information:
  Cash paid for interest                  $     937      $       -    $     630
  Other non-cash transactions
    with Citizens:
     Capital contributions by Citizens    $ 119,200      $       -    $   3,000
     Deferred income taxes                $ (12,408)     $  (3,198)   $  (1,160)
     Capitalized interest                 $   4,076      $   2,868    $   2,619                        
       
  
</TABLE>


The accompanying Notes are an integral part of these Financial Statements.

                                       F-4
<PAGE>

                            ELECTRIC LIGHTWAVE, INC.
                       Statements of Shareholders' Equity
                  (All amounts in thousands, except share data)

<TABLE>
<S>                          <C>                 <C>                    <C>                    <C>          <C>        <C>
                             
                                                 Class A Common Stock,  Class B Common Stock,                       
                             Preferred Stock       $.01 per share         $.01 per share       Additional                
                             ---------------------------------------------------------------    Paid-in-               Shareholders'
                             Shares     Amount   Shares        Amount   Shares        Amount    Capital     Deficit        Equity
                             -------------------------------------------------------------------------------------------------------
Balance January 1, 1995          99     $   -            -      $    -     411,650      $   4   $  76,251  $ (20,264)   $    55,991
  Acquisition of minority
      interest                    -         -            -           -           -          -       3,000           -         3,000
  Net loss                        -         -            -           -           -          -           -    (20,322)       (20,322)
                             -------------------------------------------------------------------------------------------------------
Balance December 31, 1995        99         -            -           -     411,650          4      79,251    (40,586)        38,669
  Conversion of preferred
      stock to common stock     (99)        -            -           -  40,753,350       408        (408)          -             -
  Net loss                        -         -            -           -           -          -           -    (29,383)       (29,383)
                             -------------------------------------------------------------------------------------------------------
Balance December 31, 1996         -         -            -           -  41,165,000       412      78,843     (69,969)         9,286
  Conversion of due to Citizens   
   to additional paid in capital  -         -            -           -           -          -     119,200           -       119,200
  Issuance of common stock        -         -    8,000,000          80           -          -     118,474           -       118,554
  Issuance of restricted stock    -         -      535,000           5           -          -       8,555           -         8,560
  Unamortized restricted stock    -         -            -           -           -          -      (8,101)          -        (8,101)
  Cancellation of                                                               
   restricted stock               -         -      (15,000)          -           -          -        (240)          -          (240)
  Net loss                        -         -            -           -           -          -           -    (33,945)       (33,945)
                                ----------------------------------------------------------------------------------------------------
Balance December 31, 1997         -     $   -    8,520,000        $ 85  41,165,000     $ 412   $ 316,731   $(103,914)    $  213,314
                                ====================================================================================================

</TABLE>















The accompanying Notes are an integral part of these Financial Statements.





                                       F-5

<PAGE>

                            
                            ELECTRIC LIGHTWAVE, INC.
                          Notes to Financial Statements


(1)      Organization and Description of Business

         Electric  Lightwave,  Inc.  ("the  Company"),  is  a  fully-integrated,
         facilities-based  competitive local exchange carrier ("CLEC") providing
         a broad range of communications  services in five major market clusters
         in the western United  States.  The Company  provides  state-of-the-art
         voice and data communications  services to retail customers,  primarily
         large-  and  medium-sized   communications-intensive   businesses,  and
         wholesale  customers.  The  Company was  incorporated  in 1990 and is a
         subsidiary of Citizens Utilities Company ("Citizens").

         The Company  currently  provides  services in five  markets:  Portland,
         Oregon;  Seattle,   Washington;   Salt  Lake  City,  Utah;  Sacramento,
         California;  and Phoenix,  Arizona ("hub cities") and their  respective
         surrounding areas.

         The  capital   expenditures   of  the  Company   associated   with  the
         installation,  development  and  expansion  of  its  existing  and  new
         communications  networks are substantial,  and a significant portion of
         these  expenditures  generally  are  incurred  before any  revenues are
         realized.   These   expenditures,   together  with  associated  initial
         operating  expenses,  have resulted in negative cash flow and operating
         losses and will  continue to do so until an adequate  customer base and
         revenue  stream for these networks have been  established.  The Company
         expects to incur losses for the  foreseeable  future as it continues to
         install,  develop  and  expand  its  new  and  existing  communications
         networks.  There can be no assurance that an adequate revenue base will
         be   established   or  that  the  Company   will   achieve  or  sustain
         profitability  or generate  sufficient  positive  cash flow to fund its
         operating and capital requirements and/or service debt.

(2)      Summary of Significant Accounting Policies

         (a)      Basis of Presentation and Use of Estimates
                  The financial statements have been prepared in accordance with
                  Generally  Accepted   Accounting   Principles  ("GAAP").   The
                  preparation  of financial statements  in conformity with  GAAP
                  requires management to make  estimates and  assumptions  which
                  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 periods.   Actual  results
                  could differ from those estimates.   Certain  items  have been
                  reclassified to conform to the current year presentation.

         (b)      Revenue Recognition
                  Revenues from communications  services are recognized when the
                  services are provided. Revenues from long-term leases of fiber
                  optic cable is  recognized  on a straight  line basis over the
                  terms of the related leases.














                                       F-6

<PAGE>



         (c)      Trade and Other Receivables
                  The  Company's  trade  customers  are  primarily   large-  and
                  medium-sized     communications-intensive    businesses    and
                  communications service providers that require state-of-the-art
                  communications and data services. Trade accounts receivable is
                  shown net of an allowance for doubtful  accounts in amounts of
                  approximately  $3,569,000 and  $1,166,000 at December 31, 1997
                  and 1996,  respectively.  At December 31, 1997,  the Company's
                  trade  receivables  are  concentrated  in and  around the five
                  cities  referred  to in Note 1. The  Company  has  substantial
                  business  relationships with a few large customers,  including
                  the major  long  distance  carriers.  In 1997,  one  customer,
                  pursuant  to a short term  contract  expiring  in early  1998,
                  accounted for  approximately  10% of the  Company's  revenues.
                  Other  receivables  at  December  31,  1997 and 1996  included
                  approximately  $7,029,000  and  $6,700,000,  respectively,  of
                  reimbursement  due to the Company under a construction  agency
                  agreement (see Note 10).

         (d)      Property, Plant and Equipment
                  Property,  plant and  equipment are stated at cost and include
                  certain costs which are  capitalized  during the  installation
                  and expansion of communications  networks  including  interest
                  costs related to  construction  of  approximately  $4,693,000,
                  $2,868,000  and  $2,619,000  for the years ended December  31,
                  1997,  1996 and 1995,  respectively.  Depreciation is computed
                  using the straight line method over the estimated useful lives
                  of the assets.  Leasehold improvements are amortized using the
                  straight line method over the shorter of the estimated  useful
                  lives of the assets or the  remaining  terms of the leases.  A
                  capital  lease  included in  communications  networks is being
                  amortized  using the straight line method over the life of the
                  capital lease.  The estimated useful lives of owned assets are
                  as follows:

                           Communications  networks               25 years
                           Electronics and related equipment   7 - 8 years
                           Office equipment and other          5 - 7 years

                  The   Company's   communications   networks   are  subject  to
                  technological  risks  and  rapid  market  changes  due  to new
                  products  and services and  changing  customer  demand.  These
                  changes  may  result in future  adjustments  to the  estimated
                  useful lives of these assets.

         (e)      Other Assets
                  Other assets  include  third party  direct  costs  incurred in
                  connection with negotiating and securing initial rights-of-way
                  and  developing  network  design  for new market  clusters  or
                  locations,  which costs are deferred until service is ready to
                  commence.  Such costs are then  amortized over a 5 year period
                  utilizing  the straight  line method.  Also  included in other
                  assets at December 31, 1997 and 1996 is goodwill of $4,504,000
                  and $4,680,000,  respectively  (see Note 7). Goodwill is being
                  amortized  utilizing  the straight  line method over a 25 year
                  period.  At December 31, 1997,  a $12,555,000 deposit  related
                  to an  indefeasible  right to use  contract was included in
                  other assets (see Note 10).









                                       F-7


<PAGE>


         (f)      Income Taxes
                  The Company is included in the consolidated federal income tax
                  return  of  Citizens.  The  Company  utilizes  the  asset  and
                  liability  method of accounting  for income  taxes.  Under the
                  asset and liability method, deferred income taxes are recorded
                  for  the tax  effect  of  temporary  differences  between  the
                  financial   statements   and  the  tax  bases  of  assets  and
                  liabilities  using tax rates expected to be in effect when the
                  temporary  differences are expected to turn around.  Citizens'
                  policy  has  been  to  record  tax   provisions,   assets  and
                  liabilities  at the  subsidiary  level on a stand alone basis.
                  Citizens will  reimburse the Company for net operating  losses
                  generated  after the IPO date but only to the extent that such
                  losses  could be  utilized  by the  Company  on a stand  alone
                  basis.

         (g)      Impairment
                  In accordance with Statement of Financial Accounting Standards
                  ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
                  Assets  and for  Long-Lived  Assets  to Be  Disposed  of," the
                  Company  reviews for the  impairment of long-lived  assets and
                  certain  identifiable  intangibles  to be held and used by the
                  Company whenever events or changes in  circumstances  indicate
                  that the carrying amount of the asset may not be recoverable.

                  The  Company  assesses  the  recoverability  of  an  asset  by
                  determining whether the amortization of the asset balance over
                  its remaining  life can be recovered  through  projections  of
                  undiscounted  future  cash  flows of the  related  asset.  The
                  amount  of asset  impairment,  if any,  is  measured  based on
                  projected  discounted  future cash flows using a discount rate
                  reflecting the Company's average cost of funds.

         (h)      Employee Stock Plans
                  Prior to the  Initial  Public  Offering  ("IPO"),  the Company
                  participated   in  the   Management   Equity   Incentive  Plan
                  ("Citizens'  MEIP") and Equity Incentive Plan ("Citizens EIP")
                  of Citizens,  which may grant awards of Citizens  Common Stock
                  to eligible officers,  management employees and non-management
                  exempt  employees of Citizens and its subsidiaries in the form
                  of incentive stock options, non-qualified stock options, stock
                  appreciation  rights,  restricted  stock or other  stock-based
                  awards.  The Company  also had  participated  in the  Employee
                  Stock  Purchase Plan  ("Citizens'  ESPP") of Citizens in which
                  employees of Citizens and its  subsidiaries  may  subscribe to
                  purchase shares of Citizens'  common stock at 85% of the lower
                  of the  average  market  price on the first or last day of the
                  purchase period.

                  In  October  1997,  the Board of  Directors  adopted  the 1997
                  Equity  Incentive Plan ("EIP") which  authorizes,  among other
                  things,  the grant of incentive  stock options,  non-qualified
                  stock options, stock appreciation rights,  restricted stock or
                  other stock-based awards.

                  Prior to  January  1,  1996,  the  Company  accounted  for the
                  Citizens'  employee stock option plans 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 is 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" which permits entities to recognize
                  as  expense  over the  vesting  period  the fair  value of all
                  stock-based awards on the date of grant.  Alternatively,  SFAS
                  123 also allows  entities to continue to apply the  provisions
                  of APB Opinion No. 25 and provide pro forma net income and pro
                  forma earnings per share disclosures for employee stock option
                  grants  made in 1995 and  future  years  as if the  fair-value
                  based method defined in SFAS 123 had been applied. The Company
                  has elected to continue to apply the provisions of APB Opinion
                  No. 25 and provide the pro forma disclosure provisions of SFAS
                  123 (see Note 9).



                                       F-8
<PAGE>
         (i)      Net Loss Per Share
                  The Company follows the provisions of SFAS No. 128,  "Earnings
                  Per  Share"  which  requires  dual  presentation  of basic and
                  diluted  earnings per share  ("EPS") on the face of the income
                  statement.  Basic EPS is based on the weighted  average number
                  of  common  shares  outstanding.   Diluted  EPS  reflects  the
                  potential  dilution  that could occur if  securities  or other
                  contracts to issue  common  stock were  exercised or converted
                  into  common  stock.  EPS for  years  prior  to  1997  are not
                  presented because the amounts are not meaningful.

                  Weighted average shares outstanding have been adjusted for the
                  effects of application  of Securities and Exchange  Commission
                  Staff Accounting  Bulletin ("SAB") No. 83. Pursuant to SAB No.
                  83,  all stock  issued  within one year of an IPO at less than
                  the offering price and all options  granted within one year of
                  the Company's  IPO which have an exercise  price less than the
                  Offering  price are  treated as  outstanding  for all  periods
                  presented  (using the treasury stock method at the assumed IPO
                  price)  even  though  the effect is to reduce the net loss per
                  share.  The  application  of SAB  No.  83 had  the  effect  of
                  increasing outstanding shares by 520,000 for 1997.

(3)      Property, Plant and Equipment

         The  components  of property,  plant and equipment at December 31, 1997
         and 1996 are as follows:

<TABLE>
<S>                                                         <C>                 <C>       

                ($ in thousands)                                  1997                 1996
                ----------------                            -------------          -----------
         Communications  networks                           $     152,578       $     112,394
         Electronics and related equipment                         22,003              20,417
         Office equipment and leasehold improvements               17,315              12,804
         Construction work in progress                            121,426              37,433
         Inventory                                                  2,787               6,286
                                                            -------------       -------------
         Property, plant and equipment                            316,109             189,334
         Accumulated depreciation and amortization                (25,791)            (17,337)
                                                            --------------      -------------
         Property, plant and equipment, net                 $     290,318       $     171,997
                                                            =============       =============
</TABLE>
         Communications  networks include a  capital lease at  December 31, 1997
         in the amount of  $11,320,000.

         Inventory  consists primarily of new and reusable parts to maintain and
         build fiber optic networks.

         The Company has leased fiber optic cable included in its communications
         networks to an unrelated long distance  carrier for 10 years  beginning
         in 1995 and to  Citizens  for 10 years  beginning  in 1996.  The  lease
         agreement  with the long distance  carrier  provided for  $1,500,000 in
         cash at  inception,  which  amount  is being  amortized  utilizing  the
         straight line method over the lease period, and $144,000 per month over
         the 10 year lease period.  The lease  agreement with Citizens calls for
         monthly rentals of $30,000 over the 10 year lease period (see Note 10).










                                       F-9
<PAGE>


 (4)     Accounts Payable and Accrued Liabilities

         The components of accounts payable and accrued liabilities at
         December 31, 1997 and 1996 are as  follows:
<TABLE>
<S>      <C>                                          <C>             <C>    
         ($ in thousands)                                1997            1996
         -----------------                            ----------      ----------
         Accounts payable - trade                     $    5,407      $    3,118
         Accrued services purchased for resale             5,609           1,106
         Accrued construction work in progress            25,986           3,097
         Accrued compensation                              3,530               -
         Other accrued liabilities                         9,705          11,571
                                                      ----------      ----------
         Accounts payable and accrued liabilities     $   50,237      $   18,892
                                                      ==========      ==========
</TABLE>

(5)      Long-term Debt

         In  November  1997 the  Company  arranged  for a $400  million,  5-year
         revolving  bank credit  facility  ("Credit  Facility"),  guaranteed  by
         Citizens,  which  expires  in  November  2002 and which has  associated
         facility fees of 1/20 of 1% (0.05) per annum. The Company has agreed to
         pay Citizens an annual  guarantee fee of 3.25% per annum on the balance
         outstanding  under the Credit  Facility.  At  December  31,  1997,  the
         balance  outstanding is $60 million and the weighted  average  interest
         rate is 6.05%. No principal payment is due until the expiration date of
         the Credit Facility.

(6)      Income Taxes

         The  components of deferred  income taxes at December 31, 1997 and 1996
         are as follows:

<TABLE>
<S>     <C>                                            <C>            <C>    
        ($ in thousands)                                 1997            1996
        -----------------                              ---------      ---------
        Benefit of operating loss carryforwards       $   3,171      $  24,348
        Less valuation allowance                               -        (24,348)
                                                       ---------      ---------
          Net deferred tax asset                       $   3,171      $        -
                                                       ---------      ----------
        Deferred income tax liability,
         primarily property, plant and equipment       $  20,089      $   5,826
                                                       ---------      ----------

        Net deferred income tax liability              $  16,918      $   5,826
                                                       =========      ==========
</TABLE>

         The Company is included in the  consolidated  federal income tax return
         of  Citizens.  The  net  deferred  tax  asset  for the  benefit  of the
         operating loss  carryforwards  represent  amounts due from Citizens for
         the utilization by Citizens of the Company's  operating losses incurred
         after  the IPO date  which are  included  in the  consolidated  federal
         income tax return. These amounts will be reimbursed to the Company only
         when such losses can be utilized by the Company on a stand alone basis.
         The benefit  reflected in  Citizens'  consolidated  federal  income tax
         return for the  cumulative  net operating  loss as of the IPO date will
         not be reimbursed  to the Company;  accordingly,  $35,374,000  has been
         eliminated along with the corresponding  amount of valuation  allowance
         as of the IPO date.










                                      F-10
<PAGE>

         The following is a reconciliation of the provision for  income taxes at
         federal statutory rates to the effective rates:
<TABLE>
<S>      <C>                                                  <C>        <C>  

                                                               1997       1996
                                                              ------     ------
         Tax provision at federal statutory rate               35.0%      35.0%
         Pre IPO operating loss not benefited                 (31.3%)    (35.0%)
                                                              -------    -------
                                                                3.7%       0.0%
                                                              =======    =======
</TABLE>

         The provision for income tax expense  consisted of deferred federal tax
         expense of  approximately  $11,092,000,  $3,198,000  and $1,160,000 and
         current tax benefits of $12,408,000,  $3,198,000 and $1,160,000 for the
         years ended December 31, 1997, 1996 and 1995, respectively.

(7)      Capital Stock

         During 1995,  Citizens purchased 58,750 shares of common stock from the
         minority shareholder of the Company. This purchase has been recorded in
         the Company's accounts as goodwill and additional paid-in capital.

         During 1996, all of the then outstanding  preferred stock was converted
         into  7,475,527  shares of common  stock.  On June 14, 1996 there was a
         reverse stock split of common stock in the amount of 100 for 7,600,536.
         The split reduced the shares of common stock outstanding from 7,600,536
         to 100 shares,  and the number of authorized  shares was reduced to 500
         shares of preferred and 500 shares of common.

         On  November  11,  1997,  the  Company   amended  its   Certificate  of
         Incorporation  to change its  authorized  capital stock to  180,000,000
         shares,  including  110,000,000 shares of Class A Common Stock $.01 par
         value per  share,  60,000,000  shares of Class B Common  Stock $.01 par
         value per share,  and  10,000,000  shares of  preferred  stock $.01 par
         value  per  share.  At that  time,  the  outstanding  common  stock was
         converted  to Class B Common  Stock and the  Company  declared  a stock
         split of 411,650 to one. The stock split increased the number of shares
         of Class B Common Stock outstanding to 41,165,000.

         On November 24, 1997, the Company completed its IPO of 8,000,000 shares
         of Class A Common Stock at a price of $16.00 per share.  Gross proceeds
         from this offering totaled approximately  $128,000,000 and proceeds net
         of  underwriting   discounts  and  commissions  totaled   approximately
         $120,320,000.  Additionally,  535,000 of  restricted  shares of Class A
         Common Stock were issued to directors, officers and employees under the
         Equity  Incentive  Plan  (See  Note  9).  Subsequently,  15,000  of the
         restricted shares were returned and canceled.

         At December 31,  1997,  there were  8,520,000  shares of Class A Common
         Stock and 41,165,000 shares of Class B Common Stock outstanding.  There
         were no preferred shares outstanding.  Citizens owns all of the Class B
         Common  Stock,  representing   approximately  82.83%  of  the  economic
         interest in the Company.

         Each share of Class A Common Stock  entitles the holder to one vote and
         each share of Class B Common  Stock  entitles the holder to 10 votes on
         each matter to be voted upon by the holders of the Common  Stock.  As a
         result,  Citizens has 97.97% of the voting control of the Company. With
         the exception of voting  rights,  the rights and  privileges of Class A
         and  Class B  Common  Stock  are  identical.  Class B  Common  Stock is
         convertible into Class A Common Stock on a one-for-one basis. The Class
         A Common Stock has no exchange  rights.  The financial  statements give
         retroactive effect to the aforementioned stock splits.




                                      F-11
<PAGE>


 (8)     Related Party Transactions

         Transactions with Citizens
         The Company has been a subsidiary of Citizens since 1990. In connection
         with this ownership  interest,  prior to the IPO, Citizens had advanced
         funds to the Company to finance  operations,  construction  and capital
         expenditures.  Interest  was  not  charged  on  Citizens  advances  for
         operations and capital  expenditures,  except for intercompany advances
         used to fund  construction-in-progress.  Interest on such  intercompany
         advances  was recorded as an increase in the amount due to Citizens and
         capitalized as part of property, plant and equipment. Subsequent to the
         construction period, the advances became non-interest bearing.

         Citizens also provides certain  administrative  services to the Company
         including, but not limited to, certain financial  management  services,
         information services,  legal and contract services and human  resources
         services. The Company entered into an Administrative Services Agreement
         ("Agreement") with Citizens on  December 1, 1997 for  the  continuation
         of such  services and will continue to be billed for reimbursable costs
         as defined in the agreement plus an administrative charge.

         In 1996,  Citizens  entered into a lease for fiber optic cable from the
         Company for 10 years which calls for rentals of $30,000 per month. Also
         during 1996,  Citizens and the Company  combined their purchasing power
         of long-haul  services in arrangements  with a long distance carrier in
         order to receive a lower unit cost.  The  Company  reimbursed  Citizens
         $5,116,000 and $7,600,000 in 1997 and 1996, respectively,  representing
         the cost of the Company's usage of these  long-haul  services plus a 5%
         administrative   fee.  This  arrangement  with  Citizens  was  replaced
         effective May 1, 1997 with a 24-month agreement which eliminated the 5%
         administrative fee.

         A summary of the activity in the amount due to Citizens at December 31,
         1997, 1996 and 1995 is as follows:

         See  Note  6  for  information  regarding  the  Company's  tax  sharing
         agreement   with  Citizens  and  Note  9  for   information   regarding
         participation in Citizens' stock plans.
<TABLE>
<S>      <C>                                       <C>              <C>            <C>     


         ($ in thousands)                               1997            1996            1995
         ----------------                          ----------       ----------     ----------
         Balance beginning  of period              $  155,395       $  64,941      $  35,109
         Capital contribution                        (119,200)              -              -
         Cash advances from Citizens, net             (31,461)         88,530         26,862
         Guarantee fees                                   548               -              -
         Deferred income taxes (see Note 6)           (12,408)         (3,198)        (1,160)
         Interest                                       4,076           2,868          2,619
         Administrative services and other items        3,994           2,254          1,511
                                                   ----------       ----------     ----------
         Balance end of period                     $      944       $ 155,395      $  64,941

                                                   ==========       ==========     ==========
</TABLE>

 (9)     Stock Plans

         Citizens Plans
         Prior to the IPO,  Company  employees  participated  in three  Citizens
         stock based  compensation  plans which are described below. The Company
         applies APB Opinion No. 25 and related  interpretations  in  accounting
         for the Citizens  employee stock plans.  Accordingly,  no  compensation
         cost was  recognized in the  financial  statements  for options  issued
         pursuant to the Citizens MEIP, Citizens EIP or Citizens ESPP.


                                      F-12
<PAGE>

         In  October  1997,  the  Board of  Directors  adopted  the 1997  Equity
         Incentive Plan ("EIP"), which authorizes, among other things, the grant
         of  incentive  stock  options,   nonqualified   stock  options,   stock
         appreciation  rights or combinations  thereof and restricted stock. The
         exercise price for such awards shall be determined by the  Compensation
         Committee of the Board of Directors at the date of grant.  The exercise
         period for option  awards is generally 10 years from the date of grant.
         The Company has reserved  4,170,000 shares for issuance under the terms
         of the plan.

         The Company applies APB Opinion No. 25 and related  interpretations  in
         accounting  for the  Company's  employee  stock plan.  Accordingly,  no
         compensation  cost has been recognized in the financial  statements for
         options issued  pursuant to EIP.  Compensation  expense  recognized for
         restricted stock issued pursuant to the EIP was $219,000 in 1997.

         Had the Company determined compensation cost based on the fair value at
         the grant date under SFAS 123, the  Company's  pro forma net loss would
         have been as follows:

<TABLE>
<S>      <C>                  <C>           <C>         <C>           <C>     
  
         ($ in thousands, except per share)    1997        1996           1995
         -----------------------------------------------------------------------
         Net loss            As reported   $ (33,945)  $ (29,383)     $ (20,322)
                             Pro forma     $ (34,392)  $ (29,528)     $ (20,352)
         Basic net loss      As reported   $ (.80)
           per share         Pro forma     $ (.81)
         Diluted net loss    As reported   $ (.80)
           per share         Pro forma     $ (.81)

</TABLE>

         The following  information reflects the Citizens MEIP, Citizens EIP and
         Citizens ESPP for Company  employees  and excludes full time  employees
         and officers of Citizens.

         Under the Citizens MEIP and Citizens  EIP, the exercise  price of stock
         options  shall be equal to or greater than the fair market value of the
         underlying  Citizens  common stock on the date of grant.  Stock options
         are  generally  not  exercisable  on the date of grant  but vest over a
         period of time.  A summary  of  Citizens  shares  subject to option for
         Company employees is as follows:
<TABLE>
<S>      <C>                               <C>               <C>    


                                             Shares              Weighted
                                           Subject to         Average Option
                                             Option              Price Per Share
         Citizens MEIP:
         Balance at January 1, 1995         107,374               $12.09
         Options granted                     29,307                10.36
         Options canceled or lapsed         (20,768)               12.05
                                            --------
         Balance at December 31, 1995       115,913                11.66
         Options granted                    114,614                10.86
         Options exercised                        -                    -
         Options canceled or lapsed          (6,223)               11.29
                                            --------
         Balance at December 31,            224,304               $11.26
           1996 and 1997                    ========


         Citizens EIP:
         Balance January 1, 1997                  -               $    -
                                                  -
         Options granted                    321,382                 8.79
                                           --------
         Balance at December 31, 1997       321,382               $ 8.79
                                           ========
</TABLE>


                                      F-13
<PAGE>

         The  following  table  summarizes  information  about  Citizens  shares
         subject to option for Company  employees  under the  Citizens  MEIP and
         Citizens EIP at December 31, 1997.
<TABLE>
<S>      <C>    


                                Options Outstanding                               Options Exercisable
         -----------------------------------------------------------------------------------------
                                                                   Weighted
                                                        Weighted    Average                  Weighted
                                                        Average    Remaining                 Average
                           Number        Range of       Exercise    Life in     Number       Exercise
                        Outstanding   Exercise Prices    Price       Years      Exercisable   Price
         ------------------------------------------------------------------------------------------
         Citizens MEIP    224,304     $9.66 - $14.67    $11.26        7.4        86,157      $10.23
         Citizens EIP     321,382         $8.79         $ 8.79        9.9           -                 -
</TABLE>


         The  weighted-average  fair value of options  granted during 1997, 1996
         and 1995 were $4.23, $4.61 and $5.09, respectively. For purposes of the
         pro forma  calculation  under SFAS 123,  the fair value of each  option
         grant  is  estimated  on the  date of  grant  using  the  Black-Scholes
         option-pricing  model with the following  weighted average  assumptions
         used for grants at December 31, 1997, 1996 and 1995:
<TABLE>
<S>               <C>                         <C>               <C>    


                                              Citizens EIP      Citizens MEIP                              
                                                     1997       1996        1995
                                              ------------      ----------------
                  Dividend yield                        -          -           -
                  Expected volatility                 32%        20%         20%
                  Risk-free interest rate           6.13%      5.62%       6.61%
                  Expected life                   7 years    7 years     7 years
</TABLE>

         The  Citizens  ESPP  allows  eligible  employees  of  Citizens  and its
         subsidiaries  to subscribe to purchase  shares of Citizens Common Stock
         at 85% of the lower of the  average  market  price on the first or last
         day of the purchase period.  An employee may elect to have up to 20% of
         annual  base  pay  withheld  in  equal   installments   throughout  the
         designated  payroll-deduction  period for the  purchase of shares.  The
         value of an employee's  subscription  may not exceed $25,000 in any one
         calendar year.

         The  weighted-average  fair value of purchase  rights  granted in 1997,
         1996 and 1995 was $3.07, $3.46 and $3.59, respectively. For purposes of
         the  pro  forma  calculation  under  SFAS  123,  compensation  cost  is
         recognized for the fair value of the employees' purchase rights,  which
         was  estimated  using  the  Black-Scholes   Model  with  the  following
         assumptions for subscription periods beginning in 1997, 1996 and 1995:
<TABLE>
<S>          <C>                         <C>         <C>         <C>    

  
                                             1997        1996        1995
             ------------------------------------------------------------
             Dividend yield                     -           -           -
             Expected volatility              32%         20%         20%
             Risk-free interest rate        5.44%       5.28%       5.53%
             Expected life               6 months    6 months    6 months

</TABLE>













                                      F-14
<PAGE>

         Company Plans

         Concurrent  with the IPO,  the  Company  granted  stock  options in the
         amount  of  2,326,000  shares of Class A Common  Stock at the  Offering
         price of $16 per share to certain directors,  officers and employees of
         the Company and Citizens.  The Company also granted 535,000  restricted
         shares  of  Class A  Common  Stock  at the  date of the IPO to  certain
         directors,  officers and  employees.  Subsequently,  15,000  restricted
         shares were returned and canceled.  None of the restricted stock awards
         may be sold, assigned, pledged or otherwise transferred, voluntarily or
         involuntarily,  by the  employee  until  the  restrictions  lapse.  The
         restrictions lapse over one through three-year  periods,  however,  the
         restrictions   on   one-third   of  the  stock  will  not  lapse  until
         $100,000,000  of annual revenue is achieved,  the  restrictions  on the
         second  one-third  of the stock will not lapse  until  $121,000,000  of
         annual revenues is achieved, and the restrictions on the last one-third
         of the stock will not lapse until  $155,000,000  of annual  revenues is
         achieved.  At  December  31,  1997,  the  Company  had not  reached the
         $100,000,000 revenue requirement.

         The  weighted-average  fair value of options  granted during 1997 under
         the EIP were $5.13.  For  purposes of the pro forma  calculation  under
         SFAS 123,  the fair value of each option grant is estimated on the date
         of  grant  using  the  Black-Scholes   option-pricing  model  with  the
         following weighted average assumptions used for grants in 1997:
<TABLE>
<S>        <C>                                      <C>


                                                     1997
           -----------------------------------------------------
           Dividend yield                              -
           Expected volatility                        13%
           Risk-free interest rate                  5.87%
           Expected life                            7 yrs
</TABLE>

(10)     Commitments and Contingencies

         In 1995, the Company  entered into a $110 million  construction  agency
         agreement  and an  operating  lease  agreement in  connection  with the
         construction of certain communications  networks and fiber cable links.
         The Company serves as agent for the  construction of these projects and
         upon  completion of each project has agreed to lease the facilities for
         a three year term, with one year renewals  available  through April 30,
         2002.  At December  31, 1997 and 1996,  the Company was leasing  assets
         with an original  cost of  approximately  $87,426,000  and  $57,300,000
         respectively,  under  this  agreement.  The  Company  has the option to
         purchase the facilities at the end of the lease terms for the amount of
         the lessor's average investment in the facilities, which is expected to
         be $110,000,000.  In the event the Company chooses not to exercise this
         option,  the  Company  is  obligated  to  arrange  for the  sale of the
         facilities to an unrelated  party and is required to pay the lessor any
         difference  between the net sales proceeds and the lessor's  investment
         in the  facilities.  However,  any  amount  required  to be paid to the
         lessor  is  subject  generally  to a  maximum  of 80%  of the  lessor's
         investment,  giving  effect  to lease  payments  previously  made.  The
         performance of these lease  obligations is guaranteed by Citizens.  The
         Company has agreed to pay to  Citizens a  guarantee  fee at the rate of
         3.25% per annum based on the amount of the lessor's  investment  in the
         leased assets.

         The Company  conducts  certain of its operations in leased premises and
         also leases certain  equipment.  Obligations,  renewals and maintenance
         costs vary by lease.







                                      F-15


<PAGE>


         The Company has entered into an operating  lease contract and a capital
         lease contract with a third party in order to develop  long-haul routes
         between Portland, Oregon and Seattle,  Washington and between Portland,
         Oregon,  and  Spokane,  Washington  and  between  Portland,  Oregon and
         Eugene,  Oregon.  The  operating  lease  agreement  provides for rental
         payments based on a percentage of the Company's  monthly leased traffic
         over such routes and is expected  to become  operational  in the second
         quarter of 1998.  The capital  lease  agreement  provides for a monthly
         minimum lease  payment of $105,000 plus a percentage of leased  traffic
         over such route in excess of certain minimums and became operational in
         February 1997. Both agreements have terms of 15 years.

         The Company has entered into an operating  lease  contract to develop a
         local network in Phoenix,  Arizona.  The operating  lease  provides for
         rental payments based on a percentage of the network's operating income
         for a period of 15 years.

         In October 1997, the Company entered into a 20 year indefeasible  right
         to use contract for 24 optical fibers with an unrelated third party for
         approximately $50,200,000. The third party intends to construct a fiber
         optic  communications  system linking Portland,  Boise, Salt Lake City,
         Las Vegas and Los Angeles.  The network is scheduled to be completed by
         February 28, 1999 and will have  approximately  1,620 route miles.  The
         Company  has  paid  approximately  $12,555,000  as a  deposit  which is
         included in Other Assets.

         In November 1997, the Company entered into a 30 year  indefeasible  and
         exclusive  right to use agreement for optical  fibers with an unrelated
         third party. The Company has exclusive rights to approximately 76 miles
         of these fibers at an annual cost of  approximately  $577,000 per year.
         The third  party  will  construct  certain  sections  of a fiber  optic
         communications  system in the San  Francisco  Bay Area.  The network is
         scheduled to be completed before December 31, 1998.

         On December 31,  1997,  the Company  entered  into an agreement  with a
         third party under which it will develop a 672 mile long-haul route from
         Oregon into southern California. The Company will construct, at its own
         expense,  an optical fiber  communications  system. In exchange for the
         construction  of the system and annual fees  payable to the third party
         (estimated to be $1,500,000) when the system is completed,  the Company
         will  receive an  indefeasible  right of way to use the system  through
         2018.

         On  January  8, 1998,  the  Company  entered  into an  operating  lease
         contract  with a third  party in order to  develop  a  long-haul  route
         between  Portland and Malin,  Oregon.  The  operating  lease  agreement
         provides for rental  payments  based on a percentage  of the  Company's
         monthly  leased  traffic  over  such  route and is  expected  to become
         operational in the first quarter of 1999. The lease agreement  provides
         for an annual  minimum  lease  payment  based on a percentage of leased
         traffic over such route in excess of certain  minimums.  The lease term
         is 20 years, beginning when the lines become operational.














                                      F-16


<PAGE>




         Future  minimum  rental  commitments  for all  long-term  noncancelable
         leases as of December 31, 1997 are:
<TABLE>
<S>                               <C>               <C>    

                                                            Lease Type
                                                    ----------------------------
                                  Year               Capital          Operating
                                  ----              ------------    ------------
                                                          ($ in thousands)
                                  1998              $      1,260    $      7,874
                                  1999                     1,260           7,741
                                  2000                     1,260           7,636
                                  2001                     1,260           6,515
                                  2002                     1,260           3,383
                                  Thereafter              10,941           3,036
                                                    ------------    ------------                          
                                    Total                 17,241    $     36,185
                                                                    ============
           Less amounts representing interest             (6,278)
                                                    -------------
           Present value of net minimum                   10,963
            lease payments
           Less current installments of                     (452)
            obligations under capital leases        -------------
                                                    $     10,511
                                                    =============
</TABLE>

         Total rental  expense  included in the Company's  results of operations
         for the years ended  December 31, 1997,  1996 and 1995 was  $9,196,000,
         $5,193,000 and $2,475,000 respectively.

         The Company is also a party to contracts  with several  unrelated  long
         distance  carriers.  The  contracts  provide  for fees  based on leased
         traffic subject to minimum monthly fees which aggregate $14,660,000 for
         1998, $19,060,000 for 1999 and $1,887,000 for 2000.

         The Company's  budgeted capital  expenditures for 1998 are $275,000,000
         and certain commitments have been entered into in connection therewith.

         The Company is involved in various claims and legal actions  arising in
         the ordinary  course of  business.  In the opinion of  management,  the
         ultimate  disposition of these matters will not have a material adverse
         effect on the Company's  results of operations,  financial  position or
         liquidity.






                                      F-17



<PAGE>



<TABLE>
<CAPTION>

Schedule II

                                                 Electric Lightwave, Inc.
                                            Valuation and Qualifying Accounts
                                                    ($ in thousands)

                                       Balance at       Charged to        Charge to                             Balance
                                       Beginning           Cost             Other                               at End
Accounts                               of Period        and Expense       Accounts         Deductions          of Period
--------                               ----------       -----------       ---------        ----------          --------- 
1995:
<S>                                    <C>               <C>            <C>              <C>                  <C>     
Allowance for doubtful accounts        $    (36)         $   (111)      $         -         $    (72)         $     (75)
Deferred income taxes valuation
    allowance                            (7,045)                 -          (7,063)                 -           (14,108)

1996:
Allowance for doubtful accounts             (75)           (3,010)                -           (1,919)            (1,166)
Deferred income taxes valuation
    allowance                           (14,108)                 -         (10,240)                 -           (24,348)

1997:
Allowance for doubtful accounts          (1,166)           (1,801)          (1,529)             (927)            (3,569)
Deferred income taxes valuation
    allowance                          $(24,348)         $       -        $(11,026)         $(35,374)         $        -

</TABLE>




<PAGE>


The Board of Directors
Electric Lightwave, Inc.:

We have audited and reported  separately  herein on the financial  statements of
Electric  Lightwave,  Inc.  as of  December  31,  1997 and 1996 and the  related
statements of  operations,  stockholders'  equity and cash flows for each of the
years in the three-year period ended December 31, 1997.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  of  Electric  Lightwave,  Inc.  taken  as  a  whole.  The
supplementary  information  included in Schedule II is presented for purposes of
additional  analysis  and  is  not  a  required  part  of  the  basic  financial
statements.  Such  information  has been  subjected to the  auditing  procedures
applied in the audit of the basic financial  statements and, in our opinion,  is
fairly  stated in all  material  respects  in  relation  to the basic  financial
statements taken as a whole.

                                     KPMG Peat Marwick LLP

March 11, 1998