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                          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, 1998

<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, 199

                                       OR

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


For the transition period from    to

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

                         Commission file number 0-23393

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

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


                               4400 NE 77th Avenue
                           Vancouver, Washington 98662
               (Address, zip code of principal executive offices)

Registrant's telephone number, including area code: (360) 816-3000

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

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 share
(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. [ ]

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant  as of  February  25,  1999 was  $70,114,000.  The  number  of shares
outstanding of each of the  registrant's  classes of common stock as of February
25, 1999 were:
                        Common Stock Class A:  8,642,763
                        Common Stock Class B: 41,165,000

                       DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement for the registrant's  1999 Annual Meeting of Stockholders to
be held on May 20, 1999, is incorporated by reference into Part III of this Form
10-K.

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ITEM 1.       DESCRIPTION OF BUSINESS

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. Further discussion
regarding  forward-looking  statements,  including  the factors  which may cause
actual  results  to  differ  from  such  statements,   is  located  in  Item  7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations", in this report.

a.       General development of business  

Electric Lightwave,  Inc. (the Company or ELI) is a facilities-based  Integrated
Communications   Provider  (ICP)  providing  a  broad  range  of  communications
services.  The Company  provides the full range of its  products  and  services,
including  switched  local and long  distance  voice service as well as enhanced
data  communications  services and  dedicated  point-to-point  services,  in the
western  United  States.  Enhanced  data  services  are also offered in selected
cities throughout the country. The Company markets to retail customers,  who are
primarily large- and medium-sized  communications-intensive  businesses,  and to
wholesale customers, who are primarily other communications providers.

The  Company  initially  operated  as a  Competitive  Access  Provider  (CAP) in
selected western United States cities, providing point-to-point connectivity for
inter-exchange  carriers  (IXCs)  and  businesses.   With  the  passage  of  the
Telecommunications  Act of 1996,  the  increase in customer  demand for enhanced
broadband data services and the development of competitive public data and voice
networks,  the Company  has  substantially  expanded  the breadth of its product
offering and its geographic reach.

During 1998 the Company  expanded the number of its  Metropolitan  Area Networks
(MANs),  where it provides the full range of its services on its own fiber optic
network,  from 5 to 7. The Company  also added 2 voice  switches,  3 frame relay
switches, 6 Asynchronous  Transfer Mode (ATM) switches and 7 Internet routers to
its  facilities  during the year.  The  Company's  ATM  network  backbone  began
operation  in 1998,  and is used to  transfer  voice,  video  images  and  data.
Management  believes  the ATM  network  will  position  the Company to offer one
network for all data,  voice and video  transmission  needs. The Company's local
and long-haul  installed  fiber optic network was expanded by 24% to 3,091 route
miles during the year, and construction has started on over 2,900 route miles of
additional  fiber with completion  scheduled for the second half of 1999. In the
second half of 1998,  the  Company  began the  expansion  of its  enhanced  data
services to cities outside of its MAN network,  with additional cities scheduled
for addition in 1999.

The Company was incorporated in 1990 and is approximately  83% owned by Citizens
Utilities Company (Citizens).  The Company completed the Initial Public Offering
(IPO) of its common stock in November 1997. On May 18, 1998,  Citizens announced
it planned to separate its telecommunications businesses and its public services
businesses  into  two   stand-alone,   publicly  traded   companies.   Citizens'
telecommunications   businesses   include   the   Company   as  well  as   other
telecommunications   businesses  and   investments.   These   telecommunications
businesses  and  investments  would be  transferred  to a new,  as yet  un-named
corporation. Citizens has advised the Company that it expects to then distribute
the stock of the Company's new parent to Citizens shareholders.  The goal of the
separation  is  to  enable  Citizens   telecommunications  and  public  services
businesses  to  independently  pursue their own  strategies,  and to operate and
compete more effectively.

The separation  requires numerous federal and state regulatory  approvals before
it can take effect.  The approval process is ongoing.  Citizens expects that the
separation will be completed in the second half of 1999.

The two post-separation  businesses (Citizens and the Company's new parent) will
have,  among other  things,  a different  capital  structure,  net asset  value,
operating  revenues  and net  income  than  Citizens  does  now.  The  Company's
relationship with Citizens is governed by agreements  entered into with Citizens
in  connection  with the Company's  IPO,  including an  Administrative  Services
Agreement,  a Tax Sharing Agreement,  an Indemnification  Agreement, a Customers
and Service  Agreement and a  Registration  Rights  Agreement.  Citizens is also
currently  guaranteeing the Company's $400 million bank Credit Facility and $110
million  construction agency and operating lease agreements.  The Company cannot
provide  assurance,  at this time,  about the effects of the separation on these
agreements and guarantees, or on the Company's new parent's ability to guarantee
future borrowings of the Company.  However, the agreements are assignable to the
Company's new parent, and Citizens has indicated its intention to do so.

                                      -1-
<PAGE>

b.       Financial information about industry segments

The Company  operates in a single  industry  segment,  communications  services.
Operations  are managed and  financial  performance  is  evaluated  based on the
delivery of multiple services to customers over a single fiber-optic network. As
a result,  there are many  shared  expenses  generated  by the  various  revenue
streams and geographic locations. Management believes that any allocation of the
expenses  incurred on a single  network to  multiple  revenue  streams  would be
impractical and arbitrary.  Management does not currently make such  allocations
internally.

c.       Narrative description of business

In the last five years, the Company has made  substantial  investments in fiber,
switching   and   transmission   equipment   and  other   assets  to  build  its
communications  network,  and it has  added  staff and  systems  to  support  an
expanded product  portfolio,  a larger customer base and planned network growth.
While the Company expects additional network growth in 1999, especially with the
completion  of its Western  route  long-haul  facilities,  the primary  focus of
Company  operations  in the  next  year  is  targeted  at  increased  use of the
installed asset base. A substantial  portion of the Company's  growth is planned
to come from increased  penetration  of existing  on-net  buildings,  a focus on
sales to customers  that are  connected to the network and an increase in market
share in MAN cities.

The Company currently provides the full range of its services in 7 primary MANs:
Seattle  and  Spokane,  Washington;  Portland,  Oregon;  Salt Lake  City,  Utah;
Sacramento,  California; Boise, Idaho; and Phoenix, Arizona and their respective
surrounding areas. The MANs include an extensive network of approximately  1,819
route miles of fiber optic cable.  Switched service,  including local dial tone,
is provided  from 7 Nortel DMS 500  switches  in the  primary  MAN  cities.  The
Company  also  has  transmission  equipment  co-located  with  switches  of  the
Incumbent Local Exchange Carrier (ILEC) at 45 locations.  The Company's MANs are
focused on  metropolitan  areas in the  western  United  States that the Company
believes have fewer Competitive  Local Exchange  Carriers (CLECs),  a relatively
high  proportion  of  communications-dependent  businesses  and the  prospect of
population and economic growth above the national average.

The Company provides enhanced  broadband data services in its MAN cities as well
as other cities  across the U.S. In addition to San  Francisco,  Los Angeles and
Las Vegas in the West,  the Company has also begun offering  enhanced  broadband
service in  Chicago  and New York City,  with  additional  cities to be added in
1999, including Atlanta, Cleveland, Dallas, Denver, Philadelphia,  San Diego and
Washington,  D.C. The  Company's  broadband  network  consists of 23 frame relay
switches  and 14 ATM switches  and  includes 58  network-to-network  interfaces.
National and international coverage is provided through strategic  relationships
with other communications  providers. The Company has also developed an Internet
backbone network with 24 routers providing Internet  connectivity in each of its
markets,  including over 90 "peering  arrangements" with other Internet backbone
service providers. A peering arrangement is an agreement where Internet backbone
service  providers  agree to allow each other  direct  access to  Internet  data
contained on their networks.

The Company owns or leases broadband  long-haul fiber optic network  connections
between its MAN cities.  By carrying traffic on its own facilities,  the Company
is able to improve  the  utilization  of its  network  facilities  and  minimize
network  access  and  certain  interconnection  costs.  Currently,  it  operates
long-haul  networks with a total route mileage of 1,272 miles,  including routes
between Phoenix and Las Vegas;  Portland and Seattle;  Portland and Spokane; and
Portland and Eugene,  Oregon. During 1998 the Company began construction of what
it believes will be the largest ringed  Synchronous  Optical  Network (SONET) in
the western United States.  The  approximately  2,900 mile  self-healing ring is
expected to be completed  in the second half of 1999 and will connect  Portland,
Sacramento, San Francisco, Los Angeles, Las Vegas, Salt Lake City and Boise. The
network will include Dense Wave Division  Multiplexing (DWDM) equipment and will
support voice and data traffic at speeds up to OC-192.

                                      -2-
<PAGE>


DWDM is a technique for transmitting 16 or more different light-wave frequencies
on a single fiber to increase transmission capacity. In addition, the Company is
completing  a link  between  Seattle and Spokane that will create a second SONET
ring connecting those cities with Portland.

In the development of its long-haul facilities, the Company has 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.  In  addition  to  the  long-haul  agreements,  another  agreement
provides for a fiber optic network in the Phoenix, Arizona metropolitan area.

The Company  continues to evaluate  potential  acquisitions  that are consistent
with its  long-range  business  plans to  generate  revenue  growth  through the
expansion of its network and customer base.

Significant Customer

U S  WEST  Communications  (US  West)  accounted  for  approximately  20% of the
Company's  revenues in 1998.  The revenues from US West are primarily the result
of interconnection  agreements that provide for reciprocal compensation relating
to the transport  and  termination  of traffic  between US West and the Company.
Further discussion regarding  reciprocal  compensation issues is located in Item
7, "Management's  Discussion and Analysis of Financial  Condition and Results of
Operations",  in this report.  No other customer  accounted for more than 10% of
1998 revenue.

PRODUCTS AND SERVICES

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:
Network  Services,  Local Telephone  Services,  Long Distance  Services and Data
Services.  The revenues for each of these four product  categories over the last
three years are presented in Item 7,  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations",  in this report.  The following
discussion  summarizes  the  components  of the  Company's  product and services
categories:

Network Services

The Network Services product consists of point-to-point  dedicated services that
provide a private  transmission channel for our customer's exclusive use between
two or more  locations.  This  product  line is  offered  in both  local MAN and
long-haul applications.

Local MAN  services are provided  over the SONET  networks  that the Company has
built  in each of its  MAN  cities.  Dedicated  point-to-point  and  multiplexed
services  are provided  from DS-0 to OC-48  transmission  levels over  protected
routes  to  our  on-net  locations.  Additionally,  an  extensive  use  of  ILEC
collocations allows the Company to extend the reach of its products to more than
just on-net locations.

Long-haul services are provided over owned or leased broadband  long-haul fiber.
As an added value,  ELI provides an end-to-end  solution by providing local loop
connectivity in MAN markets to deliver end-to-end  solutions.  Longhaul services
are offered from DS-0 to OC-48 transmission speeds.

Local Telephone Services

The Company's Local Telephone  Services product line consists of the delivery of
local dial tone and related products to various business customer segments.

                                      -3-
<PAGE>


Business  lines are offered in the form of Basic,  Enhanced and Virtual  Private
Exchange. Basic Business lines provide an incoming, outgoing, or 2-way call path
to the  Company's  Central  Office and the public  switched  telephone  network.
Calling  features are available to provide  additional user functions.  Enhanced
Business Service is a product bundle of the business line,  calling features and
voice messaging, designed to meet small business needs.

Virtual  Private  Exchange (VPX) is an  alternative  to the customer's  PBX, key
system or  ILEC-provided  Centrex for medium and large  businesses  that require
more advanced services,  such as call park, call pick-up and last number redial.
The Company  provides  approximately  28 features  for a flat  monthly rate with
optional features available.  The Company also offers customer premise telephone
sets designed for easier use of VPX features and voice messaging.

The Company offers a selection of trunk products to medium and large  businesses
with their own PBX or key system  equipment.  Trunk  products  are  provided  as
incoming, outgoing, or 2-way call paths to the ELI Central Office and the public
switched telephone network.

Integrated  Service  Digital  Network Primary Rate Interface (ISDN PRI) provides
customers with a high-speed,  flexible  digital access  connection to the public
switched  telephone  network for voice,  video and data  applications.  ISDN PRI
products  are  provided  in Data Only,  Data and Voice,  and  Dialable  Wideband
Service  configurations,  according to the  customer's  need. For Voice and Data
applications, calling features and Direct Inward Dialing functions are provided.

Local  Number  Portability  (LNP) is  provided  in Salt Lake  City,  Sacramento,
Portland,  Phoenix,  and  Seattle  for line,  trunk and ISDN PRI  products.  LNP
provides the Company's  customers with a seamless  transition from their current
provider to ELI by allowing  customers to migrate all of their telephone numbers
from their  current dial tone provider to ELI when ELI becomes their new service
provider.

Foreign Exchange Service (FEX) is provided for line, trunk and ISDN PRI products
to provide  customers local telephone  service from an exchange (central office)
other than the exchange from which they would normally be served.  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  Messaging and Voice Menuing  products  offer  customers  alternatives  to
providing their own hardware for managing  incoming  messages and the routing of
incoming calls. These services are offered either associated with line, trunk or
ISDN PRI services, or on a stand-alone basis.

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 use the unused DS-0s on the T-1
for other services.

Long Distance Services

The  Company's  Long Distance  Services are  comprised of retail and  wholesale,
switched and dedicated, 1+, toll-free and prepaid 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.


                                      -4-
<PAGE>

Travel Cards allow  customers the ability to make long  distance  calls from any
phone,  anywhere  through  accessing a toll-free  number and the prepaid switch,
which is then billed to the customer's long distance account.

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  Services  provide a platform to make long distance  phone calls to over
200 countries  worldwide.  The primary application of prepaid calling cards that
the Company offers is the remote memory card.  With remote memory,  the value of
the prepaid  card does not reside in the card itself,  but in a remote  database
accessible via a toll-free number.

Data Services

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

Dedicated Internet Services provides access to Internet Service Providers (ISPs)
and large  businesses.  The Company offers  Internet access through frame relay,
dedicated DS-1, dedicated DS-3 and dedicated 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 data networking solutions that connect two or more customer
locations at very high speeds,  typically,  10 megabits per second (Mbps) to 100
Mbps.  Included in the transparent LAN service are point-to-point  connectivity,
installed  customer  premise  equipment  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 in a variety of configurations.

Video  Conferencing is a service whereby the Company operates video conferencing
rooms in eight cities in the western United  States:  Vancouver,  Seattle,  Salt
Lake City,  Portland,  Sacramento,  Phoenix,  Boise and Spokane. 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.

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

Remote Systems Virtual Portal (RSVP) is a complete, outsourced dial-up access to
the Internet product. With the introduction of RSVP to the market, existing ISPs
will be able to outsource their local access to the Internet to the Company.

                                      -5-
<PAGE>

REGULATORY ENVIRONMENT

The Company's services are subject to federal, state and local regulation, which
in turn  receives  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.  Local  governments  may  require  the  Company to obtain  licenses or
franchises  regulating the use of public rights-of-way  necessary to install and
operate its networks.

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 its domestic  interstate long distance services
and its  international  termination  services.  The FCC has promulgated rules to
eliminate tariffing of interstate  domestic 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.  The Company has opted,
under a recent FCC  forbearance  order, to no longer 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 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 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.

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  in-region  interLATA  markets.  Full RBOC entry into interLATA
markets would  increase the level of  competition  faced by the  Company's  long
distance services.  However, no RBOC has yet successfully met the conditions for
interLATA entry.

                                      -6-
<PAGE>

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.  One RBOC,  SBC  Communications  (which was later
joined by US West)  filed a lawsuit  challenging  the  checklist  provisions  on
constitutional  grounds. A U.S. 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  against,  and then
punishing  the  RBOCs.  The FCC and the  Department  of  Justice  appealed  this
decision to the Court of Appeals for the Fifth  Circuit  which ruled against the
RBOCs. The U.S. Supreme Court recently declined further review, thus effectively
ending the RBOCs'  bill of  attainder  challenge.  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,  and the impact,  if any, that it
would have on the Company.

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.

On January 25, 1999,  the U.S.  Supreme Court upheld the bulk of the FCC's local
competition  rules,  which had been  overturned  by a lower court  primarily  on
jurisdictional  grounds. The Supreme Court, however,  vacated the portion of the
FCC rules that defined the minimum list of unbundled network elements ILECs must
make  available  to  competitors.  The FCC must now revisit its list of required
unbundled  network  elements  to  determine  which  elements  are  necessary  to
competing  carriers and without which  competitors'  ability to provide services
would be impaired.

The  Company  believes  that there will be no  material  adverse  effects on its
operations  whether  or not the FCC  ultimately  changes  this  list of  network
elements.  The Company  currently  is not reliant on  unbundled  elements in its
provision of services.

The Company  believes it may benefit from several aspects of the Supreme Court's
decision.  The  Supreme  Court  held  that the FCC  does  have  jurisdiction  to
establish certain pricing guidelines for interconnection services to be followed
by the states. Among the FCC's interconnection  guidelines  reinvigorated by the
Supreme Court's ruling is the requirement  that the price for unbundled loops be
deaveraged  geographically.  To the extent this  deaveraging is implemented  and
results in lower prices in urban areas, the Company in the future may be able to
take advantage of more economically  favorable unbundled loop rates in its urban
service areas.  Additionally,  the Supreme Court upheld the FCC's interpretation
of the "pick and choose"  language of the Federal Act,  which should  afford the
Company  the  ability  to adopt  favorable  provisions  from  multiple  existing
interconnection  agreements as it negotiates or renegotiates its interconnection
arrangements with ILECs.

                                      -7-
<PAGE>

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 to provide local telephone
services in the states of Arizona, California, Idaho, Minnesota, Nevada, Oregon,
Utah,  and  Washington.  Additionally,  the  Company  has  authority  to provide
intrastate  resold  long  distance  and prepaid  services in 48 states,  and has
applications pending in the remaining two states.

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 or 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 ELI,
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  facilities-based   markets,  the  Company  faces  significant
competition from the ILECs,  which currently  dominate the local exchange market
and are a de facto  monopoly  provider of local  switched  voice  services.  The
Company's  primary ILEC  competitors  are US 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  under-price  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 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.

As   discussed   above,   under   the   heading   "Regulatory    Environment   -
Telecommunications  Act of 1996",  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  the 14  point  checklist.  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 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.

                                      -8-
<PAGE>

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,  the Company  cannot
provide  assurance  that it 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,  among others:  AT&T Local  Services,  GST
Telecommunications,  MCI WorldCom and  NEXTLINK  Communications.  In each of the
markets 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,  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.

Network Services

Competition  for  network   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 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.

                                      -9-
<PAGE>

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.

OPERATIONS/INFORMATION TECHNOLOGY

The Company has a number of system  automation  projects  currently in progress.
The most significant of which is the development of a fully integrated  customer
care system which combines the software from three vendors and will automate the
order management  process.  This new system,  once completed,  will automate the
order  placement,   circuit  design,   provisioning  and  billing  systems.  The
integrated billing system is currently in the final stages of development and is
anticipated to be completed  during 1999. The Company  anticipates that once the
integrated system installation is complete, that additional functionality can be
added through system enhancements as necessary.


EMPLOYEES


As of  December  31,  1998  the  Company  employed  1,090  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.  See the
Financial Statements for financial information regarding domestic operations.

ITEM 2.       DESCRIPTION OF PROPERTY

The Company manages its operations through its corporate  headquarters,  located
at 4400 NE 77th Avenue, Vancouver, Washington, in an approximately 98,000 square
foot office  building  which it owns.  This  building  is fully  utilized by the
Company, and an additional 93,000 square feet of administrative office space has
been leased in Vancouver. In addition, the Company has leased local office space
in various markets  throughout the United States, and also maintains a warehouse
facility 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 services. The office,  warehouse and other facilities
leases expire on various dates through  October 2008. The Company  believes that
its properties are adequate and suitable for their intended  purposes,  and that
additional facilities will be added as needed as the Company continues expansion
into new markets.

                                      -10-
<PAGE>



ITEM 3.       LEGAL PROCEEDINGS

On June 30, 1997, the Company filed an antitrust  action against US West, in the
U.S. District Court for the Western District of Washington alleging violation of
federal and state  antitrust laws as well as various  federal and state laws and
commission  orders for US West's  failure to  provide  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,  as well as
an  injunction to prohibit US West from  discriminating  against the Company and
its  customers.  US West filed an answer denying all liability and is seeking an
award of its costs and attorney's fees. The trial court granted US West's motion
to stay the case pending  arbitration of the Company's  claims arising under the
now-expired Interim Interconnection  Agreements. All damage claims arising after
the termination of the old Interim  Agreements were not stayed and will continue
to be  prosecuted in the federal  court.  The trial court also  invalidated  the
limitations  on the Company's  remedies  that were  contained in the old Interim
Agreements so that the  arbitrators may award treble damages and attorney's fees
if the  Company  prevails.  Arbitration  is pending.  However,  US West filed an
appeal of the trial court's order denying arbitration of the Company's antitrust
claims arising after the termination of the Interim Interconnection  Agreements.
The appeal is pending before the Ninth Circuit Court of Appeals.

Additionally, the Company is currently party to routine litigation incidental to
its business,  none of which,  individually or in the aggregate,  is expected to
have a material adverse effect on the Company. The Company is a party to various
proceedings  before the public  utilities  commissions of the states in which it
provides or proposes to provide  telecommunications  services. These proceedings
typically  relate to licensure of the Company,  regulation  of provisions of the
1996 Act and  regulatory  arbitration  proceedings  relating  to  certain of the
Company's interconnection agreements.

ITEM 4.       SUBMISSION OF MATTERS TO a VOTE OF SECURITY HOLDERS

Not applicable.

                                      -11-
<PAGE>

<TABLE>

Executive Officers

<CAPTION>
The executive  officers of the Company and their  respective  ages and positions
are set forth below.
<S>                                <C>      <C>                                                      
Name                               Age      Title
----                               ---      -----
Leonard Tow                        70       Chairman of the Board
Daryl A. Ferguson                  60       Vice Chairman of the Board and Chief Executive Officer
David B. Sharkey                   49       President, Chief Operating Officer and Director
Robert J. DeSantis                 43       Chief Financial Officer, Vice President and Treasurer
James M. Berthot                   55       Vice President - Marketing and Product Development
Jerry L. Cady                      41       Vice President - Operations
Todd T. Hanson                     37       Vice President - Network Planning and Engineering
Randall J. Lis                     39       Vice President - Staff Operations
Michael J. Miller                  42       Vice President - Finance and Planning
James S. Parker                    42       Vice President - Wholesale
Kerry D. Rea                       40       Vice President and Controller
John P. Wolff                      52       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 also 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 Hungarian Telephone
and Cable Corporation.

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 Metromedia  Paging, 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 October  1991,  has been Vice  President and Treasurer of Citizens
since October 1991 and Chief Financial Officer,  Vice President and Treasurer of
Citizens since November 1997.

James M. Berthot  joined the Company as Vice  President - 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.

Jerry L. Cady joined the Company as Vice  President - Operations  in April 1998.
Prior to joining the Company,  from 1992 through  1998,  Mr. Cady served as Vice
President of Operations and Engineering for Midcom Communications.

Todd T. Hanson  joined the  Company as Vice  President  - Network  Planning  and
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.

                                      -12-
<PAGE>

Randall J. 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  - Finance  in October  1995 and  became  Vice
President  - Finance  and  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.

James S. Parker joined the Company as Vice President - Wholesale in August 1998.
Prior to joining the Company,  Mr.  Parker spent 16 years with MCI in both sales
and marketing management positions.

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 P. 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.

                                      -13-

<PAGE>

                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

The Company's Class A Common Stock began trading  publicly on November 24, 1997,
and is traded on The NASDAQ  National  Market under the ticker symbol ELIX.  The
following  table sets  forth the high and low sales  prices per share of Class A
Common  Stock  as  reported  by The  NASDAQ  National  Market  for  the  periods
indicated:
<TABLE>
<CAPTION>

<S>                              <C>         <C>              <C>                        <C>         <C>                            
                 1997            High        Low                       1998               High       Low
       ------------------------- ----------- ----------       ----------------------- ----------- -----------
       First Quarter             N/A         N/A              First Quarter               23.13      12.38
       Second Quarter            N/A         N/A              Second Quarter              20.25      11.00
       Third Quarter             N/A         N/A              Third Quarter               14.31       7.00
       Fourth Quarter            16.13       13.13            Fourth Quarter              10.69       3.50

</TABLE>

As of February 25, 1999, the approximate  number of record  security  holders of
the Company's  Class A Common Stock was 60. This  information  was obtained from
the Company's transfer agent.

Dividends

The Company to date has paid no cash dividends,  and does not anticipate  paying
any cash dividends on its common stock in the foreseeable future.

Recent Sales Of Unregistered Securities

None.

                                      -14-

<PAGE>


<TABLE>

ITEM 6.   SELECTED FINANCIAL AND OPERATING DATA                                     

<CAPTION>
-------------------------------------------------------------------------------------------------------------------------

($ in thousands, except per share and
non-dollar denominated operating data)                  1998          1997         1996           1995           1994
-------------------------------------------------------------------------------------------------------------------------
Statements of Operations Data (years ended December 31)

<S>                                                  <C>           <C>          <C>            <C>            <C> 
Revenues                                             $ 100,880     $ 61,084     $ 31,309       $ 15,660       $   8,152
Loss from operations                                   (73,783)     (34,095)     (29,383)       (19,950)         (9,541)
Net loss before cumulative effect (1)                  (67,200)     (33,945)     (29,383)       (20,322)        (10,414)
Net loss                                               (70,017)     (33,945)     (29,383)       (20,322)        (10,414)
Net loss per share before cumulative effect (1 and 2)    (1.35)       (0.80)         --             --             --
Net loss per share (2)                                   (1.41)       (0.80)         --             --             --
-------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (as at December 31)
Total assets                                         $ 532,309     $ 359,962    $ 195,656      $ 128,901      $ 110,691
Long-term obligations (3)                              302,256        70,511      155,395         64,941         41,674
Shareholders' equity                                   148,493       213,314        9,286         38,699         55,991
-------------------------------------------------------------------------------------------------------------------------
Operating Data
EBITDA without operating lease (4)                   $ (50,567)    $ (17,692)   $ (19,468)     $ (12,038)     $  (7,065)

Property, plant & equipment                            528,582       328,664      189,334        127,297        108,549
      - under operating lease (5)                      108,541        87,426       57,279         36,858            --
                                                 ------------------------------------------------------------------------
      - Total                                        $ 637,123     $ 416,090    $ 246,613      $ 164,155      $ 108,549
                                                 ========================================================================

Route miles (6)                                          3,091         2,494        1,428            780            601
Fiber miles (6)                                        181,368       140,812       97,665         52,013         37,504
Buildings connected                                        766           610          438            282            191
Access line equivalents                                 74,924        34,328        8,779            N/A            N/A
Switches and routers installed:
     Voice                                                   7             5            5              2              2
     Frame relay                                            23            20           15              5              2
     Internet                                               24            17            8            --             --
     ATM                                                    14             8          --             --             --
Employees                                                1,090           573          402            225            127
Customers                                                1,644         1,165          763            402            221
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

Information  presented  above should be read in  conjunction  with the Company's
         Financial  Statements and accompanying  Notes. 
(1)      The Company adopted SOP  98-5,  "Reporting  on the  Costs  of  Start-Up
         Activities",   effective  January  1, 1998  (see Note  4 of  Notes   to
         Financial Statements).
(2)      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).
(3)      Long-term  obligations  include  amounts  due  to Citizens in the years
         ended 1994 - 1996,  capital lease obligations and long-term debt.
(4)      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 12 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.  The  Company's
         EBITDA loss may not be comparable to similarly  calculated  measures of
         other Companies.
(5)      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 12 of Notes to Financial Statements).
(6)      Route miles and fiber miles also include those to which the Company has
         exclusive use pursuant to license and lease arrangements.

                                      -15-
<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. Forward-looking statements (including oral representations)
         are statements  about future  performance  or results,  and include any
         statements using the words "believe", "expect", "anticipate" or similar
         words.   All   forward-looking   statements  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
         overall  strategy,  changes in legal and regulatory  policy,  relations
         with ILECs and their ability to provide delivery of services  including
         interoffice  trunking,  implementation  of back office service delivery
         systems,   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 Company has no obligation to
         update or revise  forward-looking  statements to reflect the occurrence
         of future events or circumstances.
--------------------------------------------------------------------------------

The  following  information  should be read in  conjunction  with the  financial
statements and related footnotes included in this report.

(a)      Liquidity and Capital Resources

During 1998, the Company used the remaining proceeds ($6.5 million) from its IPO
and  proceeds  of $224  million  from a bank Credit  Facility to fund  operating
losses and capital  expenditures.  The bank Ccredit Facility is a $400  million,
5-year  revolving  Credit  Facility which has been  guaranteed by Citizens.  The
Credit Facility 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, 1998, the balance  outstanding was $284 million and the weighted
average interest rate was 5.61%. Interest rates are based on the Eurodollar rate
at the time the funds are drawn and reset periodically thereafter.  No principal
payment is due until the end of the term of the Credit Facility.

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 total capital additions
during 1998 were $200 million.  These  expenditures,  together  with  associated
operating  expenses,  have resulted in operating  losses and negative cash flows
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. The Company cannot assure that it
will  establish  an  adequate  revenue  base or that it 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  existing and new networks and
services will require  significant  additional  capital.  The Company's  capital
additions for 1999 are  estimated to be $261 million,  of which $216 million are
estimated to be cash expenditures and approximately $45 million are estimated to
be  non-cash  capital  lease  additions.   The  Company  continues  to  evaluate
opportunities for revenue growth and to make substantial  capital investments in
connection with continued  development of its existing  networks,  completion of
its long-haul  construction and the entry into new markets.  These opportunities
include,  but are not limited to,  acquisitions  and/or joint  ventures that are
consistent with the Company's  long-range  business plans of generating  revenue
growth through the expansion of its network and customer base. Additionally, the
Company  expects  to  continue  to  build  on its  existing  relationships  with
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.
                                      -16-

<PAGE>

The Company  anticipates  that the $116 million of remaining funds available for
draw on the Credit  Facility  will not be  adequate  to fund  operating  losses,
working capital  deficiencies and capital  expenditures for 1999. The Company is
in the process of arranging  financing  sufficient to fund its operating losses,
working capital  deficiencies and capital expenditures through at least 1999. To
the extent  such  financing  is not  arranged  prior to the  utilization  of the
un-drawn Credit Facility, Citizens has committed to provide the necessary bridge
financing,  at then market terms and conditions,  until third party financing is
completed.

The Company has the following  commitments  in the forms of service  agreements,
capital leases and a construction  agency agreement.  These agreements and costs
associated with them are summarized as follows:

In June 1998, the Company entered into a private line services  agreement with a
third  party,  which  allows the Company to utilize the third  party's  national
fiber optic  network for a period of nine years.  The Company is obligated for a
minimum  commitment  of  $122  million  over  the  life  of the  agreement  in a
take-or-pay arrangement, including $12 million in 1999. In addition, the Company
is 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 $21 million,  $7 million and $3 million for 1999, 2000 and
2001, respectively.

The Company has entered into  certain  long-term  capital  leases to obtain dark
fiber to more  quickly  expand its network.  Total  future  minimum cash payment
commitments  under these leases amounted to $41 million as of December 31, 1998,
including $2 million in 1999. For certain  contracts,  rental payments are based
on a percentage of the Company's leased traffic,  and are exclusive,  subject to
certain  minimums.  The Company  intends to maintain  exclusive use of the fiber
optic cable related to the long-haul routes where provided by certain contracts.
If  exclusivity  is not  retained on these  routes,  Management  does not expect
non-exclusivity to have a material impact on the Company's  financial  position,
results of operations or cash flows.

During  1995,  the  Company  entered  into a $110  million  construction  agency
agreement and an operating lease  agreement in connection with the  construction
of certain network facilities.  The Company will have the option to purchase the
facilities  at the end of the lease  term.  Payments  under the lease  depend on
current  interest rates,  and assuming  continuation of current  interest rates,
payments would  approximate  $6.1 million  annually  through April 30, 2002 and,
assuming exercise of the purchase option, approximately $110 million in 2002. In
the event the Company chooses not to exercise the purchase  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%  (approximately  $88
million) of the lessor's investment.  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.

Until its IPO in November 1997, the Company had been funded primarily 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
approximately 83% economic interest in the Company.  Citizens has indicated that
it intends to assist the Company in  arranging  financing,  as  discussed in the
Company's  Form 8-K dated October 14, 1998,  although the Company  cannot assure
that  Citizens  will be able to do so.  In 1997  and  1996,  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.

                                      -17-


<PAGE>



YEAR 2000

The Year 2000  (Y2K)  issue  stems  from the fact that  many  computer  programs
worldwide use two digits,  rather than four, to define the applicable  year. For
instance,  many  computers  on January 1, 2000 may assume  that  01-01-00 is the
first day of the year 1900 rather than 2000.  Massive system  failures may occur
globally if this issue is not properly  addressed.  The Company has  developed a
Y2K Initiative (the  Initiative) to mitigate the impact of the Y2K issue for its
internal  systems  and the  systems  that it relies  on  indirectly  from  third
parties.

The Company's State of Readiness

Under the Initiative, the Company has formed a cross functional Y2K project team
that reports to the Company's Chief Information  Officer (CIO). The CIO has full
authority  to  establish  methodologies,   approve  expenditures,   and  marshal
additional  resources as necessary.  A full-time consultant project manager, who
answers  regularly to the CIO,  manages the  initiative and oversees the project
team. The CIO is responsible for researching,  planning, executing, implementing
and completing the Initiative for the Company.

The three functional categories evaluated in the Initiative include:

o  Communications  Network,  which processes voice and data information relating
   to the Company's communications operations, including Transmission equipment,
o  Information  Technology  (IT) which  consists of all  internal  hardware  and
   software  used  to  support  the  Company's   financial  and   administrative
   operations, and
o  Facilities  consisting  of all systems  necessary to run an office  including
   security  system,  fire  suppression,  generators,  HVAC, and components with
   embedded technology at the Company's headquarters and leased facilities.

For each of the three  functional  categories  the  Company is in the process of
applying  the  following  three-phase  approach  to  identify  and  address  the
potential impact of Y2K compliance issues.

Phase I - Inventory and Assessment

Inventory and assessment  involves each Y2K team member identifying all relevant
systems, providers and information sources within their functional areas. A risk
analysis  rank is assigned to each item  identified  ranging from 1 to 3, with 1
representing items considered mission-critical.

Phase I was completed  December 31, 1998 for all  functional  categories  except
Transmission,  part of the Communications Network category, and Facilities which
are  substantially  complete.  Transmission  and  Facilities  are expected to be
completed by March 31, 1999.

Phase II - Remediation

Remediation is the process of making  changes to hardware,  software or services
in order to become Y2K compliant. During the inventory and assessment phase each
system  or  provider  is  evaluated  for  remediation.   Each  system  requiring
remediation  under the Company's  direct control will be replaced or upgraded as
needed.  Under  situations  where the service  provider  has  already  performed
remediation,  the Company  will accept the service  provider's  statement of Y2K
compliance that remediation has been performed.

Phase II is underway  and should be completed  during the first  quarter of 1999
for all categories  except  Transmission and Facilities which are expected to be
completed by June 30, 1999.

Phase III - Testing, Contingency Planning and Certification

All mission-critical systems,  including both internal and external,  identified
during the inventory  stage will be tested by the Company  sufficient to confirm
whether the system will continue to operate  properly in Y2K and beyond.  Proper
contingency  planning for all  mission-critical  items will allow the Company to
mitigate the risk associated with potential Y2K failures.  Y2K  certification is
achieved  when all phases have been  successfully  completed and approved by the
project manager.

Phase  III is  underway  and  should  be  completed  by June  30,  1999  for all
categories except Transmission,  which is anticipated to be completed August 31,
1999.

                                      -18-

<PAGE>

The Costs to Address the Company's Y2K Issues

As of December 31, 1998, the Company had incurred $.2 million related to the Y2K
issue.  The Company  currently  anticipates  that total costs of Y2K remediation
will be approximately $1.1 million consisting of $.7 million in costs related to
the  consultant  Y2K project  manager and  internal  salaries and $.4 million in
costs for  replacement/upgrade  of certain  equipment.  Such cost  estimates are
based  upon  presently  available  information  and  management  cannot  provide
assurance that the costs  associated with the Y2K issue will not be greater than
anticipated.

The Risks of the Company's Y2K Issues

Within its Communications  Network, the Company is dependent on the provisioning
and  switching  capabilities  of the ILECs in those markets in which the Company
provides services.  The Company has not received  certification from those ILECs
and other key suppliers  indicating  that they are Y2K  compliant,  but has been
notified that the ILECs have  initiated  programs to mitigate  their Y2K issues.
However,  the Company cannot assure that the systems of ILECs or other companies
on which the Company's systems rely will become Y2K compliant before the earlier
of when the  systems  will first be  impacted  or the year 2000.  At worst case,
failure  of the ILECs to  remediate  Y2K  compliance  issues  could  result in a
disruption of the Company's operations and have a material adverse impact on the
Company's financial condition.

Within IT, the Company is dependent on the  development  of software by internal
and  external  experts,  and the  availability  of critical  resources  with the
requisite  skill  sets.  At worst  case,  delays  in  supplier  shipment  and/or
installation  of compliant  software or hardware could result in a disruption of
the Company's  operations and the Company's ability to bill or collect revenues.
This worst case scenario  could have a material  adverse impact on the Company's
financial condition.

Within  Facilities,  the Company is dependent upon utility  suppliers to provide
compliant  service and building system compliance in leased and owned buildings.
Although the Company's Y2K compliant  backup power systems will be in place,  at
worst  case an  extended  power  outage  could  result  in a  disruption  of the
Company's  operations.   The  Company  is  dependent  on  property  managers  to
thoroughly review and  replace/upgrade  when necessary in leased  locations.  At
worst case,  failure of the property managers to remediate Y2K compliance issues
could  result in a  disruption  of the  Company's  operations.  This  worst case
scenario  could  have a  material  adverse  impact  on the  Company's  financial
condition.

Management  believes that these worst case scenarios are unlikely,  and that its
efforts to mitigate  Y2K issues  through  remediation,  testing and  contingency
planning will be successful.

The Company's Contingency Plans

As a part of Phase  III the  Company  is  preparing  contingency  plans  for all
mission-critical  systems. The Company is not anticipating any material problems
attributed to the Y2K issue,  however,  a Y2K Rapid Response Team will be formed
during the first  quarter of 1999 to quickly  respond in the event of  potential
Y2K  failures.  The team will include  experts from each of the key  operational
functions.


                                      -19-

<PAGE>


Reciprocal Compensation


The  Company  has  interconnection  agreements  with US  West,  the  ILEC in the
majority of the states in which the Company  provides local telephone  services.
These agreements  govern reciprocal  compensation  relating to the transport and
termination of traffic between the Company and US West. Reciprocal  compensation
revenues  are  recognized  by the  Company as earned,  based on the terms of the
interconnection   agreements.   Total  net  reciprocal   compensation   revenues
recognized by the Company for the years ended  December 31, 1998,  1997 and 1996
were $18.6 million, $1.4 million and $0, respectively.  Total net trade accounts
receivable  relating to  reciprocal  compensation  at December 31, 1998 and 1997
totaled $10.4 million and $1.4 million, respectively.

The Company filed  complaints  with the PUCs in Washington  and Utah  requesting
that US West pay the Company for reciprocal compensation charges relating to the
termination of calls to ISPs, as required by the interconnection agreements. The
state PUCs ruled in the Company's  favor and  accordingly,  US West began paying
the Company for reciprocal compensation in Washington in 1998 and in Utah in the
first quarter of 1999. The Company has similar  complaints pending with the PUCs
in Oregon and Arizona. Although neither the Oregon nor Arizona PUCs has issued a
final  ruling,  the  Oregon  PUC has  ruled in other  recent  cases  that  calls
terminated to ISPs should be categorized as local traffic,  and should therefore
be subject to reciprocal compensation.

The Company  recognized $1.1 million of reciprocal  compensation  revenue in the
first quarter of 1998 as a result of the reversal of an allowance established in
1997.  Additionally,  revenues of $2.2  million  were  recognized  in the fourth
quarter  of 1998 as a  result  of the  reversal  of an  allowance  that had been
established during previous quarters in 1998.

On February 25, 1999, the FCC issued a Declaratory Ruling and Notice of Proposed
Rulemaking that categorized calls terminated to ISPs as "largely"  interstate in
nature,  which could have the effect of precluding  these calls from  reciprocal
compensation  charges.  However,  the ruling  stated that ILECs are bound by the
existing  interconnection  agreements and the state  decisions that have defined
them.  Although  it cannot  provide  assurance,  the Company  believes  that the
reciprocal  compensation  revenues that it has recognized will not be subject to
reversal,  as the states in which the Company  recognizes  virtually  all of its
reciprocal  compensation  revenues  have  already  ruled  that calls to ISPs are
subject to reciprocal compensation.

Most of the Company's  interconnection  agreements  expire in the second half of
1999.  Management  believes that these agreements will be replaced by agreements
offering the Company some form of compensation regarding termination of calls to
ISPs.  The  Company  cannot  assure,  however,  that  the  level  of  reciprocal
compensation revenues will remain consistent with current levels.


                                      -20-

<PAGE>



Results of Operations


                                    Revenues

Revenues increased  approximately  $39.8 million, or 65%, in 1998 over 1997, due
to the continued  expansion of the Company's network and customer base. In 1998,
the Company added Boise, Idaho and Spokane,  Washington,  as new MANs, providing
local  and  long  distance  switched  services,  as well as  enhanced  broadband
services.  Also,  during 1998, the Company  initiated a national data expansion,
under which the Company intends to begin selling enhanced  broadband services to
cities across the United States. The Company began selling these services in Los
Angeles and San Francisco, California; Las Vegas, Nevada; Chicago, Illinois; and
New York City, New York. During 1998, access line equivalents  increased 40,596,
or 118%,  and customers  increased  479, or 41%, over December 31, 1997. The 95%
increase  in revenue in 1997 over 1996 was due to the  continued  growth  within
each of the five MANs existing at that time with the addition of 172  buildings,
a 39% increase over 1996, and the addition of 402 customers, a 53% increase over
1996.

<TABLE>
<CAPTION>
                                                 1998                            1997                      1996
                                     ----------------------------- --------------------------------- -------------
($ in thousands)                        Amount       % Increase         Amount         % Increase         Amount
----------------                     -----------    ------------      -----------      ----------        ---------
<S>                                    <C>              <C>            <C>             <C>               <C>         
Network services                       $ 36,589           9%            $ 33,522             79%         $ 18,741
Local telephone services                 38,169         261%              10,565            317%            2,533
Long distance services                   12,309          51%               8,140             75%            4,661
Data services                            13,813          56%               8,857             65%            5,374
                                     -----------    ------------      -----------      ----------        ---------
                                       $100,880          65%            $ 61,084             95%         $ 31,309
                                     ===========    ============      ===========      ==========        =========
</TABLE>

Network Services

Network  services  revenues  increased  $3.1  million,  or 9%, in 1998 over 1997
primarily due to increased revenues of $3.8 million in existing markets and $2.2
million in markets entered into subsequent to 1997. The existing market increase
resulted  from  additional  circuits sold to new and existing  customers.  These
increases were partially  offset by decreases in revenues of $3.0 million from a
significant customer, primarily due to the expiration of its short-term contract
in the first quarter of 1998.  Revenues from network  services  increased  $14.8
million, or 79%, in 1997 over 1996 primarily due to the Company's improved sales
of additional  products to existing  customers and an increase in route miles of
75% over 1996. Approximately, $6.8 million of the increase was associated with a
short-term  contract with the significant  customer mentioned above that expired
in early 1998.

Local Telephone Services

Local telephone services revenues increased $27.6 million, or 261%, in 1998 over
1997  primarily  due to  increased  reciprocal  compensation  revenues  of $17.2
million  from  $1.4  million  in 1997.  During  1998,  access  line  equivalents
increased  40,596,  or 118%,  over  December  31,  1997,  also  contributing  to
increased local dial tone services revenues. In addition, increased sales of the
ISDN product also  generated  increased  revenue over 1997 of $7.1  million,  or
301%. Revenues from local telephone services increased $8.0 million, or 317%, in
1997  over 1996  primarily  due to local  switch  implementations  in  Portland,
Sacramento  and Salt Lake City in the last half of 1996. The  implementation  of
the ISDN product generated $2.3 million of increased revenue in 1997 over 1996.

Long Distance Services

Long distance  services  revenues  increased $4.2 million,  or 51%, in 1998 over
1997  primarily due to a $4.8  million,  or 424%,  increase in prepaid  services
revenue.  The  increase  in prepaid  services  revenue is due to an  increase in
minutes  processed  over 1997,  resulting  from the  addition of new  customers.
Further,  retail long distance  revenues  increased  $1.0 million,  or 51%, over
1997, due to an increase in long distance  minutes  processed as a result of the
Company  bundling  sales of long distance with other  products.  The increase in
retail long distance  revenues was  partially  offset by a decrease in wholesale
long distance  revenues of $1.6 million,  or 33%, from 1997 primarily due to the
elimination of a large customer with credit problems.


                                      -21-

<PAGE>



Revenues from long distance  services  increased  $3.5 million,  or 75%, in 1997
over 1996 due to a $1.7  million,  or 423%,  increase  in retail  long  distance
revenues,  and a $1.1 million  increase in prepaid  services  introduced in late
1996.  The  increases  were  partially  offset  by a $1.9  million  decrease  in
wholesale long distance services from 1996.

Data Services

Data  services  revenues  increased  $5.0  million,  or 56%,  in 1998  over 1997
primarily due to a $4.5 million  increase in sales of Internet,  frame relay and
LAN/WAN services in new and existing  markets.  To a lesser extent,  new product
offerings  in  1998,  such as ATM and RSVP  also  contributed  to the  increase.
Revenues from data services in 1997 increased $3.5 million, or 65%, in 1997 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  in 1997 were  primarily  due to a 75%  increase in Internet  switches
installed in 1997.

                               Operating Expenses

Operating expenses increased $79.5 million,  or 84%, in 1998 over 1997 and $34.5
million,  or 57%, in 1997 over 1996.  The  increase  in expenses  was due to the
Company's  network and customer  growth as  reflected  in  revenues,  as well as
additional costs incurred to develop an  infrastructure to support the Company's
national data expansion and new market development.


<TABLE>
<CAPTION>


                                                      1998                            1997                   1996
                                         ------------------------------- ------------------------------- -------------
($ in thousands)                             Amount        % Increase       Amount        % Increase        Amount
----------------                          -----------    ------------     -----------      ----------     ----------
<S>                                        <C>               <C>         <C>               <C>             <C>      
Network access                             $ 50,957           72%        $  29,546             43%         $ 20,620
Operating expenses                           28,149           80%           15,615            107%            7,548
Selling, general and administrative          78,555          102%           38,851             53%           25,332
Depreciation and amortization                17,002           52%           11,167             55%            7,192
                                          -----------    ------------     -----------      ----------     -----------
                                           $174,663           84%        $  95,179             57%         $ 60,692
                                          ===========    ============     ===========      ==========     ===========

</TABLE>

Network Access

Network access expenses include resold product expenses.  The primary components
are usage  based  charges  for  carrying  and  terminating  traffic  on  another
carrier's network.

Network  access  expenses  increased  $21.4  million,  or 72%, in 1998 over 1997
primarily due to the Company's  revenue  growth.  Network  access  expenses were
higher, as a percentage of revenues, than 1997 as a result of increased expenses
related to the Company's  national data expansion  effort which utilizes  leased
circuits  outside  the  Company's  West  Coast  SONET  ring  and  owned  network
facilities.  In  addition,  the  significant  growth  in the  Company's  prepaid
services has increased usage-based charges on the Company's leased long distance
circuits, which typically have a lower gross margin.

Network  access  expenses  increased  $8.9  million,  or 43%,  in 1997 over 1996
primarily due 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.

Operating Expenses

Operating expenses include costs relating to providing  facilities based network
and enhanced communications services other than network access costs.

Operating expenses  increased $12.5 million,  or 80%, in 1998 over 1997 and $8.1
million, or 107%, in 1997 over 1996,  primarily due to increases in salaries and
related  expenses to support the  expanded  delivery of services and an expanded
customer service  organization.  Operating  employee head count increased by 229
employees to 508 employees at December 31, 1998, or 82% over 1997  primarily due
to the Company's  effort to increase  customer  service and technical  resources
available in each market. In addition,  operations  maintenance costs have risen

                                      -22-

<PAGE>

$3.3  million  and $.4  million  over  1997 and 1996,  respectively,  due to the
expansion of the  Company's  network and number of customers  on-net.  Operating
lease  payments  related to the  Company's  construction  agency  agreement  and
operating lease agreement  increased $1.0 million,  or 18%, and $1.8 million, or
51%,  over  1997  and  1996  respectively.  The  increase  is due  to  increased
utilization of the lease facility.

Selling, General and Administrative

Selling,  general and  administrative  expenses  include all direct and indirect
sales   channel   expenses  and   commissions,   as  well  as  all  general  and
administrative expenses.

Selling,  general and administrative  expenses increased $39.7 million, or 102%,
in 1998 over 1997 primarily due to increases in salaries and related expenses to
support the  infrastructure  needed for the delivery of services in existing and
new markets such as Boise, Idaho; Los Angeles and San Francisco, California; Las
Vegas,  Nevada and Spokane,  Washington,  as well as the Company's national data
expansion.  The  Company  increased  its  sales  force by 96  employees,  to 163
employees,  a 143%  increase  over 1997.  In addition,  the Company has expanded
advertising,  direct  marketing,  and public relations efforts in key markets to
increase name recognition and product awareness in 1998.

Selling, general and administrative expenses increased $13.5 million, or 53%, in
1997 over 1996  primarily  due to increases in salaries and related  expenses to
support the infrastructure  needed for the delivery of services in the Company's
original  MAN  networks  including  Seattle,   Washington;   Portland,   Oregon;
Sacramento, California; Salt Lake City, Utah; and Phoenix, Arizona.

Depreciation and Amortization

Depreciation and amortization  expenses include  depreciation of  communications
network  assets  including  fiber  optic  cable,  network  electronics,  network
switching and network data equipment.

Depreciation and amortization  expense  increased $5.8 million,  or 52%, in 1998
over 1997 and $4.0  million,  or 55%,  in 1997 over  1996.  The  increases  were
primarily  due  to  higher  plant  in  service   balances  for  newly  completed
communications network facilities and electronics.

                      Interest Expense and Interest Income

<TABLE>
<CAPTION>

                                              1998                             1997                    1996
                                     --------------------------     ---------------------------    ----------
<S>                                  <C>                <C>         <C>                 <C>               <C>  
($ in thousands)                      Amount        % Increase        Amount        % Increase        Amount
----------------                     --------       -----------      --------       -----------      --------

Interest expense, net                $ 7,526            545%        $  1,166            N/A            $  --
Interest income and other            $   272             N/A        $     --            N/A            $  --
</TABLE>

Interest  expense  increased $6.4 million,  or 545%, in 1998 over 1997, and $1.2
million in 1997 over 1996 due to interest and guarantee fees associated with the
Company's  borrowings  against  its bank  Credit  Facility  and  guarantee  fees
associated with the Company's  construction agency agreement and operating lease
agreement.  Interest expense is net of capitalized interest of $10.4 million and
$4.7 million for 1998 and 1997, respectively.

Interest  income and other  increased over 1997 primarily due to interest earned
on cash balances.


                                      -23-

<PAGE>



                               Income Tax Benefit

<TABLE>
<CAPTION>

                                              1998                             1997                    1996
                                    ---------------------------      -------------------------       --------
($ in thousands)                      Amount        % Increase        Amount        % Increase        Amount
----------------                     --------       ----------       --------       -----------      --------
<S>                                  <C>               <C>            <C>           <C>                <C>
Income tax benefit                   $ 14,414          995%           $1,316            N/A            $ --

</TABLE>

Income tax benefit  (including $.6 million netted against  cumulative  effect of
change in accounting  principle)  increased $13.1 million, or 995%, in 1998 over
1997,  primarily due to the  recognition of the tax benefit of operating  losses
net of related valuation  allowances.  Income tax benefit increased $1.3 million
in 1997 over 1996 due to the elimination on the IPO date,  November 24, 1997, of
Citizens'  policy that it would not  reimburse  the Company for the tax benefits
that were  contributed to the  consolidated tax return of Citizens for operating
losses.

               Cumulative Effect of Change in Accounting Principle

<TABLE>
<CAPTION>

                                                        1998                       1997               1996
                                              ------------------------    -----------------------   --------
<S>                                           <C>          <C>             <C>        <C>            <C>                  
($ in thousands)                               Amount      % Increase      Amount     % Increase     Amount
-------------------                           --------     -----------    ---------   -----------   --------
Cumulative Effect of Change in
  Accounting Principle                         $ 3,394        N/A           $ --          N/A          $ --
</TABLE>

Cumulative effect of change in accounting  principle  represented a write-off of
the unamortized  portion of deferred  start-up costs due to the Company adopting
AICPA  Statement  of  Position  98-5,   "Reporting  on  the  Costs  of  Start-Up
Activities" in 1998.


                                      -24-

<PAGE>



ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company  is  exposed to minimal  market  risks.  Sensitivity  of results of
operations to these risks is managed by  maintaining a  conservative  investment
portfolio,  which is comprised  solely of money market funds,  and entering into
long-term debt obligations with appropriate price and term characteristics.  The
Company does not hold or issue derivative,  derivative commodity  instruments or
other financial instruments for trading purposes. Financial instruments held for
other than trading purposes do not impose a material market risk.

The  Company is exposed  to  interest  rate risk,  as  additional  financing  is
periodically  needed due to the large operating losses and capital  expenditures
associated  with   establishing  and  expanding  the  Company's   communications
networks.  The  interest  rate that the  Company  will be able to obtain on debt
financing will depend on market conditions at that time, and may differ from the
rates the Company has secured on its current debt. Additionally,  the Company is
exposed to interest rate risk on amounts borrowed against its Credit Facility as
of December 31, 1998.  Advances against the Credit Facility  periodically renew,
at which point the borrowings  are subject to the then current  market  interest
rates,  which may differ from the rates the Company is  currently  paying on its
borrowings.

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 Note 14 to  the  Financial
              Statements (see 1. above).

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

None.


                                      -25-

<PAGE>


                                    PART III

The Company intends to file with the Commission a definitive proxy statement for
the 1999 Annual  Meeting of  Stockholders  pursuant to Regulation  14A not later
than 120 days after December 31, 1998. The  information  called for by this Part
III, including the information  required by Item 405 of Regulation S-K under the
caption  "Section  16(a)   Beneficial   Ownership   Reporting   Compliance,"  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:
<TABLE>
<CAPTION>

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

<S>           <C>
3.1           Amended and Restated Certificate of Incorporation.
3.2           Amended 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.
10.14.1       Amendment Number One to the Pre-Construction IRU agreement between the Company and FTV Communications, 
              LLC dated November 14, 1997.
10.15         Bank Credit Agreement dated November 21, 1997.
10.16*        License  Agreement  between the  Company and the United  States of America  Department of Energy 
              acting by and through the Bonneville Power Administration dated March 20, 1998.
10.17*        License  Agreement  between the  Company and the United  States of America  Department of Energy 
              acting by and through the Bonneville Power Administration dated January 8, 1998.
10.18*        Optical Fiber  Installation and IRU Agreement  between the Company and Pacific Gas and Electric Company 
              dated December 31, 1997.
10.18.1*      First  Amendment to Optical Fiber  Installation  and IRU Agreement between the Company and  Pacific Gas and
              Electric  Company  dated March 9, 1998.
10.19*        Initial Optical Fiber Design and Installation Agreement between the Company and FOCAS, Inc. dated as of May 7, 1998.
10.20*        Post-Completion Agreement between the Company and FOCAS, Inc. dated as of May 7, 1998.
10.21*        Private Line Services Agreement between the Company and Qwest Communications Corporation dated as of June 1, 1998.
10.22         Electric Lightwave, Inc. Employee Stock Purchase Plan.
23.1          Auditors' Consent.
24.1          Powers of Attorney.
27.1          Financial Data Schedule.
27.2          Restated Financial Data Schedules for the years ended December 31, 1997 and 1996.

                                      -26-
<PAGE>

Exhibits  10.13 and 10.22 are  management  contracts  or  compensatory  plans or
arrangements.

Exhibits  3.1, 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  10.14 is
incorporated  by  reference  to Exhibit No.  10.17 in the  Company's  Registration  Statement on Form S-1 (File No.
333-35227).  Exhibits  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 (File No.  0-23393).  Exhibits  10.14.1,  10.16,
10.17,  10.18 and 10.18.1 are  incorporated  by reference to the same exhibit  designations  in the Company's  Form
10-Q for the three  months  ended March 31,  1998 (File No.  0-23393).  Exhibits  3.2,  10.19,  10.20 and 10.21 are
incorporated  by reference to the same exhibit  designations  in the  Company's  Form 10-Q for the six months ended
June 30, 1998 (File No.  0-23393).  Exhibit 10.22 is  incorporated by reference to the Company's Proxy Statement on
Schedule 14A filed on April 28, 1998.
</TABLE>

* Material  has been  omitted  pursuant to a previous  request for  confidential
treatment that was granted by the Commission.

b.       Reports on Form 8-K

The Company filed the following reports on Form 8-K in the last quarter of 1998:

+        October 14, 1998,  under Item 5, "Other  Events",  to make  available a
         press  release dated  October 14, 1998  affirming the Company's  future
         outlook.
+        October 29, 1998,  under Item 5, "Other  Events",  to make  available a
         press  release dated  October 29, 1998,  regarding  the Company's  1998
         third quarter financial results.


                                      -27-

<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 4, 1999


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 4th day of March 1999.

<TABLE>
<CAPTION>

                            Signature                                                       Title
<S>                   <C>                                           <C> 


                      /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)


                      /s/ Guenther E. Greiner *                     Director
                ----------------------------------
                      (Guenther E. Greiner)

                        /s/ Stanley Harfenist *                     Director
                ----------------------------------
                       (Stanley Harfenist)

                        /s/ Robert A. Stanger *                     Director
                ----------------------------------
                       (Robert A. Stanger)

                        /s/ Maggie Wilderotter *                    Director
                ----------------------------------
                       (Maggie Wilderotter)

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

                          /s/ Leonard Tow *                         Chairman of the Board, Member, Executive Committe
                ----------------------------------                  and Director
                          (Leonard Tow)                             

</TABLE>




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

                                      -28-
<PAGE>



                            ELECTRIC LIGHTWAVE, INC.

                          INDEX TO FINANCIAL STATEMENTS
<TABLE>

<CAPTION>
                                                                                                                   Page

<S>                                                                                                                   <C>
Independent Auditors' Report..........................................................................................F-1
Balance Sheets at December 31, 1998 and 1997 .........................................................................F-2
Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 ........................................F-3
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 ........................................F-4
Statements of Changes in Shareholders' Equity for the Years Ended
   December 31, 1998, 1997 and 1996...................................................................................F-5
Notes to Financial Statements.........................................................................................F-6
</TABLE>


                                        F


<PAGE>



                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Electric Lightwave, Inc.

We have audited the accompanying  balance sheets of Electric Lightwave,  Inc. as
of  December  31,  1998 and 1997,  and the  related  statements  of  operations,
shareholders'  equity  and cash  flows for each of the  years in the  three-year
period  ended   December  31,  1998.   These   financial   statements   are  the
responsibility 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the  three-year  period ended  December  31,  1998,  in
conformity with generally accepted accounting principles.

As  discussed in Note 4 to the  financial  statements,  the Company  changed its
method of accounting  for start-up  costs in 1998 to adopt the provisions of the
American  Institute of Certified Public  Accountants  Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities".



                                                         KPMG LLP


New York, New York
March 1, 1999






















                                       F-1


<PAGE>



                            ELECTRIC LIGHTWAVE, INC.
                                 Balance Sheets
                             (Amounts in thousands)

<TABLE>
<CAPTION>


                                                                      December 31,
                                                             ----------------------------------
                                                                    1998              1997
                                                             ------------------- --------------
<S>                                                              <C>               <C>   
ASSETS
     Current assets:
         Cash ...........................................        $  13,120         $  26,531
         Trade receivables, net .........................           20,320            12,569
         Other receivables ..............................            2,671             7,688
         Other current assets ...........................            1,953               844
                                                                 ---------         ---------
             Total current assets .......................           38,064            47,632
                                                                 ---------         ---------

     Property, plant and equipment ......................          528,582           328,664
     Less accumulated depreciation and amortization .....          (40,912)          (25,791)
                                                                 ---------         ---------
         Property, plant and equipment, net .............          487,670           302,873
                                                                 ---------         ---------

     Other assets .......................................            6,575             9,457
                                                                 ---------         ---------

             Total assets ...............................        $ 532,309         $ 359,962
                                                                 =========         =========


LIABILITIES AND SHAREHOLDERS' EQUITY 
     Current liabilities:
         Accounts payable and accrued liabilities .......        $  61,760         $  50,237
         Other accrued taxes ............................            5,577             3,136
         Due to Citizens Utilities Company ..............            5,254               944
         Other current liabilities ......................            5,375             3,102
                                                                 ---------         ---------
             Total current liabilities ..................           77,966            57,419

     Deferred credits and other .........................            1,834             1,800
     Deferred income taxes payable ......................            1,760            16,918
     Capital lease obligations ..........................           18,256            10,511
     Long-term debt .....................................          284,000            60,000
                                                                 ---------         ---------
             Total liabilities ..........................          383,816           146,648

     Shareholders' equity ...............................          148,493           213,314
                                                                 ---------         ---------
             Total liabilities and shareholders' equity .        $ 532,309         $ 359,962
                                                                 =========         =========

</TABLE>





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

                                       F-2


<PAGE>


                            ELECTRIC LIGHTWAVE, INC.
                            Statements of Operations
                  (Amounts in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                    For the years ended December 31,
                                                                               -------------------------------------------
                                                                                    1998            1997         1996
                                                                               -------------------------------------------
<S>                                                                               <C>           <C>           <C>   
Revenues .....................................................................    $ 100,880     $  61,084     $  31,309
                                                                                  ---------      ---------    ---------

Operating expenses:
    Network access expenses ..................................................       50,957        29,546        20,620
    Operating expenses .......................................................       28,149        15,615         7,548
    Selling, general and administrative expenses .............................       78,555        38,851        25,332
    Depreciation and amortization ............................................       17,002        11,167         7,192
                                                                                  ---------      ---------    ---------
        Total operating expenses .............................................      174,663        95,179        60,692
                                                                                  ---------      ---------    ---------

    Loss from operations .....................................................      (73,783)      (34,095)      (29,383)

Interest expense, net of capitalized portion .................................        7,526         1,166          --
Interest income and other ....................................................          272          --            --
                                                                                  ---------      ---------    ---------

    Net loss before income taxes and cumulative effect of
      change in accounting principle .........................................      (81,037)      (35,261)      (29,383)

Income tax benefit ...........................................................      (13,837)       (1,316)         --
                                                                                  ---------      ---------    ---------

    Net loss before cumulative effect of
      change in accounting principle .........................................      (67,200)      (33,945)      (29,383)

Cumulative effect of change in accounting
    principle (net of $577 income tax benefit) ...............................        2,817          --            --
                                                                                  ----------     ---------    ----------

      Net loss ...............................................................    $ (70,017)    $ (33,945)    $ (29,383)
                                                                                  =========     =========     =========
Net loss before cumulative effect of change in accounting principle per share:
        Basic ................................................................    $   (1.35)    $    (.80)            *
        Diluted ..............................................................    $   (1.35)    $    (.80)            *

Net loss per share:
        Basic ................................................................    $   (1.41)    $    (.80)            *
        Diluted ..............................................................    $   (1.41)    $    (.80)            *

Weighted average shares outstanding ..........................................       49,709        42,352

* EPS for 1996 is not presented because the amounts are not meaningful.
</TABLE>


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

                                       F-3


<PAGE>


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

<TABLE>

<CAPTION>

                                                                  For the years ended December 31,
                                                             ------------------------------------------
                                                                  1998           1997         1996
                                                             ------------------------------------------
<S>                                                            <C>           <C>           <C>       
Cash flows from operating activities:
    Net loss ..............................................    $ (70,017)    $ (33,945)    $ (29,383)
    Adjustments to reconcile net loss to net cash
      used for operating activities:
        Depreciation and amortization .....................       17,002        11,167         7,192
        Deferred income taxes .............................      (14,414)         --            --
        Cumulative effect of change in accounting principle        3,394          --            --
        Non-cash compensation expense .....................        4,697           219          --
        Loss on disposal of property, plant and equipment .          386          --            --
    Changes in operating assets and liabilities:
        Receivables .......................................       (2,734)       (7,318)       (9,797)
        Accounts payable and other accrued liabilities ....       21,427         5,359        (2,802)
        Other accrued taxes ...............................        2,441           807           765
        Due to Citizens Utilities Company .................        4,310          --            --
        Other .............................................       (3,268)        6,522         2,035
                                                               ---------      --------     ---------
             Net cash used for operating activities .......      (36,776)      (17,189)      (31,990)
                                                               ---------      --------     ---------

Cash flows used for investing activities:
    Capital expenditures ..................................     (200,791)     (103,984)      (56,072)
                                                               ---------      --------     ---------
Cash flows from financing activities:
    Debt borrowings .......................................      224,000        60,000          --
    Reduction of capital lease obligations ................         (343)         --            --
    Citizens fundings (repayments) ........................         --         (31,461)       88,530
    Issuance of common stock, net of issuance costs .......          499       118,554          --
                                                               ---------      --------     ---------
             Net cash provided by financing activities ....      224,156       147,093        88,530
                                                               ---------      --------     ---------

Net increase (decrease) in cash ...........................      (13,411)       25,920           468

Cash at beginning of period ...............................       26,531           611           143
                                                               ---------      --------     ---------
Cash at end of period .....................................    $  13,120     $  26,531     $     611
                                                               =========      ========     =========

Supplemental cash flow information:
    Cash paid for interest, net of capitalized portion ....    $   6,074     $     937     $    --
    Non-cash increase in capital lease asset and liability         7,987          --            --
    Other non-cash transactions with Citizens:
        Capital contributions by Citizens .................         --         119,200          --
        Deferred income taxes .............................         --         (12,408)       (3,198)
        Capitalized interest ..............................         --           4,076         2,868

</TABLE>




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

                                       F-4

<PAGE>

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


<TABLE>
<CAPTION>

                                              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
                            ------------------------------------------------------------------------------------------------
  
<S>                           <C>      <C>       <C>          <C>     <C>           <C>    <C>        <C>          <C>           
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
   Issuance of common stock     --       --      121,816        1           --       --         529          --         530
   Amortization of restricted
        stock                   --       --           --       --           --       --       4,666         --        4,666
   Net loss                     --       --           --       --           --       --          --     (70,017)    (70,017)
                            ------------------------------------------------------------------------------------------------
Balance, December 31, 1998      --      $--    8,641,816     $ 86   41,165,000    $ 412    $321,926   $(173,931)   $ 148,493
                            ================================================================================================
</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 or ELI) is a  facilities-based
         Integrated  Communications  Provider  (ICP)  providing a broad range of
         communications  services.  The Company  provides  the full range of its
         products and services, including switched local and long distance voice
         services as well as enhanced data communications services and dedicated
         point-to-point   services,  in  the  western  United  States.  Enhanced
         broadband data services are also offered in selected cities  throughout
         the country. The Company markets to retail customers, who are primarily
         large- and  medium-sized  communications-intensive  businesses,  and to
         wholesale customers who are primarily other communications providers.

         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 flows 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.

         The Company was  incorporated in 1990 and is an 83% owned subsidiary of
         Citizens  Utilities  Company  (Citizens).  On May  18,  1998,  Citizens
         announced its intent to separate its telecommunications  businesses and
         public  service  businesses  into  two  stand-alone,   publicly  traded
         companies,  subject to regulatory approval. Citizens telecommunications
         businesses  include  the  Company  as well as other  telecommunications
         businesses and  investments.  These  telecommunications  businesses and
         investments would be transferred to a new, as yet un-named corporation.

         The Company  anticipates that the remaining funds available for draw on
         its Credit  Facility  (Note 7) will not be adequate  to fund  operating
         losses, working capital deficiencies and capital expenditures for 1999.
         The Company is in the process of arranging financing sufficient to fund
         its  operating  losses,   working  capital   deficiencies  and  capital
         expenditures  through at least 1999. To the extent that such  financing
         is not  arranged  prior  to the  utilization  of  the  un-drawn  Credit
         Facility,  Citizens  has  committed  to provide  the  necessary  bridge
         financing,  at then  market  terms and  conditions,  until  third party
         financing is completed.

 (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  accounted for as operating  leases are 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  $3,809,000  and $3,569,000 at December 31, 1998
                  and  1997,  respectively.   See  Note  13  for  discussion  of
                  significant customers.  Other receivables at December 31, 1997
                  included approximately  $7,029,000 of reimbursement due to the
                  Company under a construction agency agreement (see Note 12).

         (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 the Company's  communications networks. Costs
                  capitalized  during  the  network  development  stage  include
                  expenses associated with engineering,  construction,  overhead
                  and  interest.  Interest  costs  related  to  construction  of
                  approximately  $10,444,000,  $4,693,000  and  $2,868,000  were
                  capitalized  for the years ended  December 31, 1998,  1997 and
                  1996, 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.  Capital  leases  included in
                  communications   networks  are  being   amortized   using  the
                  straight-line method over the lives of the capital leases. The
                  estimated useful lives of owned assets are as follows:

                     Building                                          40 years
                     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 At December 31, 1997, other assets included third
                  party direct costs incurred in connection with negotiating and
                  securing initial  rights-of-way and the development of network
                  design for new market clusters or locations,  which costs were
                  deferred until service was ready to commence.  Such costs were
                  being   amortized   over  a  5-year   period   utilizing   the
                  straight-line  method.  On January 1, 1998,  these  costs were
                  expensed  as a  cumulative  effect of a change  in  accounting
                  principle in accordance  with American  Institute of Certified
                  Public   Accountants   Statement   of  Position   (SOP)  98-5,
                  "Reporting  on the  Costs of  Start-Up  Activities".  Start-up
                  costs are now expensed as incurred (see Note 4). Also included
                  in other  assets at December  31, 1998 and 1997 is goodwill of
                  $4,267,000 and  $4,504,000,  respectively,  resulting from the
                  acquisition  of  the  minority  interests  in the  Company  by
                  Citizens, which is being amortized utilizing the straight-line
                  method over a 25-year period.

         (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 Initial  Public  Offering  (IPO) date but
                  only to the extent that such  losses  could be utilized by the
                  Company on a stand-alone basis.


                                       F-7

<PAGE>

         (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.

          (h)     Employee Stock Plans
                  Prior to its 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. In May 1998,  shareholders  approved
                  the Company's Employee Stock Purchase Plan (ESPP).

                  Prior to January 1, 1996, the Company  accounted for the 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
                  disclosures required by SFAS 123 (see Note 11).

         (i)      Net Loss Per Share
                  The Company follows the provisions of SFAS 128,  "Earnings Per
                  Share" which requires  presentation  of both basic and diluted
                  earnings per share (EPS) on the face of the income  statement.
                  Basic EPS is computed  using the  weighted  average  number of
                  common  shares  outstanding  during the  period.  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 at the  beginning of the period.
                  EPS for 1996 is not  presented  because  the  amounts  are not
                  meaningful.  Certain  common  stock  equivalents  arising from
                  stock options  outstanding during the years ended December 31,
                  1998 and 1997 have been omitted from diluted EPS as the effect
                  would be anti-dilutive.


                                       F-8

<PAGE>

                  Weighted average shares outstanding have been adjusted for the
                  effects of application  of Securities and Exchange  Commission
                  Staff  Accounting  Bulletin (SAB) No. 98.  Pursuant to SAB 98,
                  all stock issued for nominal  consideration  should be treated
                  as  outstanding  for all  periods  presented  even  though the
                  effect is to reduce the net loss per share. The application of
                  SAB 98 had the  effect  of  increasing  outstanding  shares by
                  520,000 for the years ended December 31, 1998 and 1997.

(3)      Reciprocal Compensation

         The Company has  interconnection  agreements  with US West, the ILEC in
         the  majority  of the  states  in  which  the  Company  provides  local
         telephone  services.  These agreements govern  reciprocal  compensation
         relating  to the  transport  and  termination  of traffic  between  the
         Company and US West. Reciprocal compensation revenues are recognized by
         the  Company  as  earned,  based on the  terms  of the  interconnection
         agreements.  Total net reciprocal  compensation  revenues recognized by
         the Company for the years ended  December 31, 1998,  1997 and 1996 were
         $18.6  million,  $1.4  million  and $0,  respectively.  Total net trade
         accounts receivable relating to reciprocal compensation at December 31,
         1998 and 1997 totaled $10.4 million and $1.4 million, respectively.

         The  Company  filed  complaints  with the PUCs in  Washington  and Utah
         requesting  that US West pay the  Company for  reciprocal  compensation
         charges  relating to the  termination  of calls to ISPs, as required by
         the interconnection  agreements.  The state PUCs ruled in the Company's
         favor and accordingly,  US West began paying the Company for reciprocal
         compensation  in Washington in 1998 and in Utah in the first quarter of
         1999.  The  Company  has similar  complaints  pending  with the PUCs in
         Oregon and  Arizona.  Although  neither the Oregon nor Arizona PUCs has
         issued a final  ruling,  the Oregon PUC has ruled in other recent cases
         that calls  terminated to ISPs should be  categorized as local traffic,
         and should therefore be subject to reciprocal compensation.

         The Company recognized $1.1 million of reciprocal  compensation revenue
         in the  first  quarter  of  1998  as a  result  of the  reversal  of an
         allowance established in 1997.  Additionally,  revenues of $2.2 million
         were  recognized  in the  fourth  quarter  of 1998 as a  result  of the
         reversal of an  allowance  that had been  established  during  previous
         quarters in 1998.

         On February 25, 1999, the FCC issued a Declaratory Ruling and Notice of
         Proposed  Rulemaking  that  categorized  calls  terminated  to  ISPs as
         "largely"  interstate  in  nature,  which  could  have  the  effect  of
         precluding these calls from reciprocal  compensation charges.  However,
         the ruling stated that ILECs are bound by the existing  interconnection
         agreements and the state  decisions that have defined them. Most of the
         Company's interconnection agreements expire in the second half of 1999.

(4)      Change in Accounting Principles and New Accounting Pronouncements

         On April 3, 1998, the Accounting  Standards  Executive Committee of the
         AICPA   released  SOP  98-5,   "Reporting  on  the  Costs  of  Start-Up
         Activities".  The SOP requires that at the beginning of the fiscal year
         of adoption,  the  unamortized  portion of deferred  start-up  costs be
         written off and reported as a change in  accounting  principle.  Future
         costs of start-up  activities should then be expensed as incurred.  The
         Company  adopted SOP 98-5,  effective  January 1, 1998.  Certain  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 had been  capitalized  by the Company in previous
         years,  and were being amortized over five years. The net book value of
         these  deferred  amounts was  $3,394,000  which has been  reported as a
         cumulative effect of a change in accounting  principle in the statement
         of operations  for the year ended  December 31, 1998, net of income tax
         benefit of $577,000.  These  deferred  amounts  were  reported as other
         assets at December 31, 1997.


                                       F-9

<PAGE>

         On January 1, 1998, the Company early adopted SOP 98-1, "Accounting for
         the Costs of Computer Software Developed or Obtained for Internal Use".
         The adoption of the SOP did not have a material impact on the Company's
         financial  position and results of  operations.  The SOP requires  that
         certain costs related to the  development  or purchase of  internal-use
         software be capitalized and amortized over the estimated useful life of
         the software and costs related to the preliminary project stage and the
         post-implementation/operations   stage  of  an  internal-use   computer
         software development project be expensed as incurred.  Capital software
         costs  included  in  construction  work in progress  reflect  costs for
         internally developed or purchased software. These costs are capitalized
         and amortized on the  straight-line  method over the  estimated  useful
         life of the software.

         In  1998,  the  Company   adopted  the  provisions  of  SFAS  No.  131,
         "Disclosures about Segments of an Enterprise and Related  Information".
         SFAS  131  establishes  standards  for the  way  that  public  business
         enterprises  report  information  about  operating  segments  in annual
         financial   statements  and  requires  that  those  enterprises  report
         selected  information  about  operating  segments in interim  financial
         reports  issued to  shareholders.  It also  establishes  standards  for
         related  disclosures about products and services,  geographic areas and
         major  customers.   This  Statement   supersedes  SFAS  14,  "Financial
         Reporting  for  Segments  of a Business  Enterprise",  but  retains the
         requirement to report  information  about major customers.  See Note 13
         for segment disclosures.

(5)      Property, Plant and Equipment

         The  components of property,  plant and equipment at December 31 are as
         follows:
<TABLE>
<CAPTION>
                ($ in thousands)                                   1998                  1997
                ----------------                               -----------            -----------
<S>                                                           <C>                   <C>        
                Communications networks                       $   264,647           $   152,578
                Electronics and related equipment                  40,836                22,003
                Facility and leasehold improvements                21,280                 3,161
                Office equipment and furniture                     24,775                14,154
                Construction work in progress                     176,256               133,981
                Materials and supplies                                788                 2,787
                                                               -----------           -------------
                Property, plant and equipment                     528,582               328,664
                Accumulated depreciation and amortization         (40,912)              (25,791)
                                                               -----------           -------------
                Property, plant and equipment, net            $   487,670           $   302,873
                                                               ===========           =============
</TABLE>

         Communications networks include capital leases at December 31, 1998 and
         1997 of $18,489,000 and $11,320,000, respectively.

         Materials and supplies 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-10


<PAGE>

 (6)     Accounts Payable and Accrued Liabilities

         The components of accounts payable and accrued  liabilities at December
         31 are as follows:

         ($ in thousands)                                1998              1997
         ----------------                              --------        --------

         Accounts payable - trade                      $  3,431        $  5,407
         Accrued services purchased for resale            9,411           5,609
         Accrued construction work in progress           18,500          25,986
         Accrued compensation                             4,258           3,530
         Cash overdraft                                  25,515           9,475
         Other accrued liabilities                          645             230
                                                       --------        --------
         Accounts payable and accrued liabilities      $ 61,760        $ 50,237
                                                       ========        ========
        

(7)      Long-term Debt

         In  November  1997 the  Company  entered  into 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  (see  Note 10).  The
         balances outstanding as of December 31, 1998 and 1997 were $284 million
         and $60 million,  respectively.  The weighted  average interest rate at
         December 31, 1998 and 1997 was 5.61% and 6.05%, respectively.  Interest
         rates are based on the Eurodollar  rate at the time the funds are drawn
         and reset  periodically  thereafter.  No principal payment is due until
         the expiration date of the Credit Facility.

(8)      Income Taxes

         The components of deferred income taxes at December 31 are as follows:

         ($ in thousands)                                1998           1997
         ----------------                             ----------     ----------
         Benefit of operating loss carryforwards      $   44,181     $   3,171
         Less valuation allowance                        (15,137)          --
                                                      ----------     ----------
              Net deferred tax asset                      29,044         3,171
         Deferred income tax liability, primarily 
          property, plant and equipment                   30,804        20,089
                                                      ----------     ----------
              Net deferred income tax liability       $    1,760      $ 16,918
                                                       =========     ==========

         The Company is included in the  consolidated  federal income tax return
         of  Citizens.  In  accordance  with  the  tax  sharing  agreement  with
         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 of benefit
         was  eliminated  along  with  the  corresponding  amount  of  valuation
         allowance as of the IPO date. In addition,  the benefit  recorded prior
         to the IPO, which carried a 100% valuation  allowance,  was trued up in
         1998,  resulting in a reduction of the deferred tax payable of $744,000
         and a corresponding increase in the amount due to Citizens.


                                      F-11

<PAGE>

         The following is a reconciliation  of the provision for income taxes at
         federal statutory rates to the effective rates:

                                                     1998       1997      1996
                                                   -------     -------   -------
         Tax provision at federal statutory rate     35.0%      35.0%     35.0%
         Pre IPO operating loss not benefited         --       (31.3%)   (35.0%)
         Valuation allowance                        (17.9%)     --         --
                                                   -------     -------   -------
         Effective tax rate                          17.1%       3.7%      0.0%
                                                   =======     =======   =======

         The  provision  for income  taxes  consisted  of  deferred  federal tax
         expense  (benefit)  of  approximately  ($13,837,000),  $11,092,000  and
         $3,198,000 and current tax benefits of $0,  $12,408,000  and $3,198,000
         for the years ended December 31, 1998, 1997 and 1996, respectively.  In
         addition,  a $577,000 deferred tax benefit was recorded in 1998 related
         to the cumulative effect of an accounting change.

(9)      Capital Stock

         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 11).  Subsequently,  in 1997, 15,000 of
         the restricted shares were returned and canceled.

         During 1998,  the Company issued 119,345 shares of Class A Common Stock
         under its Employee Stock Purchase Plan (Note 11).  Additionally,  2,471
         shares of Class A Common  Stock were issued to directors of the Company
         for  services  provided.  The  Company  recognized  $31,000 of non-cash
         compensation expense related to the director issued shares.

         At December 31,  1998,  there were  8,641,816  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  82.65%  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 97.94%  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-12

<PAGE>

(10)     Related Party Transactions

         Transactions  with Citizens  
         Citizens  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.

         The  Company has  transactions  in the normal  course of business  with
         Citizen's  Communications segment (Citizens  Communications).  Citizens
         Communications  is an ILEC in  certain  markets  in which  the  Company
         provides services.  In order to provide services in those markets,  the
         Company purchases access from Citizens  Communications.  ELI is charged
         the  full-tariff  rate for those  services.  The Company paid  Citizens
         $4,790,000,   $5,116,000  and  $7,600,000  in  1998,   1997  and  1996,
         respectively,   representing  usage  based  charges  for  the  services
         provided.  Prior to the IPO in November 1997,  Citizens and the Company
         combined their purchasing power with several long distance  carriers in
         order to receive a lower unit cost.  The  amounts  paid to  Citizens in
         1997 include the cost of the Company's  usage from these  long-distance
         carriers, including a 5% administrative fee.

         Citizens  Communications  purchases  certain services and products from
         ELI at prevailing market rates. Related party revenue recognized by the
         Company was  approximately  $2,882,000,  $3,447,000  and  $1,653,000 in
         1998,  1997  and  1996,   respectively.   Outstanding   trade  accounts
         receivables  from Citizens were  $557,000 and  $1,035,000  for 1998 and
         1997, respectively.

         A summary of the  activity in the amount due to Citizens at December 31
         is as follows:
<TABLE>
<CAPTION>

        ($ in thousands)                         1998          1997          1996
        ----------------                      ---------     ---------     ---------
<S>                                           <C>           <C>           <C>      
        Balance beginning of period ......    $     944     $ 155,395     $  64,941
        Capital contribution ............          --        (119,200)         --
        Cash advances from Citizens, net .         --         (31,461)       88,530
        Guarantee fees ...................        8,614           548          --
        Deferred income taxes ............          744       (12,408)       (3,198)
        Interest .........................         --           4,076         2,868
        Administrative services:
              Services provided by Citizens       4,827         3,994         2,254
              ELI expenses paid by Citizens       6,141          --            --
        Payments to Citizens .............      (16,016)         --            --
                                              ---------     ---------     ---------
        Balance end of period ............    $   5,254     $     944     $ 155,395
                                              =========     =========     =========
</TABLE>

         See  Note  8  for  information  regarding  the  Company's  tax  sharing
         agreement  with  Citizens  and  Note  11  for   information   regarding
         participation in Citizens' stock plans.


                                      F-13

<PAGE>

(11)     STOCK PLANS

         Prior to the IPO,  Company  employees  participated  in three  Citizens
         stock based compensation plans, the Citizens MEIP, Citizens EIP and the
         Citizens ESPP (Note 2). At December 31, 1998, the Company had two stock
         based  compensation  plans,  the EIP and ESPP  (Note  2).  The  Company
         applies APB Opinion No. 25 and related  interpretations  in  accounting
         for the employee stock plans.  Accordingly,  no  compensation  cost has
         been recognized in the financial statements for options issued pursuant
         to  the  stock  plans  mentioned  above.  Had  the  Company  determined
         compensation  cost  based on the fair value at the grant date for these
         stock plans, the Company's pro forma loss and loss per share would have
         been as follows:

<TABLE>
<CAPTION>

        ($ in thousands except per share)        1998            1997               1996
                                              ---------      ----------          ---------
<S>                                           <C>            <C>                <C>       
        Net loss              As reported:    $(70,017)      $ (33,945)         $ (29,383)
                              Pro forma:       (75,783)        (34,392)           (29,528)

        Net loss per share    As Reported:
                                 Basic        $  (1.41)         $ (.80)             N/A
                                 Diluted         (1.41)           (.80)             N/A
                              Pro Forma:
                                 Basic           (1.52)           (.81)             N/A
                                 Diluted         (1.52)           (.81)             N/A
                                             
</TABLE>

         The full impact of calculating  compensation  cost for stock options is
         not  reflected  in the  pro  forma  amounts  above  because  pro  forma
         compensation  cost  only  includes  costs  associated  with the  vested
         portion  of options  granted  pursuant  to the stock  plans on or after
         January 1, 1995.

         In August 1998, the Compensation  Committee of ELI's Board of Directors
         approved a stock option exchange program for the EIP, pursuant to which
         employees of the Company holding  outstanding  options with an exercise
         price in  excess of $15.50  had the  right to  exchange  all or half of
         their options for a lesser number of new options with an exercise price
         of $8.75.  A calculation  was prepared  using the Black Scholes  Option
         Pricing Model to determine  the exchange rate for each eligible  grant.
         The repriced  options  maintain the same vesting and expiration  terms.
         This stock option exchange  program had no impact on reported  earnings
         and resulted in a net reduction in shares subject to option of 546,000.

         In November  1998,  the  Compensation  Committee of Citizens'  Board of
         Directors  approved a stock option exchange  program  pursuant to which
         current employees of Citizens and its subsidiaries  holding outstanding
         options,  under the  Citizens  MEIP and  Citizens  EIP  plans,  with an
         exercise  price in  excess of $10.00  had the right to  exchange  their
         options for a lesser  number of new options  with an exercise  price of
         $7.75.  The exchanged  options maintain the same vesting and expiration
         terms.

         Both the Company and Citizens  repriced these employee stock options in
         an effort to retain  employees at a time when a significant  percentage
         of  employee  stock  options had  exercise  prices that were above fair
         market  value.  No  compensation  costs  have  been  recognized  in the
         financial  statements as the exercise  price of the option was equal to
         the market value of the stock at the date of repricing.


                                      F-14

<PAGE>

         Company Plans

         Employee Stock Purchase Plan

         The ESPP was approved by shareholders on May 21, 1998.  Under the ESPP,
         eligible  employees  of the  Company  have the  right to  subscribe  to
         purchase  shares  of Class A Common  Stock at the  lesser of 85% of the
         average  of the high and low  market  prices  on the  first  day of the
         purchase period or on the 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.  An  employee  may  not
         participate  in the ESPP if such employee  owns stock  possessing 5% or
         more of the total  combined  voting  power or value of all  classes  of
         capital  stock.  As of December 31, 1998,  there were 200,000 shares of
         Class A Common Stock reserved for issuance under the ESPP. These shares
         may be adjusted for any future stock  dividends  or stock  splits.  The
         ESPP will terminate when all shares  reserved have been  subscribed for
         and purchased,  unless  terminated  earlier or extended by the Board of
         Directors.  The ESPP is administered by the  Compensation  Committee of
         the  Board of  Directors.  As of  December  31,  1998,  the  number  of
         employees  enrolled and participating in the ESPP was 468 and the total
         number of shares  purchased  under  the ESPP in 1998 was  119,345.  For
         purposes of the pro forma calculation,  compensation cost is recognized
         for the  fair  value  of the  employees'  purchase  rights,  which  was
         estimated  using  the  Black-Scholes   option-pricing  model  with  the
         following assumptions for subscription periods beginning in 1998:

                                                          1998
                                                    ----------------
                    Dividend yield                           --
                    Expected volatility                      71%
                    Risk-free interest rate                4.92%
                    Expected life                       6 months

         The weighted  average fair value of those  purchase  rights  granted in
         1998 was $3.82.

         Equity Incentive Plan

         In October  1997,  the Board of Directors  approved the EIP.  Under the
         EIP,  awards  of  Class A  Common  Stock  may be  granted  to  eligible
         directors, officers, management employees, non-management employees and
         consultants  of the  Company in the form of  incentive  stock  options,
         non-qualified   stock  options,   SARs,   restricted   stock  or  other
         stock-based  awards.  The  EIP  is  administered  by  the  Compensation
         Committee of the Board of Directors. The exercise price for such awards
         shall not be less than 85% or more than 110% of the average of the high
         and low stock prices on the date of grant. The exercise period for such
         awards is  generally  10 years from the date of grant.  The Company has
         reserved 4,170,600 shares for issuance under the terms of this plan.

         The  following is a summary of share  activity  subject to option under
         the EIP:
<TABLE>
<CAPTION>
                                                                   Weighted
                                                 Shares          Average Option
                                            Subject to Option    Price Per Share
                                           --------------------  ---------------
<S>                                             <C>                    <C>  
           Balance at January 1, 1997                --                $   --
             Options granted                     2,326,000                16.00
                                                -----------
           Balance at December 31, 1997          2,326,000                16.00
             Options granted                     1,654,000                10.77
             Options cancelled or lapsed        (1,649,000)               16.21
                                                -----------
           Balance at December 31, 1998          2,331,000             $  12.14
                                                ===========

</TABLE>

                                      F-15
<PAGE>


         As a result  of the  stock  option  exchange  program  approved  by the
         Compensation  Committee of the Board of Directors, a total of 2,212,000
         options were eligible for  exchange,  of which  1,426,000  options were
         cancelled in exchange for 880,000 new options.

         The following  table  summarizes  information  about shares  subject to
         options under the EIP at December 31, 1998.

<TABLE>
<CAPTION>
                                             Options Outstanding                            Options Exercisable
                         --------------------------------------------------------    --------------------------------
                                                                 Weighted Average
             Number          Range of       Weighted Average         Remaining          Number       Weighted Average
          Outstanding     Exercise Prices    Exercise Price        Life in Years      Exercisable     Exercise Price
          -----------     ---------------   ----------------     ----------------     -----------    ----------------
<S>                       <C>                 <C>                     <C>                <C>               <C>    
          1,261,000       $       8 - 9       $         9                9               268,000           $     9
             32,000               9 - 16               13                9                27,000                13
            963,000              16 - 17               16                9               320,000                16
             75,000              17 - 20               19                9                    --                --
          ---------                                                                      -------
          2,331,000               8 - 20               12                9               615,000                13
          =========                                                                      =======
</TABLE>

         For  purposes  of the  pro  forma  calculation,  compensation  cost  is
         recognized for the fair value of the employees' purchase rights,  which
         was estimated  using the  Black-Scholes  option-pricing  model with the
         following  assumptions for subscription  periods  beginning in 1998 and
         1997:


                                                      1998              1997
                                                    ---------          --------
                   Dividend yield                        --                --
                   Expected volatility                   71%               13%
                   Risk-Free interest rate             5.44%             5.87%
                   Expected life                     6 years           7 years

         The weighted  average fair value of those  options  granted in 1998 and
         1997 was $6.94 and $5.13, respectively.

         In conjunction  with the IPO, the Company  granted  535,000  restricted
         stock  awards  to key  employees  in the form of Class A Common  Stock.
         Subsequently in 1997, 15,000 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. For 395,000 shares, the restrictions lapse over one
         through three-year periods,  including one-third of the shares when the
         Company  achieves  $100,000,000  of annual  revenues,  one-third of the
         shares when the Company achieves  $125,000,000 of annual revenues,  and
         one-third  of the shares  when the  Company  achieves  $155,000,000  of
         annual  revenues.  For the remaining  125,000 shares,  the restrictions
         will lapse in January 2001 if certain  performance  targets are met. At
         December 31, 1998,  520,000 shares of this stock were  outstanding,  of
         which 131,667 shares were no longer restricted. Compensation expense of
         $4,666,000   and   $219,000   for  the  years   ended  1998  and  1997,
         respectively, has been recorded in connection with these grants.

         Citizens Plans

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


                                      F-16


<PAGE>

         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>
<CAPTION>

                                                             Shares        Weighted  
                                                          Subject to     Average Option
                                                             Option      Price Per Share
                                                        -------------- -------------------
              Citizens MEIP:
              --------------
<S>                                                          <C>         <C>      
              Balance at January 1, 1996                      119,000    $   11.32
                 Options granted                              118,000        10.54
                 Options cancelled or lapsed                   (6,000)       10.96
                                                             ---------
              Balance at December 31, 1996 and 1997           231,000        10.93
                 Options granted                               70,000         7.75
                 Options cancelled, forfeited or lapsed      (125,000)       10.77
                                                             ---------
              Balance at December 31, 1998                    176,000         9.75
                                                             =========
</TABLE>

         As a result  of the  stock  option  exchange  program  approved  by the
         Compensation  Committee of the Board of Directors of Citizens,  a total
         of 115,000 options were eligible for exchange, of which 115,000 options
         were  cancelled  in exchange  for 71,000 new  options  with an exercise
         price of $7.75.


<TABLE>
<CAPTION>

                                                             Shares        Weighted  
                                                          Subject to     Average Option
                                                             Option      Price Per Share
                                                        -------------- -------------------
              Citizens EIP:
              -------------
<S>                                                         <C>             <C>      
              Balance at January 1, 1997                       --           $   --
                 Options granted                            331,000           8.53
              Balance at December 31, 1997                  331,000           8.53
                 Options cancelled, forfeited or lapsed     (29,000)          8.53
              Balance at December 31, 1998                  302,000           8.53
</TABLE>


         The  following  table  summarizes  information  about  Citizens  shares
         subject to option for Company  employees  under the  Citizens  MEIP and
         Citizens EIP at December 31, 1998.

<TABLE>
<CAPTION>
                                             Options Outstanding                            Options Exercisable
                              --------------------------------------------------------   --------------------------------
                                                                        Weighted                                        
                                     Range of        Weighted            Average                            Weighted     
             Number                 Exercise         Average            Remaining          Number            Average
          Outstanding                Prices       Exercise Price       Life in Years     Exercisable      Exercise Price
          -----------         ----------------   ----------------     ----------------   -----------     ----------------
<S>                              <C>               <C>                    <C>            <C>                <C>    
        Citizens MEIP  176,000   $7.75-14.24       $   9.75               6.4            107,000            $  10.11
        Citizens EIP   302,000       8.53              8.53               8.7            101,000                8.53
</TABLE>

         The weighted  average fair value of options  granted during 1998,  1997
         and 1996 was $2.18, $4.23 and $4.61, respectively.  For purposes of the
         pro forma calculation, 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, 1998, 1997 and 1996:


                                      F-17


<PAGE>

                                       Citizens EIP       Citizens MEIP
                                          1997           1998       1996
                                       ------------     ------    --------
             Dividend yield               --               --         --
             Expected volatility          32%               26%        20%
             Risk-Free interest rate    6.13%             4.49%      5.61%
             Expected life            7 years           4 years    7 years


         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  annual  installments   throughout  the
         designated payroll-deduction period for the purchase of the shares. The
         value of an employee's  subscription  may not exceed $25,000 in any one
         calendar year.

         Company  employees  did not  participate  in the Citizens ESPP in 1998,
         since  the  Company's  ESPP  was  established.   The  weighted  average
         fair-value  of purchase  rights  granted in 1997 and 1996 was $3.07 and
         $3.46,  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 and 1996:

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

 (12)    Commitments and Contingency

         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 served as agent for the  construction of these projects and
         upon  completion of each project leased the facilities for a three year
         term,  with one year  renewals  available  through  April 30, 2002.  At
         December  31, 1998 and 1997,  the  Company  was leasing  assets with an
         original   cost   of   approximately   $108,541,000   and   $87,426,000
         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.  Payments under the
         lease depend on current  interest rates,  and assuming  continuation of
         current  interest  rates,   payments  would  approximate  $6.1  million
         annually through April 30, 2002 and,  assuming exercise of the purchase
         option,  approximately  $110 million in 2002.  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% (approximately $88 million) of the lessor's  investment.
         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.

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


                                      F-18


<PAGE>

         The Company has entered into various  capital and operating  leases for
         fiber optic cable to interconnect its MAN networks with long-haul fiber
         optic routes. The terms of the various  agreements  covering the routes
         described  above  range  from 20 to 25  years,  with  varying  optional
         renewal periods. For certain contracts,  rental payments are based on a
         percentage of the Company's leased traffic, and are exclusive,  subject
         to certain minimums. For other contracts,  certain minimum payments are
         required, which are reflected in the commitment table below.

         The Company has also entered into certain  operating and capital leases
         in order to develop  MANs,  including an  operating  lease to develop a
         local network in Phoenix and a capital lease to develop a local network
         in San Francisco.  The operating  lease in Phoenix  provides for rental
         payments based on a percentage of the network's  operating income for a
         period of 15 years.  The capital  lease in San  Francisco  is a 30-year
         indefeasible and exclusive right to use agreement for optical fibers in
         the San Francisco Bay Area.  The Company is required to make  quarterly
         minimum  payments  under  the  agreement,  which are  reflected  in the
         commitment  table  below.  The  Phoenix   operating  lease  network  is
         currently  operational,  and the San Francisco capital lease network is
         expected to become operational in the second half of 1999.

         Future  minimum  rental  commitments  for all long-term  non-cancelable
         leases as of December 31, 1998 are:
<TABLE>
<CAPTION>

                                                                Lease Type
                                                       -------------------------
        Year                                           Capital        Operating
        ----                                         -------------   -----------
        ($ in thousands)
<S>                                                  <C>             <C>       
        1999                                         $    1,693      $   12,383
        2000                                              1,838          12,367
        2001                                              1,838          11,826
        2002                                              1,838           7,714
        2003                                              1,838           4,153
        Thereafter                                       31,766           7,095
                                                     -------------   -----------
        Total                                            40,811      $   55,538
                                                                     ===========
        Less amounts representing interest              (22,204)
                                                     -------------
        Present value of net minimum lease
          payments                                       18,607
        Less current installments of obligations
          under capital leases                             (351)
                                                     -------------
                                                     $   18,256
                                                     =============
</TABLE>

         Total operating lease rental expense included in the Company's  results
         of operations for the years ended December 31, 1998,  1997 and 1996 was
         $12,511,000, $9,196,000 and $5,193,000, respectively.

         In  June  1998,  the  Company  entered  into a  private  line  services
         agreement  with a third party,  which allows the Company to utilize the
         third party's  national fiber optic network for a period of nine years.
         The Company has a total  minimum  commitment  of $122  million over the
         term of the  agreement,  including  $11.6 million in 1999. A portion of
         the network was operational as of December 31, 1998, with  construction
         on the remainder of the network scheduled for completion in 1999.

         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  $21,300,000,
         $7,200,000 and $3,200,000 for 1999, 2000 and 2001, respectively.

         The  Company's   capital   additions  for  1999  are  estimated  to  be
         $261,000,000.  Certain commitments have been entered into in connection
         with this budget.


                                      F-19


<PAGE>

         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.

(13)     Segment Disclosures

         The  Company  operates  in a single  industry  segment,  communications
         services.  The Company's  operations  involve  developing an integrated
         advanced  fiber  network  to provide  the full  range of the  Company's
         products and services in the western  United States as well as enhanced
         broadband  data  services  in  selected  cities  nationwide.  While the
         Company's chief  operating  decision maker monitors the revenue streams
         of the  various  products  and  geographic  locations,  operations  are
         managed and financial performance is evaluated based on the delivery of
         multiple services to customers over a single fiber-optic network.  This
         practice  allows the Company to leverage its network  costs to maximize
         profitability. As a result, there are many shared expenses generated by
         the various revenue streams and management believes that any allocation
         of the  expenses  incurred  on a single  network  to  multiple  revenue
         streams or geographic locations would be impractical and arbitrary, and
         management does not currently make such allocations internally.

         Products and Services

         The  Company  groups  its  products  and  services  into the  following
         categories:

         Network  Services -  point-to-point  dedicated  services that provide a
         private  transmission  channel for our customers' exclusive use between
         two or more locations, both in metropolitan and long haul applications.

         Local  Telephone  Services - local dial tone and switched  products and
         services  that  provide  incoming  and  outgoing  calls over the public
         switched  network  with added  functionality.  This  category  includes
         reciprocal compensation revenues.

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

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

         The revenues  generated  by these  products and services at December 31
         were:

<TABLE>
<CAPTION>

        ($ in thousands)                     1998              1997            1996
        ---------------                  ----------       ----------        ---------- 
<S>                                      <C>              <C>               <C>       
        Network services                 $   36,589       $   33,522        $   18,741
        Local telephone services             38,169           10,565             2,533
        Long distance services               12,309            8,140             4,661
        Data services                        13,813            8,857             5,374
                                         ----------       ----------        ----------- 
                                         $  100,880       $   61,084        $   31,309
                                         ==========       ==========        =========== 
</TABLE>


         The Company  does not  currently  provide  services  outside the United
         States.


                                      F-20


<PAGE>

         Major Customers

         For the years ended December 31, 1998 and 1997, two separate  customers
         have  accounted  for 10% or more of the  Company's  total  revenue.  No
         customers  accounted for 10% or more of the Company's total revenue for
         the year ended  December  31, 1996.  At December  31, 1998,  Customer A
         accounted for 20% of the Company's total revenue. At December 31, 1997,
         customer B accounted for 10% of the Company's total revenue.

(14)     Quarterly Financial Information (Unaudited)

         Selected  unaudited  financial  information for each of the quarters in
         1998 is as follows:
<TABLE>
<CAPTION>

                                                                              Three Months Ended
                                                          ------------------------------------------------------
                                                          March 31,     June 30,    September 30,    December 31,
                                                          ----------   ----------  ---------------  -------------

        ($ in thousands, except per share amounts)
        ------------------------------------------
<S>                                                       <C>          <C>           <C>             <C>       
        Revenues                                          $  20,057    $  21,443     $  25,664       $ 33,716
        Network access expenses                               9,212        9,860        12,317         19,568
        Net loss before cumulative effect of change in
            accounting principle                            (11,955)     (14,758)      (18,405)       (22,082)
        Net loss                                            (14,772)     (14,758)      (18,405)       (22,082)
        Net loss per share before cumulative effect
            of change in accounting principle             $    (.24)   $    (.30)    $    (.37)      $   (.44)
        Net loss per share                                     (.30)        (.30)         (.37)          (.44)

</TABLE>


         Quarterly  information for 1997 is not supplied, as the Company was not
         publicly traded for any full quarters in 1997.



                                      F-21


<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,  1998 and 1997 and the  related
statements of  operations,  stockholders'  equity and cash flows for each of the
years in the three-year period ended December 31, 1998.

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 LLP


March 1, 1999



<PAGE>



Schedule II

                            Electric Lightwave, Inc.
                        Valuation and Qualifying Accounts
                                ($ in thousands)
<TABLE>
<CAPTION>

                                      Balance at       Charged to        Charge to                       Balance
                                      Beginning          Cost             Other                          at End
Accounts                              of Period       And Expense        Accounts         Deductions     of Period
--------                              ---------       -----------        ---------        ----------     ----------
1996:
<S>                                    <C>              <C>              <C>              <C>             <C>      
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            --

1998
Allowance for doubtful accounts          (3,569)          (2,524)            (188)           2,472          (3,809)
Deferred income taxes valuation
    allowance .................        $   --           $(15,137)        $   --           $   --          $(15,137)
</TABLE>