As filed with the Securities and Exchange Commission on August 14, 1998.

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

                                    FORM 10-Q

                                   (Mark One)
          [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998
                                       OR

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

         For the transition period from ______________ to ______________

                           Commission File No. 0-5890

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


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

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

Registrant's telephone number, including area code: (907) 265-5600


Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No .

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

          Securities registered pursuant to Section 12(g) of the Act:

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


                                       1
<PAGE>
<TABLE>
                                                       INDEX

                                                     GCI, INC.
                              A Wholly Owned Subsidiary of General Communication, Inc.

                                                     FORM 10-Q

                                        FOR THE QUARTER ENDED JUNE 30, 1998

<CAPTION>
                                                                                                    PAGE NO
                                                                                                    -------

PART I.  FINANCIAL INFORMATION
                  <S>                                                                                     <C> 
                  Item l.      Consolidated Financial Statements..........................................3

                               Consolidated Balance Sheets as of June 30, 1998
                                  (unaudited) and December 31, 1997.......................................3

                               Consolidated Statements of Operations for the three
                                  and six-month periods ended June 30, 1998 (unaudited)
                                  and 1997 (unaudited)....................................................5

                               Consolidated Statements of Stockholders' Equity
                                  for the six months ended June 30, 1998
                                  (unaudited) and 1997 (unaudited)........................................6

                               Consolidated Statements of Cash Flows for the six
                                  months ended June 30, 1998 (unaudited)
                                  and 1997 (unaudited)....................................................7

                               Notes to Interim Condensed Consolidated Financial
                                  Statements..............................................................8

                  Item 2.      Management's Discussion and Analysis of Financial
                                 Condition and Results of Operations......................................16


PART II.  OTHER INFORMATION

                  Item 1.      Legal Proceedings..........................................................32

                  Item 6.      Exhibits and Reports on Form 8-K...........................................32


SIGNATURES................................................................................................33
</TABLE>



                                       2
<PAGE>
PART I.  FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>

                                       GCI, INC. AND SUBSIDIARIES
                                      CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                           (Unaudited)
                                                                             June 30        December 31,
                            ASSETS                                            1998              1997
--------------------------------------------------------------------    ----------------- -----------------
                                                                                (Amounts in thousands)
<S>                                                                   <C>                        <C>   
Current assets:
     Cash and cash equivalents                                        $            274             3,048
                                                                        ----------------- -----------------
     Receivables:
         Trade                                                                  36,798            29,599
         Income taxes                                                            8,870             4,752
         Other                                                                     385               649
                                                                        ----------------- -----------------
                                                                                46,053            35,000
     Less allowance for doubtful receivables                                     1,058             1,070
                                                                        ----------------- -----------------
         Net receivables                                                        44,995            33,930

     Prepaid and other current assets                                            1,942             2,520
     Deferred income taxes, net                                                  3,692             1,675
     Inventories                                                                 2,857             2,164
     Notes receivable                                                              260               897
                                                                        ----------------- -----------------
         Total current assets                                                   54,020            44,234

Restricted cash (note 4)                                                           ---            39,406
                                                                        ----------------- -----------------

Property and equipment in service, net                                         176,974           165,993
Construction in progress                                                        98,615            18,513
                                                                        ----------------- -----------------
         Net property and equipment                                            275,589           184,506
                                                                        ----------------- -----------------

Other assets:
     Intangible assets, net of amortization                                    243,839           246,534
     Deferred loan and Senior Notes costs, net of amortization                  10,325             9,379
     Transponder deposit (note 4)                                                9,100             9,100
     Undersea fiber optic cable deposit (note 4)                                   ---             9,094
     Notes receivable                                                            1,411             1,331
     Other assets, at cost, net of amortization                                  3,663             1,718
                                                                        ----------------- -----------------
         Total other assets                                                    268,338           277,156
                                                                        ----------------- -----------------

         Total assets                                                 $        597,947           545,302
                                                                        ================= =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.



                                       3                            (Continued)
<PAGE>
<TABLE>
                                                   GCI, INC. AND SUBSIDIARIES
                                                   CONSOLIDATED BALANCE SHEETS
                                                           (Continued)
<CAPTION>

                                                                                      (Unaudited)
                                                                                       June 30,         December 31,
                         LIABILITIES AND STOCKHOLDERS' EQUITY                            1998               1997
            ------------------------------------------------------------------     ----------------- -----------------
                                                                                          (Amounts in thousands)
               <S>                                                               <C>                      <C> 
               Current liabilities:
                  Current maturities of long-term debt (note 3)                  $          1,706           1,634
                  Current maturities of obligations under capital leases                      211             198
                  Accounts payable                                                         23,319          25,107
                  Accrued interest                                                          8,449           7,649
                  Accrued payroll and payroll related obligations                           5,945           4,630
                  Accrued liabilities                                                       6,157           6,019
                  Subscriber deposits and deferred revenues                                 4,440           3,898
                  Accrued income taxes                                                        ---             111
                                                                                   ----------------- -----------------
                     Total current liabilities                                             50,227          49,246

               Long-term debt, excluding current maturities (note 3)                      299,953         248,450
               Obligations under capital leases, including related party
                  obligations, excluding current maturities                                   884             990
               Deferred income taxes, net of deferred income tax benefit                   42,992          38,904
               Other liabilities                                                            3,352           3,273
                                                                                   ----------------- -----------------
                     Total liabilities                                                    397,408         340,863
                                                                                   ----------------- -----------------

               Stockholders' equity:
               Common stock (no par):
                  Class A.  Authorized 10,000 shares; issued and outstanding
                     100 shares at June 30, 1998 and December 31, 1997                    206,622         206,622
               Paid-in capital                                                                350             ---
               Retained deficit                                                           (6,433)         (2,183)
                                                                                   ----------------- -----------------
                     Total stockholders' equity                                           200,539         204,439
                                                                                   ----------------- -----------------
               Commitments and contingencies (note 4)
                     Total liabilities and stockholders' equity                  $        597,947         545,302
                                                                                   ================= =================
</TABLE>
            See accompanying notes to interim condensed  consolidated  financial
            statements.


                                       4
<PAGE>
<TABLE>
                           GCI, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>

                                                             (Unaudited)                          (Unaudited)
                                                    (Successor)     (Predecessor)        (Successor)    (Predecessor)
                                                          Three Months Ended                   Six Months Ended
                                                               June 30,                            June 30,
                                                        1998             1997               1998             1997
                                                   --------------- -----------------    -------------- -----------------
                                                             (Amounts in thousands, except per share amounts)
<S>                                              <C>                         <C>             <C>               <C> 
Revenues:
     Telecommunication services                  $        48,900             42,131           92,851            81,356
     Cable services                                       14,041             14,055           28,242            27,711
                                                   --------------- -----------------    -------------- -----------------
         Total revenues                                   62,941             56,186          121,093           109,067

Cost of sales and services                                29,355             29,778           56,670            56,946
Selling, general and administrative                       23,543             18,014           43,877            34,315
Depreciation and amortization                              8,596              5,608           16,662            11,728
                                                   --------------- -----------------    -------------- -----------------

         Operating income                                  1,447              2,786            3,884             6,078

Interest expense, net                                      4,767              4,228            9,711             8,177
                                                   --------------- -----------------    -------------- -----------------

         Net loss before income taxes                    (3,320)            (1,442)          (5,827)           (2,099)

Income tax benefit                                         1,254                610            2,145               742
                                                   --------------- -----------------    -------------- -----------------

         Net loss                                $       (2,066)              (832)          (3,682)           (1,357)
                                                   =============== =================    ============== =================

Basic net loss per common share                  $      (20,660)            (8,320)         (36,820)          (13,570)
                                                   =============== =================    ============== =================

Diluted net loss per common share                $      (20,660)            (8,320)         (36,820)          (13,570)
                                                   =============== =================    ============== =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.



                                       5
<PAGE>
<TABLE>
                           GCI, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     SIX MONTHS ENDED JUNE 30, 1998 AND 1997

<CAPTION>
                                                                                          Class A
                                             Shares of Common       Class A    Class B    Shares
(Unaudited)                                        Stock            Common     Common     Held in     Paid-in    Retained
(Amounts in thousands)                        Class A Class B       Stock      Stock      Treasury    Capital    Earnings
                                           --------------------------------------------------------------------------------
<S>                                            <C>         <C>     <C>            <C>       <C>          <C>       <C>
Predecessor balances at December 31, 1996      36,587      4,074   $ 113,421      3,432     (1,010)      4,229      29,482
Net loss                                          ---        ---         ---        ---         ---        ---     (1,357)
Tax effect of excess stock compensation
   expense for tax purposes over amounts
   recognized for financial reporting
   purposes                                       ---        ---         ---        ---         ---        159         ---
Class B shares converted to Class A                 5        (5)         ---        ---         ---        ---         ---
Shares issued upon conversion of
   convertible note                             1,538        ---       9,983        ---         ---        ---         ---
Shares purchased and held in Treasury             ---        ---         ---        ---        (29)        ---         ---
Shares issued under stock option plan              37        ---         109        ---         ---        ---         ---
                                           --------------------------------------------------------------------------------
Predecessor balances at June 30, 1997          38,167      4,069   $ 123,513      3,432     (1,039)      4,388      28,125
                                           ================================================================================

Successor balances at December 31, 1997           100        ---   $ 206,622        ---         ---        ---     (2,183)
Net loss                                          ---        ---         ---        ---         ---        ---     (3,682)
Contribution from parent                          ---        ---         ---        ---         ---        350         ---
Dividend to parent                                ---        ---         ---        ---         ---        ---       (568)
                                           --------------------------------------------------------------------------------
Successor balances at June 30, 1998               100        ---   $ 206,622        ---         ---        350     (6,433)
                                           ================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.



                                       6
<PAGE>
<TABLE>
                                       GCI, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                                  (Unaudited)
                                                                          (Successor)     (Predecessor)
                                                                                Six Months Ended
                                                                                   June 30,
                                                                           1998              1997
                                                                      ---------------- -----------------
                                                                          (Amounts in thousands)
<S>                                                                 <C>                       <C> 
Cash flows from operating activities:
     Net loss                                                       $         (3,682)          (1,357)
     Adjustments to reconcile net loss to net cash provided by
       operating activities:
              Depreciation and amortization                                    16,662           11,728
              Deferred income tax expense                                       2,071            2,457
              Deferred compensation and compensatory stock
                 options                                                           90            (111)
              Bad debt expense, net of write-offs                                (12)              308
              Other noncash income and expense items                              147              168
              Change in operating assets and liabilities (note 2)            (10,283)          (4,636)
                                                                      ---------------- -----------------
      Net cash provided by operating activities                                 4,993            8,557
                                                                      ---------------- -----------------

Cash flows from investing activities:
         Purchases of property and equipment                                 (94,853)         (21,100)
         Restricted cash investment                                            39,406              ---
         Purchases of other assets                                            (2,468)            (655)
         Notes receivable issued                                                (200)            (549)
         Payments received on notes receivable                                    610                5
                                                                      ---------------- -----------------
      Net cash used in investing activities                                  (57,505)         (22,299)
                                                                      ---------------- -----------------

Cash flows from financing activities:
         Long-term borrowings - bank debt and leases                           52,382           20,000
         Repayments of long-term borrowings and capital lease
              obligations                                                       (900)         (12,462)
         Contribution from parent                                                 350              ---
         Dividend to parent                                                     (568)              ---
         Payment of debt issuance costs (note 3)                              (1,526)              ---
         Purchase of treasury stock                                               ---             (29)
                                                                      ---------------- -----------------
      Net cash provided by financing activities                                49,738            7,618
                                                                      ---------------- -----------------

      Net decrease in cash and cash equivalents                               (2,774)          (6,124)

      Cash and cash equivalents at beginning of period                          3,048           13,349
                                                                      ---------------- -----------------

      Cash and cash equivalents at end of period                    $             274            7,225
                                                                      ================ =================
</TABLE>
See accompanying notes to interim condensed consolidated financial statements.



                                       7
<PAGE>
                           GCI, INC. AND SUBSIDIARIES

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)
                                            
(1)        General

           (a)  Basis of Presentation

           GCI, Inc. ("Successor") was incorporated in 1997. GCI, Inc., a wholly
           owned   subsidiary   of  General   Communication,   Inc.   ("GCI"  or
           "Predecessor"),  received  through  its  initial  capitalization  all
           ownership  interests  in  subsidiaries  previously  held by GCI.  All
           assets,  liabilities  and  operating  activities of GCI not conducted
           through its  subsidiaries  were  transferred  to GCI, Inc.  effective
           January  1,  1998.  The  accompanying  financial  statements  for the
           three-month  and  six-month  periods  ended June 30, 1998 include the
           operating   activities  of  GCI,  Inc.  and  its  subsidiaries.   The
           accompanying  financial  statements for the three-month and six-month
           periods ended June 30, 1997 include the operating  activities of GCI,
           Inc.'s predecessor,  GCI. The Predecessor's three-month and six-month
           periods  ended June 30, 1997  operating  activities  not conducted or
           owned through its subsidiaries were not material to GCI, Inc.

           (b)  Organization

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

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



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

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

           GCI Transport Co.,  Inc.,  Fiber Hold Co., Inc., GCI Fiber Co., Inc.,
           and  GCI  Satellite  Co.,  Inc.,   all  Alaska   corporations,   were
           incorporated   in  1997  to  finance  the  acquisition  of  satellite
           transponders and to construct and deploy the fiber optic cable system
           further  described  in note 4. GCI  Transport  Co.,  Inc. is a wholly
           owned  subsidiary of Holdings.  Fiber Hold Co.,  Inc., GCI Fiber Co.,
           Inc., and GCI Satellite Co., Inc. are  wholly-owned  subsidiaries  of
           GCI  Transport  Co.,  Inc.  Alaska  United Fiber  System  Partnership
           ("Alaska United") was organized in 1997 to construct, own and operate
           the fiber optic cable system  described in note 4. Alaska United is a
           partnership  wholly owned by the Company  through GCI Fiber Co., Inc.
           and Fiber Hold Co., Inc.

           (c)  Net Loss Per Common Share
<TABLE>
           Shares used to  calculate  net loss per common  share  consist of the
           following (amounts in thousands):
<CAPTION>
                                                         (Successor)  (Predecessor)      (Successor)  (Predecessor)
                                                           Three Months Ended               Six Months Ended
                                                                June 30,                        June 30,
                                                           1998           1997             1998           1997
                                                       -------------- -------------    -------------- -------------
                 <S>                                        <C>           <C>               <C>           <C>
                 Weighted average common shares
                 outstanding                                100           43,474            100           43,418
                                                       ============== =============    ============== =============
</TABLE>
           Common  equivalent  shares  outstanding  of 857,000  and  817,000 are
           anti-dilutive  June 30,  1998 and  1997 and are not  included  in the
           diluted net loss per share calculation.

           (c)  Other

           The accompanying  unaudited interim condensed  consolidated financial
           statements have been prepared in accordance  with generally  accepted
           accounting  principles for interim financial information and with the
           instructions   to  Form  10-Q  and  Article  10  of  Regulation  S-X.
           Accordingly, they do not include all of the information and footnotes
           required by generally  accepted  accounting  principles  for complete
           financial statements.  The interim condensed  consolidated  financial
           statements  include the  consolidated  accounts of GCI,  Inc. and its
           wholly owned  subsidiaries  (collectively,  the  "Company")  with all
           significant intercompany  transactions eliminated.  In the opinion of
           management, all adjustments (consisting of normal recurring accruals)
           considered  necessary  for a fair  presentation  have been  included.
           Operating  results for the  six-month  period ended June 30, 1998 are
           not  necessarily  indicative  of the results that may be expected for
           the year ended December 31, 1998. For further  information,  refer to
           the  financial  statements  and  footnotes  thereto  included  in the
           Company's  annual report on Form 10-K for the year ended December 31,
           1997.


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

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

(2)        Consolidated Statements of Cash Flows Supplemental Disclosures
<TABLE>
           Changes in operating assets and liabilities consist of:
<CAPTION>
                                                                                 (Successor)      (Predecessor)
                  Six-month periods ended June 30,                                  1998              1997
                  --------------------------------                            ------------------ ----------------
                                                                                    (Amounts in thousands)
                   <S>                                                      <C>                          <C> 
                   Increase in receivables                                  $          (11,164)          (3,614)
                   Increase (decrease) in prepaid and other current
                       assets                                                               578            (487)
                   Increase in inventory                                                  (693)          (1,648)
                   Increase (decrease) in accounts payable                              (1,788)            1,260
                   Increase in accrued liabilities                                          138            1,019
                   Increase (decrease) in accrued payroll and payroll
                       related obligations                                                1,315            (791)
                   Increase (decrease) in accrued interest                                  800            (468)
                   Increase in deferred revenues                                            542               93
                   Decrease in other liabilities                                           (11)              ---
                                                                              ------------------ ----------------
                                                                            $          (10,283)          (4,636)
                                                                              ================== ================
</TABLE>
           The  holders  of  $10  million  of  convertible   subordinated  notes
           exercised  their  conversion  rights in January 1997 resulting in the
           exchange of such notes for  1,538,457  shares of GCI's Class A common
           stock.

           No income taxes were paid during the six-month periods ended June 30,
           1998 and 1997.

           Interest paid totaled $12,181,000 and $9,649,000 during the six-month
           periods ended June 30, 1998 and 1997, respectively.



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

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

(3)        Long-term Debt

           In January 1998,  Alaska United closed a $75 million  project finance
           facility  ("Fiber  Facility") to construct a fiber optic cable system
           connecting Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle
           as further described in note 4. The Fiber Facility provides up to $75
           million in  construction  financing  and will bear interest at either
           Libor plus 3.0%, or at the Company's choice,  the lender's prime rate
           plus 1.75%.  The interest rate will decline to Libor plus 2.5%-2.75%,
           or at the Company's  choice,  the lender's prime rate plus 1.25%-1.5%
           after  the  project  completion  date and when  the loan  balance  is
           $60,000,000  or less.  Alaska  United is required to pay a commitment
           fee  equal  to  0.375%  per  annum  on  the  unused  portion  of  the
           commitment.  The  Fiber  Facility  is a  10-year  term  loan  that is
           interest only for the first 5 years.  The facility can be extended to
           a 12  year  term  loan at any  time  between  the  second  and  fifth
           anniversary  of closing the  facility if the Company can  demonstrate
           projected   revenues  from  certain  capacity   commitments  will  be
           sufficient  to pay all  operating  costs,  and interest and principal
           installments based on the extended maturity.

           The  Fiber  Facility  contains,  among  others,  covenants  requiring
           certain intercompany loans and advances in order to maintain specific
           levels of cash flow  necessary to pay operating  costs,  interest and
           principal  installments.  Additional  covenants pertain to the timely
           completion  of certain  project  construction  milestones.  The Fiber
           Facility also contains a guarantee that  requires,  among other terms
           and conditions,  Alaska United complete the project by the completion
           date and pay any non-budgeted costs of the project. Alaska United was
           in compliance with all covenants during the period commencing January
           1998 (date of the Fiber Facility) through June 30, 1998.

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

           The Company was in compliance  with all covenants of its senior notes
           and senior credit facility through June 30, 1998.

  (4)      Commitments and Contingencies

           Deferred Compensation Plan

           During 1995, the Company adopted a non-qualified,  unfunded  deferred
           compensation  plan to provide a means by which certain  employees may
           elect to defer receipt of designated  percentages or amounts of their
           compensation  and to provide a means for certain  other  deferrals of
           compensation. The Company may, at its discretion, contribute matching
           deferrals  equal to the rate of  matching  selected  by the  Company.
           Participants  immediately  vest  in all  elective  deferrals  and all
           income and gain attributable thereto.  Matching contributions and all
           income and gain  attributable  thereto  vest over a six-year  period.


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

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

           Participants may elect to be paid in either a single lump sum payment
           or annual  installments over a period not to exceed 10 years.  Vested
           balances  are payable  upon  termination  of  employment,  unforeseen
           emergencies,  death and total  disability.  Participants  are general
           creditors of the Company with respect to deferred  compensation  plan
           benefits.   Compensation   deferred  pursuant  to  the  plan  totaled
           approximately $0 and $89,000 during the six-month  periods ended June
           30, 1998 and 1997, respectively.

           Satellite Transponders

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

           Litigation

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

           Cable Service Rate Reregulation

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

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

           In  order  for the  State  of  Alaska  to  exercise  rate  regulation
           authority over the Company's  basic service rates,  25% of a systems'
           subscribers  must request such  regulation  by filing a 


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

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

           petition  with the APUC.  At June 30,  1998,  the State of Alaska has
           rate  regulation  authority  over the Juneau  system's  basic service
           rates. (The Juneau system serves  approximately 8.5% of the Company's
           total basic service  subscribers at June 30, 1998.) Juneau's  current
           rates have been  approved by the APUC and there are no other  pending
           filings with the APUC,  therefore,  there is no refund  liability for
           basic service at this time.

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

           In February 1996, a  telecommunications  bill was signed into federal
           law that impacts the cable  industry.  Most notably,  the bill allows
           cable  system  operators  to  provide  telephony   services,   allows
           telephone  companies  to  offer  video  services,  and  provides  for
           deregulation of cable programming  service rates by 1999.  Management
           of the Company believes the bill will not have a significant  adverse
           impact on the  financial  position  or results of  operations  of the
           Company.

           Undersea Fiber Optic Cable Contract Commitment

           The Company  signed a contract in July 1997 for  construction  of the
           undersea   portion  of  a  $125  million  fiber  optic  cable  system
           connecting the cities of Anchorage,  Juneau, and Seattle via a subsea
           route. Subsea and terrestrial connections will extend the fiber optic
           cable to  Fairbanks  via  Whittier  and Valdez.  Subsea  construction
           efforts  will begin  during the late  summer of 1998 with  commercial
           services  expected  to commence  in  December  1998.  Pursuant to the
           contract,  the Company made progress  payments of $9.1 million during
           the year  ended  December  31,  1997 and  $66.2  million  during  the
           six-month  period  ended  June 30,  1998.  The  Company  will pay the
           remaining  balance in  installments  through  December  1998 based on
           completion of certain key milestones.  Approximately $39.4 million of
           proceeds from the senior notes offering, net of the $9.1 million paid
           in 1997, were contributed to Alaska United.  The use of such proceeds
           was  restricted  to funding the  construction  and  deployment of the
           fiber optic cable system and was reported as  Restricted  Cash in the
           accompanying Interim Condensed  Consolidated  Financial Statements at
           December 31, 1997.  In January  1998,  the Company  secured up to $75
           million in bank  financing  to fund the  expected  remaining  cost of
           construction  and deployment (see note 3), of which $29.4 million has
           been borrowed at June 30, 1998.


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

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

           Fiber Capacity Exchange

           The  Company  and Kanas  Telecom,  Inc.  ("Kanas")  signed a contract
           November 21, 1997 that  provides for an exchange of fiber optic cable
           capacity between Anchorage and Fairbanks via Valdez.  The Company and
           Kanas will trade "dark fiber" capacity connecting Fairbanks,  Valdez,
           Whittier  and   Anchorage.   Each  company  will  provide  their  own
           electronic  equipment to place their fiber into service.  The Company
           will provide  Kanas with dark fiber from Valdez to  Anchorage.  Kanas
           will  provide  the  Company  with  dark  fiber  between   Valdez  and
           Fairbanks.
<TABLE>
 (5)       Supplemental financial information
           (Amounts in thousands)
<CAPTION>
                                                                   Six-month period ended June 30, 1998
                                                            ------------------------------------------------
                                                               Long-
             (Successor)                                      Distance     Cable      Local      Combined
                                                            ------------ ----------- --------- -------------
             <S>                                        <C>                 <C>        <C>       <C> 
             Revenues:
                Telecommunication revenues              $       89,789         ---     3,062      92,851
                Cable revenues                                     ---      28,242       ---      28,242
                                                            ------------ ----------- --------- -------------
                   Total revenues                               89,789      28,242     3,062     121,093
                                                            ------------ ----------- --------- -------------
             Cost of sales and services:
                Distribution costs and costs of
                  services                                      47,886         ---     2,122      50,008
                Programming and copyright costs                    ---       6,662       ---       6,662
                                                            ------------ ----------- --------- -------------
                   Total cost of sales and services             47,886       6,662     2,122      56,670
                                                            ------------ ----------- --------- -------------
                   Contribution                                 41,903      21,580       940      64,423
                                                            ------------ ----------- --------- -------------
             Selling, general and administrative expenses:
                Telephony operating and engineering              5,675         ---       775       6,450
                Cable television, including
                    management fees of $408                        ---       9,863       ---       9,863
                Sales and communications                         9,038         ---       534       9,572
                General and administrative                      12,665         ---     4,079      16,744
                Bad debts                                        1,018         230       ---       1,248
                                                            ------------ ----------- --------- -------------
                   Total selling, general and
                     administrative expenses                    28,396      10,093     5,388      43,877

             Depreciation and amortization                       7,501       7,861     1,300      16,662
                                                            ============ =========== ========= =============

                   Operating income (loss)              $        6,006       3,626   (5,748)       3,884
                                                            ============ =========== ========= =============
</TABLE>

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

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

<TABLE>
                                                                  Six-month period ended June 30, 1997
                                                            ------------------------------------------------
                                                                Long-
             (Predecessor)                                    Distance     Cable      Local      Combined
                                                            ------------ ----------- --------- -------------
             <S>                                        <C>                 <C>        <C>       <C> 
             Revenues:
                Telecommunication revenues              $       81,356         ---       ---      81,356
                Cable revenues                                     ---      27,711       ---      27,711
                                                            ------------ ----------- --------- -------------
                   Total revenues                               81,356      27,711       ---     109,067
                                                            ------------ ----------- --------- -------------
             Cost of sales and services:
               Distribution costs and costs of
                  services                                      50,379         ---       236      50,615
               Programming and copyright costs                     ---       6,331       ---       6,331
                                                            ------------ ----------- --------- -------------
                   Total cost of sales and services             50,379       6,331       236      56,946
                                                            ------------ ----------- --------- -------------
                   Contribution                                 30,977      21,380     (236)      52,121
                                                            ------------ ----------- --------- -------------
             Selling, general and administrative
               expenses:
               Telephony operating and engineering               5,430         ---       ---       5,430
               Cable television, including
                  management fees of $271                          ---       9,286       ---       9,286
               Sales and communications                          6,580         ---       229       6,809
               General and administrative                       10,665         ---       983      11,648
               Bad debts                                           936         206       ---       1,142
                                                            ------------ ----------- --------- -------------
                   Total selling, general and
                     administrative expenses                    23,611       9,492     1,212      34,315

             Depreciation and amortization                       4,918       6,810       ---      11,728
                                                            ============ =========== ========= =============

                   Operating income (loss)              $        2,448       5,078   (1,448)       6,078
                                                            ============ =========== ========= =============
</TABLE>



                                       15
<PAGE>
PART I.
ITEM 2.

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

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

                      FACTORS AFFECTING FUTURE PERFORMANCE
                         AND FORWARD LOOKING STATEMENTS

        Certain  statements  in this  quarterly  report on Form 10-Q  constitute
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1996 ("Securities Reform Act"). These statements may be
preceded  by,  followed  by,  or  include  the  words   "believes,"   "expects,"
"anticipates," or similar expressions.  For those statements, the Company claims
protection of the safe-harbor for  forward-looking  statements  contained in the
Securities Reform Act. Such forward-looking statements involve known and unknown
risks,  uncertainties  and other  important  factors that could cause the actual
results,  performance and achievements of the Company,  or industry results,  to
differ materially from future results,  performance or achievements expressed or
implied by such statements. The reader is cautioned that important factors, such
as the following risks,  uncertainties,  and other factors, in addition to those
contained  elsewhere  in this  document,  could  affect  future  results  of the
Company, its long-distance  telecommunication  services,  local access services,
and cable services and could cause those results to differ materially from those
expressed in the forward-looking statements:

             - Material  adverse  changes  in  the  economic  conditions  in the
               markets served by the Company
             - Regulatory and competitive  environment of the business  segments
               in which the Company operates
             - Uncertainties  inherent in new business  strategies,  new product
               launches and development plans,  including local access services,
               Internet services,  PCS services,  digital video services,  cable
               modem services, and transmission services
             - Rapid technological changes
             - Development  and  financing of  telecommunication,  local access,
               PCS,   and  cable   networks  and   services   
             - Future financial performance,  including availability,  terms and
               deployment of capital
             - Availability of qualified personnel


                                       16                            (Continued)
<PAGE>
             - Changes in, or failure, or inability,  to comply with, government
               regulations,  including,  without limitation,  regulations of the
               Federal  Communications  Commission,  the Alaska Public Utilities
               Commission, and adverse outcomes from regulatory proceedings
             - Competitor  responses to the Company's  products and services and
               overall market acceptance of such products and services
             - The cost of the Company's year 2000 compliance efforts
             - Uncertainties  in federal  military  spending levels and military
               base closures in markets in which the Company operates

      These forward-looking  statements (and such risks, uncertainties and other
factors)  are made only as of the date of this report and the Company  expressly
disclaims any obligation or undertaking to disseminate  any updates or revisions
to any  forward-looking  statement  contained  in this  document  to reflect any
change in the  Company's  expectations  with regard to those  statements  or any
other change in events,  conditions or circumstances on which any such statement
is based.

                                    OVERVIEW

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

      Long distance  telecommunications  services.  The Company has historically
reported  revenues  principally  from the provision of interstate and intrastate
long  distance  telecommunications  services  to  residential,   commercial  and
governmental   customers  and  to  other  common   carriers   (principally   MCI
Telecommunications,  Inc.  ("MCI")  and Sprint  Corporation  ("Sprint")).  These
services accounted for approximately  90.0% of the Company's  telecommunications
services   revenues   during  the  second   quarter  of  1998.  The  balance  of
telecommunications services revenues have been attributable to corporate network
management contracts,  telecommunications  equipment sales and service, Internet
services and other  miscellaneous  revenues (including revenues from prepaid and
debit calling  cards,  the  installation  and leasing of  customers'  very small
aperture  terminal  ("VSAT")  equipment  and fees  charged to MCI and Sprint for
certain billing services). Factors that have the greatest impact on year-to-year
changes in long distance  telecommunications  services revenues include the rate
per minute charged to customers and usage volumes,  usually expressed as minutes
of use. These factors in turn depend in part upon economic conditions in Alaska.
The economy of Alaska is  dependent  upon the natural  resource  industries,  in
particular oil production, as well as tourism, fisheries,  government and United
States military spending.


                                       17                            (Continued)
<PAGE>
      The Company's long distance  telecommunications cost of sales and services
has consisted  principally of the direct costs of providing services,  including
local  access  charges  paid  to  local  exchange   carriers  ("LECs")  for  the
origination and termination of long distance calls in Alaska, fees paid to other
long distance  carriers to carry calls that terminate in areas not served by the
Company's  network  (principally  the lower 49 states,  most of which  calls are
carried over MCI's network, and international locations, which calls are carried
principally  over  Sprint's  network),  and the  cost of  equipment  sold to the
Company's  customers.  During the second  quarter of 1998,  local access charges
accounted for 41.2% of telecommunications  cost of sales and services, fees paid
to other long distance carriers represented 31.7%,  satellite  transponder lease
and undersea fiber maintenance costs represented 9.2%,  enterprise  services and
outsourcing  costs  represented  5.6%,  Internet  costs  accounted for 7.1%, and
telecommunications equipment costs accounted for 4.4% of telecommunications cost
of sales and services.

      The  Company's  long distance  telecommunications  selling,  general,  and
administrative  expenses have consisted of operating and  engineering,  customer
service, sales and communications,  management information systems,  general and
administrative,  and  legal  and  regulatory  expenses.  Most of these  expenses
consist of salaries,  wages and benefits of personnel and certain other indirect
costs  (such as rent,  travel,  utilities,  insurance  and  property  taxes).  A
significant portion of long distance  telecommunications  selling,  general, and
administrative expenses, 38.6% during the second quarter of 1998, represents the
cost of the Company's advertising, promotion and market analysis programs.

      Long distance  telecommunications  services face  significant  competition
from AT&T  Alascom,  Inc.,  long-distance  resellers,  and from local  telephone
companies  that have  entered  the  long-distance  market as allowed by the 1996
federal  Telecommunications  Act. The number of active  long-distance  customers
billed by the Company has decreased approximately 1.1% during the second quarter
of 1998, and has decreased  approximately  2.4% during the first two quarters of
1998. Increased usage volumes and traffic carried for other common carriers have
offset usage reductions  attributed to decreased active  customers  billed.  The
Company   believes  its  approach  to   developing,   pricing,   and   providing
long-distance  telecommunication  services  will  continue  to  allow  it  to be
competitive in providing those services.

      Cable  services.  During the second  quarter of 1998,  cable  revenues and
EBITDA represented 22.3% and 56.7%,  respectively,  of consolidated revenues and
EBITDA.  The cable systems serve 26 communities  and areas in Alaska,  including
the state's three largest population centers, Anchorage, Fairbanks and Juneau.

      The Company  generates cable services revenues from three primary sources:
(1) programming  services,  including monthly basic or premium subscriptions and
pay-per-view  movies or other  one-time  events,  such as sporting  events;  (2)
equipment rentals or installation;  and (3) advertising sales. During the second
quarter of 1998  programming  services  generated  88.2% of total cable services
revenues,  equipment  rental and  installation  fees  accounted for 7.7% of such
revenues,  and advertising sales and other services  accounted for the remaining
4.1% of total cable services  revenues.  The primary  factors that contribute to
year-to-year changes in cable services revenues are 


                                       18                            (Continued)
<PAGE>
average  monthly  subscription  and  pay-per-view  rates,  the mix among  basic,
premium and pay-per-view  services, and the average number of subscribers during
a given reporting period.

      The cable systems' cost of sales and selling,  general and  administrative
expenses have  consisted  principally  of  programming  and copyright  expenses,
labor, maintenance and repairs,  marketing and advertising,  rental expense, and
property  taxes.  During the second  quarter of 1998  programming  and copyright
expenses  represented  approximately  39.1% of  total  cable  cost of sales  and
selling,  general and administrative  expenses.  Marketing and advertising costs
represented approximately 12.2% of such total expenses.

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

      Local access services.  The Company began offering local exchange services
in Anchorage  during late September 1997 and provided  service to  approximately
24,000 lines at June 30, 1998.  Approximately  4,000  additional lines were sold
and awaiting  connection  at June 30, 1998.  Local  exchange  services  revenues
totaled  $2.0 million  during the second  quarter of 1998  representing  3.2% of
total second quarter 1998 revenues.

      During  the second  quarter of 1998  operating  and  engineering  expenses
represented approximately 11.6% of total local access services cost of sales and
selling,  general and administrative  expenses.  Marketing and advertising costs
represented approximately 6.1% of such total expenses, and customer service, and
general and administrative  costs represented  approximately 54.1% of such total
expenses.

      Local  exchange  services  EBITDA totaled ($2.4) million during the second
quarter of 1998.  The Company  expects  that its local  exchange  services  will
continue to generate  operating  losses and  negative  EBITDA  during 1998 and a
portion of 1999.  Factors that have the greatest impact on year-to-year  changes
in local access services revenues include the rates charged to customers and the
number of customers served.

      The Company's local access services faces significant competition from the
Anchorage  Telephone  Utility and AT&T  Alascom,  Inc. The Company  believes its
approach to developing,  pricing,  and providing local access  telecommunication
services  will  continue  to  allow  it to be  competitive  in  providing  those
services.


                                       19                            (Continued)
<PAGE>
      Internet services. The Company's statewide SchoolAccess services (Internet
access and related products and services for Alaska schools)  commenced  January
1998.  SchoolAccess  revenues  totaled $1.1 million during the second quarter of
1998  representing  1.8% of total  revenues.  The Company began offering  retail
Internet  services  in April  1998.  Factors  that have the  greatest  impact on
year-to-year  changes in Internet services revenues include the rates charged to
customers and the number of customers served.

      The Company  competes  with  several  Internet  service  providers  in its
markets. The Company believes its approach to developing, pricing, and providing
Internet services will continue to allow it to be competitive in providing those
services.

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

      Other expenses and net loss.  Depreciation  and  amortization and interest
expense on a consolidated  basis is expected to be higher in 1998 as compared to
1997 resulting  primarily from additional  depreciation on 1997 and 1998 capital
expenditures and additional outstanding long-term debt. As a result, the Company
expects that it will continue to record net losses in 1998.


                                       20                            (Continued)
<PAGE>
                              RESULTS OF OPERATIONS
<TABLE>
      The following table sets forth selected  Statement of Operations data as a
percentage  of total  revenues  for the  periods  indicated  and the  percentage
changes in such data as compared to the corresponding prior year period:

(Underlying data rounded to the nearest thousands)
<CAPTION>


                                                                                                       Percentage Change
                                                                                                  ----------------------------
                                                                                                   Six Months    Three Months
                                              Six Months Ended            Three Months Ended      1998 vs. Six  1998 vs. Three
                                                  June 30,                     June 30,              Months        Months
                                             1997          1998          1997           1998          1997          1997
                                             ----          ----          ----           ----          ----          ----
(Unaudited)                              (Predecessor)  (Successor)  (Predecessor)  (Successor)
<S>                                          <C>           <C>           <C>            <C>          <C>           <C>
Statement of Operations Data:
Revenues
     Telecommunications services              74.6%         74.1%         75.0%          74.4%         10.4%         11.2%
     Cable services                           25.4%         23.3%         25.0%          22.3%          1.9%        (0.1)%
     Local access services                     0.0%          2.6%          0.0%           3.3%            NA            NA
---------------------------------------------------------------------------------------------------------------------------
Total revenues                               100.0%        100.0%        100.0%         100.0%         11.0%         12.0%
     Cost of sales and services               52.2%         46.8%         53.0%          46.6%        (0.5)%        (1.4)%
     Selling, general and                     31.5%         36.2%         32.1%          37.4%         27.9%         30.7%
        administrative expenses
     Depreciation and amortization            10.8%         13.8%         10.0%          13.7%         42.1%         53.3%
---------------------------------------------------------------------------------------------------------------------------
Operating income                               5.5%          3.2%          4.9%           2.3%       (36.1)%       (48.1)%
Net loss before income taxes                 (1.9)%        (4.8)%        (2.6)%         (5.3)%        177.6%        130.2%
Net loss                                     (1.2)%        (3.0)%        (1.5)%         (3.3)%        171.3%        148.3%

Other Operating Data:
Cable operating income (1)                    18.3%         12.8%         18.1%          10.4%       (28.6)%       (42.9)%
Cable EBITDA (1)                              42.9%         40.7%         41.7%          40.5%        (3.4)%        (2.9)%
Local operating loss (2)                         NA      (187.7)%            NA       (126.8)%        297.0%        219.0%
Local EBITDA (2)                                 NA      (145.3)%            NA       (115.4)%        207.2%        190.4%
Consolidated EBITDA                           16.3%         17.0%         14.9%          16.0%         15.4%         19.6%
<FN>

   --------------------------
   (1) Computed as a percentage of total cable services  revenues.  
   (2) Computed as a percentage of total local access services revenues.
</FN>
</TABLE>


                                       21                            (Continued)
<PAGE>
THREE  MONTHS ENDED JUNE 30, 1998  ("1998")  COMPARED TO THREE MONTHS ENDED JUNE
30, 1997 ("1997")

      REVENUES.  Total  revenues  increased  12.0% from $56.2 million in 1997 to
$62.9 million in 1998.  Long  distance  transmission  revenues from  commercial,
residential,  governmental,  and other common carrier  customers  increased 7.4%
from $39.3 million in 1997 to $42.2 million in 1998.  This increase  reflected a
9.4% increase in interstate  minutes of use to 167.3 million  minutes and a 1.6%
increase in  intrastate  minutes of use to 34.9 million  minutes.  Long distance
revenue  growth in 1998 was  largely due to a 26.9%  increase  in revenues  from
other common  carriers  (principally  MCI and Sprint) and private line services,
from $18.2 million in 1997 to $23.1 million in 1998. The Company's  average rate
per minute on long  distance  traffic  decreased  5.1% from $0.178 per minute in
1997 to $0.169 per minute in 1998.

      Cable revenues remained relatively constant at approximately $14.0 million
in 1997 and 1998.  The  number of homes  passed by the cable  systems  and basic
subscribers  increased  approximately 860 and 5,100,  respectively,  at June 30,
1998 as compared to June 30,  1997.  Pay-per-view  and premium  service  revenue
decreases offset increases  attributable to subscriber growth. The Company began
offering  local  access  services in  Anchorage  in  September  1997 with second
quarter 1998 revenues totaling $2.0 million.  Product sales and network services
revenues  increased  52.2% from $2.3  million  in 1997 to $3.5  million in 1998,
primarily due to increased network services  revenues and SchoolAccess  revenues
in 1998 as compared to 1997.

      COST OF SALES AND  SERVICES.  Cost of sales  and  services  totaled  $29.8
million in 1997 and $29.4 million in 1998.  As a percentage  of total  revenues,
cost of sales and services  decreased  from 53.0% in 1997 to 46.6% in 1998.  The
decrease in cost of sales and services as a percentage  of revenues is primarily
attributed  to: 1)  reductions  in access  charges  paid by the Company to other
carriers  for  distribution  of its  traffic,  2)  avoidance  of access  charges
resulting from the Company's  distribution and termination of its traffic on its
own network  instead of paying other  carriers to  distribute  and terminate its
traffic, and 3) changes in the Company's product mix.

      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.   Selling,  general  and
administrative  expenses  increased  30.7% from  $18.0  million in 1997 to $23.5
million in 1998, and, as a percentage of revenues,  increased from 32.1% in 1997
to 37.4% in 1998. This increase resulted from:

              - Operating,    engineering,    sales,    customer   service   and
                administrative  costs  totaling  $696,000 in 1997 as compared to
                $3.2 million in 1998  associated with the Company's local access
                services segment which initiated  service in September 1997. The
                second quarter increase was necessary to provide the operations,
                engineering,   customer   service  and  support   infrastructure
                necessary to  accommodate  the expected  growth in the Company's
                local access services customer base.



                                       22                            (Continued)
<PAGE>
              - Increased  telecommunication  segment  operating,   engineering,
                general and  administrative  expenses  totaling  $9.4 million in
                1998 as  compared  to $8.6  million  in  1997  due to  increased
                personnel  and other  costs in  customer  service,  engineering,
                operations,  accounting,  human resources, legal and regulatory,
                and  management   information  services.   Cost  increases  were
                associated  with  the  development,   introduction,  or  planned
                introduction, and support of new products and services including
                rural message and data telephone services, PCS services, digital
                video  services,  cable modem services,  and Internet  services.
                Increased customer service expenses were associated with support
                of  increased  sales  volumes  and  expenditures  necessary  for
                continuing  integration of customer  service  operations  across
                product lines.

              - Increased   telecommunication  segment  sales,  advertising  and
                telemarketing  costs  totaling  $3.7 million in 1997 compared to
                $5.9 million in 1998.  Increased  selling costs were  associated
                with the  introduction  of  various  marketing  plans  and other
                proprietary   rate  plans  and  continuing  cross  promotion  of
                products and services.

      DEPRECIATION  AND  AMORTIZATION.  Depreciation  and  amortization  expense
increased  53.3% from $5.6 million in 1997 to $8.6 million in 1998. The increase
is attributable to the Company's $64.6 million  investment in facilities  during
1997 for which a full year of depreciation  will be recorded during 1998 and the
1998 facilities investment of $94.9 million through June 30.

      INTEREST EXPENSE, NET. Interest expense, net of interest income, increased
14.3% from $4.2 million in 1997 to $4.8 million in 1998. This increase  resulted
from  increases in the  Company's  average  outstanding  indebtedness  resulting
primarily  from the purchase  and  construction  of new long  distance and local
telecommunication  equipment and  facilities and expansion and upgrades of cable
television facilities.

      INCOME TAX BENEFIT.  Income tax benefit increased from $610,000 in 1997 to
$1.3  million in 1998 due to an increase in the net loss before  income taxes in
1998 as compared to 1997. The Company's effective income tax rate decreased from
42.3%  in  1997  to  37.8%  in  1998  due to the  increased  net  loss  and  the
proportional amount of items that are nondeductible for income tax purposes.



                                       23                            (Continued)
<PAGE>
SIX MONTHS  ENDED JUNE 30, 1998  ("1998")  COMPARED TO SIX MONTHS ENDED JUNE 30,
1997 ("1997")

      REVENUES.  Total revenues  increased  11.0% from $109.1 million in 1997 to
$121.1 million in 1998.  Long distance  transmission  revenues from  commercial,
residential,  governmental,  and other common carrier  customers  increased 7.8%
from $75.6 million in 1997 to $81.5 million in 1998.  This increase  reflected a
7.6% increase in interstate  minutes of use to 325.8 million  minutes and a 2.2%
increase in  intrastate  minutes of use to 67.9 million  minutes.  Long distance
revenue  growth in 1998 was  largely due to a 19.6%  increase  in revenues  from
other common  carriers  (principally  MCI and Sprint) and private line services,
from $35.2 million in 1997 to $42.1 million in 1998. The Company's  average rate
per minute on long  distance  traffic  decreased  2.8% from $0.176 per minute in
1997  to  $0.171  per  minute  in  1998  primarily  due to the  introduction  of
discounted residential and commercial international calling plans.

      Cable revenues  increased 1.9% from $27.7 million in 1997 to $28.2 million
in 1998.  The number of homes passed by the cable systems and basic  subscribers
increased  approximately  860  and  5,100,  respectively,  at June  30,  1998 as
compared to June 30, 1997.  Pay-per-view  and premium service revenue  decreases
partially  offset  increases  attributable  to subscriber  growth.  Local access
services  revenues  totaled  $3.1  million in 1998.  Product  sales and  network
services  revenues  increased 27.7% from $4.7 million in 1997 to $6.0 million in
1998,  primarily due to increased  network  services  revenues and  SchoolAccess
revenues in 1998 as compared to 1997.

      COST OF SALES AND  SERVICES.  Cost of sales  and  services  totaled  $56.9
million in 1997 and $56.7 million in 1998.  As a percentage  of total  revenues,
cost of sales and services  decreased  from 52.2% in 1997 to 46.8% in 1998.  The
decrease in cost of sales and services as a percentage  of revenues is primarily
attributed  to: 1) a refund  received  in the  first  quarter  of 1998  totaling
approximately  $1.1  million  from a local  exchange  carrier  in respect of its
earnings that exceeded regulatory requirements,  2) reductions in access charges
paid by the  Company to other  carriers  for  distribution  of its  traffic,  3)
avoidance  of access  charges  resulting  from the  Company's  distribution  and
termination  of its traffic on its own network  instead of paying other carriers
to distribute and terminate its traffic, and 4) changes in the Company's product
mix.



                                       24                            (Continued)
<PAGE>
      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES.   Selling,  general  and
administrative  expenses  increased  28.0% from  $34.3  million in 1997 to $43.9
million in 1998, and, as a percentage of revenues,  increased from 31.4% in 1997
to 36.3% in 1998. This increase resulted from:

              - Operating,    engineering,    sales,    customer   service   and
                administrative  costs  totaling $1.2 million in 1997 as compared
                to $5.4  million in 1998  associated  with the  Company's  local
                access  services  segment which  initiated  service in September
                1997.

              - Increased  telecommunication  segment  operations,  engineering,
                general and  administrative  expenses  totaling $19.4 million in
                1998 as  compared  to $17.0  million  in 1997  due to  increased
                personnel  and other  costs in  customer  service,  engineering,
                operations,  accounting,  human resources, legal and regulatory,
                and  management   information  services.   Cost  increases  were
                associated  with  the  development,   introduction,  or  planned
                introduction, and support of new products and services including
                rural message and data telephone services, PCS services, digital
                video  services,  cable modem services,  and Internet  services.
                Increased customer service expenses were associated with support
                of  increased  sales  volumes  and  expenditures  necessary  for
                continuing  integration of customer  service  operations  across
                product lines.

              - Increased   telecommunication  segment  sales,  advertising  and
                telemarketing  costs  totaling  $6.6 million in 1997 compared to
                $9.0 million in 1998.  Increased  selling costs were  associated
                with the  introduction  of  various  marketing  plans  and other
                proprietary  rate  plans and cross  promotion  of  products  and
                services.

      DEPRECIATION  AND  AMORTIZATION.  Depreciation  and  amortization  expense
increased  42.1%  from  $11.7  million  in 1997 to $16.7  million  in 1998.  The
increase is attributable to the Company's $64.6 million investment in facilities
during 1997 for which a full year of  depreciation  will be recorded during 1998
and the 1998 facilities investment of $94.9 million through June 30.

      INTEREST EXPENSE, NET. Interest expense, net of interest income, increased
18.3% from $8.2 million in 1997 to $9.7 million in 1998. This increase  resulted
from  increases in the  Company's  average  outstanding  indebtedness  resulting
primarily  from the purchase  and  construction  of new long  distance and local
telecommunication  equipment and  facilities and expansion and upgrades of cable
television facilities.

      INCOME TAX BENEFIT.  Income tax benefit increased from $742,000 in 1997 to
$2.1  million in 1998 due to an increase in the net loss before  income taxes in
1998 as compared to 1997. The Company's effective income tax rate increased from
35.4%  in  1997  to  36.8%  in  1998  due to the  increased  net  loss  and  the
proportional amount of items that are nondeductible for income tax purposes.



                                       25                            (Continued)
<PAGE>
      As a result of its  acquisition  of the Cable  Companies,  the Company has
available  net operating  loss  carryforwards  for income tax purposes  totaling
$37.6  million at June 30, 1998 which  begin to expire in 2004 if not  utilized.
The  Company's   utilization  of  these  carryforwards  is  subject  to  certain
limitations pursuant to section 382 of the Internal Revenue Code.

      The amount of deferred tax asset considered realizable,  however, could be
reduced  in the near term if  estimates  of future  taxable  income  during  the
carryforward  periods are  reduced.  The Company  estimates  that its  effective
income tax rate for financial  statement  purposes will be approximately  38% in
1998. The Company  expects that its  operations  will generate net income before
income  taxes  during  the  carryforward  periods to allow  utilization  of loss
carryforwards for which no allowance has been established.

                 FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
<TABLE>
      The following chart provides  selected  unaudited  statement of operations
data from the Company's quarterly results of operations during 1997 and 1998:
<CAPTION>
                                                        (Dollars in thousands, except per share amounts)
                                                   First         Second          Third         Fourth            Total
(Unaudited)                                       Quarter        Quarter        Quarter        Quarter           Year
                                          ------------------------------------------------------------------------------
                 1997
            (Predecessor)
<S>                                     <C>                       <C>             <C>            <C>            <C> 
Revenues
     Telecommunications services        $          39,225         42,131          44,407         42,271         168,034
     Cable services                                13,656         14,055          13,294         14,160          55,165
     Local access services                            ---            ---             255            355             610
                                          ------------------------------------------------------------------------------
Total revenues                                     52,881         56,186          57,956         56,786         223,809
Operating income                                    3,292          2,786           3,786          5,518          15,382
Extraordinary item, net of income tax
     benefit                                          ---            ---             433             88             521
Net income (loss)                       $           (525)          (832)           (928)            102         (2,183)
                                          ==============================================================================
Basic net earnings (loss) per share
                                        $          (0.01)         (0.02)          (0.02)           0.00          (0.05)
                                          ==============================================================================
Diluted net earnings (loss) per share
                                        $          (0.01)         (0.02)          (0.02)           0.00          (0.05)
                                          ==============================================================================
Other financial data:
     Cable EBITDA                       $           6,025          5,863           5,687          6,168          23,743
                                          ==============================================================================
     Local EBITDA                       $           (634)          (814)           (540)        (1,809)         (3,797)
                                          ==============================================================================
     Consolidated EBITDA                $           9,412          8,394           9,553         11,790          39,149
                                          ==============================================================================
</TABLE>


                                       26                            (Continued)
<PAGE>
<TABLE>
<CAPTION>
                                                        (Dollars in thousands, except per share amounts)
                                                   First         Second          Third         Fourth            Total
(Unaudited)                                       Quarter        Quarter        Quarter        Quarter           Year
                                          ------------------------------------------------------------------------------
                 1998
             (Successor)
<S>                                     <C>                     <C>                                             <C>
Revenues
     Telecommunications services        $          42,937         46,852                                         89,789
     Cable services                                14,201         14,041                                         28,242
     Local access services                          1,014          2,048                                          3,062
                                          ------------------------------------------------------------------------------
Total revenues                                     58,152         62,941                                        121,093
Operating income                                    2,437          1,447                                          3,884
Net loss                                $         (1,616)        (2,066)                                        (3,682)
                                          ==============================================================================
Basic net loss per share                $        (16,160)       (20,660)                                       (36,820)
                                          ==============================================================================
Diluted net loss per share              $        (16,160)       (20,660)                                       (36,820)
                                          ==============================================================================
Other financial data:
     Cable EBITDA                      $            5,795          5,692                                         11,487
                                          ==============================================================================
     Local EBITDA                       $         (2,084)        (2,364)                                        (4,448)
                                          ==============================================================================
     Consolidated EBITDA                $          10,503         10,043                                         20,546
                                          ==============================================================================
</TABLE>
      Total  revenues  for the quarter  ended June 30, 1998 were $62.9  million,
representing a 8.1% increase from total revenues in the first quarter of 1998 of
$58.2 million. This increase in total revenues resulted from the following:

              - A 6.6% increase in telecommunications services revenues to $46.9
                million in the second  quarter of 1998 from $44.0 million during
                the first quarter of 1998. This increase is attributable in part
                to an increase in minutes of traffic  carried  during the second
                quarter  of  1998  of  approximately  10.8  million  minutes  as
                compared to the first quarter of 1998 (a 5.6% increase).

              - An increase in local  access  services  revenues  totaling  $1.0
                million in the second  quarter of 1998 as  compared to the first
                quarter of 1998 (a 102.0% increase)

              - These  increases  were  offset,  in part,  by a reduction in the
                average rate per minute billed by the company  during the second
                quarter of 1998 of approximately $0.004 as compared to the first
                quarter of 1998 (a 2.4% decrease).

      Cost of sales and  services  for the quarter  ended June 30, 1998  totaled
$29.4  million,  representing  a 7.7%  increase  from  total  cost of sales  and
services in the first quarter of 1998 of $27.3 million.  Increased cost of sales
resulted  primarily from the 8.1% increase in revenues described above, and were
offset,  in  part,  by a  refund  in  the  first  quarter  of  1998  aggregating
approximately  $1.1  million  from a local  exchange  carrier  in respect of its
earnings that exceeded regulatory requirements.



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

                            ACCOUNTING PRONOUNCEMENTS

      In June  1997,  the  Accounting  Standards  Board  issued  SFAS  No.  131,
"Financial Reporting for Segments of a Business Enterprise" which applies to all
public business  enterprises.  This new standard requires  companies to disclose
segment data based on how management makes decisions about allocating  resources
to segments and how it measures segment performance. SFAS 131 requires companies
to  disclose  a  measure  of  segment  profit  or  loss,   segment  assets,  and
reconciliations to consolidated totals. It also requires entity-wide disclosures
about a company's  products and services,  its major  customers and the material
countries  in which it holds  assets  and  reports  revenues.  Statement  131 is
effective for financial  statements  for periods  beginning  after  December 15,
1997.  Management of the Company  expects that adoption of SFAS No. 131 will not
have a  material  impact on the  Company's  year-end  1998  financial  statement
disclosures.

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

      In April 1998,  the American  Institute of  Certified  Public  Accountants
(AICPA) issued  Statement of Position  ("SOP") 98-5,  "Reporting on the costs of
Start-Up  Activities".  SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs and requires costs of start-up  activities
and  organization  costs to be expensed as incurred.  SOP 98-5 is effective  for
financial  statements  for fiscal  years  beginning  after  December  15,  1998.
Management of the Company expects that the adoption of SOP 98-5 will result in a
one-time  expense of  approximately  $375,000  (net of income tax effect) in the
first  quarter of 1999  associated  with the write-off of  unamortized  start-up
costs.

                         LIQUIDITY AND CAPITAL RESOURCES

      The  Company's  first and second  quarter 1998  ("1998")  cash provided by
operating  activities totaled $5.0 million,  net of changes in the components of
working capital.  Sources of cash during 1998 included  long-term  borrowings of
$52.4 million. The Company's expenditures for property and equipment,  including
construction  in  progress,  totaled  $21.1  million  and $94.9  million for the
six-month  periods  ended  June 30,  1997 and 1998,  respectively.  Uses of cash
during 1998 included  


                                       28                            (Continued)
<PAGE>
repayment of $900,000 of long-term  borrowings  and capital  lease  obligations,
payment of deferred debt issuance costs totaling $1.5 million and an increase in
other assets of $2.5 million.

      Net receivables increased $11.1 million from December 31, 1997 to June 30,
1998  resulting  from  increased  revenues  in 1998 as  compared  to 1997 and an
increase in refundable income taxes in 1998.

      Accounts payable decreased $1.8 million from December 31, 1997 to June 30,
1998  resulting  from the Company's  payment of amounts  accrued at December 31,
1997 during the first quarter of 1998.

      Accrued  interest  increased  $800,000  from December 31, 1997 to June 30,
1998 resulting  from interest  incurred on additional  indebtedness  outstanding
during 1998 as compared to December 31, 1997.

      Working  capital at June 30, 1998  totaled  $3.8  million,  a $8.8 million
increase from the working  capital deficit of $5.0 million at December 31, 1997.
The  increase  in  working  capital  is  primarily  attributed  to 1) payment of
accounts  payable  at  December  31,  1997  with  cash  generated  by  operating
activities, 2) payment of amounts accrued for facilities expansion and equipment
at December  31,  1997 with cash  generated  by  operating  activities  and cash
obtained  through the  Company's  credit  agreements,  and 3) increases in trade
accounts receivable and refundable income taxes.

      On January 27, 1998 Alaska  United  closed a $75 million  project  finance
facility ("Fiber  Facility") to construct a fiber optic cable system  connecting
Anchorage, Fairbanks, Valdez, Whittier, Juneau and Seattle (see notes 3 and 4 to
the accompanying Notes to Interim Condensed  Consolidated Financial Statements).
The Fiber Facility provides up to $75 million in construction financing and will
bear  interest  at either  Libor  plus 3.0%,  or at the  Company's  choice,  the
lender's  prime rate plus 1.75%.  The  interest  rate will decline to Libor plus
2.5%-2.75%,  or at the Company's choice, the lender's prime rate plus 1.25%-1.5%
after the project  completion  date and when the loan balance is  $60,000,000 or
less.  Alaska  United is  required to pay a  commitment  fee equal to 0.375% per
annum on the unused portion of the  commitment.  The Fiber Facility is a 10-year
term  loan that is  interest  only for the first 5 years.  The  facility  can be
extended  to a 12 year  term  loan at any time  between  the  second  and  fifth
anniversary  of closing the  facility if the Company can  demonstrate  projected
revenues  from  certain  capacity  commitments  will  be  sufficient  to pay all
operating costs, and interest and principal  installments  based on the extended
maturity. $29.4 million was borrowed under the facility at June 30, 1998.

      The Fiber Facility  contains,  among others,  covenants  requiring certain
intercompany  loans and  advances in order to maintain  specific  levels of cash
flow  necessary to pay operating  costs,  interest and  principal  installments.
Additional  covenants  pertain  to the  timely  completion  of  certain  project
construction  milestones.  The Fiber  Facility  also  contains a guarantee  that
requires,  among other terms and conditions,  Alaska United complete the project
by the completion  date and pay any  non-budgeted  costs of the project.  All of
Alaska United's assets, as well as a pledge of the partnership interests' owning
Alaska United, collateralize the Fiber Facility.



                                       29                            (Continued)
<PAGE>
      The Alaska United  project will provide a high  capacity  fiber optic link
between  Fairbanks,  Anchorage,  Valdez,  and Juneau,  Alaska,  and the lower 48
states through Seattle,  Washington. Its initial capacity will be more than five
times the capacity of Alaska's  current  undersea fiber to the lower 48. After a
preliminary route survey was completed and initial cost components determined, a
detailed sea floor survey was commissioned. On August 1, 1997 the Company issued
a  down  payment  to  Tyco  Submarine  Systems,   Inc.  to  begin  construction.
Manufacturing  of the cable and its  electronics  has been  underway  since that
time. The cable is expected to be laid from late August to October 1998. Testing
will occur after that, and services are expected to commence in December 1998.

      The Company was  notified  in August  1998 that a potential  customer  for
Alaska United's fiber services  (AT&T) has selected  another carrier to meet its
immediate  needs for additional  fiber capacity to and from Alaska.  AT&T stated
that it elected to lease a minimum  amount of capacity for a short term and that
the Company will have the  opportunity  to provide fiber capacity in the future.
The other  carrier's  facilities  were under  construction at June 30, 1998 with
service expected to commence in late 1998 or 1999. The Company will use half the
capacity of the Alaska United  project to carry its own traffic,  in addition to
its existing owned and leased facilities.  While the Alaska United project would
have received a financial benefit from carrying AT&T's traffic,  the project can
be supported solely by the Company's own network capacity requirements. GCI will
continue  to pursue  opportunities  to sell  capacity  on its system to AT&T and
others.

      The  Company's   expenditures   for  property  and  equipment,   including
construction  in progress,  totaled $94.9  million and $21.1 million  during the
first two quarters of 1998 and 1997, respectively.  The Company anticipates that
its capital expenditures in 1998 may total as much as $225.0 million,  including
approximately $40.0 million for satellite  transponders and approximately $125.0
million  for  new  undersea  fiber  optic  cable  facilities.   Planned  capital
expenditures  over the next five years include $50.0 million to $70.0 million to
fund  expansion of long distance  facilities,  between $120.0 million and $140.0
million  to fund  development,  construction  and  operating  costs of its local
exchange and PCS networks and  businesses;  and between  $55.0 million and $65.0
million  to  continue  to upgrade  its cable  television  plant and to  purchase
equipment for new cable  services,  including  digital video  services and cable
modem  services.  Sources of funds for these planned  capital  expenditures  are
expected to include  internally  generated cash flows and  borrowings  under the
Company's  credit  facilities  including  borrowings  under the new $75  million
project financing described above.

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

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


                                       30                            (Continued)
<PAGE>
                                 YEAR 2000 COSTS

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

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

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

      The total cost of modifications and conversions is not known at this time.
The Company's  management estimates that the incremental cost of compliance over
the cost of normal  software  upgrades  and  replacements  and its effect on the
Company's future results of operations  totals  approximately $2 million in 1998
and $4  million  in 1999,  subject  to  further  review as part of the  detailed
conversion planning. The cost of modifications and conversions is being expensed
as incurred. 1998 Costs incurred through June 30 totaled approximately $260,000.

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

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

                                    INFLATION

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


                                       31                            (Continued)
<PAGE>
PART II.   OTHER INFORMATION

ITEM 1.    Legal Proceedings

           Information  regarding pending legal proceedings to which the Company
           is a party  is  included  in Note 4 of  Notes  to  Interim  Condensed
           Consolidated  Financial  Statements  and is  incorporated  herein  by
           reference.

ITEM 6.    Exhibits and Reports on Form 8-K

           (a) Exhibits:

           Exhibit 10.86 - Credit and Security Agreement Dated as of January 27,
              1998 among Alaska United Fiber System  Partnership as Borrower and
              The Lenders Referred to Herein and Credit Lyonnais New York Branch
              as  Administrative   Agent  and  Nationsbank  of  Texas,  N.A.  as
              Syndication  Agent and TD Securities  (USA), Inc. as Documentation
              Agent *

           Exhibit 27.1 - Financial Data Schedule *

           (b)Reports on Form 8-K filed  during the quarter  ended June 30, 1998
              - None


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



                                       32                            (Continued)
<PAGE>
                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                    GCI, INC.


         August 12, 1998                     By:     /s/  Ronald A. Duncan
---------------------------------                    ---------------------------
              (Date)                                 Ronald A. Duncan, President
                                                     and Director
                                                     (Principal Executive 
                                                      Officer)



         August 12, 1998                     By:     /s/  G. Wilson Hughes
---------------------------------                    ---------------------------
              (Date)                                 G. Wilson Hughes, Vice 
                                                     President and Director



         August 12, 1998                     By:     /s/  John M. Lowber
---------------------------------                    ---------------------------
              (Date)                                 John M. Lowber, Secretary,
                                                     Treasurer and Director
                                                     (Chief Financial and 
                                                     Accounting Officer)


                                       33