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 March 31, 2009




OR




o 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
      Employerincorporation
      or organization)
            
            Identification
      No.)





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





Registrant’s
      telephone number, including area code: (907)
      868-5600





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





Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (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
o





Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files.  Yes o No o





Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.  See the
definitions of “large accelerated filer", "accelerated filer” and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.:





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer x (Do
      not check if a smaller reporting company)
            Smaller
      reporting company o





Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).  Yes o No x


1





GCI,
INC.


A
WHOLLY-OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.


FORM
10-Q


FOR
THE QUARTER ENDED MARCH 31, 2009





TABLE
OF CONTENTS





Page No.Cautionary
      Statement Regarding Forward-Looking Statements
                3Part
      I.  FINANCIAL INFORMATIONItem
      I.
                Financial
      StatementsConsolidated
      Balance Sheets as of March 31, 2009 (unaudited)and
      December 31, 2008
                
                
                4Consolidated
      Income Statement for the three months ended March 31,2009
      (unaudited) and 2008 (unaudited)
                
                
                6Consolidated
      Statements of Cash Flows for the three monthsended
      March 31, 2009 (unaudited) and 2008 (unaudited)
                
                
                7Notes to
      Interim Consolidated Financial Statements (unaudited)
                
                
                8Item
      2.
                Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                
                
                21Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                
                36Item
      4.
                Controls and
      Procedures
                
                
                36Part
      II.  OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                
                
                38Item
      6.
                Exhibits
                
                
                38Other items
      are omitted, as they are not applicable.SIGNATURES
                
                
                39





2











Cautionary
Statement Regarding Forward-Looking Statements







You should
carefully review the information contained in this Quarterly Report, but should
particularly consider any risk factors that we set forth in this Quarterly
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission (“SEC”). In this Quarterly Report, in
addition to historical information, we state our future strategies, plans,
objectives or goals and our beliefs of future events and of our future operating
results, financial position and cash flows. In some cases, you
can  identify these so-called “forward-looking statements” by words
such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “project,” or “continue” or the negative
of these words and other comparable words. All forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
may cause our actual results, performance, achievements, plans and objectives to
differ materially from any future results, performance, achievements, plans and
objectives expressed or implied by these forward-looking statements. In
evaluating these statements, you should specifically consider various factors,
including those identified under “Risk Factors” in Item 1A of our December 31,
2008 annual report on Form 10-K.  Those factors may cause our actual
results to differ materially from any of our forward-looking statements. For
these forward looking statements, we claim the protection of the safe harbor for
forward-looking statements provided by the Private Securities Litigation Reform
Act of 1995.





You should not
place undue reliance on any such forward-looking statements. Further, any
forward-looking statement, and the related risks, uncertainties and other
factors speak only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to update or revise any
forward-looking statement to reflect any change in our expectations with regard
to these statements or any other change in events, conditions or circumstances
on which any such statement is based. New factors emerge from time to time, and
it is not possible for us to predict what factors will arise or when. In
addition, we cannot assess the impact of each factor on our business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.


3





PART
I. FINANCIAL INFORMATION


ITEM
1. FINANCIAL STATEMENTS





GCI,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS








(Amounts in
      thousands)
                
                (Unaudited)March
      31,
                
                
                December
      31,ASSETS
                
                2009
                
                
                2008Current
      assets:Cash and cash
      equivalents
                
                $
                25,299
                
                
                
                29,693Receivables
                
                
                105,706
                
                
                
                113,136Less
      allowance for doubtful receivables
                
                
                2,946
                
                
                
                2,582Net
      receivables
                
                
                102,760
                
                
                
                110,554Inventories
                
                
                8,299
                
                
                
                7,085Deferred
      income taxes
                
                
                7,034
                
                
                
                7,843Prepaid
      expenses
                
                
                6,424
                
                
                
                5,960Investment
      securities
                
                
                1,349
                
                
                
                1,563Other current
      assets
                
                
                1,228
                
                
                
                647Total current
      assets
                
                
                152,393
                
                
                
                163,345Property and
      equipment in service, net of depreciation
                
                
                796,044
                
                
                
                793,051Construction
      in progress
                
                
                45,204
                
                
                
                54,098Net property
      and equipment
                
                
                841,248
                
                
                
                847,149Cable
      certificates
                
                
                191,565
                
                
                
                191,565Goodwill
                
                
                68,477
                
                
                
                66,868Wireless
      licenses
                
                
                25,967
                
                
                
                25,967Other
      intangible assets, net of amortization
                
                
                21,019
                
                
                
                22,976Deferred loan
      and senior notes costs, net of amortization
                
                
                6,142
                
                
                
                6,496Other
      assets
                
                
                10,772
                
                
                
                10,724Total other
      assets
                
                
                323,942
                
                
                
                324,596Total
      assets
                
                $
                1,317,583
                
                
                
                1,335,090





See accompanying
notes to interim consolidated financial statements.


(Continued)
 4


GCI,
INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Continued)





(Amounts in
      thousands)
                
                (Unaudited)March
      31,
                
                
                December
      31,LIABILITIES
      AND STOCKHOLDER'S EQUITY
                
                2009
                
                
                2008Current
      liabilities:Current
      maturities of obligations under long-term debt and capital
      leases
                
                $
                12,951
                
                
                
                12,857Accounts
      payable
                
                
                31,608
                
                
                
                40,497Deferred
      revenue
                
                
                22,100
                
                
                
                22,095Accrued
      payroll and payroll related obligations
                
                
                18,045
                
                
                
                22,632Accrued
      liabilities
                
                
                13,396
                
                
                
                11,043Accrued
      interest
                
                
                3,768
                
                
                
                10,224Subscriber
      deposits
                
                
                1,386
                
                
                
                1,262Total current
      liabilities
                
                
                103,254
                
                
                
                120,610Long-term
      debt
                
                
                706,076
                
                
                
                708,406Obligations
      under capital leases, excluding current maturities
                
                
                92,874
                
                
                
                94,029Obligation
      under capital lease due to related party, excluding current
      maturity
                
                
                1,870
                
                
                
                1,868Deferred
      income taxes
                
                
                85,897
                
                
                
                86,187Long-term
      deferred revenue
                
                
                51,358
                
                
                
                49,998Other
      liabilities
                
                
                15,078
                
                
                
                15,288Total
      liabilities
                
                
                1,056,407
                
                
                
                1,076,386Commitments
      and contingenciesStockholder's
      equity:Common stock
      (no par):Class A
      common stock (no par). Authorized 10 shares; issued and outstanding 0.1
      shares at March 31, 2009 and December 31, 2008
                
                
                206,622
                
                
                
                206,622Paid-in
      capital
                
                
                47,821
                
                
                
                45,468Retained
      earnings
                
                
                6,733
                
                
                
                6,614Total
      stockholder's equity
                
                
                261,176
                
                
                
                258,704Total
      liabilities and stockholder's equity
                
                $
                1,317,583
                
                
                
                1,335,090







See
      accompanying notes to interim consolidated financial
      statements.


5


GCI,
INC. AND SUBSIDIARIES


CONSOLIDATED
INCOME STATEMENT


(Unaudited)





Three Months
      EndedMarch
      31,(Amounts in
      thousands)
                              
                              
                              2009
                              
                              2008Revenues
                              
                              $
                              148,689
                              
                              134,674Cost of goods
      sold (exclusive of depreciation and amortization shown separately
      below)
                              
                              
                              47,857
                              
                              51,311Selling,
      general and administrative expenses
                              
                              
                              56,586
                              
                              46,406Depreciation
      and amortization expense
                              
                              
                              30,734
                              
                              27,243Operating
      income
                              
                              
                              13,512
                              
                              9,714Other income
      (expense):Interest
      expense (including amortization of deferred loan
                                fees)
                              
                              
                              (12,647
                              )
                              (8,908
                              )Interest
      income
                              
                              
                              8
                              
                              81Other
      expense, net
                              
                              
                              (12,639
                              )
                              (8,827
                              )Income before
      income tax expense
                              
                              
                              873
                              
                              887Income tax
      expense
                              
                              
                              519
                              
                              1,427Net income
      (loss)
                              
                              
                              354
                              
                              (540
                              )Net loss
      attributable to the non-controlling interest
                              
                              
                              ---
                              
                              976Net income
      attributable to GCI, Inc.
                              
                              $
                              354
                              
                              436





See accompanying
notes to interim consolidated financial statements.


6


GCI,
INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


THREE
MONTHS ENDED MARCH 31, 2009 AND 2008


(Unaudited)





(Amounts in
      thousands)
                  
                  
                  2009
                  
                  2008Cash flows
      from operating activities:Net income
      attributable to GCI, Inc.
                  
                  $
                  354
                  
                  436Adjustments
      to reconcile net income attributable to GCI, Inc. to net cash
      provided  by operating activities:Net loss
      attributable to non-controlling interest
                  
                  
                  ---
                  
                  (976
                  )Depreciation
      and amortization expense
                  
                  
                  30,734
                  
                  27,243Share-based
      compensation expense
                  
                  
                  1,802
                  
                  1,260Deferred
      income tax expense
                  
                  
                  519
                  
                  1,427Other noncash
      income and expense items
                  
                  
                  2,108
                  
                  1,448Change in
      operating assets and liabilities
                  
                  
                  (3,515
                  )
                  4,686Net cash
      provided by operating activities
                  
                  
                  32,002
                  
                  35,524Cash flows
      from investing activities:Purchases of
      property and equipment
                  
                  
                  (32,546
                  )
                  (49,647
                  )Purchases of
      other assets and intangible assets
                  
                  
                  (448
                  )
                  (1,183
                  )Net cash used
      in investing activities
                  
                  
                  (32,994
                  )
                  (50,830
                  )Cash flows
      from financing activities:Repayment of
      debt and capital lease obligations
                  
                  
                  (3,168
                  )
                  (567
                  )Borrowing on
      Senior Credit Facility
                  
                  
                  ---
                  
                  20,000Distribution
      to General Communication, Inc.
                  
                  
                  (234
                  )
                  (30
                  )Other
                  
                  
                  ---
                  
                  (6
                  )Net cash
      provided by (used in) financing activities
                  
                  
                  (3,402
                  )
                  19,397Net increase
      (decrease) in cash and cash equivalents
                  
                  
                  (4,394
                  )
                  4,091Cash and cash
      equivalents at beginning of period
                  
                  
                  29,693
                  
                  13,074Cash and cash
      equivalents at end of period
                  
                  $
                  25,299
                  
                  17,165





See accompanying
notes to interim consolidated financial statements.


7
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)


The accompanying
unaudited interim consolidated financial statements include the accounts of GCI,
Inc. and its subsidiaries and have been prepared in accordance with U.S.
Generally Accepted Accounting Principles ("GAAP") for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. They should be
read in conjunction with our audited consolidated financial statements for the
year ended December 31, 2008, filed with the SEC on March 23, 2009 as part of
our annual report on Form 10-K.  In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations for interim
periods are not necessarily indicative of the results that may be expected for
an entire year or any other period.




(l)      Business and Summary of
Significant Accounting Principles





In
the following discussion, GCI, Inc. and its direct and indirect subsidiaries are
referred to as “we,” “us” and “our.”





Basis of
Presentation


We
were incorporated in Alaska in 1997 to affect the issuance of Senior
Notes.  As a wholly-owned subsidiary of General Communication, Inc.
("GCI"), we received through our initial capitalization all ownership interests
in subsidiaries previously held by GCI.  The GCI and GCI, Inc. interim
consolidated financial statements include substantially the same account
activity.





(a)
            Business


We
offer the following services:


·
            Origination
      and termination of traffic in Alaska for certain common
      carriers,


·
            Cable
      television services throughout
Alaska,


·
            Competitive
      local access services in Anchorage, Fairbanks, Juneau, Wasilla, Eagle
      River, Kodiak, Palmer, Kenai, Soldotna, Seward, Chugiak, Sitka, Valdez,
      Ketchikan, Nome, and Homer, Alaska,


·
            Incumbent
      local access services in rural
Alaska,


·
            Long-distance
      telephone service between Alaska and the remaining United States and
      foreign countries,


·
            Sale of
      postpaid and prepaid wireless telephone services and sale of wireless
      telephone handsets and accessories,


·
            Data network
      services,


·
            Internet
      access services,


·
            Broadband
      services, including our SchoolAccess®
      offering to rural school districts, our ConnectMD®
      offering to rural hospitals and health clinics, and managed video
      conferencing,


·
            Managed
      services to certain commercial
customers,


·
            Sales and
      service of dedicated communications systems and related
      equipment,


·
            Lease,
      service arrangements and maintenance of capacity on our fiber optic cable
      systems used in the transmission of interstate and intrastate data,
      switched message long-distance and Internet services within Alaska and
      between Alaska and the remaining United States and foreign countries,
      and


·
            Distribution
      of white and yellow pages directories to residential and business
      customers in certain markets we serve and on-line directory
      products.





(b)
            Principles of
      Consolidation


The
      consolidated financial statements include the consolidated accounts of
      GCI, Inc. and its wholly-owned subsidiaries, as well as a variable
      interest entity in which we were the primary beneficiary as defined by
      Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No.
      46R, “Consolidation of Variable Interest Entities, an interpretation of
      ARB No. 51” through August 17, 2008.  All significant
      intercompany transactions between non-regulated affiliates of our company
      are eliminated.  Statement of Financial Accounting Standard
      ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
      Regulation" requires intercompany revenue and expenses generated between
      regulated and non-regulated affiliates of the company not be eliminated on
      consolidation.  Intercompany revenue and expenses with
      affiliates not subject to SFAS No. 71 have been
  eliminated.


(Continued)
 8
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  (c)     Recently Issued Accounting
Pronouncements


In
March 2009, the FASB issued FASB Staff Position (“FSP”) FAS No. 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial
Instruments.“  FSP FAS 107-1 amends SFAS No. 107, Disclosures about
Fair Value of Financial Instruments and APB Opinion No. 28, Interim Financial
Reporting, to require entities to disclose the fair value of all financial
instruments within the scope of SFAS No. 107 in all interim financial
statements. FSP FAS 107-1 also requires disclosure of the method(s) and
significant assumptions used to estimate the fair value of those financial
instruments. Previously, these disclosures were required only in annual
financial statements. FSP FAS 107-1 is effective for interim reporting periods
ending after June 15, 2009. In periods after initial adoption, FSP FAS 107-1
requires comparative disclosures only for periods ending subsequent to initial
adoption. The adoption of FSP FAS 107-1 is not expected to have a material
impact on our income statement, financial position or cash flows.





In
April 2009, the FASB issued FSP SFAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” which provides
additional guidance for estimating fair value in accordance with FASB Statement
No. 157, “Fair Value Measurements,” when the volume and level of activity for
the asset or liability have significantly decreased. This FSP also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. This pronouncement is effective for periods ending after June 15, 2009.
The adoption of FSP SFAS 157-4 is not expected to have a material impact on our
income statement, financial position or cash flows.





(d)
            Recently Adopted
      Accounting Pronouncements


In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations.”  SFAS No. 141R broadens the guidance of SFAS No. 141,
extending its applicability to all transactions and other events in which one
entity obtains control over one or more other businesses. It also broadens the
fair value measurement and recognition of assets acquired, liabilities assumed,
and interests transferred as a result of business combinations; and acquisition
related costs will generally be expensed rather than included as part of the
basis of the acquisition. SFAS No. 141R expands required disclosures to improve
the ability to evaluate the nature and financial effects of business
combinations. SFAS No. 141R became effective for all transactions entered into
on or after January 1, 2009. The adoption of SFAS No. 141R effective January 1,
2009 did not have any effect on our consolidated financial
statements.





In
December 2007, FASB issued SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51.” SFAS No. 160
changed the accounting and reporting for minority interests, which were
recharacterized as non-controlling interests and classified as a component of
equity. In addition, SFAS No. 160 requires companies to report a net income
(loss) measure that includes the amounts attributable to such non-controlling
interests. We adopted SFAS No. 160 effective January 1, 2009, and it will be
applied prospectively to any non-controlling interests that we may acquire in
the future. However, the presentation and disclosure requirements of SFAS 160
were applied retrospectively for all periods presented; as a result our income
statement for the three months ended March 31, 2008 was recast to reflect the
adoption of SFAS No. 160.





In
March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities.” SFAS No.161 applies to the disclosure requirements for
all derivative instruments and hedged items accounted for under SFAS No.
133,“Accounting for Derivative Instruments and Hedging Activities and its
related interpretations.” This statement amends and expands the disclosure
requirements of SFAS No. 133, requiring qualitative disclosures about objectives
and strategies for using derivatives, quantitative disclosures about fair value
amounts and gains and losses on derivative instruments, and disclosures about
the credit risk related contingent features in derivative agreements. FSP 142-3
became effective on January 1, 2009.  We have adopted SFAS No. 161
effective




(Continued)
 9
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)




January 1, 2009,
and have expanded our disclosures as required by SFAS No. 161. See note 1(k)
regarding adoption of this statement.





On January 1,
      2009, we fully adopted SFAS No. 157 “Fair Value Measurements,” to include
      all nonfinancial assets and nonfinancial liabilities that are not
      recognized or disclosed at fair value in the financial statements on a
      recurring basis (at least annually). The full adoption of SFAS No. 157 did
      not have any effect on our consolidated financial
    statements.





In April
      2008, FASB issued FSP No. 142-3, “Determination of the Useful Life of
      Intangible Assets.” FSP 142-3 amends the factors an entity should consider
      in developing renewal or extension assumptions used in determining the
      useful life of recognized intangible assets under SFAS No. 142, “Goodwill
      and Other Intangible Assets.”  FSP 142-3 applies prospectively
      to intangible assets that are acquired individually or with a group of
      other assets in business combinations and asset acquisitions. FSP 142-3
      became effective on January 1, 2009.  The adoption of FSP 142-3
      effective January 1, 2009, did not have any effect on our consolidated
      financial statements.





In October
      2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
      Financial Asset When the Market for That Asset Is Not
      Active.”  FSP 157-3 clarifies the application of SFAS No. 157 in
      a market that is not active and addresses application issues such as the
      use of internal assumptions when relevant observable data does not exist,
      the use of observable market information when the market is not active and
      the use of market quotes when assessing the relevance of observable and
      unobservable data. FSP 157-3 is effective for all periods presented in
      accordance with SFAS No. 157. The adoption of FSP 157-3 did not have any
      effect on our consolidated financial
statements.





(e)
              Acquisitions


We acquired
      100% of the outstanding stock of United Utilities, Inc ("UUI") and Unicom,
      Inc. on June 1, 2008.  We acquired 100% of the ownership
      interests of Alaska Wireless, LLC ("Alaska Wireless") on July 1,
      2008.  On August 18, 2008, we acquired the 18.1% of the equity
      interest and voting control of Alaska DigiTel, LLC ("Alaska
      DigiTel").





Assuming we
      had completed all of our acquisitions on January 1, 2008, our revenues and
      net income for the three months ended March 31, 2008 would have been as
      follows (amounts in
thousands):





2008Pro forma
      consolidated revenue
                
                $
                142,589Pro forma net
      income attributable to GCI, Inc.
                
                $
                (5
                )





(f)
            Regulatory Accounting
      and Regulation


We account
      for our regulated operations in accordance with the accounting principles
      for regulated enterprises prescribed by SFAS No. 71.  This
      accounting recognizes the economic effects of rate regulation by recording
      cost and a return on investment as such amounts are recovered through
      rates authorized by regulatory authorities.  Accordingly, under
      SFAS No. 71, plant and equipment is depreciated over lives approved by
      regulators and certain costs and obligations are deferred based upon
      approvals received from regulators to permit recovery of such amounts in
      future years.  Our cost studies and depreciation rates for our
      regulated operations are subject to periodic audits that could result in
      reductions of revenues.





(g)
            Revenue
      Recognition


As
an Eligible Telecommunications Carrier ("ETC"), we receive subsidies from the
Universal Service Fund ("USF") to support the provision of local access service
in high-cost areas.  On May 1, 2008, the Federal Communications
Commission ("FCC") issued an order adopting the recommendation of the Federal
State Joint Board on Universal Service (“Joint Board”) to impose a
state-by-state interim cap




(Continued)
 10
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)




on
high cost funds to be distributed to competitive ETCs.  As part of the
revised policy, the FCC adopted a limited exception from the cap for competitive
ETCs serving tribal lands or Alaska Native regions.  While the
operation of the cap will generally reduce the high cost fund amounts available
to competitive ETCs as new competitive ETCs are designated and as existing
competitive ETCs acquire new customers, providers like us who serve tribal lands
or Alaska Native regions were provided some relief.  On March 5, 2009,
the FCC issued an additional order waiving a previously adopted limitation to
the exception, the result of which is to provide uncapped support for all lines
served by competitive ETCs for tribal lands or Alaska Native regions during the
time the interim cap is in effect.  The uncapped support for tribal
lands or Alaska Native regions and the cap for all other regions will be in
place until the FCC takes action on proposals for long term
reform.  We recognized $1.9 million of voice and wireless revenue from
the Universal Service Administrative Company (“USAC”) from August 2008 to
December 2008 in 2009 due to the March 2009 FCC order that provides uncapped
support for all lines served by competitive ETCs for tribal lands or Alaska
Native regions retroactive to August 2008.





(h)
              Earnings per Common
      Share


We
are a wholly-owned subsidiary of GCI and, accordingly, are not required to
present earnings per share.  Our common stock is not publicly
traded.





(i)
            Investment
      Securities


We have
      investment securities of $1.3 million at March 31, 2009, that are
      classified as trading under SFAS No. 115, "Accounting for Certain
      Investments in Debt and Equity Securities."  Our investments
      consist primarily of money market funds and U.S. government
      securities.  Trading securities are recorded at fair value with
      unrealized holding gains and losses included in net income.  In
      2009, the change in net unrealized holding gains/losses in the trading
      portfolio included in earnings was a net loss of
  $5,000.





(j)      Asset Retirement
Obligations


Following is a
reconciliation of the beginning and ending aggregate carrying amount of our
asset retirement obligations at March 31, 2009 and 2008 (amounts in
thousands):





Balance at
      December 31, 2007
                
                $
                4,173Accretion
      expense for the three months ended
                  March 31,
      2008
                
                
                26Balance at
      March 31, 2008
                
                $
                4,199Balance at
      December 31, 2008
                
                $
                6,179Accretion
      expense for the three months ended
                  March 31,
      2009
                
                
                151Liability
      settled
                
                
                (1
                )Balance at
      March 31, 2009
                
                $
                6,329





Our asset
retirement obligations are included in Other Liabilities.





(k)
              Derivatives


In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133”.
SFAS No. 161 requires entities to provide greater transparency in interim and
annual financial statements about how and why the entity uses derivative
instruments, how the instruments and related hedged items are accounted for
under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”, and how the instruments and related hedged items affect the
financial position, results of operations, and cash flows of the entity. We
adopted SFAS No. 161 effective January 1, 2009.


(Continued)
 11
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)


We
enter into derivative contracts to manage exposure to variability in cash flows
from floating-rate financial instruments, particularly on our long-term debt
instruments and credit facilities.  We do not apply hedge accounting
to our derivative instruments and therefore treat these instruments as “economic
hedges.”   Consistent with the guidance in SFAS No. 133,
derivative instruments are accounted for at fair value as either assets or
liabilities on the balance sheet.  Changes in the fair value of
derivatives are recognized in earnings each reporting period.





Derivative
financial instruments are subject to credit risk and market
risk.  Credit risk is the failure of the counterparty to perform under
the terms of the derivative contract.  We minimize the credit risk in
derivative instruments by entering into transactions with high-quality
counterparties.





Market risk is the
adverse effect on the value of a derivative instrument that results from a
change in interest rates or other market variables.  The market risk
associated with interest-rate contracts is managed by establishing and
monitoring parameters that limit the types and degree of market risk that may be
undertaken.





In
the third quarter of 2008, we entered into two interest rate caps with a
combined notional value of $180.0 million that mature on July 1,
2010.  The initial cost of the caps was $928,000.  These
derivative instruments are being used to manage the interest rate risk on our
Senior Credit Facility, which is indexed to the London Interbank Offered Rate
("LIBOR").





The following is a
summary of the derivative contracts outstanding in the balance sheet at March
31, 2009 (dollar amounts in thousands):





Number of
      Contracts
                      
                      Notional
      Value
                      Balance Sheet
      Location
                      
                      Fair
      ValueInterest rate
      caps
                      2
                      
                      $
                      180,000
                      
                      Other
      Assets
                      
                      $
                      1





During the
      three months ended March 31, 2009, a loss of $6,000 relating to the fair
      value change on derivative instruments was reported in interest
      expense.





(l)      Use of
Estimates


The
      preparation of financial statements in conformity with GAAP requires us to
      make estimates and assumptions that affect the reported amounts of assets
      and liabilities and disclosure of contingent assets and liabilities at the
      date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. Significant items subject to
      estimates and assumptions include the allowance for doubtful receivables,
      unbilled revenues, accrual of the USF high-cost area program subsidy,
      share-based compensation, reserve for future customer credits, valuation
      allowances for deferred income tax assets, depreciable and amortizable
      lives of assets, the carrying value of long-lived assets including
      goodwill, cable certificates and wireless licenses, our effective tax
      rate, purchase price allocations, the accrual of cost of goods sold
      exclusive of depreciation and amortization ("Cost of Goods Sold"), and the
      accrual of contingencies and litigation. Actual results could differ from
      those estimates.





(m)    Income
Taxes


GCI, Inc., as a
wholly-owned subsidiary and member of the GCI controlled group of corporations,
files its income tax returns as part of the consolidated group of corporations
under GCI.  Accordingly, all discussions regarding income taxes
reflect the consolidated group's activity.  Our income tax expense and
deferred income tax assets and liabilities are presented herein using the
separate-entity method.





(Continued)
 12
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)


(n)    Classification of Taxes
Collected from Customers


We
report sales, use, excise, and value added taxes assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between us
and a customer on a net basis in our income statement.  We report a
certain surcharge on a gross basis in our income statement of $916,000 and
$950,000 for the three months ended March 31, 2009 and 2008,
respectively.




(o)    Reclassifications


Reclassifications
have been made to the 2008 financial statements to make them comparable with the
2009 presentation.





(2)
            Consolidated
      Statements of Cash Flows Supplemental
  Disclosures




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







Three month
      period ended March 31,
                
                2009
                
                
                2008Decrease in
      accounts receivable
                
                $
                6,650
                
                
                
                9,466Increase in
      prepaid expenses
                
                
                (309
                )
                
                
                (1,008
                )(Increase)
      decrease in inventories
                
                
                286
                
                
                
                (1,273
                )(Increase)
      decrease in other current assets
                
                
                (612
                )
                
                
                23Increase
      (decrease) in accounts payable
                
                
                (633
                )
                
                
                2,784Increase
      (decrease) in deferred revenues
                
                
                (91
                )
                
                
                571Decrease in
      accrued payroll and payroll related obligations
                
                
                (4,650
                )
                
                
                (1,170
                )Increase in
      accrued liabilities
                
                
                2,353
                
                
                
                756Decrease in
      accrued interest
                
                
                (6,456
                )
                
                
                (5,851
                )Increase in
      subscriber deposits
                
                
                124
                
                
                
                79Increase
      (decrease) in long-term deferred revenue
                
                
                (221
                )
                
                
                335Increase
      (decrease) in components of other long-term liabilities
                
                
                44
                
                
                
                (26
                )$
                (3,515
                )
                
                
                4,686







We
paid interest, exclusive of capitalized interest, totaling $19.0 million and
$14.9 million during the three months ended March 31, 2009 and 2008,
respectively.





We
paid no income taxes and received no income tax refunds during the three months
ended March 31, 2009 and 2008.





During the three
months ended March 31, 2009 and 2008, we capitalized interest expense of
$223,000 and $870,000, respectively.





We
had $3.9 million and $10.1 million in non-cash additions to property and
equipment due to unpaid purchases as of March 31, 2009 and 2008,
respectively.





During the three
months ended March 31, 2009, we applied $465,000 of a warranty receivable to
offset our cash obligation relating to a capital lease.





(3)
            Intangible
      Assets


Goodwill increased
$1.6 million at March 31, 2009 as compared to December 31, 2008, to record an
adjustment for grant deferred revenue to the United Utilities, Inc. and Unicom,
Inc. purchase price allocations.





Amortization
expense for amortizable intangible assets was as follows (amounts in
thousands):




(Continued)
 13
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)





Three Months
      EndedMarch
      31,2009
                  
                  2008Amortization
      expense
                  $
                  1,881
                  
                  
                  915





Amortization
expense for amortizable intangible assets for each of the five succeeding fiscal
years is estimated to be (amounts in thousands):





Years Ending
      December 31,2009
                
                $
                5,6042010
                
                
                5,5892011
                
                
                3,5192012
                
                
                2,5692013
                
                
                1,270





For the period from
January 1, 2009 to March 31, 2009, the U.S. financial markets have been impacted
by continued deterioration in economic conditions.  Should economic
conditions in the State of Alaska and other indicators deteriorate such that
they impact our ability to achieve levels of forecasted operating results and
cash flows, should our stock price and market capitalization decline below our
book value for a sustained period of time, or should other events occur
indicating the carrying value of goodwill and intangible assets might be
impaired, we would test our intangible assets for impairment and may recognize
an impairment loss to the extent that the carrying amount exceeds such asset's
fair value.  Any future impairment charges could have a material
adverse effect on our results of operations.





(4)
            Fair Value
      Measurements


SFAS No. 157, “Fair
Value Measurements,” establishes a three-tiered fair value hierarchy that
prioritizes inputs to valuation techniques used in fair value calculations.
Level 1 inputs, the highest priority, are quoted prices in active markets for
identical assets or liabilities. Level 2 inputs reflect other than quoted prices
included in Level 1 that are either observable directly or through corroboration
with observable market data. Level 3 inputs are unobservable inputs, due to
little or no market activity for the asset or liability, such as
internally-developed valuation models.  We have applied the provisions
of SFAS No. 157 to our trading securities, the assets of our deferred
compensation plan (primarily money market funds and mutual funds) and interest
rate caps.




Assets and
liabilities measured at fair value on a recurring basis as of March 31, 2009
were as follows (amounts in thousands):





Observable
      Inputs Level 1
            
            Other
      Observable Inputs Level 2
            
            Unobservable
      Inputs Level 3
            
            TotalAssetsMoney market
      funds and U.S. government securities
            $
            1,349
            
            ---
            
            ---
            
            1,349Deferred
      compensation plan assets
            
            1,224
            
            ---
            
            ---
            
            1,224Derivative
      financial instruments
            
            ---
            
            1
            
            ---
            
            1Total assets
      at fair value
            $
            2,573
            
            1
            
            ---
            
            2,574





The valuation of
our marketable securities, money market funds, and mutual funds are determined
using quoted market prices utilizing market observable inputs. Derivative
financial instruments are valued using




(Continued)
 14
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)




mid-market
quotations that are based on actual bid/ask quotations shown on reliable
electronic information screens as of March 31, 2009.





(5)     Share-Based
Compensation


GCI's 1986
Stock Option Plan ("Stock Option Plan"), as amended, provides for the grant of
options and restricted stock awards (collectively "award") for a maximum of 15.7
million shares of GCI Class A common stock, subject to adjustment upon the
occurrence of stock dividends, stock splits, mergers, consolidations or certain
other changes in corporate structure or capitalization. If an award expires or
terminates, the shares subject to the award will be available for further grants
of awards under the Stock Option Plan. The Compensation Committee of GCI’s Board
of Directors administers the Stock Option Plan. Substantially all restricted
stock awards granted vest over periods of up to five years. Substantially all
options vest in equal installments over a period of five years and expire ten
years from the date of grant. Options granted pursuant to the Stock Option Plan
are only exercisable if at the time of exercise the option holder is our
employee, non-employee director, or a consultant or advisor working on our
behalf. New shares of GCI Class A common stock are issued when stock option
agreements are exercised and restricted stock awards are
made.





The fair value of
restricted stock awards is determined based on the quoted price of GCI's Class A
common stock.  We use a Black-Scholes-Merton option pricing model to
estimate the fair value of stock options issued under SFAS No.123(R). The
Black-Scholes-Merton option pricing model incorporates various and highly
subjective assumptions, including expected term and expected volatility. We have
reviewed our historical pattern of option exercises and have determined that
meaningful differences in option exercise activity existed among employee job
categories. Therefore, for all stock options, we have categorized these awards
into two groups for valuation purposes.





The weighted
average grant date fair value of options granted during the three months ended
March 31, 2009 and 2008 was $3.43 per share and $4.33 per share,
respectively. The total fair value of options vesting during the three months
ended March 31, 2009 and 2008 was $1.6 million and $1.3 million,
respectively.





We
have recorded share-based compensation expense of $1.8 million for the three
months ended March 31, 2009, which consists of $2.3 million for employee
share-based compensation expense and a $457,000 decrease in the fair value of
liability-classified share-based compensation.  We recorded
share-based compensation expense of $1.3 million for the three months ended
March 31, 2008, which consists of $2.2 million for employee share-based
compensation expense and a $931,000 decrease in the fair value of
liability-classified share-based compensation. Share-based compensation expense
is classified as selling, general and administrative expense in our consolidated
income statement.  Unrecognized share-based compensation expense was
$2.3 million relating to 336,000 restricted stock awards and $8.6 million
relating to 2.3 million unvested stock options as of March 31,
2009.  We expect to recognize share-based compensation expense over a
weighted average period of 2.7 years for stock options and 1.3 years for
restricted stock awards.


(Continued)
 15
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)


The following is a
summary of the Stock Option Plan activity for the three months ended March
31, 2009:





Shares
                  (in
      thousands)
                
                
                Weighted
                  Average
                  Exercise
      PriceOutstanding
      options and restricted stock awards at December 31, 2008
                
                
                7,205
                
                
                $
                9.08Options
      granted
                
                
                99
                
                
                $
                6.35Restricted
      stock awards granted
                
                
                12
                
                
                $
                7.36Restricted
      stock awards vested
                
                
                (88
                )
                
                $
                12.99Options
      forfeited and retired
                
                
                (10
                )
                
                $
                10.34Outstanding
      options and restricted stock awards at March 31, 2009
                
                
                7,218
                
                
                $
                8.85Available for
      grant at March 31, 2009
                
                
                850





The following is a
summary of activity for stock option grants that were not made pursuant to
the Stock Option Plan for the three months ended March 31,
2009:





Shares
                  (in
      thousands)
                
                
                Weighted
                  Average
                  Exercise
      PriceOutstanding
      at December 31, 2008 and March 31, 2009
                
                
                150
                
                
                $
                6.50Available for
      grant at March 31, 2009
                
                
                ---





In
January 2001 we entered into an aircraft operating lease agreement with a
company owned by our President and Chief Executive Officer.  The lease
was amended effective January 1, 2002 and February 25, 2005.  Upon
signing the lease, the lessor was granted an option to purchase 250,000 shares
of GCI Class A common stock at $6.50 per share, of which 150,000 shares remain
and expire on March 31, 2010.





The total intrinsic
values, determined as of the date of exercise, of options exercised during the
three months ended March 31, 2009 and 2008 were $0 and $5,000, respectively. We
received $0 and $16,000 from GCI in cash from stock option exercises during
the three months ended March 31, 2009 and 2008,
respectively.





(6)
            Industry Segments
      Data


Our reportable
segments are business units that offer different products and are each managed
separately.





A
description of our five reportable segments follows:





Consumer - We offer a
full range of voice, video, data and wireless services to residential
customers.





Network Access - We
offer a full range of voice, data and wireless services to common carrier
customers.





Commercial - We offer
a full range of voice, video, data and wireless services to business and
governmental customers.





(Continued)
 16
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)




Managed Broadband -
We offer data services to rural school districts and rural hospitals and health
clinics through our SchoolAccess® and
ConnectMD®
initiatives.





Regulated Operations
- We offer voice, data and wireless services to residential, business,
governmental, and common carrier customers in areas of rural
Alaska.





Corporate
      related expenses including engineering, information technology,
      accounting, legal and regulatory, human resources, and other general and
      administrative expenses for the three months ended March 31, 2009 and 2008
      are allocated to our segments using segment margin for the years ended
      December 31, 2008 and 2007, respectively.  Bad debt expense for
      the three months ended March 31, 2009 and 2008 is allocated to our
      segments using a combination of specific identification and allocations
      based upon segment revenue for the three months ended March 31, 2009 and
      2008, respectively.  Corporate related expenses and bad debt
      expense are specifically identified for our Regulated Operations segment
      and therefore, are not included in the
  allocations.





We
evaluate performance and allocate resources based on earnings before
depreciation and amortization expense, net interest expense, income taxes,
share-based compensation expense, and non-cash contribution adjustment
(“adjusted EBITDA”). The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies in
note 1 in the “Notes to Consolidated Financial Statements” included in Part II
of our December 31, 2008 annual report on Form 10-K. Intersegment sales are
recorded at cost plus an agreed upon intercompany profit.





We
earn all revenues through sales of services and products within the United
States. All of our long-lived assets are located within the United States of
America, except approximately 82% of our undersea fiber optic cable systems
which transit international waters and all of our satellite
transponders.





Summarized
financial information for our reportable segments for the three months
ended March 31, 2009 and 2008 follows (amounts in thousands):





Three months
      ended March 31,
                
                Consumer
                
                
                Network
      Access
                
                
                Commercial
                
                
                Managed
      Broadband
                
                
                Regulated
      Operations
                
                
                Total
      Reportable Segments2009Revenues:Intersegment
                
                $
                ---
                
                
                
                227
                
                
                
                1,456
                
                
                
                ---
                
                
                
                52
                
                
                
                1,735External
                
                
                70,719
                
                
                
                33,199
                
                
                
                27,992
                
                
                
                10,610
                
                
                
                6,169
                
                
                
                148,689Total
      revenues
                
                $
                70,719
                
                
                
                33,426
                
                
                
                29,448
                
                
                
                10,610
                
                
                
                6,221
                
                
                
                150,424Adjusted
      EBITDA
                
                $
                18,778
                
                
                
                16,919
                
                
                
                5,301
                
                
                
                3,918
                
                
                
                1,532
                
                
                
                46,4482008Revenues:Intersegment
                
                $
                ---
                
                
                
                301
                
                
                
                1,349
                
                
                
                ---
                
                
                
                ---
                
                
                
                1,650External
                
                
                61,383
                
                
                
                39,174
                
                
                
                26,591
                
                
                
                7,526
                
                
                
                ---
                
                
                
                134,674Total
      revenues
                
                $
                61,383
                
                
                
                39,475
                
                
                
                27,940
                
                
                
                7,526
                
                
                
                ---
                
                
                
                136,324Adjusted
      EBITDA
                
                $
                12,254
                
                
                
                20,137
                
                
                
                4,325
                
                
                
                2,477
                
                
                
                ---
                
                
                
                39,193





(Continued)
 17
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)




A
reconciliation of reportable segment revenues to consolidated revenues follows
(amounts in thousands):





Three Months
      EndedMarch
      31,2009
                
                
                2008Reportable
      segment revenues
                
                $
                150,424
                
                
                
                136,324Less
      intersegment revenues eliminated in consolidation
                
                
                1,735
                
                
                
                1,650Consolidated
      revenues
                
                $
                148,689
                
                
                
                134,674





A
reconciliation of reportable segment earnings from adjusted EBITDA to
consolidated income before income taxes follows (amounts in
thousands):





Three Months
      EndedMarch
      31,2009
                
                
                2008Reportable
      segment adjusted EBITDA
                
                $
                46,448
                
                
                
                39,193Less
      depreciation and amortization expense
                
                
                30,734
                
                
                
                27,243Less
      share-based compensation expense
                
                
                1,802
                
                
                
                1,260Less non-cash
      contribution adjustment
                
                
                400
                
                
                
                ---Less net loss
      attributable to non-controlling interest
                
                
                ---
                
                
                
                976Consolidated
      operating income
                
                
                13,512
                
                
                
                9,714Less other
      expense, net
                
                
                12,639
                
                
                
                8,827Consolidated
      income before income tax expense
                
                $
                873
                
                
                
                887





(7)
            Commitments and
      Contingencies





Litigation, Disputes, and
Regulatory Matters


We
are involved in various lawsuits, billing disputes, legal proceedings, and
regulatory matters that have arisen from time to time in the normal course of
business. While the ultimate results of these items cannot be predicted with
certainty we do not expect at this time the resolution of them to have a
material adverse effect on our financial position, results of operations or
liquidity.





In
the third quarter of 2008, Alaska DigiTel received a request for documents
pursuant to a notification of investigation from the FCC’s Office of the
Inspector General in connection with its review of Alaska DigiTel’s compliance
with program rules and requirements under certain USF programs. The request
covers the period beginning January 1, 2004 through August 31, 2008, and relates
to amounts received by Alaska DigiTel, LLC (“Alaska DigiTel”) and its
affiliates during that period.  Alaska DigiTel is an Alaska based
wireless communications company of which we acquired an 81.9% equity interest on
January 2, 2007 and the remaining 18.1% equity interest on August 18,
2008.  Prior to August 18, 2008, our control over the operations of
Alaska DigiTel was limited as required by the FCC upon their approval of our
initial acquisition completed in January 2007.  We have been and intend to
continue fully complying with this request on behalf of Alaska DigiTel and the
GCI companies as affiliates.  This request has not had a material impact on
our statement of operations, financial position or cash flows but given the
preliminary nature of this request we are unable to assess the ultimate
resolution of this matter.





(Continued)
 18
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)


Alaska Communications
Systems (“ACS”) Access Service Pricing


On
May 22, 2006, the ACS subsidiary serving Anchorage filed a petition with the
FCC, seeking forbearance from regulation of interstate broadband and access
services. On August 20, 2007, the FCC granted in part and denied in part the
requested relief, requiring that ACS comply with certain safeguards to ensure
the relief granted would not result in harm to consumers or competition. 
On October 22, 2008, ACS filed a petition to convert to price cap regulation the
access services it provides in each of its operating areas.   The
petition was granted on April 17, 2009, rescinding the forbearance relief
previously granted.  We cannot predict at this time the effect of
these matters on our cost of purchasing ACS access services.





Universal
Service


The USF pays
subsidies to ETCs to support the provision of local service in high-cost areas.
Under FCC regulations, we have qualified as a competitive ETC in the Anchorage,
Fairbanks, Juneau, MTA, Mukluk, Ketchikan, Fort Wainwright/Eielson, and Glacier
State study areas. Without ETC status, we would not qualify for USF subsidies in
these areas or other rural areas where we propose to offer wireline and wireless
local services, and our revenue for providing local services in these areas
would be materially adversely affected.





On
May 1, 2008, the FCC issued an order adopting the recommendation of the Joint
Board to impose a state-by-state interim cap on high cost funds to be
distributed to competitive ETCs.  As part of the revised policy, the
FCC adopted a limited exception from the cap for competitive ETCs serving tribal
lands or Alaska Native regions.  While the operation of the cap will
generally reduce the high cost fund amounts available to competitive ETCs as new
competitive ETCs are designated and as existing competitive ETCs acquire new
customers, providers like us who serve tribal lands or Alaska Native regions
were provided some relief.  On March 5, 2009, the FCC issued an
additional order waiving a previously adopted limitation to the exception, the
result of which is to provide uncapped support for all lines served by
competitive ETCs for tribal lands or Alaska Native regions during the time the
interim cap is in effect.  The uncapped support for tribal lands or
Alaska Native regions and the cap for all other regions will be in place until
the FCC takes action on proposals for long term reform.





On
April 8, 2009, the FCC issued a Notice of Inquiry to review aspects of its
high cost support program.  Comments are due on May 8, 2009, and replies
are due on June 8, 2009.  We cannot predict at this time the outcome of
this proceeding or its affect on high cost support available to
us.





Dobson Resale
Agreement


AT&T Mobility,
LLC (“AT&T Mobility”) acquired Dobson Communications Corporation (“Dobson”),
including its Alaska properties, on November 15, 2007. In December 2007 we
signed an agreement with AT&T Mobility that provides for an orderly
transition of our wireless customers from the Dobson/AT&T network in Alaska
to our wireless facilities that we began building in 2008 and are expected to be
substantially completed in 2010 or 2011.  The agreement requires our
customers to be on our wireless network by June 30, 2009, but allows our
customers to use the AT&T Mobility network for roaming during the transition
period.  The four-year transition period, which expires June 30, 2012,
provides us adequate time to replace the Dobson/AT&T network in Alaska with
our own wireless facilities. Under the agreement, AT&T




(Continued)
 19
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)




Mobility’s
obligation to purchase network services from us terminated as of July 1, 2008.
AT&T Mobility provided us with a large block of wireless network usage at no
charge to facilitate the transition of our customers to our
facilities.  We will pay for usage in excess of that base transitional
amount.  Under the previous agreement with Dobson, our margin was
fixed.  Under the new agreement with AT&T Mobility, we will pay
for usage in excess of the block of free minutes on a per minute
basis.  The block of wireless network usage at no charge is expected
to substantially reduce our wireless product Cost of Goods Sold during the
approximate four year period beginning June 4, 2008 and ending June 30,
2012.








20




PART
I.


ITEM
2.




MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL


CONDITION
AND RESULTS OF OPERATIONS





In
the following discussion, GCI, Inc. and its direct and indirect subsidiaries are
referred to as “we,” “us” and “our.”




Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses our consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”). The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, we evaluate our estimates and judgments,
including those related to the allowance for doubtful receivables, unbilled
revenues, accrual of the USF high-cost area program subsidy, share-based
compensation, reserve for future customer credits, valuation allowances for
deferred income tax assets, depreciable and amortizable lives of assets, the
carrying value of long-lived assets including goodwill, cable certificates and
wireless licenses, our effective tax rate, purchase price allocations, the
accrual of Cost of Goods Sold, depreciation, and contingencies and litigation.
We base our estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. See also our “Cautionary Statement Regarding Forward-Looking
Statements.”





GCI, Inc. was
incorporated under the laws of the State of Alaska in 1997 to affect the
issuance of Senior Notes.  GCI, Inc., a wholly-owned subsidiary of
GCI, received through its initial capitalization all ownership interests in
subsidiaries previously held by GCI.  Shares of GCI's Class A common
stock are traded on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol of GNCMA.  Shares of GCI's Class B common stock are
traded on the Over-the-Counter market.  Shares of GCI, Inc.'s common
stock are wholly-owned by GCI and are not publicly traded.  The GCI
and GCI, Inc. interim consolidated financial statements include substantially
the same account activity.





General
Overview





Through our focus
on long-term results, acquisitions, and strategic capital investments, we strive
to consistently grow our revenues and expand our margins. We have historically
met our cash needs for operations, regular capital expenditures and maintenance
capital expenditures through our cash flows from operating activities.
Historically, cash requirements for significant acquisitions and major capital
expenditures have been provided largely through our financing
activities.  The ongoing weakness in the national economy and credit
market turmoil continue to negatively impact consumer confidence and spending.
If these trends continue, they could lead to reductions in our customers’
spending which could impact our revenue growth.  We believe the Alaska
economy continues to perform well compared to most other states at the current
time. Mortgage foreclosure rates in Alaska are among the lowest in the nation
and the commercial real estate market is steady. The majority of our revenue is
driven by the strength of the Alaska economy which appears to be relatively well
positioned to weather recessionary pressures despite the continued low price per
barrel of Alaska oil. The State of Alaska has large cash reserves that should
enable it to maintain its budget for at least the next two fiscal years. This is
important for Alaska’s economy as the State is the largest employer and second
largest source of gross state product. We cannot predict the impact the economic
crisis may have on us.





Our five reportable
segments are Consumer, Network Access, Commercial, Managed Broadband and
Regulated Operations.  Our reportable segments are business units that
offer different products, are each managed separately, and serve distinct types
of customers.  The Network Access segment provides services to other
common carrier customers and the Managed Broadband segment provides services to
rural school districts, hospitals and health clinics.  Effective June
1, 2008, we purchased 100% of the outstanding stock of United Utilities, Inc.
("UUI") and Unicom, Inc. ("Unicom").  The financial results of the
long-




21


distance, local
access and Internet services sold to consumer and commercial customers of
certain of these acquired companies are reported in the Regulated Operations
segment.  The financial results of the long-distance services sold to
other common carrier customers and the managed broadband services components of
certain of these acquired companies are included in the Network Access and
Managed Broadband Services segments, respectively.  Effective July 1,
2008, we closed on our purchase of 100% of the ownership interests of Alaska
Wireless whose results are included in the Consumer segment.


Following are our
segments and the services and products each offers to its
customers:





Reportable
      SegmentsServices and
      Products
                
                Consumer
                
                
                Network
      Access
                
                
                Commercial
                
                
                Managed
      Broadband
                
                
                Regulated
      OperationsVoice:Long-distance
                
                
                X
                
                
                
                X
                
                
                
                X
                
                
                
                
                
                
                XLocal
      Access
                
                
                X
                
                
                
                X
                
                
                
                X
                
                
                
                
                
                
                XDirectories
                
                
                
                
                
                
                
                
                
                
                XVideo
                
                
                X
                
                
                
                
                
                
                
                XData:Internet
                
                
                X
                
                
                
                X
                
                
                
                X
                
                
                
                X
                
                
                
                XData
      Networks
                
                
                
                
                
                
                X
                
                
                
                X
                
                
                
                XManaged
      Services
                
                
                
                
                
                
                
                
                
                
                X
                
                
                
                XManaged
      Broadband Services
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                XWireless
                
                
                X
                
                
                
                X
                
                
                
                X
                
                
                
                
                
                
                
                X





An
overview of our services and products follows.





Voice
Services and Products


Long-distance


We
generate long-distance services revenues from monthly plan fees and usage
charges.





Factors that have
the greatest impact on year-to-year changes in long-distance services revenues
include the rate per minute charged to customers and usage volumes expressed as
minutes of use.





Common carrier
traffic routed to us for termination in Alaska is largely dependent on traffic
routed to our common carrier customers by their customers. Pricing pressures,
new program offerings, and market and business consolidations continue to evolve
in the markets served by our other common carrier customers. If, as a result,
their traffic is reduced, our traffic will also likely be reduced or, if their
competitors’ costs to terminate or originate traffic in Alaska are reduced, our
pricing may be reduced to respond to competitive pressures, consistent with
federal law. Additionally, disruption in the economy resulting from terrorist
attacks and other attacks or acts of war could affect our carrier customers. We
are unable to predict the effect on us of such changes. However, given the
materiality of other common carrier revenues to us, a significant reduction in
traffic or pricing could have a material adverse effect on our financial
position, results of operations and liquidity.





AT&T Mobility,
LLC (“AT&T Mobility”) acquired Dobson Communications Corporation (“Dobson”),
including its Alaska properties, on November 15, 2007. In December 2007 we
signed an agreement with AT&T Mobility that provides for an orderly
transition of our wireless customers from the Dobson/AT&T network in Alaska
to our wireless facilities that we began building in 2008 and are expected to be
substantially completed in 2010 or 2011.  The agreement requires our
customers to be on our wireless network by June 30, 2009, but allows our
customers to use the AT&T Mobility network for roaming during the transition
period.  The four-year transition period, which expires June 30, 2012,
provides us adequate time to replace the Dobson/AT&T network in Alaska with
our own wireless facilities. Under the agreement, AT&T Mobility’s obligation
to purchase network services from us terminated as of July 1, 2008. AT&T
Mobility provided us with a large block of wireless network usage at no charge
to facilitate the transition of our customers to our facilities.  We
will pay for usage in excess of that base transitional amount.  Under
the previous agreement with Dobson, our margin was fixed.  Under the
new agreement with AT&T Mobility, we will pay for usage in excess of the




22


block of free
minutes on a per minute basis.  The block of wireless network usage at
no charge is expected to substantially reduce our wireless product cost of goods
sold exclusive of depreciation and amortization (“Cost of Goods Sold”) during
the approximate four year period beginning June 4, 2008 and ending June 30,
2012.





Due in large part
to the favorable synergistic effects of our bundling strategy focused on
consumer and commercial customers, long-distance services continue to be a
significant contributor to our overall performance, although the migration of
traffic from our voice products to our data and wireless products
continues.





Our long-distance
service faces significant competition from AT&T Alascom ("Alascom"), ACS,
Matanuska Telephone Association ("MTA"), long-distance resellers, and certain
smaller rural local telephone companies that have entered the long-distance
market. We believe our approach to developing, pricing, and providing
long-distance services and bundling different services will continue to allow us
to be competitive in providing those services.





Local
Access


We
generate local access services revenues from five primary sources: (1) basic
dial tone services; (2) data network and special access services; (3) Universal
Service Administrative Company ("USAC") support; (4) origination and termination
of long-distance calls for other common carriers; and (5) features and other
charges, including voice mail, caller ID, distinctive ring, inside wiring and
subscriber line charges.





The primary factors
that contribute to year-to-year changes in local access services revenues
include the average number of subscribers to our services during a given
reporting period, the average monthly rates charged for non-traffic sensitive
services, the number and type of additional premium features selected, the
traffic sensitive access rates charged to carriers and amounts received from the
USAC.





We
estimate that our March 31, 2009 and 2008 total lines in service represent a
statewide market share of 34% and 29%, respectively. At March 31, 2009 and 2008,
71% and 58%, respectively, of our lines, including the lines of UUI at March 31,
2009, are provided on our own facilities.





Our local access
service faces significant competition in Anchorage, Fairbanks, and Juneau from
ACS, which is the largest incumbent local exchange carrier ("ILEC") in Alaska.
In the Matanuska-Susitna Valley our local access service faces competition from
MTA, the ILEC in this area.  In the Kenai-Soldotna area our local
access service faces competition from ACS, the ILEC in this area.  We
compete against other smaller ILECs in certain smaller
communities.  We believe our approach to developing, pricing, and
providing local access services and bundling different services will allow us to
be competitive in providing those services.





UUI and its
subsidiary, United-KUC, Inc. ("United-KUC"), which were acquired by us effective
June 1, 2008, are ILECs and therefore are subject to regulation by the
Regulatory Commission of Alaska (“RCA”).  UUI and United-KUC do not
face significant competition although we expect technological changes and
wireless substitutions will affect their results.





We
plan to continue to deploy digital local phone service ("DLPS") lines which
utilize our coaxial cable facilities. This service delivery method allows us to
utilize our own cable facilities to provide local access service to our
customers and avoid paying local loop charges to the ILEC.





On
May 1, 2008, the Federal Communications Commission ("FCC") issued an order
adopting the recommendation of the Joint Board to impose a state-by-state
interim cap on high cost funds to be distributed to competitive Eligible
Telecommunications Carriers ("ETC").  As part of the revised policy,
the FCC adopted a limited exception from the cap for competitive ETCs serving
tribal lands or Alaska Native regions.  While the operation of the cap
will generally reduce the high cost fund amounts available to competitive ETCs
as new competitive ETCs are designated and as existing competitive ETCs acquire
new customers, providers like us who serve tribal lands or Alaska Native regions
were provided some relief.  On March 5, 2009, the FCC issued an
additional order waiving a previously adopted limitation to the exception, the
result of which is to provide uncapped support for all lines served by
competitive ETCs for tribal lands or Alaska Native regions during the time the
interim cap is in effect.  The uncapped support for tribal lands or
Alaska Native regions and the cap for all other regions will be in place until
the FCC takes action on proposals for long term reform.





23


The Joint Board has
recommended for FCC consideration long-term options for reforming Universal
Service Fund ("USF") support, including establishing separate funds for mobility
and broadband support.  Separately, the FCC has issued two reform
proposals for changing the basis for support amounts.  On April 8,
2009, the FCC issued a Notice of Inquiry to review aspects of its high cost
support program.  Comments are due on May 8, 2009, and replies are due
on June 8, 2009.  We cannot predict at this time the outcome of the
FCC proceedings to consider USF reform proposals or their respective impacts on
us.  Both these and any future regulatory, legislative, or judicial
actions could affect the operation of the USF and result in a change in our
revenue for providing local access services in new and existing markets and
facilities-based wireless services in new markets.





Directories


We
sell advertising in our yellow pages directories to commercial customers,
distribute white and yellow pages directories to customers in certain markets we
serve, and offer an on-line directory.





Video
Services and Products


We
generate cable services revenues from three primary sources: (1) digital
programming services, including monthly basic and premium subscriptions,
pay-per-view movies, video on demand and one-time events, such as sporting
events; (2) equipment rentals; and (3) advertising sales.





Our cable systems
serve 40 communities and areas in Alaska, including the state’s five largest
population centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley, the
Kenai Peninsula, and Juneau.  We transmit an entirely digital signal
for all cable television channels in all markets we serve.





The primary factors
that contribute to period-to-period changes in cable services revenues include
average monthly subscription rates and pay-per-view buys, the mix among basic,
premium and digital tier services, the average number of cable television
subscribers during a given reporting period, set-top box utilization and related
rates, revenues generated from new product offerings, and sales of cable
advertising services.





Our cable service
offerings are bundled with various combinations of our long-distance, local
access, and Internet services. Value-added premium services are available for
additional charges.





Our cable
television systems face competition primarily from alternative methods of
receiving and distributing television signals, including DBS and digital video
over telephone lines, and other sources of news, information and entertainment,
including Internet services.





Data
Services and Products


Internet


We
generate Internet services revenues from four primary sources: (1) access
product services, including cable modem, dial-up, and dedicated access; (2)
network management services; (3) wholesale access for other common carriers; and
(4) usage charges.





The primary factors
that contribute to year-to-year changes in Internet services revenues include
the average number of subscribers to our services during a given reporting
period, the average monthly subscription rates, the amount of bandwidth
purchased by large commercial customers, and the number and type of additional
premium features selected.





Marketing campaigns
continue to be deployed featuring bundled products. Our Internet offerings are
bundled with various combinations of our long-distance, cable, and local access
services and provide free or discounted basic or premium Internet services.
Value-added premium Internet features are available for additional
charges.





We
compete with a number of Internet service providers in our markets. We believe
our approach to developing, pricing, and providing Internet services allows us
to be competitive in providing those services.





Data
Networks


We
generate data network services revenue from two primary sources: (1) leasing
capacity on our facilities that utilize voice and data transmission circuits,
dedicated to particular subscribers, which link a device in one location to
another in a different location and (2) through the sale of Internet Protocol
("IP") based data services on a secured shared network to businesses linking
multiple enterprise locations. The factor that




24


has the greatest
impact on year-to-year changes in data network services revenues is the number
of data networks in use. We compete against Alascom, ACS and other local
telecommunication service providers.





Managed
Services


We
design, sell, install, service and operate, on behalf of certain customers,
communications and computer networking equipment and provide field/depot, third
party, technical support, communications consulting and outsourcing services. We
also supply integrated voice and data communications systems incorporating
interstate and intrastate digital data networks, point-to-point and multipoint
private network and small earth station services. There are a number of
competing companies in Alaska that actively sell and maintain data and voice
communications systems.





Our ability to
integrate communications networks and data communications equipment has allowed
us to maintain our market position based on “value added” support services
rather than price competition. These services are blended with other transport
products into unique customer solutions, including managed services and
outsourcing.





Managed Broadband
Services


We
generate managed broadband services revenue through our SchoolAccess®,
ConnectMD® and
managed video conferencing products. Our customers may purchase end-to-end
broadband services solutions blended with other transport and software products.
There are several competing companies in Alaska that actively sell broadband
services. Our ability to provide end-to-end broadband services solutions has
allowed us to maintain our market position based on “value added” products and
services rather than solely based on price competition.





SchoolAccess® is a
suite of services designed to advance the educational opportunities of students
in underserved regions of the country. Our SchoolAccess® division
provides Internet and distance learning services designed exclusively for the
school environment. The Schools and Libraries Program of the USF makes discounts
available to eligible rural school districts for telecommunication services and
monthly Internet service charges. The program is intended to ensure that rural
school districts have access to affordable services.





Our network,
Internet and software application services provided through our Managed
Broadband segment’s Medical Services Division are branded as ConnectMD®. Our
ConnectMD® services
are currently provided under contract to medical businesses in Alaska,
Washington and Montana. The Rural Health Care Program of the USF makes discounts
available to eligible rural health care providers for telecommunication services
and monthly Internet service charges. The program is intended to ensure that
rural health care providers pay no more for telecommunications in the provision
of health care services than their urban counterparts. Customers utilize
ConnectMD® services
to securely move data, images, or voice traffic, to include real time multipoint
interactive video.





We
offer a managed video conferencing product for use in distance learning,
telemedicine and group communication and collaboration environments. The product
is designed to offer customers enhanced communication services that support
video, audio and data presentation. Our product benefits customers by reducing
travel costs, improving course equity in education and increasing the quality of
health services available to patients. The product bundles our data
products, video conferencing services and optional rental of video conferencing
endpoint equipment. Our video conferencing services include
multipoint conferencing, ISDN gateway and transcoding services, online
scheduling and conference control, and videoconference recording, archiving and
streaming. We provide 24-hour technical support via telephone or
online.





Wireless
Services and Products


We
generate wireless services and equipment revenues from five primary sources: (1)
monthly plan fees; (2) usage and roaming charges; (3) USAC support; (4) wireless
Internet access; and (5) handset and accessory sales.





We
offer wireless services by selling services over our own facilities and,
primarily in 2008, reselling AT&T Mobility's services under the GCI brand
name and by selling services over our own facilities under the Alaska DigiTel
and Alaska Wireless brand names. We compete against AT&T Mobility, ACS, MTA,
and resellers of those services in Anchorage and other markets.  The
GCI and Alaska DigiTel brands compete against each other.





25


In
December 2007 we signed an agreement with AT&T Mobility that provides for an
orderly transition of our wireless customers from the AT&T Mobility network
in Alaska to our wireless facilities. The agreement requires our customers to be
on our wireless network by June 30, 2009, but allows our customers to use the
AT&T Mobility network for roaming during the transition
period.  The four-year transition period, which expires June 30, 2012,
provides us adequate time to replace the AT&T Mobility network in Alaska
with our own wireless facilities. We started transitioning our customers to our
wireless facilities in November 2008.





For a discussion of
the FCC's action on proposals for long term reform of USF support, please see
Part I – Item 2 – Management's Discussion and Analysis of Financial Condition
and Results of Operations – Voice Services and Products – Local
Access.





Results
of Operations





The following table
sets forth selected Statements of Operations data as a percentage of total
revenues for the periods indicated (underlying data rounded to the nearest
thousands):





Percent­age
      Change1Three
      Months Ended
                
                
                2009March
      31,
                
                
                vs.(Unaudited)
                
                2009
                
                
                2008
                
                
                2008Statements
      of Operations Data:Revenues:Consumer
      segment
                
                
                47.6
                %
                
                
                45.6
                %
                
                
                15.2
                %Network
      Access segment
                
                
                22.3
                %
                
                
                29.1
                %
                
                
                (15.3
                %)Commercial
      segment
                
                
                18.8
                %
                
                
                19.7
                %
                
                
                5.3
                %Managed
      Broadband segment
                
                
                7.1
                %
                
                
                5.6
                %
                
                
                41.0
                %Regulated
      Operations segment
                
                
                4.2
                %
                
                
                0.0
                %
                
                NMTotal
      revenues
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                10.4
                %Selling,
      general and administrative expenses
                
                
                38.1
                %
                
                
                34.5
                %
                
                
                21.9
                %Depreciation
      and amortization expense
                
                
                20.7
                %
                
                
                20.2
                %
                
                
                12.8
                %Operating
      income
                
                
                9.1
                %
                
                
                7.2
                %
                
                
                39.1
                %Other
      expense, net
                
                
                8.5
                %
                
                
                6.6
                %
                
                
                43.2
                %Income before
      income taxes
                
                
                0.6
                %
                
                
                0.7
                %
                
                
                (1.6
                %)Net income
      (loss)
                
                
                0.2
                %
                
                
                (0.4
                %)
                
                
                165.6
                %Net income
      attributable to GCI, Inc.
                
                
                0.2
                %
                
                
                0.3
                %
                
                
                (18.8
                %)


________________________________


1Percentage
change in underlying data.





NM
– Not meaningful.


________________________________








Three
Months Ended March 31, 2009 (“2009”) Compared to Three Months Ended March 31,
2008 (“2008”)





Overview
of Revenues and Cost of Goods Sold


Total revenues
increased 10.4% from $134.7 million in 2008 to $148.7 million in
2009.  Revenue increases in our Consumer, Commercial, Managed
Broadband and Regulated Operations segments were partially off-set by decreased
revenue in our Network Access segment.  See the discussion below for
more information by segment.





Total Cost of Goods
Sold decreased 6.7% from $51.3 million in 2008 to $47.9 million in 2009. Cost of
Goods Sold decreases in our Consumer, Commercial and Network Access segments
were partially off-set by




26


increases in our
Managed Broadband and Regulated Operations segments.  See the
discussion below for more information by segment.




Consumer
Segment Overview




Consumer segment
revenue represented 47.6% of 2009 consolidated revenues. The components of
Consumer segment revenue are as follow (amounts in thousands):





Percentage2009
                
                
                2008
                
                
                ChangeVoice
                
                $
                13,915
                
                
                
                11,844
                
                
                
                17.5
                %Video
                
                
                27,370
                
                
                
                25,647
                
                
                
                6.7
                %Data
                
                
                11,762
                
                
                
                10,096
                
                
                
                16.5
                %Wireless
                
                
                17,672
                
                
                
                13,796
                
                
                
                28.1
                %Total
      Consumer segment revenue
                
                $
                70,719
                
                
                
                61,383
                
                
                
                15.2
                %





Consumer segment
Cost of Goods Sold represented 48.9% of 2009 consolidated Cost of Goods Sold.
The components of Consumer segment Cost of Goods Sold are as follows (amounts in
thousands):





2009
                
                
                2008
                
                
                Percentage
                  ChangeVoice
                
                $
                3,717
                
                
                
                5,052
                
                
                
                (26.4
                %)Video
                
                
                11,322
                
                
                
                9,930
                
                
                
                14.0
                %Data
                
                
                1,114
                
                
                
                1,826
                
                
                
                (39.0
                %)Wireless
                
                
                7,250
                
                
                
                7,893
                
                
                
                (8.2
                %)Total
      Consumer segment Cost of Goods Sold
                
                $
                23,403
                
                
                
                24,701
                
                
                
                (5.3
                %)





Consumer segment
adjusted EBITDA, representing 40.4% of 2009 consolidated adjusted EBITDA, is as
follows (amounts in thousands):





Percentage2009
                
                
                2008
                
                
                ChangeConsumer
      segment adjusted EBITDA
                
                $
                18,778
                
                
                
                12,254
                
                
                
                53.2
                %





See note 6 in the
"Notes to Interim Consolidated Financial Statements" included in Part I of this
quarterly report on Form 10-Q for a reconciliation of consolidated adjusted
EBITDA, a non-GAAP financial measure, to consolidated income before income
taxes.





Selected key
performance indicators for our Consumer segment follow:





March
      31,
                  
                  
                  Percentage2009
                  
                  
                  2008
                  
                  
                  ChangeVoice:Long-distance
      subscribers1
                  
                  
                  88,700
                  
                  
                  
                  90,400
                  
                  
                  
                  (1.9
                  %)Long-distance
      minutes carried (in millions)
                  
                  
                  29.6
                  
                  
                  
                  33.7
                  
                  
                  
                  (12.2
                  %)Total local
      access lines in service2
                  
                  
                  81,400
                  
                  
                  
                  76,800
                  
                  
                  
                  6.0
                  %Local access
      lines in service on GCI facilities2
                  
                  
                  69,900
                  
                  
                  
                  55,500
                  
                  
                  
                  26.0
                  %Video:Basic
      subscribers3
                  
                  
                  130,000
                  
                  
                  
                  130,700
                  
                  
                  
                  (0.5
                  %)Digital
      programming tier subscribers4
                  
                  
                  76,100
                  
                  
                  
                  68,100
                  
                  
                  
                  11.8
                  %HD/DVR
      converter boxes5
                  
                  
                  72,100
                  
                  
                  
                  55,400
                  
                  
                  
                  30.1
                  %Homes
      passed
                  
                  
                  229,700
                  
                  
                  
                  225,700
                  
                  
                  
                  1.8
                  %Average
      monthly gross revenue per subscriber6
                  
                  $
                  69.50
                  
                  
                  $
                  66.09
                  
                  
                  
                  5.2
                  %Data:Cable modem
      subscribers7
                  
                  
                  94,300
                  
                  
                  
                  90,900
                  
                  
                  
                  3.7
                  %  27
  Wireless:Wireless
      lines in service8
                  
                  
                  97,100
                  
                  
                  
                  73,000
                  
                  
                  
                  33.0
                  %Average
      monthly gross revenue per subscriber9
                  
                  $
                  58.63
                  
                  
                  $
                  59.25
                  
                  
                  
                  (1.1
                  %)1A
      long-distance customer is defined as a customer account that is invoiced a
      monthly long-distance plan fee or has made a long-distance call during the
      month.
                    2A
      local access line in service is defined as a revenue generating circuit or
      channel connecting a customer to the public switched telephone
      network.
                    3A
      basic cable subscriber is defined as one basic tier of service delivered
      to an address or separate subunits thereof regardless of the number of
      outlets purchased. On January 1, 2009, our Consumer segment transferred
      2,900 basic cable subscribers to our Commercial segment.
                    4A
      digital programming tier subscriber is defined as one digital programming
      tier of service delivered to an address or separate subunits thereof
      regardless of the number of outlets or digital programming tiers
      purchased. Digital programming tier subscribers are a subset of basic
      subscribers.
                    5A
      high definition/digital video recorder (“HD/DVR”) converter box is defined
      as one box rented by a digital programming or basic tier subscriber. A
      digital programming or basic tier subscriber is not required to rent an
      HD/DVR converter box to receive service.
                    6Year-to-date
      average monthly consumer video revenues divided by the average of consumer
      video basic subscribers at the beginning and end of the
      period.
                    7A
      cable modem subscriber is defined by the purchase of cable modem service
      regardless of the level of service purchased. If one entity purchases
      multiple cable modem service access points, each access point is counted
      as a subscriber. Cable modem subscribers may also be video basic
      subscribers though basic cable service is not required to receive cable
      modem service. On January 1, 2009, our Consumer segment transferred 1,400
      cable modem subscribers to our Commercial segment.
                    8A
      wireless line in service is defined as a revenue generating wireless
      device.
                    9Year-to-date
      average monthly consumer wireless revenues divided by the average of
      consumer wireless subscribers at the beginning and end of the
      period.


Consumer
Segment Revenues


The increase in
voice revenue is primarily due to a $2.0 million or 165% increase in recognized
support from the USAC primarily due to increased local subscribers and the FCC
order issued in March 2009, the result of which provides uncapped support for
all lines served by competitive ETCs for tribal lands or Alaska Native regions
retroactive to August 2008.  The issuance of this order allowed us to
recognize $674,000 in additional USAC support from August 2008 to December 2008
in 2009.  The increase was partially offset by decreased long-distance
billable minutes carried and long-distance subscribers.





The increase in
video revenue is primarily due to the following:





·
            A 5.0%
      increase in programming services revenue to $21.7 million in 2009
      primarily resulting from an increase in digital programming tier
      subscribers in 2009, and


·
            A 16.0%
      increase in equipment rental revenue to $5.3 million in 2009 primarily
      resulting from our customers’ increased use of our HD/DVR converter
      boxes.





The increase in
data revenue is primarily due to a 17.6% increase in cable modem revenue to
$10.1 million due to increased subscribers and their selection of more
value-added features.





The increase in
wireless revenue is primarily due to an increase in the number of wireless
subscribers and a $1.7 million or 37.5% increase in recognized support from the
USAC primarily due to increased wireless subscribers and the FCC order issued in
March 2009, the result of which provides uncapped support for all lines served
by competitive ETCs for tribal lands or Alaska Native regions retroactive to
August 2008.  The issuance of this order allowed us to recognize
$810,000 in additional USAC support from August 2008 to December 2008 in
2009.





28


Consumer
Segment Cost of Goods Sold


The decrease in
voice Cost of Goods Sold is primarily due to cost savings resulting from the
increased deployment of local access services DLPS lines on our own facilities
during 2008 and decreased voice minutes carried.





The video Cost of
Goods Sold increase is primarily due to increased channels offered to our
subscribers, increased rates paid to programmers, increased costs associated
with delivery of digital services offered over our HD/DVR converter boxes due to
the increased number of boxes in service, and increased
subscribers.





The decrease in
data Cost of Goods Sold is primarily due to the transition of traffic to our own
facilities from leased facilities.





The decrease in
wireless Cost of Goods Sold is primarily due to decreased costs due to the June
4, 2008 implementation of the new distribution agreement with AT&T Mobility
as described in "Part I – Item II – Management's Discussion and Analysis of
Financial Condition and Results of Operations – Voice Services and Products –
Long Distance."  The decrease was partially off-set by costs
associated with the increased number of wireless subscribers.





Consumer
Segment Adjusted EBITDA


The increase in
adjusted EBITDA is primarily due to increased margin resulting from increased
revenue and decreased Cost of Goods Sold as described above in "Consumer Segment
Revenues" and “Consumer Segment Cost of Goods Sold,”
respectively.  The increased margin was partially offset by an
increase in the selling, general and administrative expense that was allocated
to our Consumer segment primarily due to an increase in the 2008 segment margin
upon which the allocation is based.





Network
Access Segment Overview


Network access
segment revenue represented 22.3% of 2009 consolidated revenues. The components
of Network Access segment revenue are as follows (amounts in
thousands):





Percentage2009
                
                
                2008
                
                
                ChangeVoice
                
                $
                14,334
                
                
                
                21,942
                
                
                
                (34.7
                %)Data
                
                
                17,954
                
                
                
                16,839
                
                
                
                6.6
                %Wireless
                
                
                911
                
                
                
                393
                
                
                
                131.8
                %Total Network
      Access segment revenue
                
                $
                33,199
                
                
                
                39,174
                
                
                
                (15.3
                %)





Network Access
segment Cost of Goods Sold represented 14.0% of 2009 consolidated Cost of Goods
Sold. The components of Network Access segment Cost of Goods Sold are as follows
(amounts in thousands):





Percentage2009
                
                
                2008
                
                
                ChangeVoice
                
                $
                4,077
                
                
                
                7,308
                
                
                
                (44.2
                %)Data
                
                
                2,486
                
                
                
                2,726
                
                
                
                (8.8
                %)Wireless
                
                
                121
                
                
                
                221
                
                
                
                (45.3
                %)Total Network
      Access segment Cost of Goods Sold
                
                $
                6,684
                
                
                
                10,255
                
                
                
                (34.8
                %)





Network Access
segment adjusted EBITDA, representing 36.4% of 2008 consolidated adjusted
EBITDA, is as follows (amounts in thousands):





Percentage2009
                
                
                2008
                
                
                ChangeNetwork
      Access segment adjusted EBITDA
                
                $
                16,919
                
                
                
                20,137
                
                
                
                (16.0
                %)





See note 6 in the
"Notes to Interim Consolidated Financial Statements" included in Part I of this
quarterly report on Form 10-Q for a reconciliation of consolidated adjusted
EBITDA, a non-GAAP financial measure, to consolidated income before income
taxes.





29


Selected key
performance indicators for our Network Access segment follow:





March
      31,
                  
                  
                  Percentage2009
                  
                  
                  2008
                  
                  
                  ChangeVoice:Long-distance
      minutes carried (in millions)
                  
                  
                  200.4
                  
                  
                  
                  314.6
                  
                  
                  
                  (36.3
                  %)Data:Total
      Internet service provider access lines in service1
                  
                  
                  1,700
                  
                  
                  
                  2,600
                  
                  
                  
                  (34.6
                  %)1An
      Internet service provider access line in service is defined as a revenue
      generating circuit or channel connecting a customer to the public switched
      telephone network.





Network
Access Segment Revenues


The decrease in
voice revenue is primarily due to the June 4, 2008 implementation of the new
distribution agreement with AT&T Mobility as described in "Part I – Item II
– Management's Discussion and Analysis of Financial Condition and Results of
Operations – Voice Services and Products – Long Distance."  The voice
revenue decrease also resulted from a decrease in our average rate per minute on
billable minutes carried for our common carrier customers and the transition of
voice traffic to dedicated networks.  The average rate per minute
decrease is primarily due to a change in the composition of traffic and a 3.0%
rate decrease mandated by federal law.





The increase in
data revenue is primarily due to an increase in circuits sold and other common
carriers moving switched voice services to data networks.





Network
Access Segment Cost of Goods Sold


The decrease in
voice Cost of Goods Sold is primarily due to decreased long-distance minutes
carried.





Network
Access Segment Adjusted EBITDA


The adjusted EBITDA
decrease is primarily due to decreased margin resulting from decreased revenue
as described above in "Network Access Segment Revenues" and a decrease in the
selling, general and administrative expense that was allocated to our Network
Access segment primarily due to a decrease in the 2008 segment margin upon which
the allocation is based.  The adjusted EBITDA decrease is partially
off-set by decreased Cost of Goods Sold as described above in “Network Access
Segment Cost of Goods Sold.”





Commercial
Segment Overview


Commercial segment
revenue represented 18.8% of 2009 consolidated revenues. Commercial segment data
revenue is comprised of monthly recurring charges for data services and charges
billed on a time and materials basis largely for personnel providing on-site
customer support.  This latter category can vary significantly based
on project activity.  The components of Commercial segment revenue are
as follows (amounts in thousands):





Percentage2009
                
                
                2008
                
                
                ChangeVoice
                
                $
                7,984
                
                
                
                7,214
                
                
                
                10.7
                %Video
                
                
                2,050
                
                
                
                1,820
                
                
                
                12.6
                %Data
                
                
                16,515
                
                
                
                16,209
                
                
                
                1.9
                %Wireless
                
                
                1,443
                
                
                
                1,348
                
                
                
                7.1
                %Total
      Commercial segment revenue
                
                $
                27,992
                
                
                
                26,591
                
                
                
                5.3
                %





30


Commercial segment
Cost of Goods Sold represented 27.9% of 2009 consolidated Cost of Goods Sold.
The components of Commercial segment Cost of Goods Sold are as follows (amounts
in thousands):





2009
                
                
                2008
                
                
                Percentage
                  ChangeVoice
                
                $
                4,569
                
                
                
                4,929
                
                
                
                (7.3
                %)Video
                
                
                497
                
                
                
                388
                
                
                
                28.1
                %Data
                
                
                7,565
                
                
                
                7,580
                
                
                
                (0.2
                %)Wireless
                
                
                724
                
                
                
                1,174
                
                
                
                (38.3
                %)Total
      Commercial segment Cost of Goods Sold
                
                $
                13,355
                
                
                
                14,071
                
                
                
                (5.1
                %)





Commercial segment
adjusted EBITDA, representing 11.4% of 2009 consolidated adjusted EBITDA, is as
follows (amounts in thousands):





Percentage2009
                
                
                2008
                
                
                ChangeCommercial
      segment adjusted EBITDA
                
                $
                5,301
                
                
                
                4,325
                
                
                
                22.6
                %





See note 6 in the
"Notes to Interim Consolidated Financial Statements" included in Part I of this
quarterly report on Form 10-Q for a reconciliation of consolidated adjusted
EBITDA, a non-GAAP financial measure, to consolidated income before income
taxes.





Selected key
      performance indicators for our Commercial segment
  follow:





March
      31,
                  
                  Percentage2009
                  
                  2008
                  
                  ChangeVoice:Long-distance
      subscribers1
                  
                  9,700
                  
                  10,400
                  
                  (6.7%)Total local
      access lines in service2
                  
                  46,900
                  
                  43,500
                  
                  7.8%Local access
      lines in service on GCI facilities2
                  
                  18,000
                  
                  13,400
                  
                  34.3%Long-distance
      minutes carried (in millions)
                  
                  32.2
                  
                  32.8
                  
                  (2.0%)Data:Cable modem
      subscribers3
                  
                  10,200
                  
                  8,800
                  
                  15.9%Wireless:Wireless
      lines in service4
                  
                  8,000
                  
                  7,200
                  
                  11.1%1A
      long-distance customer is defined as a customer account that is invoiced a
      monthly long-distance plan fee or has made a long-distance call during the
      month.
                    2A
      local access line in service is defined as a revenue generating circuit or
      channel connecting a customer to the public switched telephone
      network.
                    3A
      cable modem subscriber is defined by the purchase of cable modem service
      regardless of the level of service purchased. If one entity purchases
      multiple cable modem service access points, each access point is counted
      as a subscriber. On January 1, 2009, our Consumer segment transferred
      1,400 cable modem subscribers to our Commercial segment.
                    4A
      wireless line in service is defined as a revenue generating wireless
      device.





Commercial
Segment Revenues


The increase in
voice revenue is primarily due to increased local access lines in service and a
$614,000 or 228.3% increase in recognized support from the USAC primarily due to
increased local subscribers and the FCC order issued in March 2009, the result
of which provides uncapped support for all lines served by competitive ETCs for
tribal lands or Alaska Native regions retroactive to August 2008.  The
issuance of this order allowed us to recognize $386,000 in additional USAC
support from August 2008 to December 2008 in 2009.  The increase in
voice revenue was partially off-set by decreased long-distance subscribers and
decreased voice minutes carried.





31


Commercial
Segment Adjusted EBITDA


The adjusted EBITDA
increase was primarily due to increased margin resulting from increased revenue
as described above in "Commercial Segment Revenues" and decreased Cost of Goods
Sold as described above in “Commercial Segment Cost of Goods Sold.” The
increased margin was partially offset by an increase in the selling, general and
administrative expense that was allocated to our Commercial segment primarily
due to an increase in the 2008 segment margin upon which the allocation is
based.





Managed
Broadband Segment Overview


Managed Broadband
segment revenue, Cost of Goods sold and adjusted EBITDA represented 7.1%, 5.6%
and 8.4% of 2009 consolidated revenues, Cost of Goods Sold and adjusted EBITDA,
respectively.





Managed
Broadband Segment Revenues


Managed Broadband
segment revenue, which includes data products only, increased 41.0% to $10.6
million in 2009 as compared to 2008. The increase is primarily due to increased
circuits purchased by our Rural Health and SchoolAccess®customers and revenue totaling $2.5 million from our acquisition of
Unicom effective June 1, 2008.





Managed
Broadband Segment Cost of Goods Sold


Managed Broadband
segment Cost of Goods Sold increased 17.7% to $2.7 million primarily due to
costs associated with the increased revenue and $188,000 in additional costs
from our acquisition of Unicom effective June 1, 2008.





Managed
Broadband Segment Adjusted EBITDA


Managed Broadband
segment adjusted EBITDA increased 58.2% to $3.9 million in 2009 primarily due to
an increase in the margin resulting from increased revenue as described above in
"Managed Broadband Segment Revenues."





See note 6 in the
"Notes to Interim Consolidated Financial Statements" included in Part I of this
quarterly report on Form 10-Q for a reconciliation of consolidated adjusted
EBITDA, a non-GAAP financial measure, to consolidated income before income
taxes.





Regulated
Operations Segment Overview


Regulated
Operations segment revenue represented 4.2% of 2009 consolidated revenues, Cost
of Goods Sold represented 3.6% of 2009 consolidated Cost of Goods Sold and
adjusted EBITDA represented 3.3% of 2009 consolidated adjusted EBITDA. The
Regulated Operations segment includes voice, data and wireless
services.





Selected key
performance indicators for our Regulated Operations segment follow:





March
      31,
                      
                      Percentage2009
                      
                      2008
                      
                      ChangeVoice:Long-distance
      subscribers1
                      
                      
                      844
                      
                      NA
                      
                      NALong-distance
      minutes carried (in thousands)
                      
                      
                      332
                      
                      NA
                      
                      NATotal local
      access lines in service (all on GCI facilities)2
                      
                      
                      11,900
                      
                      NA
                      
                      NA1A
      long-distance subscriber is defined as a customer account that is invoiced
      a monthly long-distance plan fee or has made a long-distance call during
      the month.
                        2A
      local access line in service is defined as a revenue generating circuit or
      channel connecting a customer to the public switched telephone
      network.
                        NA – Not
      Applicable





Regulated
Operations Segment Revenues


We
completed our acquisition of UUI effective June 1, 2008.  In
connection with this acquisition, we recognized revenues of $6.2 million from
the acquired operations during 2009.





32


Regulated
Operations Segment Cost of Goods Sold


In
connection with our acquisition of UUI we recognized Cost of Goods Sold of $1.7
million during 2009.





Regulated
Operations Segment Adjusted EBITDA


Regulated
Operations segment adjusted EBITDA was $1.5 million in 2009.





See note 6 in the
"Notes to Interim Consolidated Financial Statements" included in Part I of this
quarterly report on Form 10-Q for a reconciliation of consolidated adjusted
EBITDA, a non-GAAP financial measure, to consolidated income (loss) before
income taxes.





Selling,
General and Administrative Expenses


Selling, general
and administrative expenses increased 21.9% to $56.6 million in 2009 primarily
due to the following:





·
            A $3.6
      million increase in labor costs,


·
            $2.9 million
      in additional expense resulting from our June 1, 2008, acquisition of UUI
      and Unicom,


·
            $748,000 in
      additional expense incurred in 2009 for the conversion of our customers'
      wireless phones to our facilities,
and


·
            A $508,000
      increase in our company-wide success sharing bonus accrual in
      2009.





As
a percentage of total revenues, selling, general and administrative expenses
increased to 38.1% in 2009 from 34.5% in 2008, primarily due to the increases
described above without a proportional increase in revenues.





Depreciation
and Amortization Expense


Depreciation and
amortization expense increased 12.8% to $30.7 million in 2009. The increase is
primarily due to our $322.3 million investment in equipment and facilities
placed into service during 2008 for which a full year of depreciation will be
recorded in 2009 and the $33.5 million investment in equipment and facilities
placed into service during the first quarter of 2009 for which a partial year of
depreciation will be recorded in 2009.





Other
Expense, Net


Other expense, net
of other income, increased 43.2% to $12.6 million in 2009 primarily due to a
$3.7 million increase in interest expense to $12.6 million in 2009 due to the
following:





·
            A $1.4
      million increase in interest expense on our Senior Credit Facility to $4.0
      million resulting from additional debt from the Additional Incremental
      Term Loan agreement beginning in May 2008 and the increased interest rate
      on our Senior Credit Facility beginning in May
  2008,


·
            $1.7 million
      in additional interest expense resulting from the Galaxy 18 capital lease
      commencing in May 2008, and


·
            $366,000 of
      additional interest expense as a result of our acquisition of UUI in June
      2008.





Income
Tax Expense


GCI, Inc., as a
wholly-owned subsidiary and member of the GCI controlled group of corporations,
files its income tax return as part of the consolidated group of corporations
under GCI.  Accordingly, all discussions regarding income taxes
reflect the consolidated group's activity.  Our income tax expense and
deferred income tax assets and liabilities are presented herein using the
separate-entity method.





Income tax expense
totaled $519,000 and $1.4 million in 2009 and 2008, respectively. Our effective
income tax rate decreased from 76.6% in 2008 to 59.5% in 2009 primarily due to a
decrease in the permanent differences as compared to our net income before
income tax expense in 2009 as compared to 2008.





At
March 31, 2009, we have (1) tax net operating loss carryforwards of $171.3
million that will begin expiring in 2011 if not utilized, and (2) alternative
minimum tax credit carryforwards of $3.1 million available to offset regular
income taxes payable in future years.





We
have recorded deferred tax assets of $70.2 million associated with income tax
net operating losses that were generated from 1995 to 2009, and that expire from
2011 to 2029, and with charitable contributions




33


that were converted
to net operating losses in 2004 through 2007, and that expire in 2024 through
2027, respectively.





Tax benefits
associated with recorded deferred tax assets are considered to be more likely
than not realizable through future reversals of existing taxable temporary
differences and future taxable income. The amount of deferred tax asset
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced which would result in
additional income tax expense. We estimate that our effective annual income tax
rate for financial statement purposes will be 60% to 62% in the year ended
December 31, 2009.





Multiple
System Operator Operating Statistics


Our operating
statistics include capital expenditures and customer information from our
Consumer and Commercial segments which offer services utilizing our cable
services’ facilities.





Our capital
expenditures, including non-cash additions, by standard reporting category for
the three months ended March 31, 2009 and 2008 follows (amounts in
thousands):





2009
                
                
                2008Line
      extensions
                
                $
                1,166
                
                
                
                10,320Customer
      premise equipment
                
                
                4,453
                
                
                
                6,043Scalable
      infrastructure
                
                
                113
                
                
                
                1,209Upgrade/rebuild
                
                
                274
                
                
                
                356Commercial
                
                
                1,207
                
                
                
                232Support
      capital
                
                
                133
                
                
                
                30Sub-total
                
                
                7,346
                
                
                
                18,190Remaining
      reportable segments capital expenditures
                
                
                17,007
                
                
                
                34,862$
                24,353
                
                
                
                53,052





The standardized
definition of a customer relationship is the number of customers that receive at
least one level of service utilizing our cable service facilities, encompassing
voice, video, and data services, without regard to which services customers
purchase. At March 31, 2009 and 2008 we had 132,400 and 129,400 customer
relationships, respectively.





The standardized
definition of a revenue generating unit is the sum of all primary analog video,
digital video, high-speed data, and telephony customers, not counting additional
outlets. At March 31, 2009 and 2008 we had 330,400 and 306,900 revenue generating
units, respectively.





Liquidity
and Capital Resources





Our principal
sources of current liquidity are cash and cash equivalents. We believe, but can
provide no assurances, that we will be able to meet our current and long-term
liquidity and capital requirements and fixed charges through our cash flows from
operating activities, existing cash, cash equivalents, credit facilities, and
other external financing and equity sources. Should operating cash flows be
insufficient to support additional borrowings and principal payments scheduled
under our existing credit facilities, capital expenditures will likely be
reduced.





Global capital and
credit markets have recently experienced increased volatility and disruption.
Despite this volatility and disruption, we continue to have full access to our
Senior Credit Facility.  Although there can be no assurances in these
difficult economic times that financial institutions will continue to provide
financing, we believe that the lenders participating in our credit facilities
will be willing and able to provide financing to us in accordance with their
legal obligations under our credit facilities. While our short-term and
long-term financing abilities are believed to be adequate as a supplement to
internally generated cash flows to fund capital expenditures and acquisitions as
opportunities arise, the current decline in the global financial markets may
negatively impact our ability to access the capital markets in a timely manner
and on attractive terms, which may have a negative impact on our ability to grow
our business.





34


We
monitor the third-party depository institutions that hold our cash and cash
equivalents on a daily basis. Our emphasis is primarily on safety of principal
and secondarily on maximizing yield on those funds.





Our net cash flows
provided by and (used for) operating, investing and financing activities, as
reflected in the Consolidated Statement of Cash Flows for the three months ended
March 31, 2009 and 2008, are summarized as follows:





2009
                
                
                2008Operating
      activities
                
                $
                32,002
                
                
                
                35,524Investing
      activities
                
                
                (32,994
                )
                
                
                (50,830
                )Financing
      activities
                
                
                (3,402
                )
                
                
                19,397Net increase
      (decrease) in cash and cash equivalents
                
                $
                (4,394
                )
                
                
                4,091





Operating
Activities


The decrease in
cash flows provided by operating activities is due primarily to cash paid to
reduce accounts payable and accrued payroll liabilities that was partially
offset by an increase in depreciation and amortization expense for 2009 compared
to 2008.





Investing
Activities


The decrease in
cash flows used for investing activities is due primarily to a decrease in
spending for property and equipment, including construction in progress in
2009.





Capital
Expenditures


Our expenditures
for property and equipment, including construction in progress, totaled $24.4
million and $53.1 million during the three months ended March 31, 2009 and 2008,
respectively. The 2009 expenditures do not include $8.2 million for additions of
property and equipment that had been accrued in prior periods and paid for
during the three months ended March 31, 2009.  The 2008 expenditures
include non-cash additions of $3.4 million for property and equipment that are
accrued in accounts payable as of March 31, 2008.  Our capital
expenditures requirements in excess of approximately $25.0 million per year are
largely success driven and are a result of the progress we are making in the
marketplace. We expect our 2009 expenditures for property and equipment for our
core operations, including construction in progress to total $115.0 million to
$120.0 million, depending on available opportunities and the amount of cash flow
we generate during 2009.





Financing
Activities


The decrease in
cash flows provided by financing activities is due primarily to the absence of
any borrowing in 2009 on our Senior Credit Facility.





Senior Notes and Senior
Credit Facility


At
March 31, 2009, we were in compliance with all our Senior Notes and Senior
Credit Facility loan covenants.





Working
Capital


Working capital
totaled $49.1 million at March 31, 2009, a $6.4 million increase as compared to
$42.7 million at December 31, 2008.





The long-distance,
local access, cable, Internet and wireless services industries continue to
experience substantial competition, regulatory uncertainty, and continuing
technological changes.  Our future results of operations will be
affected by our ability to react to changes in the competitive and regulatory
environment and by our ability to fund and implement new or enhanced
technologies.  We are unable to determine how competition, economic
conditions, and regulatory and technological changes will affect our ability to
obtain additional financing under acceptable terms and conditions.  A
complete discussion of our liquidity and capital resources can be found in Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our December 31, 2008 annual report on Form 10-K.





35


Critical
Accounting Policies





Our accounting and
reporting policies comply with US GAAP. The preparation of financial statements
in conformity with US GAAP requires management to make estimates and
assumptions. The financial position and results of operations can be affected by
these estimates and assumptions, which are integral to understanding reported
results. Critical accounting policies are those policies that management
believes are the most important to the portrayal of our financial condition and
results, and require management to make estimates that are difficult, subjective
or complex. Most accounting policies are not considered by management to be
critical accounting policies. Several factors are considered in determining
whether or not a policy is critical in the preparation of financial statements.
These factors include, among other things, whether the estimates are significant
to the financial statements, the nature of the estimates, the ability to readily
validate the estimates with other information including third parties or
available prices, and sensitivity of the estimates to changes in economic
conditions and whether alternative accounting methods may be utilized under
GAAP. For all of these policies, management cautions that future events rarely
develop exactly as forecast, and the best estimates routinely require
adjustment. Management has discussed the development and the selection of
critical accounting policies with GCI's Audit Committee.





Those policies
considered to be critical accounting policies for the three months ended March
31, 2009 are the allowance for doubtful accounts, impairment and useful lives of
intangible assets, accruals for unbilled costs, and the valuation allowance for
net operating loss deferred tax assets.  A complete discussion of our
critical accounting policies can be found in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our December 31,
2008 annual report on Form 10-K.





Other significant
accounting policies, not involving the same level of measurement uncertainties
as those discussed above, are nevertheless important to an understanding of the
financial statements. Policies related to revenue recognition, share-based
expense, and financial instruments require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance.
Certain of these and other matters are among topics currently under
reexamination by accounting standards setters and regulators. No specific
conclusions reached by these standard setters appear likely to cause a material
change in our accounting policies, although outcomes cannot be predicted with
confidence. A complete discussion of our significant accounting policies can be
found in note 1 included in Part II of our December 31, 2008 annual report on
Form 10-K.





Item
3. Quantitative and Qualitative Disclosures About Market Risk





We
are exposed to various types of market risk in the normal course of business,
including the impact of interest rate changes. We do not hold derivatives for
trading purposes.





Our Senior Credit
Facility carries interest rate risk. Amounts borrowed under this Agreement bear
interest at LIBOR plus 4.25% or less depending upon our Total Leverage Ratio (as
defined). Should the LIBOR rate change, our interest expense will increase or
decrease accordingly. In July 2008, we entered into an interest rate cap
agreement with a two year term to limit the LIBOR rate on $180.0 million of
variable interest rate debt to 4.5%.  The agreement is being accounted
for as a derivative under SFAS 133 "Accounting for Derivative Instruments and
Hedging Activities."  As of March 31, 2009, we have borrowed $359.3
million subject to interest rate risk. On this amount, each 1% increase in the
LIBOR interest rate would result in $3.6 million of additional gross interest
cost on an annualized basis.





Item
4. Controls and Procedures





(a)
Evaluation of Disclosure Controls and Procedures





As
of the end of the period covered by this Quarterly Report on Form 10-Q, we
carried out an evaluation of the effectiveness of the design and operation of
our “disclosure controls and procedures” (as defined below) under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer.  Based on that
evaluation and as described below under “Changes in Internal Control over
Financial Reporting” (Item 4(b)), we identified material weaknesses in our
"internal control over financial reporting" (as defined in Item 4(b)
below).  Because of these material weaknesses, which are in the
process of being remediated as described below under “Changes in Internal
Control over Financial Reporting” (Item 4(b)), our management, including our
Chief Executive Officer and our Chief Financial Officer,




36


concluded that our
disclosure controls and procedures were not effective as of March 31, 2009,
which is the end of the period covered by this report.





Our "disclosure
controls and procedures" are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms.  Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under the
Exchange Act is accumulated and communicated to management to allow timely
decisions regarding required disclosure.





The certifications
attached as Exhibits 31 and 32 to this report should be read in conjunction with
the disclosures set forth herein.





(b)
Changes in Internal Control over Financial Reporting





Our entity-level
control related to the selection and application of accounting policies in
accordance with GAAP was not designed to include policies and procedures to
periodically review our accounting policies to ensure ongoing GAAP compliance.
This led to ineffective procedures for recording depreciation expense which
caused material errors in interim financial reporting which were corrected
through the restatement of our 2007 interim financial
information.  Although we began to remediate this material weakness in
June 2008, by expanding our accounting policy documentation we have not had
sufficient time to fully implement the control changes necessary to ensure that
a misstatement of interim or annual financial reporting does not occur. We
continued to work towards remediation of this deficiency during the first
quarter of 2009 and will continue to remediate this deficiency during the
remainder of 2009 by implementing policies and procedures to periodically review
our accounting policies to ensure ongoing GAAP compliance.





The internal
control over financial reporting at Alaska DigiTel did not include i) activities
adequate to timely identify changes in financial reporting risks, ii) activities
adequate to monitor the continued effectiveness of controls, and iii) staff with
adequate technical expertise to ensure that policies and procedures necessary
for reliable interim and annual financial statements were selected and applied.
Prior to August 18, 2008, our control over the operations of Alaska DigiTel was
limited as required by the FCC upon their approval of our initial acquisition
completed in January 2007. These control deficiencies in our Alaska DigiTel
business represented material weaknesses in our internal control over financial
reporting and led to the failure to timely identify and respond to triggering
events which necessitated a change in useful life of depreciable assets to
ensure reporting in accordance with GAAP. These material weaknesses led to
errors in our interim financial reporting which were corrected through the
restatement of our interim financial information for the March 31 and June 30,
2008 quarterly periods. We made progress towards remediation with the
acquisition of the Alaska DigiTel minority interest on August 18, 2008, which
gave us 100% ownership and control over this subsidiary.  During the
fourth quarter of 2008 we made progress towards integrating Alaska DigiTel into
our financial reporting process by replacing the accounting management with GCI
accounting management.  During the first quarter of 2009 we integrated
Alaska DigiTel’s general ledger into our general ledger system.  We
will continue to integrate Alaska DigiTel’s accounting processes into our
internal control over financial reporting during the remainder of
2009.  Additionally, Alaska DigiTel will become subject to the
improvements we anticipate due to the fourth quarter of 2008 expansion of our
accounting policy documentation and the 2009 implementation of a procedure to
periodically review our accounting policies to ensure ongoing GAAP
compliance.  Although we have taken the steps noted above to remediate
this material weakness, we have not had sufficient time to fully implement the
control changes necessary to ensure that a misstatement of interim or annual
financial reporting does not occur.





Except as described
above, there were no changes in our internal control over financial reporting
during the quarter ended March 31, 2009, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





A
company's "internal control over financial reporting" is a process designed by,
or under the supervision of, a company's principal executive and principal
financial officers, and effected by a company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with




37


generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Internal control
over financial reporting has inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human
failures. Internal control over financial reporting also can be circumvented by
collusion or improper management override. Because of such limitations, there is
a risk that material misstatements will not be prevented or detected on a timely
basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it
is possible to design into the process safeguards to reduce, though not
eliminate, this risk.





We
may enhance, modify, and supplement internal controls and disclosure controls
and procedures based on experience.





PART
II – OTHER INFORMATION


Item
1. Legal Proceedings





Except as set forth
in this item, neither the Company, its property nor any of its subsidiaries or
their property is a party to or subject to any material pending legal
proceedings. We are parties to various claims and pending litigation as part of
the normal course of business. We are also involved in several administrative
proceedings and filings with the FCC and state regulatory authorities. In the
opinion of management, the nature and disposition of these matters are
considered routine and arising in the ordinary course of business. In addition,
the FCC's Office of Inspector General has initiated an investigation of our
compliance with program rules and requirements under certain USF
programs.  The request covers the period beginning January 1, 2004
through August 31, 2008, and relates to amounts received by Alaska DigiTel and
its affiliates during that period.  This request has not had a
material impact on our statement of operations, financial position or cash flows
but given the preliminary nature of this request we are unable to assess the
ultimate resolution of this matter.





Item
6. Exhibits





Exhibit
      No.
            Description31.1
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 by our President and
    Director31.2
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002 by our Senior Vice President, Chief
      Financial Officer, Secretary and Treasurer32.1
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 by our President and
    Director32.2
            Certification
      Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002 by our Senior Vice President, Chief
      Financial Officer, Secretary and
Treasurer





38





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.








Signature
            
            Title
            
            Date/s/
      Ronald A. Duncan
            
            President and
      Director
            
            May
      12, 2009Ronald A.
      Duncan
            
            (Principal
      Executive Officer)/s/ G.
      Wilson Hughes
            
            Vice
      President and Director
            
            May
      12, 2009G. Wilson
      Hughes/s/
      John M. Lowber
            
            Secretary,
      Treasurer and Director
            
            May
      12, 2009John M.
      Lowber
            
            (Principal
      Financial and Accounting Officer)







39