UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
 
 (Mark
One)
 
 x QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF
THE
 SECURITIES
      EXCHANGE ACT OF 1934
  For the quarterly
period ended June 30, 2008
  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 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 JUNE 30, 2008
 
 TABLE
OF CONTENTS
 
 Page No.Cautionary
      Statement Regarding Forward-Looking Statements
              3Part
      I.  FINANCIAL INFORMATIONItem
      I.
              Financial
      StatementsConsolidated
      Balance Sheets as of June 30, 2008 (unaudited)and
      December 31, 2007
              
              
              4Consolidated
      Income Statement for the three and six months endedJune
      30, 2008 (unaudited) and 2007 (as restated, unaudited)
              
              
              6Consolidated
      Statements of Cash Flows for the six monthsended
      June 30, 2008 (unaudited) and 2007 (as restated,
unaudited)
              
              
              7Notes to
      Interim Consolidated Financial Statements (unaudited)
              
              
              8Item
      2.
              Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
              
              
              24Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              
              49Item
      4.
              Controls and
      Procedures
              
              
              49Part
      II.  OTHER INFORMATIONItem
      1A.
              Risk
      Factors
              
              
              51Item
      6.
              Exhibits
              
              
              51Other items
      are omitted, as they are not applicable.SIGNATURES
              
              
              52
 
 
  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,
2007 annual report on Form 10-K/A (Amendment No. 2) and in this Quarterly
Report.  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)June
      30,
              
              
              December
      31,ASSETS
              
              2008
              
              
              2007Current
      assets:Cash and cash
      equivalents
              
              $
              95,703
              
              
              
              13,074Receivables
              
              
              107,502
              
              
              
              97,913Less
      allowance for doubtful receivables
              
              
              1,864
              
              
              
              1,657Net
      receivables
              
              
              105,638
              
              
              
              96,256Deferred
      income taxes
              
              
              6,448
              
              
              
              5,734Prepaid
      expenses
              
              
              6,246
              
              
              
              5,356Inventories
              
              
              5,390
              
              
              
              2,541Investment
      securities
              
              
              5,230
              
              
              
              ---Other current
      assets
              
              
              558
              
              
              
              717Total current
      assets
              
              
              225,213
              
              
              
              123,678Property and
      equipment in service, net of depreciation
              
              
              692,561
              
              
              
              504,273Construction
      in progress
              
              
              115,809
              
              
              
              69,409Net property
      and equipment
              
              
              808,370
              
              
              
              573,682Cable
      certificates
              
              
              191,565
              
              
              
              191,565Goodwill
              
              
              48,211
              
              
              
              42,181Wireless
      licenses
              
              
              25,907
              
              
              
              25,757Other
      intangible assets, net of amortization
              
              
              18,080
              
              
              
              11,769Deferred loan
      and senior notes costs, net of amortization
              
              
              6,726
              
              
              
              6,202Other
      assets
              
              
              10,685
              
              
              
              9,399Total other
      assets
              
              
              301,174
              
              
              
              286,873Total
      assets
              
              $
              1,334,757
              
              
              
              984,233
 
 See accompanying
notes to interim consolidated financial statements.
 
  (Continued)
 4
  GCI,
INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (Continued)
 
 (Amounts in
      thousands)
              
              (Unaudited)June
      30,
              
              
              December
      31,LIABILITIES,
      MINORITY INTEREST, AND STOCKHOLDER'S EQUITY
              
              2008
              
              
              2007Current
      liabilities:Current
      maturities of obligations under long-term debt and capital
      leases
              
              $
              13,830
              
              
              
              2,375Accounts
      payable
              
              
              46,094
              
              
              
              35,747Deferred
      revenue
              
              
              20,886
              
              
              
              16,600Accrued
      payroll and payroll related obligations
              
              
              17,401
              
              
              
              16,329Accrued
      interest
              
              
              9,322
              
              
              
              8,927Accrued
      liabilities
              
              
              9,219
              
              
              
              7,536Subscriber
      deposits
              
              
              1,020
              
              
              
              877Total current
      liabilities
              
              
              117,772
              
              
              
              88,391Long-term
      debt
              
              
              702,952
              
              
              
              536,115Obligations
      under capital leases, excluding current maturities
              
              
              96,254
              
              
              
              2,290Obligation
      under capital lease due to related party, excluding current
      maturity
              
              
              1,864
              
              
              
              469Deferred
      income taxes
              
              
              89,315
              
              
              
              84,294Long-term
      deferred revenue
              
              
              37,738
              
              
              
              845Other
      liabilities
              
              
              19,766
              
              
              
              12,396Total
      liabilities
              
              
              1,065,661
              
              
              
              724,800Minority
      interest
              
              
              6,502
              
              
              
              6,478Commitments
      and contingenciesStockholder's
      equity:Class A
      common stock (no par). Authorized 10 shares; issued and outstanding 0.1
      shares at June 30, 2008 and December 31, 2007
              
              
              206,622
              
              
              
              206,622Paid-in
      capital
              
              
              41,456
              
              
              
              37,804Retained
      earnings
              
              
              14,516
              
              
              
              8,529Total
      stockholder's equity
              
              
              262,594
              
              
              
              252,955Total
      liabilities, minority interest, and stockholder's equity
              
              $
              1,334,757
              
              
              
              984,233
  
 See
      accompanying notes to interim consolidated financial
      statements.
  5
  GCI,
INC. AND SUBSIDIARIES
 CONSOLIDATED
INCOME STATEMENT
 (Unaudited)
 
 Three Months
      Ended
              
              
              Six Months
      EndedJune
      30,
              
              
              June
      30,(Amounts in
      thousands)
              
              2008
              
              
              (as restated)
                2007
              
              
              2008
              
              
              (as restated)
                2007Revenues
              
              $
              142,461
              
              
              
              129,890
              
              
              
              277,135
              
              
              
              254,921Cost of goods
      sold (exclusive of depreciation and amortization shown separately
      below)
              
              
              52,448
              
              
              
              45,579
              
              
              
              103,759
              
              
              
              93,569Selling,
      general and administrative expenses
              
              
              48,260
              
              
              
              43,430
              
              
              
              94,666
              
              
              
              87,035Depreciation
      and amortization expense
              
              
              23,707
              
              
              
              21,437
              
              
              
              46,489
              
              
              
              42,303Operating
      income
              
              
              18,046
              
              
              
              19,444
              
              
              
              32,221
              
              
              
              32,014Other income
      (expense):Interest
      expense
              
              
              (10,899
              )
              
              
              (8,557
              )
              
              
              (19,584
              )
              
              
              (16,875
              )Loan and
      senior note fees
              
              
              (879
              )
              
              
              (216
              )
              
              
              (1,102
              )
              
              
              (396
              )Interest
      income
              
              
              402
              
              
              
              161
              
              
              
              483
              
              
              
              345Minority
      interest
              
              
              26
              
              
              
              (24
              )
              
              
              (24
              )
              
              
              (11
              )Other
      expense, net
              
              
              (11,350
              )
              
              
              (8,636
              )
              
              
              (20,227
              )
              
              
              (16,937
              )Income before
      income tax expense
              
              
              6,696
              
              
              
              10,808
              
              
              
              11,994
              
              
              
              15,077Income tax
      expense
              
              
              3,191
              
              
              
              4,890
              
              
              
              5,960
              
              
              
              6,853Net
      income
              
              $
              3,505
              
              
              
              5,918
              
              
              
              6,034
              
              
              
              8,224
 
 See accompanying
notes to interim consolidated financial statements.
  6
  GCI,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 SIX
MONTHS ENDED JUNE 30, 2008 AND 2007
 (Unaudited)
 
 (Amounts in
      thousands)
              
              
              2008
              
              (as
      restated)
                2007Cash flows
      from operating activities:Net
      income
              
              $
              6,034
              
              8,224Adjustments
      to reconcile net income to net cash provided  by operating
      activities (net of effects of acquisition):Depreciation
      and amortization expense
              
              
              46,489
              
              42,303Deferred
      income tax expense
              
              
              5,220
              
              6,663Share-based
      compensation expense
              
              
              2,853
              
              1,748Other noncash
      income and expense items
              
              
              4,088
              
              3,312Change in
      operating assets and liabilities, net of effect of
    acquisition
              
              
              44,773
              
              (6,727
              )Net cash
      provided by operating activities
              
              
              109,457
              
              55,523Cash flows
      from investing activities:Purchases of
      property and equipment
              
              
              (113,491
              )
              (68,455
              )Purchase of
      business, net of cash received
              
              
              (40,161
              )
              (19,530
              )Purchases of
      other assets and intangible assets
              
              
              (2,324
              )
              (4,733
              )Other
              
              
              ---
              
              25Net cash used
      in investing activities
              
              
              (155,976
              )
              (92,693
              )Cash flows
      from financing activities:Borrowing on
      Senior Credit Facility
              
              
              132,100
              
              15,000Repayment of
      debt and capital lease obligations
              
              
              (1,999
              )
              (26,126
              )Payment of
      debt issuance costs
              
              
              (1,626
              )
              ---Issuance of
      long-term debt
              
              
              614
              
              ---Net
      contribution from (distribution to) General Communication,
      Inc.
              
              
              59
              
              (1,013
              )Other
              
              
              ---
              
              (1
              )Net cash
      provided by (used in) financing activities
              
              
              129,148
              
              (12,140
              )Net increase
      (decrease) in cash and cash equivalents
              
              
              82,629
              
              (49,310
              )Cash and cash
      equivalents at beginning of period
              
              
              13,074
              
              57,647Cash and cash
      equivalents at end of period
              
              $
              95,703
              
              8,337
 
 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, 2007, filed with the SEC on June 12, 2008 as part of our
annual report on Form 10-K (Amendment No. 2). 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 with on-going expansion into additional
      Alaska communities,
 ·
              Incumbent
      local access services in rural
Alaska,
 ·
              Long-distance
      telephone service between Alaska and the remaining United States and
      foreign countries,
 ·
              Resale and
      sale of postpaid and sale of 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 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, sales
      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 are 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.”  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 profit generated between regulated and non-regulated affiliates of
the company not be eliminated on consolidation.  Intercompany profit
on transactions with affiliates not subject to SFAS 71 has been
eliminated.
  (Continued)
 8
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  (c)
              United Utilities, Inc.
      and Unicom, Inc. Acquisition
 Effective June 1,
2008, we closed on our purchase of 100% of the outstanding stock of the United
Utilities, Inc. ("UUI") and Unicom, Inc. ("Unicom"), which were subsidiaries of
United Companies, Inc. ("UCI").  UUI, together with its subsidiary,
United-KUC, Inc. ("United-KUC"), provides local telephone service to 60 rural
communities across Alaska.  Unicom operates DeltaNet, a long-haul
broadband microwave network ringing the Yukon-Kuskokwim Delta.  We
view this investment as an opportunity to expand our Managed Broadband services
in rural Alaska.  We recorded our investment in UUI and Unicom in
accordance with SFAS No. 141, "Business Combinations" and their results of
operations for the month of June 2008 are included in the Consolidated Income
Statement for the three and six months ended June 30, 2008.  This
transaction was a stock purchase but we elected to treat it as an asset purchase
for income tax purposes.  As a result, goodwill has been recorded for
tax purposes and will be amortized over 15 years.
 
 The aggregate
purchase price for UUI and Unicom is $40.2 million paid in cash, net of cash
received.  Additionally, we have agreed to make additional payments in
each of the years 2008 through 2012 that are contingent on sequential
year-over-year revenue growth for specified customers.  We are unable
to reasonably estimate the amount of the contingent consideration that may be
paid, but do not believe any amount paid will be significant.
 
 We
are in the process of determining the value of the tangible and intangible
assets, long-term debt, leases, contracts with customers, as well as other
assets and liabilities; therefore, the purchase price allocation for our
acquisition has not been finalized at June 30, 2008 and all assets acquired and
liabilities assumed are subject to refinement.  The UUI and Unicom
purchase price has been preliminarily allocated as follows (amounts in
thousands):
 
 At June 30,
      2008Current
      assets
              
              $
              14,460Property and
      equipment, including construction in progress
              
              
              68,149Intangible
      assets
              
              
              6,549Goodwill
              
              
              6,030Other
      assets
              
              
              2,411Total assets
      acquired
              
              
              97,599Current
      liabilities
              
              
              4,452Long-term
      debt, including current portion
              
              
              42,704Other
      long-term liabilities
              
              
              8,188Total
      liabilities assumed
              
              
              55,344Net assets
      acquired
              
              $
              42,255
 
 The total assets of
UUI and Unicom were $98.0 million at June 30, 2008.  UUI and Unicom's
revenues, net of intercompany revenue, for the month ended June 30, 2008 were
$2.6 million and are primarily allocated as follows: $1.9 million to our
Regulated Operations segment, $440,000 to our Managed Broadband segment, and
$307,000 to our Network Access segment.  UUI and Unicom had
outstanding debt of $42.9 million at June 30, 2008 that is collateralized by
substantially all of UUI's and Unicom's assets.  UUI and Unicom's
creditors do not have recourse to our assets.
 
 As
a result of the acquisition, we have a new operating segment for our regulated
activities.  Additionally, the financial results of the long-distance
services sold to other common carrier customers and the managed broadband
services of UUI and Unicom have been included in the Network Access and Managed
Broadband services segments, respectively.
  (Continued)
 9
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  Assuming we had
acquired UUI and Unicom on January 1, 2008 and 2007, our revenues and income
before taxes for the three and six months ended June 30, 2008 and 2007 would
have been as follows (amounts in thousands):
 
 Three Months
      Ended June 30,
              
              
              Six Months
      Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Pro forma
      consolidated revenue
              
              $
              146,824
              
              
              
              136,223
              
              
              
              288,185
              
              
              
              267,764Pro forma net
      income
              
              $
              3,707
              
              
              
              6,138
              
              
              
              6,507
              
              
              
              8,713
 
 (d)
              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.  Based upon the preliminary purchase
      price allocation described in note 1(c), the effects of regulation for the
      three and six months ended June 30, 2008 are not material to the
      consolidated financial statements.
 
 (e)
              Revenue
      Recognition
 Access revenue is
recognized when earned.  We participate in access revenue pools with
other telephone companies.  Such pools are funded by toll revenue
and/or access charges regulated by the Regulatory Commission of Alaska (“RCA”)
within the intrastate jurisdiction and the Federal Communications Commission
(“FCC”) within the interstate jurisdiction. Much of the interstate access
revenue is initially recorded based on estimates. These estimates are derived
from interim financial statements, available separation studies and the most
recent information available about achieved rates of return. These estimates are
subject to adjustment in future accounting periods as additional operational
information becomes available. To the extent that disputes arise over revenue
settlements, our policy is to defer revenue collected until settlement
methodologies are resolved.
 
 (f)
              Earnings per
      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.
 
 (g)
              Investment
      Securities
 We
have investment securities of $5.2 million at June 30, 2008 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.  We did not have investment securities prior to the quarter
ended June 30, 2008.
  (Continued)
 10
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  (h)
              Asset
      Retirement Obligations
 Following is a
reconciliation of the beginning and ending aggregate carrying amount of our
asset retirement obligations at June 30, 2008 and 2007 (amounts in
thousands):
 
 Balance at
      December 31, 2006
              
              $
              3,408Liability
      incurred
              
              
              85Accretion
      expense for the six months ended
                June 30,
      2007
              
              
              71Liability
      settled
              
              
              (2
              )Balance at
      June 30, 2007
              
              $
              3,562Balance at
      December 31, 2007
              
              $
              4,173Liability
      incurred
              
              
              18Accretion
      expense for the six months ended
                June 30,
      2008
              
              
              124Additions
      upon acquisition of UUI and Unicom
              
              
              6,211Liability
      settled
              
              
              (40
              )Balance at
      June 30, 2008
              
              $
              10,486
 
 Our asset
retirement obligations are included in Other Liabilities.
  (i)
    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, 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, effective tax rate, purchase price allocations, the accrual
of cost of goods sold (exclusive of depreciation and amortization expense)
(“Cost of Goods Sold”), and contingencies and litigation. Actual results could
differ from those estimates.
  (j)     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 are presented herein using the separate-entity
method.
  (k)    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.  Following are
certain surcharges on a gross basis in our income statement for the three and
six months ended June 30, 2008 and 2007 (amounts in thousands):
 
 Three Months
      Ended
              
              Six Months
      EndedJune
      30,
              
              June
      30,2008
              
              2007
              
              2008
              
              2007Surcharges
      reported gross
              
              
              1,062
              
              
              1,097
              
              
              2,012
              
              
              2,065
  (Continued)
 11
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  (l)     Change in Accounting
Policy
 Effective January
1, 2008 we prospectively changed our accounting policy for recording
depreciation on our property and equipment placed in service. For assets placed
in service on or after January 1, 2008 we are using a mid-month convention to
recognize depreciation expense. Previous to this change we used the half-year
convention to recognize depreciation expense in the year an asset was placed in
service, regardless of the month the property and equipment was placed in
service. We believe the mid-month convention is preferable because it results in
more precise recognition of depreciation expense over the estimated useful life
of the asset. No retroactive adjustment has been made.  The following
table sets forth the impact of this accounting change on depreciation and
amortization expense, operating income and net income for the three and six
months ended June 30, 2008:
 
 Three Months
      Ended June 30, 2008
              
              
              Six Months
      Ended June 30, 2008Increased
      depreciation and amortization expense
              
              $
              419
              
              
              
              562Decreased
      operating income
              
              
              419
              
              
              
              562Decreased net
      income
              
              
              222
              
              
              
              298
 
 (m)
              Restatement, Immaterial Error
      CorrectionandReclassification
 On
June 12, 2008, we filed a Form 10K/A (Amendment No. 2) with the SEC to reflect
the restatement of our summary of unaudited quarterly results of operations for
the year ended December 31, 2007.  We made the following corrections
as part of the restatement of our results of operations for the three and six
months ended June 30, 2007:
 
 ·
              We decreased
      depreciation expense $590,000 and $1.5 million for the three and six
      months ended June 30, 2007, respectively, to correct an error in
      calculating depreciation in the initial year an asset is placed in
      service.  We originally recorded our estimated depreciation
      expense evenly throughout the year with periodic adjustments based upon
      improved estimates or actual results.  In accordance with GAAP
      we now initially record depreciation expense in the month an asset is
      placed in service.  Depreciation was improperly allocated among
      quarters, but the year-end total was correct.  Therefore the
      restatement impacts the quarterly results but not the December 31, 2007
      year-end results.
 
 Additionally we
corrected the 2007 quarters for errors that have been determined to be
immaterial individually and in the aggregate.  Other than interest
capitalization, these immaterial errors do not impact the December 31, 2007
results.  They are as follows:
 
 ·
              We decreased
      interest expense $384,000 and $766,000 for the three and six months ended
      June 30, 2007, respectively, to correct an interest capitalization error
      on certain assets.  Our capitalized interest policy was too
      restrictive and resulted in no interest capitalization on certain
      qualifying capital expenditures.  Our capitalized interest
      policy now conforms to GAAP;
 ·
              We increased
      depreciation expense $322,000 and $644,000 for the three and six months
      ended June 30, 2007, respectively, due to the recognition of depreciation
      on additional capitalized interest;
 ·
              We increased
      revenue $173,000 and $492,000 for the three and six months ended June 30,
      2007, respectively, to correct understated revenue resulting from a
      configuration error in the automated interface between our unified billing
      system and our general ledger;
 ·
              We increased
      revenue $125,000 and $258,000 for the three and six months ended June 30,
      2007, respectively, to correct revenue recognition for a majority
      noncontrolling interest in a subsidiary that was recognizing a certain
      type of revenue on a cash basis rather than an accrual
    basis;
 ·
              We decreased
      share-based compensation expense $715,000 and $757,000 for the three and
      six months ended June 30, 2007, respectively, to correct expense
      recognition timing for options that did not vest in equal increments over
      the vesting period;
 ·
              We decreased
      depreciation expense $37,000 and $75,000 for the three and six months
      ended June 30, 2007, respectively, due to a revision of the purchase price
      allocation of our purchase of Alaska DigiTel, LLC ("Alaska DigiTel") on
      January 1, 2007; and
 ·
              We increased
      income tax expense $799,000 and $1.5 million for the three and six months
      ended June 30, 2007, respectively, to record the income tax effect of the
      corrections described above.
  (Continued)
 12
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  We
reclassified $3.3 million and $8.2 million of network maintenance and operations
expense from selling, general and administrative expense to Cost of Goods Sold
for the three and six months ended June 30, 2007, respectively.  We
believe this change in accounting more closely aligns our maintenance and
operations components to the nature of expenses included in our financial
statement captions, and will improve the comparability of our financial
statement presentation with our industry peers.
 
 The impact of the
restatement and immaterial error correction adjustments and the reclassification
as described above for the periods presented are as follows (amounts in
thousands):
 
 Three Months
      Ended June 30, 2007As previously
      reported1
              
              
              Adjustments
              
              
              Reclassification
              
              
              As
      restatedRevenues
              
              $
              129,592
              
              
              
              298
              
              
              
              ---
              
              
              
              129,890Cost of goods
      sold (exclusive of depreciation and amortization shown separately
      below)
              
              
              42,238
              
              
              
              ---
              
              
              
              3,341
              
              
              
              45,579Selling,
      general and administrative expenses
              
              
              47,486
              
              
              
              (715
              )
              
              
              (3,341
              )
              
              
              43,430Depreciation
      and amortization expense
              
              
              21,742
              
              
              
              (305
              )
              
              
              ---
              
              
              
              21,437Operating
      income
              
              
              18,126
              
              
              
              1,318
              
              
              
              ---
              
              
              
              19,444Other income
      (expense):Interest
      expense
              
              
              (8,941
              )
              
              
              384
              
              
              
              ---
              
              
              
              (8,557
              )Loan and
      senior note fees
              
              
              (216
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (216
              )Interest
      income
              
              
              161
              
              
              
              ---
              
              
              
              ---
              
              
              
              161Minority
      interest
              
              
              (24
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (24
              )Other
      expense, net
              
              
              (9,020
              )
              
              
              384
              
              
              
              ---
              
              
              
              (8,636
              )Income before
      income tax expense
              
              
              9,106
              
              
              
              1,702
              
              
              
              ---
              
              
              
              10,808Income tax
      expense
              
              
              4,091
              
              
              
              799
              
              
              
              ---
              
              
              
              4,890Net
      income
              
              $
              5,015
              
              
              
              903
              
              
              
              ---
              
              
              
              5,9181As
      reported on Form 10-Q for the quarter ended June 30, 2007
  (Continued)
 13
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  Six Months
      Ended June 30, 2007As previously
      reported1
              
              
              Adjustments
              
              
              Reclassification
              
              
              As
      restatedRevenues
              
              $
              254,171
              
              
              
              750
              
              
              
              ---
              
              
              
              254,921Cost of goods
      sold (exclusive of depreciation and amortization shown separately
      below)
              
              
              85,351
              
              
              
              ---
              
              
              
              8,218
              
              
              
              93,569Selling,
      general and administrative expenses
              
              
              96,010
              
              
              
              (757
              )
              
              
              (8,218
              )
              
              
              87,035Depreciation
      and amortization expense
              
              
              43,196
              
              
              
              (893
              )
              
              
              ---
              
              
              
              42,303Operating
      income
              
              
              29,614
              
              
              
              2,400
              
              
              
              ---
              
              
              
              32,014Other income
      (expense):Interest
      expense
              
              
              (17,641
              )
              
              
              766
              
              
              
              ---
              
              
              
              (16,875
              )Loan and
      senior note fees
              
              
              (396
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (396
              )Interest
      income
              
              
              345
              
              
              
              ---
              
              
              
              ---
              
              
              
              345Minority
      interest
              
              
              (11
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (11
              )Other
      expense, net
              
              
              (17,703
              )
              
              
              766
              
              
              
              ---
              
              
              
              (16,937
              )Income before
      income tax expense
              
              
              11,911
              
              
              
              3,166
              
              
              
              ---
              
              
              
              15,077Income tax
      expense
              
              
              5,366
              
              
              
              1,487
              
              
              
              ---
              
              
              
              6,853Net
      income
              
              $
              6,545
              
              
              
              1,679
              
              
              
              ---
              
              
              
              8,224Cash provided
      by operating activities
              
              $
              54,469
              
              
              
              766
              
              
              
              ---
              
              
              
              55,235Cash used in
      investing activities
              
              
              (87,027
              )
              
              
              (766
              )
              
              
              ---
              
              
              
              (87,793
              )Cash used in
      financing activities
              
              
              (16,752
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (16,752
              )1As
      reported on Form 10-Q for the six months ended June 30,
    2007
 
 
 (2)
              Consolidated
      Statements of Cash Flows Supplemental
  Disclosures
  Change in
      operating assets and liabilities, net of effect of acquisition, consists
      of (amounts in thousands):
  
 Six month
      period ended June 30,
              
              2008
              
              
              2007
                  (as
      restated)(Increase)
      decrease in accounts receivable
              
              $
              7,001
              
              
              
              (5,726
              )Decrease in
      prepaid expenses
              
              
              114
              
              
              
              6Increase in
      inventories
              
              
              (2,030
              )
              
              
              (53
              )Net sale of
      investment securities
              
              
              800
              
              
              
              ---Decrease in
      other current assets
              
              
              89
              
              
              
              1,238Increase in
      accounts payable
              
              
              1,979
              
              
              
              811Increase
      (decrease) in deferred revenues
              
              
              3,159
              
              
              
              (3,251
              )Decrease in
      accrued payroll and payroll related obligations
              
              
              (41
              )
              
              
              (757
              )Increase in
      accrued liabilities
              
              
              1,314
              
              
              
              408Increase in
      accrued interest
              
              
              324
              
              
              
              49Increase in
      subscriber deposits
              
              
              115
              
              
              
              78Increase in
      long-term deferred revenue
              
              
              36,893
              
              
              
              ---Increase
      (decrease) in components of other long-term liabilities
              
              
              (4,944
              )
              
              
              470$
              44,773
              
              
              
              (6,727
              )
  We paid interest, exclusive of capitalized interest, totaling $18.9 million and
$17.5 million during the six months ended June 30, 2008 and 2007,
respectively.
 
 We paid
      $478,000 and $0 income taxes during the six months ended June 30, 2008 and
      2007, respectively.  We received no income tax refunds during
      the six months ended June 30, 2008 and
2007.
  (Continued)
 14
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  During the
      six months ended June 30, 2008 and 2007, we capitalized interest of $2.1
      million and $514,000, respectively.
 
 During the
      six months ended June 30, 2008, we financed $98.6 million for the use of
      satellite transponders through a capital lease obligation.  We
      also financed $1.3 million in capital expenditures through the extension
      of a previously existing capital
lease.
 
 We received
      net cash of $110.6 million from the $145.0 million term loan that we
      obtained in May 2008. We used $30.0 million of the term loan to repay
      the revolver portion of our Senior Credit Facility and our loan proceeds
      were reduced by $2.9 million for an original issue discount and $1.5
      million for bank and legal fees associated with the new term
      loan.
 
 In June 2008
      the Galaxy XR satellite was taken out of service resulting in the removal
      of the remaining $8.8 million net book value and the recognition of an
      $8.8 million warranty receivable.
 
 We had $6.3
      million and $5.7 million in non-cash additions to property and equipment
      due to unpaid purchases as of June 30, 2008 and 2007,
      respectively.
 
 In February
      2007, our President and Chief Executive Officer ("CEO") tendered 112,000
      shares of his GCI Class A common stock to us at $15.50 per share for a
      total value of $1.7 million.  The stock tender was in lieu of a
      cash payment on his note receivable with a related party and a note
      receivable with a related party issued upon stock option exercise, both of
      which originated in 2002.
 
 (3)
              Intangible
      Assets
 On
a preliminary basis our goodwill increased $5.7 million, customer relationships
increased $3.1 million, other intangible assets increased $3.3 million, and
wireless licenses increased $150,000 upon the acquisition of UUI and Unicom
effective June 1, 2008 as further described in note 1(c).  Goodwill
and the wireless licenses are indefinite-lived assets.  The increase
in other intangible assets is due to the recognition of customer relationships
and contracts with a weighted average amortization period of 3.3
years.
 
 Amortization
expense for amortizable intangible assets was as follows (amounts in
thousands):
 
 Three Months
      Ended
              
              Six Months
      EndedJune
      30,
              
              June
      30,2008
              
              2007
              
              2008
              
              2007Amortization
      expense
              $
              
              1,165
              
              
              937
              
              
              2,080
              
              
              1,758
 
 Amortization
expense for amortizable intangible assets for each of the five succeeding fiscal
years is estimated to be (amounts in thousands):
 
 Years Ending
      December 31,2008
              $
              4,8142009
              
              5,4862010
              
              4,5802011
              
              1,5272012
              
              962
  (Continued)
 15
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  (4)
              Long-term
      Debt
 On
May 2, 2008, we signed an agreement to add an Additional Incremental Term Loan
of up to $145.0 million to our existing Senior Credit Facility.  The
Additional Incremental Term Loan will become due under the same terms and
conditions as set forth in the existing Senior Credit Facility.
 
 The Additional
Incremental Term Loan increased the interest rate on the term loan component of
our Senior Credit Facility from LIBOR plus 2.00% to LIBOR plus
4.25%.  The Additional Incremental Term Loan increased the revolving
credit facility interest rate for our Senior Credit Facility from LIBOR plus a
margin dependent upon our Total Leverage Ratio ranging from 1.50% to 2.25% to
LIBOR plus the following Applicable Margin set forth opposite each applicable
Total Leverage Ratio below:
 
 Total
      Leverage Ratio (as defined)
              
              Applicable
      Margin>3.75
              
              4.25%>3.25 but <3.75
              
              3.75%>2.75 but <3.25
              
              3.25%<2.75
              
              2.75%
 
 $145.0 million was
drawn on the Additional Incremental Term Loan at the time of the debt
modification.  The proceeds were used to pay down the $30.0 million
outstanding under our revolving credit facility including accrued interest and
to pay expenses associated with the transaction at closing with the balance
deposited in our bank account. Our term loan is fully drawn and we have letters
of credit outstanding totaling $4.0 million, which leaves $96.0 million
available for borrowing under the revolving credit facility.
 
 The Term Loan
allows for the repurchase of GCI’s common stock under its buyback program when
our total debt leverage is below 4.0 times EBITDAS. The amendment revised
various financial covenants in the agreement and made conforming changes to
various covenants to permit certain previously announced
acquisitions.  Additionally, our loan proceeds were reduced by $2.9
million for an original issue discount.  The discount on the term loan
will be amortized into interest expense using the effective interest
method.
 
 Borrowings under
the Senior Credit Facility are subject to certain financial covenants and
restrictions on indebtedness, dividend payments, financial guarantees, business
combinations, and other related items. As a result of the Additional Incremental
Term Loan, our Senior Credit Facility key debt covenants changed to the
following: our Senior Credit Facility Total Leverage Ratio (as defined) may not
exceed (i) 5.25:1.00 for the period beginning May 2, 2008 and ending on June 30,
2009, (ii) 5.00:1.00 for the period beginning on July 1, 2009, and ending on
December 31, 2009, and (iii) 4.50:1.00 for the period beginning January 1, 2010,
and ending on August 31, 2012; the Senior Leverage Ratio (as defined) may not
exceed (i) 3.25:1.00 for the period beginning on May 2, 2008 and ending on June
30, 2009, and (ii) 3.00:1.00 for the period beginning July 1, 2009, and ending
on August 31, 2012; the Fixed Charge Coverage Ratio (as defined) must be 1.0:1.0
or greater beginning December 31, 2009; and the Interest Coverage Ratio (as
defined) must not be less than (i) 2.50:1.00 for the period beginning on May 2,
2008 and ending on September 30, 2009, and (ii) 2.75:1.00 for the period
beginning October 1, 2009, and ending on August 31, 2012.
 
 Our Senior Credit
Facility also limits the amount of capital expenditures that we can incur each
year based on the following (amounts in thousands):
 
 Year
      Ended:
              
              Maximum
      Capital Expenditure Amount2008
              
              $
              225,0002009
              
              $
              125,0002010
              
              $
              125,0002011 and
      thereafter
              
              $
              100,000
  (Continued)
 16
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  If
the Company’s capital expenditures for a given year are less than the maximum,
the difference between the amount incurred and the maximum capital expenditure
limitation may be carried over to the following year.
 
 This transaction
was a partial substantial modification of our existing Senior Credit Facility
resulting in a $667,000 write-off of previously deferred loan fees during the
three and six months ended June 30, 2008 in our Consolidated Income
Statement.  Deferred loan fees of $58,000 associated with the portion
of our existing Senior Credit Facility determined not to have been substantially
modified continue to be amortized over the remaining life of the Senior Credit
Facility.
 
 In
connection with the Additional Incremental Term Loan, we paid bank fees and
other expenses of $1.6 million during the three and six months ended June 30,
2008 of which $527,000 were immediately expensed in the three and six months
ended June 30, 2008 and $1.1 million were deferred and will be amortized over
the remaining life of the Senior Credit Facility.
 
 We
acquired long-term debt of $42.7 million upon our acquisition of UUI and Unicom
effective June 1, 2008.  The long-term debt is due in monthly
installments of principal based on a fixed rate amortization
schedule.  The interest rates on the various loans to which this debt
relates range from 2.0% to 11.25%.
 
 As
of June 30, 2008, maturities of long-term debt were as follows (amounts in
thousands):
 
 Years ending
      December 31,2008 (balance
      of the year)
              
              $
              4,9752009
              
              
              8,4952010
              
              
              8,7382011
              
              
              178,2552011
              
              
              176,4852013 and
      thereafter
              
              
              340,786717,734Less
      unamortized discount paid on the Senior Notes
              
              
              2,794Less
      unamortized discount paid on the Senior Credit Facility
              
              
              2,777Less current
      portion of long-term debt
              
              
              9,211$
              702,952
 
 (5)      Share-Based
Compensation
 GCI's 1986
Stock Option Plan, as amended ("Stock Option Plan"), 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 or restricted stock awards are made.
 
 The fair value of
restricted stock awards is determined based on the quoted price of GCI’s 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.
 (Continued)
 17
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
 The weighted average
grant date fair value of options granted during the six months ended June 30,
2008 and 2007 was $4.27 per share and $9.49 per share, respectively. The total
fair value of options vesting
 during the six
months ended June 30, 2008 and 2007 was $2.3 million and $2.8 million,
respectively.
 
 We have recorded
share-based compensation expense of $2.9 million for the six months ended June
30, 2008, which consists of $3.5 million for employee share-based compensation
expense and a
 $681,000 decrease in
the fair value of liability-classified share-based compensation.  We
recorded share-based compensation expense of $1.7 million for the six months
ended June 30, 2007, which consists
 of $2.2
million for employee share-based compensation expense and a $460,000 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 $3.4
million relating to 388,000 restricted stock awards and
 $10.3 million
relating to 2.4 million unvested stock options as of June 30,
2008.  We expect to recognize share-based compensation expense over a
weighted average period of 2.9 years for stock options and
 2.2 years for
restricted stock awards.
 
 The following is a
summary of our Stock Option Plan activity for the six months ended June 30,
2008:
 
 Shares
                (in
      thousands)
              
              
              Weighted
                Average
                Exercise
      PriceOutstanding
      at December 31, 2007
              
              
              6,751
              
              
              $
              9.37Options
      granted
              
              
              331
              
              
              $
              7.94Restricted
      stock awards granted
              
              
              43
              
              
              $
              6.94Exercised
              
              
              (18
              )
              
              $
              6.02Restricted
      stock awards vested
              
              
              (131
              )
              
              $
              12.05Forfeited
              
              
              (95
              )
              
              $
              9.51Outstanding
      at June 30, 2008
              
              
              6,881
              
              
              $
              9.23Available for
      grant at June 30, 2008
              
              
              1,305
 
 The following is a
summary of activity for stock option grants that were not made pursuant to
the Stock Option Plan for the six months ended June 30, 2008:
 
 Shares
                (in
      thousands)
              
              
              Weighted
                Average
                Exercise
      PriceOutstanding
      at December 31, 2007 and June 30, 2008
              
              
              150
              
              
              $
              6.50Available for
      grant at June 30, 2008
              
              
              ---
 
 In January 2001 we
entered into an aircraft operating lease agreement with a company owned by our
President and CEO.  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 available for
purchase and expire on March
 31,
2010.
 (Continued)
 18
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
 The total intrinsic
values, determined as of the date of exercise, of options exercised during the
six months ended June 30, 2008 and 2007 were $38,000 and $2.7 million,
respectively. We received $106,000
 and $2.4 million
from GCI in cash from stock option exercises during the six months ended June
30, 2008 and 2007, respectively.
 
 (6)
              Industry Segments
      Data
 Our reportable
segments are business units that offer different products. The reportable
segments are each managed separately and serve distinct types of
customers.
 
 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.
 
 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, and
governmental customers in rural Alaska.
 
 Corporate related
expenses including engineering, information technology, accounting, legal and
regulatory, human resources, and other general and administrative expenses for
the three and six months ended June 30, 2008 and 2007 are allocated to our
Consumer, Network Access, Commercial, and Broadband segments using segment
margin for the years ended December 31, 2007 and 2006,
respectively.  Corporate related expenses are specifically identified
for our Regulated Operations segment and therefore, are not included in this
allocation.  Bad debt expense for the three and six months ended
June 30, 2008 and 2007 is allocated to our Consumer, Network Access, Commercial
and Managed Broadband segments using a combination of specific identification
and allocations based upon segment revenue for the three and six months ended
June 30, 2008 and 2007, respectively.
 
 We
evaluate performance and allocate resources based on earnings from operations
before depreciation and amortization expense, net interest expense, income tax
expense and share-based compensation expense. 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, 2007 annual report
on Form 10-K/A (Amendment No. 2). 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.
  (Continued)
 19
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  Summarized
financial information for our reportable segments for the three and six months
ended June 30, 2008 and 2007 follows (amounts in thousands):
 Three months
      ended June 30,
              
              Consumer
              
              
              Network
      Access
              
              
              Commer-cial
              
              
              Managed
      Broadband
              
              
              Regulated
      Operations
              
              
              Total
      Reportable Segments2008Revenues:Intersegment
              
              $
              17
              
              
              
              167
              
              
              
              1,569
              
              
              
              ---
              
              
              
              116
              
              
              
              1,869External
              
              
              62,113
              
              
              
              41,891
              
              
              
              27,444
              
              
              
              9,134
              
              
              
              1,879
              
              
              
              142,461Total
      revenues
              
              $
              62,130
              
              
              
              42,058
              
              
              
              29,013
              
              
              
              9,134
              
              
              
              1,995
              
              
              
              144,330EBITDAS
              
              $
              13,019
              
              
              
              21,315
              
              
              
              5,541
              
              
              
              3,138
              
              
              
              359
              
              
              
              43,3722007 (as restated)Revenues:Intersegment
              
              $
              ---
              
              
              
              1,092
              
              
              
              1,004
              
              
              
              ---
              
              
              
              ---
              
              
              
              2,096External
              
              
              55,128
              
              
              
              41,616
              
              
              
              26,193
              
              
              
              6,953
              
              
              
              ---
              
              
              
              129,890Total
      revenues
              
              $
              55,128
              
              
              
              42,708
              
              
              
              27,197
              
              
              
              6,953
              
              
              
              ---
              
              
              
              131,986EBITDAS
              
              $
              10,965
              
              
              
              23,543
              
              
              
              4,996
              
              
              
              2,116
              
              
              
              ---
              
              
              
              41,620
 
 Six months
      ended June 30,
              
              Consumer
              
              
              Network
      Access
              
              
              Commer-cial
              
              
              Managed
      Broadband
              
              
              Regulated
      Operations
              
              
              Total
      Reportable Segments2008Revenues:Intersegment
              
              $
              17
              
              
              
              468
              
              
              
              2,918
              
              
              
              ---
              
              
              
              116
              
              
              
              3,519External
              
              
              123,496
              
              
              
              81,065
              
              
              
              54,035
              
              
              
              16,660
              
              
              
              1,879
              
              
              
              277,135Total
      revenues
              
              $
              123,513
              
              
              
              81,533
              
              
              
              56,953
              
              
              
              16,660
              
              
              
              1,995
              
              
              
              280,654EBITDAS
              
              $
              24,822
              
              
              
              41,050
              
              
              
              9,693
              
              
              
              5,615
              
              
              
              359
              
              
              
              81,5392007 (as restated)Revenues:Intersegment
              
              $
              ---
              
              
              
              1,363
              
              
              
              2,629
              
              
              
              ---
              
              
              
              ---
              
              
              
              3,992External
              
              
              108,731
              
              
              
              81,942
              
              
              
              50,374
              
              
              
              13,874
              
              
              
              ---
              
              
              
              254,921Total
      revenues
              
              $
              108,731
              
              
              
              83,305
              
              
              
              53,003
              
              
              
              13,874
              
              
              
              ---
              
              
              
              258,913EBITDAS
              
              $
              20,923
              
              
              
              43,308
              
              
              
              8,075
              
              
              
              3,748
              
              
              
              ---
              
              
              
              76,054
 
 A
reconciliation of reportable segment revenues to consolidated revenues follows
(amounts in thousands):
 
 Three Months
      Ended
              
              
              Six Months
      EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007 (as
      restated)
              
              
              2008
              
              
              2007 (as
      restated)Reportable
      segment revenues
              
              $
              144,330
              
              
              
              131,986
              
              
              
              280,654
              
              
              
              258,913Less
      intersegment revenues eliminated in consolidation
              
              
              1,869
              
              
              
              2,096
              
              
              
              3,519
              
              
              
              3,992Consolidated
      revenues
              
              $
              142,461
              
              
              
              129,890
              
              
              
              277,135
              
              
              
              254,921
  (Continued)
 20
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  A
reconciliation of reportable segment earnings from external EBITDAS to
consolidated income before income taxes (amounts in thousands):
 
 Three Months
      Ended
              
              
              Six Months
      EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007 (as
      restated)
              
              
              2008
              
              
              2007 (as
      restated)Reportable
      segment EBITDAS
              
              $
              43,372
              
              
              
              41,620
              
              
              
              81,539
              
              
              
              76,054Less
      depreciation and amortization expense
              
              
              23,707
              
              
              
              21,437
              
              
              
              46,489
              
              
              
              42,303Less
      share-based compensation expense
              
              
              1,593
              
              
              
              763
              
              
              
              2,853
              
              
              
              1,748Less (plus)
      minority interest
              
              
              26
              
              
              
              (24
              )
              
              
              (24
              )
              
              
              (11
              )Consolidated
      operating income
              
              
              18,046
              
              
              
              19,444
              
              
              
              32,221
              
              
              
              32,014Less other
      expense, net
              
              
              11,350
              
              
              
              8,636
              
              
              
              20,227
              
              
              
              16,937Consolidated
      income before income tax expense
              
              $
              6,696
              
              
              
              10,808
              
              
              
              11,994
              
              
              
              15,077
 
 (7)
              Indefeasible Right to
      Use (“IRU”) Capacity Sale
 We entered
      into various IRU sales agreements for which we received cash of $33.9
      million and $37.1 million during the three and six months ended June 30,
      2008, respectively.  These transactions are being accounted for
      as operating leases with deferred revenue to be recognized over the
      estimated life of the IRU agreement.  We had long-term deferred
      revenue of $34.7 million related to these IRU transactions at June 30,
      2008.
 
 (8)
              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, that the resolution of them will have
a material adverse effect on our financial position, results of operations or
liquidity.
 
 Access to ACS Unbundled
Network Elements
 On
May 22, 2006, the Alaska Communications Systems Group, Inc. (“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 that the relief granted would
not result in harm to consumers or competition.  On September 19,
2007, GCI and ACS both filed petitions for reconsideration on discrete findings
in the order.  The petitions are pending and we cannot predict the
final outcome of the proceeding at this time.
 
 Universal
Service
 The Universal
Service Fund ("USF") pays subsidies to Eligible Telecommunications Carriers
("ETC") to support the provision of local access service in high-cost areas.
Under FCC regulations, we have qualified as a competitive ETC in the Anchorage,
Fairbanks, Juneau, Matanuska-Susitna Valley, Ketchikan, and Glacier State
service areas. Without ETC status, we would not qualify for USF subsidies in
these areas or other rural areas where we propose to offer local access
services, and our revenue for providing local access services in these areas
would be materially adversely affected.
 
 On
May 1, 2008, the 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 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
  (Continued)
 21
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
  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
will be provided some relief.  The USF cap will be in place until the
FCC takes action on proposals for long-term reform.  The FCC and the
Universal Service Administrative Company are each considering issues related to
the interpretation and implementation of the limited exception from the cap,
which may materially affect the scope and extent to which eligible entities may
avail themselves of the exception, as well as the timing for eligible entities
to exercise the exception.
 
 The Joint Board has
recommended for FCC consideration long-term options for reforming 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.  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.
 
 Capital Lease
Obligation
 On
March 31, 2006, through our subsidiary GCI Communication Corp. we entered into
an agreement to lease transponder capacity on Intelsat, Ltd.’s (“Intelsat”)
Galaxy 18 spacecraft that successfully launched on May 21, 2008. We are also
leasing capacity on the Horizons 1 satellite, which is owned jointly by Intelsat
and JSAT International, Inc. The leased capacity replaced our existing
transponder capacity on Intelsat’s Galaxy XR satellite.
 
 The Intelsat Galaxy
18 C-band and Ku-Band transponders are being leased over an expected term of 14
years. The present value of the lease payments, excluding telemetry, tracking
and command services and back-up protection, is $98.6 million. We recorded a
capital lease obligation and an addition to our Property and Equipment at June
30, 2008.
 
 In
June 2008 Galaxy XR was taken out of service resulting in the removal of the
remaining $8.8 million net book value and the recognition of an $8.8 million
warranty receivable.
 
 A
summary of future minimum lease payments for this lease follows (amounts in
thousands):
 
 Years ending
      December 31:2008
              $
              6,5102009
              
              11,1602010
              
              11,1602011
              
              11,1602012
              
              11,1602013 and
      thereafter
              
              105,090Total minimum
      lease payments
              $
              156,240
  Capital Lease Amendment
 On April 8,
      2008, we signed an amendment to a long-term capital lease agreement with
      our President and CEO and his wife for property we occupy.  The
      amended lease terminates on September 30, 2026.    We
      increased our existing capital lease asset and liability by $1.3 million
      at June 30, 2008 to record the extension of this capital
      lease.
  (Continued)
 22
 GCI,
INC. AND SUBSIDIARIES
 Notes
to Interim Consolidated Financial Statements
 (Unaudited)
 
 A summary of
      future minimum lease payments for this lease follows (amount in
      thousands):
 
 Years ending
      December 31:2008
              $
              1942009
              
              2582010
              
              2582011
              
              2612012
              
              2702013 and
      thereafter
              
              4,691Total minimum
      lease payments
              $
              5,932
 
 (9)
              Subsequent
      Event
 On
July 1, 2008, we completed the acquisition of all the interests in Alaska
Wireless, LLC (“Alaska Wireless”) for an initial acquisition payment of $14.2
million.  In addition to the initial acquisition payment, we have
agreed to a contingent payment of approximately $3.0 million in 2010 if certain
financial conditions are met.  Alaska Wireless is a Global System for
Mobile Communications ("GSM") cellular provider and an Internet service provider
serving subscribers in the Dutch Harbor, Sand Point, and Akutan, Alaska
areas.  It is not practicable to determine the initial purchase price
allocation at this time
 
  23
  
  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. 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 unbilled
revenues, Cost of Goods Sold accruals, allowance for doubtful accounts,
share-based compensation, depreciation, amortization and accretion periods,
intangible assets, income taxes, effective tax rate, purchase price allocation,
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.
 
 
 On
June 12, 2008, we filed a Form 10K/A (Amendment No. 2) with the SEC to reflect
the restatement of our summary of unaudited quarterly results of operations for
the year ended December 31, 2007. We made the following corrections as part of
the restatement of our results of operations for the three and six months ended
June 30, 2007:
 
 ·
              We decreased
      depreciation expense $590,000 and $1.5 million for the three and six
      months ended June 30, 2007, respectively, to correct an error in
      calculating depreciation in the initial year an asset is placed in
      service.  We originally recorded our estimated depreciation
      expense evenly throughout the year with periodic adjustments based upon
      improved estimates or actual results.  In accordance with GAAP
      we now initially record depreciation expense in the month an asset is
      placed in service.  Depreciation was improperly allocated among
      quarters, but the year-end total was correct.  Therefore the
      restatement impacts the quarterly results but not the December 31, 2007
      year-end results.
 
 Additionally we
corrected the 2007 quarters for errors that have been determined to be
immaterial individually and in the aggregate.  Other than interest
capitalization, these immaterial errors do not impact the December 31, 2007
results.  They are as follows:
 
 ·
              We decreased
      interest expense $384,000 and $766,000 for the three and six months ended
      June 30, 2007, respectively, to correct an interest capitalization error
      on certain assets.  Our capitalized interest policy was too
      restrictive and resulted in no interest capitalization on certain
      qualifying capital expenditures.  Our capitalized interest
      policy now conforms to GAAP;
 ·
              We increased
      depreciation expense $322,000 and $644,000 for the three and six months
      ended June 30, 2007, respectively, due to the recognition of depreciation
      on additional capitalized interest;
 ·
              We increased
      revenue $173,000 and $492,000 for the three and six months ended June 30,
      2007, respectively, to correct understated revenue resulting from
      a  configuration error in the automated interface between our
      unified billing system and our general
ledger;
 ·
              We increased
      revenue $125,000 and $258,000 for the three and six months ended June 30,
      2007, respectively, to correct revenue recognition for a majority
      noncontrolling interest in a subsidiary that was recognizing a certain
      type of revenue on a cash basis rather than an accrual
    basis;
 ·
              We decreased
      share-based compensation expense $715,000 and $757,000 for the three and
      six months ended June 30, 2007, respectively, to correct expense
      recognition timing for options that did not vest in equal increments over
      the vesting period;
 ·
              We decreased
      depreciation expense $37,000 and $75,000 for the three and six months
      ended June 30, 2007, respectively, due to a revision of the purchase price
      allocation of our purchase of Alaska DigiTel on January 1, 2007;
      and
 ·
              We increased
      income tax expense $799,000 and $1.5 million for the three and six months
      ended June 30, 2007, respectively, to record the income tax effect of the
      corrections described above.
  24
  We
reclassified $3.3 million and $8.2 million of network maintenance and operations
expense from selling, general and administrative expenses to Cost of Goods Sold
for the three and six months ended June 30, 2007, respectively.  We
believe this change in accounting more closely aligns our maintenance and
operations components to the nature of expenses included in our financial
statement captions, and will improve the comparability of our financial
statement presentation with our industry peers.
 
 The impact of the
restatement and immaterial error correction adjustments and the reclassification
as described above for the periods presented are as follows (amounts in
thousands):
 
 Three Months
      Ended June 30, 2007As previously
      reported1
              
              
              Adjustments
              
              
              Reclassification
              
              
              As
      restatedRevenues
              
              $
              129,592
              
              
              
              298
              
              
              
              ---
              
              
              
              129,890Cost of goods
      sold (exclusive of depreciation and amortization shown separately
      below)
              
              
              42,238
              
              
              
              ---
              
              
              
              3,341
              
              
              
              45,579Selling,
      general and administrative expenses
              
              
              47,486
              
              
              
              (715
              )
              
              
              (3,341
              )
              
              
              43,430Depreciation
      and amortization expense
              
              
              21,742
              
              
              
              (305
              )
              
              
              ---
              
              
              
              21,437Operating
      income
              
              
              18,126
              
              
              
              1,318
              
              
              
              ---
              
              
              
              19,444Other income
      (expense):Interest
      expense
              
              
              (8,941
              )
              
              
              384
              
              
              
              ---
              
              
              
              (8,557
              )Loan and
      senior note fees
              
              
              (216
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (216
              )Interest
      income
              
              
              161
              
              
              
              ---
              
              
              
              ---
              
              
              
              161Minority
      interest
              
              
              (24
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (24
              )Other
      expense, net
              
              
              (9,020
              )
              
              
              384
              
              
              
              ---
              
              
              
              (8,636
              )Income before
      income tax expense
              
              
              9,106
              
              
              
              1,702
              
              
              
              ---
              
              
              
              10,808Income tax
      expense
              
              
              4,091
              
              
              
              799
              
              
              
              ---
              
              
              
              4,890Net
      income
              
              $
              5,015
              
              
              
              903
              
              
              
              ---
              
              
              
              5,9181As
      reported on Form 10-Q for the quarter ended June 30, 2007
  25
  Six Months
      Ended June 30, 2007As previously
      reported1
              
              
              Adjustments
              
              
              Reclassification
              
              
              As
      restatedRevenues
              
              $
              254,171
              
              
              
              750
              
              
              
              ---
              
              
              
              254,921Cost of goods
      sold (exclusive of depreciation and amortization shown separately
      below)
              
              
              85,351
              
              
              
              ---
              
              
              
              8,218
              
              
              
              93,569Selling,
      general and administrative expenses
              
              
              96,010
              
              
              
              (757
              )
              
              
              (8,218
              )
              
              
              87,035Depreciation
      and amortization expense
              
              
              43,196
              
              
              
              (893
              )
              
              
              ---
              
              
              
              42,303Operating
      income
              
              
              29,614
              
              
              
              2,400
              
              
              
              ---
              
              
              
              32,014Other income
      (expense):Interest
      expense
              
              
              (17,641
              )
              
              
              766
              
              
              
              ---
              
              
              
              (16,875
              )Loan and
      senior note fees
              
              
              (396
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (396
              )Interest
      income
              
              
              345
              
              
              
              ---
              
              
              
              ---
              
              
              
              345Minority
      interest
              
              
              (11
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (11
              )Other
      expense, net
              
              
              (17,703
              )
              
              
              766
              
              
              
              ---
              
              
              
              (16,937
              )Income before
      income tax expense
              
              
              11,911
              
              
              
              3,166
              
              
              
              ---
              
              
              
              15,077Income tax
      expense
              
              
              5,366
              
              
              
              1,487
              
              
              
              ---
              
              
              
              6,853Net
      income
              
              $
              6,545
              
              
              
              1,679
              
              
              
              ---
              
              
              
              8,224Cash provided
      by operating activities
              
              $
              54,469
              
              
              
              766
              
              
              
              ---
              
              
              
              55,235Cash used in
      investing activities
              
              
              (87,027
              )
              
              
              (766
              )
              
              
              ---
              
              
              
              (87,793
              )Cash used in
      financing activities
              
              
              (16,752
              )
              
              
              ---
              
              
              
              ---
              
              
              
              (16,752
              )1As
      reported on Form 10-Q for the six months ended June 30,
    2007
 
 All adjustments
noted above have been included in the amounts for the three and six months end
June 30, 2007 shown in Management's Discussion and Analysis.
 
 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 Network Access
segment provides services to other common carrier customers and the Managed
Broadband segment provides services to rural school districts and hospitals and
health clinics.  Effective June 1, 2008, we purchased 100% of the
outstanding stock of the UUI and Unicom subsidiaries.  The financial
results of the long-distance, local access and Internet services sold to
consumer and commercial customers 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 these acquired companies are included in the
Network Access and Managed Broadband Services segments,
respectively.  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
  26
  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, or if their competitors’ costs to terminate or
originate traffic in Alaska are reduced, our traffic will also likely be
reduced, and 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 or events.
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 acquired
Dobson Communications Corporation (“Dobson”), including its Alaska properties,
on November 15, 2007. In December 2007 we signed an agreement with AT&T that
provides for an orderly four-year transition of our wireless customers from the
Dobson/AT&T network in Alaska to our wireless facilities to be built in 2008
and 2009.  The agreement allows our current and future customers to
use the AT&T wireless network for local access and roaming during the
transition period.  The four-year transition period, which expires
June 30, 2012, provides us with adequate time to replace the Dobson/AT&T
network in Alaska with our own wireless facilities. Under the agreement,
AT&T’s obligation to purchase network services from us terminated as of July
1, 2008. AT&T 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, 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 paid to AT&T during the approximate
four year period beginning June 4, 2008 and ending June 30, 2012.  We
expect our wireless product Cost of Goods Sold to decrease $11.0 million to
$12.0 million during the six months ended December 31, 2008 as compared to the
six months ended December 31, 2007.
 
 Due in large part
to the favorable synergistic effects of our bundling strategy focused on
consumer and commercial customers, long-distance service continues 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 ACS, AT&T Alascom, Inc.
(“Alascom”), 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 business segment
services will continue to allow us to be competitive in providing those
services.
 
 Local
Access
 We
generate local access services revenues from four primary sources: (1) basic
dial tone services; (2) data network and special access services; (3)
origination and termination of long-distance calls for other common carriers;
and (4) features and other charges, including voice mail, caller ID, distinctive
ring, inside wiring and subscriber line charges.
  27
  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
Universal Service Program.
 
 We
estimate that our June 30, 2008 and 2007 total lines in service represent a
statewide market share of approximately 33% and 27%, respectively. At June 30,
2008 and 2007, 66% and 48%, respectively, of our lines, including the lines of
UUI at June 30, 2008, are provided on our own facilities.
 
 Our local access
service faces competition in Anchorage, Fairbanks, and Juneau from ACS, which is
the largest incumbent local exchange carrier (“ILEC”) in Alaska, and from
Alascom in Anchorage for consumer services. Alascom has received certification
from the Regulatory Commission of Alaska ("RCA") to provide local access
services in Fairbanks and Juneau. In February 2007, we began offering local
access service in certain MTA exchanges and face competition from
MTA.  In October 2007, we began offering local access service in the
Kenai-Soldotna area and face competition from the 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.
 
 We
are continuing to expand our local access service areas and will offer services
in these new areas using a combination of methods. To a large extent, we plan to
use our existing coaxial cable network to deliver local access services. Where
we do not have cable facilities, we may resell other carriers’ services, lease
portions of an existing carrier’s network or seek wholesale
discounts.
 
 In
2008 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 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
will be provided some relief.  The USF cap will be in place until the
FCC takes action on proposals for long-term reform.  The FCC and the
Universal Service Administrative Company are each considering issues related to
the interpretation and implementation of the limited exception from the cap,
which may materially affect the scope and extent to which eligible entities may
avail themselves of the exception, as well as the timing for eligible entities
to exercise the exception.
 
 The Joint Board has
recommended for FCC consideration long-term options for reforming 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.  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.
 
 UUI and its
subsidiary, United-KUC, which were acquired by us effective June 1, 2008, are
ILECs and therefore are subject to regulation by the RCA.  UUI and
United-KUC do not face significant competition.
 
 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 and
analog programming services, including monthly basic and premium subscriptions,
video on demand, pay-per-view movies and one-time events, such as sporting
events; (2) equipment rentals; and (3) advertising sales.
  28
  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.
 
 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 and include an offering of free cable service.
Value-added premium services are available for additional charges.
 
 Data
Services and Products
 Internet
 We
generate Internet services revenues from three primary sources: (1) access
product services, including cable modem, dial-up, and dedicated access; (2)
network management services; and (3) wholesale access for other common
carriers.
 
 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-based data services on a secured shared network to businesses linking
multiple enterprise locations. The factor that 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
data 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.
  29
  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 services in the
provision of health care services than their urban counterparts. Customers
utilize ConnectMD® services
to securely move data, images, voice traffic, and 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, integrated services digital network 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.
 
 Unicom, one of the
companies that we acquired effective June 1, 2008, operates DeltaNet, a
long-haul broadband microwave network ringing the Yukon-Kuskokwim Delta – a
region of approximately 30,000 square miles in western Alaska. In the third
quarter of 2008, DeltaNet, which is still under construction but has already
commenced operations where completed microwave towers have been placed into
service, will link more than 40 villages to Bethel, the region’s
hub.  We will use this facility, in addition to our other facilities,
to offer our SchoolAccess®,
ConnectMD® and
managed video conferencing products.
 
 Wireless
Services and Products
 We
generate wireless services and equipment revenues from four primary sources: (1)
monthly plan fees; (2) usage and roaming charges; (3) wireless Internet access;
and (4) handset and accessory sales.
 
 We
offer wireless services by reselling AT&T services under our brand name and
Alaska DigiTel's services under its brand name. We provide limited wireless
local access and Internet services using our own facilities. We compete against
AT&T, ACS, MTA, and resellers of those services in Anchorage and other
markets. The GCI and Alaska DigiTel brands compete against each
other.
 
 In
2008 we are constructing a GSM network throughout the terrestrially served
portions of Alaska including the cities of Anchorage, Fairbanks, and
Juneau.  Alaska DigiTel operates the Code-Division Multiple Access
("CDMA") CDMA portion of our statewide wireless platform and is expanding this
network in 2008.
 
 We
had a distribution agreement with Dobson allowing us to resell Dobson wireless
services.  For a discussion of AT&T’s acquisition of Dobson please
see "Part I – Item II – Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Voice Services and Products – Long
Distance".
 
 On
July 1, 2008, we completed the acquisition of all of the interests in Alaska
Wireless for an initial acquisition payment of $14.2 million.  In
addition to the initial acquisition payment, we have agreed to a contingent
payment of approximately $3.0 million in 2010 if certain financial conditions
are met.  Alaska Wireless is a GSM cellular provider and an Internet
service provider serving subscribers in the Dutch Harbor, Sand Point, and
Akutan, Alaska areas.  In addition to the acquisition, we entered into
a management agreement with the previous owners of Alaska
Wireless.  The business will continue to operate under the Alaska
Wireless name and the previous owners will continue to manage the day-to-day
operations.  The results of operations generated by Alaska Wireless
will impact our wireless services in our Consumer segment.
  30
  We
have signed a definitive agreement to acquire the remaining minority interest in
Alaska DigiTel for a total consideration of approximately $10.3
million.  On January 22, 2008, the FCC initiated its proceedings to
review the application seeking requisite regulatory approval of the proposed
change in control caused by this acquisition.  Following FCC approval
of the change in control, which we expect to occur in the third or fourth
quarter of 2008, we will own 100% of Alaska DigiTel.
 
 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
      Change1
              
              
              
              
              
              
              
              
              Percent­age
      Change1Three
      Months Ended
              
              
              2008
              
              
              Six
      Months Ended
              
              
              2008June
      30,
              
              
              vs.
              
              
              June
      30,
              
              
              vs.2008
              
              
              2007
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              2007(Unaudited)Statements
      of Operations Data:Revenues:Consumer
      segment
              
              
              43.6
              %
              
              
              42.4
              %
              
              
              12.7
              %
              
              
              44.5
              %
              
              
              42.7
              %
              
              
              13.6
              %Network
      Access segment
              
              
              29.4
              %
              
              
              32.0
              %
              
              
              0.7
              %
              
              
              29.3
              %
              
              
              32.1
              %
              
              
              (0.7
              %)Commercial
      segment
              
              
              19.3
              %
              
              
              20.2
              %
              
              
              4.8
              %
              
              
              19.5
              %
              
              
              19.8
              %
              
              
              7.3
              %Managed
      Broadband segment
              
              
              6.4
              %
              
              
              5.4
              %
              
              
              31.4
              %
              
              
              6.0
              %
              
              
              5.4
              %
              
              
              20.0
              %Regulated
      Operations segment
              
              
              1.3
              %
              
              NA
              
              
              NA
              
              
              
              0.7
              %
              
              NA
              
              
              NATotal
      revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              9.7
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              8.7
              %Selling,
      general and administrative expenses
              
              
              33.9
              %
              
              
              33.4
              %
              
              
              11.1
              %
              
              
              34.2
              %
              
              
              34.1
              %
              
              
              8.8
              %Depreciation
      and amortization expense
              
              
              16.5
              %
              
              
              16.5
              %
              
              
              9.8
              %
              
              
              16.7
              %
              
              
              16.6
              %
              
              
              9.5
              %Operating
      income
              
              
              12.8
              %
              
              
              15.0
              %
              
              
              (6.3
              %)
              
              
              11.7
              %
              
              
              12.6
              %
              
              
              1.2
              %Other
      expense, net
              
              
              8.0
              %
              
              
              6.7
              %
              
              
              31.4
              %
              
              
              7.3
              %
              
              
              6.6
              %
              
              
              19.4
              %Income before
      income taxes
              
              
              4.8
              %
              
              
              8.3
              %
              
              
              (36.4
              %)
              
              
              4.4
              %
              
              
              5.9
              %
              
              
              (19.3
              %)Net
      income
              
              
              2.5
              %
              
              
              4.6
              %
              
              
              (39.3
              %)
              
              
              2.2
              %
              
              
              3.2
              %
              
              
              (25.5
              %)
 
 1Percentage
      change in underlying data.NA – Not
      Applicable
 
 Three
Months Ended June 30, 2008 (“second quarter of 2008”) Compared to Three Months
Ended June 30, 2007 (“second quarter of 2007”)
 
 Overview
of Revenues and Cost of Goods Sold
 Total revenues
increased 9.7% from $129.9 million in the second quarter of 2007 to $142.5
million in the second quarter of 2008.  Revenue increased in all of
our segments.  See the discussion below for more information by
segment.
 
 Total Cost of Goods
Sold increased 15.1% from $45.6 million in the second quarter of 2007 to $52.4
million in the second quarter of 2008. Cost of Goods Sold increased in all of
our segments.  See the discussion below for more information by
segment.
  31
  Consumer
Segment Overview
 Consumer segment
revenue represented 43.6% of second quarter 2008 consolidated revenues. The
components of Consumer segment revenue in the second quarter of 2008 and the
second quarter of 2007 are as follows (amounts in thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice
              
              $
              12,117
              
              
              
              11,608
              
              
              
              4.4
              %Video
              
              
              25,668
              
              
              
              23,907
              
              
              
              7.4
              %Data
              
              
              10,386
              
              
              
              8,269
              
              
              
              25.6
              %Wireless
              
              
              13,942
              
              
              
              11,344
              
              
              
              22.9
              %Total
      Consumer segment revenue
              
              $
              62,113
              
              
              
              55,128
              
              
              
              12.7
              %
 
 Consumer segment
Cost of Goods Sold represented 45.2% of second quarter of 2008 consolidated Cost
of Goods Sold. The components of Consumer segment Cost of Goods Sold in the
second quarter of 2008 and the second quarter of 2007 are as follows (amounts in
thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice
              
              $
              4,682
              
              
              
              5,112
              
              
              
              (8.4
              %)Video
              
              
              9,936
              
              
              
              8,931
              
              
              
              11.3
              %Data
              
              
              1,877
              
              
              
              1,282
              
              
              
              46.4
              %Wireless
              
              
              7,194
              
              
              
              7,050
              
              
              
              2.0
              %Total
      Consumer segment Cost of Goods Sold
              
              $
              23,689
              
              
              
              22,375
              
              
              
              5.9
              %
 
 Consumer segment
EBITDAS, representing 30.0% of second quarter of 2008 consolidated EBITDAS, is
as follows (amounts in thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeConsumer
      segment EBITDAS
              
              $
              13,019
              
              
              
              10,965
              
              
              
              18.7
              %
 
 Selected key
performance indicators for our Consumer segment follow:
 
 June
      30,
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice:Long-distance
      subscribers1
              
              
              89,800
              
              
              
              90,500
              
              
              
              (0.8
              %)Long-distance
      minutes carried (in millions)
              
              
              32.0
              
              
              
              33.6
              
              
              
              (4.8
              %)Total local
      access lines in service2
              
              
              78,100
              
              
              
              68,400
              
              
              
              14.2
              %Local access
      lines in service on GCI facilities2
              
              
              60,500
              
              
              
              41,800
              
              
              
              44.7
              %Video:Basic
      subscribers3
              
              
              130,300
              
              
              
              124,700
              
              
              
              4.5
              %Digital
      programming tier subscribers4
              
              
              68,200
              
              
              
              61,000
              
              
              
              11.8
              %HD/DVR
      converter boxes5
              
              
              56,900
              
              
              
              40,200
              
              
              
              41.5
              %Homes
      passed
              
              
              226,900
              
              
              
              221,100
              
              
              
              2.6
              %Average
      monthly gross revenue per subscriber6
              
              $
              65.86
              
              
              $
              63.79
              
              
              
              3.2
              %Data:Cable modem
      subscribers7
              
              
              91,000
              
              
              
              82,600
              
              
              
              10.2
              %Wireless:Wireless
      lines in service8
              
              
              77,000
              
              
              
              62,900
              
              
              
              22.4
              %Average
      monthly gross revenue per subscriber9
              
              $
              57.39
              
              
              $
              55.25
              
              
              
              3.9
              %
  32
  1A
      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.
                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.
                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.
                6Quarter-to-date
      average monthly consumer video revenues divided by the average of consumer
      video basic subscribers at the beginning and ending 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.
                8A
      wireless line in service is defined as a revenue generating wireless
      device.
                9Quarter-to-date
      average monthly consumer wireless revenues divided by the average of
      consumer wireless subscribers at the beginning and ending of the
      period.
 
 Consumer
Segment Revenues
 The increase in
voice revenue is primarily due to a $713,000 or 11.1% increase in local service
revenue due to increased local access lines in service.  The increase
is partially off-set by a $322,000 or 22.1% decrease in support from the
Universal Service Program, decreased long-distance billable minutes carried, and
decreased long-distance subscribers.
 
 The increase in
video revenue is primarily due to the following:
 
 ·
              A 5.0%
      increase in programming services revenue to $20.6 million primarily
      resulting from an increase in basic and digital programming tier
      subscribers, and
 ·
              A 19.5%
      increase in equipment rental revenue to $4.7 million primarily resulting
      from our customers’ increased use of digital distribution
      technology.
 
 The increase in
data revenue is primarily due to a 28.6% increase in cable modem revenue to $8.9
million. The cable modem revenue increase is primarily due to increased
subscribers and their selection of more value-added premium features in the
second quarter of 2008 as compared to the second quarter of 2007.
 
 The increase in
wireless revenue is primarily due to an increase in the number of wireless
subscribers, a $1.1 million or 45.5% increase in wireless subscriber line charge
due to increased subscribers to our Lifeline offering, and a $562,000 or 70.5%
increase in support from the Universal Service Program.
 
 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 DLPS lines during the last six months of 2007 and the
first six months of 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 converter boxes in service, and increased
subscribers.
 
 The data Cost of
Goods Sold increase is primarily due to increased internet circuit costs due to
an increased number of cable modem subscribers.
 
 The wireless Cost
of Goods Sold increase is primarily due to costs associated with the increased
number of wireless subscribers discussed above, partially off-set by decreased
expense due to the June 4, 2008 implementation of the new distribution agreement
with AT&T 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."
  33
  Consumer
Segment EBITDAS
 The EBITDAS
increase was primarily due to increased margin resulting from increased
subscribers for most product lines in the second quarter of 2008.  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 second quarter of 2007 segment margin upon which the
allocation is based.
 
 Network
Access Segment Overview
 Network access
segment revenue represented 29.4% of second quarter of 2008 consolidated
revenues. The components of Network Access segment revenue in the second quarter
of 2008 and the second quarter of 2007 are as follows (amounts in
thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice
              
              $
              23,213
              
              
              
              24,577
              
              
              
              (5.5
              %)Data
              
              
              17,988
              
              
              
              15,469
              
              
              
              17.8
              %Wireless
              
              
              690
              
              
              
              1,570
              
              
              
              (56.1
              %)Total Network
      Access segment revenue
              
              $
              41,891
              
              
              
              41,616
              
              
              
              0.7
              %
 
 Network Access
segment Cost of Goods Sold represented 22.0% of second quarter of 2008
consolidated Cost of Goods Sold. The components of Network Access segment Cost
of Goods Sold in the second quarter of 2008 and the second quarter of 2007 are
as follows (amounts in thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice
              
              $
              8,226
              
              
              
              6,363
              
              
              
              29.3
              %Data
              
              
              2,830
              
              
              
              2,185
              
              
              
              29.5
              %Wireless
              
              
              473
              
              
              
              174
              
              
              
              171.8
              %Total Network
      Access segment Cost of Goods Sold
              
              $
              11,529
              
              
              
              8,722
              
              
              
              32.2
              %
 
 Network Access
segment EBITDAS, representing 49.1% of second quarter of 2008 consolidated
EBITDAS, is as follows (amounts in thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeNetwork
      Access segment EBITDAS
              
              $
              21,315
              
              
              
              23,543
              
              
              
              (9.5
              %)
 
 Selected key
performance indicators for our Network Access segment follow:
 
 June
      30,
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice:Long-distance
      minutes carried (in millions)
              
              
              326.2
              
              
              
              317.7
              
              
              
              2.7
              %Data:Internet
      service provider access lines in service1
              
              
              2,000
              
              
              
              2,600
              
              
              
              (23.1
              %)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 an 11.9% decrease in our average rate per
minute on billable minutes carried for our common carrier customers and the
transition of voice traffic to dedicated data 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 which will result in
annual rate decreases of 3.0%.  The voice revenue decrease is
partially off-set by the increase in voice minutes carried.
  34
  The increase in
data revenue is primarily due to an increase in circuits sold and from other
common carriers moving switched voice services to data networks.
 
 The decrease in
wireless revenue results from a decrease in our rate per minute on billable
minutes carried for customers roaming on our network.
 
 Network
Access Segment Cost of Goods Sold
 The increase in
voice Cost of Goods Sold is primarily due to increased long-distance minutes
carried and a $879,000 favorable adjustment based upon a refund for which
negotiations were completed in the second quarter of 2007.  In the
course of business we estimate unbilled long-distance services Cost of Goods
Sold based upon minutes of use processed through our network and established
rates.  Such estimates are revised when subsequent billings are
received, payments are made, billing matters are researched and resolved,
tariffed billing periods lapse, or when disputed charges are
resolved.
 
 The increase in
data Cost of Goods Sold is primarily due to the recognition of a $763,000
warranty payment received in the second quarter of 2007 as a reimbursement for
fiber optic cable repair expenses recognized in an earlier period.
 
 Network
Access Segment EBITDAS
 The EBITDAS
decrease was primarily due to decreased margin resulting from the decreased rate
per minute on billable minutes carried for our common carrier
customers.  The decreased margin was partially offset by an increase
in data circuits sold in the second quarter of 2008, increased IRU sales in the
second quarter of 2008, and a decrease in the selling, general and
administrative expense allocated to our Network Access segment primarily due to
a decrease in the second quarter of 2007 segment margin upon which the
allocation is based.
 
 Commercial
Segment Overview
 Commercial segment
revenue represented 19.3% of second quarter of 2008 consolidated revenues. The
components of Commercial segment revenue in the second quarter of 2008 and the
second quarter of 2007 are as follows (amounts in thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice
              
              $
              7,280
              
              
              
              8,045
              
              
              
              (9.4
              %)Video
              
              
              2,149
              
              
              
              2,004
              
              
              
              7.2
              %Data
              
              
              16,584
              
              
              
              14,561
              
              
              
              13.9
              %Wireless
              
              
              1,431
              
              
              
              1,583
              
              
              
              (9.6
              %)Total
      Commercial segment revenue
              
              $
              27,444
              
              
              
              26,193
              
              
              
              4.8
              %
 
 Commercial segment
Cost of Goods Sold represented 26.5% of second quarter of 2008 consolidated Cost
of Goods Sold. The components of Commercial segment Cost of Goods Sold in the
second quarter of 2008 and the second quarter of 2007 are as follows (amounts in
thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice
              
              $
              4,809
              
              
              
              4,823
              
              
              
              (0.3
              %)Video
              
              
              382
              
              
              
              421
              
              
              
              (9.3
              %)Data
              
              
              7,481
              
              
              
              5,972
              
              
              
              25.3
              %Wireless
              
              
              1,240
              
              
              
              1,041
              
              
              
              19.1
              %Total
      Commercial segment Cost of Goods Sold
              
              $
              13,912
              
              
              
              12,257
              
              
              
              13.5
              %
  35
  Commercial segment
EBITDAS, representing 12.8% of second quarter of 2008 consolidated EBITDAS, is
as follows (amounts in thousands):
 
 Second
      Quarter of
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeCommercial
      segment EBITDAS
              
              $
              5,541
              
              
              
              4,996
              
              
              
              10.9
              %
 
 Selected key
performance indicators for our Commercial segment follow:
 
 June
      30,
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice:Long-distance
      subscribers1
              
              
              10,400
              
              
              
              11,100
              
              
              
              (6.3
              %)Long-distance
      minutes carried (in millions)
              
              
              32.9
              
              
              
              34.1
              
              
              
              (3.5
              %)Total local
      access lines in service2
              
              
              45,400
              
              
              
              42,900
              
              
              
              5.8
              %Local access
      lines in service on GCI facilities2
              
              
              16,600
              
              
              
              10,700
              
              
              
              55.1
              %Data:Cable modem
      subscribers3
              
              
              9,000
              
              
              
              8,100
              
              
              
              11.1
              %Wireless:Wireless
      lines in service4
              
              
              7,100
              
              
              
              6,700
              
              
              
              6.0
              %1A
      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.
                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.
                4A
      wireless line in service is defined as a revenue generating wireless
      device.
 
 Commercial
Segment Revenues
 The decrease in
voice revenue is primarily due to decreased long-distance subscribers and voice
minutes carried.  Revenues associated with increased local access
lines in service partially off-set this decrease.
 
 The increase in
data revenue is primarily due to a $1.3 million or 22.3% increase in managed
services project revenue, a $590,000 or 16.4% increase in Internet revenue
primarily due to increased subscribers, and the effects of a non-recurring
$500,000 credit issued to a customer in June 2007.
 
 Commercial
Segment Cost of Goods Sold
 The increase in
data Cost of Goods Sold resulted primarily from an increase in contract labor
and internal labor classified as Cost of Goods Sold due to the increase in
managed services project revenue discussed above under "Commercial Segment
Revenues".
 
 Commercial
Segment EBITDAS
 The EBITDAS
increase was primarily due to increased margin resulting from increased managed
services projects, increased subscribers for most product lines in the second
quarter of 2008, and a decrease in the selling, general and administrative
expenses allocated to our Commercial segment primarily due to a decrease in the
2007 segment margin upon which the allocation is based.
 
 Managed
Broadband Segment Overview
 Managed Broadband
segment revenue represented 6.4% of second quarter of 2008 consolidated
revenues, Cost of Goods Sold represented 5.8% of second quarter of 2008
consolidated Cost of Goods Sold and EBITDAS represented 7.2% of second quarter
of 2008 consolidated EBITDAS. The Managed Broadband segment includes data
services only.
  36
  Selected key
performance indicators for our Managed Broadband segment follow:
 
 June
      30,
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeManaged
      Broadband segment:SchoolAccess®customers
              
              
              51
              
              
              
              48
              
              
              
              6.3
              %Rural health
      customers
              
              
              39
              
              
              
              21
              
              
              
              85.7
              %
 
 Through our June 1,
2008, acquisition of Unicom our Managed Broadband segment has added one rural
health customer.
 
 Managed
Broadband Segment Revenues
 Managed Broadband
segment revenue increased 31.4% to $9.1 million in the second quarter of
2008.  The increase is primarily due to increased circuits purchased
by our rural health and SchoolAccess®
customers and product sales of $690,000 in the second quarter of 2008 to a
SchoolAccess®customer
and a rural health customer.
 
 Managed
Broadband Segment Cost of Goods Sold
 Managed Broadband
segment Cost of Goods Sold increased 35.7% to $3.0 million in the second quarter
of 2008 primarily due to costs associated with the product sale discussed
above.
 
 Managed
Broadband Segment EBITDAS
 Managed Broadband
segment EBITDAS increased $1.0 million to $3.1 million in the second quarter of
2008 primarily due to an increase in the margin resulting from increased
circuits sold to our rural health and SchoolAccess®
customers. The increased margin was partially offset by an increase in the
selling, general and administrative expense that was allocated to our Managed
Broadband segment primarily due to an increase in the second quarter of 2007
segment margin upon which the allocation is based.
 
 Regulated
Operations Segment Overview
 Regulated
Operations segment revenue represented 1.3% of second quarter of 2008
consolidated revenues, Cost of Goods Sold represented 0.6% of second quarter of
2008 consolidated Cost of Goods Sold and EBITDAS represented 0.8% of second
quarter of 2008 consolidated EBITDAS. The Regulated Operations segment includes
voice, data and wireless services.
 
 Selected key
performance indicators for our Regulated Operations segment follow:
 
 June
      30,
              Percentage2008
              
              2007
              ChangeVoice:Long-distance
      subscribers1
              
              
              900
              
              NA
              NALong-distance
      minutes carried (in millions)
              
              
              0.1
              
              NA
              NATotal local
      access lines in service2
              
              
              12,200
              
              NA
              NA
  1A
      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
 As
described above we completed our acquisition of UUI and Unicom effective June 1,
2008.  In connection with this acquisition, we recognized revenues of
$2.7 million from the acquired operations during the second quarter of 2008 with
$1.9 million recorded in the Regulated Operations segment and the remaining
revenues were recorded in the Network Access and Managed Broadband
segments.
  37
  Regulated
Operations Segment Cost of Goods Sold
 As
described above we completed our acquisition of UUI and Unicom effective June 1,
2008.  In connection with this acquisition, we recognized Cost of
Goods Sold of $534,000 during the second quarter of 2008 with $298,000 recorded
in the Regulated Operations segment and the remaining Cost of Goods Sold
recorded in the Network Access and Managed Broadband segments.
 
 Regulated
Operations Segment EBITDAS
 Regulated
Operations segment EBITDAS was $359,000 in the second quarter of
2008.
 
 Selling,
General and Administrative Expenses
 Selling, general
and administrative expenses increased 11.1% to $48.3 million in the second
quarter of 2008 primarily due to a $2.1 million increase in labor costs and
$715,000 in additional expense resulting from our June 1, 2008, acquisition of
UUI and Unicom.
 
 As
a percentage of total revenues, selling, general and administrative expenses
increased to 33.9% in the second quarter of 2008 from 33.4% in the second
quarter of 2007.
 
 Depreciation
and Amortization Expense
 Depreciation and
amortization expense increased 9.9% to $23.7 million in the second quarter of
2008. The increase is primarily due to our $113.3 million investment in
equipment and facilities placed into service during the 2007 year for which a
full year of depreciation will be recorded in the 2008 year and the $67.1
million investment in equipment and facilities placed into service during the
six months ended June 30, 2008 for which a partial year of depreciation will be
recorded in the 2008 year.
 
 Effective January
1, 2008 we prospectively changed our accounting policy for recording
depreciation on our property and equipment placed in service. For assets placed
in service on or after January 1, 2008 we are using a mid-month convention to
recognize depreciation expense. Previous to this change we used the half-year
convention to recognize depreciation expense in the year an asset was placed in
service, regardless of the month the property and equipment was placed in
service. We believe the mid-month convention is preferable because it results in
more precise recognition of depreciation expense over the estimated useful life
of the asset. No retroactive adjustment has been made. As a result of this
accounting change, our reported amount of depreciation and amortization expense
has increased $419,000, our reported operating income has decreased $419,000,
and our reported net income has decreased $222,000.
 
 Other
Expense, Net
 Other expense, net
of other income, increased 31.4% to $11.4 million in the second quarter of 2008
due to the following:
 
 ·
              Our total
      interest expense increased $2.2 million to $10.9 million in the second
      quarter of 2008 due to a $1.9 million increase in interest expense on our
      Senior Credit Facility to $4.9 million resulting from additional debt from
      the Additional Incremental Term Loan agreement beginning in May 2008, the
      increased interest rate on our Senior Credit Facility beginning May 2008,
      and $587,000 in additional interest expense resulting from the Galaxy 18
      capital lease commencing in the second quarter of 2008 partially offset by
      a $302,000 increase in capitalized interest to $993,000 due to increased
      capital expenditures subject to capitalized interest,
  and
 ·
              In the second
      quarter of 2008, we modified our existing Senior Credit Facility resulting
      in $1.2 million of other third party costs and bank fees
      incurred.
 
 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 are presented herein using the separate-entity
method.
 
 Income tax expense
totaled $3.2 million and $4.9 million in the second quarters of 2008 and 2007,
respectively. Our effective income tax rate increased from 45.2% in the second
quarter of 2007 to 49.7% in the second quarter of 2008 due primarily to lower
forecasted pre-tax net income for the year ended December 31, 2008, without a
comparable decrease in non-deductible items.
  38
  At
June 30, 2008, we have (1) tax net operating loss carryforwards of $67.7 million
that will begin expiring in 2011 if not utilized, and (2) alternative minimum
tax credit carryforwards of $3.9 million available to offset regular income
taxes payable in future years. We estimate that we will utilize $51.0 million to
$54.0 million in net operating loss carryforwards during the year ended December
31, 2008. Our utilization of certain net operating loss carryforwards is subject
to limitations pursuant to Section 382 of the Internal Revenue Code of 1986, as
amended.
 
 We
have recorded deferred tax assets of $27.5 million associated with income tax
net operating losses that were generated from 1995 to 2008, and that expire from
2011 to 2028, and with charitable contributions that were converted to net
operating losses in 2006 to 2008, and that expire from 2024 to
2028.
 
 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 exclusive of reversing temporary
differences and carryforwards. The amount of deferred tax assets 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 49% to 51% in the year ended December 31,
2008.
 
 Six
Months Ended June 30, 2008 (“2008”) Compared to Six Months Ended June 30, 2007
(“2007”)
 
 Overview
of Revenues and Cost of Goods Sold
 Total revenues
increased 8.7% from $254.9 million in 2007 to $277.1 million in
2008.  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 increased 10.9% from $93.6 million in 2007 to $103.8 million in 2008. Cost
of Goods Sold increased in all of our segments.  See the discussion
below for more information by segment.
 
 Consumer
Segment Overview
 Consumer segment
revenue represented 44.5% of 2008 consolidated revenues. The components of
Consumer segment revenue are as follows (amounts in thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeVoice
              
              $
              23,978
              
              
              
              22,961
              
              
              
              4.4
              %Video
              
              
              51,315
              
              
              
              47,538
              
              
              
              8.0
              %Data
              
              
              20,482
              
              
              
              16,216
              
              
              
              26.3
              %Wireless
              
              
              27,721
              
              
              
              22,016
              
              
              
              25.9
              %Total
      Consumer segment revenue
              
              $
              123,496
              
              
              
              108,731
              
              
              
              13.6
              %
 
 Consumer segment
Cost of Goods Sold represented 46.6% of 2008 consolidated Cost of Goods Sold.
The components of Consumer segment Cost of Goods Sold are as follows (amounts in
thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeVoice
              
              $
              9,735
              
              
              
              10,176
              
              
              
              (4.3
              %)Video
              
              
              19,866
              
              
              
              17,790
              
              
              
              11.7
              %Data
              
              
              3,703
              
              
              
              2,551
              
              
              
              45.2
              %Wireless
              
              
              15,087
              
              
              
              13,815
              
              
              
              9.2
              %Total
      Consumer segment Cost of Goods Sold
              
              $
              48,391
              
              
              
              44,332
              
              
              
              9.2
              %
  39
  Consumer segment
EBITDAS, representing 30.4% of 2008 consolidated EBITDAS, is as follows (amounts
in thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeConsumer
      segment EBITDAS
              
              $
              24,822
              
              
              
              20,923
              
              
              
              18.6
              %
 
 Selected key
performance indicators for our Consumer segment follow:
 
 June
      30,
              
              
              Percentage2008
              
              
              2007
              
              
              ChangeVoice:Long-distance
      minutes carried (in millions)
              
              
              65.6
              
              
              
              67.8
              
              
              
              (3.2
              %)Video:Average
      monthly gross revenue per subscriber1
              
              $
              66.19
              
              
              $
              63.76
              
              
              
              3.8
              %Wireless:Average
      monthly gross revenue per subscriber2
              
              $
              58.25
              
              
              $
              54.59
              
              
              
              6.7
              %1Year-to-date
      average monthly consumer video revenues divided by the average of consumer
      video basic subscribers at the beginning and ending of the
      period.
                2Year-to-date
      average monthly consumer wireless revenues divided by the average of
      consumer wireless subscribers at the beginning and ending of the
      period.
 
 Please refer to our
three-month results of operations discussion for additional selected key
performance indicators for the second quarter of 2008 and the second quarter of
2007.
 
 Consumer
Segment Revenues
 The increase in
voice revenue is primarily due to a $1.4 million or 11.4% increase in local
service revenue due to increased local access lines in service.  The
increase is partially off-set by a $540,000 or 18.8% decrease in support from
the Universal Service Program and decreased long-distance billable minutes
carried.
 
 The increase in
video revenue is primarily due to the following:
 
 ·
              A 5.7%
      increase in programming services revenue to $41.2 million primarily
      resulting from an increase in basic and digital programming tier
      subscribers, and
 ·
              A 19.3%
      increase in equipment rental revenue to $9.3 million primarily resulting
      from our customers’ increased use of digital distribution
      technology.
 
 The increase in
data revenue is primarily due to a 27.9% increase in cable modem revenue to
$17.5 million. The cable modem revenue increase is primarily due to increased
subscribers and their selection of more value-added premium features in 2008 as
compared to 2007.
 
 The increase in
wireless revenue is primarily due to an increase in the number of wireless
subscribers, a $2.7 million or 68.1% increase in wireless subscriber line charge
due to increased subscribers to our Lifeline offering, and a $1.5 million or
106.1% increase in support from the Universal Service Program.
 
 Consumer
Segment Cost of Goods Sold
 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 converter boxes in service, and increased
subscribers.
 
 The data Cost of
Goods Sold increase is primarily due to increased internet circuit costs due to
an increased number of cable modem subscribers.
  40
  The wireless Cost
of Goods Sold increase is primarily due to costs associated with the increased
number of wireless subscribers discussed above, partially off-set by decreased
expense due to the June 4, 2008 implementation of the new distribution agreement
with AT&T 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."
 
 Consumer
Segment EBITDAS
 The EBITDAS
increase was primarily due to increased margin resulting from increased
subscribers for most product lines in 2008.  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 2007 segment margin upon which the allocation is based.
 
 Network
Access Segment Overview
 Network access
segment revenue represented 29.3% of 2008 consolidated revenues. The components
of Network Access segment revenue are as follows (amounts in
thousands):
 
 2008
              
              
              2007
              
              
              Percentage
                ChangeVoice
              
              $
              45,155
              
              
              
              48,848
              
              
              
              (7.6
              %)Data
              
              
              34,827
              
              
              
              30,397
              
              
              
              14.6
              %Wireless
              
              
              1,083
              
              
              
              2,697
              
              
              
              (59.8
              %)Total Network
      Access segment revenue
              
              $
              81,065
              
              
              
              81,942
              
              
              
              (0.7
              %)
 
 Network Access
segment Cost of Goods Sold represented 21.0% of 2008 consolidated Cost of Goods
Sold. The components of Network Access segment Cost of Goods Sold are as follows
(amounts in thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeVoice
              
              $
              15,533
              
              
              
              13,953
              
              
              
              11.3
              %Data
              
              
              5,556
              
              
              
              5,615
              
              
              
              (1.0
              %)Wireless
              
              
              694
              
              
              
              393
              
              
              
              76.6
              %Total Network
      Access segment Cost of Goods Sold
              
              $
              21,783
              
              
              
              19,961
              
              
              
              8.9
              %
 
 Network Access
segment EBITDAS, representing 50.3% of 2008 consolidated EBITDAS, is as follows
(amounts in thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeNetwork
      Access segment EBITDAS
              
              $
              41,050
              
              
              
              43,308
              
              
              
              (4.5
              %)
 
 Selected key
performance indicators for our Network Access segment follow:
 
 Percentage2008
              
              
              2007
              
              
              ChangeVoice:Long-distance
      minutes carried (in millions)
              
              
              640.8
              
              
              
              633.5
              
              
              
              1.2
              %
 
 Please refer to our
three-month results of operations discussion for additional selected key
performance indicators for the second quarter of 2008 and for the second quarter
of 2007.
 
 Network
Access Segment Revenues
 The decrease in
voice revenue is primarily due to a 10.7% decrease in our average rate per
minute on billable minutes carried for our common carrier customers and the
transition of voice traffic to dedicated data 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 which will result in
annual rate decreases of 3.0%.  The voice revenue decrease is
partially off-set by the increase in voice minutes carried.
  41
  The decrease in
wireless revenue results from a decrease in our rate per minute on billable
minutes carried for customers roaming on our network.
 
 Network
Access Segment Cost of Goods Sold
 The increase in
voice Cost of Goods Sold is primarily due to increased long-distance minutes
carried and the absence of an $879,000 favorable adjustment based upon a refund
for which negotiations were completed in 2007.  In the course of
business we estimate unbilled long-distance services Cost of Goods Sold based
upon minutes of use processed through our network and established
rates.  Such estimates are revised when subsequent billings are
received, payments are made, billing matters are researched and resolved,
tariffed billing periods lapse, or when disputed charges are
resolved.
 
 Network
Access Segment EBITDAS
 The EBITDAS
decrease was primarily due to decreased margin resulting from the decreased rate
per minute on billable minutes carried for our common carrier
customers.  The decreased margin was partially offset by an increase
in data circuits sold in 2008 and increased IRU sales in 2008.
 
 Commercial
Segment Overview
 Commercial segment
revenue represented 19.5% of 2008 consolidated revenues. The components of
Commercial segment revenue are as follows (amounts in thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeVoice
              
              $
              14,494
              
              
              
              15,902
              
              
              
              (8.9
              %)Video
              
              
              3,969
              
              
              
              3,770
              
              
              
              5.3
              %Data
              
              
              32,793
              
              
              
              28,515
              
              
              
              15.0
              %Wireless
              
              
              2,779
              
              
              
              2,187
              
              
              
              27.1
              %Total
      Commercial segment revenue
              
              $
              54,035
              
              
              
              50,374
              
              
              
              7.3
              %
 
 Commercial segment
Cost of Goods Sold represented 27.0% of 2008 consolidated Cost of Goods Sold.
The components of Commercial segment Cost of Goods Sold are as follows (amounts
in thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeVoice
              
              $
              9,738
              
              
              
              9,746
              
              
              
              (0.2
              %)Video
              
              
              770
              
              
              
              824
              
              
              
              (6.6
              %)Data
              
              
              15,061
              
              
              
              12,011
              
              
              
              25.4
              %Wireless
              
              
              2,414
              
              
              
              1,944
              
              
              
              24.2
              %Total
      Commercial segment Cost of Goods Sold
              
              $
              27,983
              
              
              
              24,525
              
              
              
              14.1
              %
 
 Commercial segment
EBITDAS, representing 11.9% of 2008 consolidated EBITDAS, is as follows (amounts
in thousands):
 
 2008
              
              
              2007
              
              
              Percentage
      ChangeCommercial
      segment EBITDAS
              
              $
              9,693
              
              
              
              8,075
              
              
              
              20.0
              %
 
 Selected key
performance indicators for our Commercial segment follow:
 
 Percentage2008
              
              
              2007
              
              
              ChangeVoice:Long-distance
      minutes carried (in millions)
              
              
              65.7
              
              
              
              67.1
              
              
              
              (2.1
              %)
 
 Please refer to our
three-month results of operations discussion for additional selected key
performance indicators for the second quarter of 2008 and for the second quarter
of 2007.
 
 42
  Commercial
Segment Revenues
 The decrease in
voice revenue is primarily due to decreased long-distance
subscribers.  Revenues associated with increased local access lines in
service partially off-set this decrease.
 
 The increase in
data revenue is primarily due to a $3.4 million or 19.4% increase in managed
services project revenue, a $1.3 million or 19.4% increase in Internet revenue
primarily due to increased subscribers, and a non-recurring $500,000 credit
issued to a customer in June 2007.
 
 The increase in
wireless revenue is primarily due to an increase in the number of wireless
subscribers.
 
 Commercial
Segment Cost of Goods Sold
 The increase in
data Cost of Goods Sold resulted primarily from an increase in contract labor
and internal labor classified as Cost of Goods Sold due to the increase in
managed services project revenue discussed above in "Commercial Segment
Revenues".
 
 The wireless Cost
of Goods Sold increase is primarily due to costs associated with an increase in
the number of wireless subscribers.
 
 Commercial
Segment EBITDAS
 The EBITDAS
increase was primarily due to increased margin resulting from increased managed
services projects, increased subscribers for most product lines in 2008, and a
decrease in the selling, general and administrative expenses allocated to our
Commercial segment primarily due to a decrease in the 2007 segment margin upon
which the allocation is based.
 
 Managed
Broadband Segment Overview
 Managed Broadband
segment revenue represented 6.0% of 2008 consolidated revenues, Cost of Goods
Sold represented 5.1% of 2008 consolidated Cost of Goods Sold and EBITDAS
represented 6.9% of consolidated EBITDAS. The Managed Broadband segment includes
data services only.
 
 Please refer to our
three-month results of operations discussion for selected key performance
indicators for the second quarter of 2008 and for the second quarter of
2007.
 
 Managed
Broadband Segment Revenues
 Managed Broadband
segment revenue increased 20.0% to $16.7 million in 2008.  The
increase is primarily due to increased circuits purchased by our rural health
and SchoolAccess®
customers.
 
 Managed
Broadband Segment Cost of Goods Sold
 Managed Broadband
segment Cost of Goods Sold increased 14.1% to $5.3 million in 2008 primarily due
to costs associated with the increased revenue.
 
 Managed
Broadband Segment EBITDAS
 Managed Broadband
segment EBITDAS increased $1.9 million to $5.6 million in 2008 primarily due to
an increase in the margin resulting from increased circuits sold to our rural
health and SchoolAccess®
customers.  The increased margin was partially offset by an increase
in the selling, general and administrative expense that was allocated to our
Managed Broadband segment primarily due to an increase in the 2007 segment
margin upon which the allocation is based.
 
 Regulated
Operations Segment Overview
 Regulated
Operations segment revenue represented 0.7% of 2008 consolidated revenues, Cost
of Goods Sold represented 0.3% of 2008 consolidated Cost of Goods Sold and
EBITDAS represented 0.4% of 2008 consolidated EBITDAS. The Regulated Operations
segment includes voice, data and wireless services.
 
 Please refer to our
three-month results of operations discussion for selected key performance
indicators for the second quarter of 2008.
 
 Regulated
Operations Segment Revenues
 As
described above we completed our acquisition of UUI and Unicom effective June 1,
2008.  In connection with this acquisition, we recognized revenues of
$2.7 million during 2008 with $1.9 million recorded in the Regulated Operations
segment and the remaining revenues recorded in the Network Access and Managed
Broadband segments.
  43
  Regulated
Operations Segment Cost of Goods Sold
 As
described above we completed our acquisition of UUI and Unicom effective June 1,
2008.  In connection with this acquisition, we recognized Cost of
Goods Sold of $534,000 during 2008 with $298,000 recorded in the Regulated
Operations segment and the remaining Cost of Goods Sold recorded in the Network
Access and Managed Broadband segments.
 
 Regulated
Operations Segment EBITDAS
 Regulated
Operations segment EBITDAS totaled $359,000 in 2008.
 
 Selling,
General and Administrative Expenses
 Selling, general
and administrative expenses increased 8.8% to $94.7 million in 2008 primarily
due to the following:
 ·
              A $2.9
      million increase in labor costs,
 ·
              A $818,000
      increase in our facilities leases primarily related to our wireless
      facilities expansion,
 ·
              A $752,000
      increase in our share-based compensation expense partially off-set by
      changes in the fair value of our share-based liability in
      2008,
 ·
              $715,000 in
      additional expense resulting from our June 1, 2008, acquisition of UUI and
      Unicom, and
 ·
              A $622,000
      increase in our company-wide success sharing bonus
  accrual.
 
 The increases
described above are partially offset by a $576,000 decrease in bad debt expense
primarily due to improvements in our collections of consumer accounts
receivable.
 
 As
a percentage of total revenues, selling, general and administrative expenses
increased to 34.2% in 2008 from 34.1% in 2007.
 
 Depreciation
and Amortization Expense
 Depreciation and
amortization expense increased 9.9% to $46.5 million in 2008. The increase is
primarily due to our $113.3 million investment in equipment and facilities
placed into service during the 2007 year for which a full year of depreciation
will be recorded in the 2008 year and the $67.1 million investment in equipment
and facilities placed into service during the six months ended June 30, 2008 for
which a partial year of depreciation will be recorded in the 2008
year.
 
 Effective January
1, 2008 we prospectively changed our accounting policy for recording
depreciation on our property and equipment placed in service. For assets placed
in service on or after January 1, 2008 we are using a mid-month convention to
recognize depreciation expense. Previous to this change we used the half-year
convention to recognize depreciation expense in the year an asset was placed in
service, regardless of the month the property and equipment was placed in
service. We believe the mid-month convention is preferable because it results in
more precise recognition of depreciation expense over the estimated useful life
of the asset. No retroactive adjustment has been made. As a result of this
accounting change, our reported amount of depreciation expense has increased
$562,000, our reported operating income has decreased $562,000, and our reported
net income has decreased $298,000
 
 Other
Expense, Net
 Other expense, net
of other income, increased 19.4% to $20.2 million in 2008 due to the
following:
 ·
              Our total
      interest expense increased $2.7 million to $19.6 million in 2008 primarily
      due to a $2.6 million increase in our senior credit facility interest
      expense to $8.3 million resulting from additional debt from the Additional
      Incremental Term Loan agreement beginning May 2008, the increased interest
      rate on our Senior Credit Facility in May 2008, and $587,000 in additional
      interest expense resulting from the Galaxy 18 capital lease commencing in
      2008 partially offset by a $583,000 increase in capitalized interest to
      $1.9 million due to increased capital expenditures subject to capitalized
      interest, and
 ·
              In 2008 we
      modified our existing Senior Credit Facility resulting in $1.2 million of
      other third party costs and bank fees
incurred.
  44
  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 are presented herein using the separate-entity
method.
 
 Income tax expense
totaled $6.0 million and $6.9 million in 2008 and 2007, respectively. Our
effective income tax rate increased from 45.5% in 2007 to 49.7% in 2008 due
primarily to lower forecasted pre-tax net income for the year ended December 31,
2008, without a comparable decrease in non-deductible items.
 
 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 by standard reporting category in 2008 and 2007 follows (amounts in
thousands):
 
 2008
              
              
              2007Line
      extensions
              
              $
              9,706
              
              
              
              18,730Customer
      premise equipment
              
              
              4,897
              
              
              
              4,286Scalable
      infrastructure
              
              
              580
              
              
              
              1,042Support
      capital
              
              
              304
              
              
              
              599Upgrade/rebuild
              
              
              747
              
              
              
              264Commercial
              
              
              80
              
              
              
              99Sub-total
              
              
              16,314
              
              
              
              25,020Remaining
      reportable segments capital expenditures
              
              
              97,177
              
              
              
              43,435$
              113,491
              
              
              
              68,455
 
 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 June 30, 2008 and 2007 we had 130,400 and 125,000 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 June 30, 2008 and 2007 we had 314,400 and 277,200 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 cash flows be insufficient
to support additional borrowings and principal payments scheduled under our
existing credit facilities, capital expenditures will likely be
reduced.
 
 Cash flows from
operating activities totaled $109.5 million in 2008 as compared to $55.2 million
in 2007.  The increase is due to a $35.7 million increase in long-term
deferred revenue due to cash received from IRU capacity sales.
 
 Other sources of
cash in 2008 included a $132.1 million borrowing on our Senior Credit Facility.
Uses of cash in 2008 included expenditures of $113.5 million for property and
equipment, including construction in progress, and the purchase of the stock of
the UUI and Unicom subsidiaries of UCI for $40.2 million, net of cash
received.
  45
  Working capital
totaled $107.4 million at June 30, 2008, a $72.2 million increase as compared to
$35.3 million at December 31, 2007. The increase is primarily due to an increase
in cash following the closing of the Additional Incremental Term Loan agreement,
the $37.1 million in cash received from certain customers for the provision of
IRU capacity in May 2008 and the recognition of an $8.8 million warranty
receivable when the Galaxy XR satellite was taken out of service in June
2008.  The warranty receivable was a reclassification of the Galaxy XR
satellite net book value from property and equipment to
receivables.  The increase was partially offset by an increase in
accounts payable resulting from increased purchases of property and equipment at
June 30, 2008.
 
 Net receivables
increased $9.4 million in 2008 primarily due to the recognition of an $8.8
million warranty receivable described above.
 
 Senior
Notes
 At
June 30, 2008 we were in compliance with all loan covenants relating to our
7.25% senior notes due 2014.
 
 Senior Credit
Facility
 The Additional
Incremental Term Loan increased the interest rate on the term loan component of
our Senior Credit Facility from LIBOR plus 2.00% to LIBOR plus
4.25%.  The Additional Incremental Term Loan increased the revolving
credit facility interest rate for our Senior Credit Facility from LIBOR plus a
margin dependent upon our Total Leverage Ratio ranging from 1.50% to 2.25% to
LIBOR plus the following Applicable Margin set forth opposite each applicable
Total Leverage Ratio below:
 
 Total
      Leverage Ratio (as defined)
              
              Applicable
      Margin>3.75
              
              4.25%>3.25 but <3.75
              
              3.75%>2.75 but <3.25
              
              3.25%<2.75
              
              2.75%
 
 $145.0 million was
drawn on the Additional Incremental Term Loan at the time of the debt
modification.  The proceeds were used to pay down the $30.0 million
outstanding under our revolving credit facility including accrued interest and
to pay expenses associated with the transaction at closing with the balance
deposited in our bank account. Our term loan is fully drawn and we have letters
of credit outstanding totaling $4.0 million, which leaves $96.0 million
available for borrowing under the revolving credit facility.
 
 The Term Loan
allows for the repurchase of GCI’s common stock under its buyback program when
our total debt leverage is below 4.0 times EBITDAS. The amendment revised
various financial covenants in the agreement and made conforming changes to
various covenants to permit certain previously announced
acquisitions.  Additionally, our loan proceeds were reduced by $2.9
million for an original issue discount.  The discount on the term loan
will be amortized into interest expense using the effective interest
method.
 
 This transaction
was a partial substantial modification of our existing Senior Credit Facility
resulting in a $667,000 write-off of previously deferred loan fees during the
three and six months ended June 30, 2008 in our Consolidated Income
Statement.  Deferred loan fees of $58,000 associated with the portion
of our existing Senior Credit Facility determined not to have been substantially
modified continue to be amortized over the remaining life of the Senior Credit
Facility.
 
 In
connection with the Additional Incremental Term Loan, we paid bank fees and
other expenses of $1.6 million during the three and six months ended June 30,
2008 of which $527,000 were immediately expensed in the three and six months
ended June 30, 2008 and $1.1 million were deferred and will be amortized over
the remaining life of the Senior Credit Facility.
 
 We
acquired long-term debt of $42.7 million upon our acquisition of UUI and Unicom
effective June 1, 2008.  The long-term debt is due in monthly
installments of principal based on a fixed rate amortization
schedule.  The interest rates on the various loans to which this debt
relates range from 2.0% to 11.25%.
  46
  As
of June 30, 2008, maturities of long-term debt were as follows (amounts in
thousands):
 
 Years ending
      December 31,2008 (balance
      of the year)
              
              $
              4,9752009
              
              
              8,4952010
              
              
              8,7382011
              
              
              178,2552011
              
              
              176,4852013 and
      thereafter
              
              
              340,786$
              717,734
 
 Capital
Expenditures
 Our expenditures
for property and equipment, including construction in progress, totaled $122.3
million and $68.5 million in 2008 and 2007, respectively. The 2008 and 2007
expenditures include non-cash additions of $6.3 million and $5.7 million,
respectively, for property and equipment that are accrued in accounts payable as
of June 30, 2008 and 2007.  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
2008 yearly expenditures for property and equipment for our core operations,
including construction in progress, to total $220.0 million to $225.0 million,
depending on available opportunities and the amount of cash flow we generate
during the 2008 year.
 
 Other
 We
entered into various IRU sales agreements for which we received cash of $33.9
million and $37.1 million during the three and six months ended June 30, 2008,
respectively.  These transactions are being accounted for as operating
leases with deferred revenue to be recognized over the estimated life of the IRU
agreement.  We had long-term deferred revenue of $34.7 million related
to these IRU transactions at June 30, 2008.
 
 Effective June 1,
2008 we purchased the stock of the UUI and Unicom subsidiaries of UCI for $40.2
million, net of cash received.  Additionally we assumed $42.7 million
in debt as part of the acquisition.  UUI together with its subsidiary,
United-KUC, provides local telephone service to 60 rural Alaska communities
across Alaska.  Unicom operates DeltaNet, a long-haul broadband
microwave network ringing the Yukon-Kuskokwim Delta – a region of approximately
30,000 square miles in western Alaska. By the summer of 2008, DeltaNet, which is
still under construction but has already commenced operations where completed
microwave towers have been placed into service, will link more than 40 villages
to Bethel, the region’s hub.
 
 On
July 1, 2008, we completed the acquisition all of the interests in Alaska
Wireless for an initial acquisition payment of $14.2 million.  In
addition to the initial acquisition payment, we have agreed to a contingent
payment of approximately $3.0 million in 2010 if certain financial conditions
are met.  Alaska Wireless is a GSM wireless provider and an Internet
service provider serving subscribers in the Dutch Harbor, Sand Point, and
Akutan, Alaska areas.
 
 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 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, 2007 annual
report on Form 10-K/A (Amendment No. 2).
 
 Schedule of Certain Known
Contractual Obligations
 The following table
details future projected payments associated with certain known contractual
obligations as of December 31, 2007, the date of our most recent fiscal year-end
balance sheet.  Our schedule of certain known contractual obligations
has been updated to reflect the Senior Credit Facility Additional Incremental
Term Loan described above, the payments due on the long-term debt acquired in
our June 1, 2008 acquisition of UUI and Unicom, and an amendment to a long-term
capital lease agreement with the wife of our President and CEO for property we
occupy.
  47
  Payments Due
      by PeriodTotal
              
              
              Less than 1
      Year
              
              
              1 to
      3
                Years
              
              
              4 to
      5
                Years
              
              
              More Than 5
      Years(Amounts in
      thousands)Long-term
      debt
              
              $
              719,704
              
              
              
              6,584
              
              
              
              17,240
              
              
              
              355,094
              
              
              
              340,786Interest on
      long-term debt
              
              
              251,125
              
              
              
              45,020
              
              
              
              93,776
              
              
              
              77,529
              
              
              
              34,800Capital lease
      obligations, including interest
              
              
              167,401
              
              
              
              6,947
              
              
              
              23,300
              
              
              
              23,400
              
              
              
              113,754Operating
      lease commitments
              
              
              55,429
              
              
              
              10,979
              
              
              
              15,535
              
              
              
              10,600
              
              
              
              18,315Purchase
      obligations
              
              
              74,828
              
              
              
              60,028
              
              
              
              14,800
              
              
              
              ---
              
              
              
              ---Other
              
              
              66,500
              
              
              
              63,500
              
              
              
              3,000
              
              
              
              ---
              
              
              
              ---Total
      contractual obligations
              
              $
              1,334,987
              
              
              
              193,058
              
              
              
              167,651
              
              
              
              466,623
              
              
              
              507,655
 
 For long-term debt
included in the above table, we have included principal payments on our Senior
Credit Facility and Senior Notes.  Interest on amounts outstanding
under our Senior Credit Facility is based on variable rates.  We used
the current rate paid in June 2008 to estimate our future interest
payments.  Our Senior Notes require semi-annual interest payments of
$11.6 million through February 2014.  For a discussion of our Senior
Notes and Senior Credit Facility see note 7 in the "Notes to Consolidated
Financial Statements" included in Part II of our December 31, 2007 annual report
on Form 10-K/A (Amendment No. 2).  For a discussion of our modified
Senior Credit Facility see note 7 in the accompanying "Notes to Interim
Consolidated Financial Statements".
 
 Capital lease
obligations include the amended capital leases as discussed in note 8 in the
accompanying "Notes to Interim Consolidated Financial
Statements."  For a discussion of our capital and operating leases and
purchase obligations see note 15 in the "Notes to Consolidated Financial
Statements included in Part II of our December 31, 2007 annual report on Form
10-K/A (Amendment No. 2).
 
 The "Other" line
item consists of our commitments to acquire the remaining minority interest in
Alaska DigiTel for approximately $10.3 million, UUI and Unicom for $40.0
million, and Alaska Wireless for approximately $16.0 million to $17.0
million.
 
 We
believe, but can provide no assurances, that we will be able to fund future
projected payments associated with our certain known contractual obligations
through our cash flows from operating activities, existing cash, cash
equivalents, short-term investments, credit facilities, and other external
financing and equity sources.  Should cash flows be insufficient to
support additional borrowings and principal payments scheduled under our
existing credit facilities, capital expenditures will likely be
reduced.
 
 Critical
Accounting Policies
 
 Our accounting and
reporting policies comply with U.S. GAAP. The preparation of financial
statements in conformity with 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 six months ended June 30,
2008 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,
2007 annual report on Form 10-K/A (Amendment No. 2).
  48
  Other significant
accounting policies, not involving the same level of measurement uncertainties
as those listed 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, 2007 annual report on
Form 10-K/A (Amendment No.2).
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 We
are exposed to interest rate risk, which is our primary risk, as well as various
types of market risk in the normal course of business.  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.  On July 1,
2008, we entered into an interest rate cap agreement with a two year term to
convert $180.0 million of variable interest rate debt to 4.5% fixed rate
debt.  The agreement will be accounted for as a derivative under SFAS
133 "Accounting for Derivative Instruments and Hedging
Activities."  As of June 30, 2008, we have borrowed $350.7 million
subject to interest rate risk.  On this amount, each 1% increase in
the LIBOR interest rate would result in $3.5 million of additional gross
interest cost on an annualized basis.  As of July 1, 2008, we have
borrowed $170.7 million subject to interest rate risk.  On this
amount, each 1% increase in the LIBOR interest rate would result in $1.7 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, concluded that our
disclosure controls and procedures were not effective as of June 30, 2008, 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.
  49
  (b)
Changes in Internal Control over Financial Reporting
 
 Information
technology program development and change controls over the unified billing
system and the interface with the general ledger were not designed effectively.
As a result, our automated interface between the unified billing system and the
general ledger was not appropriately configured. In addition, our management
review control over unreconciled transactions recorded in accounts receivable
general ledger accounts was not designed at the level of precision necessary to
detect and correct errors that could be material to annual or interim financial
statements. As a result of these deficiencies, errors existed in our accounts
receivable and revenues that were corrected prior to the issuance of our 2007
annual report on Form 10-K.  Although we began remediation of the
material weaknesses evidenced by these deficiencies during the six months ended
June 30, 2008, we have not had sufficient time to fully implement the control
changes necessary to completely remediate these material
weaknesses.
 
 Our policies and
procedures to ensure that our accounting personnel are sufficiently trained on
technical accounting matters did not operate effectively. More specifically, our
accounting personnel did not have the necessary knowledge and training to
adequately account for and disclose certain share-based compensation awards in
accordance with SFAS No.123(R), Share-Based Payment. In addition, our accounting
personnel lacked adequate training on the operation of certain aspects of the
software used to calculate the Company’s share-based compensation expense. As a
result of these deficiencies, errors existed in the Company's share-based
compensation expense that were corrected prior to the issuance of our 2007
annual report on Form 10-K.  Although we began remediation of the
material weaknesses evidenced by these deficiencies during the fourth quarter of
2007 and continued efforts toward remediation during the six months ended June
30, 2008, we have not had sufficient time to fully implement the control changes
necessary to completely remediate these material weaknesses.
 
 Our entity-level
control related to the selection and application of accounting policies in
accordance with GAAP was not designed effectively, and our policies and
procedures for the recording of depreciation expense during interim reporting
periods were not designed to ensure reporting in accordance with GAAP. These
deficiencies led to errors in interim financial reporting that have been
corrected through the restatement of our interim financial information described
in note 1(m) in the accompanying “Notes to Interim Consolidated Financial
Statements.”  Although we began to remediate these material weaknesses
in June 2008, we have not had sufficient time to fully develop and implement the
control changes necessary to ensure a misstatement of interim or annual
financial reporting does not occur. We will continue to remediate these
deficiencies in the third quarter of 2008 by taking the following
actions:
 
 •
              Expanding our
      accounting policy documentation and implementing policies and procedures
      to periodically review our accounting policies to ensure ongoing GAAP
      compliance.
 •
              With regards
      to our policies and procedures for the recording of depreciation expense
      during interim reporting periods, we will continue to revise our
      accounting policies and implement procedures to ensure depreciation is
      recorded consistent with GAAP for interim and annual reporting
      periods.
 
 In
March 2008 we implemented a new online payment system.  The
implementation replaced a system supported internally with a system supported by
an external company and has resulted in certain changes to our processes and
procedures affecting internal control over financial reporting during the six
months ended June 30, 2008.  We have committed internal and external
resources to revise and document processes and related internal controls over
the new system.
 
 Except as described
above, there were no changes in our internal control over financial reporting
during the quarter ended June 30, 2008 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 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
  50
  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
1A. Risk Factors.
 
 All of our risk
factors as disclosed in our December 31, 2007 annual report on Form 10-K/A
(Amendment No. 2) remain substantially unchanged. Upon our acquisition of
100% of the outstanding stock of the regulated incumbent local service provider,
UUI effective June 1, 2008, as further described in note 1(l) in the
accompanying notes to interim consolidated financial statements, we have
identified the following additional risk factor that may affect our business and
future results:
 
 ·
              Revenues from access charges
      may be reduced or lost.  We expect to recognize $13.0
      million to $14.0 million for the year ended December 31, 2008 from local
      exchange network access charges.  The amount of revenue that we
      receive from these access charges is calculated in accordance with
      requirements set by the FCC and the RCA.  Any change in these
      requirements may reduce our revenues and earnings.  The FCC has
      actively reviewed new mechanisms for intercarrier compensation that, in
      some cases, could eliminate access charges
      entirely.  Elimination of access charges would likely have an
      adverse effect on our revenue and earnings.  In any event, we
      believe that new mechanisms for intercarrier compensation would more
      likely than not reduce this source of revenue.  Similarly, the
      RCA has adopted regulations modifying intrastate access charges that may
      reduce our revenue.
 
 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 Treasurer10.154
              Fourteenth
      Amendment to Contract for Alaska Access Services between General
      Communication, Inc. and its wholly owned subsidiary GCI Communication
      Corp., and MCI Communications Services, Inc. d/b/a Verizon Business
      Services (successor-in-interest to MCI Network Services, Inc., which was
      formally known as MCI WorldCom Network Services) dated May 15,
      2008
 
  51
  
 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
              
              August 13,
      2008Ronald A.
      Duncan
              
              (Principal
      Executive Officer)/s/ G. Wilson
      Hughes
              
              Vice
      President and Director
              
              August 13,
      2008G. Wilson
      Hughes/s/ John M.
      Lowber
              
              Secretary,
      Treasurer and Director
              
              August 13,
      2008John M.
      Lowber
              
              (Principal
      Financial and Accounting Officer)
 
 
 
 
 
 
 
  
  52