UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

**FORM 10-K**

xANNUAL REPORT PURSUANT TO SECTION 13 or            15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For            the fiscal year endedDecember 31, 2007

 

or

 

oTRANSITION REPORT PURSUANT TO SECTION 13            or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For            the transition period            from             to          

 

Commission File No.0-5890

 

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

 

|   | **State of Alaska**             |   | **91-1820757**      |   |
|--------|---------------------------------|--------|---------------------|--------|
|   | (State or other jurisdiction of |   | (I.R.S Employer     |   |
|   | incorporation or organization)  |   | Identification No.) |   |

 

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

 

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

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

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

 

Indicate by check mark if the registrant is a well-known seasoned            issuer, as defined in Rule 405 of the Securities Act.

YesoNox

Indicate by check mark if the registrant is not required to file reports            pursuant to Section 13 or Section 15(d) of the Exchange Act.

YesoNox

Indicate by check mark whether the registrant (1) has filed all reports            required to be filed by Section 13 or 15(d) of the Exchange Act 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.

YesxNoo

Indicate by check mark if disclosure of delinquent filers pursuant to            Item 405 of Regulation S-K is not contained herein, and will not be contained, to the            best of registrant’s knowledge, in definitive proxy or information statements            incorporated by reference in Part III of this Form 10-K or any amendment to this Form            10-K.            o

             

             

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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 (Check one).

 

| Large accelerated filero                                                                       | Accelerated filero         |
|------------------------------------------------------------------------------------------------|----------------------------|
| Non-accelerated filerx(Do not check if a                            smaller reporting company) | Smaller reporting companyo |

 

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Exchange Act).

|  Yeso | Nox |
|------------|-----|

 

*THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS            I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED            DISCLOSURE FORMAT.*

 

 

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**GCI, INC.**

**A            WHOLLY-OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.**

**2007 ANNUAL REPORT ON FORM 10-K**

**TABLE OF CONTENTS**

 

 

| Glossary                                                                             |                                                                                                                                                                           |   |   |   | 4      |
|--------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                                 |                                                                                                                                                                           |   |   |   |   |
| Cautionary Statement Regarding Forward-Looking                            Statements |                                                                                                                                                                           |   |   | 7      |
|                                                                                 |                                                                                                                                                                           |   |   |   |   |
| Part I                                                                               |                                                                                                                                                                           |   |   |   | 8      |
|                                                                                 |                                                                                                                                                                           |   |   |   |   |
|                                                                                 | Item 1. Business                                                                                                                                                               |   |   |   | 8      |
|                                                                                 | Item 1A. Risk Factors                                                                                                                                                          |   |   |   | 39     |
|                                                                                 | Item 1B. Unresolved Staff Comments                                                                                                                                             |   |   |   | 47     |
|                                                                                 | Item 2. Properties                                                                                                                                                             |   |   |   | 47     |
|                                                                                 | Item 3. Legal Proceedings                                                                                                                                                      |   |   |   | 48     |
|                                                                                 | Item 4. Omitted per General Instruction I(1)(a) and (b)                            of Form 10-K                                                                                |   |   |   |   |
|                                                                                 |                                                                                                                                                                           |   |   |   |   |
| Part II                                                                              |                                                                                                                                                                           |   |   |   | 48     |
|                                                                                 | Item 5. Market for the Registrant's Common Equity,                            Related Stockholder Matters and Issuer Purchases of Equity                            Securities |   |   |   | 48     |
|                                                                                 | Item 6. Selected Financial Data                                                                                                                                                |   |   |   | 49     |
|                                                                                 | Item 7. Management's Discussion and Analysis of                            Financial Condition and Results of Operations                                                       |   |   |   | 49     |
|                                                                                 | Item 7A. Quantitative and Qualitative Disclosures about                            Market Risk                                                                                 |   |   |   | 78     |
|                                                                                 | Item 8. Consolidated Financial Statements and                            Supplementary Data                                                                                    |   |   |   | 79     |
|                                                                                 | Item 9. Changes In and Disagreements With Accountants on                            Accounting and Financial Disclosure                                                        |   |   |   | 79     |
|                                                                                 | Item 9A. Controls and Procedures                                                                                                                                               |   |   |   | 79     |
|                                                                                 | Item 9B. Other Information                                                                                                                                                     |   |   |   | 81     |
|                                                                                 |                                                                                                                                                                           |   |   |   |   |
| Part III                                                                             |                                                                                                                                                                           |   |   |   | 81     |
|                                                                                 | Items 10, 11, 12, 13 and 14 are omitted per General                            Instruction I(1)(a) and (b) of Form 10-K                                                        |   |   |   | 81     |
|                                                                                 |                                                                                                                                                                           |   |   |   |   |
| Part IV                                                                              |                                                                                                                                                                           |   |   |   | 82     |
|                                                                                 | Item 15. Exhibits, Consolidated Financial Statement                            Schedules                                                                                       |   |   |   | 82     |
|                                                                                 |                                                                                                                                                                           |   |   |   |   |
| SIGNATURES                                                                           |                                                                                                                                                                           |   |   | 133    |
|                                                                                      |                                                                                                                                                                                |        |        |        |        |  |

 

 

This            Annual Report on Form 10-K is for the year ending December 31, 2007. This Annual Report            modifies and supersedes documents filed prior to this Annual Report. The Securities and            Exchange Commission (“SEC”) allows us to “incorporate by            reference” information that we file with them, which means that we can disclose            important information to you by referring you directly to those documents. Information            incorporated by reference is considered to be part of this Annual Report. In addition,            information that we file with the SEC in the future will automatically update and            supersede information contained in this Annual Report.

 

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**Glossary**

 

We and            our industry use many terms and acronyms that may not be familiar to you. To assist you            in reading this document, we have provided below definitions of some of these            terms.

 

Alaska            DigiTel — An Alaska based wireless communications company of which we acquired an            81.9% equity interest on January 2, 2007.

 

AULP            East — An undersea fiber optic cable system connecting Whittier, Valdez and            Juneau, Alaska and Seattle, Washington, which was placed into service in February            1999.

 

AULP            West — An undersea fiber optic cable system connecting Seward, Alaska to            Warrenton, Oregon which was placed into service in June 2004.

 

Basic            Service — The basic service tier includes, at a minimum, signals of local            television broadcast stations, any public, educational, and governmental programming            required by the franchise to be carried on the basic tier, and any additional video            programming service added to the basic tier by the cable operator.

 

CDMA            —Code Division Multiple Access — A digital wireless phone technology            offered under our Alaska DigiTel brand name.

 

CLEC            — Competitive Local Exchange Carrier — A company that provides its            customers with an alternative to the ILEC for local transport of communications            services, as allowed under the 1996 Telecom Act.

 

Collocation — The ability of a competitive access provider or CLEC            to connect its network to the LEC’s central offices. Physical collocation occurs            when a connecting carrier places its network connection equipment inside the            LEC’s central offices. Virtual collocation is an alternative to physical            collocation pursuant to which the LEC permits a competitive access provider or CLEC to            connect its network to the LEC’s central offices on comparable terms, even though            the competitive access provider’s or CLEC’s network connection equipment is            not physically located inside the central offices.

 

DAMA            — Demand Assigned Multiple Access — Digital satellite earth station            technology that allows calls to be made between remote villages using only one            satellite hop thereby reducing satellite delay and capacity requirements while            improving quality.

 

DBS            — Direct Broadcast Satellite — Subscription television service obtained            from satellite transmissions using frequency bands that are internationally allocated            to the broadcast satellite services. The major providers of DBS are currently The            DirecTV Group, Inc. and EchoStar Communications Corporation (marketed as the DISH            Network).

 

DLC            — Digital Loop Carrier — A digital transmission system designed for            subscriber loop plant. Multiplexes a plurality of circuits onto very few wires or onto            a single fiber pair.

 

DLPS            — Digital Local Phone Service — A term we use referring to our deployment            of voice telephone service utilizing our hybrid-fiber coax cable facilities.

 

DSL            — Digital Subscriber Line — Technology that allows Internet access and            other high-speed data services at data transmission speeds greater than those of modems            over conventional telephone lines.

 

DVR            — Digital Video Recorder — A service that allows digital cable subscribers            to select, record and store programs and play them at whatever time is convenient. DVR            service also provides the ability to pause and rewind “live”            television.

 

Equal            Access — Connection provided by a LEC permitting a customer to be automatically            connected to the Interexchange carrier of the customer’s choice when the customer            dials “1.” Also refers to a generic concept under which the Bell system            operating companies (“BOC”) must provide access services to            AT&T’s competitors that are equivalent to those provided to            AT&T.

 

ETC            — Eligible Telecommunications Carrier — A telephone service provider that            has agreed to hold out service to all customers (excluding those who fail to pay for            service) in the area for which the carrier is designated as an ETC. In return, the            carrier is eligible for state and federal universal service funds.

 

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FCC            — Federal Communications Commission — A federal regulatory body empowered            to establish and enforce rules and regulations governing public utility companies and            others, such as the Company.

 

Frame            Relay — A wideband (64 kilobits per second to 1.544 Mbps) packet-based data            interface standard that transmits bursts of data over WANs. Frame-relay packets vary in            length from 7 to 1024 bytes. Data oriented; it is generally not used for voice or            video.

 

GCI            — General Communication, Inc. — An Alaska corporation and the parent of            GCI, Inc.

 

GSM            — Global System for Mobile Communications — A digital wireless phone            technology offered under our GCI brand name.

 

HDTV            — High-Definition Television — A digital television format delivering            theater-quality pictures and CD-quality sound. HDTV offers an increase in picture            quality by providing up to 1,920 active horizontal pixels by 1,080 active scanning            lines, representing an image resolution of more than two million pixels. In addition to            providing improved picture quality with more visible detail, HDTV offers a wide screen            format and Dolby® Digital 5.1 surround sound.

 

ILEC            — Incumbent Local Exchange Carrier — With respect to an area, the LEC that            — (A) on the date of enactment of the Telecommunications Act of 1996, provided            telephone exchange service in such area; and (B)(i) on such date of enactment, was            deemed to be a member of the exchange carrier association pursuant to section 69.601(b)            of the FCC’s regulations (47 C.F.R. 69.601(b)); or (ii) is a person or entity            that, on or after such date of enactment, became a successor or assign of a member            described in clause (i).

 

Interexchange — Communication between two different local access            and transport areas or, in Alaska, between two different Local Exchange serving            areas.

 

IP            — Internet Protocol — The method or protocol by which data is sent from one            computer to another on the Internet. Each computer (known as a host) on the Internet            has at least one IP address that uniquely identifies it from all other computers on the            Internet.

 

ISDN            — Integrated Services Digital Network — A set of standards for transmission            of simultaneous voice, data and video information over fewer channels than would            otherwise be needed, through the use of out-of-band signaling. The most common ISDN            system provides one data and two voice circuits over a traditional copper wire pair,            but can represent as many as 30 channels. Broadband ISDN extends the ISDN capabilities            to services in the Gigabit per second range.

 

ISP            — Internet Service Provider — A company providing retail and/or wholesale            Internet services.

 

LAN            — Local Area Network — The interconnection of computers for sharing files,            programs and various devices such as printers and high-speed modems. LANs may include            dedicated computers or file servers that provide a centralized source of shared files            and programs.

 

LEC            — Local Exchange Carrier — A company providing local telephone access            services. Each BOC is a LEC.

 

LMDS            — Local Multipoint Distribution System — LMDS uses microwave signals            (millimeter wave signals) in the 28 GHz spectrum to transmit voice, video, and data            signals within small cells 3-10 miles in diameter. LMDS allows license holders to            control up to 1.3 GHz of wireless spectrum in the 28 GHz Ka-band. The 1.3 GHz can be            used to carry digital data at speeds in excess of one gigabit per second. The extremely            high frequency used and the need for point to multipoint transmissions limits the            distance that a receiver can be from a transmitter. This means that LMDS will be a            “cellular” technology, based on multiple, contiguous, or overlapping cells.            LMDS is expected to provide customers with multichannel video programming, telephony,            video communications, and two-way data services. ILECs and cable companies may not            obtain the in-region 1150 MHz license for three years following the date of the license            grant. Within 10 years following the date of the license grant, licensees will be            required to provide ‘substantial service’ in their service            regions.

 

Local            Exchange — A geographic area generally determined by a state regulatory body, in            which calls generally are transmitted without toll charges to the calling or called            party.

 

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Local            Number Portability — The ability of an end user to change local or wireless            service providers while retaining the same telephone number.

 

Lower            48 States or Lower 48 — Refers to the 48 contiguous states south of or below            Alaska.

 

Lower            49 States or Lower 49 — Refers to Hawaii and the Lower 48 States.

 

MAN            — Metropolitan Area Network — LANs interconnected within roughly a 50-mile            radius. MANs typically use fiber optic cable to connect various wire LANs. Transmission            speeds may vary from 2 to 100 Mbps.

 

Mat-Su            Valley — The Matanuska and Susitna valleys are located in south-central Alaska,            to the north of Anchorage, and include the communities of Palmer and Wasilla and the            immediately surrounding areas.

 

PCS            — Personal Communication Services — PCS encompasses a range of advanced            wireless mobile technologies and services. It promises to permit communications to            anyone, anywhere and anytime while on the move. The Cellular Telecommunications            Industry Association defines PCS as a “wide range of wireless mobile            technologies, chiefly cellular, paging, cordless, voice, personal communications            networks, mobile data, wireless private branch exchange, specialized mobile radio, and            satellite-based systems.” The Federal Communications Commission defines PCS as a            “family of mobile or portable radio communications services that encompasses            mobile and ancillary fixed communications services to individuals and businesses and            can be integrated with a variety of competing networks.”

 

Private            Line — Uses dedicated circuits to connect customer’s equipment at both ends            of the line. Does not provide any switching capability (unless supported by customer            premise equipment). Usually includes two local loops and an Interexchange carrier            circuit.

 

Private            Network — A communications network with restricted (controlled) access usually            made up of Private Lines (with some private branch exchange switching).

 

RCA            — Regulatory Commission of Alaska — A state regulatory body empowered to            establish and enforce rules and regulations governing public utility companies and            others, such as the Company, within the State of Alaska (sometimes referred to as            Public Service Commissions, or PSCs, or Public Utility Commissions, or            PUCs).

 

SchoolAccess® — Our Internet and related services            offering to schools in Alaska, and some sites in Arizona, Montana and New Mexico. The            federal mandate through the 1996 Telecom Act to provide universal service resulted in            schools across Alaska qualifying for varying levels of discounts to support the            provision of Internet services. The Universal Service Administrative Company through            its Schools and Libraries Division administers this federal program.

 

SDN            — Software Defined Network — A switched long-distance service for very            large users with multiple locations. Instead of putting together their own network,            large users can get special usage rates for calls carried on regular switched            long-distance lines.

 

SMATV            — Satellite Master Antenna Television — (Also known as “private cable            systems”) are multichannel video programming distribution systems that serve            residential, multiple-dwelling units, and various other buildings and complexes. A            SMATV system typically offers the same type of programming as a cable system, and the            operation of a SMATV system largely resembles that of a cable system — a            satellite dish receives the programming signals, equipment processes the signals, and            wires distribute the programming to individual dwelling units. The primary difference            between the two is that a SMATV system typically is an unfranchised, stand-alone system            that serves a single building or complex, or a small number of buildings or complexes            in relatively close proximity to each other.

 

SONET            — Synchronous Optical Network — A 1984 standard for optical fiber            transmission on the public network. 51.84 Mbps to 9.95 Gigabits per second, effective            for ISDN services including asynchronous transfer mode.

 

T-1            — A data communications circuit capable of transmitting data at 1.5            Mbps.

 

TCP/IP            — Transmission Control Protocol/Internet Protocol — A suite of network            protocols that allows computers with different architectures and operating system            software to communicate with other computers on the Internet.

 

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UNE            — Unbundled Network Element — A discrete component of a telephone network.            Unbundled network elements are the basic network functions, i.e., the components needed            to provide a full range of communications services. They are physical facilities as            well as all the features and capabilities provided by those facilities.

 

VoIP            – Voice over Internet Protocol — Technology that allows voice telephone            service over broadband Internet connections via digital packets rather than traditional            protocols.

 

VSAT            — Very Small Aperture Terminal — A small, sometimes portable satellite            terminal that allows connection via a satellite link.

 

WAN            — Wide Area Network — A remote computer communications system. WANs allow            file sharing among geographically distributed workgroups (typically at higher cost and            slower speed than LANs or MANs). WANs typically use common carriers’ circuits and            networks. WANs may serve as a customized communication backbone that interconnects all            of an organization’s local networks with communications trunks that are designed            to be appropriate for anticipated communication rates and volumes between            nodes.

 

1992            Cable Act — The Cable Television Consumer Protection and Competition Act of            1992.

 

1996            Telecom Act — The Telecommunications Act of 1996 — The 1996 Telecom Act was            signed into law February 8, 1996. Under its provisions, BOCs were allowed to            immediately begin manufacturing, research and development; GTE Corp. could begin            providing Interexchange services through its telephone companies nationwide; laws in 27            states that foreclosed competition were pre empted; co-carrier status for CLECs was            ratified; and the physical collocation of competitors’ facilities in LECs central            offices was allowed.

 

The            purpose of the 1996 Telecom Act was to move from a regulated monopoly model of            telecommunications to a deregulatory competitive markets model. The act eliminated the            old barriers that prevented three groups of companies, the LECs, including the BOCs,            the long-distance carriers, and the cable TV operators, from competing head-to-head            with each other. The act requires LECs to let new competitors into their business. It            also requires the LECs to open up their networks to ensure that new market entrants            have a fair chance of competing. The bulk of the act is devoted to establishing the            terms under which the LECs must open up their networks.

 

The            1996 Telecom Act substantially changed the competitive and regulatory environment for            telecommunications providers by significantly amending the Communications Act of 1934            including certain of the rate regulation provisions previously imposed by the Cable            Television Consumer Protection and Competition Act of 1992 (the “1992 Cable            Act”). The 1996 Telecom Act eliminated rate regulation of the cable programming            service tier in 1999. Further, the regulatory environment will continue to change            pending, among other things, the outcome of legal challenges, legislative activity, and            FCC rulemaking and enforcement activity in respect of the 1992 Cable Act and the            completion of a significant number of continuing FCC rulemakings under the 1996 Telecom            Act.

 

**Cautionary Statement Regarding Forward-Looking            Statements**

 

You            should carefully review the information contained in this Annual Report, but should            particularly consider any risk factors that we set forth in this Annual Report and in            other reports or documents that we file from time to time with the SEC. In this Annual            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 those            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 those 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 those statements, you should specifically consider various factors,            including those identified under “Risk Factors,” and elsewhere in this            Annual Report. Those factors may cause our actual results to differ materially from any            of our forward-looking statements. For these 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 such risks, uncertainties and other factors speak only            as of the date on which they were originally made and we

 

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expressly disclaim any obligation or undertaking to update or revise any            forward-looking statement to reflect any change in our expectations with regard to            those 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.

 

**Part I**

 

***Item 1. Business***

 

**General**

 

In this            Annual Report, “we,” “us,” “our” and “the            Company” refer to GCI, Inc. and its direct and indirect subsidiaries.

 

GCI,            Inc. was incorporated in 1997 to effect the issuance of Senior Notes as further            described in note 10 to the accompanying "Consolidated Financial Statements" included            in Part II of this Report. GCI, Inc. as a wholly owned subsidiary of GCI, received            through its initial capitalization all ownership interests in subsidiaries previously            held by GCI, GCI was incorporated in 1979 under the laws of the State of Alaska and has            its principal executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK            99503-2781 (telephone number 907-868-5600).

 

GCI,            Inc. is primarily a holding company and together with its direct and indirect            subsidiaries, is a diversified communications provider in the State of            Alaska.

 

**Availability of Reports and Other Information**

 

Internet users can access information about the Company and its services            at http://www.gci.com/, http://www.gcinetworksolutions.com/, and            http://www.alaskaunited.com/. The Company hosts Internet services at            http://www.gci.net/, broadband delivery of health services at http://www.connectmd.com,            and SchoolAccess® services at http://www.schoolaccess.net/. Our online telephone            directory and yellow pages are hosted at http://www.gcidirectory.com/. Internet users            can access information about our majority-owned subsidiary, Alaska DigiTel, and its            services at http://www.alaskadigitel.com/.

 

We make            available on the http://www.gci.com/ website, free of charge, access to our Annual            Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,            GCI’s Proxy Statement on Schedule 14A and amendments to those materials filed or            furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934            as soon as reasonably practicable after we electronically submit such material to the            SEC. In addition, the SEC’s website is http://www.sec.gov/. The SEC makes            available on this website, free of charge, reports, proxy and information statements,            and other information regarding issuers, such as us, that file electronically with the            SEC. Information on our websites or the SEC’s website is not part of this            document.

 

**Financial Information about Industry Segments**

 

Our            four reportable segments are Consumer, Network Access, Commercial and Managed Broadband            services.

 

For            financial information about our reportable segments, see “Part II — Item 7            — Management’s Discussion and Analysis of Financial Condition and Results            of Operations.” Also refer to note 11 included in “Part II — Item 8            — Consolidated Financial Statements and Supplementary Data.”

 

**Narrative Description of our Business**

 

**General**

We are            Alaska’s leading provider of long-distance, cable television, data and Internet            services, as measured by revenues, we are the second largest local access provider, as            measured by local access lines, and we are the third largest wireless service provider            as measured by lines in service. A pioneer in bundled service offerings, we provide            facilities-based local and long distance voice, cable video, Internet and data            communication services, and resell wireless telephone services, to

 

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consumer, network access, commercial and managed broadband customers            under our GCI brand. As of our January 2, 2007 acquisition of a majority ownership            position in Alaska DigiTel, we provide wireless telephone services over our own            facilities under the Alaska DigiTel brand name. Over the next three years we plan to            expand our CDMA wireless facilities and construct GSM wireless facilities throughout            the terrestrially served portions of Alaska and become a facilities-based wireless            telephone provider.

 

We            generated consolidated revenues of $520.3 million in 2007. We ended 2007 with 100,400            long-distance subscribers, 120,000 local access lines in service, 143,300 basic cable            subscribers, 77,300 wireless lines in service, and 96,500 cable modem subscribers. A            substantial number of our customers subscribe to product bundles that include two or            more of our services.

 

Since            GCI’s founding in 1979, we have consistently expanded our product portfolio to            satisfy our customers’ needs. We have benefited from the attractive and unique            demographic and economic characteristics of the Alaska market. We believe our            integrated strategy of providing innovative bundles of voice, video, data and wireless            services provides us with an advantage over our competitors and will allow us to            continue to attract new customers, retain existing customers and expand our addressable            market. We hold leading market shares in long-distance, cable video and Internet            services and have gained significant market share in the local access market against an            incumbent provider. We are increasing our market share in the wireless services market            against the incumbent providers.

 

Through            our focus on long-term results and strategic capital investments, we have consistently            grown our revenues and expanded our margins. Our integrated strategy provides us with            competitive advantages in addressing the challenges of converging telephony, video and            broadband markets and has been a key driver of our success. We use our extensive            communications networks to provide our customers with integrated communication services            packages that we believe are unmatched by any other competitor in Alaska.

 

We            operate a broadband communications network that permits the delivery of a seamless            integrated bundle of communications, entertainment and information services. We offer a            wide array of consumer and commercial communications and entertainment services —            including local access telephone, long-distance and wireless communications, cable            television, consulting services, network and desktop computing outsourced services, and            dial-up, broadband (cable modem, wireless and DSL) and dedicated Internet access            services at a wide range of speeds — all under the GCI brand name. We also offer            wireless communications under the Alaska DigiTel brand name.

 

We            believe that the size and growth potential of the voice, video and data market, the            increasing deregulation of communication services, and the increased convergence of            telephony, wireless, and cable services continue to offer us considerable opportunities            to integrate our communications, Internet and cable services and expand into            communications markets within Alaska.

 

Considerable deregulation has already taken place in the United States            because of the 1996 Telecom Act with the barriers to competition between long-distance,            local access and cable providers being lowered. We believe our continued development of            cable video service, local access service, Internet services, broadband services, and            wireless services leave us well positioned to continue to take advantage of deregulated            markets.

 

**Recent Developments**

 

*Wireless Business Strategy.*During 2007 we            finalized our wireless business strategy. We plan to expand Alaska DigiTel’s CDMA            network and construct a GSM network. We estimate we will spend approximately $100.0            million to construct wireless facilities throughout the terrestrially served portions            of Alaska including the cities of Anchorage, Fairbanks, and Juneau. We expect that            sixty percent of that amount will be expended in 2008 with the remainder spread about            equally over the subsequent two years.

 

*Dobson /AT&T Agreement.*AT&T            Mobility, LLC (“AT&T”) acquired Dobson Communications            (“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 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 will terminate as of July 1, 2008.            AT&T will provide us with a large block of wireless network usage at no charge to            facilitate the transition of our customers to our facilities. We

 

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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 on a per minute basis. The block of wireless network usage at no charge will            reduce cost of goods sold exclusive of depreciation and amortization (“Cost of            Goods Sold”) during the four year period ended June 30, 2012, that we would have            otherwise recognized in accordance with the new agreement, however, we are unable to            estimate the impact this change will have on our Cost of Goods Sold.

 

*UUI            and Unicom Acquisition.*In October 2007 we signed an            agreement to purchase the stock of the United Utilities, Inc. (“UUI”) and            Unicom Telecommunications (“Unicom”) subsidiaries of United Companies, Inc.            (“UCI”) for $40.0 million expected to be paid upon closing. Additionally we            may assume approximately $37.0 million in net debt as part of the acquisition. We            expect to fund the transaction by drawing down additional debt. 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. We            have filed applications with the RCA and FCC seeking the requisite regulatory consent            for the transaction. The FCC comment cycle is completed and the parties are awaiting            FCC action. GCI is currently filing replies to comments and the statutory date for a            final RCA decision is May 16, 2008. This transaction will close upon regulatory            approval which is expected in the second or third quarter of 2008.

 

*Alaska Wireless Acquisition.*In December            2007 we signed a purchase agreement to acquire all of the interests in Alaska Wireless,            LLC (“Alaska Wireless”) for $13.0 million to $14.0 million, expected to be            paid upon closing. In addition to the initial payment we have agreed to a contingent            payment of approximately $3.0 million in 2010 if certain financial conditions are met.            We will fund the transaction from cash on hand, by drawing down additional debt, or a            combination of the two. Alaska Wireless is a GSM cellular provider serving            approximately 4,000 subscribers in the Dutch Harbor, Alaska area. In addition to the            acquisition, we will enter into a management agreement with the existing owners of            Alaska Wireless. The business will continue to operate under the Alaska Wireless name            and the current management team will continue to manage its day-to-day operations. We            filed an FCC application seeking the requisite regulatory consent for this transaction            on January 18, 2008. This transaction will close upon regulatory approval which is            expected in the second or third quarter of 2008.

 

*Acquisition of Remaining Alaska DigiTel Interest.*In December 2007, we signed a definitive agreement to acquire the            remaining minority interest in Alaska DigiTel for a total consideration of            approximately $10.0 million. On January 22, 2008, the FCC initiated its proceedings to            review our application seeking requisite regulatory approval of the proposed change in            control. Following the expected FCC approval of the change in control, we will own 100%            of Alaska DigiTel. Alaska DigiTel will construct and operate the CDMA portion of our            statewide wireless platform. Please see the discussion of our initial acquisition of            Alaska DigiTel below.

 

*Southeast Alaska Fiber Optic Cable Network.*In November 2008 we expect to complete construction of a fiber optic            cable network in Southeast Alaska. The 802 miles of fiber optic cable will connect            Ketchikan, Wrangell, Petersburg, Angoon and Sitka, Alaska to our Alaska United West            undersea fiber optic cable currently connecting Alaska to the Lower 48. The fiber optic            cable will also provide a second fiber link to Juneau, Alaska creating a SONET ring            which will provide alternative routing and overflow traffic-handling capabilities. In            2007 we entered into agreements to purchase the submarine cable, amplifiers and line            terminal equipment for this project.

 

**Development of our Business During the Past Fiscal            Year**

 

*Alaska DigiTel Initial Acquisition and Loan.*On January 1, 2007 we invested $29.5 million in Alaska DigiTel in            exchange for an 81.9% equity interest. In exchange for our investment, we received a            majority equity interest in Alaska DigiTel but do not have voting control of Alaska            DigiTel. Our existing wireless products continue to compete with Alaska DigiTel in the            Alaska market.

 

We also            entered into a loan agreement with Alaska DigiTel dated as of January 2, 2007. Under            the loan agreement, we made available to Alaska DigiTel a $15.0 million revolving            credit facility. In January 2008 the revolving credit facility available to Alaska            DigiTel was increased to $25.0 million. The advances under the loan agreement are            secured by all personal property of Alaska DigiTel and its subsidiaries, and by the            membership interests in Alaska DigiTel held by AKD Holdings, LLC. The agreement            provides that the outstanding loans under the revolving credit facility will convert to            a term loan on December 31, 2008. Principal on the term loan will be due in quarterly            installments beginning March 31, 2009

 

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equal            to 1.25% of the term loan, increasing to 2.50% beginning March 31, 2010. The remaining            balance of the term loan is due on June 30, 2011.

 

*Capital Lease Obligation.*On March 31,            2006, through our subsidiary GCC, we entered into an agreement to lease transponder            capacity on Intelsat, Ltd.’s (“Intelsat”) Galaxy 18 spacecraft that            is expected to be launched May 3, 2008. We will continue to lease capacity on the            Horizons 1 satellite, which is owned jointly by Intelsat and JSAT International, Inc.            The leased capacity is expected to replace our existing transponder capacity on            Intelsat’s Galaxy XR satellite when it reaches its end of life which is estimated            to be May 18, 2008.

 

We will            lease C-band and Ku-Band transponders over an expected term of 14 years once the            satellite is placed into commercial operation in its assigned orbital location, and the            transponders meet specific performance specifications and are made available for our            use. We will record the capital lease obligation of $98.6 million and the addition to            our Property and Equipment when the satellite is made available for our use which is            expected to occur May 18, 2008.

 

There            is uncertainty whether the Galaxy 18 spacecraft will launch on schedule as discussed in            “Part I — Item 1A. Risk Factors — If a failure occurs in our            satellite communications systems, our ability to immediately restore the entirety of            our service may be limited.”

 

*Senior Credit Facility.*In September 2007            we exercised our right to add an Incremental Facility of up to $100.0 million to our            existing Senior Credit Facility. The Incremental Facility was structured in the form of            a $55.0 million increase to the existing term loan component of our Senior Credit            Facility and a $45.0 million increase to the existing revolving loan component of our            Senior Credit Facility. The $100.0 million Incremental Facility will become due under            the same terms and conditions as set forth in the existing Senior Credit            Facility.

 

You            should see “Part I — Item 1. Business — Regulation” for            regulatory developments since 2006.

 

**Competition in the Communications Industry**

There            is substantial competition in the communications industry. The traditional dividing            lines between providers offering long-distance, local and wireless telephone services,            Internet services and video services are increasingly becoming blurred. Through mergers            and various service integration and product bundling strategies, major providers,            including us, are striving to provide integrated communications service offerings            within and across geographic markets. The converging communications industry is            competing to deliver service bundles that include voice, broadband Internet access, and            video content. We maintain a strong competitive position; however, there is active            competition in the sale of substantially all services and products we offer. For more            information about competition in each of our reportable segments, you should refer to            each section titled “Competition” in “Description of our Business by            Reportable Segment” below.

 

**Competitive Strengths**

*Market Leader.*We are Alaska’s            leading provider of long-distance, cable television and data and Internet services, as            measured by revenues, we are the second largest local access provider, as measured by            local access lines, and we are the third largest wireless service provider as measured            by wireless revenues and lines in service. We attribute our leadership position to our            commitment to provide our customers with high-quality products in bundled offerings            that maximize their satisfaction.

 

*Advanced Infrastructure and Robust Network Assets.*We own and operate advanced networks that provide integrated end-to-end            solutions. Our hybrid-fiber coax cable network enables us to offer last-mile broadband            connectivity to our customers. Our interstate and undersea fiber optic cable systems            connect our major markets in Alaska to the Lower 48 States. We employ satellite            transmission for rural intrastate and interstate traffic in markets where terrestrial            based network alternatives are not available. We have or expect to be able to obtain            satellite transponders to meet our long-term satellite capacity requirements. In our            local access service markets, we offer services using our own facilities, unbundled            network elements and wholesale/resale.

 

*Bundled Service Offerings.*Ownership and            control of our network and communications assets have enabled us to effectively market            bundled service offerings. Bundling facilitates the integration of operations and            administrative support to meet the needs of our customers. Our product and service            portfolio includes stand-alone offerings and bundled combinations of local and            long-distance voice and data services, cable video, broadband (cable modem, fixed            wireless and DSL), dedicated Internet access services, mobile wireless and other            services.

 

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*Well-recognized Brand Name.*Our GCI brand            is the oldest brand among major communications providers in Alaska and positively            differentiates our services from those of our competitors. We believe our customers            associate our brand name with quality products. We continue to benefit from high name            recognition and strong customer loyalty, and the majority of our customers purchase            multiple services from us. We have been successful in selling new and enhanced products            to our customers based on perceived quality of products and brand recognition. Our            Alaska DigiTel brand name has been in the Alaska marketplace since 1998 and we believe            our customers associate this brand name with quality wireless products.

 

*Favorable Alaskan Market Dynamics.*The            Alaskan communications market is characterized by its large geographic size and            isolated markets that include a combination of major metropolitan areas and small,            dense population clusters, which create a deterrent to potential new entrants. Due to            the remote nature of its communities, the state’s residents and businesses rely            extensively on our systems to meet their communications needs. We believe that, when            compared to national averages, Alaskan households spend more on communication services.            According to the United States Census Bureau, the median household income in Alaska was            22% higher than the 2006 United States national average. Please see the            “Geographic Concentration and the Alaska Economy” section of “Part II            — Item 7. Management’s Discussion and Analysis of Financial Condition and            Results of Operations” for a discussion of Alaska’s economic outlook. We            believe there is a positive outlook for continued growth due to our planned facilities            expansion and marketing strategy.

 

*Experienced Management Team.*Our            experienced management team has a proven track record and has consistently expanded our            business and improved our operations. Our senior management averages more than 27 years            of experience in the communications industry and more than 18 years with our            Company.

 

**Business Strategy**

We            intend to continue to increase revenues and cash flow using the following            strategies:

 

*Continue to Offer Bundled Products.*We            offer innovative service bundles to meet the needs of our consumer and commercial            customers. We believe that bundling our services significantly improves customer            retention, increases revenue per customer and reduces customer acquisition expenses.            Our experience indicates that our bundled customers are significantly less likely to            churn, and we experience less price erosion when we effectively combine our offerings.            Bundling improves our top line revenue growth, provides operating cost efficiencies            that expand our margins and drives our overall business performance. As a measure of            success to date, over 51,000 of our consumer customers subscribe to one of our service            bundles.

 

*Maximize Sales Opportunities.*We            successfully sell new and enhanced services and products between and within our            business segments to our existing customer base to achieve increased revenues and            penetration of our services. Through close coordination of our customer service and            sales and marketing efforts, our customer service representatives cross-sell and            up-sell our products. Many calls into our customer service centers result in sales of            additional services and products. We actively encourage our existing customers to            acquire higher value, enhanced services.

 

*Deliver Industry Leading Customer Service.*We have positioned ourselves as a customer service leader in the Alaska            communications market. We have organized our operations to effectively focus on our            customers. We operate our own customer service department and maintain and staff our            own call centers. We have empowered our customer service representatives to handle most            service issues and questions on a single call. We prioritize our customer services to            expedite handling of our most valuable customers’ issues, particularly for our            largest commercial customers. We believe our integrated approach to customer service,            including service set-up, programming various network databases with the            customer’s information, installation, and ongoing service, allows us to provide a            customer experience that fosters customer loyalty.

 

*Leverage Communications Operations.*We            continue to expand and evolve our integrated network for the delivery of our services.            Our bundled strategy and integrated approach to serving our customers creates            efficiencies of scale and maximizes network utilization. By offering multiple services,            we are better able to leverage our network assets and increase returns on our invested            capital. We periodically evaluate our network assets and continually monitor            technological developments that we can potentially deploy to increase network            efficiency and performance.

 

*Expand Our Product Portfolio and Footprint in Alaska.*Throughout our history, we have successfully added and expect to            continue to add new products to our product portfolio. Management has a demonstrated            history of new product evaluation, development and deployment for our customers, and we            will continue to assess revenue-enhancing opportunities that create value for our            customers. In addition to new services such as additional HDTV channels,            video-on-demand, on-line advertising placement, on-line content delivery such as            streaming music, and mobile high speed data

 

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we are            also expanding the reach of our core products to new markets. Where feasible and where            economic analysis supports geographic expansion of our network coverage, we are            currently pursuing and expect to pursue opportunities to increase the scale of our            facilities, enhance our ability to serve our existing customers’ needs and            attract new customers.

 

**Description of our Business by Reportable Segment**

 

***Overview***

 

Our            four reportable segments are Consumer, Network Access, Commercial and Managed            Broadband. Our reportable segments are business units that offer different products,            are each managed separately, and serve distinct types of customers.

 

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

 

|                              | Reportable Segments |
|-----------------------------------|---------------------|
| Services and Products             | Consumer            | Network Access | Commercial | Managed Broadband |
| Voice:                            |                |   |   |   |
| Long-Distance                     | **X**               | **X** | **X** |   |
| Local Access                      | **X**               | **X** | **X** |   |
| Directories                       |                |   | **X** |   |
|                              |                |   |   |   |
| Video                             | **X**               |   | **X** |   |
|                              |                |   |   |   |
| Data:                             |                |   |   |   |
| Internet                          | **X**               | **X** | **X** | **X** |
| Private Line and Private Networks |                | **X** | **X** | **X** |
| Managed Services                  |                |   | **X** | **X** |
| Managed Broadband Services        |                |   |   | **X** |
|                              |                |   |   |   |
| Wireless                          | **X**               | **X** | **X** |   |

 

Our            Consumer segment customers include residential customers. Our Commercial segment            customers include small businesses, local, national and global businesses, governmental            entities, and public and private educational institutions. Our Network Access segment            customers are other common carriers. Our Managed Broadband segment customers are rural            school districts and hospitals and health clinics. We distribute information about our            services and products to these customers through a variety of channels, including            direct sales, telemarketing and media advertising.

 

Many of            our networks and facilities are utilized by more than one segment to provide services            and products to our customers. The following description of our business by reportable            segment includes a comprehensive discussion within the Consumer segment section with            references to that section if such common network and facility use exists in another            segment. Similarly, many of the same services and products are sold to our customers in            different segments. The following description of our business by reportable segment            includes a comprehensive discussion of services and products within the Consumer            Segment section with references to that section if such common services and products            exist in another segment.

 

The            following discussion includes information about significant services and products,            sales and marketing, facilities, customers, competition and seasonality for each of our            four reportable segments. For a discussion and analysis of financial condition and            results of operations please see “Part II – Item 7 –            Management’s Discussion and Analysis of Financial Condition and Results of            Operations.”

 

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***Consumer Segment***

 

We            offer a full range of communications services and products to our consumer customers.            Consumer segment revenues for 2007, 2006 and 2005 are summarized as follows:

 

|             |    | **Year Ended                            December** **31,** |
|------------------|--------------|-----------------------------------------------------------------|
|             |    | **2007**                                                        |    | **2006** |    | **2005** |
|             |    | ***(in thousands)***                                            |
| Total revenues 1 |    | $                                                               | 223,502 |    |   | 178,951 |    |   | 162,928 |
|                  |              |                                                                 |  |  |  |  |  |  |  |

                                        

1 See “Part II — Item 7 —            Management’s Discussion and Analysis of Financial Condition and Results of            Operations” and note 11 included in “Part II — Item 8 —            Consolidated Financial Statements and Supplementary Data” for more information            regarding the financial performance of our Consumer segment.

                                       

 

**Services and Products**

Our            Consumer segment offers a full range of voice, video, data and wireless services and            products to residential customers.

 

Voice Services and Products

 

Long-Distance

We are            engaged in the transmission of interstate and intrastate-switched message telephone            service communications service between the major communities in Alaska, and the            remaining United States and foreign countries. Our message toll services include            intrastate, interstate and international direct dial, toll-free 800, 888, 877 and 866            services, our calling card, operator and enhanced conference calling.

 

We have            positioned ourselves as a price, quality, and customer service leader in the Alaska            communications market. The value of our long-distance services is generally designed to            be equal to or greater than that for comparable services provided by our            competitors.

 

Local Access

We            offer Local Access services in many communities and areas in Alaska, including the            state’s five largest population centers, Anchorage, Fairbanks, the            Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau. Our own DLPS facilities and            collocated remote facilities that access the ILEC’s UNE loops allow us to offer            full featured local service products to consumer customers. In areas where we do not            have our own DLPS facilities or access to ILEC loop facilities, we offer service using            total service resale of the ILEC’s local service or UNE platform.

 

Our            package offerings are competitively priced and include popular features, including            caller ID, voice messaging, call forwarding, and call waiting.

 

Video Services and Products

 

Our            cable television systems serve 40 communities and areas in Alaska, including the            state’s five largest population centers, Anchorage, Fairbanks, the            Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau.

 

We            offer a full range of video services over our broadband cable systems. We tailor our            channel offerings for each system serving a particular geographic area according to            applicable local and federal regulatory requirements, programming preferences,            demographics and the capabilities of our cable facilities in each system. Our video            service offerings include the following:

 

*Basic cable*. Our basic cable service            consists of a limited analog or digital Basic Service with access to between 12 and 19            channels of programming and an expanded analog Basic Service with access to between 36            and 59 additional channels of programming. These services generally consist of            programming provided by national and local broadcast networks, national and regional            cable networks, and governmental and public access programming. In January 2008 we            began to digitize our basic cable service. We have made a commitment to the FCC to            transmit an entirely digital signal for all cable television channels in all markets we            serve by December 31, 2008.

 

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*Digital cable.*Our digital cable service            uses a digital set-top box to deliver up to 52 channels of video programming, 48 music            channels and an interactive program guide.

 

*High-Definition Television*. Our HDTV            service provides our digital subscribers with improved, high-resolution picture            quality, improved audio quality and a wide-screen, theater-like display. Our HDTV            service offers a broad selection of high-definition programming with access of up to 23            high-definition channels including most major broadcast networks, leading national            cable networks, premium channels and national sports networks.

 

*Digital Video Recorder*. Our advanced DVR            service lets digital cable subscribers select, record and store programs and play them            at whatever time is convenient. DVR service also provides the ability to pause and            rewind “live” television.

 

*Premium channel programming.*Our premium            channel programming service, which includes cable networks such as Home Box Office,            Showtime, Starz and Cinemax, generally offers, without commercial interruption, feature            motion pictures, live and taped sporting events, concerts and other special            features.

 

*Pay-per-view programming.*Our pay-per-view            service permits our cable subscribers to order, for a separate fee, individual feature            motion pictures and special event programs, such as professional boxing, professional            wrestling and concerts, on an unedited, commercial-free basis.

 

In            March 2008 we expect to begin offering video-on-demand services to our consumer            customers.

             

Data            Services and Products

 

Internet

We            primarily offer three types of Internet access for consumer use: high-speed cable            modem, dial-up and fixed wireless. Value-added Internet features, such as email virus            prevention, personal web site and domain hosting, and additional email accounts, are            available for additional charges. Our consumer high-speed cable modem Internet service            offers up to 10 Mbps download and 2 Mbps upload speeds as compared with up to 56 Kbps            upload and download speeds through standard copper wire dial-up modem access. Our fixed            wireless Internet product is available in 139 communities. Three distinct products are            offered; 56 Kbps, 256 Kbps, and 256 Kbps for multiple computers. We provide 24-hour            customer service and technical support via telephone or online.

 

An            entry-level cable modem service also offers free data transfer up to one gigabyte per            month at a rate of 64 Kbps and can be connected 24-hours-a-day, 365-days-a-year,            allowing for real-time information and e-mail access. This product acts as a dialup            replacement and upgrade since it is always connected and provides more efficient data            transfer. Cable modems use our coaxial cable plant that provides cable television            service, instead of the traditional ILEC copper wire. Coaxial cable has a much greater            carrying capacity than telephone copper wire and can be used to simultaneously deliver            both cable television (analog or digital) and Internet access services.

 

Wireless Services and Products

 

We            offer mobile wireless services by reselling Dobson’s services under our brand            name and selling Alaska DigiTel’s service under its brand name. We offer fixed            wireless local access services over our own facilities, and have purchased PCS and LMDS            wireless broadband licenses in FCC auctions covering markets in Alaska. We offer mobile            wireless service to our customers located in Anchorage, Fairbanks, Fort Greely, Juneau,            Kenai/Soldotna, Kodiak, Nome, North Pole, Palmer/Wasilla, Homer, Ketchikan, Petersburg,            Prudhoe Bay, Seward, Sitka, Valdez and Wrangell, Alaska.

 

In            November 2007, AT&T acquired Dobson including its Alaska properties. 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, which expires June 30, 2012. The four-year transition            period provides us adequate time to replace the Dobson/AT&T network in Alaska with            our own wireless facilities.

 

We            offer our customers a variety of rate plans so they can choose the plan that best fits            their expected calling needs. We focus our offers to take advantage of theGSM network            using the GCI brand name or the CDMA network using the Alaska DigiTel brand name.            Consumer voice service is generally offered on a contract basis for one or two year            periods. Under

 

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the            terms of these contracts, service is billed and provided on a monthly basis according            to the applicable rate plan chosen. Our offerings include regional and national rate            plans at a variety of pricing tiers. Our rate plans generally combine a fixed monthly            access charge, a designated number of minutes-of-use, per minute usage charges for            minutes in excess of the included amount and additional charges for certain            custom-calling features. Most of our plans include basic features such as voice            messaging, caller ID, call forwarding and call waiting, and two-way text            messaging.

 

We sell            a variety of handsets and personal computer wireless data cards manufactured by various            suppliers for use with our wireless services. We also sell accessories, such as            carrying cases, hands-free devices, batteries, battery chargers and other items. We            provide contract subscribers substantial equipment subsidies to initiate or upgrade            service.

 

Bundled Services and Products

 

We            combine one or more of our individual service and product offerings into bundles that            we sell to our Consumer segment customers at attractive prices. Our most popular            bundled offering includes long-distance, cable television, cable modem Internet access            and local access services. In addition to several other bundled offerings we also offer            a bundle of wireless services, cable television and cable modem Internet            access.

 

**Sales and Marketing**

Our            Consumer segment sales efforts are primarily directed toward increasing the number of            subscribers we serve, selling bundled services, and generating incremental revenues            through product and feature up-sell opportunities. We sell our Consumer segment            services through telemarketing, direct mail advertising, door-to-door selling,            up-selling by our customer service and call center personnel, local media advertising,            retail stores, and through our website.

 

**Facilities**

Voice Facilities

We            operate a modern, competitive communications network employing the latest digital            transmission technology based upon fiber optic facilities within and between Anchorage,            Fairbanks, Prudhoe Bay, and Juneau, Alaska. Our facilities include two self-constructed            digital undersea fiber optic cable systems linking our Alaska terrestrial networks to            the networks of other carriers in the Lower 49 States. AULP East was placed into            service in February 1999 and connects Whittier, Valdez and Juneau, Alaska and Seattle,            Washington. AULP West was placed into service in June 2004 and connects Seward, Alaska            to Warrenton, Oregon. The Seward cable landing station connects to our switching and            distribution center in Anchorage and the Warrenton cable landing station connects to            our switching and distribution center in Seattle via long-term leased capacity. The            combination of our AULP East and AULP West systems provides us with the ability to            provide fully protected geographically diverse routing of service between Alaska and            the Lower 48 States.

 

We have            IRU capacity in the Kodiak-Kenai Cable Company, LLC’s marine-based fiber optic            cable system linking Anchorage to Kenai, Homer, Kodiak, Narrow Cape on Kodiak Island,            and Seward, Alaska.

 

These            undersea fiber optic cable systems allow us to carry our military base traffic and our            Anchorage, Delta Junction, Eagle River, Fairbanks, Glenallen, Homer, Juneau, Kenai,            Kodiak, Palmer, Prudhoe Bay, Seward, Soldotna, Valdez, Wasilla, and Whittier, Alaska            traffic to and from the Lower 48 States and between these instate locations over            terrestrial circuits, eliminating the one-half second round trip delay associated with            satellite circuits.

 

Another            carrier completed construction of fiber optic facilities connecting points in Alaska to            the Lower 48 States in 1999. The additional fiber system provides direct competition to            services we provide on our owned fiber optic facilities; however, this fiber system            also provides an alternative routing path for us for a limited amount of traffic in            case of a major fiber outage in our systems. A competitor has announced its intention            to construct an undersea fiber optic cable system between Homer, Alaska and Florence,            Oregon to be completed by the end of 2008.

 

We use            satellite transponders to transmit voice and data traffic to remote areas of Alaska. We            acquired satellite transponders on the Intelsat Galaxy XR satellite in March 2000 to            meet our long-term satellite capacity requirements. We further augmented capacity on            Galaxy XR with the lease of a seventh C-band transponder in October 2002. As previously            discussed we have entered into an agreement to lease transponder capacity on            Intelsat’s Galaxy 18 spacecraft that is expected to be launched May 3, 2008. We            will also lease capacity on the Horizons 1 satellite. The leased capacity is expected            to replace our capacity on Intelsat’s Galaxy XR satellite when it reaches its end            of life which is estimated to be May 18, 2008.

 

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We            continue to develop and deploy new technology to further increase the efficiency of            bandwidth utilization for our satellite network. With a sparse population spread over a            large geographic area, neither terrestrial microwave nor fiber optic transmission            technology is considered to be economically feasible in rural Alaska in the foreseeable            future. See “Part I — Item 1A — Risk Factors — If a failure            occurs in our satellite communications systems, our ability to immediately restore the            entirety of our service may be limited.” for more information.

 

We            operate digital microwave systems to link Anchorage with the Kenai Peninsula, and our            Prudhoe Bay Earth Station with Deadhorse, Alaska. Digital microwave facilities are also            used between our Fairbanks earth station and our Fairbanks distribution center.            Virtually all switched services are computer controlled, digitally switched, and            interconnected by a packet switched SS7 signaling network.

 

Other            facilities include major earth stations at Adak, Barrow, Bethel, Cordova, Dillingham,            Dutch Harbor, Eagle River, Galena, Juneau, Ketchikan, King Salmon, Kodiak, Kotzebue,            McGrath, Nome, Prudhoe Bay, Sitka, Unalakleet, and Yakutat, all in Alaska, serving the            communities in their vicinity, and at Issaquah, Washington, which provides            interconnection to Seattle and the Lower 48 States for traffic to and from major Alaska            earth stations. The Eagle River earth station is linked to the Anchorage distribution            center by fiber optic facilities.

 

We use            SONET as a service delivery method for our terrestrial metropolitan area networks as            well as our long-haul terrestrial and undersea fiber optic cable networks.

 

A fiber            optic cable system from our Anchorage distribution center connects to the Matanuska            Telephone Association (“MTA”) Eagle River central office and to our major            hub earth station in Eagle River. The Issaquah earth station is connected with the            Seattle distribution center by means of diversely-routed leased fiber optic cable            transmission systems, each having the capability to restore the other in the event of            failure. The Juneau earth station and distribution centers are collocated. We have            digital microwave facilities serving the Kenai Peninsula communities. We maintain earth            stations in Fairbanks (linked by digital microwave to the Fairbanks distribution            center), Juneau (collocated with the Juneau distribution center), Anchorage (Benson            earth station), and in Prudhoe Bay as fiber network restoration earth stations. Our            Benson earth station also uplinks our statewide video service; such service may be            pre-empted if earth station capacity is needed to restore our fiber network between            Anchorage and Prudhoe Bay.

 

We use            our DAMA facilities to serve 69 additional locations throughout Alaska. DAMA is a            digital satellite earth station technology that allows calls to be made between remote            villages using only one satellite hop, thereby reducing satellite delay and capacity            requirements while improving quality. In addition, 54 (for a total of 123) C-band            facilities provide dedicated Internet access and private network services to rural            public schools, hospitals, health clinics, and natural resource development industries            throughout Alaska. Our network of 83 Ku-band facilities provides dedicated Internet            access and private network services to rural public schools, hospitals, health clinics,            and natural resource development industries throughout Alaska, and in 10 locations in            the Lower 48 States.

             

Our            Anchorage, Fairbanks, and Juneau distribution centers contain electronic switches to            route calls to and from Local Exchange companies and, in Seattle, to obtain access to            Verizon Communications Inc. (“Verizon”), Sprint Nextel Corporation            (“Sprint Nextel”) and other carriers to distribute our southbound traffic            to the remaining 49 states and international destinations. Our extensive metropolitan            area fiber network in Anchorage supports cable television, Internet and telephony            services. The Anchorage, Fairbanks, and Juneau facilities also include digital access            cross-connect systems, frame relay data switches, Internet platforms, and in Anchorage            and Fairbanks, collocation facilities for interconnecting and hosting equipment for            other carriers. We also maintain an operator and customer service center in Wasilla,            Alaska. Our operator services traffic is processed by an integrated services platform            that also hosts answering services, directory assistance, and internal conferencing            services.

 

In 1997            we entered the local services market in Anchorage. At December 31, 2007 we could access            approximately 96%, 75% and 90% of Anchorage, Fairbanks, and Juneau area local loops,            respectively, from our collocated remote facilities and DLC installations, excluding            Fort Wainwright and Eielson Air Force Base areas.

 

We            continue our DLPS deployment utilizing our coaxial cable facilities. This 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.

 

Video Facilities

Our            statewide cable systems consist of 2,853 miles of installed cable plant having 450 to            625 MHz of channel capacity. Our cable television businesses are located throughout            Alaska and serve 40 communities and areas in Alaska, including

 

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the            state’s five largest population centers, Anchorage, Fairbanks, the            Matanuska-Susitna Valley, the Kenai Peninsula, and Juneau. Our facilities include cable            plant and head-end distribution equipment. Certain of our head-end distribution centers            are collocated with customer service, sales and administrative offices.

             

Data            Facilities

We            provide access to the Internet using a platform that includes many of the latest            advancements in technology. The physical platform is concentrated in Anchorage and is            extended into many remote areas of the state. Our Internet platform includes the            following:

 

|   | **•** | Our Anchorage facilities are connected to multiple                            Internet access points in Seattle through multiple, diversely routed                            networks; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We use multiple routers on each end of the circuits to                            control the flow of data and to provide resiliency; and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Our Anchorage facility consists of routers, a bank of                            servers that perform support and application functions, database                            servers providing authentication and user demographic data, layer 2                            gigabit switch networks for intercommunications and broadband services                            (cable modem, wireless and DSL), and access servers for dial-up                            users. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Our            dedicated Internet access and IP data services are delivered to a router located at the            service point. Our Internet management platform constantly monitors this router and            continual communications are maintained with all of the core and distribution routers            in the network. The availability and quality of service, as well as statistical            information on traffic loading, are continuously monitored for quality assurance. The            management platform has the capability to remotely access routers, servers and layer            two switches, permitting changes in configuration without the need to be physically            located at the service point.

 

Bandwidth is made available for our Internet services through our AULP            East and AULP West undersea fiber cable systems and our Galaxy XR            transponders.

 

Our            GCI.net product offers a unique combination of innovative network design and aggressive            performance management. Our Internet platform has received a certification that places            it in the top one percent of all service providers worldwide and is the only ISP in            Alaska with such a designation. We operate and maintain what we believe is the largest,            most reliable, and highest performance Internet network in Alaska.

 

Wireless Facilities

We had            a distribution agreement with Dobson allowing us to resell Dobson cellular services. In            November 2007 AT&T acquired Dobson, including its Alaska properties, andin 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, which expires June 30, 2012. The four-year transition            period provides us adequate time to replace the Dobson/AT&T network in Alaska with            our own wireless facilities. Commencing in 2008 we plan to expand Alaska            DigiTel’s CDMA network and construct a GSM network throughout the terrestrially            served portions of Alaska including the cities of Anchorage, Fairbanks, and            Juneau.

 

We            provide limited wireless local access and Internet services using our own facilities            utilizing our 30-MHz PCS license and unlicensed 2.4 GHz spectrum. We provide the            service through 802.11 (a set of wireless standards), and wireless DOCSIS (a data over            cable service interface specification).

 

Alaska            DigiTel owns the 30-MHz “A” Block PCS license in Major Trading Area 49, the            state of Alaska. The Alaska DigiTel network includes a Lucent 5ESS wireless switch            located in Anchorage, and more than 100 cell sites that cover more than 75% of the            populated areas of Alaska, including Anchorage and Eagle River, the Matanuska-Susitna            Valley, Kenai Peninsula, Juneau and Fairbanks. Alaska DigiTel extends its network            coverage in Alaska, the Lower 49 States and Canada through roaming arrangements with            other CDMA carriers.

 

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**Customers**

A            discussion of Consumer segment customers by product type follows.

 

Voice Customers

 

Long-Distance 

We had            89,900, 89,800, and 95,000 Consumer segment long-distance subscribers at December 31,            2007, 2006 and 2005, respectively. The decrease from 2005 to 2006 is primarily due to a            decrease in the total number of long-distance services subscribers in the markets we            serve resulting from customers substituting wireless phone, prepaid calling card, VoIP            and email usage for direct dial minutes.

 

Equal            Access conversions have been completed in all communities where we serve with owned            facilities. Equal Access is in progress in several small communities where we are            expanding our owned facilities. We estimate that we carry greater than 50% of combined            consumer and commercial traffic as a statewide average for both originating interstate            and intrastate message telephone service.

 

Revenues derived from Consumer segment long-distance services in 2007,            2006 and 2005 totaled $20.3 million, $20.6 million and $23.5 million, respectively, or            3.9%, 4.3% and 5.5% of our total revenues, respectively.

 

A            summary of our Consumer segmentswitched long-distance message telephone service traffic            (in minutes) follows:

 

|                                                              |           | **Year Ended                            December** **31,** |
|-------------------------------------------------------------------|---------------------|-----------------------------------------------------------------|
|                                                              |           | **2007**                                                        |    | **2006** |    | **2005** |
| Consumer long-distance                            minutes: 1 | ***(in millions)*** |
| Interstate                                                        |                |                                                            | 105.0 |   |   | 109.1 |   |   | 125.5 |
| Intrastate                                                        |                |                                                            | 25.0 |   |   | 27.2 |   |   | 32.0 |
| International                                                     |                |                                                            | 5.8 |   |   | 5.6 |   |   | 5.5 |
| Total                                                             |           |                                                            | 135.8 |   |   | 141.9 |   |   | 163.0 |

                                  

1 All minutes data were taken from our internal billing            statistics reports.

                                  

             

Although we have several agreements to facilitate the origination and            termination of international toll traffic, we have neither foreign operations nor            export sales. See “Part I — Item 1 — Business — Financial            Information about our Foreign and Domestic Operations and Export Sales” for more            information.

 

Local Access 

We had            74,400, 66,200 and 68,400 Consumer segmentlocal access lines in service subscribers at            December 31, 2007, 2006 and 2005, respectively. We ended 2007 with market share gains            in substantially all market segments.

 

Revenues derived from Consumer segment local access services in 2007,            2006 and 2005 totaled $25.9 million, $25.0 million and $23.3 million, respectively, or            5.0%, 5.2% and 5.3% of our total revenues, respectively.

 

Video Customers

 

Our            cable systems passed 224,700, 219,900 and 215,000 homes at December 31, 2007, 2006 and            2005, respectively, and served 128,000, 124,000 and 122,600 basic Consumer segment            subscribers at December 31, 2007, 2006 and 2005, respectively. Revenues derived from            Consumer segment video services totaled $96.3 million, $90.2 million and $84.7 million            in 2007, 2006 and 2005, respectively, or 18.5%, 18.9% and 19.1% of our total revenues,            respectively.

 

Data            Customers

 

We had            88,000, 78,500 and 70,800 active Consumer segment cable modem Internet subscribers at            December 31, 2007, 2006 and 2005, respectively. Revenues derived from Consumer segment            Internet services totaled $34.2 million, $29.4 million and $25.3 million, in 2007, 2006            and 2005, respectively, or 6.6%, 6.2% and 5.7% of our total revenues,            respectively.

 

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Wireless Customers

 

We had            70,000 and 24,400 total Consumer segment wireless lines in service at December 31, 2007            and 2006, respectively. The total wireless lines in service at December 31, 2007            include Alaska DigiTel lines in service. We had 16,000 total Consumer segment and            Commercial segment wireless lines in service at December 31, 2005. Data was not            available to separately identify the number of Consumer segment and Commercial segment            lines in service at December 31, 2005. Our Consumer segment wireless services revenue            totaled $46.7 million, $13.7 million and $6.1 million in the years ended December 31,            2007, 2006 and 2005, respectively, or 9.0%, 2.9% and 1.4% of total revenues,            respectively. The total wireless revenue at December 31, 2007 includes Alaska DigiTel            revenue.

 

**Competition**

A            discussion of competition by product and service in our Consumer segment follows. See            “Item 1A. — Risk Factors — We face intense competition that may            reduce our market share and harm our financial performance.”

 

Voice Services and Products Competition

 

Long-Distance

The            long-distance industry is intensely competitive and subject to constant technological            change. Competition is based upon price and pricing plans, the type of services            offered, customer service, billing services, performance, perceived quality,            reliability and availability. Current or future competitors could be substantially            larger than we are, or have greater financial, technical and marketing resources than            we do.

 

In the            intrastate, interstate and international long-distance market, we compete against            AT&T Alascom, Inc. (“AT&T Alascom”), Alaska Communications Systems            Group, Inc. (“ACS”), MTA, long-distance resellers, and certain smaller            rural local telephone companies. AT&T Alascom, as a subsidiary of AT&T, has            access to greater financial, technical and marketing resources than we have. There is            also the possibility that new competitors will enter the Alaska market. In addition,            wireless and VoIP services continue to grow as an alternative to wireline services as a            means of reaching customers. Wireless Local Number Portability allows consumers to            retain the same phone number as they change service providers allowing for            interchangeable and portable fixed-line and wireless numbers. Some consumers now use            wireless service as their primary voice phone service for local and long-distance            calling.

 

We have            competed in the long-distance market by offering discounts from rates charged by our            competitors and by providing desirable bundles of services. Discounts have been eroded            in recent years due to lowering of prices by AT&T Alascom and entry of other            competitors into the long-distance markets we serve. In addition, our competitors offer            their own bundles of services.

 

Our            ability to compete successfully will depend on our ability to anticipate and respond to            various competitive factors affecting the industry, including new services that may be            introduced, changes in consumer preferences, demographic trends, economic conditions            and pricing strategies.

 

Under            the terms of the acquisition of Alascom by AT&T Inc., which were retained in the            subsequent acquisition of AT&T by SBC Communications Inc., AT&T Alascom rates            and services must mirror those offered by AT&T Inc., so changes in AT&T Inc.            prices indirectly affect our rates and services. AT&T Inc.’s and AT&T            Alascom’s interstate prices are regulated under a price cap plan whereby their            rate of return is not regulated or restricted. Price increases by AT&T Inc. and            AT&T Alascom generally improve our ability to raise prices while price decreases            pressure us to follow. We believe we have, so far, successfully adjusted our pricing            and marketing strategies to respond to AT&T Inc. and other competitors’            pricing practices. However, if competitors significantly lower their rates, we may be            forced to reduce our rates, which could have a material adverse effect on our financial            position, results of operations or liquidity.

 

Local Access

Data            obtained from the RCA indicates that there are 23 ILECs and 12 CLECs certified to            operate in the State of Alaska at December 31, 2007. We compete against ACS, the ILEC,            and AT&T Alascom in Anchorage, Juneau and Fairbanks. AT&T Alascom offers Local            Exchange service only to consumer customers through total service resale. We compete            against MTA, the ILEC, in the Mat-Su Valley and ACS, the ILEC, in the Kenai-Soldotna            area. We compete against other smaller ILECs in certain smaller communities.

 

We plan            to provide local telephone service in other locations in the future where we would face            other competitors. The RCA granted amendments to our certificates of convenience and            public necessity to provide local service in areas where

 

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population growth has occurred and is likely to occur over the next five            years. The service area changes are in Anchorage, Bethel, Cordova, Fairbanks, Homer,            Juneau-Douglas, Kenai, Soldotna, Sterling, Ketchikan, Kodiak, Kotzebue, Nome,            Palmer-Wasilla, Petersburg, Seward, Sitka, Valdez and Wrangell. The RCA also granted            amendments to our certificates of convenience and public necessity to provide local            service to the entire service areas of Ketchikan Public Utilities, Cordova            Telephone Cooperative, Copper Valley Telephone Cooperative (“CVTC”),            MTA, the Glacier State service area, and Arctic Slope Telephone Association Cooperative            (“ASTAC”) as well as the cities of Wrangell, Petersburg, Sitka, Seward,            Bethel and Nome. We expect further competition in the marketplaces we serve as other            companies may receive certifications in the future.

 

In the            local telephone services market, the 1996 Telecom Act, judicial decisions, state and            federal legislative and regulatory developments, and new technologies have increased            the overall likelihood that barriers to local telephone competition will be            substantially reduced or removed. These initiatives include requirements that ILECs            negotiate with entities, including us, to provide interconnection to the existing local            telephone network, to allow the purchase, at cost-based rates, of access to UNEs, to            establish dialing parity, to obtain access to rights-of-way and to resell services            offered by the ILEC. We have been able to obtain interconnection, access and related            services from the ILECs, at rates that allow us to offer competitive services. However,            if we are unable to continue to obtain these services and access at acceptable rates,            our ability to offer local access services, and our revenues and net income, could be            materially adversely affected. To date, we have been successful in capturing a            significant portion of the local telephone market in the locations where we are            offering these services. However, there can be no assurance that we will continue to be            successful in attracting or retaining these customers.

 

We            believe that we have certain advantages over ILECs in providing communications            services, including awareness by Alaskan customers of the GCI brand name, our            facilities-based communications network, and our prior experience in, and knowledge of,            the Alaskan market.

 

See            “Regulation — Wireline Voice Services and Products” below for more            information.

 

Video Services and Products Competition

 

Our            cable television systems face competition from alternative methods of receiving and            distributing television signals, including DBS and digital video over telephone lines,            broadband IP-based services, wireless and SMATV systems, and from other sources of            news, information and entertainment such as Internet services, off-air television            broadcast programming, newspapers, movie theaters, live sporting events, interactive            computer services, and home video products, including video disks. Our cable television            systems also face competition from potential overbuilds of our existing cable systems            by other cable television operators and municipally-owned cable systems, and            alternative methods of receiving and distributing television signals. The extent to            which our cable television systems are competitive depends, in part, upon our ability            to provide quality programming and other services at competitive prices.

 

We            believe that the greatest source of potential competition for video services could come            from the DBS industry. Two major companies, The DirecTV Group, Inc. and EchoStar            Communications Corporation are currently offering nationwide high-power DBS services.            We also are subject to competition from providers of digital video over telephone lines            in the Mat-Su Valley and in Ketchikan. With the addition of Anchorage local broadcast            stations, increased marketing, ILEC and DBS alliances, and emerging technologies            creating new opportunities, competition from these sources has increased and will            likely continue to increase.

 

DBS is            more competitive with cable in the Alaska market than it once was because technological            advances have improved signal quality and reduced equipment costs and local programming            is more widely available than it once was.

 

In the            past, the majority of Alaska DBS subscribers were required to bear the cost of and            install larger satellite dishes (generally three to six feet in diameter) because of            the weaker satellite signals available in northern latitudes, particularly in            communities surrounding, and north of, Fairbanks. In addition, the satellites had a            relatively low altitude above the horizon when viewed from Alaska, making their signals            subject to interference from mountains, buildings and other structures. Satellite            placements have provided Alaska residents with a DBS package that requires a smaller            satellite dish (typically 18 inches); however, a second larger dish is required if the            subscriber wants to receive a channel line-up similar to that provided by our cable            systems with high-definition programming. In addition to the dish and equipment cost            deterrents, DBS signals are subject to degradation from atmospheric conditions such as            rain and snow. The changing nature of technology and of the DBS business may result in            greater satellite coverage within Alaska.

 

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The            largest ILEC in Alaska has engaged in marketing arrangements to provide DBS services            along with local telephone and other services. Similar arrangements could be extended            to other ILECs in the markets we serve in Alaska. DirecTV and EchoStar have satellites            that can transmit a stronger signal and deliver local network programming in certain            communities in Alaska.

 

The            ILECs in the Mat-Su Valley and Ketchikan offer digital video service over telephone            lines in limited areas. Their product offerings and price points are similar to our            product offerings.

 

Competitive forces will be counteracted by offering expanded programming            through digital services and by providing high-speed data services. System upgrades            have been completed to make our systems reverse activated, providing the necessary            infrastructure to offer cable modem service to greater than 99% of our homes passed.            Digital delivery technology is being utilized in all of our systems. We have            retransmission agreements with Anchorage broadcasters that expire in 2009 and provide            for the uplink/downlink of their signals into all our systems, and local programming            for our customers.

 

Other            new technologies may become competitive with non-entertainment services that cable            television systems can offer. The FCC has authorized television broadcast stations to            transmit textual and graphic information useful to both consumers and businesses. The            FCC also permits commercial and non-commercial FM stations to use their subcarrier            frequencies to provide non-broadcast services including data transmissions. The FCC            established an over-the-air interactive video and data service that will permit two-way            interaction with commercial and educational programming along with informational and            data services. LECs and other common carriers also provide facilities for the            transmission and distribution to homes and businesses of interactive computer-based            services, including the Internet, as well as data and other non-video services. The FCC            has conducted spectrum auctions for licenses to provide PCS, as well as other services.            PCS and other services will enable license holders, including cable operators, to            provide voice and data services. We own a statewide license to provide PCS in            Alaska.

 

Cable            television systems generally operate pursuant to franchises granted on a non-exclusive            basis. The 1992 Cable Act gives local franchising authorities jurisdiction over basic            cable service rates and equipment in the absence of “effective            competition,” prohibits franchising authorities from unreasonably denying            requests for additional franchises and permits franchising authorities to operate cable            systems. Well-financed businesses from outside the cable industry (such as the public            utilities that own certain of the poles on which cable is attached) may become            competitors for franchises or providers of competing services.

 

We            expect to continue to provide, at reasonable prices and in competitive bundles, a            greater variety of communication services than are available off-air or through other            alternative delivery sources. Additionally, we believe we offer superior technical            performance and responsive community-based customer service. Increased competition,            however, may adversely affect our market share and results of operations from our cable            services product offerings.

 

Data            Services and Products Competition

 

The            Internet industry is highly competitive, rapidly evolving and subject to constant            technological change. Competition is based upon price and pricing plans, service            bundles, the types of services offered, the technologies used, customer service,            billing services, perceived quality, reliability and availability. As of December 31,            2007, we competed with more than eight Alaska based Internet providers, and competed            with other domestic, non-Alaska based providers that provide national service coverage.            Several of the providers headquartered outside of Alaska have substantially greater            financial, technical and marketing resources than we do.

 

With            respect to our high-speed cable modem service, ACS and other Alaska telephone service            providers are providing competitive high-speed DSL services over their telephone lines            in direct competition with our high-speed cable modem service. Competitive local fixed            wireless providers are providing service in certain of our markets as is a national            WiMax-based provider in Anchorage with plans for Juneau and Fairbanks. WiMax is a            standards-based wireless technology that provides high-throughput broadband connections            over long distances. WiMax can be used for a number of applications, including last            mile broadband connections, hotspots and cellular backhaul, and high-speed enterprise            connectivity for business. DBS providers and others provide wireless high speed            Internet service in competition with our high-speed cable modem services.

 

Niche            providers in the industry, both local and national, compete with certain of our            Internet service products, such as web hosting, list services and email.

 

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Wireless Services and Products Competition

 

We            compete against AT&T Wireless, ACS, MTA, and resellers of those services in            Anchorage and other markets. We competed against Dobson until its acquisition by            AT&T in November 2007. The GCI and Alaska DigiTel brands compete against each            other.

 

We also            compete, to a lesser extent, with mobile satellite service providers, as well as from            resellers of these services. The FCC has granted mobile satellite service providers the            flexibility to deploy an ancillary terrestrial component to their satellite services.            This added flexibility may enhance their ability to offer more competitive mobile            services.

 

Regulatory policies favor robust competition in wireless markets.            Wireless Local Number Portability, which was implemented by the FCC late in 2003, has            also increased the level of competition in the industry. Number portability allows            subscribers to switch carriers without having to change their telephone            numbers.

 

The            communications industry continues to experience significant technological changes, as            evidenced by the increasing pace of improvements in the capacity and quality of digital            technology, shorter cycles for new products and enhancements and changes in consumer            preferences and expectations. Accordingly, we expect competition in the wireless            communications industry to continue to be dynamic and intense as a result of the            development of new technologies, services and products.

 

We            compete for customers based principally upon price, bundled services, the services and            enhancements offered, network quality, customer service, network coverage and capacity,            and the availability of differentiated features and services. Our ability to compete            successfully will depend, in part, on our marketing efforts and our ability to            anticipate and respond to various competitive factors affecting the            industry.

 

**Seasonality**

Our            Consumer segment voice, video, and data services do not exhibit significant            seasonality. Our ability to implement construction projects is hampered during the            winter months because of cold temperatures, snow and short daylight hours.

 

***Network Access Segment***

 

We            offer wholesale voice and data services and products to other common carrier customers.            Network Access segment revenues for 2007, 2006 and 2005 are summarized as            follows:

|             |         |                                                            |         |         |         |     |         |   |    |   |
|------------------|--------------|-----------------------------------------------------------------|--------------|--------------|--------------|----------|--------------|--------|---------|--------|
|             |    | **Year Ended                            December** **31,** |         |
|             |    | **2007**                                                        |    | **2006**     |    | **2005** |         |
|             |    | ***(in thousands)***                                            |         |
| Total revenues 1 |    | $                                                               | 163,377      |    |         | 166,471  |    |   | 148,333 |   |
|                  |              |                                                                 |              |              |              |          |              |        |         |        |  |  |  |  |  |  |  |  |  |  |

                                        

1 See “Part II — Item 7 —            Management’s Discussion and Analysis of Financial Condition and Results of            Operations” and note 11 included in “Part II — Item 8 —            Consolidated Financial Statements and Supplementary Data” for more information            regarding the financial performance of our Network Access segment.

                                        

 

**Services and Products**

Our            Network Access segment offers wholesale voice and data services and products to other            common carrier customers. We provide network transport, billing services and access to            our network to other common carriers. These services allow other common carriers to            provide services to their customers that originate or terminate on our network, or on            the networks of other communication companies to which we connect.

 

We are            engaged in the transmission of interstate and intrastate-switched message telephone            service, Internet service, and Private Line and Private Network communications service            between the major communities in Alaska, and the remaining United States and foreign            countries. Our message toll services include intrastate and interstate direct dial,            toll-free 800, 888, 877 and 866 services, our calling card, directory assistance,            operator and enhanced conference calling, frame relay, Multi-Protocol Label Switching            (“MPLS”), IP, SDN, and ISDN technology based services. MPLS is a            data-carrying mechanism which emulates certain properties of a circuit-switched network            over a packet-switched network. We

 

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terminate northbound message telephone service traffic for Verizon,            Sprint Nextel and several large resellers who do not have facilities of their own in            Alaska. We also provide origination of southbound calling card and toll-free 800, 888,            877 and 866 toll services for Verizon, Sprint Nextel, and other Interexchange carriers.            Services are generally provided pursuant to contracts with terms of up to five years in            length. Toll, Private Line and Private Network, and related services account for 31.4%,            34.7%, and 33.5% of our 2007, 2006 and 2005 revenues, respectively. Private Line and            Private Network services utilize voice and data transmission circuits, dedicated to            particular subscribers, which link a device in one location to another in a different            location.

 

We have            positioned ourselves as a price, quality, and customer service leader in the Alaska            communications market. The value of our voice and data services is generally designed            to be equal to or greater than that for comparable services provided by our            competitors.

 

**Sales and Marketing**

Our            Network Access segment sales and marketing efforts are primarily directed toward            increasing the number of other common carriers we serve, the number of billable minutes            of long-distance traffic we carry over our network and the number of voice and data            transmission circuits leased. We sell our voice and data services primarily through            direct contact marketing.

 

**Facilities**

Our            Network Access segment shares common facilities used for voice and data services by            other segments. You should refer to “Consumer Segment — Facilities”            above for additional information.

 

**Customers**

A            summary of our Network Access segment switched long-distance message telephone service            traffic (in minutes) follows:

 

|                                                                    |           | **Year Ended                            December** **31,** |
|-------------------------------------------------------------------------|---------------------|-----------------------------------------------------------------|
|                                                                    |           | **2007**                                                        |    | **2006** |    | **2005** |
| Network Access long-distance                            minutes: 1 | ***(in millions)*** |
| South-bound Interstate                                                  |                |                                                            | 690.2 |   |   | 662.0 |   |   | 576.5 |
| North-bound Interstate                                                  |                |                                                            | 476.5 |   |   | 574.6 |   |   | 408.1 |
| Intrastate                                                              |                |                                                            | 62.8 |   |   | 60.9 |   |   | 66.8 |
| Other                                                                   |                |                                                            | 20.7 |   |   | 19.1 |   |   | 21.7 |
| Total                                                                   |           |                                                            | 1,250.2 |   |   | 1,316.6 |   |   | 1,073.1 |

                             

1 All minutes data were taken from our internal billing            statistics reports.

                            

             

Our            largest customer was MCI through December 31, 2005. On January 6, 2006, Verizon            announced the completion and closing of its merger with MCI and consequently Verizon is            now our largest customer. During the year ended December 31, 2005, MCI was classified            as a major customer of our Network Access segment. During the years ended December 31,            2007 and 2006, Verizon is classified as a major customer. At December 31, 2007 and            2006, Verizon (previously MCI) owned 0% and 37.9%, respectively, of GCI’s            outstanding Class B common stock. Each share of GCI’s Class B common stock has            ten votes per share.

 

Revenues attributed to Verizon during the years ended December 31, 2007            and 2006, totaled $71.5 million and $93.4 million or 13.8% and 19.6% of total revenues,            respectively. Revenues attributed to MCI’s message telephone traffic during the            year ended December 31, 2005, totaled $85.4 million or 19.3% of total revenues. Our            contract with Verizon has a term through December 2009, with five, one year automatic            extensions thereafter. We believe that Verizon will continue to make use of our            services during the extended term.

 

We also            provide Network Access segment services to Sprint Nextel and Dobson. Although these            customers do not meet the threshold for classification as a major customer, we do            derive significant revenues and operating income from them. Our contract with Sprint            Nextel was renewed in January 2007 to extend the term through March 2009, with two,            one-year renewal options. Our majority-owned subsidiary, Alaska DigiTel, entered into a            roaming agreement with Sprint Nextel in November 2007.

 

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In            November 2007,AT&T acquired Dobson, including its Alaska properties. In December            2007, we signed an agreement with AT&T that terminates AT&T’s obligation            to purchase network services from us as of July 1, 2008. AT&T will provide 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 on a per minute basis. The            block of wireless network usage at no charge will reduce Cost of Goods Sold during the            four year period ended June 30, 2012, that we would have otherwise recognized in            accordance with the new agreement, however, we are unable to estimate the impact this            change will have on our Cost of Goods Sold. We expect our message telephone and Private            Line revenues earned from Dobson to decrease in 2008 and forward. Dobson revenues were            $23.2 million in 2007. We do not believe the termination of the agreement with Dobson            will have a material adverse effect on our financial position, results of operations or            liquidity.

 

The            loss of Verizon or Sprint Nextel as customers or a material adverse change in our            relationships with them could have a material adverse effect on our financial position,            results of operations or liquidity. There are no other individual Network Access            segment customers, the loss of which would have a material impact on our revenues or            operating income.

 

Voice Customers

 

Long-Distance

Revenues derived from Network Access segment long-distance services            totaled $93.1 million, $105.1 million and $90.1 million, respectively, or 17.9%, 22.0%            and 20.3% of our total revenues in 2007, 2006 and 2005, respectively.

 

Local Access

Revenues derived from Network Access segment local access services            totaled $3.8 million, $5.7 million and $5.4 million, respectively, or 1.0%, 1.2% and            1.2% of our total revenues in 2007, 2006 and 2005, respectively.

 

Data            Customers

 

Revenues derived from Network Access segment data services, including            Internet and Private Line and Private Network services, totaled $61.2 million, $55.6            million and $52.8 million, or 11.8%, 11.9% and 11.9% of our total revenues in 2007,            2006 and 2005, respectively.

 

Wireless Customers

 

Revenues derived from Network Access segment wireless services totaled            $5.3 million or 1.0% of our total revenues in 2007. Alaska DigiTel provides roaming            services to other CDMA wireless carriers in Alaska. In October 2007, Alaska DigiTel            entered a long-term roaming agreement with Sprint Nextel, becoming a Sprint Rural            Alliance partner. Under this agreement, Sprint Nextel and Alaska DigiTel will provide            each other seamless access to voice and high speed data platforms on a reciprocal            basis.

 

**Competition**

Our            Network Access segment competes against AT&T Alascom, ACS, MTA, and certain smaller            rural local telephone carrier affiliates. There is also the possibility that new            competitors will enter the Alaska market. You should refer to “Consumer Segment            — Competition” above for additional information.

 

Other            common carrier traffic routed to us for termination in Alaska is largely dependent on            traffic routed to our carrier customers by their customers. Pricing pressures, new            program offerings, revised business plans, and market consolidation continue to evolve            in the markets served by our 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 we may have to respond            to competitive pressures, consistent with federal law. We are unable to predict the            effect of such changes on our business.

 

Historically, we have competed in the Network Access segment market by            offering rates comparable to or less than our competitors, by providing a comprehensive            service model to meet the complete needs of our carrier customers, and by providing            responsive customer service.

 

See            “Item 1A. — Risk Factors — We face intense competition that may            reduce our market share and harm our financial performance.”

 

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**Seasonality**

Network            Access segment long-distance services revenues derived from our other common carrier            customers have historically been highest in the summer months because of temporary            population increases attributable to tourism and increased seasonal economic activity            such as construction, commercial fishing, and oil and gas activities. Our Network            Access segment data services do not exhibit significant seasonality.

 

***Commercial Segment***

 

We            offer a full range of communications services and products to commercial and            governmental customers. Commercial segment revenues for 2007, 2006 and 2005 are            summarized as follows:

|             |         |                                                            |         |         |         |     |         |   |    |   |
|------------------|--------------|-----------------------------------------------------------------|--------------|--------------|--------------|----------|--------------|--------|---------|--------|
|             |    | **Year Ended                            December** **31,** |         |
|             |    | **2007**                                                        |    | **2006**     |    | **2005** |         |
|             |    | ***(in thousands)***                                            |         |
| Total revenues 1 |    | $                                                               | 104,640      |    |         | 105,929  |    |   | 105,663 |   |
|                  |              |                                                                 |              |              |              |          |              |        |         |        |  |  |  |  |  |  |  |  |  |  |

                                          

1 See “Part II — Item 7 —            Management’s Discussion and Analysis of Financial Condition and Results of            Operations” and note 11 included in “Part II — Item 8 —            Consolidated Financial Statements and Supplementary Data” for more information            regarding the financial performance of our Commercial segment.

                                          

 

**Services and Products**

Our            Commercial segment offers a full range of voice, video, data and wireless services and            products to commercial and governmental customers.

 

Voice Services and Products

 

Long-Distance

We are            engaged in the transmission of interstate and intrastate-switched message telephone            service between the major communities in Alaska, and the remaining United States and            foreign countries. Our message toll services include intrastate, interstate and            international direct dial, toll-free 800, 888, 877 and 866 services, our calling card,            operator and enhanced conference calling services. Small business subscribers generally            may cancel long-distance service at any time. Certain small business and most large            commercial and governmental customers generally contract with us for service over one            to five year periods.

 

We have            positioned ourselves as a price, quality, and customer service leader in the Alaska            communications market. The value of our long-distance services is generally designed to            be equal to or greater than that for comparable services provided by our            competitors.

 

Local Access

We            offer full featured local access service to our Commercial segment customers using our            own fiber facilities and collocated remote facilities that access the ILEC’s UNE            loops. In areas where we do not have our own facilities or access to ILEC loop            facilities, we offer service using total service resale of the ILEC’s local            service or UNE platform.

 

Our            package offerings are competitively priced and include popular features, including            caller ID, voice messaging, call forwarding, and call waiting.

 

Directories Services

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. We offer three yellow pages directories with each directory covering            multiple locations and including custom features for each area. Our directories cover            the following communities:

 

|   | **•** | Anchorage, Elmendorf Air Force Base, Fort Richardson,                            Bird, Girdwood, Hope, Indian, Portage, Rainbow, Sunrise, Eagle River,                            Chugiak, Big Lake, Houston, Palmer, Wasilla, Willow, Talkeetna,                            Anderson, Clear, |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

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Cantwell, Healy, Denali National Park, Tyonek, Beluga, Kenai, North            Kenai, Soldotna, Kasilof, Clam Gulch, Sterling, Cooper Landing, Homer, Anchor Point,            Halibut Cove, Nanwalek, Ninilchik, Port Gaham, Seldovia;

|   | **•** | Fairbanks, North Pole, Eielson Air Force Base, Fort                            Wainwright, Delta Junction, Fort Greeley, Nenana; and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Juneau, Auke Bay, Douglas, Lemon Creek, Mendenhall                            Valley |
|--------|------------|--------------------------------------------------------------------------------------|

 

Video Services and Products

 

Commercial segment subscribers such as hospitals, hotels and motels are            charged negotiated monthly service fees. Programming services offered to our cable            television systems subscribers differ by system as described in the Consumer segment            Video Services and Products section above. You should refer to “Consumer Segment            — Services and Products” above for additional information.

 

Data            Services and Products

 

Internet

We            currently offer several Internet service packages for commercial use: dial-up access,            DSL, passive optical networking, fixed wireless, T-1 and fractional T-1 leased line,            metro Ethernet, multi-megabit and high-speed cable modem Internet access. Our business            high-speed cable modem Internet service offers access speeds ranging from 512 Kbps to            2.4 Mbps, free monthly data transfers of up to 30 gigabytes and free 24-hour customer            service and technical support. Our DSL offering can support speeds of up to 1.5 Mbps            over the same copper line used for phone service. Business services also include a            personalized web page, domain name services, and e-mail.

 

We also            provide dedicated access Internet service to commercial and public organizations in            Alaska. We offer a premium service and currently support many of the largest            organizations in the state such as BP Exploration (Alaska) Inc., the State of Alaska            and the Anchorage School District. We have hundreds of other enterprise customers, both            large and small, using this service. Additional cable modem service packages tailored            to high-use commercial Internet users are also available.

 

Private Lines and Private Networks

Private            Line and Private Network services utilize voice and data transmission circuits,            dedicated to particular subscribers, which link a device in one location to another in            a different location. private IP, Private Lines, metro Ethernet and frame relay offer a            secure solution for frequent communication of large amounts of data between            sites.

 

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 supply            integrated voice and data communications systems incorporating private IP, interstate            and intrastate digital Private Lines, point-to-point and multipoint Private Network and            small earth station services.

 

Wireless Services and Products

Wireless services and products offered to our Commercial segment            customers are the same as those described in the Consumer Wireless Services and            Products section above. You should refer to “Consumer Segment — Services            and Products” above for additional information.

 

Bundled Services and Products

We            combine one or more of our individual service or product offerings into bundles that we            sell to our Commercial segment customers at attractive prices as described further in            the Consumer segment Services and Products section above. You should refer to            “Consumer Segment — Services and Products” above for additional            information.

 

**Sales and Marketing**

Our            Commercial segment sales and marketing efforts focus on increasing the number of            subscribers we serve, selling bundled services, and generating incremental revenues            through product and feature up-sell opportunities. We sell our Commercial segment            services and products primarily through direct contact marketing. We also use direct            mail advertising, door-to-door selling, up-selling by our customer service and call            center personnel, local media advertising, retail stores, and our website.

 

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**Facilities**

Our            Commercial segment uses many facilities to provide services and products that are            common to the Consumer segment. You should refer to “Consumer Segment —            Facilities” above for additional information.

             

We            provide our own facilities-based local access services to many of Anchorage’s            larger business customers through expansion and deployment of SONET, Ethernet, and            Gigabit Passive Optical Network fiber transmission facilities, DLC facilities, and            leased T-1 facilities.

 

Our            dedicated Internet access and IP data services are delivered to an Ethernet port            located at the service point. Our management platform constantly monitors this port and            continual communications are maintained with all of the core and distribution routers            in the network. The availability and quality of service, as well as statistical            information on traffic loading, are continuously monitored for quality assurance. The            management platform has the capability to remotely access routers, servers and layer            two switches, permitting changes in configuration without the need to physically be at            the service point. This management platform allows us to offer outsourced network            monitoring and management services to businesses and governmental entities. Many of the            largest commercial networks in Alaska use this service, including the state            government.

             

**Customers**

A            discussion of Commercial segment customers by product type follows.

 

Voice Customers

             

Long-Distance

We had            10,500, 11,100 and 11,700 active Commercial segment long-distance subscribers at            December 31, 2007, 2006 and 2005, respectively. The 2007 and 2006 decrease is primarily            due to a decrease in the total number of long-distance services subscribers in the            markets we serve resulting from customers substituting wireless phone, prepaid calling            card, VoIP and email usage for direct dial minutes.

 

Commercial segment long-distance services revenues totaled $12.8            million, $12.94 million and $14.4 million, or 2.5%, 2.7% and 3.2% of our total revenues            in 2007, 2006 and 2005, respectively.

 

Equal            Access conversions have been completed in all communities where we serve with owned            facilities. Equal Access is in progress in several small communities where we are            expanding our owned facilities. We estimate that we carry greater than 50% of combined            commercial and consumer traffic as a statewide average for both originating interstate            and intrastate message telephone service.

 

A            summary of our Commercial segment switched long-distance message telephone service            traffic (in minutes) follows:

 

|                                                                |           | **Year Ended                            December** **31,** |
|---------------------------------------------------------------------|---------------------|-----------------------------------------------------------------|
|                                                                |           | **2007**                                                        |    | **2006** |    | **2005** |
| Commercial long-distance                            minutes: 1 | ***(in millions)*** |
| Intrastate                                                          |                |                                                            | 79.4 |   |   | 79.7 |   |   | 84.2 |
| Interstate                                                          |                |                                                            | 49.7 |   |   | 49.8 |   |   | 52.7 |
| International                                                       |                |                                                            | 2.2 |   |   | 2.3 |   |   | 2.0 |
| Total                                                               |           |                                                            | 131.3 |   |   | 131.8 |   |   | 138.9 |
|                                                                |                |                                                            |   |   |   |   |   |   |   |

                             

1 All minutes data were taken from our internal billing            statistics reports.

                            

             

We            provide various services to the State of Alaska and BP Exploration (Alaska) Inc.            Although these customers do not meet the threshold for classification as major            customers, we do derive significant revenues and operating income from them.

 

Although we have several agreements to facilitate the origination and            termination of international toll traffic, we have neither foreign operations nor            export sales. See “Part I — Item 1 — Business — Financial            Information about our Foreign and Domestic Operations and Export Sales” for more            information.

 

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Local Access

We had            43,100, 41,900 and 40,700 Commercial segment local access lines in service at December            31, 2007, 2006 and 2005, respectively.

 

Commercial segment local access services revenues totaled $17.1 million,            $16.6 million and $16.8 million, or 3.3%, 3.5% and 3.8% of our total revenues in 2007,            2006 and 2005, respectively.

 

Video Customers

 

We            served 15,300, 15,200 and 14,400 basic Commercial segment subscribers at December 31,            2007, 2006 and 2005, respectively. Commercial segment video services revenues totaled            $8.0 million, $8.0 million and $7.2 million, or 1.5%, 1.7% and 1.6% of our total            revenues in 2007, 2006 and 2005, respectively.

 

Data            Customers

 

Internet

We had            8,500, 7,800 and 6,500 active Commercial segment cable modem subscribers at December            31, 2007, 2006 and 2005, respectively. Commercial segment Internet services revenues            totaled $14.4 million, $16.3 million and $16.9 million, or 2.8%, 3.4% and 3.8% of our            total revenues in 2007, 2006 and 2005, respectively.

 

Private Line and Private Networks

We had            230, 237 and 241 total active Commercial segment Private Line and Private Networks            subscribers at December 31, 2007, 2006 and 2005, respectively. Commercial segment            Private Line and Private Networks services revenues totaled $16.8 million, $16.8            million and $14.3 million, or 3.2%, 3.5% and 3.2% of our total revenues in 2007, 2006            and 2005, respectively.

 

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 through our            Network Solutions business. We also supply integrated voice and data communications            systems incorporating interstate and intrastate digital Private Lines, point-to-point            and multipoint Private Network and small earth station services. Our Managed Services            revenues totaled $29.8 million, $30.1 million and $32.4 million, or 5.7%, 6.3% and 7.3%            of total revenuesin 2007, 2006 and 2005, respectively.

 

Wireless Customers

 

We had            7,300 and 4,600 total Commercial segment wireless lines in service at December 31, 2007            and 2006, respectively. The total wireless lines in service at December 31, 2007            include Alaska DigiTel lines in service. At December 31, 2005 we had 16,000 total            Consumer and Commercial segment wireless lines in service. Data is not available to            separately identify the number of Consumer and Commercial segment lines in service at            December 31, 2005. Our Commercial segment wireless services revenue totaled $4.8            million, $2.5 million and $1.2 million, respectively, or 0.9%, 0.5% and 0.3% of total            revenues in 2007, 2006 and 2005, respectively. Total wireless revenue at December 31,            2007 includes Alaska DigiTel revenue.

 

**Competition**

Many of            our Commercial segment voice, video, data and wireless services and products are also            common to the Consumer segment. You should refer to “Consumer Segment —            Competition” above for additional information.

 

We            expect further competition in commercial customer telephone access, Internet access,            DSL and data markets. Competition is based upon price and pricing plans, the type of            services offered, customer service, billing services, performance, perceived quality,            reliability and availability.

 

Presently, 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.

 

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We            compete with two other major yellow page directories and several local community            directories. We compete based on reduced advertising and listing prices, broad            circulation, and directory quality and features.

 

See            “Item 1A. — Risk Factors — We face intense competition that may            reduce our market share and harm our financial performance.”

 

**Seasonality**

Our            Commercial segment voice, video, and data services do not exhibit significant            seasonality. Our ability to implement construction projects is hampered during the            winter months because of cold temperatures, snow and short daylight hours.

 

***Managed Broadband Segment***

 

We            offer Internet access and related services for schools and health organizations using a            platform including many of the latest advancements in technology. Managed Broadband            segment revenues for 2007, 2006 and 2005 are summarized as follows:

 

|             |    | **Year Ended                            December** **31,** |
|------------------|--------------|-----------------------------------------------------------------|
|             |    | **2007**                                                        |    | **2006** |    | **2005** |
|             |    | ***(in thousands)***                                            |
| Total revenues 1 |    | $                                                               | 28,792 |    |   | 26,131 |    |   | 26,102 |
|                  |              |                                                                 |  |  |  |  |  |  |  |

                                        

1 See “Part II — Item 7 —            Management’s Discussion and Analysis of Financial Condition and Results of            Operations” and note 11 included in “Part II — Item 8 —            Consolidated Financial Statements and Supplementary Data” for more information            regarding the financial performance of our Managed Broadband segment.

                                       

 

**Services and Products**

Our            Managed Broadband segment offers Internet access and related services to schools and            health organizations.

 

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 Universal Service Fund (“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.

 

Our            videoconferencing network is the largest in Alaska, and network coverage expanded in            2006 to parts of the state of Washington. The network supports all H.323 IP            videoconferencing standards including the newer H.264 standard, and supports call data            rates from 128 kilobits per second up to and including multi-megabit high definition            calls. In 2007 and

 

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2006,            we terminated over 37,000 and 30,000, respectively, videoconferencing endpoint            connections amounting to over 2.8 and 2.0 million, respectively, videoconferencing            minutes on our network.

 

**Sales and Marketing**

Our            Managed Broadband segment sales and marketing efforts focus on increasing the number of            subscribers we serve, selling bundled services, and generating incremental revenues            through product and feature up-sell opportunities. We sell our Managed Broadband            segment services and products primarily through direct contact marketing.

 

**Facilities**

Our            Managed Broadband segment services and products are delivered using a platform            including many of the latest advancements in technology through a locally available            circuit, our existing lines, and/or satellite earth stations. Our Internet services are            partially provisioned over a satellite based digital video broadcast carrier that            reduces the requirement for new satellite transponder bandwidth to support growth in            rural health, SchoolAccess® and other broadband services.

 

We            employ a packet data satellite transmission technology for the efficient transport of            broadband data in support of our rural health and SchoolAccess®            initiatives. Our SchoolAccess® Internet service is delivered as            follows:

 

|   | **•** | In communities where we have terrestrial interconnects                            or provide existing service over regional earth stations, we have                            configured intermediate distribution facilities. Schools that are                            within these service boundaries are connected locally to one of those                            facilities; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | In communities where we have extended communications                            services via our DAMA earth station program,                            SchoolAccess® is provided via a satellite circuit to an                            intermediate distribution facility at the Eagle River Earth Station;                            and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | In communities or remote locations where we have not                            extended communications services, SchoolAccess® is                            provided via a dedicated (usually on premise) VSAT satellite station.                            The VSAT connects to an intermediate distribution facility located in                            Anchorage. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In            October 2007 we signed an agreement to purchase the stock of Unicom which 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. We expect to utilize DeltaNet            in 2008 to support growth in rural health, SchoolAccess® and other            broadband services.

 

You            should refer to “Consumer Segment — Facilities” above for additional            information.

 

**Customers**

Our            Managed Broadband segment revenue, including our SchoolAccess® and rural            health initiatives, totaled $28.8 million, $26.1 million and $26.1 million, or 5.6%,            5.5% and 5.9% of total revenues in 2007, 2006 and 2005, respectively. Our            SchoolAccess® Internet service was delivered to 51 customers at December            31, 2007 representing over 162 schools in rural Alaska and 9 schools in Montana, New            Mexico and Arizona. Our SchoolAccess® Internet service was delivered to            48 customers at December 31, 2006 representing over 203 schools in rural Alaska and 9            schools in Montana, New Mexico and Arizona. We had 45 SchoolAccess®            customers at December 31, 2005. Our rural health service was delivered to 21 customers            in Alaska, Washington and Montana at December 31, 2007, 2006 and 2005.

 

**Competition**

Presently, 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”            services and products rather than solely based on price competition. These services are            blended with other transport and software products into unique customer solutions,            including SchoolAccess® and rural health applications such as video            conferencing and unique web content services.

 

See            “Item 1A. — Risk Factors — We face intense competition that may            reduce our market share and harm our financial performance.”

 

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**Seasonality**

Our            Managed Broadband segment does not exhibit seasonality.

 

**Sales and Marketing – Company-wide**

 

Our            sales and marketing strategy hinges on our ability to leverage (i) our unique position            as an integrated provider of multiple communications, Internet and cable services, (ii)            our well-recognized and respected brand name in the Alaskan marketplace and (iii) our            leading market positions in long-distance, Internet and cable television services. By            continuing to pursue a marketing strategy that takes advantage of these            characteristics, we believe we can increase our consumer and commercial customer market            penetration and retention rates, increase our share of our customers’ aggregate            voice, video and data services expenditures and achieve continued growth in revenues            and operating cash flow.

 

**Environmental Regulations**

 

We may            undertake activities that, under certain circumstances may affect the environment.            Accordingly, they are subject to federal, state, and local regulations designed to            preserve or protect the environment. The FCC, the Bureau of Land Management, the United            States Forest Service, and the National Park Service are required by the National            Environmental Policy Act of 1969 to consider the environmental impact before the            commencement of facility construction.

 

We            believe that compliance with such regulations has had no material effect on our            consolidated operations. The principal effect of our facilities on the environment            would be in the form of construction of facilities and networks at various locations in            Alaska and between Alaska, Seattle, Washington, and Warrenton, Oregon. Our facilities            have been constructed in accordance with federal, state and local building codes and            zoning regulations whenever and wherever applicable. Some facilities may be on lands            that may be subject to state and federal wetland regulation.

 

Uncertainty as to the applicability of environmental regulations is            caused in major part by the federal government’s decision to consider a change in            the definition of wetlands. Most of our facilities are on leased property, and, with            respect to all of these facilities, we are unaware of any violations of lease terms or            federal, state or local regulations pertaining to preservation or protection of the            environment.

 

Our            Alaska United projects consist, in part, of deploying land-based and undersea fiber            optic cable facilities between Anchorage, Juneau, Seward, Valdez, and Whittier, Alaska,            Seattle, Washington, and Warrenton, Oregon. The engineered routes pass over wetlands            and other environmentally sensitive areas. We believe our construction methods used for            buried cable have a minimal impact on the environment. The agencies, among others, that            are involved in permitting and oversight of our cable deployment efforts are the United            States Army Corps of Engineers, National Marine Fisheries Service, United States Fish            and Wildlife Service, United States Coast Guard, National Oceanic and Atmospheric            Administration, Alaska Department of Natural Resources, and the Alaska Office of the            Governor-Governmental Coordination. We are unaware of any violations of federal, state            or local regulations or permits pertaining to preservation or protection of the            environment.

 

In the            course of operating our cable television and communications systems, we have used            various materials defined as hazardous by applicable governmental regulations. These            materials have been used for insect repellent, paint used to mark the location of our            facilities, and pole treatment, and as heating fuel, transformer oil, cable cleaner,            batteries, diesel fuel, and in various other ways in the operation of those systems. We            do not believe that these materials, when used in accordance with manufacturer            instructions, pose an unreasonable hazard to those who use them or to the            environment.

 

**Patents, Trademarks and Licenses**

 

We do            not hold patents, franchises or concessions for communications services or local access            services. We do hold registered service marks for the letters GCI®, and            for the terms SchoolAccess®, Alaska United Fiber Optic Cable            System®, GCI ConnectMD®, ConnectMD®, GCI            Hypernet®, My GCI®, MyGCI®, Info Anchorage            GCI Internet Hot Spot®, Info Fairbanks GCI Internet Hot            Spot®, and Info Juneau GCI Internet Hot Spot®. The            Communications Act of 1934 gives the FCC the authority to license and regulate the use            of the electromagnetic spectrum for radio communications. We hold licenses through our            subsidiary GCI Communication Corp. for our satellite and microwave transmission            facilities for provision of long-distance services provided by our Consumer, Commercial            and Network Access segments.

 

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Our            majority-owned subsidiary, Alaska DigiTel, holds registered service marks for the terms            Keep Talking Alaska® and Digiminutes®.

 

We            acquired a license for use of a 30-MHz block of spectrum for providing PCS services in            Alaska. We are required by the FCC to provide adequate broadband PCS service to at            least two-thirds of the population in our licensed areas within 10 years of being            licensed. The PCS license had an initial duration of 10 years. At the end of the            license period, a renewal application was filed. Licenses may be revoked and license            renewal applications may be denied for cause. The PCS license was renewed in 2005 for            an additional 10-year term.

 

We            acquired a LMDS license in 1998 for use of a 150-MHz block of spectrum in the 28 GHz            Ka-band for providing wireless services. The LMDS license has an initial duration of 10            years at which time licensees will be required to provide “substantial            service” in their service regions. Our LMDS license will expire in 2008 if not            renewed by the FCC. We are a member of a coalition that has petitioned the FCC for an            extension of the expiration date due to the lack of suitable equipment for this            bandwidth. We are unable to predict at this time whether the FCC will grant an            extension of our LMDS license expiration. Our operations may require additional            licenses in the future.

 

In 1998            our majority-owned subsidiary, Alaska DigiTel, acquired a license for use of a 30-MHz            block of spectrum for providing PCS services in Alaska. We are required by the FCC to            provide adequate broadband PCS service to at least two-thirds of the population in our            licensed areas within 10 years of being licensed. The PCS license has an initial            duration of 10 years. At the end of the license period, a renewal application will be            filed. Licenses may be revoked and license renewal applications may be denied for            cause. We expect the PCS license will be renewed in 2008 for an additional 10-year            term.

 

Earth            stations are licensed generally for fifteen years. The FCC also issues a single blanket            license for a large number of technically identical earth stations (e.g.,            VSATs).

 

**Regulation**

 

Our            businesses are subject to substantial government regulation and oversight. The            following summary of regulatory issues does not purport to describe all existing and            proposed federal, state, and local laws and regulations, or judicial and regulatory            proceedings that affect our businesses. Existing laws and regulations are reviewed            frequently by legislative bodies, regulatory agencies, and the courts and are subject            to change. For example, critics continue to ask Congress to modify, if not altogether            rework, the 1996 Telecom Act. Any change in the Act that loosened regulatory oversight            of ILECs’ control of bottleneck facilities could have an adverse impact on our            businesses. We cannot predict at this time the outcome of the debate over the 1996            Telecom Act or any other existing or proposed laws and regulations.

 

**Wireline Voice Services and Products**

*General.*As an Interexchange carrier, we            are subject to regulation by the FCC and RCA as a non-dominant provider of interstate,            international, and intrastate long-distance services. As a state-certificated CLEC, we            are subject to regulation by the RCA and the FCC as a non-dominant provider of local            communications services. Military franchise requirements also affect our ability to            provide communications services to military bases.

 

*Rural Exemption.*A Rural Telephone Company            is exempt from compliance with certain material interconnection requirements under            Section 251(c) of the 1996 Telecom Act, including the obligation to negotiate Section            251(c) interconnection requirements in good faith, unless and until a state regulatory            commission lifts such “rural exemption” or otherwise finds it not to            apply.

 

On            April 2, 1997, we made a bona fide request to ACS for 251(c) interconnection in            Fairbanks and Juneau and requested the RCA to lift the rural exemption for those two            cities. After extensive regulatory and judicial action, we and ACS entered into a            comprehensive settlement on April 18, 2004, that, in part, included a relinquishment by            ACS of its rural exemption for its Fairbanks and Juneau operating companies.

 

On            January 12, 2004, we made a bona fide request to MTA for 251(c) interconnection under            Section 251(f)(1)(C) of the 1996 Telecom Act, which provides that the rural exemption            does not apply to such a request from a cable operator seeking to provide            telecommunications service in an area where a rural telephone company is providing            video programming in competition with the cable operator. On February 2, 2005, the RCA            ruled that MTA’s provision of video service through a wholly owned subsidiary            meant that MTA’s rural exemption did not apply to our request. MTA subsequently            petitioned the RCA to suspend and modify certain of its Section 251(c) obligations. On            December 20, 2005,

 

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the RCA            granted MTA’s petition for a three-year period. We have appealed the RCA’s            decision. Following negotiation and arbitration of MTA’s remaining            interconnection obligations, the RCA approved an Interconnection Agreement between MTA            and us on February 17, 2006. We entered the Mat-Su Valley market with local access            services in 2006 and 2007.

 

On May            2, 2005, we made a bona fide request to the City of Ketchikan d/b/a “KPU”            for 251(c) interconnection under Section 251(f)(1)(C) of the 1996 Telecom Act. On June            3, 2005, we entered into a stipulation with KPU providing that KPU would forfeit its            rural exemption and that negotiations for interconnection would commence when KPU            executed its then existing plan to offer video programming. On November 14, 2006, the            RCA approved the resulting Interconnection Agreement. We entered the Ketchikan market            with local access services in 2007.

On May            17, 2006, we made a bona fide request to CVTC for 251(c) interconnection. This request            resulted in a settlement under which CVTC agreed to negotiate section 251(a) and (b)            interconnection with us subject to private arbitration if necessary. Following            negotiation and arbitration of CVTC’s interconnection obligations, the RCA            approved an Interconnection Agreement between CVTC and us on October 11, 2007. We            entered the Valdez CVTC market with local access services in 2007.

 

On            October 19, 2006, we made bona fide requests to TelAlaska Inc. d/b/a MukLuk Telephone            Company, Inc. (“Mukluk”) and TelAlaska Inc. d/b/a Interior Telephone            Company, Inc. (“Interior”) for 251(c) interconnection. This request            resulted in a settlement under which Mukluk and Interior agreed to negotiate section            251(a) and (b) interconnection with us subject to private arbitration if necessary.            Following negotiation and arbitration of Mukluk’s and Interior’s            interconnection obligations, the RCA approved interconnection agreements between Mukluk            and Interior and us on February 22, 2008.

 

On            September 26, 2007, we requested that Alaska Telephone Company (“ATC”)            enter into an agreement under which ATC would agree to negotiate section 251(a) and (b)            interconnection with us subject to private arbitration if necessary. Such agreement was            reached and negotiations for an Interconnection Agreement with ATC are            ongoing.

 

On            October 17, 2007, we requested that Cordova Telephone Cooperative (“CTC”)            enter into an agreement under which ATC would agree to negotiate section 251(a) and (b)            interconnection with us subject to private arbitration if necessary. Such agreement was            reached and negotiations and arbitration for an Interconnection Agreement with ATC are            ongoing.

 

On            December 14, 2007, we requested that ASTAC enter into an agreement under which ASTAC            would agree to negotiate section 251(a) and (b) interconnection with us subject to            private arbitration if necessary. Such agreement was reached and negotiations and            arbitration for an Interconnection Agreement with ASTAC are ongoing.

 

See            “Description of Our Business by Reportable Segment — Consumer —            Competition — Voice Services and Products Competition” for more            information.

 

*Access Charges and Other Regulated Fees.*The FCC regulates the fees that local telephone companies charge            long-distance companies for access to their local networks. The FCC is considering            proposals to restructure and possibly reduce interstate access charges. Changes to the            interstate access charge regime or introduction of new technologies not subject to            access charges could fundamentally change the economics of some aspects of our            business.

 

Carriers also pay fees for switched wholesale transport services in and            out of Alaska. The rates for such services offered by and to any provider are currently            governed by a federal law that is effective through December 31, 2009.

 

*Access to Unbundled Network Elements.*The            ability to obtain unbundled network elements is an important element of our local            access services business. In 2005, the FCC, in response to a court decision, adopted            new standards that generally curb access to certain ILEC high capacity loop and            transport facilities. We do not believe that any of these standards are met for the            markets we serve. The FCC also eliminated access to mass market switching, which we            generally self-provision.

 

We            cannot predict the extent to which existing FCC rules will be sustained in the face of            additional legal action and the impact of any further rules that are yet to be            determined by the FCC. For example, the FCC has pending a notice of proposed rulemaking            for review of the pricing standard that governs the rates ILECs may charge competitors            for access to unbundled network elements. The outcome of this regulatory proceeding            could result in a change in our cost of serving new and existing markets. Moreover, the            future regulatory classification of services that are transmitted over facilities may            impact the extent to which we will be permitted access to such facilities.

 

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Recurring and non-recurring charges for UNE-loops and other unbundled            network elements may increase based on the rates adopted in RCA proceedings to            establish new Interconnection Agreements or renew existing agreements. These increases            could have an adverse effect on our financial position, results of operations or            liquidity.

 

On            September 30, 2005, the ACS subsidiary serving Anchorage filed a petition with the FCC,            seeking forbearance from the requirement that it provide access to UNEs, and that to            the extent it voluntarily did so, that the pricing provisions of the Act would not            apply. We filed our opposition on January 9, 2006 and our reply on February 23, 2006.            On December 28, 2006, the FCC granted ACS the requested relief from the provision of            unbundled loops and transport in five of its eleven tariffed wire centers. The relief            is conditioned on the requirement that ACS make loops and certain subloops available in            those wire centers where relief was granted, by no later than a one-year transition            period, at the same rates, terms and conditions as those negotiated between GCI and ACS            for Fairbanks, until commercially negotiated rates were reached.

 

On            March 15, 2007, GCI and ACS entered into an agreement (the "Settlement Agreement") to            settle issues related to the FCC’s December 28, 2006 decision and other matters.            Under the Settlement Agreement, ACS and GCI entered into a Global Interconnection            Agreement that covers all ACS study areas, including ACS’s Sitka-Bush and Glacier            State study areas. The Settlement Agreement also provides that ACS will continue to            provide GCI with access to UNE loops in the Anchorage, Fairbanks, and Juneau study            areas at a rate of $23.00 per UNE loop per month. The per-loop price is subject to an            upward or downward adjustment depending on the aggregate number of UNE and wholesale            lines GCI is purchasing from ACS in all of ACS’s study areas. The initial term of            the Settlement Agreement is five years.

 

On            March 21, 2007, GCI and ACS filed motions to withdraw their appeals of the FCC            decision, before United States Court of Appeals for the District of Columbia Circuit            and the United States Court of Appeals for the Ninth Circuit, respectively, which            motions have been granted. Additional appeals that were filed by others have been            dismissed and on June 28, 2007, the RCA approved the Global Interconnection Agreement            that incorporated the terms of the settlement.

 

On May            22, 2006, the ACS subsidiary serving Anchorage filed a petition with the FCC, seeking            forbearance from regulation of interstate broadband and access services. On August 20,            2007, the FCC granted in part and denied in part the requested relief, requiring that            ACS comply with certain safeguards to ensure the relief granted would not result in            harm to consumers or competition. On 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 USF pays subsidies            to ETCs to support the provision of facilities-based wireline and wireless telephone            service in high-cost areas. Under FCC regulations, we have qualified as a competitive            ETC in the Anchorage, Fairbanks, Juneau, Mat-Su 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 facilities-based wireline and            wireless telephone services, and our net cost of providing local telephone services in            these areas would be materially adversely affected.

 

The            Federal State Joint Board on Universal Service (“Joint Board”) has            recommended the imposition of a state-by-state interim cap on high cost funds to be            distributed to ETCs. If the Joint Board recommendation is adopted by the FCC, this cap            will reduce the high cost fund amounts available to competitive ETCs, such as us, as            new competitive ETCs are designated and as existing competitive ETCs acquire new            customers. In addition, 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 impact 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.

 

*Local Regulation.*We may be required to            obtain local permits for street opening and construction permits to install and expand            our networks. Local zoning authorities often regulate our use of towers for microwave            and other communications sites. We also are subject to general regulations concerning            building codes and local licensing. The 1996 Telecom Act requires that fees charged to            communications carriers be applied in a competitively neutral manner, but there can be            no assurance that ILECs and others with whom we will be competing will bear costs            similar to those we will bear in this regard.

 

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**Video Services and Products**

*General.*Because cable communications            systems use local streets and rights-of-way, they generally are operated pursuant to            franchises (which can take the form of certificates, permits or licenses) granted by a            municipality or other state or local government entity. The RCA is the franchising            authority for all of Alaska. We believe that we have generally met the terms of our            franchises, which do not require periodic renewal, and have provided quality levels of            service. On December 20, 2006, the FCC adopted rules to ensure a reasonable franchising            process for new video market entrants; these rules have not had a material effect on            our operations. Military franchise requirements also affect our ability to provide            video services to military bases.

 

The RCA            is also certified under federal law to regulate rates for the Basic Service tier on our            cable systems. Under state law, however, cable television service is exempt from            regulation unless subscribers petition the RCA. At present, regulation of basic cable            rates takes place only in Juneau. The RCA does not regulate rates for cable modem            service.

 

*Must            Carry/Retransmission Consent.*The 1992 Cable Act contains            broadcast signal carriage requirements that allow local commercial television broadcast            stations to elect once every three years to require a cable system to carry the            station, subject to certain exceptions, or to negotiate for “retransmission            consent” to carry the station.

 

The FCC            has adopted rules to require cable operators to carry the digital programming streams            of broadcast television stations. The FCC has also decided, however, that cable            operators should be required to carry both the analog and digital programming streams            of broadcast television stations while broadcasters are transitioning from analog to            digital transmission and that cable operators should not be required to carry multiple            digital programming streams from a single broadcast television station. Should the FCC            change this policy, we would be required to devote additional cable capacity to            carrying broadcast television programming streams, a step that could require the            removal of other programming services.

 

*Cable System Delivery of Internet Service.*The FCC has defined high-speed Internet over cable as an            “information service” not subject to local cable-franchise fees, as cable            service may be, or any explicit requirements for “open access,” as            telecommunications service is. The Supreme Court affirmed the FCC’s position in a            decision issued on June 27, 2005.

 

Although there is at present no significant federal regulation of cable            system delivery of Internet services, this situation may change as cable systems expand            their broadband delivery of Internet services. Proposals have been advanced at the FCC            and Congress to require cable operators to provide access to unaffiliated Internet            service providers and online service providers and to govern the terms under which            content providers and applications are delivered by all broadband network operators. If            such requirements were imposed on cable operators, it could burden the capacity of            cable systems and frustrate our plans for providing expanded Internet access services.            These access obligations could adversely affect our financial position, results of            operations or liquidity.

 

*Segregated Security for Set-top Devices.*The FCC mandated, effective July 1, 2007, that all new set-top video            navigation devices must segregate the security function from the navigation function.            The new devices are more expensive than existing equipment, and compliance would            increase our cost of providing cable services. A waiver has been granted to one small            cable system conditioned upon, among other things, its commitment to fully digitize            analog signals throughout its cable network. The FCC has also indicated that            enforcement of the separate security requirement may be deferred with respect to small            cable operators that meet certain criteria and are unable to receive compliant set-top            devices in a timely manner from manufacturers. Subject to a waiver granted by the FCC            on May 4, 2007, we may continue providing low-cost integrated set-top boxes to            consumers to facilitate our transition to all-digital cable networks through February            17, 2009.

 

*Pole            Attachments.*The Communications Act requires the FCC to            regulate the rates, terms and conditions imposed by public utilities for cable            systems’ use of utility pole and conduit space unless state authorities can            demonstrate that they adequately regulate pole attachment rates. In the absence of            state regulation, the FCC administers pole attachment rates on a formula basis. This            formula governs the maximum rate certain utilities may charge for attachments to their            poles and conduit by companies providing communications services, including cable            operators. The RCA has largely retained the existing pole attachment formula that has            been in state regulation since 1987. This formula could be subject to further revisions            upon petition to the RCA and the FCC has initiated a rulemaking to consider application            of the federal formula. We cannot predict at this time the outcome of any such            proceedings.

 

*Copyright.*Cable television systems are            subject to federal copyright licensing covering carriage of television and radio            broadcast signals. In exchange for filing certain reports and contributing a percentage            of their revenues to a federal

 

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copyright royalty pool that varies depending on the size of the system,            the number of distant broadcast television signals carried, and the location of the            cable system, cable operators can obtain blanket permission to retransmit copyrighted            material included in broadcast signals. The possible modification or elimination of            this compulsory copyright license is the subject of continuing legislative review. We            cannot predict the outcome of this legislative review, which could adversely affect our            ability to obtain desired broadcast programming. Copyright clearances for non-broadcast            programming services are arranged through private negotiations.

 

**Internet-Based Services and Products**

*General**.***There            is no one entity or organization that governs the Internet. Each facilities-based            network provider that is interconnected with the global Internet controls operational            aspects of their own network. Certain functions, such as IP addressing, domain name            routing, and the definition of the TCP/IP protocol, are coordinated by an array of            quasi-governmental, intergovernmental, and non-governmental bodies. The legal authority            of these bodies is not precisely defined.

 

The            1996 Telecom Act provides little direct guidance as to whether the FCC has authority to            regulate Internet-based services. Given the absence of clear statutory guidance, the            FCC must determine on a case-by-case basis whether it has the authority or the            obligation to exercise regulatory jurisdiction over specific Internet-based            activities.

 

Although the FCC does not regulate the prices charged by ISPs or            Internet backbone providers, the vast majority of users connect to the Internet over            facilities of existing communications carriers. Those communications carriers are            subject to varying levels of regulation at both the federal and the state level. Thus,            non-Internet-specific regulatory decisions exercise a significant influence over the            economics of the Internet market.

 

Many            aspects of the coordination and regulation of Internet activities and the underlying            networks over which those activities are conducted are evolving. Internet-specific and            non-Internet-specific changes in the regulatory environment, including changes that            affect communications costs or increase competition from ILECs or other communications            services providers, could adversely affect the prices at which we sell Internet-based            services.

 

**Wireless Services and Products**

*General**.***The            FCC regulates the licensing, construction, interconnection, operation, acquisition, and            transfer of wireless network systems in the United States pursuant to the            Communications Act. As a licensee of PCS, LMDS, and other wireless services, we are            subject to regulation by the FCC, and must comply with certain build-out and other            license conditions, as well as with the FCC’s specific regulations governing the            PCS and LMDS services (described above). The FCC does not currently regulate rates for            services offered by commercial mobile radio service providers.

 

Commercial mobile radio service wireless systems are subject to Federal            Aviation Administration and FCC regulations governing the location, lighting and            construction of antenna structures on which our antennas and associated equipment are            located and are also subject to regulation under federal environmental laws and the            FCC’s environmental regulations, including limits on radio frequency radiation            from wireless handsets and antennas on towers.

 

*Assignments or Transfers of Control.*The            FCC (and in some instances, the Department of Justice) must grant prior approval to any            assignment or transfer of control of an FCC spectrum license. On December 22, 2006, the            FCC released an order approving our acquisition of 82% percent of the equity of Alaska            DigiTel, a statewide commercial mobile radio service provider in Alaska, in a            non-control transaction. In January 2008, we requested the FCC approve our acquisition            of the remaining 18% of the equity of Alaska DigiTel. This transaction is subject to            customary closing conditions, including regulatory approval, but is expected to occur            in the third quarter of 2008.

 

*Universal Service**.***A wireless carrier may seek ETC status so that it can receive subsidies            from the USF to support the provision of wireless voice service to consumers residing            in certain high cost areas. Several wireless carriers have successfully applied to the            RCA for ETC status in Alaska.

 

*Emergency 911**.***The FCC has imposed rules requiring carriers to provide emergency 911            services, including enhanced 911 services that provide to local public safety dispatch            agencies the caller’s communications number and approximate location. Providers            are required to transmit the geographic coordinates of the customer’s location            within accuracy parameters set forth by the FCC, either by means of network-based or            handset-based technologies. Providers may not demand cost recovery as a condition of            doing so, although they are permitted to negotiate cost recovery if it is not mandated            by the state or local governments.

 

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*State and Local Regulation**.***While the Communications Act generally preempts state and local            governments from regulating the entry of, or the rates charged by, wireless carriers,            it also permits a state to petition the FCC to allow it to impose commercial mobile            radio service rate regulation when market conditions fail adequately to protect            customers and such service is a replacement for a substantial portion of the telephone            wireline exchange service within a state. No state currently has such a petition on            file, and all prior efforts have been rejected. In addition, the Communications Act            does not expressly preempt the states from regulating the “terms and            conditions” of wireless service.

 

Several            states have invoked this “terms and conditions” authority to impose or            propose various consumer protection regulations on the wireless industry. State            attorneys general have also become more active in enforcing state consumer protection            laws against sales practices and services of wireless carriers. States also may impose            their own universal service support requirements on wireless and other communications            carriers, similar to the contribution requirements that have been established by the            FCC.

 

States            have become more active in imposing new taxes on wireless carriers, such as gross            receipts taxes, and fees for items such as the use of public rights of way. These taxes            and fees are generally passed through to our customers and result in higher costs to            our customers.

 

At the            local level, wireless facilities typically are subject to zoning and land use            regulation. Neither local nor state governments may categorically prohibit the            construction of wireless facilities in any community or take actions, such as            indefinite moratoria, which have the effect of prohibiting construction. Nonetheless,            securing state and local government approvals for new tower sites has been and is            likely to continue to be difficult, lengthy and costly.

 

**Financial Information about our Foreign and Domestic Operations and            Export Sales**

Although we have several agreements to help originate and terminate            international toll traffic, we do not have foreign operations or export sales. We            conduct our operations throughout the western contiguous United States and Alaska and            believe that any subdivision of our operations into distinct geographic areas would not            be meaningful. Revenues associated with international toll traffic were $2.6 million,            $2.5 million and $2.6 million for the years ended December 31, 2007, 2006 and 2005,            respectively.

 

**Customer-Sponsored Research**

We have            not expended material amounts during the last three fiscal years on customer-sponsored            research activities.

 

**Backlog of Orders and Inventory**

As of            December 31, 2007 and 2006, our Network Access segment had a backlog of Private Line            orders of $40,000 and $157,000, respectively, which represents recurring monthly            charges for Private Line services. As of December 31, 2007 and 2006, our Commercial            segment had a backlog of Private Line orders of $19,000 and $12,000, respectively,            which represents recurring monthly charges for Private Line. We expect that all of the            Private Line orders in backlog at the end of 2007 will be delivered during            2008.

 

**Geographic Concentration and Alaska Economy**

We            offer voice and data communications and video services to customers primarily in the            State of Alaska. Because of this geographic concentration, growth of our business and            operations depends upon economic conditions in Alaska. The economy of the State of            Alaska is dependent upon natural resource industries, in particular oil production, as            well as investment earnings (including earnings from the State of Alaska Permanent            Fund), tourism, government, and United States military spending. Any deterioration in            these markets could have an adverse impact on us. Oil revenues are the second largest            source of state revenues, following funds from investment sources. To the extent that            our large common carrier customers experience reduced demand for traffic destined for            and originating in Alaska, it could adversely affect our common carrier traffic and            associated revenues. See “Part I — Item 1A — Risk Factors — Our            business is currently geographically concentrated in Alaska,” and “Part II            — Item 7 — Management’s Discussion and Analysis of Financial            Condition and Results of Operations” for more information about the effect of            geographic concentration and the Alaska economy on us.

 

**Employees**

We            employed 1,295 persons as of January 4, 2008, and we are not party to union contracts            with our employees. We believe our future success will depend upon our continued            ability to attract and retain highly skilled and qualified employees. We believe that            relations with our employees are satisfactory.

 

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**Other**

No            material portion of our businesses is subject to renegotiation of profits or            termination of contracts at the election of the federal government.

 

***Item 1A. Risk Factors.***

 

***Factors That May Affect Our Business and Future            Results***

 

Additional risks and uncertainties not currently known to us or that we            currently deem to be immaterial may also materially and adversely affect our business            operations. Any of the following risks could materially and adversely affect our            business, financial position, results of operations or liquidity.

 

***We depend on a small number of customers for a substantial portion            of our revenue and business. The loss of any of such customers would have a material            adverse effect on our financial position, results of operations or            liquidity.***

 

For the            year ended December 31, 2007, we provided services to Verizon and Sprint Nextel which            generated combined revenues of 21.3% of our total 2007 revenues. These customers are            free to seek out long-distance communications services from our competitors upon            expiration of their contracts (in December 2009 in the case of Verizon and in March            2009 in the case of Sprint Nextel) or earlier upon the occurrence of certain            contractually stipulated events including a default, the occurrence of a force majeure            event, or a substantial change in applicable law or regulation under the applicable            contract. Additionally, the contracts provide for periodic reviews to assure that the            prices paid by Verizon and Sprint Nextel for their services remain            competitive.

 

Mergers            and acquisitions in the communications industry are relatively common. If a change in            control of Verizon or Sprint Nextel were to occur it would not permit them to terminate            their existing contracts with us without a negotiated settlement, but it could in the            future result in the termination of or a material adverse change in our relationships            with these customers.

 

In            addition, Verizon’s and Sprint Nextel’s need for our long-distance services            depends directly upon their ability to obtain and retain their own long-distance and            wireless customers and upon the needs of those customers for long-distance            services.

 

The            loss of one or more of Verizon or Sprint Nextel as customers, a material adverse change            in our relationships with either of them or a material loss of or reduction in their            long-distance customers would have a material adverse effect on our financial position,            results of operations and liquidity.

 

***We face competition that may reduce our market share and harm our            financial performance.***

 

There            is substantial competition in the communications industry. The traditional dividing            lines between long-distance telephone service, local access telephone service, wireless            telephone service, Internet services and video services are increasingly becoming            blurred. Through mergers and various service integration strategies, major providers            are striving to provide integrated communications services offerings within and across            geographic markets. We face increasing video services competition from DBS            providers.

 

We            expect competition to increase as a result of the rapid development of new            technologies, services and products. We cannot predict which of many possible future            technologies, products or services will be important to maintain our competitive            position or what expenditures will be required to develop and provide these            technologies, products or services. Our ability to compete successfully will depend on            marketing and on our ability to anticipate and respond to various competitive factors            affecting the industry, including new services that may be introduced, changes in            consumer preferences, economic conditions and pricing strategies by competitors. To the            extent we do not keep pace with technological advances or fail to timely respond to            changes in competitive factors in our industry and in our markets, we could lose market            share or experience a decline in our revenue and net income. Competitive conditions            create a risk of market share loss and the risk that customers shift to less profitable            lower margin services. Competitive pressures also create challenges for our ability to            grow new businesses or introduce new services successfully and execute our business            plan. Each of our business segments also faces the risk of potential price cuts by our            competitors that could materially adversely affect our market share and gross            margins.

 

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For            more information about competition by segment, see the sections titled            “Competition” included in “Item 1 — Business — Narrative            Description of our Business — Description of our Business by Reportable            Segment.”

 

***Our business is subject to extensive governmental legislation and            regulation. Applicable legislation and regulations and changes to them could adversely            affect our business, financial position, results of operations or            liquidity.***

 

***Local Access Services.***Our success            in the local telephone market depends on our continued ability to obtain            interconnection, access and related services from Local Exchange carriers on terms that            are just and reasonable and that are based on the cost of providing these services. Our            local telephone services business faces the risk of the impact of the implementation of            current regulations and legislation, unfavorable changes in regulation or legislation            or the introduction of new regulations. Our ability to enter into the local telephone            market depends on our negotiation or arbitration with Local Exchange carriers to allow            interconnection to the carrier’s existing local telephone network, to establish            dialing parity, to obtain access to rights-of-way, to resell services offered by the            Local Exchange carrier, and in some cases, to allow the purchase, at cost-based rates,            of access to unbundled network elements. In some Alaska markets, it also depends on our            ability to gain interconnection at economic costs. Future arbitration proceedings with            respect to new or existing markets could result in a change in our cost of serving            these markets via the facilities of the ILEC or via wholesale offerings.

 

***Video Services**.*The cable television industry is subject to extensive regulation at            various levels, and many aspects of such regulation are currently the subject of            judicial proceedings and administrative or legislative proposals. The law permits            certified local franchising authorities to order refunds of rates paid in the previous            12-month period determined to be in excess of the reasonable rates. It is possible that            rate reductions or refunds of previously collected fees may be required of us in the            future. Currently, pursuant to Alaska law, the basic cable rates in Juneau are the only            rates in Alaska subject to regulation by the local franchising authority, and the rates            in Juneau were reviewed and approved by the RCA in January 2007.

 

Other            existing federal regulations, currently the subject of judicial, legislative, and            administrative review, could change, in varying degrees, the manner in which cable            television systems operate. Neither the outcome of these proceedings nor their impact            upon the cable television industry in general, or on our activities and prospects in            the cable television business in particular, can be predicted at this time. There can            be no assurance that future regulatory actions taken by Congress, the FCC or other            federal, state or local government authorities will not have a material adverse effect            on our business, financial position, results of operations or liquidity.

 

Proposals may be made before Congress and the FCC to mandate cable            operators provide “open access” over their cable systems to Internet            service providers. As of the date of this report, the FCC has declined to impose such            requirements. If the FCC or other authorities mandate additional access to our cable            systems, we cannot predict the effect that this would have on our Internet service            offerings.

 

***Internet Services.***Changes in the            regulatory environment relating to the Internet access market, including changes in            legislation, FCC regulation, judicial action or local regulation that affect            communications costs or increase competition from the ILEC or other communications            services providers, could adversely affect the prices at which we sell Internet            services. Legislative or regulatory proposals under the banner of “net            neutrality”, if adopted, could interfere with our ability to reasonably manage            and invest in our broadband network, and could adversely affect the manner and price of            providing service.

 

***Wireless Services.***The licensing,            construction, operation, sale and interconnection arrangements of wireless            communications systems are regulated by the FCC and, depending on the jurisdiction,            state and local regulatory agencies. In particular, the FCC imposes significant            regulation on licensees of wireless spectrum with respect to:

 

|   | **•** | How radio spectrum is used by licensees; |
|--------|------------|------------------------------------------|

|   | **•** | The nature of the services that licensees may offer and                            how such services may be offered; and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Resolution of issues of interference between spectrum                            bands. |
|--------|------------|-----------------------------------------------------------------------------------------|

 

The            Communications Act of 1934 preempts state and local regulation of market entry by, and            the rates charged by, commercial mobile radio service providers, except that states may            exercise authority over such things as certain billing practices and consumer-related            issues. These regulations could increase the costs of our wireless operations. The FCC            grants wireless licenses for terms of generally ten years that are subject to renewal            and revocation. FCC rules require all

 

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wireless licensees to meet certain build-out requirements and            substantially comply with applicable FCC rules and policies and the Communications Act            of 1934 in order to retain their licenses. Failure to comply with FCC requirements in a            given license area could result in revocation of the license for that license area.            There is no guarantee that our licenses will be renewed. You should also see the risk            factor below titled “We may not fully develop our wireless services, in which            case we could not meet the needs of our customers who desire packaged            services.”

 

The FCC            has initiated a number of proceedings to evaluate its rules and policies regarding            spectrum licensing and usage. New uses could adversely impact our utilization of our            licensed spectrum and our operational costs.

 

Commercial mobile radio service providers must implement E911            capabilities in accordance with FCC rules. Failure to deploy E911 service consistent            with FCC requirements could subject us to significant fines.

 

The            FCC, together with the FAA, also regulates tower marking and lighting. In addition,            tower construction is affected by federal, state and local statutes addressing zoning,            environmental protection and historic preservation. The FCC adopted significant changes            to its rules governing historic preservation review of projects, which makes it more            difficult and expensive to deploy antenna facilities. The FCC is also considering            changes to its rules regarding environmental protection as related to tower            construction, which, if adopted, could make it more difficult to deploy            facilities.

 

For            more information about Regulations affecting our operations, see            “Competition” contained in “Item 1 — Business —            Regulation.”

 

***Loss of our ETC status would disqualify us for USF            subsidies.***

 

The USF            pays subsidies to ETCs to support the provision of facilities-based wireline and            wireless telephone 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            facilities-based wireline and wireless telephone services. Loss of our ETC status could            have an adverse effect on our business, financial position, results of operations or            liquidity.

 

***Failure to complete development, testing and deployment of new            technology that supports new services could affect our ability to compete in the            industry. In addition, the technology we use may place us at a competitive            disadvantage.***

 

We            develop, test and deploy various new technologies and support systems intended to            enhance our competitiveness by both supporting new services and features and reducing            the costs associated with providing those services or features. Successful development            and implementation of technology upgrades depend, in part, on the willingness of third            parties to develop new applications in a timely manner. We may not successfully            complete the development and rollout of new technology and related features or services            in a timely manner, and they may not be widely accepted by our customers or may not be            profitable, in which case we could not recover our investment in the technology.            Deployment of technology supporting new service offerings may also adversely affect the            performance or reliability of our networks with respect to both the new and existing            services. Any resulting customer dissatisfaction could affect our ability to retain            customers and may have an adverse effect on our financial position, results of            operations, or liquidity.

 

***Our businesses are currently geographically concentrated in            Alaska. Any deterioration in the economic conditions in Alaska could have a material            adverse effect on our financial position, results of operations or            liquidity.***

 

We            offer voice, data and wireless communication and video services to customers primarily            in Alaska. Because of this geographic concentration, our growth and operations depend            upon economic conditions in Alaska. The economy of Alaska is dependent upon natural            resource industries, in particular oil production, as well as tourism, and government            spending including substantial amounts for the United States military. Any            deterioration in these markets could have an adverse impact on the demand for            communication and cable television services and on our results of operations and            financial condition. In addition, the customer base in Alaska is limited. Alaska has a            population of approximately 670,000 people, 54% of whom are located in the Anchorage            and Matanuska-Susitna Borough region. We have already achieved significant market            penetration with respect to our service offerings in Anchorage and in other locations            in Alaska.

 

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We may            not be able to continue to increase our market share of the existing markets for our            services, and no assurance can be given that the Alaskan economy will continue to grow            and increase the size of the markets we serve or increase the demand for the services            we offer. As a result, the best opportunities for expanding our business may arise in            other geographic areas such as the Lower 49 States. There can be no assurance that we            will find attractive opportunities to grow our businesses outside of Alaska or that we            will have the necessary expertise to take advantage of such opportunities. The markets            in Alaska for voice and data communications and video services are unique and distinct            within the United States due to Alaska’s large geographical size, its sparse            population located in a limited number of clusters, and its distance from the rest of            the United States. The expertise we have developed in operating our businesses in            Alaska may not provide us with the necessary expertise to successfully enter other            geographic markets.

 

***We may not fully develop our wireless services, in which case we            could not meet the needs of our customers who desire such services.***

 

We            offer wireless mobile services under the GCI brand by distributing other            providers’ wireless mobile services and over our own facilities under the Alaska            DigiTel brand. We offer wireless local telephone services over our own facilities, and            have purchased personal communications system, or PCS, and local multipoint            distribution system, or LMDS, wireless broadband licenses in FCC auctions covering            markets in Alaska. In 2007 we acquired a substantial ownership interest in Alaska            DigiTel (see “Part I — Item 1 — Business — Development of our            Business during the Past Fiscal Year — Alaska DigiTel Acquisition and Loan”            for more information.) We have entered into an agreement to acquire the remaining            ownership interest in Alaska DigiTel (see “Part I — Item 1 — Business            — Recent Developments — Acquisition of Remaining Alaska DigiTel            Interest” for more information.) We have fewer subscribers to our wireless            services than to our other service offerings. Currently the geographic coverage of our            wireless services is smaller than the geographic coverage of our other services. Some            of our competitors offer or propose to offer an integrated bundle of communications,            entertainment and information services, including wireless services. If we are unable            to expand our wireless facilities (see “Part I — Item 1 — Business            — Recent Developments — Wireless Business Strategy” for more            information) and further develop our wireless services, we may not be able to meet the            needs of customers who desire such services, and our competitors who offer these            services would have an advantage. This could result in the loss of market share for our            other service offerings.

 

As a            PCS and LMDS licensee, we are subject to regulation by the FCC, and must comply with            certain build-out and other conditions of the licenses, as well as with the FCC’s            regulations governing the PCS and LMDS services. The FCC renewed our PCS Block B            license in 2005 for an additional 10-year term. We expect the FCC to renew the PCS            Block A license held by our majority-owned subsidiary, Alaska DigiTel, in 2008. Our            LMDS license will expire in 2008 if not renewed by the FCC. We are a member of a            coalition that has petitioned the FCC for an extension of the expiration date due to            the lack of suitable equipment for this bandwidth. We are unable to predict at this            time whether the FCC will grant an extension of our LMDS license expiration.

 

***Prolonged service interruptions could affect our            business.***

 

We rely            heavily on our network equipment, communications providers, data and software to            support all of our functions. We rely on our networks and the networks of others for            substantially all of our revenues. We are able to deliver services only to the extent            that we can protect our network systems against damage from power or communication            failures, computer viruses, natural disasters, unauthorized access and other            disruptions. While we endeavor to provide for failures in the network by providing            back-up systems and procedures, we cannot guarantee that these back-up systems and            procedures will operate satisfactorily in an emergency. Should we experience a            prolonged failure, it could seriously jeopardize our ability to continue operations. In            particular, should a significant service interruption occur, our ongoing customers may            choose a different provider, and our reputation may be damaged, reducing our            attractiveness to new customers.

 

To the            extent that any disruption or security breach results in a loss or damage to our            customers’ data or applications, or inappropriate disclosure of confidential            information, we may incur liability and suffer from adverse publicity. In addition, we            may incur additional costs to remedy the damage caused by these disruptions or security            breaches.

 

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***If failures occur in our undersea fiber optic cable systems, our            ability to immediately restore the entirety of our service may be limited and we could            incur significant costs, which could lead to a material adverse effect on our business,            financial position, results of operations or liquidity.***

 

Our            communications facilities include two undersea fiber optic cable systems that carry a            large portion of our voice, data and Internet traffic to and from the contiguous Lower            48 States one of which provides an alternative geographically diverse backup            communication facility to the other. If a failure of both sides of the ring of our            undersea fiber optic facilities occurs and we are not able to secure alternative            facilities, some of the communications services we offer to our customers could be            interrupted which could have a material adverse effect on our business, financial            position, results of operations or liquidity. Damage to an undersea fiber optic cable            system can result in significant unplanned Cost of Goods Sold which could have a            material adverse effect on our business, financial position, results of operations or            liquidity.

 

***If a failure occurs in our satellite communications systems, our            ability to immediately restore the entirety of our service may be            limited.***

 

We            serve many rural and remote Alaska locations solely via satellite communications. Each            of our C-band and Ku-band satellite transponders is backed up on the same spacecraft            with multiple backup transponders. The primary spacecrafts we use to provide voice,            data and Internet services to our rural Alaska customers is Intelsat’s Galaxy XR            for C-band and Intelsat's Horizons 1 for Ku-band, but we also lease capacity on two            other spacecraft for services we provide, SES Americom’s AMC-7 and            AMC-8.

 

On            Galaxy XR, we use 9 C-band transponders. Galaxy XR experienced a failure of its primary            and secondary xenon ion propulsion system (“XIPS”) that maintains the            satellite’s proper orbital position in 2004. The satellite is using its backup            bi-propellant thrusters to maintain its orbital position. These thrusters are a space            flight proven technology. The failure of the primary and secondary XIPS had no short            term impact on service to our customers. Intelsat, the owner and operator of Galaxy XR,            believes the satellite has sufficient fuel to continue normal operations until May 18,            2008. The terms of our Galaxy XR transponder purchase agreement extends through March            2012. Intelsat intends to replace the satellite before its estimated end-of-life. The            launch of the replacement satellite, Galaxy 18, is expected to occur on May 3, 2008. We            purchased a warranty with the original agreement to cover a loss of this nature. We            have had an agreement in place that provides backup transponder capacity on            Intelsat’s Galaxy XII and Galaxy XIII satellites in the event of a catastrophic            failure of Galaxy XR. Additionally, our agreement includes backup of our Horizons 1            Ku-band transponders on the Ku-band payload of Galaxy 18.

 

If such            a failure occurs with Galaxy XR, we plan to divide our C-band network between Galaxy            XII and Galaxy XIII. Galaxy XII will be moved from its current orbital slot to where            Galaxy XR is currently positioned. Service may not be fully restored for up to a week            or longer due to the time necessary for Intelsat to move Galaxy XII and for us to            redirect earth station antennae. We have installed additional facilities at our Barrow,            Nome, Kotzebue, and Bethel, Alaska earth stations to allow dual use of Galaxy XII and            Galaxy XIII from those locations to help mitigate the impact of this transition. We are            also reactivating our Fairbanks, Alaska gateway earth station to help share the load of            our primary gateway earth stations in Eagle River, Alaska and Issaquah,            Washington.

 

We also            lease one 36 MHz transponder on SES Americom's AMC-7 spacecraft. We use this            transponder to distribute multi-channel, digitally encoded video programming and            services to remote locations within Alaska. We may use this transponder along with two            others that we reserve on AMC-7 to restore service during any fiber outage that may            occur in our network.

 

There            is uncertainty whether the Galaxy 18 spacecraft will launch on schedule. The contracted            provider of launch services for Galaxy 18 experienced a launch failure on January 20,            2007 that damaged the launch platform and delayed future launches scheduled prior to            the Galaxy 18 launch. One more satellite is scheduled to launch March 9, 2008 and the            next scheduled launch is of Galaxy 18. There is additional uncertainty that Galaxy 18            will be launched successfully and will become fully operational once in orbit.            Additionally, Galaxy XR station-keeping fuel may not last the estimated or expected            amount of time before the replacement spacecraft is operational. Such a loss of            station-keeping fuel would cause the spacecraft to drift out of its normal orbital            position and our fixed ground antennas would no longer point directly at the spacecraft            causing loss of signal and thus loss of communications with the spacecraft. While we            have developed contingency plans that provide for continued satellite service in the            event the launch date extends beyond the Galaxy XR satellite’s end-of-life we may            experience extended service outages which could have a material adverse effect on our            business, financial position, results of operations or liquidity.

 

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***We may not be able to successfully integrate the businesses we            plan to acquire in 2008.***

 

The            process of integrating the operations of Alaska DigiTel, UUI and Unicom and Alaska            Wireless with ours in 2008 may cause interruptions of or loss of momentum in our            business and financial performance. The diversion of management’s attention and            any delays or difficulties encountered in connection with the integration of the            companies’ operations may have an adverse effect on our business, financial            condition, or results of operations. We may also incur additional and unforeseen            expenses in connection with the integration efforts. There can be no assurance that the            expense savings and synergies that we anticipate from the acquisitions will be realized            fully or will be realized within the expected timeframe.

 

***We depend on a limited number of third-party vendors to supply            communications equipment. If we do not obtain the necessary communications equipment,            we will not be able to meet the needs of our customers.***

 

We            depend on a limited number of third-party vendors to supply cable, Internet, DLPS,            wireless and telephony-related equipment. If our providers of this equipment are unable            to timely supply the equipment necessary to meet our needs or provide them at an            acceptable cost, we may not be able to satisfy demand for our services and competitors            may fulfill this demand. Due to the unique characteristics of the Alaska communications            markets (i.e., remote locations, rural, satellite-served, low density populations, and            our leading edge services and products), in many situations we deploy and utilize            specialized, advanced technology and equipment that may not have a large market or            demand. Our vendors may not succeed in developing sufficient market penetration to            sustain continuing production and may fail. Vendor bankruptcy (or acquisition without            continuing product support by the acquiring company) may require us to replace            technology before its otherwise useful end of life due to lack of on-going vendor            support and product development.

 

***We do not have insurance to cover certain risks to which we are            subject, which could lead to the incurrence of uninsured liabilities that adversely            affect our financial position, results of operations or liquidity.***

 

We are            self-insured for damage or loss to certain of our transmission facilities, including            our buried, undersea and above-ground transmission lines. If we become subject to            substantial uninsured liabilities due to damage or loss to such facilities, our            financial position, results of operations or liquidity may be adversely            affected.

 

***We must perform impairment tests of our goodwill, cable            certificate and wireless license assets on an annual basis. Impairment testing may            result in a material, non-cash write-down of our cable certificate, wireless license,            or goodwill assets and could have a material adverse impact on our results of            operations.***

 

Under            Statement of Financial Accounting Standard (“SFAS”) No. 142,            “Goodwill and Other Intangible Assets,” we must test our goodwill and other            intangible assets with indefinite lives for impairment at least annually. The SEC Staff            Announcement Topic “Use of the Residual Method to Value Acquired Assets Other            than Goodwill,” requires us to apply a direct value method to determine the fair            value of our intangible assets with indefinite lives other than goodwill for purposes            of impairment testing. We must also recognize previously unrecognized intangible            assets, if any, in the determination of fair value for impairment testing purposes. Our            cable certificate and wireless license assets are our only indefinite-lived assets            other than goodwill as of December 31, 2007. Our cable certificate assets were            originally valued and recorded using the residual method. Our wireless license assets            were originally valued using the direct value method. Impairment testing of these            assets in future periods may result in a material, non-cash write-down of these assets            and could have a material adverse impact on our results of operations.

 

***Our significant debt could adversely affect our business and            prevent us from fulfilling our obligations under our senior notes.***

 

We have            and will continue to have a significant amount of debt. On December 31, 2007, we had            total debt of $541.4 million. Our high level of debt could have important consequences,            including the following:

 

|   | **•** | Use of a large portion of our cash flow to pay principal                            and interest on our senior notes, the senior secured credit facility                            and our other debt, which will reduce the availability of our cash flow                            to fund working capital, capital expenditures, research and development                            expenditures and other business activities; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Current and future debt under our senior secured credit                            facility will continue to be secured; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Increase our vulnerability to general adverse economic                            and industry conditions; |
|--------|------------|------------------------------------------------------------------------------------------------------------|

|   | **•** | Limit our flexibility in planning for, or reacting to,                            changes in our business and the industry in which we                            operate; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Restrict us from making strategic acquisitions or                            exploiting business opportunities; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------|

|   | **•** | Make it more difficult for us to satisfy our obligations                            with respect to the senior notes and our other debt; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   | **•** | Place us at a competitive disadvantage compared to our                            competitors that have less debt; and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Limit, along with the financial and other restrictive                            covenants in our debt, among other things, our ability to borrow                            additional funds, dispose of assets or pay cash dividends. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In            addition, a substantial amount of our debt bears interest at variable rates. If market            interest rates increase, variable-rate debt will create higher debt service            requirements, which would adversely affect our financial position, results of            operations or liquidity.

 

***We will require a significant amount of cash to service our debt,            complete our planned network expansion, complete our planned acquisitions and to meet            other obligations. Our ability to generate cash depends on many factors beyond our            control. If we are unable to meet our future capital needs it may be necessary for us            to curtail, delay or abandon our business growth            plans.******If we incur significant additional            indebtedness to fund our plans, it could cause a decline in our credit rating and could            increase our borrowing costs or limit our ability to raise additional            capital.***

 

We will            require a significant amount of cash for our planned wireless network expansion,            acquisitions, to satisfy our debt service requirements and to meet other obligations.            To meet our capital needs we may incur additional debt in the future. Our ability to            make payments on and to refinance our debt and to fund planned capital expenditures and            acquisitions will depend on our ability to generate cash and to arrange additional            financing in the future. These abilities are subject to, among other factors, our            credit rating, our financial performance, general economic conditions, prevailing            market conditions, the state of competition in our market, the outcome of certain            legislative and regulatory issues and other factors that may be beyond our control. Our            ability to obtain suitable financing when needed has become more difficult due to the            downturn in economic conditions in 2008 and our failure to obtain suitable financing            could, among other things, result in our inability to continue to expand our business            and meet competitive challenges. If we incur significant additional indebtedness, or if            we do not continue to generate sufficient cash from our operations, our credit rating            could be adversely affected, which would likely increase our future borrowing costs and            could affect our ability to access capital.

 

***The terms of our debt impose restrictions on us that may affect            our ability to successfully operate our business and our ability to make payments on            the senior notes.***

 

The            indenture governing our senior notes contains and/or the credit agreement governing our            senior secured credit facility contains covenants that, among other things, limit our            ability to:

 

|   | **•** | Incur additional debt and issue preferred                            stock; |
|--------|------------|-----------------------------------------------------------------------------|

|   | **•** | Pay dividends or make other restricted                            payments; |
|--------|------------|-----------------------------------------------------------------------------|

|   | **•** | Make certain investments; |
|--------|------------|---------------------------|

|   | **•** | Create liens; |
|--------|------------|---------------|

|   | **•** | Allow restrictions on the ability of certain of our                            subsidiaries to pay dividends or make other payments to us; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Sell assets; |
|--------|------------|--------------|

|   | **•** | Merge or consolidate with other entities; and |
|--------|------------|-----------------------------------------------|

|   | **•** | Enter into transactions with affiliates. |
|--------|------------|------------------------------------------|

             

The            senior secured credit facility also requires us to comply with specified financial            ratios and tests, including, but not limited to, minimum interest coverage ratio,            maximum leverage ratio and maximum annual capital expenditures.

 

These            covenants could materially and adversely affect our ability to finance our future            operations or capital needs and to engage in other business activities that may be in            our best interest.

 

All of            these covenants may restrict our ability to expand or to pursue our business            strategies. Our ability to comply with these covenants may be affected by events beyond            our control, such as prevailing economic conditions and changes in regulations, and if            such events occur, we cannot be sure that we will be able to comply. A breach of these            covenants could result in a default under the indenture governing our senior notes            and/or the senior secured credit facility. If there were an event of default under the            indenture for the senior notes and/or the senior secured credit facility, holders of            such defaulted debt could cause all amounts borrowed under these instruments to be due            and payable immediately. Additionally, if we fail to repay the debt under the senior            secured credit facility when it becomes due, the lenders under the senior secured            credit facility could proceed against certain of our assets and capital stock of our            subsidiaries that we have pledged to them as security. Our assets or cash flow may not            be sufficient to repay borrowings under our outstanding debt instruments in the event            of a default thereunder.

 

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***Concerns about health risks associated with wireless equipment may            reduce the demand for our wireless services.***

 

Portable communications devices have been alleged to pose health risks,            including cancer, due to radio frequency emissions from these devices. Purported class            actions and other lawsuits have been filed against numerous other wireless carriers            seeking not only damages but also remedies that could increase the cost of doing            business. We cannot be sure of the outcome of those cases or that the industry will not            be adversely affected by litigation of this nature or public perception about health            risks. The actual or perceived risk of mobile communications devices could adversely            affect us through a reduction in subscribers and reduced network usage per subscriber.            Further research and studies are ongoing, and we cannot be sure that additional studies            will not demonstrate a link between radio frequency emissions and health            concerns.

 

Additionally, new government regulations on the use of a wireless device            while driving may affect us through a reduction in subscribers and reduced network            usage per subscriber. Studies have indicated that using wireless devices while driving            may impair a driver’s attention. Many state and local legislative bodies have            passed or proposed legislation to restrict the use of wireless telephones while driving            vehicles. Concerns over safety and the effect of future legislation, if adopted and            enforced in the areas we serve, could limit our ability to market and sell our wireless            services and decrease our revenue from customers who now use their wireless telephones            while driving. Litigation relating to accidents, deaths or serious bodily injuries            allegedly incurred as a result of wireless telephone use while driving could result in            damage awards against telecommunications providers, adverse publicity and further            governmental regulation. Any of these results could have a material adverse effect on            our financial position, results of operations or liquidity.

 

***A            significant percentage of GCI’s voting securities are owned by a small number of            shareholders and these shareholders can control shareholder decisions on very important            matters.***

 

As of            December 31, 2007, our executive officers and directors and their affiliates owned 4.4%            of GCI’s combined outstanding Class A and class B common stock, representing            16.9% of the combined voting power of that stock. These shareholders can significantly            influence, if not control, our management policy and all fundamental corporate actions,            including mergers, substantial acquisitions and dispositions, and election of directors            to GCI’s Board.

 

***Corporate governance rules may impose increased costs and internal            control assessment requirements on us.***

 

The            Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEC, the Public            Company Accounting Oversight Board, and the Nasdaq National Market have required            changes in corporate governance practices of public companies. For example, Section 404            of the Sarbanes-Oxley Act of 2002 requires that we and our auditor evaluate and report            on our system of internal controls over financial reporting. We expect to incur ongoing            costs to comply with these rules and regulations and may incur increased legal and            financial compliance costs that may negatively affect our results of            operations.

 

***If we fail to maintain an effective system of internal control            over financial reporting, we may not be able to accurately report our financial            results. As a result, current and potential shareholders could lose confidence in our            financial reporting, which would harm our business and the trading price of GCI’s            stock.***

 

Our            management has determined that as of December 31, 2007, we did not maintain effective            internal controls over financial reporting based on criteria set forth by the Committee            of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal            Control-Integrated Framework as a result of one identified material weakness in our            internal control over financial reporting. A material weakness is a deficiency, or a            combination of deficiencies, in internal control over financial reporting, such that            there is a reasonable possibility that a material misstatement of the company's annual            or interim financial statements will not be prevented or detected on a timely basis.            For a detailed description of this material weakness and our remediation efforts and            plans, see “Part II — Item 9A — Controls and Procedures.” If            the result of our remediation of the identified material weakness is not successful, or            if additional material weaknesses are identified in our internal control over financial            reporting, our management will be unable to report favorably as to the effectiveness of            our internal control over financial reporting and/or our disclosure controls and            procedures, and we could be required to further implement expensive and time-consuming            remedial measures and potentially lose investor confidence in the accuracy and            completeness of our financial reports which could have an adverse effect on our stock            price and potentially subject us to litigation.

 

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***Item 1B. Unresolved Staff Comments.***

 

None.

 

***Item 2. Properties***

 

**General**

Our            properties do not lend themselves to description by location of principal units. Our            investment in property and equipment in our consolidated operations consisted of the            following at December 31:

 

|                                        |   | 2007   |   | 2006   |
|---------------------------------------------|--------|--------|--------|--------|
| Telephone distribution systems              |   | 63.6%  |   | 65.1%  |
| Cable television distribution systems       |   | 16.2%  |   | 18.2%  |
| Support equipment                           |   | 10.8%  |   | 11.0%  |
| Construction in progress                    |   | 6.9%   |   | 3.5%   |
| Land and buildings                          |   | 1.4%   |   | 1.0%   |
| Transportation equipment                    |   | 0.8%   |   | 0.8%   |
| Property and equipment under capital leases |   | 0.3%   |   | 0.4%   |
| Total                                       |   | 100.0% |   | 100.0% |
|                                             |        |        |        |        |  |

 

It is            not practicable to allocate our properties to our operating segments since many of our            properties are employed by more than one segment to provide common services and            products. Additionally our Chief Operating Decision Maker manages our properties at the            consolidated company level rather than at the segment level.

 

These            properties consist primarily of undersea and land-based fiber-optic networks, switching            equipment, satellite transponders and earth stations, microwave radio and cable and            wire facilities, cable head-end equipment, coaxial distribution networks, routers,            servers, transportation equipment, computer equipment and general office equipment.            Land and buildings consist of land, land improvements and landing stations and other            buildings. Substantially all of our properties secure our Senior Credit Facility. See            note 7 included in “Part II — Item 8 — Consolidated Financial            Statements and Supplementary Data” for more information.

 

Our            cable television plant and related equipment are generally attached to utility poles            under pole rental agreements with local public utilities and telephone companies and in            certain locations are buried in underground ducts or trenches. We own or lease real            property for signal reception sites.

 

Our            local access services outside plant consists of connecting lines (aerial, underground            and buried cable), the majority of which is on or under public roads, highways or            streets, while the remainder is on or under private property.

 

Our            construction in progress totaled $69.4 million at December 31, 2007, consisting of            long-distance, video, local, wireless and Internet services, and support systems            projects that were incomplete at December 31, 2007. Our construction in progress            totaled $30.0 million at December 31, 2006, consisting of long-distance, video, local            and Internet services, and support systems projects that were incomplete at December            31, 2006. The property, plant and equipment included in construction in progress at            December 31, 2007 are expected to be placed in service in 2008.

 

We            lease our executive, corporate and administrative facilities and business offices. Our            operating, executive, corporate and administrative properties are in good condition. We            consider our properties suitable and adequate for our present needs and they are being            fully utilized.

 

**Capital Expenditures**

Capital            expenditures consist primarily of (a) gross additions to property, plant and            equipment having an estimated service life of one year or more, plus the incidental            costs of preparing the asset for its intended use, and (b) gross additions to            capitalized software.

 

The            total investment in property, plant and equipment has increased from            $611.2 million at January 1, 2003 to $932.3 million at December 31,            2007, including Alaska DigiTel in 2007 and construction in progress and excluding            deductions of accumulated depreciation. Significant additions to property, plant and            equipment will be required in the future to meet the

 

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growing            demand for communications, Internet and entertainment services and to continually            modernize and improve such services to meet competitive demands.

 

Additions to property and equipment and construction in progress for            2003 through 2007 were as follows (in millions):

 

| 2003 |   | $ | 62.5  |
|------|--------|---|-------|
| 2004 |   | $ | 112.6 |
| 2005 |   | $ | 81.2  |
| 2006 |   | $ | 105.1 |
| 2007 |   | $ | 154.5 |

 

We            expect our 2008 expenditures for property and equipment for our core operations,            including construction in progress and excluding the Galaxy 18 satellite transponder            capacity lease discussed in “Part I – Item 1 – Development of our            Business During the Past Year,” to total $220.0 million to $230.0 million,            depending on available opportunities, available credit, and the amount of cash flow we            generate during 2008. We have made capital and operating purchase commitments totaling            $74.8 million at December 31, 2007. A majority of the expenditures are expected to            expand, enhance and modernize our current networks, facilities and operating systems,            and to develop other businesses.

 

We            funded our normal business capital requirements substantially through internal sources            during 2007 and, to the extent necessary, from external financing sources. We expect            expenditures for 2008 to be financed through internal sources and, for the Galaxy 18            satellite transponder capacity lease and wireless facility expansion discussed above,            through external financing sources.

 

**Insurance**

We have            insurance to cover risks incurred in the ordinary course of business, including general            liability, property coverage, director and officers and employment practices liability,            auto, crime, fiduciary, aviation, and business interruption insurance in amounts            typical of similar operators in our industry and with reputable insurance providers.            Central office equipment, buildings, furniture and fixtures and certain operating and            other equipment are insured under a blanket property insurance program. This program            provides substantial limits of coverage against “all risks” of loss            including fire, windstorm, flood, earthquake and other perils not specifically excluded            by the terms of the policies. As is typical in the communications industry, we are            self-insured for damage or loss to certain of our transmission facilities, including            our buried, undersea, and above-ground transmission lines. We self-insure with respect            to employee health insurance and workers’ compensation, subject to stop-loss            insurance with other parties that caps our liability at specified limits. We believe            our insurance coverage is adequate; however, if we become subject to substantial            uninsured liabilities due to damage or loss to such facilities, our financial position,            results of operations or liquidity may be adversely affected.

 

***Item 3. Legal Proceedings***

 

Except            as set forth in this item, neither the Company, its property nor any of its            subsidiaries or their property is a party to or subject to any material pending legal            proceedings. We are parties to various claims and pending litigation as part of the            normal course of business. We are also involved in several administrative proceedings            and filings with the FCC and state regulatory authorities. In the opinion of            management, the nature and disposition of these matters are considered routine and            arising in the ordinary course of business. Management believes these matters would not            have a materially adverse affect on our business or financial position, results of            operations or liquidity.

 

***Item 4. Submissions of Matters to a Vote of Security            Holders***

 

Omitted            per General Instruction I(1)(a) and (b) of Form 10-K

 

**Part II**

 

***Item 5. Market for the Registrant’s Common Equity, Related            Stockholder Matters and Issuer Purchases of Equity Securities***

 

**Market Information for Common Stock**

All            issued and outstanding shares of GCI, Inc's Class A common stock are held by GCI and            are not publicly traded. GCI's Class A and Class B common stock are publicly            traded.

 

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**Dividends**

GCI and            GCI, Inc. have never paid cash dividends on GCI’s common stock, and we have no            present intention of doing so. Payment of cash dividends in the future, if any, will be            determined by GCI’s Board of Directors in light of our earnings, financial            condition and other relevant considerations. Our existing bank loan agreements contain            provisions that limit payment of dividends on common stock, other than stock dividends            (see note 7 included in “Part II — Item 8 — Consolidated Financial            Statements and Supplementary Data” for more information).

 

**Stock Transfer Agent and Registrar**

BNY            Mellon Shareowner Services is GCI’s stock transfer agent and            registrar.

 

***Item 6. Selected Financial Data***

 

The            following table presents selected historical information relating to financial            condition and results of operations over the past five years.

 

|                                                                                                                                                                                                | Years ended December 31, |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|
|                                                                                                                                                                                                |                     | 2007 | 2006 | 2005 | 2004 | 2003 |
| (Amounts in thousands except per share                            amounts)

                                                                                                                   |
| Revenues                                                                                                                                                                                            | $                        | 520,311 | 477,482 | 443,026 | 424,826 | 390,797 |
| Income before income tax expense and cumulative effect                            of a change in accounting principle                                                                               |  

$                | 25,465 | 34,253 | 36,835 | 38,715 | 26,160 |
| Cumulative effect of a change in accounting principal,                            net of income tax expense of $44 in 2006 and net of income tax benefit                            of $367 in 2003 |  

$                | --- | 64 | --- | --- | (544) |
| Net income                                                                                                                                                                                          | $                        | 13,504 | 18,520 | 20,831 | 21,252 | 15,542 |
| Total assets                                                                                                                                                                                        | $                        | 982,386 | 914,659 | 873,775 | 849,191 | 763,020 |
| Long-term debt, including current portion and net of                            unamortized discount                                                                                                | $                        | 538,398 | 489,462 | 475,840 | 437,137 | 345,000 |
| Obligations under capital leases, including current                            portion                                                                                                              |  

$                | 2,851 | 2,857 | 672 | 39,661 | 44,775 |
| Total stockholders’ equity                                                                                                                                                                    | $                        | 251,921 | 240,395 | 243,620 | 228,604 | 246,271 |
| Dividends declared per common share                                                                                                                                                                 | $                        | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
|                                                                                                                                                                                                     |                          |  |  |  |  |  |  |

 

The            Selected Financial Data should be read in conjunction with “Part II — Item            7 — Management’s Discussion and Analysis of Financial Condition and Results            of Operations.”

 

***Item 7. Management’s Discussion and Analysis of Financial            Condition and Results of Operations***

 

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

Management’s Discussion and Analysis of Financial Condition and            Results of Operations discusses our consolidated financial statements, which have been            prepared in accordance with U.S. generally accepted accounting principles. 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 expense, depreciation, amortization and accretion periods, intangible            assets, income taxes, 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

 

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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.

 

The            following discussion and analysis of financial condition and results of operations            should be read in conjunction with our consolidated financial statements and            supplementary data as presented in Item 8 of this Form 10-K.

 

**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.

 

Our            four reportable segments are Consumer, Network Access, Commercial and Managed            Broadband. Our reportable segments are business units that offer different products,            are each managed separately, and serve distinct types of customers.

 

The            Network Access segment provides services to other common carrier customers and the            Managed Broadband segment provides services to rural school districts and hospitals and            health clinics. Following are our segments and the services and products each offers to            its customers:

 

|                              | Reportable Segments |
|-----------------------------------|---------------------|
| Services and Products             | Consumer            | Network Access | Commercial | Managed Broadband |
| Voice:                            |                |   |   |   |
| Long-distance                     | **X**               | **X** | **X** |   |
| Local Access                      | **X**               | **X** | **X** |   |
| Directories                       |                |   | **X** |   |
|                              |                |   |   |   |
| Video                             | **X**               |   | **X** |   |
|                              |                |   |   |   |
| Data:                             |                |   |   |   |
| Internet                          | **X**               | **X** | **X** | **X** |
| Private Line and Private Networks |                | **X** | **X** | **X** |
| Managed Services                  |                |   | **X** | **X** |
| Managed Broadband Services        |                |   |   | **X** |
|                              |                |   |   |   |
| Wireless                          | **X**               | **X** | **X** |   |

 

An            overview of our services and products follows.

 

**Voice Services and Products**

Long-distance 

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

 

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

 

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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. 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, 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 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 will terminate as of July 1, 2008.            AT&T will provide 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 on a per            minute basis. The block of wireless network usage at no charge will reduce Cost of            Goods Sold during the four year period ended June 30, 2012, that we would have            otherwise recognized in accordance with the new agreement, however, we are unable to            estimate the impact this change will have on our Cost of Goods Sold.

 

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

 

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

 

Local Access 

We            generate local access services revenues from four primary sources: (1) basic dial tone            services; (2) private line 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.

 

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 December 31, 2007, 2006 and 2005 total lines in service represent a            statewide market share of approximately 28%, 26% and 26%, respectively. At December 31,            2007, 2006 and 2005 approximately 89%, 87% and 86%, respectively, of our lines are            provided on our own facilities and leased local loops. At December 31, 2007, 2006 and            2005 approximately 8%, 6% and 6%, respectively, of our lines are provided using the UNE            platform delivery method.

 

Our            local access service faces significant competition in Anchorage, Fairbanks, and Juneau            from ACS, which is the largest ILEC in Alaska, and from AT&T Alascom in Anchorage            for consumer services. AT&T Alascom has received certification from the 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 significant competition            from MTA. In October 2007, we began offering local access service in the Kenai-Soldotna            area and face significant competition from the ILEC, ACS. 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.

 

In 2005            and 2006 the RCA issued orders granting us certification to serve the service areas of            Ketchikan Public Utility, Cordova Telephone Cooperative, Copper Valley Telephone            Cooperative, MTA, the Glacier State area served by ACS of

 

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the            Northland, Alaska Telephone Company, Interior Telephone Company, United-KUC, ASTAC and            Mukluk Telephone Company. The affected rural Local Exchange carriers had appealed            various aspects of the certification rulings. We cross-appealed questioning whether the            RCA had issued an untimely order beyond the statutory deadline when it approved the            portion of the application granting us authority to serve Wrangell, Petersburg, Seward,            Sitka and Nome. In rulings on October 5, 2007 and November 23, 2007, the Superior Court            held that the RCA’s approval had been untimely and that our authority to serve            those areas was effective immediately by operation of law.

 

In 2007            we expanded our local access service areas within Alaska by offering facilities-based            services in Eagle River, Chugiak, Wasilla, Palmer, Kenai-Soldotna, Ketchikan, Kodiak,            Sitka and Valdez. In 2007 we also began offering resale services in all of the Glacier            State study area and those areas in the MTA study area in which we do not offer            facilities-based services.

 

We plan            to continue to expand our local access service areas in 2008 and will offer service 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.

 

We plan            to have deployed more than 79,900 DLPS lines which utilize our coaxial cable facilities            by December 31, 2008. 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.

 

The USF            pays subsidies to ETCs 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.

 

The            Federal-State Joint Board on Universal Service has issued recommendations to the FCC            for curbing growth in the fund, and the FCC has initiated rulemaking proceedings to            consider these and its own proposals. We cannot predict at this time the outcome of            these proceedings or their impact on us. 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.

 

We have            signed an agreement to purchase the UUI and Unicom telecommunications subsidiaries of            UCI for $40.0 million. Additionally we may assume approximately $37.0 million in net            debt as part of the acquisition. This transaction is subject to customary closing            conditions, including regulatory approval. We have filed applications with the RCA and            FCC seeking the requisite regulatory consent for the transaction. The FCC comment cycle            is completed, and the parties are awaiting FCC action. GCI is currently filing replies            to comments and the statutory date for a final RCA decision is May 16, 2008. The            results of operations generated by the acquired companies will impact our voice and            data services in all of our segments. This transaction will close upon regulatory            approval which is expected in the second or third quarter of 2008.

 

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, pay-per-view            movies and one-time events, such as sporting events; (2) equipment rentals; and (3)            advertising sales.

 

Our            cable systems serve 40 communities and areas in Alaska, including the state’s            five largest population centers, Anchorage, Fairbanks, the Matanuska-Susitna Valley,            the Kenai Peninsula, and Juneau.

 

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.

 

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We            increased rates charged for certain cable services in eleven communities, including            four of the state’s five largest population centers, Anchorage, Fairbanks, the            Matanuska-Susitna Valley, and the Kenai Peninsula. The rate increases were primarily            effective in January 2006 and increased approximately 5% for those customers who            experienced an adjustment.

 

In the            fourth quarter of 2006 we increased rates charged for certain cable services in seven            communities, including the state’s five largest population centers. The rates            increased approximately 5% for those customers who experienced an            adjustment.

 

Our            cable service offerings are bundled with various combinations of our long-distance,            local access, and Internet services and beginning in the second quarter of 2007 include            an offering of free cable service. Value-added premium services are available for            additional charges. We expect to transmit an entirely digital signal for all cable            television channels in all markets by December 31, 2008.

 

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

 

**Data            Services and Products**

Internet 

We            generate Internet services revenues from 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.

 

Private Line and Private Networks

We            generate private line and private 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 IP 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 private line and private            network services revenues is the number of private lines and private networks in use.            We compete against AT&T 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 private lines, point-to-point and multipoint private network and            small earth station services. There are a number of competing companies in Alaska that            actively sell and maintain data and voice communications systems.

 

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

 

Managed Broadband Services

We            generate managed broadband services revenue through our SchoolAccess®,            ConnectMD® and managed video conferencing products. Our customers may            purchase end-to-end broadband services solutions blended with other transport and            software products. There are several competing companies in Alaska that actively sell            broadband services.

 

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Our            ability to provide end-to-end broadband services solutions has allowed us to maintain            our market position based on “value added” products and services rather            than solely based on price competition.

 

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

 

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

 

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

 

**Wireless Services and Products**

We            generate wireless services and equipment revenues from 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 Dobson 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 Wireless,            ACS, MTA, and resellers of those services in Anchorage and other markets. The GCI and            Alaska DigiTel brands compete against each other. We competed against Dobson until its            acquisition by AT&T discussed below.

 

On            January 2, 2007 we invested $29.5 million in Alaska DigiTel in exchange for an 81.9%            equity interest. We do not have voting control of Alaska DigiTel. In December 2007, we            signed a definitive agreement to acquire the remaining minority interest in Alaska            DigiTel for a total consideration of approximately $10.0 million.  On January 22,            2008, the FCC initiated its proceedings to review the application seeking requisite            regulatory approval of the proposed change in control. Following FCC approval, we will            own 100% of Alaska DigiTel.

 

Commencing in 2008 we plan to construct a GSM network throughout the            terrestrially served portions of Alaska including the cities of Anchorage, Fairbanks,            and Juneau. Alaska DigiTel will construct and operate the CDMA portion of our statewide            wireless platform.

 

We had            a distribution agreement with Dobson allowing us to resell Dobson wireless services. In            November 2007 AT&T acquired Dobson, including its Alaska properties. 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 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 will terminate as of July 1, 2008. AT&T will            provide 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 on a per minute            basis. The block of wireless network usage at no charge will reduce Cost of Goods Sold            during the four year period ended June 30, 2012, that we would have otherwise            recognized in accordance with the new agreement, however, we are unable to estimate the            impact this change will have on our Cost of Goods Sold.

 

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We have            signed a purchase agreement to acquire all of the interests in Alaska Wireless for            $13.0 million to $14.0 million, expected to be paid upon closing. 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 serving approximately 4,000 subscribers in the Dutch Harbor, Alaska            area. In addition to the acquisition, we will enter into a management agreement with            the existing owners of Alaska Wireless. The business will continue to operate under the            Alaska Wireless name and the current management will continue to manage the day-to-day            operations. The results of operations generated by the acquired company will impact our            wireless services in our Consumer and Commercial segments. We filed the application            with the FCC seeking the requisite regulatory consent to the transaction on January 18,            2008. This transaction will close upon regulatory approval which is expected in the            second or third quarter of 2008.

 

**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                            Change**1 | **Percent­age                            Change**1 |
|-------------------------------------------------------------------------------------------------------------------------|-----------------------------|----------|----------|--------------------------------------------------------|--------------------------------------------------------|
|                                                                                                                    |                        |     |     | **2007**                                               | **2006**                                               |
|                                                                                                                    | **Year Ended December 31,** | **vs.**  | **vs.**  |
| (Unaudited)                                                                                                             | **2007**                    | **2006** | **2005** | **2006**                                               | **2005**                                               |
| ***Statements of                            Operations Data:***                                                         |                        |     |     |                                                   |                                                   |
| Revenues:                                                                                                               |                        |     |     |                                                   |                                                   |
| Consumer segment                                                                                                        | 43.0%                       | 37.5%    | 36.8%    | 24.9%                                                  | 9.8%                                                   |
| Network Access segment                                                                                                  | 31.4%                       | 34.9%    | 33.5%    | (1.9%)                                                 | 12.2%                                                  |
| Commercial segment                                                                                                      | 20.1%                       | 22.2%    | 23.8%    | (1.2%)                                                 | 0.3%                                                   |
| Managed Broadband segment                                                                                               | 5.5%                        | 5.4%     | 5.9%     | 10.2%                                                  | 0.1%                                                   |
| Total revenues                                                                                                          | 100.0%                      | 100.0%   | 100.0%   | 9.0%                                                   | 7.8%                                                   |
| Selling, general and administrative expenses                                                                            | 37.0%                       | 36.0%    | 35.1%    | 12.1%                                                  | 10.4%                                                  |
| Restructuring charge                                                                                                    | 0.0%                        | 0.0%     | 0.4%     | ---                                                    | NM                                                     |
| Depreciation and amortization expense                                                                                   | 16.6%                       | 17.2%    | 16.7%    | 5.2%                                                   | 10.8%                                                  |
| Operating income                                                                                                        | 12.0%                       | 14.1%    | 17.3%    | (7.3%)                                                 | (12.3%)                                                |
| Other expense, net                                                                                                      | 7.1%                        | 6.9%     | 9.0%     | 11.8%                                                  | (16.7%)                                                |
| Income before income taxes and cumulative effect of a                            change in accounting principle in 2006 | 4.9%                        | 7.2%     | 8.3%     | (25.7%)                                                | (7.0%)                                                 |
| Income before cumulative effect of a change in                            accounting principle in 2006                  | 2.6%                        | 3.9%     | 4.7%     | (26.5%)                                                | (11.5%)                                                |
| Net income                                                                                                              | 2.6%                        | 3.9%     | 4.7%     | (26.7%)                                                | (11.2%)                                                |

                                                                               

|   | 1   | Percentage change in underlying data. |
|--------|---------------|---------------------------------------|

             

NM – Not meaningful.

                                                                

             

**Year            Ended December 31, 2007 (“2007”) Compared to Year Ended December 31, 2006            (“2006”)**

 

**Overview of Revenues and Cost of Goods Sold**

Total            revenues increased 9.0% from $477.5 million in 2006 to $520.3 million in 2007. Revenue            increases in our Consumer and Managed Broadband segments were partially off-set by            decreases in our Network Access and Commercial segments. See the discussion below for            more information by segment.

 

Total            Cost of Goods Sold increased 14.5% from $156.4 million in 2006 to $179.1 million in            2007. Cost of Goods Sold

 

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increased in all of our segments. See the discussion below for more            information by segment.

 

**Consumer Segment Overview**

Consumer segment revenue represented 43.0% of 2007 consolidated            revenues. The components of Consumer segment revenue are as follow (amounts in            thousands):

 

|                           |   |    |   | Percentage |
|--------------------------------|--------|---------|--------|------------|
|                           |   | 2007    |   | 2006       |   | Change |
| Voice                          | $      | 46,212  |   | 45,625     |   | 1.3% |
| Video                          |   | 96,327  |   | 90,226     |   | 6.8% |
| Data                           |   | 34,230  |   | 29,406     |   | 16.4% |
| Wireless                       |   | 46,733  |   | 13,694     |   | 241.3% |
| Total Consumer segment revenue | $      | 223,502 |   | 178,951    |   | 24.9% |

 

Consumer segment Cost of Goods Sold represented 45.7% of 2007            consolidated Cost of Goods Sold. The components of Consumer segment Cost of Goods Sold            are as follows (amounts in thousands):

|                                      |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|
|                                      |   | 2007   |   | 2006   |   | Percentage Change |
| Voice                                     | $      | 17,835 |   | 20,264 |   | (12.0%) |
| Video                                     |   | 33,550 |   | 30,573 |   | 9.7% |
| Data                                      |   | 2,872  |   | 2,167  |   | 32.5% |
| Wireless                                  |   | 27,620 |   | 13,885 |   | 98.9% |
| Total Consumer segment Cost of Goods Sold | $      | 81,877 |   | 66,889 |   | 22.4% |

 

Selected key performance indicators for our Consumer segment            follow:

 

|                                                                        |   | December 31, |   | Percentage |
|-----------------------------------------------------------------------------|--------|--------------|--------|------------|
|                                                                        |   | 2007         |   | 2006       |   | Change |
| Voice:                                                                      |   |         |   |       |   |   |
| Long-distance subscribers1                                                  |   | 89,900       |   | 89,800     |   | 0.1% |
| Long-distance minutes carried (in millions)                                 |   | 135.8        |   | 141.9      |   | (4.3%) |
| Total local access lines in                            service2             |   | 74,400       |   | 66,200     |   | 12.4% |
| Local access lines in service on GCI                            facilities2 |   | 50,700       |   | 31,400     |   | 61.5% |
|                                                                        |   |         |   |       |   |   |
| Video:                                                                      |   |         |   |       |   |   |
| Basic subscribers3                                                          |   | 128,000      |   | 124,000    |   | 3.2% |
| Digital programming tier                            subscribers4            |   | 65,800       |   | 58,700     |   | 12.1% |
| HD/DVR converter boxes5                                                     |   | 50,200       |   | 29,200     |   | 71.9% |
| Homes passed                                                                |   | 224,700      |   | 219,900    |   | 2.2% |
| Average monthly gross revenue per                            subscriber6    |   | $64.01       |   | $61.57     |   | 4.0% |
|                                                                        |   |         |   |       |   |   |
| Data:                                                                       |   |         |   |       |   |   |
| Cable modem subscribers7                                                    |   | 88,000       |   | 78,500     |   | 12.1% |
|                                                                        |   |         |   |       |   |   |
| Wireless:                                                                   |   |         |   |       |   |   |
| Wireless lines in service8                                                  |   | 70,000       |   | 24,400     |   | 186.9% |
| Average monthly gross revenue per                            subscriber9    |   | $58.29       |   | $52.21     |   | 11.6% |
|                                                                        |   |
|                                                                             |        |              |        |            |  |  |  |

 

 

56

 

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| 1 A long-distance customer is defined as a                            customer account that is invoiced a monthly long-distance plan fee or                            has made a long-distance call during the month.

2 A local access line in service is defined                            as a revenue generating circuit or channel connecting a customer to the                            public switched telephone network.

3 A 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.

4 A 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.

5 A high definition/digital video recorder                            (“HD/DVR”) converter box is defined as one box rented by a                            digital programming or basic tier subscriber. A digital programming or                            basic tier subscriber is not required to rent an HD/DVR converter box                            to receive service.

6Year-to-date average                            monthly consumer video revenues divided by the average of consumer                            video basic subscribers at the beginning and 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 and includes                            Alaska DigiTel lines in service in 2007.

9Year-to-date average                            monthly consumer wireless revenues divided by the average of consumer                            wireless subscribers at the beginning and ending of the period. The                            2007 average monthly gross revenue per subscriber includes Alaska                            DigiTel consumer revenue and subscribers. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |

**Consumer Segment Revenues**

The            increase in voice revenue is primarily due to a $991,000 or 15.8% increase in the            monthly local service network access fee in April 2007 and a $508,000 or 4.6% increase            due to increased local access lines partially offset by a $474,000 or 44.7% decrease in            support from the Universal Service Program.

 

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

 

|   | **•** | A 22.7% increase in equipment rental revenue to $16.3                            million in 2007 primarily resulting from our customers’ increased                            use of digital distribution technology. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A 4.1% increase in programming services revenue to $78.6                            million in 2007 primarily resulting from an increase in digital                            programming tier subscribers in 2007 and increased rates charged for                            certain cable services primarily effective in the fourth quarter of                            2006. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            increase in data revenue is primarily due to a 17.0% increase in cable modem revenue to            $28.8 million primarily due to increased subscribers.

 

The            increase in wireless revenue is due to our January 1, 2007 acquisition of Alaska            DigiTel and a $9.9 million or 72.3% increase in the wireless revenue from our resale            agreement primarily due to increased subscribers. Consumer segment wireless revenues            from our Alaska DigiTel investment totaled $23.1 million in 2007.

 

**Consumer Segment Cost of Goods Sold**

The            decrease in voice Cost of Goods Sold is primarily due to the following:

 

|   | **•** | Cost savings resulting from the increased deployment of                            DLPS lines during the year ended December 31, 2007, |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Decreased voice minutes carried, and |
|--------|------------|--------------------------------------|

|   | **•** | Reduced access costs resulting from the distribution and                            termination of our traffic on our own local access services network                            instead of paying other carriers to distribute and terminate our                            traffic. The statewide average cost savings is approximately $0.012 and                            up to $0.054 per minute for originating and terminating interstate and                            intrastate traffic, respectively. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            voice Cost of Goods Sold decrease is partially off-set by an increased UNE loop cost            charged by ACS due to the Settlement Agreement, as further described and defined above            in “Part I – Item 1 – Regulation.”

 

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

 

57

 

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The            data Cost of Goods Sold increase is primarily due to increased satellite costs due to            increased cable modem subscribers.

 

The            wireless Cost of Goods Sold increase is primarily due to our January 1, 2007            acquisition of Alaska DigiTel and a $7.3 million or 52.8% increase in our wireless            service Cost of Goods Sold related to increased wireless service revenue from our            resale agreement. Consumer segment wireless Cost of Goods Sold from our Alaska DigiTel            investment totaled $6.4 million in 2007.

 

**Network Access Segment Overview**

Network            access segment revenue represented 31.4% of 2007 consolidated Revenues. The components            of Network Access segment revenue are as follows (amounts in thousands):

 

|                                 |   |    |   | Percentage |
|--------------------------------------|--------|---------|--------|------------|
|                                 |   | 2007    |   | 2006       |   | Change |
| Voice                                | $      | 96,896  |   | 110,834    |   | (12.6%) |
| Data                                 |   | 61,199  |   | 55,637     |   | 10.0% |
| Wireless                             |   | 5,282   |   | ---        |   | NM |
| Total Network Access segment revenue | $      | 163,377 |   | 166,471    |   | (1.9%) |
|                                 |   |    |   |       |   |   |
| NM – Not meaningful.           |   |    |   |       |   |   |   |
|                                      |        |         |        |            |  |  |  |

 

Network            Access segment Cost of Goods Sold represented 22.7% of 2007 consolidated Cost of Goods            Sold. The components of Network Access segment Cost of Goods Sold are as follows            (amounts in thousands):

 

|                                                                       |   |   |   | Percentage |
|----------------------------------------------------------------------------|--------|--------|--------|------------|
|                                                                       |   | 2007   |   | 2006       |   | Change |
| Voice                                                                      | $      | 29,431 |   | 28,888     |   | 1.9% |
| Data                                                                       |   | 10,792 |   | 8,392      |   |   28.6% |
| Wireless                                                                   |   | 370    |   | ---        |   |   NM |
| Total Network Access segment Cost of Goods                            Sold | $      | 40,593 |   | 37,280     |   |   8.9% |
|                                                                       |   |   |   |       |   |   |
| NM – Not meaningful.                                                 |   |   |   |       |   |   |   |
|                                                                            |        |        |        |            |  |  |  |

 

Selected key performance indicators for our Network Access segment            follow:

 

|                                                                                                                                                                                                                                                         |   | December 31, |   | Percentage |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|------------|
|                                                                                                                                                                                                                                                         |   | 2007         |   | 2006       |   | Change |
| Voice:                                                                                                                                                                                                                                                       |   |         |   |       |   |   |
| Long-distance minutes carried (in millions)                                                                                                                                                                                                                  |   | 1,251        |   | 1,317      |   | (5.0%) |
|                                                                                                                                                                                                                                                         |   |         |   |       |   |   |
| Data:                                                                                                                                                                                                                                                        |   |         |   |       |   |   |
| Total Internet service provider access lines in                            service1                                                                                                                                                                          |   | 2,600        |   | 3,100      |   | (16.1%) |
|                                                                                                                                                                                                                                                         |   |
| 1 An 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 decreased billable minutes and a 6.4%            decrease in our rate per minute on billable minutes carried for our common carrier            customers. 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            increase in data revenue is primarily due to an increase in circuits sold.

 

The            Network Access segment wireless revenue results from our January 1, 2007 acquisition of            Alaska DigiTel.

 

58

 

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**Network Access Segment Cost of Goods Sold**

The            increase in voice Cost of Goods Sold is primarily due to an average cost per minute            increase due to a change in the composition of traffic and is partially off-set by            decreased long-distance minutes carried.

 

The            increase in data Cost of Goods Sold is primarily due to costs associated with the            increased circuits sold discussed above and $878,000 in costs to repair breaks in our            undersea and terrestrial fiber-optic cable systems.

 

The            Network Access segment wireless Cost of Goods Sold results from our January 1, 2007            acquisition of Alaska DigiTel.

 

**Commercial Segment Overview**

Commercial segment revenue represented 20.1% of 2007 consolidated            revenues. The components of Commercial segment revenue are as follows (amounts in            thousands):

 

|                             |   |    |   | Percentage |
|----------------------------------|--------|---------|--------|------------|
|                             |   | 2007    |   | 2006       |   | Change |
| Voice                            | $      | 30,761  |   | 32,162     |   | (4.4%) |
| Video                            |   | 8,018   |   | 7,993      |   | 0.3% |
| Data                             |   | 61,052  |   | 63,276     |   | (3.5%) |
| Wireless                         |   | 4,809   |   | 2,498      |   | 92.5% |
| Total Commercial segment revenue | $      | 104,640 |   | 105,929    |   | (1.2%) |

 

Commercial segment Cost of Goods Sold represented 28.2% of 2007            consolidated Cost of Goods Sold. The components of Commercial segment Cost of Goods            Sold are as follows (amounts in thousands):

 

|                                        |   |   |   |   |
|---------------------------------------------|--------|--------|--------|--------|
|                                        |   | 2007   |   | 2006   |   | Percentage Change |
| Voice                                       | $      | 18,622 |   | 20,426 |   | (8.8%) |
| Video                                       |   | 1,576  |   | 1,413  |   | 11.5% |
| Data                                        |   | 26,201 |   | 23,422 |   | 11.9% |
| Wireless                                    |   | 4,160  |   | 2,608  |   | 59.5% |
| Total Commercial segment Cost of Goods Sold | $      | 50,559 |   | 47,869 |   | 5.6% |

             

Selected key performance indicators for our Commercial segment            follow:

             

|                                                                         |   | December 31, |   | Percentage |
|------------------------------------------------------------------------------|--------|--------------|--------|------------|
|                                                                         |   | 2007         |   | 2006       |   | Change |
| Voice:                                                                       |   |         |   |       |   |   |
| Long-distance subscribers1                                                   |   | 10,500       |   | 11,100     |   | (5.4%) |
| Total local access lines in                            service2              |   | 43,100       |   | 41,900     |   | 2.9% |
| Local access lines in service on GCI facilities                            2 |   | 12,500       |   | 8,400      |   | 48.8% |
| Long-distance minutes carried (in millions)                                  |   | 131.3        |   | 131.8      |   | (0.4%) |
|                                                                         |   |         |   |       |   |   |
| Data:                                                                        |   |         |   |       |   |   |
| Cable modem subscribers3                                                     |   | 8,500        |   | 7,800      |   | 9.0% |
|                                                                         |   |         |   |       |   |   |
| Wireless:                                                                    |   |         |   |       |   |   |
| Wireless lines in service4                                                   |   | 7,300        |   | 4,600      |   | 58.7% |
|                                                                         |   |         |   |       |   |   |
|                                                                              |        |              |        |            |  |  |  |  |  |  |  |  |

 

 

59

 

----

 

| 1 A long-distance customer is defined as a                            customer account that is invoiced a monthly long-distance plan fee or                            has made a long-distance call during the month.

2 A local access line in service is defined                            as a revenue generating circuit or channel connecting a customer to the                            public switched telephone network.

3 A 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 and includes                            Alaska DigiTel lines in service in 2007. |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |

 

We            leased a portion of our 800-mile fiber optic system capacity that extends from Prudhoe            Bay to Valdez via Fairbanks, and provided management and maintenance services for this            capacity to a significant customer. The lessee signed a contract with a competitor in            March 2005, started the transition of their circuits from our fiber optic cable system            to our competitor’s microwave system in June 2006, and completed the transition            in April 2007. In November 2006, we signed an agreement with our competitor to lease            capacity on our fiber optic cable system and provide certain other services to them in            association with their contract.

 

**Commercial Segment Revenues**

The            decrease in voice revenue is due to decreased long distance subscribers and decreased            minutes carried. Revenues associated with increased local access lines in service            partially off-set this decrease.

 

The            decrease in data revenue is primarily due to a $7.9 million or 58.2% decrease in            revenue earned from the lease and provision of management and maintenance services on a            portion of our 800-mile fiber optic system capacity that extends from Prudhoe Bay to            Valdez via Fairbanks as described above and a decrease in revenue earned from a large            customer who reduced their services with us. The decrease is partially off-set by a            $4.6 million increase in managed services project revenue and growth in our private IP            product resulting from new customers and increased coverage for existing            customers.

 

The            increase in wireless revenue is primarily due to increased subscribers to our wireless            offerings from our resale agreement.

 

**Commercial Segment Cost of Goods Sold**

The            decrease in voice Cost of Goods Sold is due to savings resulting from increased            provision of services through our own facilities in 2007, decreased voice minutes            carried, and decreased costs associated with decreased long-distance subscribers. The            voice Cost of Goods Sold decrease is partially off-set by an increased UNE loop cost            charged by ACS due to the Settlement Agreement, as further described and defined above            in “Part I – Item 1 – Regulation.”

 

The            increase in data Cost of Goods Sold resulted primarily from an increase in contract            labor and internal labor classified as Cost of Good Sold due to the increase in managed            service project revenue discussed above.

 

The            wireless Cost of Goods Sold increase is primarily due to increased wireless service            revenue from our resale agreement.

 

**Managed Broadband Segment Overview**

Managed            Broadband segment revenue and Cost of Goods sold represented 5.5% and 3.4% of 2007            consolidated revenues and Cost of Goods Sold, respectively.

 

Selected key performance indicators for our Managed Broadband segment            follow:

 

|                        |   | December 31, |   | Percentage |
|-----------------------------|--------|--------------|--------|------------|
|                        |   | 2007         |   | 2006       |   | Change |
| Managed Broadband segment:  |   |         |   |       |   |   |
| SchoolAccess® customers |   | 51           |   | 48         |   | 6.3% |
| Rural health customers      |   | 21           |   | 21         |   | 0.0% |

 

**Managed Broadband Segment Revenues**

Managed            Broadband segment revenue, which includes data products only, increased 10.2% to $28.8            million in 2007 as compared to 2006. The increase is primarily due to increased            circuits purchased by our rural health and SchoolAccess® customers and            several 2007 product sales that did not occur in 2006.

 

**Managed Broadband Segment Cost of Goods Sold**

Managed            Broadband segment Cost of Goods Sold increased $1.7 million to $6.0 million from 2006            to 2007 primarily due to costs associated with the product sales and increased circuits            purchased as discussed above.

 

60

 

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**Selling, General and Administrative Expenses**

Selling, general and administrative expenses increased 12.1% to $192.5            million in 2007 primarily due to the following:

 

|   | **•** | Recognition of $15.5 million in additional expense                            resulting from our January 1, 2007 acquisition of Alaska                            DigiTel,  |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $3.8 million increase in labor and benefits costs,                            and |
|--------|------------|-------------------------------------------------------------------------------------|

|   | **•** | A $1.4 million increase in bad debt expense primarily                            due to the realization of recoveries for certain Managed Broadband                            services customers and MCI, Inc. (merged with Verizon Communications,                            Inc.) in 2006 through a reduction to bad debt expense which did not                            recur in 2007. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The            selling, general and administrative expenses increase is partially off-set by the            following:

 

|   | **•** | A $2.2 million decrease in certain promotion expenses,                            and |
|--------|------------|---------------------------------------------------------------------------------------|

|   | **•** | A $658,000 decrease in our company-wide success sharing                            bonus accrual in 2007. |
|--------|------------|-----------------------------------------------------------------------------------------------------------|

 

As a            percentage of total revenues, selling, general and administrative expenses increased to            37.0% in 2007 from 36.0% in 2006, primarily due to the net increases described above            without a proportional increase in revenues.

 

**Depreciation and Amortization Expense**

Depreciation and amortization expense increased 5.2% to $86.3 million in            2007. The increase is primarily due to our $83.4 million investment in equipment and            facilities placed into service during 2006 for which a full year of depreciation was            recorded in 2007, the $111.6 million investment in equipment and facilities placed into            service during the year ended December 31, 2007 for which a partial year of            depreciation was recorded in 2007, and the increased depreciation and amortization            expense recognized in 2007 on the depreciable and amortizable assets recorded upon the            acquisition and consolidation of Alaska DigiTel. The depreciation and amortization            expense increase is partially off-set by the $790,000 software impairment recognized in            2006 upon the closure of an operating segment.

 

**Other Expense, Net**

Other            expense, net of other income, increased 11.8% to $37.0 million in 2007 primarily due to            the following:

 

|   | **•** | A $2.5 million or 7.2% increase in interest costs due to                            an increase in our average outstanding debt balance in 2007 as compared                            to 2006, |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $1.3 million or 70.5% decrease in interest income in                            2007 resulting from a decrease in our average cash and cash equivalents                            balance in 2007 as compared to 2006, and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | In the third quarter of 2007, we substantially modified                            our Senior Credit Facility resulting in loan fee expense of                            $611,000. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            increases described above are partially offset by an increase in capitalized interest            from $820,000 in 2006 to $1.6 million in 2007.

 

**Income Tax Expense**

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

 

Income            tax expense totaled $12.0 million and $15.8 million in 2007 and 2006, respectively. Our            effective income tax rate increased from 46.1% in 2006 to 47.0% in 2007 primarily due            to increases in permanent differences in 2007.

 

At            December 31, 2007, we have (1) tax net operating loss carryforwards of approximately            $116.4 million that will begin expiring in 2011 if not utilized, and (2) alternative            minimum tax credit carryforwards of approximately $3.1 million available to offset            regular income taxes payable in future years. We estimate that we will utilize net            operating loss carryforwards of $1.0 million to $3.0 million during the year ended            December 31, 2008. Our utilization of certain net operating loss carryforwards is            subject to limitations pursuant to Internal Revenue Code section 382.

 

We have            recorded deferred tax assets of approximately $47.6 million associated with income tax            net operating losses that were generated from 1995 to 2005, and that expire from 2011            to 2025, and with charitable contributions that were converted to net operating losses            in 2006 and 2007, and that expire in 2026 and 2027, respectively.

 

61

 

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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 asset considered realizable, however, could            be reduced if estimates of future taxable income during the carryforward period are            reduced which would result in additional income tax expense. We estimate that our            effective annual income tax rate for financial statement purposes will be 47% to 49% in            the year ended December 31, 2008.

 

**Cumulative Effect of a Change in Accounting Principle**

On            January 1, 2006 we adopted SFAS No. 123(R), “Share-Based Payment.” SFAS            123(R) requires us to estimate pre-vesting option forfeitures at the time of grant and            periodically revise those estimates in subsequent periods if actual forfeitures differ            from those estimates. We record share-based compensation expense only for those awards            expected to vest using an estimated forfeiture rate based on our historical pre-vesting            forfeiture data. Previously, we accounted for forfeitures as they occurred under the            pro forma disclosure provisions of SFAS 123 for periods prior to 2006. The transition            impact (benefit) of adopting SFAS No. 123(R) attributed to accruing for expected            forfeitures on outstanding share-based awards totaled $108,000, which was reduced by            income tax expense of $44,000, and is reported as a cumulative effect of a change in            accounting principle during the year ended December 31, 2006 in the accompanying            Consolidated Income Statements.

 

**Year            Ended December 31, 2006 (“2006”) Compared to Year Ended December 31, 2005            (“2005”)**

             

**Overview of Revenues and Cost of Goods Sold**

Total            revenues increased 7.8% from $443.0 million in 2005 to $477.5 million in 2006. Revenue            increased in all of our segments. See the discussion below for more information by            segment.

 

Total            Cost of Goods Sold increased 16.0% from $134.9 million in 2005 to $156.4 million in            2006. Cost of Goods Sold increases in our Consumer, Network Access and Commercial            segments were partially off-set by decreased Cost of Goods Sold in our Managed            Broadband segment. See the discussion below for more information by segment.

 

**Consumer Segment Overview**

Consumer segment revenue represented 37.5% of 2006 consolidated            revenues. The components of Consumer segment revenue are as follow (amounts in            thousands):

 

|                           |   |    |   | Percentage |
|--------------------------------|--------|---------|--------|------------|
|                           |   | 2006    |   | 2005       |   | Change |
| Voice                          | $      | 45,625  |   | 46,821     |   | (2.6%) |
| Video                          |   | 90,226  |   | 84,731     |   | 6.5% |
| Data                           |   | 29,406  |   | 25,313     |   | 16.2% |
| Wireless                       |   | 13,694  |   | 6,063      |   | 125.9% |
| Total Consumer segment revenue | $      | 178,951 |   | 162,928    |   | 9.8% |

 

Consumer segment Cost of Goods Sold represented 42.8% of 2006            consolidated Cost of Goods Sold. The components of Consumer segment Cost of Goods Sold            are as follows (amounts in thousands):

|                                      |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|
|                                      |   | 2006   |   | 2005   |   | Percentage Change |
| Voice                                     | $      | 20,264 |   | 21,022 |   | (3.6%) |
| Video                                     |   | 30,573 |   | 28,557 |   | 7.1% |
| Data                                      |   | 2,167  |   | 5,365  |   | (59.6%) |
| Wireless                                  |   | 13,885 |   | 5,818  |   | 138.7% |
| Total Consumer segment Cost of Goods Sold | $      | 66,889 |   | 60,762 |   | 10.1% |

 

 

62

 

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Selected key performance indicators for our Consumer segment            follow:

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | December 31, |   | Percentage |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 2006         |   | 2005       |   | Change |
| Voice:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |         |   |       |   |   |
| Long-distance subscribers1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 89,800       |   | 95,000     |   | (5.5%) |
| Long-distance minutes carried (in millions)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 141.9        |   | 163.0      |   | (12.9%) |
| Total local access lines in                            service2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 66,200       |   | 68,400     |   | (3.2%) |
| Local access lines in service on GCI                            facilities2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | 31,400       |   | 21,700     |   | 44.7% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |         |   |       |   |   |
| Video:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |         |   |       |   |   |
| Basic subscribers3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 124,000      |   | 122,600    |   | 1.1% |
| Digital programming tier                            subscribers4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 58,700       |   | 53,700     |   | 9.3% |
| HD/DVR converter boxes5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 29,200       |   | 12,500     |   | 133.6% |
| Homes passed                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 219,900      |   | 215,000    |   | 2.3% |
| Average monthly gross revenue per                            subscriber6                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | $61.57       |   | $59.45     |   | 3.6% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |         |   |       |   |   |
| Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |         |   |       |   |   |
| Cable modem subscribers7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 78,500       |   | 70,800     |   | 10.9% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |         |   |       |   |   |
| Wireless:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |   |       |   |   |
| Wireless lines in service8                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 24,400       |   | 15,900     |   | 53.5% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
| 1 A long-distance customer is defined as a                            customer account that is invoiced a monthly long-distance plan fee or                            has made a long-distance call during the month.

2 A local access line in service is defined                            as a revenue generating circuit or channel connecting a customer to the                            public switched telephone network.

3 A 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.

4 A 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.

5 An HD/DVR converter box is defined as one                            box rented by a digital programming or basic tier subscriber. A digital                            programming or basic tier subscriber is not required to rent an HD/DVR                            converter box to receive service.

6Year-to-date average                            monthly consumer video revenues divided by the average of consumer                            video basic subscribers at the beginning and 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. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |        |              |        |            |  |  |  |

**Consumer Segment Revenues**

The            decrease in voice revenue is primarily due to decreased long-distance minutes carried            for these customers. The decrease is partially off-set by a $446,000 or 9.1% increase            in support from the Universal Service Program in 2006 and a $300,000 increase in local            service revenue in 2006 due to the implementation of the monthly network access fee in            April 2005.

 

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

 

|   | **•** | A 23.9% increase in equipment rental revenue to $13.3                            million in 2006 primarily resulting from our customers’ increased                            use of digital distribution technology and an equipment rental rate                            increase effective primarily in January 2006, and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

63

 

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|   | **•** | A 4.2% increase in programming services revenue to $75.6                            million in 2006 primarily resulting from an increase in digital                            programming tier subscribers in 2006, and increased rates charged for                            certain cable services primarily effective in the first and fourth                            quarters of 2006. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            increase in data revenue is primarily due to a 9.7% increase in cable modem revenue to            $24.6 million and a 68.8% increase to $1.6 million in revenue earned from our            customers’ use of our Internet facilities in excess of that allowed by their plan            in 2006. The increase in cable modem revenue is primarily due to increased            subscribers.

 

The            increase in wireless revenue is primarily due to increased wireless            subscribers.

 

**Consumer Segment Cost of Goods Sold**

The            Consumer segment Cost of Goods Sold increase is primarily due to increased wireless            Cost of Goods Sold resulting from increased revenue and increased video Cost of Goods            Sold. The increased video Cost of Goods Sold is primarily due to the 2006 expiration of            arrangements with suppliers from which we earned rebates and refunds upon us meeting            specified goals, increased channels offered to our subscribers, and increased            subscribers. The increase in Cost of Goods Sold is partially off-set by decreased voice            Cost of Goods Sold primarily due to the following:

 

|   | **•** | Cost savings resulting from the increased deployment of                            DLPS lines during the year ended December 31, 2006, |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Decreased voice minutes carried, and |
|--------|------------|--------------------------------------|

|   | **•** | Reduced access costs resulting from the distribution and                            termination of our traffic on our own local access services network                            instead of paying other carriers to distribute and terminate our                            traffic. The statewide average cost savings is approximately $0.011 and                            $0.057 per minute for originating and terminating interstate and                            intrastate traffic, respectively. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            decrease in voice Costs of Goods Sold is partially off-set by the receipt in 2005 of            $9.1 million upon the settlement of four separate claims with AT&T and Alascom            pursuant to a master agreement of which $1.8 million reduced the Consumer segment voice            Cost of Goods Sold in 2005.

 

**Network Access Segment Overview**

Network            access segment revenue represented 34.9% of 2006 consolidated revenues. The components            of Network Access segment revenue are as follows (amounts in thousands):

 

|                                 |   |    |   | Percentage |
|--------------------------------------|--------|---------|--------|------------|
|                                 |   | 2006    |   | 2005       |   | Change |
| Voice                                | $      | 110,834 |   | 95,555     |   | 16.0% |
| Data                                 |   | 55,637  |   | 52,778     |   | 5.4% |
| Total Network Access segment revenue | $      | 166,471 |   | 148,333    |   | 12.2% |

 

Network            Access segment Cost of Goods Sold represented 23.8% of 2006 consolidated Cost of Goods            Sold. The components of Network Access segment Cost of Goods Sold are as follows            (amounts in thousands):

 

|                                                                       |   |   |   | Percentage |
|----------------------------------------------------------------------------|--------|--------|--------|------------|
|                                                                       |   | 2006   |   | 2005       |   | Change |
| Voice                                                                      | $      | 28,888 |   | 18,223     |   | 58.5% |
| Data                                                                       |   | 8,392  |   | 7,318      |   | 14.7% |
| Total Network Access segment Cost of Goods                            Sold | $      | 37,280 |   | 25,541     |   | 46.0% |
|                                                                       |   |   |   |       |   |   |

 

 

64

 

----

Selected key performance indicators for our Network Access segment            follow:

 

|                                                                                                                                                                                                                                                         |   | December 31, |   | Percentage |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|------------|
|                                                                                                                                                                                                                                                         |   | 2006         |   | 2005       |   | Change |
| Voice:                                                                                                                                                                                                                                                       |   |         |   |       |   |   |
| Long-distance minutes carried (in millions)                                                                                                                                                                                                                  |   | 1,317        |   | 1,073      |   | 22.7% |
|                                                                                                                                                                                                                                                         |   |         |   |       |   |   |
| Data:                                                                                                                                                                                                                                                        |   |         |   |       |   |   |
| Total Internet service provider access lines in                            service1                                                                                                                                                                          |   | 3,100        |   | 3,700      |   | (16.2%) |
|                                                                                                                                                                                                                                                         |   |
| 1 An 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            increase in voice revenue is primarily due to increased minutes carried for our other            common carrier customers partially off-set by a 4.7% decrease in our rate per minute on            minutes carried for other common carriers. 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%.

 

**Network Access Segment Cost of Goods Sold**

The            Network Access segment Cost of Goods Sold increase is primarily due to the            following:

 

|   | **•** | Increased voice minutes carried, and |
|--------|------------|--------------------------------------|

|   | **•** | Receipt in 2005 of $9.1 million upon the settlement of                            four separate claims with AT&T and Alascom pursuant to a master                            agreement of which $5.3 million reduced the Network Access segment                            voice Cost of Goods Sold in 2005. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Commercial Segment Overview**

Commercial segment revenue represented 22.2% of 2006 consolidated            revenues. The components of Commercial segment revenue are as follows (amounts in            thousands):

 

|                             |   |    |   | Percentage |
|----------------------------------|--------|---------|--------|------------|
|                             |   | 2006    |   | 2005       |   | Change |
| Voice                            | $      | 32,162  |   | 33,718     |   | (4.6%) |
| Video                            |   | 7,993   |   | 7,163      |   | 11.6% |
| Data                             |   | 63,276  |   | 63,592     |   | (0.5%) |
| Wireless                         |   | 2,498   |   | 1,190      |   | 109.9% |
| Total Commercial segment revenue | $      | 105,929 |   | 105,663    |   | 0.3% |

 

Commercial segment Cost of Goods Sold represented 30.6% of 2006            consolidated Cost of Goods Sold. The components of Commercial segment Cost of Goods            Sold are as follows (amounts in thousands):

 

|                                        |   | 2006   |   | 2005   |   | Percentage Change |
|---------------------------------------------|--------|--------|--------|--------|--------|-------------------|
| Voice                                       | $      | 20,426 |   | 19,481 |   | 4.9%              |
| Video                                       |   | 1,413  |   | 1,369  |   | 3.2%              |
| Data                                        |   | 23,422 |   | 21,926 |   | 6.8%              |
| Wireless                                    |   | 2,608  |   | 1,140  |   | 128.8%            |
| Total Commercial segment Cost of Goods Sold | $      | 47,869 |   | 43,916 |   | 9.0%              |

 

Selected key performance indicators for our Commercial segment            follow:

 

|                                                            |   | December 31, |   | Percentage |
|-----------------------------------------------------------------|--------|--------------|--------|------------|
|                                                            |   | 2006         |   | 2005       |   | Change |
| Voice:                                                          |   |         |   |       |   |   |
| Long-distance subscribers1                                      |   | 11,100       |   | 11,700     |   | (5.1%) |
| Total local access lines in                            service2 |   | 41,900       |   | 40,700     |   | 2.9% |

 

 

65

 

----

 

| Local access lines in service on GCI facilities                            2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 8,400  |   | 6,900  |   | 21.7%  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Long-distance minutes carried (in millions)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 131.8  |   | 138.9  |   | (5.1%) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |
| Data:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |
| Cable modem subscribers3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 7,800  |   | 6,500  |   | 20.0%  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |
| Wireless:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |
| Wireless lines in service4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 4,600  |   | 3,000  |   | 53.3%  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |
| 1 A long-distance customer is defined as a                            customer account that is invoiced a monthly long-distance plan fee or                            has made a long-distance call during the month.

2 A local access line in service is defined                            as a revenue generating circuit or channel connecting a customer to the                            public switched telephone network.

3 A 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 minutes carried for our            Commercial segment customers.

 

The            increase in video revenue is primarily due to a 27.4% or $1.2 million increase in            political advertising sales for the 2006 Alaska state-wide and local            elections.

 

The            decrease in data revenue is primarily due to a $4.6 million or 31.7% decrease in            revenue earned from the lease and provision of management and maintenance services on a            portion of our 800-mile fiber optic system capacity that extends from Prudhoe Bay to            Valdez via Fairbanks as described above. The decrease is partially off-set by            following:

 

|   | **•** | A $2.6 million increase to $14.7 million in private line                            and private network services due to increased circuits sold, |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | $2.1 million in revenue recognized for a special project                            completed in 2006, and |
|--------|------------|------------------------------------------------------------------------------------------------------------|

|   | **•** | A $738,000 or 4.5% increase in other special project                            revenues. |
|--------|------------|-------------------------------------------------------------------------------------------|

 

The            increase in wireless revenue is primarily due to increased wireless            subscribers.

 

**Commercial Segment Cost of Goods Sold**

The            Commercial segment Cost of Goods Sold increase is primarily due to the            following:

 

|   | **•** | $2.3 million in managed services Cost of Goods Sold                            recognized for a special project completed in 2006, |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $1.5 million or 128.4% increase in wireless Cost of                            Goods Sold resulting from increased revenue, |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Receipt in 2005 of $9.1 million upon the settlement of                            four separate claims with AT&T and Alascom pursuant to a master                            agreement of which $2.0 million reduced the Commercial segment                            long-distance Cost of Goods Sold in 2005, and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A 7.9% increase in managed services Cost of Goods Sold                            to $14.4 million primarily due to increased managed services revenue in                            2006 as compared to 2005. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            increase in Cost of Goods Sold is partially off-set by cost savings resulting from            increased deployment of DLPS lines during the year ended December 31, 2006 and            decreased voice minutes carried.

 

66

 

----

**Managed Broadband Segment Overview**

Managed            Broadband segment revenue and Cost of Goods Sold represented 5.4% and 2.8% of 2006            consolidated revenues and Cost of Goods Sold, respectively.

 

Selected key performance indicators for our Managed Broadband segment            follow:

 

|                        |   | December 31, |   | Percentage |
|-----------------------------|--------|--------------|--------|------------|
|                        |   | 2006         |   | 2005       |   | Change |
| Managed Broadband segment:  |   |         |   |       |   |   |
| SchoolAccess® customers |   | 48           |   | 45         |   | 6.7% |
| Rural health customers      |   | 21           |   | 21         |   | 0.0% |

 

**Managed Broadband Segment Revenues**

Managed            Broadband segment revenue, which includes data products only, increased 0.1% to $26.1            million in 2006. The increase is primarily due to increased multi-site and single-site            SchoolAccess® customers, increased circuits purchased by our rural            health customers, and increased single-site rural health customers in the last six            months of 2006 and a $358,000 contribution from the RCA to fund the construction of            rural wireless sites. The increase is partially off-set by decreased multi-site            SchoolAccess® customers in the first six months of 2006 and a rate            decrease for certain circuits purchased by our rural health customers in            2006.

 

**Managed Broadband Segment Cost of Goods Sold**

Managed            Broadband segment Cost of Goods Sold decreased $275,000 to $4.4 million from 2005 to            2006 primarily due to reduced satellite capacity costs in 2006.

 

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses increased 10.4% to $171.7            million in 2006 primarily due to the following:

 

|   | **•** | A $5.9 million increase in our share-based compensation                            expense due to the recognition of $3.5 million in share-based                            compensation expense following our adoption of SFAS No. 123(R) on                            January 1, 2006 and a $2.9 million increase in expense relating to the                            fair value of our share-based liability during 2006. The $6.6 million                            in share-based compensation expense was allocated to our reportable                            segments as follows (amounts in thousands): |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|                             |     | Reportable Segments |
|----------------------------------|----------|---------------------|
|                             | Consumer | Network Access      | Commercial | Managed Broadband | Total |
| Share-based compensation expense | $ 2,154  | 2,565               | 1,380 | 484 | 6,583 |
|                                  |          |                     |  |  |  |  |

 

|   | **•** | A $2.9 million increase in bad debt expense due to a                            decrease in the realization of a recovery from Verizon in 2006 as                            compared to 2005, |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $2.1 million increase in health insurance costs                            primarily resulting from a decreased reserve for incurred but not                            reported health insurance claims in 2005 to reflect historical                            experience that was not repeated in 2006 and increased medical claims                            in 2006, |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $1.7 million increase in bad debt expense due to a                            temporary slowdown in our collection process on our long-distance,                            local service and Internet invoices. The slowdown was due to the                            September 1, 2005 conversion to our unified order management and                            fulfillment, billing, customer service, cash application, and credit                            and collection system. Our ability to perform our collections process                            timely was significantly restored by December 31, 2006, and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $1.4 million increase in certain promotion expenses in                            2006. |
|--------|------------|-------------------------------------------------------------------------------------------|

             

The            selling, general and administrative expenses increase is partially off-set by the            following:

 

|   | **•** | A $3.1 million decrease in Managed Broadband                            segment’s bad debt expense primarily due to increased allowances                            for certain Managed Broadband segment customers in 2005 for which                            payments were received in 2006, |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $2.5 million decrease in labor costs in                            2006, |
|--------|------------|----------------------------------------------------------------------------|

|   | **•** | A $2.2 million decrease in our company-wide success                            sharing bonus accrual in 2006, and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------|

 

67

 

----

|   | **•** | A $1.4 million decrease in contract labor in 2006                            primarily due to a reduced number of contractors supporting our                            information technology systems. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As a            percentage of total revenues, selling, general and administrative expenses increased to            36.0% in 2006 from 35.1% in 2005, primarily due to the net increases described above            without a proportional increase in revenues.

 

**Restructuring Charge**

In            August 2005 we committed to a reorganization plan to more efficiently meet the demands            of technological and product convergence by realigning along customer lines rather than            product lines. The reorganization plan included integration of several functions            resulting in the layoff of 76 employees by November 30, 2005. During the year ended            December 31, 2005 we recognized a restructuring charge of $2.0 million for workforce            reduction costs across all functions. Total costs incurred under this plan were $2.1            million. The following table sets forth the restructuring charges by segment during            2005 (amounts in thousands):

|                                                                                               |   | Consumer |   | Network Access |   | Commer-cial |   | Managed Broadband |   | Total Reportable Segments |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|----------------|--------|-------------|--------|-------------------|--------|---------------------------|--------|
| Restructuring charge incurred through the year ending                            December 31, 2005 | $      | 660      |   | 737            |   | 417         |   | 153               |   | 1,967                     |   |

 

**Depreciation and Amortization Expense**

Depreciation and amortization expense increased 10.8% to $82.1 million            in 2006. The increase is primarily due to our $95.3 million investment in equipment and            facilities placed into service during 2005 for which a full year of depreciation was            recorded in 2006, the $83.4 million investment in equipment and facilities placed into            service during the year ended December 31, 2006 for which a partial year of            depreciation was recorded in 2006, and a $790,000 software impairment recognized in            2006 upon the closure of an operating segment.

 

**Other Expense, Net**

Other            expense, net of other income, decreased 16.7% to $33.1 million in 2006 primarily due to            the following:

 

|   | **•** | In August 2005, we finalized a $215.0 million Amended                            Senior Credit Facility to replace our May 21, 2004 Senior Credit                            Facility resulting in the following 2005 expenses: |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | We recognized a $2.8 million Loss on Early                            Extinguishment of Debt in 2005 resulting from termination of our                            satellite transponder capital lease, and |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | o | We recognized $1.8 million in Amortization and Write-off                            of Loan and Senior Notes Fees in 2005 because a portion of the Amended                            Senior Credit Facility was a substantial modification of the May 21,                            2004 Senior Credit Facility. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Senior Credit Facility deferred loan fee amortization                            expense decreased $502,000 or 73% in 2006 after the August 2005                            amendment, |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Interest income increased $1.2 million to $1.8 million                            in 2006 resulting from the increased average cash and cash equivalents                            and restricted cash balances in 2006, and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Interest expense decreased $820,000 due to construction                            period interest capitalization in 2006. |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------|

 

**Income Tax Expense**

Income            tax expense was $15.8 million in 2006 and $16.0 million in 2005. Our effective income            tax rate increased from 43.4% in 2005 to 46.1% in 2006 due to adjustments to deferred            tax assets and liabilities balances in 2005. Partially offsetting this decrease were            increases in nondeductible entertainment expenses in 2005.

 

**Cumulative Effect of a Change in Accounting Principle**

On            January 1, 2006 we adopted SFAS No. 123(R), “Share-Based Payment.” SFAS            123(R) requires us to estimate pre-vesting option forfeitures at the time of grant and            periodically revise those estimates in subsequent periods if actual forfeitures differ            from those estimates. We record share-based compensation expense only for those awards            expected to vest using an estimated forfeiture rate based on our historical pre-vesting            forfeiture data. Previously, we accounted for forfeitures as they occurred under the            pro forma disclosure provisions of SFAS 123 for periods prior to 2006. The transition            impact (benefit) of adopting SFAS No. 123(R) attributed to accruing for expected            forfeitures on outstanding share-based awards totaled $108,000, which was reduced by            income tax expense of $44,000, and is reported as a

 

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cumulative effect of a change in accounting principle during the year            ended December 31, 2006 in the accompanying Consolidated Income Statements.

 

**Multiple System Operator (“MSO”) 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 for the years ended December 31,            2007, 2006 and 2005 follows (amounts in thousands):

 

|                                                                          |   | 2007           |   | 2006           |   | 2005           |   |
|-------------------------------------------------------------------------------|--------|----------------|--------|----------------|--------|----------------|--------|
| Line extensions                                                               | $      | 62,984         |   | 24,126         |   | 3,877          |   |
| Customer premise equipment                                                    |   | 23,554         |   | 14,771         |   | 18,600         |   |
| Scalable infrastructure                                                       |   | 4,749          |   | 1,062          |   | 2,702          |   |
| Upgrade/rebuild                                                               |   | 1,451          |   | 4,145          |   | 11,761         |   |
| Support capital                                                               |   | 1,317          |   | 1,146          |   | 935            |   |
| Commercial                                                                    |   | 392            |   | 138            |   | 331            |   |
| Sub-total                                                                     |   | 94,447         |   | 45,388         |   | 38,206         |   |
| Remaining reportable segments capital                            expenditures |   |  

62,850 |   |  

59,672 |   |  

42,945 |   |
|                                                                          | $      | 157,297        |   | 105,060        |   | 81,151         |   |

 

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 December 31, 2007, 2006 and 2005 we had 129,000, 125,300 and            123,500 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 December 31, 2007, 2006 and 2005 we had 295,200, 249,300 and 236,300            revenue generating units, respectively.

 

***Liquidity and Capital Resources***

 

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

 

Cash            flows from operating activities totaled $108.8 million for the year ended December 31,            2007 as compared to $122.8 million for the year ended December 31, 2006.

 

Other            sources of cash during the year ended December 31, 2007 included a $60.0 million            borrowing on our Senior Credit Facility, $4.6 million of collateral released and            returned to us on behalf of GCI, and $3.3 million from GCI’s issuance of its            Class A common stock. Other uses of cash during the year ended December 31, 2007            included expenditures of $151.3 million for property and equipment, including            construction in progress, $19.5 million to acquire Alaska DigiTel, $15.2 million to            repay a note payable and convertible debenture previously owed by Alaska DigiTel,            repayment of $12.0 million of our Senior Credit Facility, purchase of $15.3 million of            common stock to be retired and held for corporate purposes on behalf of GCI, and the            purchase of $7.2 million of other assets and intangible assets.

 

Working            capital totaled $35.3 million at December 31, 2007, a $59.1 million decrease as            compared to $94.4 million at December 31, 2006. The decrease is primarily due to cash            paid for capital expenditures, the Alaska DigiTel acquisition and debt            repayment.

 

Net            receivables increased $20.4 million from December 31, 2006 to December 31, 2007            primarily due to payment timing on trade receivables from several large customers, an            increase in amounts due from the Universal Service Administrative Company            (“USAC”), the addition of $6.3 million net receivables due to the            acquisition of Alaska DigiTel, and an increase

 

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in            trade receivables for Managed Broadband services provided to hospitals and health            clinics due to the timing of payments received.

 

Senior Notes

We have            outstanding Senior Notes of $317.0 million at December 31, 2007. We pay interest of            7.25% on the Senior Notes and they are due in 2014. The Senior Notes are carried on our            Consolidated Balance Sheet net of the unamortized portion of the discount, which is            being amortized to Interest Expense over the term of the Senior Notes.

 

The            Senior Notes are not redeemable prior to February 15, 2009. At any time on or after            February 15, 2009, the Senior Notes are redeemable at our option, in whole or in part,            on not less than thirty days nor more than sixty days notice, at the following            redemption prices, plus accrued and unpaid interest (if any) to the date of            redemption:

 

| If redeemed during the twelve month period commencing                            February 1 of the year indicated: |  

Redemption Price |
|--------------------------------------------------------------------------------------------------------------------|--------------------------|
| 2009                                                                                                               | 103.625%                 |
| 2010                                                                                                               | 102.417%                 |
| 2011                                                                                                               | 101.208%                 |
| 2012 and thereafter                                                                                                | 100.000%                 |

 

The            Senior Notes restrict GCI, Inc. and certain of its subsidiaries from incurring debt,            but permits debt under the Senior Credit Facility and vendor financing as long as our            leverage ratio does not exceed 6.0 to one. In addition, certain other debt is permitted            regardless of our leverage ratio, including debt under the Senior Credit Facility not            exceeding (and reduced by certain stated items):

 

|   | **•** | $250.0 million, reduced by the amount of any                            prepayments, or |
|--------|------------|-----------------------------------------------------------------------------------------|

|   | **•** | 3.0 times earnings before interest, taxes, depreciation                            and amortization for the last four full fiscal quarters of GCI, Inc.                            and certain of its subsidiaries. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            Senior Notes limit our ability to make cash dividend payments.

 

Semi-annual interest payments of $11.6 million are payable in February            and August of each year.

 

We were            in compliance with all Senior Notes loan covenants at December 31, 2007.

 

Senior Credit Facility

In            September 2007 we exercised our right to add an Incremental Facility of up to $100.0            million to our existing Senior Credit Facility. The Incremental Facility was structured            in the form of a $55.0 million increase to the existing term loan component of our            Senior Credit Facility and a $45.0 million increase to the existing revolving loan            component of our Senior Credit Facility. The $100.0 million Incremental Facility will            become due under the same terms and conditions as set forth in the existing Senior            Credit Facility.

             

The            Senior Credit Facility which includes the incremental facility as discussed above            includes a $215.0 million term loan and a $100.0 million revolving credit facility with            a $25.0 million sublimit for letters of credit. Our term loan is fully drawn. We            borrowed $10.0 million under our revolving credit facility in December 2007, and we            have letters of credit outstanding totaling $4.2 million at December 31, 2007 which            leaves $85.8 million available at December 31, 2007 to draw under the revolving credit            facility if needed. The term and revolving loan portions of our Senior Credit Facility            are due in 2012 and 2011, respectively. In 2008 we have borrowed an additional $20.0            million under our revolving credit facility.

 

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The            Incremental Facility increased the interest rate on the term loan component of our            Senior Credit Facility from LIBOR plus 1.50% to LIBOR plus 2.00%. The interest rate on            the revolving loan component of the previous Senior Credit Facility was LIBOR plus a            margin dependent upon our Total Leverage Ratio ranging from 1.00% to 1.75%. The            Incremental Facility increased the revolving credit facility interest rate for our            Senior Credit Facility to LIBOR plus the following applicable margin dependent upon our            Total Leverage ratio:

 

| Total Leverage Ratio (as defined)                |   | Applicable Margin |   |
|--------------------------------------------------|--------|-------------------|--------|
| >3.75                                         |   | 2.25%             |   |
| >3.25 but                            <3.75 |   | 2.00%             |   |
| >2.75 but                            <3.25 |   | 1.75%             |   |
| <2.75                                         |   | 1.50%             |   |

 

The            annual commitment fee we are required to pay on the unused portion of the commitment is            0.375%.

 

The            Senior Credit Facility Total Leverage Ratio (as defined) limit is 4.50:1.0, the Senior            Leverage Ratio (as defined) limit is 2.25:1.0, and the Fixed Charge Coverage Ratio (as            defined) must be less than 1.0:1.0subject to certain exceptions.            On May 7, 2007 our Senior Credit Facility was amended to allow the exclusion of up to            $100.0 million of capital expenditures in aggregate from Fixed Charges (as defined)            during the Excluded Capital Expenditures Period (as defined) beginning on May 7, 2007            and ending September 30, 2009.

 

The            Incremental Facility was a substantial modification of a portion of our existing Senior            Credit Facility resulting in a $348,000 write-off of previously deferred loan fees            during the year ended December 31, 2007 in our Consolidated Income Statement. Deferred            loan fees of $312,000 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 Incremental Facility, we paid bank fees and other expenses of            $519,000 during the year ended December 31, 2007 of which $263,000 were written off in            the year ended December 31, 2007 and $256,000 were deferred and will be amortized over            the remaining life of the Senior Credit Facility.

 

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. At December 31, 2007 we            were in compliance with all loan covenants relating to our Senior Credit            Facility.

 

We            expect to increase the amount available to borrow under our Senior Credit Facility            early in the second quarter of 2008 to ensure we have access to the capital required            for our acquisitions and planned capital expenditures.

 

Total Long-term Debt

As of            December 31, 2007 maturities of long-term debt were as follows (amounts in            thousands):

 

| Years ending December 31, |   |    |   |
|---------------------------|--------|---------|--------|
| 2008                      | $      | 2,283   |   |
| 2009                      |   | 2,181   |   |
| 2010                      |   | 2,179   |   |
| 2011                      |   | 112,751 |   |
| 2012                      |   | 101,690 |   |
| 2013 and thereafter       |   | 320,305 |   |
| Total                     | $      | 541,389 |   |

 

Capital Lease Obligation

On            March 31, 2006, through our subsidiary GCC we entered into an agreement to lease            transponder capacity on Intelsat’s Galaxy 18 spacecraft that is expected to be            launched May 3, 2008. We will also lease capacity on the Horizons 1 satellite, which is            owned jointly by Intelsat and JSAT International, Inc. The leased capacity is expected            to replace our existing transponder capacity on Intelsat’s Galaxy XR satellite            when it reaches its end of life.

 

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We will            lease C-band and Ku-Band transponders over an expected term of 14 years once the            satellite is placed into commercial operation in its assigned orbital location, and the            transponders meet specific performance specifications and are made available for our            use. We will record the capital lease obligation of $98.6 million and the addition to            our Property and Equipment when the satellite is made available for our use which is            expected to occur May 18, 2008.

 

A            summary of estimated future minimum lease payments for this lease follows (amounts in            thousands):

             

| Years ending December 31:    |   |    |
|------------------------------|--------|---------|
| 2008                         | $      | 6,510   |
| 2009                         |   | 11,160  |
| 2010                         |   | 11,160  |
| 2011                         |   | 11,160  |
| 2012                         |   | 11,160  |
| 2013 and thereafter          |   | 105,090 |
| Total minimum lease payments | $      | 156,240 |

 

Capital Expenditures

Our            cash expenditures for property and equipment, including construction in progress,            totaled $151.3 million and $96.0 million during the years ended December 31, 2007 and            2006, respectively. 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 expenditures for property and            equipment for our core operations, including construction in progress and excluding the            Galaxy 18 satellite transponder capacity lease discussed above and potential            acquisitions discussed earlier, to total $220.0 million to $230.0 million, depending on            available opportunities and the amount of cash flow we generate during 2008.

 

Planned            capital expenditures over the next five years include those necessary for the expansion            of Alaska DigiTel’s CDMA network, construction of our GSM network, maintenance of            existing facilities, growth of our long-distance, local access, cable and Internet            facilities, improving network integrity, continuing deployment of DLPS, adding new            products, and introducing other new facilities and automation to reduce            costs.

 

During            2007 Alaska DigiTel and GCI signed an agreement with Sprint Nextel to build-out Alaska            DigiTel's CDMA network to provide expanded roaming area coverage. If we fail to meet            the schedule, Sprint Nextel has the right to terminate the agreement and we may be            required to pay up to $16.0 million as liquidated damages. We expect to meet the            deadlines imposed by the build-out schedule and therefore expect our expenditures to            result in an expansion of our wireless facilities rather than payment of the liquidated            damages. To complete the CDMA network build-out, we signed an agreement to purchase            CDMA network equipment for $12.5 million which is expected to be paid in            2008.

 

On July            31, 2006, through our subsidiary GCC we entered into an agreement to purchase an IRU in            the Kodiak-Kenai Cable Company, LLC’s marine-based fiber optic cable system            linking Anchorage to Kenai, Homer, Kodiak and Seward, Alaska. The new system was placed            into service in December 2006. We accepted the first installment of our IRU capacity in            December 2006. We have committed to purchase a minimum of $5.0 million to $5.5 million            in additional IRU capacity in two installments through 2011.

 

We have            entered into an agreement to purchase hardware and software capable of providing            wireless service to small markets in rural Alaska as a reliable substitute for standard            wire line service. The agreement has a total commitment of $20.6 million. We paid a            $3.5 million down payment in 2007 and expect to pay $4.3 million, $9.0 million, and            $3.8 million during the years ended December 31, 2008, 2009, and 2010,            respectively.

 

In 2007            we entered into several agreements to purchase submarine cable, amplifiers and line            terminal equipment for our Southeast Alaska submarine fiber optic system project. In            addition to providing the equipment for the new submarine line, the contracts include            additional equipment to upgrade the Alaska United West submarine cable system and also            include an option to increase capacity on the Alaska United East submarine cable            system. The agreements have a total commitment of $25.3 million. We paid a $2.5 million            down payment in 2007 and expect to pay the remaining $22.8 million in 2008.

 

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Operating Leases

A            summary of estimated future minimum lease payments for operating leases follows            (amounts in thousands):

 

| Years ending December 31:    |   |   |   |   |   |
|------------------------------|--------|--------|--------|--------|--------|
| 2008                         | $      | 10,979 |   |   |   |
| 2009                         |   | 8,412  |   |   |   |
| 2010                         |   | 7,123  |   |   |   |
| 2011                         |   | 6,156  |   |   |   |
| 2012                         |   | 4,444  |   |   |   |
| 2013 and thereafter          |   | 18,315 |   |   |   |
| Total minimum lease payments | $      | 55,429 |   |   |   |

 

Share Repurchases

GCI’s Board of Directors has authorized a common stock buyback            program for the repurchase of GCI’s Class A and Class B common stock in order to            reduce its outstanding shares of Class A and Class B common stock. We pay for the stock            repurchases on GCI's behalf. GCI’s Board of Directors authorized us and we            obtained permission from our lenders for up to $80.0 million of repurchases through            December 31, 2007. GCI is authorized to continue the stock repurchases of up to $5.0            million per quarter indefinitely and to use stock option exercise proceeds, in            GCI’s discretion, to repurchase additional shares. If stock repurchases are less            than the total approved quarterly amount the difference may be carried forward and used            to repurchase additional shares in future quarters. During the year ended December 31,            2007 we repurchased on GCI's behalf 1,252,000 shares of its common stock at a cost of            $15.1 million. We do not expect further share repurchases in the near term. We will            likely curtail our share repurchases as a condition for increasing the availability            under our credit facilities. When we begin generating free cash flow we may continue            the repurchases subject to the availability under our credit facilities and the price            of GCI’s Class A and Class B common stock. The repurchases have and will continue            to comply with the restrictions of SEC Rule 10b-18.

 

Other Expenditures and Commitments

Effective January 1, 2007 we invested $29.5 million in Alaska DigiTel in            exchange for an 81.9% equity interest. We do not have voting control of Alaska DigiTel.            We funded the transaction from existing cash balances and by drawing down $15.0 million            under the revolving portion of our Senior Credit Facility. Additionally, we entered            into a revolving credit loan agreement with Alaska DigiTel effective January 1, 2007.            The loan agreement provides that Alaska DigiTel can draw, subject to certain            restrictions and financial covenants, up to $15.0 million of which all was drawn during            the year ended December 31, 2007. In January 2008 the revolving credit facility            available to Alaska DigiTel was increased to $25.0 million. In December 2007, we signed            a definitive agreement to acquire the remaining minority interest in Alaska DigiTel for            a total consideration of approximately $10.0 million.  This transaction is subject            to customary closing conditions, including regulatory approval, but is expected to            occur in the third quarter of 2008.

 

At            December 31, 2006 we had provided a $4.6 million bank depository account as collateral            for a term loan from a bank to Alaska DigiTel. The $4.6 million collateral was released            and returned to us in January 2007.

 

We have            an agreement with Alaska Airlines, Inc. (“Alaska Airlines”) to offer our            consumer and commercial customers who make qualifying purchases from us the opportunity            to accrue mileage awards in the Alaska Airlines Mileage Plan. The agreement as amended            has a remaining commitment at December 31, 2007 totaling $3.8 million.

 

As            previously described, in October 2007 we signed an agreement to purchase the stock of            the UUI and Unicom telecommunications subsidiaries of UCI for $40.0 million expected to            be paid upon closing. Additionally we may assume approximately $37.0 million in net            debt as part of the acquisition. We will fund the transaction from cash on hand, by            drawing down additional debt, or a combination of the two. This transaction will close            upon regulatory approval which is expected in the second or third quarter of            2008.

 

As            previously described, in December 2007 we signed a purchase agreement to acquire all of            the interests in Alaska Wireless for $13.0 million to $14.0 million, expected to be            paid upon closing. 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. We will fund the transaction from cash on hand, by drawing down            additional debt, or a combination of the two. This transaction will close upon            regulatory approval which is expected in the second or third quarter of            2008.

 

The            long-distance, local access, cable, Internet and wireless services industries continue            to experience substantial competition, regulatory uncertainty, and continuing            technological changes. Our future results of operations will be affected

 

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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.

 

***New Accounting Standards***

 

In            December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" which requires            the acquiring entity in a business combination to record all assets acquired and            liabilities assumed at their respective acquisition-date fair values, changes the            recognition of assets acquired and liabilities assumed arising from contingencies,            changes the recognition and measurement of contingent consideration, and requires the            expensing of acquisition-related costs as incurred. SFAS 141(R) also requires            additional disclosure of information surrounding a business combination, such that            users of the entity's financial statements can fully understand the nature and            financial impact of the business combination. We will implement SFAS No. 141(R) on            January 1, 2009 and we will apply it to any business combinations with an acquisition            date after January 1, 2009.

 

In            December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated            Financial Statements" which establishes accounting and reporting standards for            ownership interests in subsidiaries held by parties other than the parent, the amount            of consolidated net income attributable to the parent and to the noncontrolling            interest, changes in a parent's ownership interest and the valuation of retained            noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also            established reporting requirements that provide sufficient disclosures that clearly            identify and distinguish between the interests of the parent and the interests of the            noncontrolling owner. We will implement SFAS No. 160 on January 1, 2009. We do not            expect the adoption of this standard to have a material impact on our income statement,            financial position or cash flows.

 

In            September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" which provides            a definition of fair value, establishes a framework for measuring fair value, and            expands disclosures about fair value measurements for future transactions. SFAS 157 is            effective for us beginning January 1, 2008. We do not expect the adoption of this            standard to have a material impact on our income statement, financial position or cash            flows.

 

***Critical Accounting Policies***

 

Our            accounting and reporting policies comply with U.S. generally accepted accounting            principles (“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 year ended December 31,            2007 are described below.

 

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses            resulting from the inability of our customers to make required payments. We also            maintain an allowance for doubtful accounts based on our assessment of the likelihood            that our customers will satisfactorily comply with rules necessary to obtain            supplemental funding from the USAC for services provided by us under our packaged            communications offerings to hospitals, health clinics and rural school districts. We            base our estimates on the aging of our accounts receivable balances, financial health            of specific customers, regional economic data, changes in our collections process,            regulatory requirements, and our customers’ compliance with USAC            rules*.*If the financial condition of            our customers were to deteriorate or if they are unable to emerge from reorganization            proceedings, resulting in an impairment of their ability to make payments, additional            allowances may be required. If their financial condition improves or they emerge            successfully from reorganization

             

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proceedings, allowances may be reduced. Such allowance changes could            have a material effect on our consolidated financial condition and results of            operations.

 

Impairment and Useful Lives of Intangible Assets

We record all assets and liabilities acquired in purchase acquisitions,            including goodwill and other intangibles, at fair value as required by SFAS No. 141,            “Business Combinations.” Goodwill and indefinite-lived assets such as our            cable certificates and wireless licenses are not amortized but are subject, at a            minimum, to annual tests for impairment and quarterly evaluations of whether events and            circumstances continue to support an indefinite useful life as required by SFAS No.            142, “Goodwill and Other Intangible Assets.” Other intangible assets are            amortized over their estimated useful lives primarily using the straight-line method,            and are subject to impairment if events or circumstances indicate a possible inability            to realize the carrying amount as required by SFAS No. 142 and SFAS No. 144. The            initial goodwill and other intangibles recorded and subsequent impairment analysis            requires management to make subjective judgments concerning estimates of the            applicability of quoted market prices in active markets and, if quoted market prices            are not available and/or are not applicable, how the acquired asset will perform in the            future using a discounted cash flow analysis. Estimated cash flows may extend beyond            ten years and, by their nature, are difficult to determine over an extended timeframe.            Events and factors that may significantly affect the estimates include, among others,            competitive forces, customer behaviors and attrition, changes in revenue growth trends,            cost structures and technology, and changes in discount rates, performance compared to            peers, material and ongoing negative economic trends, and specific industry or market            sector conditions. In determining the reasonableness of cash flow estimates, we review            historical performance of the underlying asset or similar assets in an effort to            improve assumptions utilized in our estimates. In assessing the fair value of goodwill            and other intangibles, we may consider other information to validate the reasonableness            of our valuations including third-party assessments. These evaluations could result in            a change in useful lives in future periods and could result in write-down of the value            of intangible assets. Our cable certificates, wireless licenses and goodwill assets are            our only indefinite-lived intangible assets and because of the significance of our            cable certificate and goodwill assets to our consolidated balance sheet, our annual and            quarterly impairment analyses and quarterly evaluations of remaining useful lives are            critical. Any changes in key assumptions about the business and its prospects, changes            in market conditions or other externalities, or recognition of previously unrecognized            intangible assets for impairment testing purposes could result in an impairment charge            and such a charge could have a material adverse effect on our consolidated results of            operations.

 

Accruals for Unbilled Costs

We estimate unbilled long-distance services Cost of Goods Sold based            upon minutes of use carried through our network and established rates. We estimate            unbilled costs for new circuits and services, and network changes that result in            traffic routing changes or a change in carriers. Carriers that provide service to us            regularly make network changes that can lead to new, revised or corrected billings.            Such estimates are revised or removed when subsequent billings are received, payments            are made, billing matters are researched and resolved, tariffed billing periods lapse,            or when disputed charges are resolved. Revisions to previous estimates could either            increase or decrease costs in the year in which the estimate is revised which could            have a material effect on our consolidated financial condition and results of            operations.

 

Valuation Allowance for Net Operating Loss Deferred Tax            Assets

Our income tax policy provides for deferred income taxes to show the            effect of temporary differences between the recognition of revenue and expenses for            financial and income tax reporting purposes and between the tax basis of assets and            liabilities and their reported amounts in the financial statements in accordance with            SFAS No. 109, “Accounting for Income Taxes.” We have recorded deferred tax            assets of approximately $47.6 million associated with income tax net operating losses            that were generated from 1995 to 2005, and that expire from 2011 to 2025, and with            charitable contributions that were converted to net operating losses in 2006 and 2007,            and that expire in 2026 and 2027, respectively. Pre-acquisition income tax net            operating losses associated with acquired companies are subject to additional            deductibility limits. We have recorded deferred tax assets of approximately $3.1            million associated with alternative minimum tax credits that do not expire. Significant            management judgment is required in developing our provision for income taxes, including            the determination of deferred tax assets and liabilities and any valuation allowances            that may be required against the deferred tax assets. We have not recorded a valuation            allowance on the deferred tax assets as of December 31, 2007 based on            management’s belief that future reversals of existing taxable temporary            differences and estimated future taxable income exclusive of reversing temporary            differences and carryforwards, will, more likely than not, be sufficient to realize the            benefit of these assets over time. In the event that actual results differ from these            estimates or if our historical trends change, we may be required to record a valuation            allowance on deferred tax assets, which could have a material adverse effect on our            consolidated financial position or results of operations.

 

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Other            significant accounting policies, not involving the same level of measurement            uncertainties as those discussed above, are nevertheless important to an understanding            of the financial statements. Policies related to revenue recognition, share-based            payments, 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 in the accompanying “Notes to            Consolidated Financial Statements.”

 

***Geographic Concentration and the Alaska Economy***

 

We            offer voice, data and wireless telecommunication services and video services to            customers primarily throughout Alaska. Because of this geographic concentration, growth            of our business and of our operations depends upon economic conditions in Alaska. The            economy of Alaska is dependent upon the natural resource industries, and in particular            oil production, as well as investment earnings, tourism, government, and United States            military spending. Any deterioration in these markets could have an adverse impact on            us. All of the federal funding and the majority of investment revenues are dedicated            for specific purposes, leaving oil revenues as the primary source of general operating            revenues. In fiscal 2007 the State of Alaska reported that oil revenues, federal            funding and investment revenues supplied 43%, 16% and 31%, respectively, of the            state’s total revenues. In fiscal 2008 state economists forecast that            Alaska’s oil revenues, federal funding and investment revenues will supply 50%,            19% and 23%, respectively, of the state’s total projected revenues. These            forecasts incorporate Alaska’s Clear and Equitable Share (ACES) production tax,            passed by the Alaska legislature in November 2007 and signed into law in December 2007.            With the new production tax, the revenue estimates are significantly higher than they            would have been under the prior law.

 

The            volume of oil transported by the TransAlaska Oil Pipeline System over the past 20 years            has been as high as 2.0 million barrels per day in fiscal 1988. Production has been            declining over the last several years with an average of 0.715 million barrels produced            per day in fiscal 2007. The state forecasts the production rate to decline from 0.731            million barrels produced per day in fiscal 2008 to 0.680 million barrels produced per            day in fiscal 2018.

 

Market            prices for North Slope oil averaged $61.63 in fiscal 2007 and are forecasted to average            $72.64 in fiscal 2008. The closing price per barrel was $87.31 on February 1, 2008. To            the extent that actual oil prices vary materially from the state’s projected            prices, the state’s projected revenues and deficits will change. Every $5 change            in the price per barrel of oil is forecasted to result in an increase of at least            $552.0 million in the state’s fiscal 2008 revenue. The production policy of the            Organization of Petroleum Exporting Countries and its ability to continue to act in            concert represents a key uncertainty in the state’s revenue forecast.

 

The            State of Alaska maintains the Constitutional Budget Reserve Fund (“CBRF”)            that is intended to fund budgetary shortfalls. If the state’s current projections            are realized and no surpluses are deposited into the CBRF it will be depleted in 2016.            The date the CBRF is depleted is highly influenced by the price of oil. If the fund is            depleted, aggressive state action will be necessary to increase revenues and reduce            spending in order to balance the budget. The governor of the State of Alaska and the            Alaska legislature continue to evaluate cost cutting and revenue enhancing            measures.

 

Should            new oil discoveries or developments not materialize or the price of oil become            depressed, the long term trend of continued decline in oil production from the Prudhoe            Bay area is inevitable with a corresponding adverse impact on the economy of the state,            in general, and on demand for telecommunications and cable television services, and,            therefore, on us, in particular. Periodically there are renewed efforts to allow            exploration and development in the Arctic National Wildlife Refuge            (“ANWR”). The United States Energy Information Agency has estimated that it            could take nine years to begin oil field drilling after approval of ANWR            exploration.

 

No            assurance can be given that the driving forces in the Alaska economy, and in            particular, oil production, will continue at appropriate levels to provide an            environment for expanded economic activity.

 

No            assurance can be given that oil companies doing business in Alaska will be successful            in discovering new fields or further developing existing fields which are economic to            develop and produce oil with access to the pipeline or other means of transport to            market. We are not able to predict the effect of changes in the price and production            volumes of North Slope oil on Alaska’s economy or on us.

 

76

 

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Deployment of a natural gas pipeline from the State of Alaska’s            North Slope to the Lower 48 States has been proposed to supplement natural gas            supplies. The economic viability of a natural gas pipeline depends upon the price of            and demand for natural gas. The Governor of the State of Alaska introduced natural gas            pipeline legislation on March 2, 2007, which outlined project criteria that energy            companies must meet in exchange for inducement incentives from the State of Alaska to            build a natural gas pipeline. The state is currently in the process of evaluating            proposals from various commercial entities. Such a project could have a positive impact            on the State of Alaska’s revenues and could provide a substantial stimulus to the            Alaska economy.

 

Development of the ballistic missile defense system project has had a            significant impact on Alaskan telecommunication requirements. The system is a fixed,            land-based, non-nuclear missile defense system with a land and space based detection            system capable of responding to limited strategic ballistic missile threats to the            United States. The system includes deployment of up to 100 ground-based interceptor            silos and battle management command and control facilities at Fort Greely,            Alaska.

 

The            United States Army Corps of Engineers awarded a construction contract and construction            of test bed facilities began in 2002. As of January 2008 a total of twenty-one            ground-based missile interceptors have been placed in underground silos. The Missile            Defense Agency is reported to expect to emplace up to thirty interceptors in Alaska by            2009.

 

Tourism, air cargo, and service sectors have helped offset the            prevailing pattern of oil industry downsizing that has occurred during much of the last            several years.

 

We            have, since our entry into the telecommunication marketplace, aggressively marketed our            services to seek a larger share of the available market. The customer base in Alaska is            limited, however, with a population of approximately 670,000 people. The State of            Alaska’s population is distributed as follows:

 

|   | **•** | 42% are located in the Municipality of                            Anchorage, |
|--------|------------|------------------------------------------------------------------------------|

|   | **•** | 13% are located in the Fairbanks North Star                            Borough, |
|--------|------------|---------------------------------------------------------------------------------|

|   | **•** | 12% are located in the Matanuska-Susitna                            Borough, |
|--------|------------|------------------------------------------------------------------------------|

|   | **•** | 8% are located in the Kenai Peninsula                            Borough, |
|--------|------------|---------------------------------------------------------------------------|

|   | **•** | 5% are located in the City and Borough of Juneau,                            and |
|--------|------------|----------------------------------------------------------------------------------|

|   | **•** | The remaining 20% are located in other communities                            across the State of Alaska. |
|--------|------------|-----------------------------------------------------------------------------------------------------------|

 

**Seasonality**

 

Revenue            derived from our long-distance services product in our Network Access segment have            historically been highest in the summer months because of temporary population            increases attributable to tourism and increased seasonal economic activity such as            construction, commercial fishing, and oil and gas activities. Our long-distance            services product in our Consumer and Commercial segments and our other products in all            our segments do not exhibit significant seasonality. Our ability to implement            construction projects is hampered during the winter months because of cold            temperatures, snow and short daylight hours.

 

**Off-Balance Sheet Arrangements**

 

We have            not created, and are not party to, any special-purpose or off-balance sheet entities            for the purpose of raising capital, incurring debt or operating parts of our business            that are not consolidated into our financial statements. We do not have any            arrangements or relationships with entities that are not consolidated into our            financial statements that are reasonably likely to materially affect our liquidity or            the availability of our capital resources.

 

77

 

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**Schedule of Certain Known Contractual Obligations**

 

The            following table details future projected payments associated with certain known            contractual obligations as of December 31, 2007:

 

|                                          |   | Payments Due by Period |
|-----------------------------------------------|--------|------------------------|
|                                          |   | Total                  | Less than 1 Year | 1 to 3

Years | 4 to 5

Years | More Than 5 Years |
|                                          |   | (Amounts in thousands) |
| Long-term debt                                | $      | 541,389                | 2,283 | 4,360 | 214,441 | 320,305 |
| Interest on long-term debt                    |   | 215,754                | 38,580 | 76,628 | 65,746 | 34,800 |
| Capital lease obligations, including interest |   | 163,199                | 6,981 | 23,389 | 23,152 | 109,677 |
| Operating lease commitments                   |   | 55,429                 | 10,979 | 15,535 | 10,600 | 18,315 |
| Purchase obligations                          |   | 74,828                 | 60,028 | 14,800 | --- | --- |
| Other                                         |   | 66,500                 | 63,500 | 3,000 | --- | --- |
| Total contractual obligations                 | $      | 1,117,099              | 182,351 | 137,712 | 313,939 | 483,097 |

 

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 on the            Senior Credit Facility 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            accompanying “Notes to Consolidated Financial Statements.”

 

Capital            lease obligations include our obligation to lease transponder capacity on Galaxy 18,            which is expected to be launched on May 3, 2008 and placed into service on May 18,            2008. For a discussion of our capital and operating leases, see note 15 in the            accompanying “Notes to Consolidated Financial Statements.”

 

Purchase obligations include a commitment to purchase hardware and            software capable of providing wireless service to small markets in rural Alaska of            $17.1 million, a commitment to purchase submarine cable, amplifiers and line terminal            equipment of $22.8 million, a commitment to purchase additional capacity through an IRU            purchase of fiber of $5.0 million, a commitment to purchase CDMA network equipment of            $12.5 million for the build-out of Alaska DigiTel's CDMA network, and a remaining $3.8            million commitment for our Alaska Airlines agreement as further described in note 15 in            the accompanying “Notes to Consolidated Financial Statements.” The            contracts associated with these commitments are non-cancelable. Purchase obligations            also include open purchase orders for goods and services for capital projects and            normal operations totaling $12.9 million which are not included in our Consolidated            Balance Sheets at December 31, 2007, because the goods had not been received or the            services had not been performed at December 31, 2007. The open purchase orders are            cancelable.

 

Other            consists of our commitments to acquire the remaining minority interest in Alaska            DigiTel for approximately $10.0 million, UUI and Unicom for approximately $40.0            million, and Alaska Wireless for approximately $16.0 million to $17.0            million.

 

**Regulatory Developments**

 

See            “Part I — Item 1 — Business — Regulation” for more            information about regulatory developments affecting us.

 

**Inflation**

 

We do            not believe that inflation has a significant effect on our operations.

 

***Item 7A. Quantitative and Qualitative Disclosures about Market            Risk***

 

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

 

78

 

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Our            Senior Credit Facility carries interest rate risk. Amounts borrowed under this            Agreement bear interest at LIBOR plus 2.0% or less depending upon our Total Leverage            Ratio (as defined). Should the LIBOR rate change, our interest expense will increase or            decrease accordingly. As of December 31, 2007, we have borrowed $220.8 million subject            to interest rate risk. On this amount, each 1% increase in the LIBOR interest rate            would result in $2,208,000 of additional gross interest cost on an annualized            basis.

 

***Item 8. Consolidated Financial Statements and Supplementary            Data***

 

Our            consolidated financial statements are filed under this Item, beginning on page 83. Our            supplementary data is filed under Item 7, beginning on page 49.

 

***Item 9. Changes In and Disagreements With Accountants on            Accounting and Financial Disclosure***

 

None.

 

***Item 9A. Controls and Procedures***

 

**(a)            Evaluation of Disclosure Controls and Procedures**

 

We            maintain disclosure controls and procedures that are designed to ensure that            information required to be disclosed by us in reports that we file or submit under the            Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed,            summarized and reported as specified in the SEC’s rules and forms. As of the end            of the period covered by this Annual Report on Form 10-K, we carried out an evaluation            of the effectiveness of the design and operation of our “disclosure controls and            procedures” (as defined in Exchange Act Rule 13a - 15(e)) 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 “Management’s Report on            Internal Control Over Financial Reporting" (Item 9A.(b)), we have identified material            weaknesses in our internal control over financial reporting (as defined in Exchange Act            Rule 13a-15(f)). Because of these material weaknesses, our management, including our            Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure            controls and procedures were not effective as of December 31, 2007.

 

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

 

**(b)            Management’s Report on Internal Control Over Financial Reporting**

 

Our            management is responsible for establishing and maintaining adequate internal control            over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under            the supervision and with the participation of our management, including our Chief            Executive Officer and our Chief Financial Officer, we conducted an evaluation of the            effectiveness of our internal control over financial reporting based on the framework            in*Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway            Commission (COSO).

 

We            acquired Alaska DigiTel during 2007, and have excluded from our assessment of the            effectiveness of our internal control over financial reporting as of December 31, 2007,            Alaska DigiTel’s internal control over financial reporting associated with total            assets of $57.3 million and total revenues of $28.5 million included in our            consolidated financial statements as of and for the year ended December 31,            2007.

 

Based            on our evaluation of the effectiveness of our internal control over financial            reporting, our management concluded that as of December 31, 2007, we did not maintain            effective internal control over financial reporting due of the existence of material            weaknesses. A material weakness is a control deficiency, or a combination of            deficiencies, in internal control over financial reporting, such that there is a            reasonable possibility that a material misstatement of the company's annual or interim            financial statements will not be prevented or detected on a timely basis. The material            weaknesses in internal control over financial reporting that existed as of December 31,            2007 were as follows:

 

79

 

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*Information Technology Program Development and Change Controls over            the Unified Billing System and Related Monitoring Controls -*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 to detect and correct errors            that could be material to annual or interim financial statements. As a result of these            deficiencies, errors existed in the Company's accounts receivable and revenues that            were corrected prior to the issuance of the 2007 consolidated financial            statements.

             

*Share-Based Payment Arrangements*– 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 Statement of Financial Accounting Standard 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 the 2007 consolidated            financial statements.

 

This            annual report does not include an auditor's attestation report regarding the            effectiveness of our internal control over financial reporting and our independent            registered public accounting firm has not attested to management's report on our            internal control over financial reporting.

 

**(c)            Remediation of Material Weaknesses in Internal Control Over Financial            Reporting**

 

Subsequent to December 31, 2007, we plan to remediate the material            weakness associated with the unified billing system by taking the following            actions:

 

|   | **•** | We will enhance the design of our detective monitoring                            control over of the recording of receivables and revenues                            by: |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

1) Performing the monitoring at a level of precision to detect all            transactions that could aggregate to a material component of the account balances,            and

2) Ensuring differences identified during the monitoring process are            resolved in a timely manner, and

|   | **•** | With regards to our system development and change                            controls we will incorporate more thorough end-user testing of                            developments and changes to ensure the outputs of transactions                            processed are recorded correctly in the general ledger before the                            system changes are implemented |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Subsequent to December 31, 2007, we plan to finalize remediation of the            share-based payments material weakness by taking the following actions:

 

|   | **•** | Independently recalculate shared-based compensation                            expense on a sample of options and restricted stock awards on a                            quarterly basis and compare the expense to the amounts reported by our                            stock option plan administration software to validate correct settings                            were entered into the software. This independent verification will be                            reviewed and approved on a quarterly basis, and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Require our staff to continue to attend training related                            to the application of SFAS No. 123(R),*Share-Based Payment,*and                            related interpretations and obtain further training in using our stock                            option plan administration software as appropriate. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We            cannot assure you that these remediation efforts will be successful or that our            internal control over financial reporting will be effective in accomplishing all            control objectives all of the time. See “Part I — Item 1A — Risk            Factors.”

 

**(d)            Changes in Internal Control Over Financial Reporting**

 

As a            result of the material weakness related to Share-Based Payment Arrangements reported in            Form 10-Q for the period ending June 30, 2007, we began taking steps toward remediation            of this control deficiency. During the fourth quarter of 2007 we made the following            changes in internal control:

 

|   | **•** | We reorganized and reassigned the accounting duties                            related to share-based compensation expense, and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------|

 

80

 

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|   | **•** | Our accounting personnel attended training sessions                            related to SFAS No. 123(R),*Share-Based                            Payment,*and our stock option plan                            administration software. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Although we began remediation of the material weakness during the fourth            quarter, we have not had sufficient time to fully implement the control changes            necessary to completely remediate the Share-Based Payment Arrangements material            weakness described above.

 

There            were no other changes in our internal control over financial reporting (as defined in            Rules 13a-13(f) and 15d-15(f) of the Exchange Act) identified in connection with the            evaluation of our controls performed during the quarter ended December 31, 2007 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 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 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.

 

***Item 9B. Other Information***

 

None.

 

**Part III**

 

Items            10, 11, 12, 13 and 14 are omitted per General Instruction I(1)(a) and (b) of Form            10-K.

 

 

81

 

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**Part IV**

 

***Item 15. Exhibits, Consolidated Financial Statement            Schedules***

 

| (l) Consolidated Financial Statements                                     |                                                                                                                                                                                                                       |   |   |   | Page No.            |
|---------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------|
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
| Included in Part II of this Report:                                       |                                                                                                                                                                                                                       |   |   |   |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
|                                                                      | Report of Independent Registered Public Accounting                            Firm                                                                                                                                         |   |   |   | 83                  |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
|                                                                      | Consolidated Balance Sheets, December 31, 2007 and                            2006                                                                                                                                         |   |   |   | 84 — 85  |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
|                                                                      | Consolidated Income Statements, years ended December 31,                            2007, 2006 and 2005                                                                                                                    |   |   |   | 86                  |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
|                                                                      | Consolidated Statements of Stockholder’s Equity,                            years ended December 31, 2007, 2006 and 2005                                                                                             |   |   |   | 87                  |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
|                                                                      | Consolidated Statements of Cash Flows, years ended                            December 31, 2007, 2006 and 2005                                                                                                             |   |   |   | 88                  |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
|                                                                      | Notes to Consolidated Financial Statements                                                                                                                                                                                 |   |   |   | 89 — 125 |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
| (2) Consolidated Financial Statement                            Schedules |                                                                                                                                                                                                                       |   |   |   |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
|                                                                      | Schedules are omitted, as they are not required or are                            not applicable, or the required information is shown in the applicable                            financial statements or notes thereto. |   |   |   |                |
|                                                                      |                                                                                                                                                                                                                       |   |   |   |                |
| (3) Exhibits                                                              |                                                                                                                                                                                                                       |   |   | 126    |
|                                                                           |                                                                                                                                                                                                                            |        |        |        |                     |  |

 

82

 

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**Report of Independent Registered Public Accounting            Firm**

 

The            Board of Directors and Stockholders

GCI,            Inc.:

 

We have            audited the accompanying consolidated balance sheets of GCI, Inc. and subsidiaries as            of December 31, 2007 and 2006, and the related consolidated statements of income,            stockholder’s equity, and cash flows for each of the years in the three-year            period ended December 31, 2007. These consolidated financial statements are the            responsibility of the Company’s management. Our responsibility is to express an            opinion on these consolidated financial statements based on our audits.

 

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

 

In our            opinion, the consolidated financial statements referred to above present fairly, in all            material respects, the financial position of GCI, Inc. and subsidiaries as of December            31, 2007 and 2006, and the results of their operations and their cash flows for each of            the years in the three-year period ended December 31, 2007, in conformity with U.S.            generally accepted accounting principles.

 

As            discussed in Notes 1(v) and 10 to the consolidated financial statements, effective            January 1, 2006, the Company adopted the fair value method of accounting for            stock-based compensation as required by Statement of Financial Accounting Standards No.            123(R), Share-Based Payment. As discussed in Note 1(ae) to the consolidated financial            statements, the Company changed its method of quantifying errors in 2006 to conform to            Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements            When Quantifying Misstatements in Current Year Financial Statements.

 

(signed) KPMG LLP

Anchorage, Alaska

March            6, 2008

83

 

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**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 

 

|                                                                                                                                                                             |   |         |   |    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|---------|--------|
| (Amounts in thousands)                                                                                                                                                           |   | December 31, |   |
| ASSETS                                                                                                                                                                           |   | 2007         |   | 2006    |   |
|                                                                                                                                                                             |   |         |   |    |   |
| Current assets:                                                                                                                                                                  |   |         |   |    |   |
| Cash and cash equivalents                                                                                                                                                        | $      | 13,074       |   | 57,647  |   |
|                                                                                                                                                                             |   |         |   |    |   |
| Receivables                                                                                                                                                                      |   | 97,913       |   | 78,811  |   |
| Less allowance for doubtful receivables                                                                                                                                          |   | 1,657        |   | 2,922   |   |
| Net receivables                                                                                                                                                                  |   | 96,256       |   | 75,889  |   |
|                                                                                                                                                                             |   |         |   |    |   |
| Deferred income taxes                                                                                                                                                            |   | 5,734        |   | 20,685  |   |
| Prepaid expenses                                                                                                                                                                 |   | 5,356        |   | 5,729   |   |
| Inventories                                                                                                                                                                      |   | 2,541        |   | 3,362   |   |
| Notes receivable from related parties                                                                                                                                            |   | 31           |   | 1,080   |   |
| Property held for sale                                                                                                                                                           |   | ---          |   | 2,316   |   |
| Other current assets                                                                                                                                                             |   | 686          |   | 1,988   |   |
| Total current assets                                                                                                                                                             |   | 123,678      |   | 168,696 |   |
|                                                                                                                                                                             |   |         |   |    |   |
| Property and equipment in service, net of                            depreciation                                                                                                |   | 502,426      |   | 454,879 |   |
| Construction in progress                                                                                                                                                         |   | 69,409       |   | 29,994  |   |
| Net property and equipment                                                                                                                                                       |   | 571,835      |   | 484,873 |   |
|                                                                                                                                                                             |   |         |   |    |   |
| Cable certificates                                                                                                                                                               |   | 191,565      |   | 191,565 |   |
| Goodwill                                                                                                                                                                         |   | 42,181       |   | 42,181  |   |
| Wireless licenses                                                                                                                                                                |   | 25,757       |   | 1,497   |   |
| Other intangible assets, net of amortization                                                                                                                                     |   | 11,769       |   | 7,011   |   |
| Deferred loan and senior notes costs, net of                            amortization of $2,787 and $1,976 at December 31, 2007 and 2006,                            respectively |   | 6,202        |   | 7,091   |   |
| Other assets                                                                                                                                                                     |   | 9,399        |   | 6,456   |   |
| Total other assets                                                                                                                                                               |   | 286,873      |   | 255,801 |   |
| Total assets                                                                                                                                                                     | $      | 982,386      |   | 909,370 |   |

 

See            accompanying notes to consolidated financial statements.

 

 

                                                                                                                                               84                                                 (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCESHEETS**

**(Continued)**

 

|                                                                                                                                                                       |   |   |         |    |   |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------------|---------|--------|---------|
| (Amounts in thousands)                                                                                                                                                     |   |   | December 31, |    |
| LIABILITIES, MINORITY INTEREST AND STOCKHOLDER’S                            EQUITY                                                                                   |   |   | 2007         |    | 2006   |    |
|                                                                                                                                                                       |   |   |         |    |   |    |   |
| Current liabilities:                                                                                                                                                       |   |   |         |    |   |    |   |
| Current maturities of obligations under long-term debt                            and capital leases                                                                       |   | $      |         | 2,375   |   | 1,792   |   |
| Accounts payable                                                                                                                                                           |   |   |         | 35,747  |   | 28,404  |   |
| Deferred revenue                                                                                                                                                           |   |   |         | 16,600  |   | 16,566  |   |
| Accrued payroll and payroll related                            obligations                                                                                                 |   |   |         | 16,329  |   | 14,598  |   |
| Accrued interest                                                                                                                                                           |   |   |         | 8,927   |   | 8,710   |   |
| Accrued liabilities                                                                                                                                                        |   |   |         | 7,536   |   | 8,166   |   |
| Subscriber deposits                                                                                                                                                        |   |   |         | 877     |   | 489     |   |
| Total current liabilities                                                                                                                                                  |   |   |         | 88,391  |   | 78,725  |   |
|                                                                                                                                                                       |   |   |         |    |   |    |   |
| Long-term debt                                                                                                                                                             |   |   |         | 536,115 |   | 487,737 |   |
| Obligations under capital leases, excluding current                            maturities                                                                                  |   |   |         | 2,290   |   | 2,229   |   |
| Obligation under capital lease due to related party,                            excluding current maturity                                                                 |   |   |         | 469     |   | 561     |   |
| Deferred income taxes                                                                                                                                                      |   |   |         | 83,481  |   | 86,998  |   |
| Other liabilities                                                                                                                                                          |   |   |         | 13,241  |   | 12,725  |   |
| Total liabilities                                                                                                                                                          |   |   |         | 723,987 |   | 668,975 |   |
|                                                                                                                                                                       |   |   |         |    |   |    |   |
| Minority interest                                                                                                                                                          |   |   |         | 6,478   |   | ---     |   |
|                                                                                                                                                                       |   |   |         |    |   |    |   |
| Commitments and contingencies                                                                                                                                              |   |   |         |    |   |    |   |
| Stockholders’ equity:                                                                                                                                                |   |   |         |    |   |    |   |
| Class A common stock (no par). Authorized 10 shares;                            issued and outstanding 0.1 shares at December 31, 2007 and                            2006 |   |   |         | 206,622 |   | 206,622 |   |
| Paid-in capital                                                                                                                                                            |   |   |         | 37,804  |   | 27,744  |   |
| Retained earnings                                                                                                                                                          |   |   |         | 7,495   |   | 6,029   |   |
| Total stockholder’s equity                                                                                                                                           |   |   |         | 251,921 |   | 240,395 |   |
| Total liabilities, minority interest and                            stockholder’s equity                                                                             |   | $      |         | 982,386 |   | 909,370 |   |

 

See accompanying notes to consolidated financial statements.

 

85

 

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**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATED INCOME STATEMENTS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

 

| (Amounts in thousands)                                                                                                |   |   | 2007    |   |   | 2006    |   |   | 2005    |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
| Revenues                                                                                                              |   | $      | 520,311 |   |   | 477,482 |   |   | 443,026 |   |
|                                                                                                                  |   |   |    |   |   |    |   |   |    |   |
| Cost of goods sold (exclusive of depreciation and                            amortization shown separately below)     |   |   | 179,057 |   |   | 156,405 |   |   | 134,861 |   |
| Selling, general and administrative expenses                                                                          |   |   | 192,494 |   |   | 171,652 |   |   | 155,542 |   |
| Restructuring charge                                                                                                  |   |   | ---     |   |   | ---     |   |   | 1,967   |   |
| Depreciation and amortization expense                                                                                 |   |   | 86,327  |   |   | 82,099  |   |   | 74,126  |   |
| Operating income                                                                                                      |   |   | 62,433  |   |   | 67,326  |   |   | 76,530  |   |
|                                                                                                                  |   |   |    |   |   |    |   |   |    |   |
| Other income (expense):                                                                                               |   |   |    |   |   |    |   |   |    |   |
| Interest expense                                                                                                      |   |   | (36,125 | )      |   | (34,413 | )      |   | (34,116 | )      |
| Interest income                                                                                                       |   |   | 544     |   |   | 1,841   |   |   | 624     |   |
| Amortization and write-off of loan and senior note                            fees                                    |   |   | (1,423  | )      |   | (964    | )      |   | (3,406  | )      |
| Loss on termination of capital lease                                                                                  |   |   | ---     |   |   | ---     |   |   | (2,797  | )      |
| Other                                                                                                                 |   |   | 36      |   |   | 463     |   |   | ---     |   |
| Other expense, net                                                                                                    |   |   | (36,968 | )      |   | (33,073 | )      |   | (39,695 | )      |
|                                                                                                                  |   |   |    |   |   |    |   |   |    |   |
| Income before income tax expense and cumulative effect                            of a change in accounting principle |   |   | 25,465  |   |   | 34,253  |   |   | 36,835  |   |
|                                                                                                                  |   |   |    |   |   |    |   |   |    |   |
| Income tax expense                                                                                                    |   |   | 11,961  |   |   | 15,797  |   |   | 16,004  |   |
|                                                                                                                  |   |   |    |   |   |    |   |   |    |   |
| Income before cumulative effect of a change in                            accounting principle                        |   |   | 13,504  |   |   | 18,456  |   |   | 20,831  |   |
|                                                                                                                  |   |   |    |   |   |    |   |   |    |   |
| Cumulative effect of a change in accounting principle,                            net of income tax expense of $44    |   |   | ---     |   |   | 64      |   |   | ---     |   |
|                                                                                                                  |   |   |    |   |   |    |   |   |    |   |
| Net income                                                                                                            |   | $      | 13,504  |   |   | 18,520  |   |   | 20,831  |   |

 

See accompanying notes to consolidated financial statements.

86

 

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**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY**

**YEARSENDEDDECEMBER 31,            2007, 2006 AND 2005**

 

|  

                             

                             

                             

(Amounts in thousands, except share amounts) |   | Shares of Class A Common Stock |   |   | Class A Common Stock |   |   | Paid-in Capital |   |   | Retained Earnings |   |   |   | Total   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|--------|----------------------|--------|--------|-----------------|--------|--------|-------------------|--------|--------|--------|---------|--------|
| Balances at January 1, 2005                                                                                                                                      |   | 100                            |   | $      | 206,622              |   |   | 5,677           |   |   | 16,305            |   |   |   | 228,604 |   |
| Net income                                                                                                                                                       |   | ---                            |   |   | ---                  |   |   | ---             |   |   | 20,831            |   |   |   | 20,831  |   |
| Distribution to General Communication, Inc.                                                                                                                      |   | ---                            |   |   | ---                  |   |   | ---             |   |   | (10,978           | )      |   |   | (10,978 | )      |
| Contribution from General Communication, Inc.                                                                                                                    |   | ---                            |   |   | ---                  |   |   | 5,163           |   |   | ---               |   |   |   | 5,163   |   |
| Balances at December 31, 2005                                                                                                                                    |   | 100                            |   |   | 206,622              |   |   | 10,840          |   |   | 26,158            |   |   |   | 243,620 |   |
| Net income                                                                                                                                                       |   | ---                            |   |   | ---                  |   |   | ---             |   |   | 18,520            |   |   |   | 18,520  |   |
| SAB 108 cumulative adjustment, net of income tax                            expense                                                                              |   | ---                            |   |   | ---                  |   |   | ---             |   |   | 1,104             |   |   |   | 1,104   |   |
| Distribution to General Communication, Inc.                                                                                                                      |   | ---                            |   |   | ---                  |   |   | ---             |   |   | (39,753           | )      |   |   | (39,753 |   |
| Contribution from General Communication, Inc.                                                                                                                    |   | ---                            |   |   | ---                  |   |   | 16,904          |   |   | ---               |   |   |   | 16,904  |   |
| Balances at December 31, 2006                                                                                                                                    |   | 100                            |   |   | 206,622              |   |   | 27,744          |   |   | 6,029             |   |   |   | 240,395 |   |
| Net income                                                                                                                                                       |   | ---                            |   |   | ---                  |   |   | ---             |   |   | 13,504            |   |   |   | 13,504  |   |
| Distribution to General Communication, Inc.                                                                                                                      |   | ---                            |   |   | ---                  |   |   | ---             |   |   | (17,076           | )      |   |   | (17,076 | )      |
| Contribution from General Communication, Inc.                                                                                                                    |   | ---                            |   |   | ---                  |   |   | 10,060          |   |   | ---               |   |   |   | 10,060  |   |
| Balances at December 31, 2007                                                                                                                                    |   | 100                            |   | $      | 206,622              |   |   | 37,804          |   |   | 7,495             |   |   |   | 251,921 |   |

 

See            accompanying notes to consolidated financial statements.

 

87

 

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**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

 

| (Amounts in thousands)                                                                                                           |   |   | 2007     |   |   | 2006    |   |   | 2005    |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|---------|--------|--------|---------|--------|
| Cash flows from operating activities:                                                                                            |   |   |     |   |   |    |   |   |    |   |
| Net income                                                                                                                       |   | $      | 13,504   |   |   | 18,520  |   |   | 20,831  |   |
| Adjustments to reconcile net income to net cash provided                            by operating activities, net of acquisition: |   |   |     |   |   |    |   |   |    |   |
| Depreciation and amortization expense                                                                                            |   |   | 86,327   |   |   | 82,099  |   |   | 74,126  |   |
| Deferred income tax expense                                                                                                      |   |   | 11,448   |   |   | 15,384  |   |   | 14,936  |   |
| Share-based compensation expense                                                                                                 |   |   | 4,944    |   |   | 6,365   |   |   | 546     |   |
| Loss on termination of capital lease                                                                                             |   |   | ---      |   |   | ---     |   |   | 2,797   |   |
| Other noncash income and expense items                                                                                           |   |   | 7,615    |   |   | 4,941   |   |   | 9,090   |   |
| Change in operating assets and liabilities                                                                                       |   |   | (15,045  | )      |   | (4,510  | )      |   | (12,925 | )      |
| Net cash provided by operating activities                                                                                        |   |   | 108,793  |   |   | 122,799 |   |   | 109,401 |   |
|                                                                                                                             |   |   |     |   |   |    |   |   |    |   |
| Cash flows from investing activities:                                                                                            |   |   |     |   |   |    |   |   |    |   |
| Purchases of property and equipment, including                            construction period interest                           |   |   | (151,312 | )      |   | (95,998 | )      |   | (79,789 | )      |
| Purchase of business                                                                                                             |   |   | (19,530  | )      |   | ---     |   |   | ---     |   |
| Purchases of other assets and intangible                            assets                                                       |   |   | (7,471   | )      |   | (4,285  | )      |   | (1,881  | )      |
| Other                                                                                                                            |   |   | 44       |   |   | 3,326   |   |   | 2,087   |   |
| Net cash used in investing activities                                                                                            |   |   | (178,269 | )      |   | (96,957 | )      |   | (79,583 | )      |
|                                                                                                                             |   |   |     |   |   |    |   |   |    |   |
| Cash flows from financing activities:                                                                                            |   |   |     |   |   |    |   |   |    |   |
| Borrowing on Senior Credit Facility                                                                                              |   |   | 60,000   |   |   | 15,000  |   |   | 38,831  |   |
| Payment of debt                                                                                                                  |   |   | (27,152  | )      |   | (1,725  | )      |   | (800    | )      |
| Net distribution to General Communication,                            Inc.                                                       |   |   | (7,349   | )      |   | (25,745 | )      |   | (12,077 | )      |
| Payment of debt issuance costs                                                                                                   |   |   | (527     | )      |   | (44     | )      |   | (1,076  | )      |
| Repayments of capital lease obligations                                                                                          |   |   | (69      | )      |   | (43     | )      |   | (38,989 | )      |
| Payment upon early termination of capital                            lease                                                       |   |   | ---      |   |   | ---     |   |   | (2,797  | )      |
| Net cash provided by (used in) financing                            activities                                                   |   |   | 24,903   |   |   | (12,577 | )      |   | (16,908 | )      |
| Net increase (decrease) in cash and cash                            equivalents                                                  |   |   | (44,573  | )      |   | 13,285  |   |   | 12,910  |   |
| Cash and cash equivalents at beginning of                            period                                                      |   |   | 57,647   |   |   | 44,362  |   |   | 31,452  |   |
|                                                                                                                             |   |   |     |   |   |    |   |   |    |   |
| Cash and cash equivalents at end of period                                                                                       |   | $      | 13,074   |   |   | 57,647  |   |   | 44,362  |   |

 

See accompanying notes to consolidated financial statements.

 

88

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

| (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, Chugiak, Sitka, Valdez, and Ketchikan, Alaska as of December                            31, 2007 with on-going expansion into additional Alaska                            communities, |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | 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, |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Private line and private 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 and sales of capacity on our fiber optic cable                            systems used in the transmission of interstate and intrastate private                            line, 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. 46(R), “Consolidation of Variable Interest            Entities, an interpretation of ARB No. 51.” FIN 46(R) addresses the consolidation            of business enterprises to which the usual condition (majority voting interest) does            not apply. This interpretation focuses on controlling financial interests that may be            achieved through arrangements that do not involve voting interests. It concludes that,            in the absence of clear control through voting interests, a company's exposure            (variable interest) to the economic risks and potential rewards from the variable            interest entity's assets and activities are the best evidence of control. If an            enterprise holds a majority of the variable interests of an entity, it would be            considered the primary beneficiary. The primary beneficiary is required to consolidate            the assets, liabilities and results of operations of the variable interest entity in            its financial statements. All significant intercompany transactions are eliminated in            consolidation.

             

Alaska DigiTel, LLC ("Alaska DigiTel") Acquisition

On January 2, 2007, we acquired 82% of the equity interest and 20.0% of            the voting interest of Alaska DigiTel, an Alaska wireless provider, for $29.5 million.            We have a variable interest in Alaska DigiTel in which we are the primary beneficiary            as defined by FIN 46(R). We view our investment as an

             

                                                                                                                  89                                                                      (Continued)

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

incremental way to participate in future growth of the Alaska wireless            industry. We consolidated Alaska DigiTel in accordance with FIN 46(R) and their results            of operations are included in the Consolidated Income Statement for the entire year            ended December 31, 2007. The Alaska DigiTel purchase price has been allocated as            follows: cash $10.0 million, receivables, net $4.4 million, other current assets            $850,000, property and equipment $12.3 million, wireless licenses $24.3 million, other            intangible assets $4.5 million, current liabilities $4.1 million, debt $15.7 million            and minority interest $6.5 million. The total assets of Alaska DigiTel were $57.3            million at December 31, 2007. Alaska DigiTel’s revenues for the year ended            December 31, 2007 were $28.5 million with $23.1 million, $4.9 million and $538,000            allocated to our Consumer, Network Access, and Commercial segments, respectively.            Alaska DigiTel had outstanding debt of $529,000 at December 31, 2007 that is            collateralized by $801,000 of its property in service. Alaska DigiTel’s creditors            do not have recourse to GCI’s assets.

             

Assuming we had consolidated Alaska DigiTel on January 1, 2006, our            revenues and income before cumulative effect of a change in accounting principle for            the year ended December 31, 2006 would have been as follows (amounts in            thousands):

             

| (Unaudited)                                                                                              |   | 2006    |   |   |   |   |
|----------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|--------|
| Pro forma consolidated revenue                                                                           | $      | 497,822 |   |   |   |   |
| Pro forma income before cumulative effect of a change in                            accounting principle | $      | 18,414  |   |   |   |   |

             

|   | (c) | Earnings per Common Share |
|--------|-----|---------------------------|

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

             

|   | (d) | Cash Equivalents |
|--------|-----|------------------|

Cash equivalents consist of repurchase interest investments and            certificates of deposit which have an original maturity of three months or less and are            readily convertible into cash.

             

|   | (e) | Accounts Receivable and Allowance for Doubtful                            Receivables |
|--------|-----|---------------------------------------------------------------------------------------|

Trade accounts receivable are recorded at the invoiced amount and do not            bear interest. The allowance for doubtful accounts is our best estimate of the amount            of probable credit losses in our existing accounts receivable. We base our estimates on            the aging of our accounts receivable balances, financial health of specific customers,            regional economic data, changes in our collections process, regulatory requirements,            and our customers’ compliance with Universal Service Administrative Company            rules. We review our allowance for doubtful accounts methodology at least annually.            During the review process we consider a change to our methodology if there are any            changes to these factors.

             

Depending upon the type of account receivable our allowance is            calculated using a pooled basis with an allowance for all accounts greater than 120            days past due, a specific identification method, or a combination of the two methods.            When a specific identification method is used past due balances over 90 days old and            balances less than 90 days old but potentially uncollectible due to bankruptcy or other            issues are reviewed individually for collectibility. Account balances are charged off            against the allowance when we feel it is probable the receivable will not be recovered.            We do not have any off-balance-sheet credit exposure related to our            customers.

             

|   | (f) | Inventories |
|--------|-----|-------------|

Wireless handset inventories are stated at the lower of cost or market.            Cost is determined using the average cost method. Handset costs in excess of the            revenues generated from handset sales, or handset subsidies, are expensed at the time            of sale. We do not recognize the expected handset subsidies prior to the time of sale            because the promotional discount decision is made at the point of sale and/or because            we expect to recover the handset subsidies through service revenue.

             

                                                                                                                  90                                                           (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

Inventories of merchandise for resale and parts are stated at the lower            of cost or market. Cost is determined using the average cost method.

             

|   | (g) | Property and Equipment |
|--------|-----|------------------------|

Property and equipment is stated at cost. Construction costs of            facilities are capitalized. Equipment financed under capital leases is recorded at the            lower of fair market value or the present value of future minimum lease payments.            Construction in progress represents distribution equipment and systems and support            equipment and systems not placed in service on December 31, 2007 that management            intends to place in service during 2008.

             

Depreciation is computed on a straight-line basis based upon the shorter            of the estimated useful lives of the assets or the lease term, if applicable, in the            following ranges:

             

| Asset Category                                                                                        |   | Asset Lives |
|-------------------------------------------------------------------------------------------------------|--------|-------------|
| Telephony distribution equipment and systems and fiber                            optic cable systems |   | 10-20 years |
| Cable television distribution equipment and                            systems                        |   | 3-10 years  |
| Support equipment and systems                                                                         |   | 3-10 years  |
| Transportation equipment                                                                              |   | 5-10 years  |
| Property and equipment under capital leases                                                           |   | 12-20 years |
| Buildings                                                                                             |   | 30-40 years |

             

Amortization of property and equipment under capital leases is included            in Depreciation and Amortization Expense on the Consolidated Income            Statement.

             

Repairs and maintenance are charged to expense as incurred. Expenditures            for major renewals and betterments are capitalized. Accumulated depreciation is removed            and gains or losses are recognized at the time of retirements, sales or other            dispositions of property and equipment.

             

|   | (h) | Long-lived Assets to be Disposed of |
|--------|-----|-------------------------------------|

Long-lived assets to be disposed of, including those of discontinued            operations, if any, are measured at the lower of carrying amount or fair value less            cost to sell, if applicable. We classify a long-lived asset to be disposed of other            than by sale as held and used until it is disposed of. We classify a long-lived asset            to be sold as held for sale in the period in which all of certain criteria established            by Statement of Financial Accounting Standard (“SFAS”) No. 144,            “Accounting for the Impairment or Disposal of Long-lived Assets” are met.            We do not depreciate or amortize long-lived assets to be sold.

             

A loss is recognized for any initial or subsequent write-down to fair            value less cost to sell. A gain is recognized for any subsequent increase in fair value            less cost to sell, but not in excess of the cumulative loss previously recognized (for            a write-down to fair value less cost to sell). The loss or gain adjusts only the            carrying amount of a long-lived asset, whether classified as held for sale individually            or as part of a disposal group. A gain or loss not previously recognized that results            from the sale of a long-lived asset (disposal group) is recognized at the date of            sale.

             

                                                                                                                  91                                                                      (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

|   | (i) | Intangible Assets |
|--------|-----|-------------------|

Goodwill, cable certificates (certificates of convenience and public            necessity) and wireless licenses are not amortized. Cable certificates represent            certain perpetual operating rights to provide cable services. Wireless licenses            represent the right to utilize certain radio frequency spectrum to provide wireless            communications services. Goodwill represents the excess of cost over fair value of net            assets acquired in connection with a business acquisition. Goodwill is not allocated to            our segments as our Chief Operating Decision Maker does not review a balance sheet by            segment to make decisions about resource allocation or evaluate segment performance.            Goodwill is allocated to our Consumer and Commercial reporting segments for the sole            purpose of the annual impairment test.

 

All other amortizable intangible assets are being amortized over 2 to 20            year periods using the straight-line method. Customer relationships obtained through            the purchase of a majority non-controlling interest in Alaska DigiTel are amortized            over the four-year expected life of the customers.

             

|   | (j) | Impairment of Intangibles, Goodwill, and Long-lived                            Assets |
|--------|-----|---------------------------------------------------------------------------------------|

Cable certificate assets and wireless licenses are tested annually for            impairment, and are tested for impairment more frequently if events and circumstances            indicate that the asset might be impaired. The impairment test consists of a comparison            of the fair value of the asset with its carrying amount. If the carrying amount of the            assets exceeds its fair value, an impairment loss is recognized in an amount equal to            that excess. After an impairment loss is recognized, the adjusted carrying amount of            the asset becomes its new accounting basis. Impairment testing of our cable certificate            assets and wireless licenses as of December 31, 2007 and 2006 used a direct value            method.

             

Our goodwill assets are tested annually for impairment, and are tested            for impairment more frequently if events and circumstances indicate that the assets            might be impaired. An impairment loss is recognized to the extent that the carrying            amount exceeds the asset’s fair value. This determination is made at the            reporting unit level and consists of two steps. First, we determine the fair value of a            reporting unit and compare it to its carrying amount. Second, if the carrying amount of            a reporting unit exceeds its fair value, an impairment loss is recognized for any            excess of the carrying amount of the reporting unit’s goodwill asset over the            implied fair value of that asset. The implied fair value of goodwill is determined by            allocating the fair value of the reporting unit in a manner similar to a purchase price            allocation, in accordance with SFAS No. 141, “Business            Combinations.”

             

Long-lived assets, such as property, plant, and equipment, and purchased            intangibles subject to amortization, are reviewed for impairment whenever events or            changes in circumstances indicate that the carrying amount of an asset may not be            recoverable. Recoverability of assets to be held and used is measured by a comparison            of the carrying amount of an asset to estimated undiscounted future cash flows expected            to be generated by the asset. If the carrying amount of an asset exceeds its estimated            future cash flows, an impairment charge is recognized by the amount by which the            carrying amount of the asset exceeds the fair value of the asset.

             

|   | (k) | Amortization and Write-off of Loan and Senior Notes                            Fees |
|--------|-----|-------------------------------------------------------------------------------------|

Debt issuance costs are deferred and amortized using the effective            interest method. If a refinancing or amendment of a debt instrument is a substantial            modification, all or a portion of the applicable debt issuance costs are written            off.

             

|   | (l) | Other Assets |
|--------|-----|--------------|

Other Assets primarily include long-term deposits, prepayments, and            non-trade accounts receivable.

             

                                                                                                                  92                                                                      (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

|   | (m) | Asset Retirement Obligations |
|--------|-----|------------------------------|

We record the fair value of a liability for an asset retirement            obligation in the period in which it is incurred in Other Liabilities on the            Consolidated Balance Sheets. Additionally, a conditional asset retirement obligation is            recognized as a liability if the fair value of the liability can be reasonably            estimated. When the liability is initially recorded, we capitalize a cost by increasing            the carrying amount of the related long-lived asset. Over time, the liability is            accreted to its present value each period, and the capitalized cost is depreciated over            the useful life of the related asset. Upon settlement of the liability, we either            settle the obligation for its recorded amount or incur a gain or loss upon            settlement.

             

The majority of our asset retirement obligation is the estimated cost to            remove telephony distribution equipment and support equipment from leased            property.

             

Following is a reconciliation of the beginning and ending aggregate            carrying amount of our liability for asset retirement obligation (amounts in            thousands):

 

| Balance at December 31, 2005                                              | $      | 3,210 |   |   |   |   |
|---------------------------------------------------------------------------|--------|-------|--------|--------|--------|--------|
| Liability incurred                                                        |   | 30    |   |   |   |   |
| Accretion expense                                                         |   | 172   |   |   |   |   |
| Liability settled                                                         |   | (4    | )      |   |   |   |
| Balance at December 31, 2006                                              |   | 3,408 |   |   |   |   |
| Liability incurred                                                        |   | 260   |   |   |   |   |
| Additions upon consolidation of Alaska                            DigiTel |   | 365   |   |   |   |   |
| Accretion expense                                                         |   | 144   |   |   |   |   |
| Liability settled                                                         |   | (4    | )      |   |   |   |
| Balance at December 31, 2007                                              | $      | 4,173 |   |   |   |   |

 

During the years ended December 31, 2007 and 2006 we recorded additional            capitalized costs of $260,000 and $30,000, respectively, in Property and Equipment in            Service, Net of Depreciation.

             

|   | (n) | Alaska Airlines, Inc. ("Alaska Airlines")                            Contract |
|--------|-----|-------------------------------------------------------------------------------|

Our contract with Alaska Airlines provides that we purchase a specific            minimum number of mileage awards in the Alaska Airlines Mileage Plan each year at a            specific price per mile. If we exceed the minimum purchase commitment in any of the            specified periods, the excess miles are priced at a reduced fixed cost per mile. Alaska            Airlines invoices us for all mileage credited during the prior month. Our contractual            cost for purchased miles is not tied or related in any way to our customers’            usage of the awarded miles. Use of the miles is a transaction between our customers and            Alaska Airlines and does not involve us in any way. Accordingly we do not account for            or record our customers’ usage of miles purchased.

             

We have recorded a liability for the estimated obligation under the            contract as of December 31, 2007 and 2006. We estimated the amount of the obligation            based on the amount of mileage awards purchased through December 31, 2007 and 2006 in            comparison to the required minimum commitment. We have recorded the expense for the            miles purchased from Alaska Airlines in Selling, General and Administrative expenses            for each of our benefiting segments.

             

|   | (o) | Revenue Recognition |
|--------|-----|---------------------|

All revenues are recognized when the earnings process is complete in            accordance with SEC Staff Accounting Bulletins (“SAB”) No. 101 and No. 104,            “Revenue Recognition” as follows:

             

|   | **•** | Revenues generated from long-distance service usage and                            plan fees, Internet service excess usage, and managed services are                            recognized when the services are provided, |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Cable television service package fees, local access and                            Internet service plan fees, and private line telecommunication revenues                            are billed in advance, recorded as Deferred |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

                                                                                                                  93                                                                      (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

Revenue on the balance sheet, and are recognized as the associated            service is provided,

|   | **•** | Certain of our wireless services offerings have been                            determined to be revenue arrangements with multiple deliverables.                            Revenues are recognized as each element is earned based on objective                            evidence regarding the relative fair value of each element and when                            there are no undelivered elements that are essential to the                            functionality of the delivered elements. Revenues generated from                            wireless service usage and plan fees are recognized when the services                            are provided. Revenues generated from the sale of wireless handsets and                            accessories are recognized when title to the handset and accessories                            passes to the customer. As the non-refundable, up-front activation fee                            charged to the customer does not meet the criteria as a separate unit                            of accounting, we allocate the additional arrangement consideration                            received from the activation fee to the handset (the delivered item) to                            the extent that the aggregate handset and activation fee proceeds do                            not exceed the fair value of the handset. Any activation fees not                            allocated to the handset would be deferred upon activation and                            recognized as service revenue on a straight-line basis over the                            expected customer relationship period, |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | The majority of our equipment sale transactions involve                            the sale of communications equipment with no other services involved.                            Such equipment is subject to standard manufacturer warranties and we do                            not manufacture any of the equipment we sell. In such instances the                            customer takes title to the equipment generally upon delivery. We                            recognize revenue for such transactions when title passes to the                            customer and the revenue is earned and realizable pursuant to the                            provisions of SAB 101 and SAB 104. On certain occasions we enter into                            agreements to sell and satisfactorily install or integrate                            telecommunications equipment for a fixed fee. Customers may have refund                            rights if the installed equipment does not meet certain performance                            criteria. We defer revenue recognition until we have received customer                            acceptance per the contract or agreement, and all other required                            revenue recognition elements have been achieved. Revenues from                            contracts with multiple element arrangements, such as those including                            installation and integration services, are recognized as each element                            is earned based on objective evidence regarding the relative fair value                            of each element and when there are no undelivered elements that are                            essential to the functionality of the delivered elements, |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Technical services revenues are derived primarily from                            maintenance contracts on equipment and are recognized on a prorated                            basis over the term of the contracts, |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Revenues from white and yellow page directories are                            recognized ratably during the period following publication, which                            typically begins with distribution and is complete in the month prior                            to publication of the next directory, |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Other revenues are recognized when the service is                            provided, |
|--------|------------|----------------------------------------------------------------------------------------|

|   | **•** | We recognize unbilled revenues when the service is                            provided based upon minutes of use processed, and/or established rates,                            net of credits and adjustments, and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We account for the sale of fiber capacity indefeasible                            rights to use (“IRU”) as sales-type leases if substantially                            all of the benefits and risks of ownership have been transferred to the                            purchaser. If substantially all of the benefits and risks of ownership                            have not been transferred to the purchaser, we defer the revenue and                            recognize it ratably over the life of the IRU. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | (p) | Payments Received from Suppliers |
|--------|-----|----------------------------------|

Our Consumer and Commercial segments occasionally receive reimbursements            for video services costs to promote suppliers’ services, called cooperative            advertising arrangements. The supplier payment is classified as a reduction of selling,            general and administrative expenses if it reimburses specific, incremental and            identifiable costs incurred to resell the suppliers’ services. Excess            consideration, if any, is classified as a reduction of cost of goods sold (exclusive of            depreciation and amortization expense) ("Cost of Goods Sold").

             

Occasionally our Consumer and Commercial segments enter into a binding            arrangement with a supplier in which we receive a rebate dependent upon us meeting a            specified goal. We recognize the rebate as a reduction of Cost of Goods Sold            systematically as we make progress toward the

             

                                                                                                                  94                                                           (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

specified goal, provided the amounts are probable and reasonably            estimable. If earning the rebate is not probable and reasonably estimable, it is            recognized only when the goal is met.

             

|   | (q) | Advertising Expense |
|--------|-----|---------------------|

We expense advertising costs in the year during which the first            advertisement appears. Advertising expenses were $5.6 million, $3.5 million and $3.2            million for the years ended December 31, 2007, 2006 and 2005, respectively.

             

|   | (r) | Leases |
|--------|-----|--------|

We account for capital and operating leases as lessee as required by            SFAS No. 13, “Accounting for Leases” and in subsequently issued amendments            and interpretations of SFAS No. 13. Scheduled operating lease rent increases are            amortized over the lease term on a straight-line basis. Contingent rent expense results            from increases in the Consumer Price Index. Rent holidays are recognized on a            straight-line basis over the operating lease term (including any rent holiday            period).

             

Leasehold improvements are amortized over the shorter of their economic            lives or the lease term. We may amortize a leasehold improvement over a term that            includes assumption of a lease renewal if the renewal is reasonably assured. Leasehold            improvements acquired in a business combination are amortized over the shorter of the            useful life of the assets or a term that includes required lease periods and renewals            that are deemed to be reasonably assured at the date of acquisition. Leasehold            improvements that are placed in service significantly after and are not contemplated at            or near the beginning of the lease term are amortized over the shorter of the useful            life of the assets or a term that includes required lease periods and renewals that are            deemed to be reasonably assured at the date the leasehold improvements are purchased.            Leasehold improvements made by us and funded by landlord incentives or allowances under            an operating lease are recorded as deferred rent and amortized as reductions to lease            expense over the lease term.

             

|   | (s) | Interest Expense |
|--------|-----|------------------|

Material interest costs incurred during the construction period of            non-software capital projects are capitalized. Interest costs incurred during the            development period of a software capital project are capitalized. Interest is            capitalized in the period commencing with the first expenditure for a qualifying            capital project and ending when the capital project is substantially complete and ready            for its intended use. We capitalized interest cost of $1.6 million, $820,000 and $0            during the years ended December 31, 2007, 2006 and 2005, respectively.

             

|   | (t) | 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.

             

Income taxes are accounted for using the asset and liability method.            Deferred tax assets and liabilities are recognized for their future tax consequences            attributable to differences between the financial statement carrying amounts of            existing assets and liabilities and their respective tax bases. Deferred tax assets and            liabilities are measured using enacted tax rates expected to apply to taxable earnings            in the years in which those temporary differences are expected to be recovered or            settled. Deferred tax assets recognized are reduced by a valuation allowance to the            extent that the benefits are more likely to be realized than not.

             

On January 1, 2007, we adopted FIN 48, “Accounting for Uncertainty            in Income Taxes” which clarifies the accounting for uncertainty in income taxes            recognized in an enterprise’s financial statements in accordance with SFAS No.            109, “Accounting for Income Taxes.” FIN 48 prescribes

             

                                                                                                                  95                                                           (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

a recognition threshold and measurement attribute for the financial            statement recognition and measurement of a tax position taken or expected to be taken            in a tax return. FIN 48 also provides guidance on derecognition, classification,            interest and penalties, accounting in interim periods, disclosure, and transition.            Adoption of FIN 48 on January 1, 2007 did not have a material effect on our results of            operations, financial position, and cash flows.

             

We file federal income tax returns in the U.S. and in various state            jurisdictions. We are no longer subject to U.S. or state tax examinations by tax            authorities for years before 2004. Certain U.S. federal income tax returns for years            after 1994 are not closed by relevant statutes of limitations due to unused net            operating losses reported on those income tax returns.

             

We recognize accrued interest on unrecognized tax benefits in interest            expense and penalties in selling, general and administrative expenses. We did not have            any unrecognized tax benefits as of December 31, 2007, 2006 and 2005, and, accordingly,            we did not recognize any interest expense. Additionally, we did not record any            penalties during the years ended December 31, 2007, 2006 and 2005.

             

|   | (u) | Incumbent Local Exchange Carrier (“ILEC”)                            Over-earnings Refunds |
|--------|-----|--------------------------------------------------------------------------------------------------------|

We receive refunds from time to time from ILECs with which we do            business in respect of their earnings that exceed regulatory requirements. Telephone            companies that are rate regulated by the Federal Communications Commission            (“FCC”) using the rate of return method are required by the FCC to refund            earnings from interstate access charges assessed to long-distance carriers when their            earnings exceed their authorized rate of return. Such refunds are computed based on the            regulated carrier’s earnings in several access categories. Uncertainties exist            with respect to the amount of their earnings, the refunds (if any), their timing, and            their realization. We account for such refundable amounts as gain contingencies, and,            accordingly, do not recognize them until realization is a certainty upon            receipt.

             

|   | (v) | Share-based Payment Arrangements |
|--------|-----|----------------------------------|

Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R),            “Share-Based Payment,” and related interpretations, to account for            share-based compensation using the modified prospective transition method and therefore            will not restate our prior period results. SFAS 123(R) supersedes Accounting Principles            Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to            Employees” and revises guidance in SFAS 123, “Accounting for Stock-Based            Compensation.” Among other things, SFAS 123(R) requires that compensation expense            be recognized in the financial statements for share-based awards based on the grant            date fair value of those awards. The modified prospective transition method applies to            (a) unvested stock options under our 1986 Stock Option Plan (“Stock Option            Plan”) and unvested stock options not issued pursuant to a plan that were            outstanding as of December 31, 2005 based on the grant date fair value estimated in            accordance with the pro forma provisions of SFAS 123, and (b) any new share-based            awards granted subsequent to December 31, 2005, based on the grant-date fair value            estimated in accordance with the provisions of SFAS 123(R). Additionally, share-based            compensation expense includes an estimate for pre-vesting forfeitures and is recognized            over the requisite service periods of the awards on a straight-line basis, which is            generally commensurate with the vesting term. See note 10 for information on the            assumptions we used to calculate the fair value of share-based compensation.

             

Prior to January 1, 2006, we accounted for all of our stock option            awards in accordance with APB No. 25 and related interpretations. Accordingly,            compensation expense for a stock option grant was recognized only if the exercise price            was less than the market value of GCI’s common stock on the grant            date.

             

SFAS 123(R) requires the benefits associated with tax deductions in            excess of recognized compensation cost to be reported as a financing cash flow rather            than as an operating cash flow as previously required.

 

                                                                                                                  96                                                                      (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

             

The following illustrates the effect on net income for the year ended            December 31, 2005 as if we had applied the fair value method to measure share-based            compensation, as required under the disclosure provisions of SFAS No. 123 (amounts in            thousands):

 

|                                                                                                                                                                             |   |   | 2005   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Net income, as reported                                                                                                                                                          | $      |   | 18,325 |   |
| Total share-based employee compensation expense included                            in reported net income, net of related tax effects                                           |   |   | 287    |   |
| Less share-based employee compensation expense                            determined under the SFAS 123 fair value method, net of related tax                            effects |   |   | (1,876 | )      |
| Pro forma net income                                                                                                                                                             | $      |   | 16,736 |   |

             

|   | (w) | Stock Options and Stock Warrants Issued for                            Non-employee Services |
|--------|-----|----------------------------------------------------------------------------------------------|

Stock options and warrants issued in exchange for non-employee services            pursuant to the provisions of SFAS 123(R), Emerging Issues Task Force            (“EITF”) 96-3 and EITF 96-18 are accounted for at the fair value of the            consideration or services received or the fair value of the equity instruments issued,            whichever is more reliably measurable.

             

When a stock option or warrant is issued for non-employee services where            the fair value of such services is not stated, we estimate the value of the stock            option or warrant issued using the Black- Scholes-Merton method.

             

The fair value determined using these principles is charged to operating            expense over the shorter of the term for which non-employee services are provided, if            stated, or the stock option or warrant vesting period.

             

|   | (x) | Use of Estimates |
|--------|-----|------------------|

The preparation of financial statements in conformity with generally            accepted accounting principles 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, 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, wireless licenses and the accrual of Cost of            Goods Sold. Actual results could differ from those estimates.

             

|   | (y) | Concentrations of Credit Risk |
|--------|-----|-------------------------------|

Financial instruments that potentially subject us to concentrations of            credit risk are primarily cash and cash equivalents and accounts receivable. Excess            cash is invested in high quality short-term liquid money instruments issued by highly            rated financial institutions. At December 31, 2007 and 2006, substantially all of our            cash and cash equivalents were invested in short-term liquid money instruments at one            highly rated financial institution.

             

We have one major customer, Verizon Communications, Inc.            (“Verizon”) (see note 11). We also provide services to Sprint Nextel            Corporation ("Sprint Nextel") and Dobson Communications Corporation ("Dobson").            Although these customers do not meet the threshold for classification as a major            customer, we do derive significant revenues and operating income from them. In November            2007, AT&T Mobility LLC ("AT&T") acquired Dobson, including its Alaska            properties. In December 2007, we signed an agreement with AT&T that terminates            AT&T’s obligation to purchase network services from us as of July 1, 2008. As            compensation AT&T will provide us with

             

                                                                                                                  97                                                           (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

a large block of wireless network usage at no charge. The block of            wireless network usage at no charge will reduce Cost of Goods Sold during the four year            period ended June 30, 2012, that we would have otherwise recognized in accordance with            the new agreement, however, we are unable to estimate the impact this agreement will            have on our Cost of Goods Sold. We expect our message telephone and Private Line            revenues earned from Dobson to decrease in 2008 and forward. Dobson revenues were $23.2            million in 2007. We do not believe the termination of the agreement with Dobson will            have a material adverse effect on our financial position, results of operations or            liquidity. There is increased risk associated with these customers' accounts receivable            balances. Our remaining customers are located primarily throughout Alaska. Because of            this geographic concentration, our growth and operations depend upon economic            conditions in Alaska. The economy of Alaska is dependent upon the natural resources            industries, and in particular oil production, as well as tourism, government, and            United States military spending. Though limited to one geographical area and except for            Verizon, Sprint Nextel and AT&T, the concentration of credit risk with respect to            our receivables is minimized due to the large number of customers, individually small            balances, and short payment terms.

             

We entered into a loan agreement with Alaska DigiTel dated as of January            2, 2007. Under the loan agreement, we made available to Alaska DigiTel a $15.0 million            revolving credit facility. In January 2008 the revolving credit facility available to            Alaska DigiTel was increased to $25.0 million. The advances under the loan agreement            are secured by all personal property of Alaska DigiTel and its subsidiaries, and by the            membership interests in Alaska DigiTel held by AKD Holdings, LLC. The agreement            provides that the outstanding loans under the revolving credit facility will convert to            a term loan on December 31, 2008. Principal on the term loan will be due in quarterly            installments beginning March 31, 2009 equal to 1.25% of the term loan, increasing to            2.50% beginning March 31, 2010. The remaining balance of the term loan is due on June            30, 2011. The loan is eliminated upon consolidation, however, there is increased credit            risk since, although we are a majority owner, we do not have voting control of Alaska            DigiTel.

             

|   | (z) | Software Capitalization Policy |
|--------|-----|--------------------------------|

Internally used software, whether purchased or developed, is capitalized            and amortized using the straight-line method over an estimated useful life of five            years. We capitalize certain costs associated with internally developed software such            as payroll costs of employees devoting time to the projects and external direct costs            for materials and services. Costs associated with internally developed software to be            used internally are expensed until the point the project has reached the development            stage. Subsequent additions, modifications or upgrades to internal-use software are            capitalized only to the extent that they allow the software to perform a task it            previously did not perform. Software maintenance and training costs are expensed in the            period in which they are incurred. The capitalization of software requires judgment in            determining when a project has reached the development stage.

             

|   | (aa) | Guarantees |
|--------|------|------------|

Certain of our customers have guaranteed levels of service. We accrue            for guarantees as they become probable and estimable.

             

|   | (ab) | Exchanges of Nonmonetary Assets |
|--------|------|---------------------------------|

The cost of a nonmonetary asset or service acquired in exchange for            another nonmonetary asset or service is based upon the fair value of the asset            surrendered to obtain it unless the fair value is not determinable, the transaction is            an exchange of a product or property held for sale in the ordinary course of business            for a product or property to be sold in the same line of business to facilitate sales            to customers other than the parties to the exchange, or the exchange lacks commercial            substance. If the exceptions apply we value the transaction using the recorded amount            (after reduction, if appropriate, for an indicated impairment of value) of the            nonmonetary asset or service relinquished. A gain or loss may be recognized on the            exchange.

             

                                                                                                                  98                                                           (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

|   | (ac) | Classification of Taxes Collected from                            Customers |
|--------|------|-----------------------------------------------------------------------------|

We report sales, use, excise, and value added taxes assessed by a            governmental authority that is directly imposed on a revenue-producing transaction            between us and a customer on a net basis in our income statement. We report a certain            surcharge on a gross basis in our income statement of $4.2 million, $4.6 million and            $4.0 million for the years ended December 31, 2007, 2006 and 2005,            respectively.

             

|   | (ad) | New Accounting Standards |
|--------|------|--------------------------|

In December 2007, the FASB issued SFAS No. 141(R), "Business            Combinations" which requires the acquiring entity in a business combination to record            all assets acquired and liabilities assumed at their respective acquisition-date fair            values, changes the recognition of assets acquired and liabilities assumed arising from            contingencies, changes the recognition and measurement of contingent consideration, and            requires the expensing of acquisition-related costs as incurred. SFAS 141(R) also            requires additional disclosure of information surrounding a business combination, such            that users of the entity's financial statements can fully understand the nature and            financial impact of the business combination. We will implement SFAS No. 141(R) on            January 1, 2009 and we will apply it to any business combinations with an acquisition            date after January 1, 2009.

             

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling            Interests in Consolidated Financial Statements" which establishes accounting and            reporting standards for ownership interests in subsidiaries held by parties other than            the parent, the amount of consolidated net income attributable to the parent and to the            noncontrolling interest, changes in a parent's ownership interest and the valuation of            retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS            160 also established reporting requirements that provide sufficient disclosures that            clearly identify and distinguish between the interests of the parent and the interests            of the noncontrolling owner. We will implement SFAS No. 160 on January 1, 2009. We do            not expect the adoption of this standard to have a material impact on our income            statement, financial position or cash flows.

             

In September 2006, the FASB issued SFAS No. 157, "Fair Value            Measurements" which provides a definition of fair value, establishes a framework for            measuring fair value, and expands disclosures about fair value measurements for future            transactions. SFAS 157 is effective for us beginning January 1, 2008. We do not expect            the adoption of this standard to have a material impact on our income statement,            financial position or cash flows.

 

|   | (ae) | SAB No. 108 |
|--------|------|-------------|

Effective January 1, 2006, we adopted SAB No. 108, “Considering            the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year            Financial Statements.” SAB No. 108 requires a dual approach for quantifying            misstatements using both a method that quantifies a misstatement based on the amount of            misstatement originating in the current year income statement, as well as a method that            quantifies a misstatement based on the effects of correcting the misstatement existing            in the balance sheet. Prior to the adoption of SAB No. 108, we quantified any            misstatements in our consolidated financial statements using the income statement            method in addition to evaluating qualitative characteristics. As this method focuses            solely on the income statement, this can lead to the accumulation of misstatements in            the balance sheet that may become material if recorded in a particular            period.

             

Prior to January 1, 2006, only the interest costs incurred during the            construction period of significant capital projects, such as construction of an            undersea fiber optic cable system, were capitalized. Beginning January 1, 2006, we            modified our interest capitalization policy resulting in the capitalization of material            interest costs incurred during the construction period of non-software capital projects            and the capitalization of interest costs incurred during the development period of a            software capital project.

             

These misstatements accumulated over several years and were immaterial            when quantifying the misstatements using the income statement method. Upon adoption of            SAB No. 108 on January 1,

             

                                                                                                                  99                                                                      (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

2006, we recorded a $3.5 million increase to property and equipment in            service and $1.6 million increase to accumulated depreciation for the cumulative            misstatement as of December 31, 2005. Accordingly, we increased retained earnings by            $1.1 million and recorded $772,000 as a long-term deferred tax liability.

             

|   | (af) | Reclassifications |
|--------|------|-------------------|

Reclassifications have been made to the 2006 and 2005 financial            statements to make them comparable with the 2007 presentation.

             

| (2) | Consolidated Statements of Cash Flows Supplemental                            Disclosures |
|-----|-------------------------------------------------------------------------------------------|

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

 

| Year ended December 31,                                                                           |   | 2007   |    | 2006   |   | 2005   |   |
|---------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|
| Increase in accounts receivable                                                                   | $      |   | (19,713 | )      | (5,649 | )      |   | (5,824 | ) |
| (Increase) decrease in prepaid expenses                                                           |   |   | 949     |   | 863    |   |   | (609 | ) |
| (Increase) decrease in inventories                                                                |   |   | 1,455   |   | (1,732 | )      |   | 27 |   |
| Decrease in other current assets                                                                  |   |   | 1,089   |   | 1,965  |   |   | 179 |   |
| Increase (decrease) in accounts payable                                                           |   |   | 2,738   |   | 3,790  |   |   | (5,525 | ) |
| Increase (decrease) in accrued payroll and payroll                            related obligations |   |   | 620     |   | (3,397 | )      |   | 2,963 |   |
| Increase (decrease) in deferred revenue                                                           |   |   | (2,000  | )      | (998   | )      |   | 460 |   |
| Decrease in due to related party                                                                  |   |   | ---     |   | ---    |   |   | (5,432 | ) |
| Increase (decrease) in accrued interest                                                           |   |   | 217     |   | (878   | )      |   | 841 |   |
| Increase (decrease) in accrued liabilities                                                        |   |   | (1,120  | )      | 804    |   |   | 97 |   |
| Increase (decrease) in subscriber deposits                                                        |   |   | 194     |   | 128    |   |   | (76 | ) |
| Increase (decrease) in components of other long-term                            liabilities       |   |   | 526     |   | 594    |   |   | (26 | ) |
|                                                                                              | $      |   | (15,045 | )      | (4,510 | )      |   | (12,925 | ) |

 

We paid interest totaling $35.8 million, $35.1 million and $33.1 million            during the years ended December 31, 2007, 2006 and 2005, respectively.

             

We paid income taxes totaling $293,000, $689,000 and $133,000 during the            years ended December 31, 2007, 2006 and 2005, respectively. We received $213,000,            $5,000 and $0 in income tax refunds during the years ended December 31, 2007, 2006 and            2005, respectively.

             

We recorded a net cumulative effect adjustment (benefit) of $64,000            during the year ended December 31, 2006 for share-based compensation instruments            outstanding at December 31, 2005 for which the requisite service was not expected to be            rendered. We recorded $922,000 and $1,730,000 during the years ended December 31, 2005            and 2004, respectively, in paid-in capital in recognition of the income tax effect of            excess stock compensation expense for tax purposes over amounts recognized for            financial reporting purposes.

             

During the year ended December 31, 2005 our Senior Vice-President and            CFO tendered 20,701 shares of his GCI Class A common stock to us at the then existing            market value of $9.87 per share for a total value of $204,000. The stock tender was in            lieu of a cash payment on a note receivable with related party and a note receivable            with related party issued upon stock option exercise.

             

During the year ended December 31, 2006 our Senior Vice President,            Strategic Initiatives, tendered 40,000 shares of his GCI Class A common stock to us at            the then existing market value of $12.50 per share for a total value of $500,000. The            stock tender was in lieu of a cash payment on a note receivable with related            party.

 

                                                                                                                 100                                                          (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

             

During the year ended December 31, 2006 a company owned by our President            and CEO tendered 100,000 shares of its GCI Class A common stock to us at the then            existing market value of $15.34 per share for a total value of $1,534,000.            Additionally, during the year ended December 31, 2006 our President and CEO tendered            50,000 shares of his GCI Class A common stock to us at the then existing market value            of $15.34 per share for a total value of $767,000. The stock tenders were in lieu of            cash payments on behalf of our President and CEO on a note receivable with related            party and a note receivable with related party issued upon stock option            exercise.

             

During the year ended December 31, 2006 we financed $2.2 million for the            acquisition of two buildings through capital lease obligations.

             

As described in note 1(ae) we adopted SAB No. 108 effective January 1,            2006, resulting in a modification of our interest capitalization policy. Upon adoption            of SAB No. 108 we recorded a $3.5 million increase to Property and Equipment in Service            and a $722,000 increase to Deferred Tax Liability during the year ended December 31,            2006.

             

In February 2007, our President and Chief Executive Officer 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 related party and a note receivable with related party issued upon            stock option exercise, both of which originated in 2002.

             

Upon our acquisition of Alaska DigiTel, we consolidated $12.7 million in            property and equipment, $24.3 million in wireless licenses, $4.5 million in other            intangible assets, $365,000 in other liabilities and $15.7 million in debt.

             

During the year ended December 31, 2007, $9.0 million in non-cash            additions to property and equipment were recorded consisting of $6.7 million in unpaid            purchases as of December 31, 2007 and $2.3 million in land and buildings that were            transferred from property held for sale.

             

During the years ended December 31, 2006 and 2005, we had $3.7 million            and $2.4 million, respectively, in non-cash additions for unpaid purchases of property            and equipment as of December 31, 2006 and 2005, respectively.

             

During the years ended December 31, 2007, 2006 and 2005, we had            $260,000, $30,000 and $41,000, respectively, in non-cash additions to property and            equipment for assets added when recording asset retirement obligations.

 

| (3) | Receivables and Allowance for Doubtful                            Receivables |
|-----|-------------------------------------------------------------------------------|

Receivables consist of the following at December 31, 2007 and 2006            (amounts in thousands):

 

|              |   | 2007   |   | 2006   |   |   |   |
|-------------------|--------|--------|--------|--------|--------|--------|--------|
| Trade             | $      |   | 95,941 |   | 77,508 |   |   |   |   |
| Employee          |   |   | 198    |   | 203    |   |   |   |   |
| Other             |   |   | 1,774  |   | 1,100  |   |   |   |   |
| Total Receivables | $      |   | 97,913 |   | 78,811 |   |   |   |   |

 

 

                                                                                                                 101                                                          (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

 

Changes in the allowance for doubtful receivables during the years ended            December 31, 2007, 2006 and 2005 are summarized below (amounts in            thousands).

 

|                                                    |   |                         |   | Additions                     |   | Deductions                |   |                         |   |
|---------------------------------------------------------|--------|------------------------------|--------|-------------------------------|--------|---------------------------|--------|------------------------------|--------|
|  

                             

Description |   | Balance at beginning of year |   | Charged to costs and expenses |   | Charged to Other Accounts |   | Write-offs net of recoveries |   | Balance at end of year |   |
| December 31, 2007                                       | $      | 2,922                        |   | 4,822                         |   | ---                       |   | 6,087                        |   | 1,657 |   |
|                                                    |   |                         |   |                          |   |                      |   |                         |   |   |   |
| December 31, 2006                                       | $      | 5,317                        |   | 3,057                         |   | ---                       |   | 5,452                        |   | 2,922 |   |
|                                                    |   |                         |   |                          |   |                      |   |                         |   |   |   |
| December 31, 2005                                       | $      | 2,317                        |   | 4,366                         |   | ---                       |   | 1,366                        |   | 5,317 |   |

 

During the years ended December 31, 2007, 2006 and 2005 we utilized $0,            $372,000 and $3.3 million, respectively, of the MCI credit (as further described and            defined in note 11) against amounts otherwise payable for services received from            MCI.

             

| (4) | Net Property and Equipment in Service |
|-----|---------------------------------------|

Net property and equipment in service consists of the following at            December 31, 2007 and 2006 (amounts in thousands):

             

|                                        |   | 2007   |    | 2006   |    |   |   |
|---------------------------------------------|--------|--------|---------|--------|---------|--------|--------|
| Land and buildings                          | $      |   | 14,424  |   | 8,685   |   |   |   |   |
| Telephony distribution systems              |   |   | 636,832 |   | 556,494 |   |   |   |   |
| Cable television distribution systems       |   |   | 161,934 |   | 155,693 |   |   |   |   |
| Support equipment                           |   |   | 107,920 |   | 95,206  |   |   |   |   |
| Transportation equipment                    |   |   | 8,102   |   | 6,645   |   |   |   |   |
| Property and equipment under capital leases |   |   | 3,086   |   | 3,086   |   |   |   |   |
|                                        |   |   | 932,298 |   | 825,809 |   |   |   |   |
| Less accumulated depreciation               |   |   | 428,808 |   | 369,976 |   |   |   |   |
| Less accumulated amortization               |   |   | 1,064   |   | 954     |   |   |   |   |
| Net property and equipment in service       | $      |   | 502,426 |   | 454,879 |   |   |   |   |

             

| (5) | Intangible Assets |
|-----|-------------------|

As of December 31, 2007 cable certificates, wireless licenses and            goodwill were tested for impairment and the fair values were greater than the carrying            amounts, therefore these intangible assets were determined not to be impaired at            December 31, 2007. The remaining useful lives of our cable certificates, wireless            licenses and goodwill were evaluated as of December 31, 2007 and events and            circumstances continue to support an indefinite useful life.

             

No intangible assets subject to amortization have been impaired based            upon impairment testing performed as of December 31, 2007. No indicators of impairment            have occurred since the impairment testing was performed.

             

Other Intangible Assets subject to amortization include the following at            December 31, 2007 and 2006 (amounts in thousands):

             

|                   |   | 2007   |   | 2006   |   |   |   |
|------------------------|--------|--------|--------|--------|--------|--------|--------|
| Software license fees  | $      |   | 12,094 |   | 9,755  |   |   |   |   |
| Customer relationships |   |   | 4,528  |   | 240    |   |   |   |   |

 

 

                                                                                                                 102                                                                     (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

 

| Right-of-way                  |   |   | 783    |   | 783    |   |   |   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Other                         |   |   | 261    |   | 365    |   |   |   |   |
|                          |   |   | 17,666 |   | 11,143 |   |   |   |   |
| Less accumulated amortization |   |   | 5,897  |   | 4,132  |   |   |   |   |
| Net other intangible assets   | $      |   | 11,769 |   | 7,011  |   |   |   |   |

             

Changes in Other Intangible Assets are as follows (amounts in            thousands):

             

| Balance at December 31, 2005                                                    | $      | 4,704  |   |   |   |   |
|---------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Asset additions                                                                 |   | 4,901  |   |   |   |   |
| Less amortization expense                                                       |   | 1,804  |   |   |   |   |
| Less asset write-off                                                            |   | 790    |   |   |   |   |
| Balance at December 31, 2006                                                    |   | 7,011  |   |   |   |   |
| Asset additions upon consolidation of Alaska                            DigiTel |   | 4,469  |   |   |   |   |
| Asset additions                                                                 |   | 3,738  |   |   |   |   |
| Less amortization expense                                                       |   | 3,332  |   |   |   |   |
| Less asset write-off                                                            |   | 117    |   |   |   |   |
| Balance at December 31, 2007                                                    | $      | 11,769 |   |   |   |   |

             

During the year ended December 31, 2006, we decided to close an            operating subsidiary and in connection with the closure we determined the software for            a Managed Broadband segment product offering with a net book value of $790,000 was            impaired and had no net realizable value. During the year ended December 31, 2006, we            recognized the impairment in depreciation and amortization expense in the accompanying            Consolidated Income Statement.

             

Additions to other intangible assets mainly consist of software license            fees purchased for our statewide local service expansion and in 2007 the addition of            customer relationships obtained through the purchase of a majority non-controlling            interest in Alaska DigiTel.

             

Amortization expense for amortizable intangible assets for the years            ended December 31, 2007, 2006 and 2005 follow (amounts in thousands):

             

|                                                                              |   | Years Ended December 31, |   |
|-----------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                              |   | 2007                     |   | 2006 |   | 2005 |   |
| Amortization expense for amortizable intangible                            assets | $      |                     | 3,332  |   | 1,804 |   |   | 1,244 |   |
|                                                                                   |        |                          |        |  |  |  |  |  |  |

             

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                      | $      | 3,297  |   |
| 2009                      |   | 2,979  |   |
| 2010                      |   | 2,458  |   |
| 2011                      |   | 1,051  |   |
| 2012                      |   | 486    |   |

             

 

                                                                                                                 103                                                                     (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

             

| (6) | Notes Receivable from Related Parties |
|-----|---------------------------------------|

Notes receivable from related parties consist of the following (amounts            in thousands):

             

|                                                                                                                                                                                                                                                                                                                        |   | December 31, |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|
|                                                                                                                                                                                                                                                                                                                        |   | 2007         |   | 2006 |   |
| Note receivable from officers bearing interest at the                            prime rate or at the rate paid by us on our senior indebtedness which                            is considered market rate, unsecured, unconditionally guaranteed by the                            borrower, due through February 8, 2007 | $      |         | ---    |   | 1,003 |   |
| Notes receivable from other related parties bearing                            interest up to 7.6% or at the rate paid by us on our senior                            indebtedness, unsecured, due through January 1, 2010                                                                                                  |   |         | 48     |   | 92 |   |
| Interest receivable                                                                                                                                                                                                                                                                                                         |   |         | 8      |   | 29 |   |
| Total notes receivable from related parties                                                                                                                                                                                                                                                                                 |   |         | 56     |   | 1,124 |   |
| Less current portion, including current interest                            receivable                                                                                                                                                                                                                                      |   |         | 31     |   | 1,080 |   |
| Long-term portion, including long-term interest                            receivable                                                                                                                                                                                                                                       | $      |         | 25     |   | 44 |   |

             

| (7) | Debt |
|-----|------|

Long-term debt consists of the following (amounts in            thousands):

             

|                                                                               |   | December 31, |    |
|------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                               |   | 2007         |    | 2006 |   |
| Senior Notes (a)                                                                   | $      |         | 320,000 |   | 320,000 |   |
| Senior Credit Facility (b)                                                         |   |         | 220,760 |   | 172,600 |   |
| Mortgage                                                                           |   |         | 529     |   | --- |   |
| Note Payable                                                                       |   |         | 100     |   | 225 |   |
| Debt                                                                               |   |         | 541,389 |   | 492,825 |   |
| Less unamortized bond discount paid on the Senior                            Notes |   |         | 2,991   |   | 3,363 |   |
| Less current portion of long-term debt                                             |   |         | 2,283   |   | 1,725 |   |
| Long-term debt, net of unamortized bond                            discount        | $      |         | 536,115 |   | 487,737 |   |

             

|   | (a) | We pay interest of 7.25% on Senior Notes that are due in                            2014. The Senior Notes are an unsecured senior obligation. The Senior                            Notes are carried on our Consolidated Balance Sheet net of the                            unamortized portion of the discount based on an effective interest rate                            of 7.50%, which is being amortized to Interest Expense over the term of                            the Senior Notes using the effective interest method. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

The Senior Notes are not redeemable prior to February 15, 2009. At any            time on or after February 15, 2009, the Senior Notes are redeemable at our option, in            whole or in part, on not less than thirty days nor more than sixty days notice, at the            following redemption prices, plus accrued and unpaid interest (if any) to the date of            redemption:

             

| If redeemed during the twelve month period commencing                            February 1 of the year indicated: |   | Redemption Price |   |
|--------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
| 2009                                                                                                               |   | 103.625%         |   |
| 2010                                                                                                               |   | 102.417%         |   |
| 2011                                                                                                               |   | 101.208%         |   |
| 2012 and thereafter                                                                                                |   | 100.000%         |   |

             

The Senior Notes restrict GCI, Inc. and certain of its subsidiaries from            incurring debt, but permits debt under the Senior Credit Facility and vendor financing            as long as our leverage ratio does not

             

                                                                                                                 104                                                          (Continued)

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

exceed 6.0 to one. In addition, certain other debt is permitted            regardless of our leverage ratio, including debt under the Senior Credit Facility not            exceeding (and reduced by certain stated items):

             

|   | **•** | $250.0 million, reduced by the amount of any                            prepayments, or |
|--------|------------|-----------------------------------------------------------------------------------------|

|   | **•** | 3.0 times earnings before interest, taxes, depreciation                            and amortization for the last four full fiscal quarters of GCI, Inc.                            and certain of its subsidiaries. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The Senior Notes limit our ability to make cash dividend            payments.

             

Semi-annual interest payments of $11.6 million are payable in February            and August of each year.

             

The Senior Notes are structurally subordinate to our Senior Credit            Facility.

             

Our Senior Notes’ key debt covenants require our Total Leverage            Ratio (as defined) be 6.0:1.0 or less and our Senior Leverage Ratio (as defined) be            3.0:1.0 or less if our Senior Notes are greater than $250.0 million.

             

|   | (b) | In September 2007 we exercised our right to add an                            Incremental Facility of up to $100.0 million to our existing Senior                            Credit Facility. The Incremental Facility was structured in the form of                            a $55.0 million increase to the existing term loan component of our                            Senior Credit Facility and a $45.0 million increase to the existing                            revolving loan component of our Senior Credit Facility. The $100.0                            million Incremental Facility will become due under the same terms and                            conditions as set forth in the existing Senior Credit                            Facility. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The Senior Credit Facility which includes the incremental facility as            discussed above includes a $215.0 million term loan and a $100.0 million revolving            credit facility with a $25.0 million sublimit for letters of credit. Our term loan is            fully drawn. We borrowed $10.0 million under our revolving credit facility in December            2007, and we have letters of credit outstanding totaling $4.2 million at December 31,            2007 which leaves $85.8 million available at December 31, 2007 to draw under the            revolving credit facility if needed. The term and revolving loan portions of our Senior            Credit Facility are due in 2012 and 2011, respectively. In 2008 we have borrowed an            additional $20.0 million under our revolving credit facility.

 

The Incremental Facility increased the interest rate on the term loan            component of our Senior Credit Facility from LIBOR plus 1.50% to LIBOR plus 2.00%. The            interest rate on the revolving loan component of the Senior Credit Facility was LIBOR            plus a margin dependent upon our Total Leverage Ratio ranging from 1.00% to 1.75%. The            Incremental Facility increased the revolving credit facility interest rate for our            Senior Credit Facility to LIBOR plus the following applicable margin dependent upon our            Total Leverage ratio (as defined):

             

| Total Leverage Ratio (as defined)                |   | Applicable Margin |   |
|--------------------------------------------------|--------|-------------------|--------|
| >3.75                                         |   | 2.25%             |   |
| >3.25 but                            <3.75 |   | 2.00%             |   |
| >2.75 but                            <3.25 |   | 1.75%             |   |
| <2.75                                         |   | 1.50%             |   |

             

The annual commitment fee we are required to pay on the unused portion            of the commitment is 0.375%.

             

Substantially all of the Company’s assets collateralize the Senior            Credit Facility.

             

The Incremental Facility was a substantial modification of a portion of            our existing Senior Credit Facility resulting in a $348,000 write-off of previously            deferred loan fees during the year ended December 31, 2007 in our Consolidated Income            Statement. Deferred loan fees of $312,000

             

                                                                                                                 105                                                                     (Continued)

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

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 Incremental Facility, we paid bank fees and other            expenses of $519,000 during the year ended December 31, 2007 of which $263,000 were            written-off in the year ended December 31, 2007 and $256,000 were deferred and will be            amortized over the remaining life of the Senior Credit Facility.

             

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. Our Senior Credit Facility            key debt covenants require our Senior Credit Facility Total Leverage Ratio (as defined)            be 4.50:1.0 or less, the Senior Leverage Ratio (as defined) must be less than 2.25:1.0,            and the Fixed Charge Coverage Ratio (as defined) must be less than 1.0:1.0 subject to            certain exceptions. On May 7, 2007 our Senior Credit Facility was amended to allow the            exclusion of up to $100.0 million of capital expenditures in aggregate from Fixed            Charges (as defined) during the Excluded Capital Expenditures Period (as defined)            beginning on May 7, 2007 and ending September 30, 2009.

             

On August 31, 2005 our April 2004 Senior Credit Facility was amended and            restated. Proceeds from the amendment were used to pay down our previous Senior Credit            Facility and to pay off our Satellite Transponder Capacity Capital Lease with the            remainder used to pay financing fees. Outstanding principal of $35.8 million on the            Satellite Transponder Capacity Capital Lease was repaid, and we incurred a $2.8 million            charge due to the early termination of the capital lease which is classified as a            component of Other Income (Expense) during the year ended December 31, 2005 in our            Consolidated Income Statement. A portion of the 2005 amendment was a substantial            modification of our April 2004 Senior Credit Facility and we therefore recognized $1.8            million in Amortization and Write-off of Loan and Senior Notes Fees during the year            ended December 31, 2005 in our Consolidated Income Statement.

             

Maturities of long-term debt as of December 31, 2007 were as follows            (amounts in thousands):

             

| Years ending December 31, |   |    |   |
|---------------------------|--------|---------|--------|
| 2008                      | $      | 2,283   |   |
| 2009                      |   | 2,181   |   |
| 2010                      |   | 2,179   |   |
| 2011                      |   | 112,751 |   |
| 2012                      |   | 101,690 |   |
| 2013 and thereafter       |   | 320,305 |   |
|                      | $      | 541,389 |   |

             

| (8) | Comprehensive Income |
|-----|----------------------|

During the years ended December 31, 2007, 2006 and 2005 we had no other            comprehensive income. Total comprehensive income which was equal to net income during            the years ended December 31, 2007, 2006 and 2005 was $13,504,000, $18,520,000 and            $20,831,000, respectively.

 

                                                                                                                 106                                                                     (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

             

| (9) | Income Taxes |
|-----|--------------|

Total income tax expense (benefit) was allocated as follows (amounts in            thousands):

             

|                                                                                                                                                                                                      |   | Years ended December 31, |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                                                                                                                                      |   | 2007                     |   | 2006 |   | 2005 |   |
| Income before cumulative effect of a change in                            accounting principle                                                                                                            | $      |                     | 11,961 |   | 15,797 |   |   | 16,004 |   |
| SAB 108 cumulative adjustment                                                                                                                                                                             |   |                     | ---    |   | 772 |   |   | --- |   |
| Cumulative effect of a change in accounting                            principle                                                                                                                          |   |                     | ---    |   | 44 |   |   | --- |   |
| Net income from continuing operations                                                                                                                                                                     |   |                     | 11,961 |   | 16,613 |   |   | 16,004 |   |
| Stockholders’ equity, for stock option                            compensation expense for tax purposes in excess of amounts recognized                            for financial reporting purposes |   |                     | ---    |   | --- |   |   | (922 | ) |
|                                                                                                                                                                                                      | $      |                     | 11,961 |   | 16,613 |   |   | 15,082 |   |

             

We did not record any excess tax benefit generated from stock options            exercised during the years ended December 31, 2007 and 2006 since we are in a net            operating loss carryforward position and the income tax deduction will not yet reduce            income taxes payable.

             

Income tax expense (benefit) consists of the following (amounts in            thousands):

             

|                  |   | Years ended December 31, |   |
|-----------------------|--------|--------------------------|--------|
|                  |   | 2007                     |   | 2006 |   | 2005 |   |
| Current tax expense:  |   |                     |   |   |   |   |   |   |   |
| Federal taxes         | $      |                     | 436    |   | (278 | ) |   | 827 |   |
| State taxes           |   |                     | 77     |   | (81 | ) |   | 238 |   |
|                  |   |                     | 513    |   | (359 | ) |   | 1,065 |   |
|                  |   |                     |   |   |   |   |   |   |   |
| Deferred tax expense: |   |                     |   |   |   |   |   |   |   |
| Federal taxes         |   |                     | 9,616  |   | 12,514 |   |   | 11,587 |   |
| State taxes           |   |                     | 1,832  |   | 3,642 |   |   | 3,352 |   |
|                  |   |                     | 11,448 |   | 16,156 |   |   | 14,939 |   |
|                  | $      |                     | 11,961 |   | 15,797 |   |   | 16,004 |   |

             

 

                                                                                                                 107                                                                     (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

Total income tax expense differed from the “expected” income            tax expense determined by applying the statutory federal income tax rate of 35% as            follows (amounts in thousands):

             

|                                                                                           |   | Years ended December 31, |   |
|------------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                           |   | 2007                     |   | 2006 |   | 2005 |   |
| “Expected” statutory tax expense                                                   | $      |                     | 8,913  |   | 11,988 |   |   | 12,892 |   |
| State income taxes, net of federal benefit                                                     |   |                     | 1,558  |   | 2,529 |   |   | 2,343 |   |
| Income tax effect on nondeductible entertainment                            expenses           |   |                     | 569    |   | 423 |   |   | 310 |   |
| Income tax effect of nondeductible lobbying                            expenses                |   |                     | 468    |   | 409 |   |   | 368 |   |
| Income tax effect of nondeductible expenditures and                            otheritems, net |   |                     | 500    |   | 60 |   |   | 102 |   |
| Other, net                                                                                     |   |                     | (47    | ) | 388 |   |   | (11 | ) |
|                                                                                           | $      |                     | 11,961 |   | 15,797 |   |   | 16,004 |   |

             

The tax effects of temporary differences that give rise to significant            portions of deferred tax assets and liabilities at December 31, 2007 and 2006 are            summarized below (amounts in thousands):

             

|                                                                                                                                            |   | 2007   |   | 2006   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Current deferred tax assets, net of current deferred tax                            liability:                                                  |   |   |   |   |   |   |
| Compensated absences, accrued for financial reporting                            purposes                                                       | $      |   | 2,196  |   | 2,029  |   |
| Net operating loss carryforwards                                                                                                                |   |   | 2,033  |   | 16,811 |   |
| Workers compensation and self insurance health reserves,                            principally due to accrual for financial reporting purposes |   |   | 694    |   | 652    |   |
| Accounts receivable, principally due to allowance for                            doubtful accounts                                              |   |   | 629    |   | 1,193  |   |
| Deferred compensation expense for tax purposes in excess                            of amounts recognized for financial reporting purposes      |   |   | (401   | )      | ---    |   |
| Other                                                                                                                                           |   |   | 583    |   | ---    |   |
| Total current deferred tax assets                                                                                                               | $      |   | 5,734  |   | 20,685 |   |

             

|                                                                                                                                       |   | 2007   |   | 2006   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Long-term deferred tax assets:                                                                                                             |   |   |   |   |   |   |
| Net operating loss carryforwards                                                                                                           | $      |   | 45,518 |   | 41,002 |   |
| Alternative minimum tax credits                                                                                                            |   |   | 3,160  |   | 2,574  |   |
| Deferred compensation expense for financial reporting                            purposes in excess of amounts recognized for tax purposes |   |   | 2,690  |   | 2,082  |   |
| Asset retirement obligations in excess of amounts                            recognized for tax purposes                                   |   |   | 1,444  |   | 1,398  |   |
| Other                                                                                                                                      |   |   | 222    |   | 51     |   |
| Total long-term deferred tax assets                                                                                                        |   |   | 53,034 |   | 47,107 |   |
|                                                                                                                                       |   |   |   |   |   |   |

 

 

                                                                                                                 108                                                                     (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

 

| Long-term deferred tax liabilities                                                             |   |   |    |   |    |   |
|------------------------------------------------------------------------------------------------|--------|--------|---------|--------|---------|--------|
| Plant and equipment, principally due to differences in                            depreciation |   |   | 106,376 |   | 107,696 |   |
| Amortizable assets                                                                             |   |   | 29,677  |   | 25,788  |   |
| Other                                                                                          |   |   | 462     |   | 621     |   |
| Total long-term deferred tax liabilities                                                       |   |   | 136,515 |   | 134,105 |   |
| Net combined long-term deferred tax                            liabilities                     | $      |   | 83,481  |   | 86,998  |   |

             

At December 31, 2007, we have (1) tax net operating loss carryforwards            of $116.4 million that will begin expiring in 2011 if not utilized, and (2) alternative            minimum tax credit carryforwards of $3.1 million available to offset regular income            taxes payable in future years. We utilized federal tax net operating loss carryforwards            of $21.7 million in 2007. Our utilization of remaining acquired net operating loss            carryforwards is subject to annual limitations pursuant to Internal Revenue Code            section 382 which could reduce or defer the utilization of these losses.

             

Our tax net operating loss carryforwards are summarized below by year of            expiration (amounts in thousands).

             

| Years ending December 31,                  |   | Federal |    | State  |    |
|--------------------------------------------|--------|---------|---------|--------|---------|
| 2011                                       | $      |    | 759     |   | 759     |   |
| 2018                                       |   |    | 644     |   | 637     |   |
| 2019                                       |   |    | 20,210  |   | 19,675  |   |
| 2020                                       |   |    | 44,744  |   | 43,797  |   |
| 2021                                       |   |    | 29,614  |   | 28,987  |   |
| 2022                                       |   |    | 14,081  |   | 13,788  |   |
| 2023                                       |   |    | 3,968   |   | 3,903   |   |
| 2024                                       |   |    | 544     |   | ---     |   |
| 2025                                       |   |    | 1,342   |   | ---     |   |
| 2026                                       |   |    | 337     |   | ---     |   |
| 2027                                       |   |    | 116     |   | ---     |   |
| Total tax net operating loss carryforwards | $      |    | 116,359 |   | 111,546 |   |

             

Tax benefits associated with recorded deferred tax assets are considered            to be more likely than not realizable through taxable income earned in carryback years,            future reversals of existing taxable temporary differences, and future taxable income            exclusive of reversing temporary differences and carryforwards. The amount of deferred            tax asset considered realizable, however, could be reduced if estimates of future            taxable income during the carryforward period are reduced.

             

| (10) | Stockholders’ Equity |
|------|----------------------------|

             

Common Stock

We were incorporated in 1997 and issued 100 shares of our no par Class A            common stock to GCI in our initial capitalization. We received all ownership interests            in subsidiaries previously held by GCI and proceeds from GCI’s August 1, 1997            common stock offering. We recorded $206.6 million associated with our initial            capitalization. All of our issued and outstanding Class A common stock is owned by            GCI.

             

Share-Based Compensation

GCI’s Stock Option Plan, as amended, provides for the grant of            options and restricted stock awards (collectively "award") for a maximum of 15.7            million shares of GCI Class A common stock, subject to adjustment upon the occurrence            of stock dividends, stock splits, mergers, consolidations or certain other changes in            corporate structure or capitalization. If an award expires or terminates, the shares            subject to the award will be available for further grants of awards under the Stock            Option Plan. The Compensation Committee of GCI’s Board of Directors administers            the Stock Option Plan. Substantially

             

                                                                                                                 109                                                          (Continued)

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

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 are issued when stock option agreements are exercised and restricted stock            awards are made. GCI’s share repurchase program may include the purchase of            shares issued pursuant to stock option agreement exercise transactions.

             

The fair value of restricted stock awards is determined based on the            number of shares granted and 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 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, we have categorized these awards into two groups of            employees for valuation purposes.

             

We estimated the expected term of options granted by evaluating the            vesting period of stock option awards, employee’s past exercise and post-vesting            employment departure behavior, and expected volatility of the price of the underlying            shares.

             

We estimated the expected volatility of GCI’s common stock at the            grant date using the historical volatility of GCI’s common stock over the most            recent period equal to the expected stock option term and evaluated the extent to which            available information indicated that future volatility may differ from historical            volatility.

             

The risk-free interest rate assumption was determined using the Federal            Reserve nominal rates for U.S. Treasury zero-coupon bonds with maturities similar to            those of the expected term of the award being valued. GCI and GCI, Inc. have never paid            any cash dividends on GCI’s common stock and we do not anticipate paying any cash            dividends in the foreseeable future. Therefore, we assumed an expected dividend yield            of zero.

             

The following table shows our assumptions used to compute the            share-based compensation expense and pro forma information in note 1(v) for stock            options granted during the years ended December 31, 2007, 2006 and 2005:

             

|                    | 2007                | 2006                | 2005                |
|-------------------------|---------------------|---------------------|---------------------|
| Expected term (years)   | 5.2 – 6.8     | 5.4 – 8.0     | 4.3 – 5.2     |
| Volatility              | 41.5% – 54.3% | 43.3% – 61.4% | 41.9% – 45.5% |
| Risk-free interest rate | 3.5% – 4.7%   | 4.7% – 5.0%   | 3.7% – 4.4%   |

             

SFAS 123(R) requires us to estimate pre-vesting option forfeitures at            the time of grant and periodically revise those estimates in subsequent periods if            actual forfeitures differ from those estimates. We record share-based compensation            expense only for those awards expected to vest using an estimated forfeiture rate based            on our historical pre-vesting forfeiture data. Previously, we accounted for forfeitures            as they occurred under the pro forma disclosure provisions of SFAS 123 for periods            prior to 2006. The transition impact of adopting SFAS No. 123(R), attributed to            accruing for expected forfeitures on outstanding share-based awards, totaled $108,000,            which was reduced by income tax expense of $44,000 and is reported as cumulative effect            of a change in accounting principle in the accompanying Consolidated Income Statement            for the year ended December 31, 2006.

             

The weighted average grant date fair value of options granted during the            years ended December 31, 2007, 2006 and 2005 was $7.03 per share, $6.92 per share and            $4.81 per share, respectively. The total fair value of options vesting during the years            ended December 31, 2007, 2006 and 2005 was $3.3 million, $3.6 million and $3.8 million,            respectively.

             

                                                                                                                 110                                                                    (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

We have recorded share-based compensation expense of $4.9 million for            the year ended December 31, 2007, which consists of $6.2 million for employee            share-based compensation expense and a $1.3 million decrease in the fair value of            liability-classified share-based compensation. We recorded share-based compensation            expense of $6.4 million for the year ended December 31, 2006, which consists of $4.8            million for employee share-based compensation expense and $1.6 million for            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 $4.2 million relating to            475,000 restricted stock awards and $14.0 million relating to 2.6 million unvested            stock options as of December 31, 2007. We expect to recognize share-based compensation            expense over a weighted average period of 3.1 years for stock options and 2.7 years for            restricted stock awards.

             

The following is a summary of the Stock Option Plan activity for the            years ended December 31, 2007, 2006 and 2005 (in thousands):

 

|                                     | Shares |   | WeightedAverageExercise Price |
|------------------------------------------|--------|--------|-------------------------------|
| Outstanding at December 31, 2004         | 6,437  |   | $6.81                         |
|                                     |   |   |                          |
| Granted                                  | 983    |   | $9.47                         |
| Exercised                                | (659   | )      | $6.06                         |
| Forfeited                                | (218   | )      | $7.22                         |
| Outstanding at December 31, 2005         | 6,543  |   | $7.27                         |
|                                     |   |   |                          |
| Granted                                  | 1,003  |   | $12.11                        |
| Exercised                                | (1,606 | )      | $6.74                         |
| Forfeited                                | (73    | )      | $8.83                         |
| Outstanding at December 31, 2006         | 5,867  |   | $8.22                         |
|                                     |   |   |                          |
| Options granted                          | 983    |   | $12.85                        |
| Restricted stock awards granted          | 499    |   | $13.04                        |
| Exercised                                | (477   | )      | $6.93                         |
| Restricted stock awards vested           | (23    | )      | $13.34                        |
| Forfeited                                | (98    | )      | $9.69                         |
| Outstanding at December 31, 2007         | 6,751  |   | $9.37                         |
|                                     |   |   |                          |
| Available for grant at December 31, 2007 | 1,584  |   |                          |

 

The following is a summary of activity for stock options granted not            pursuant to the Stock Option Plan for the years ended December 31, 2007, 2006 and 2005            (in thousands):

 

|                                                                            | Shares |   | WeightedAverageExercise Price |
|---------------------------------------------------------------------------------|--------|--------|-------------------------------|
| Outstanding at January 1, 2005 and December 31,                            2005 | 250    |   | $6.50                         |   |
| Exercised during 2006                                                           | (100   | )      | $6.50                         |   |
| Outstanding at December 31, 2006 and 2007                                       | 150    |   | $6.50                         |   |
|                                                                            |   |   |                          |   |
| Available for                            grant at December 31, 2007             | ---    |   |                          |   |

 

 

                                                                                                                 111                                                          (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

 

The following is a summary of all outstanding stock options at December            31, 2007:

 

| Options Outstanding |
|---------------------|
|                |   | Weighted Average |   |   |
|                |   | Remaining |   | Aggregate |
| Range of            | Shares | Contractual Life | Weighted Average | Intrinsic Value |
| Exercise Prices     | (thousands) | (years) | Exercise Price | (thousands) |
| $3.11-$6.00         | 726 | 3.57 | $5.50 | $2,359 |
| $6.01-$6.35         | 42 | 3.05 | $6.13 | $108 |
| $6.36-$6.50         | 780 | 2.78 | $6.50 | $1,754 |
| $6.51-$7.12         | 118 | 2.83 | $7.08 | $197 |
| $7.13-$7.25         | 1,050 | 4.10 | $7.25 | $1,575 |
| $7.26-$9.00         | 679 | 5.19 | $8.37 | $294 |
| $9.01-$10.14        | 813 | 7.37 | $9.83 | $--- |
| $10.15-$11.50       | 651 | 7.95 | $11.28 | $--- |
| $11.51-$12.92       | 194 | 9.39 | $11.74 | $--- |
| $12.93-$15.54       | 1,222 | 9.15 | $13.07 | $--- |
| $3.11-$15.54        | 6,275 | 5.93 | $9.09 | $6,287 |

             

| Options Vested  |
|-----------------|
|            |   | Weighted Average |   |   |
|            |   | Remaining |   | Aggregate |
| Range of        | Shares | Contractual Life | Weighted Average | Intrinsic Value |
| Exercise Prices | (thousands) | (years) | Exercise Price | (thousands) |
| $3.11-$6.00     | 698 | 3.50 | $5.48 | $2,281 |
| $6.01-$6.35     | 42 | 3.04 | $6.13 | $107 |
| $6.36-$6.50     | 731 | 2.61 | $6.50 | $1,644 |
| $6.51-$7.12     | 118 | 2.83 | $7.08 | $197 |
| $7.13-$7.25     | 967 | 4.10 | $7.25 | $1,450 |
| $7.26-$9.00     | 563 | 4.93 | $8.33 | $262 |
| $9.01-$10.14    | 351 | 7.11 | $9.79 | $--- |
| $10.15-$11.50   | 130 | 6.98 | $10.99 | $--- |
| $11.51-$12.92   | 12 | 8.57 | $11.96 | $--- |
| $12.93-$15.54   | 94 | 8.49 | $13.26 | $--- |
| $3.11-$15.54    | 3,706 | 4.28 | $7.46 | $5,941 |

             

The total intrinsic value, determined as of the date of exercise, of            options exercised in the years ended December 31, 2007, 2006 and 2005 were $3.5            million, $9.8 million and $2.7 million, respectively. We received $3.3 million, $11.5            million and $4.0 million in cash from stock option exercises in the years ended            December 31, 2007, 2006 and 2005, respectively. We used cash of $0, $5.8 million, and            $0 to settle stock option agreements in the years ended December 31, 2007, 2006 and            2005, respectively. We discontinued offering a cash-settlement exercise option to            employees on October 23, 2006 and do not intend to cash-settle option exercises in the            future.

             

Employee Stock Purchase Plan

In December 1986, GCI adopted an Employee Stock Purchase Plan (the            “401(k) Plan”) qualified under Section 401 of the Internal Revenue Code of            1986. The 401(k) Plan provides for acquisition of GCI’s Class A and Class B            common stock at market value. The 401(k) Plan permits each employee who has completed            one year of service to elect to participate in the 401(k) Plan. Through December 31,            2007,

             

                                                                                                                 112                                                                     (Continued)

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

eligible employees could elect to reduce their compensation by up to 50            percent of such compensation (subject to certain limitations) up to a maximum of            $15,000. Beginning January 1, 2008, eligible employees can elect to reduce their            compensation by up to 50 percent of such compensation (subject to certain limitations)            up to a maximum of $15,500. Eligible employees may contribute up to 10 percent of their            compensation with after-tax dollars, or they may elect a combination of salary            reductions and after-tax contributions.

             

Eligible employees were allowed to make catch-up contributions of no            more than $5,000 during the year ended December 31, 2007 and will be able to make such            contributions limited to $5,000 during the year ended December 31, 2008. We do not            match employee catch-up contributions.

             

We may match up to 100% of employee salary reductions and after tax            contributions in any amount, decided by GCI’s Board of Directors each year, but            not more than 10 percent of any one employee’s compensation will be matched in            any year. Matching contributions vest over the initial six years of employment. For the            year ended December 31, 2007, the combination of salary reductions, after tax            contributions and matching contributions could not exceed the lesser of 100 percent of            an employee’s compensation or $45,000 (determined after salary reduction). For            the year ended December 31, 2006, the combination of salary reductions, after tax            contributions and matching contributions could not exceed the lesser of 100 percent of            an employee’s compensation or $44,000 (determined after salary reduction). For            the year ended December 31, 2005 the combination of salary reductions, after tax            contributions and matching contributions could not exceed the lesser of 100 percent of            an employee’s compensation or $42,000 (determined after salary reduction) for any            year.

             

Employee contributions may be invested in GCI Class A and Class B common            stock, AT&T common stock, Comcast Corporation common stock, or various mutual            funds.

             

In 2005 and 2006 employee contributions received up to 100% matching, as            determined by GCI’s Board of Directors each year, in GCI common stock. As of            January 1, 2007, employee contributions receive up to 100% matching and employees            self-direct their matching investment. Our matching contributions allocated to            participant accounts totaled $5.5 million, $4.6 million, and $5.2 million for the years            ended December 31, 2007, 2006, and 2005, respectively. The 401(k) Plan may, at its            discretion, purchase shares of GCI common stock from GCI at market value or may            purchase GCI’s common stock on the open market. We funded all of our            employer-matching contributions through market purchases during the years ended            December 31, 2007, 2006 and 2005.

             

| (11) | 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 four 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 hospitals and health clinics through our            SchoolAccess® and ConnectMD® initiatives.

             

Corporate related expenses including engineering, operations and            maintenance of our core network, information technology, accounting, legal and            regulatory, human resources, and other selling, general

             

                                                                                                                 113                                                                     (Continued)

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

and administrative (“SG&A”) expenses are allocated to            our segments using the segment margin for the previous year. Bad debt expense is            allocated to our segments using a combination of specific identification and            allocations based upon segment revenue in the same year. Restructuring charge and loss            on termination of capital lease for the year ended December 31, 2005 was allocated            using the percentage of each segment's margin for the year ended December 31, 2004 to            total margin for the same period.

             

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. 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 82% of our undersea fiber optic cable systems which transit            international waters and all of our satellite transponders.

Summarized financial information for our reportable segments for the            years ended December 31, 2007, 2006 and 2005 follows (amounts in thousands):

             

|                                                                                                                                                                                               |   | Consumer |   | Network Access |   | Commer-cial |   | Managed Broadband |   | Total Reportable Segments |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------------|--------|-------------|--------|-------------------|--------|---------------------------|--------|
| 2007                                                                                                                                                                                               |   |     |   |           |   |        |   |              |   |                      |   |
| Revenues:                                                                                                                                                                                          |   |     |   |           |   |        |   |              |   |                      |   |
| Intersegment                                                                                                                                                                                       | $      | ---      |   | 2,978          |   | 5,471       |   | ---               |   | 8,449                     |   |
| External                                                                                                                                                                                           |   | 223,502  |   | 163,377        |   | 104,640     |   | 28,792            |   | 520,311                   |   |
| Total revenues                                                                                                                                                                                     |   | 223,502  |   | 166,355        |   | 110,111     |   | 28,792            |   | 528,760                   |   |
| Cost of Goods Sold:                                                                                                                                                                                |   |     |   |           |   |        |   |              |   |                      |   |
| Intersegment                                                                                                                                                                                       |   | 2,067    |   | 1,303          |   | 2,487       |   | ---               |   | 5,857                     |   |
| External                                                                                                                                                                                           |   | 81,877   |   | 40,593         |   | 50,559      |   | 6,028             |   | 179,057                   |   |
| Total Cost of Goods Sold                                                                                                                                                                           |   | 83,944   |   | 41,896         |   | 53,046      |   | 6,028             |   | 184,914                   |   |
| Contribution:                                                                                                                                                                                      |   |     |   |           |   |        |   |              |   |                      |   |
| Intersegment                                                                                                                                                                                       |   | (2,067   | )      | 1,675          |   | 2,984       |   | ---               |   | 2,592                     |   |
| External                                                                                                                                                                                           |   | 141,625  |   | 122,784        |   | 54,081      |   | 22,764            |   | 341,254                   |   |
| Total contribution                                                                                                                                                                                 |   | 139,558  |   | 124,459        |   | 57,065      |   | 22,764            |   | 343,846                   |   |
| Less SG&A                                                                                                                                                                                      |   | 95,808   |   | 44,182         |   | 38,655      |   | 13,849            |   | 192,494                   |   |
| Plus share-based compensation                                                                                                                                                                      |   | 1,720    |   | 1,744          |   | 1,071       |   | 409               |   | 4,944                     |   |
| Plus other income                                                                                                                                                                                  |   | 14       |   | 15             |   | 7           |   | ---               |   | 36                        |   |
| Earnings from external operations before depreciation,                            amortization, net interest expense, income taxes and share-based                            compensation expense | $      | 47,551   |   | 80,361         |   | 16,504      |   | 9,324             |   | 153,740                   |   |
|                                                                                                                                                                                               |   |     |   |           |   |        |   |              |   |                      |   |
| 2006                                                                                                                                                                                               |   |     |   |           |   |        |   |              |   |                      |   |
| Revenues:                                                                                                                                                                                          |   |     |   |           |   |        |   |              |   |                      |   |
| Intersegment                                                                                                                                                                                       | $      | ---      |   | ---            |   | 5,335       |   | ---               |   | 5,335                     |   |
| External                                                                                                                                                                                           |   | 178,951  |   | 166,471        |   | 105,929     |   | 26,131            |   | 477,482                   |   |
| Total revenues                                                                                                                                                                                     |   | 178,951  |   | 166,471        |   | 111,264     |   | 26,131            |   | 482,817                   |   |
| Cost of Goods Sold:                                                                                                                                                                                |   |     |   |           |   |        |   |              |   |                      |   |

 

 

                                                                                                                 114                                                                     (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

 

| Intersegment                                                                                                                                                                                       |   | ---     |   | 636     |   | 2,353   |   | ---    |   | 2,989   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|---------|--------|---------|--------|--------|--------|---------|--------|
| External                                                                                                                                                                                           |   | 66,889  |   | 37,280  |   | 47,869  |   | 4,367  |   | 156,405 |   |
| Total Cost of Goods Sold                                                                                                                                                                           |   | 66,889  |   | 37,916  |   | 50,222  |   | 4,367  |   | 159,394 |   |
| Contribution:                                                                                                                                                                                      |   |    |   |    |   |    |   |   |   |    |   |
| Intersegment                                                                                                                                                                                       |   | ---     |   | (636    | )      | 2,982   |   | ---    |   | 2,346   |   |
| External                                                                                                                                                                                           |   | 112,062 |   | 129,191 |   | 58,060  |   | 21,764 |   | 321,077 |   |
| Total contribution                                                                                                                                                                                 |   | 112,062 |   | 128,555 |   | 61,042  |   | 21,764 |   | 323,423 |   |
| Less SG&A                                                                                                                                                                                      |   | 80,750  |   | 40,268  |   | 38,169  |   | 12,465 |   | 171,652 |   |
| Plus other income                                                                                                                                                                                  |   | ---     |   | ---     |   | ---     |   | 463    |   | 463     |   |
| Plus share-based compensation                                                                                                                                                                      |   | 2,081   |   | 2,478   |   | 1,337   |   | 469    |   | 6,365   |   |
| Earnings from external operations before depreciation,                            amortization, net interest expense, income taxes and share-based                            compensation expense | $      | 33,393  |   | 91,401  |   | 21,228  |   | 10,231 |   | 156,253 |   |
|                                                                                                                                                                                               |   |    |   |    |   |    |   |   |   |    |   |
| 2005                                                                                                                                                                                               |   |    |   |    |   |    |   |   |   |    |   |
| Revenues:                                                                                                                                                                                          |   |    |   |    |   |    |   |   |   |    |   |
| Intersegment                                                                                                                                                                                       | $      | 59      |   | 6,764   |   | 24,655  |   | 568    |   | 32,046  |   |
| External                                                                                                                                                                                           |   | 162,928 |   | 148,333 |   | 105,663 |   | 26,102 |   | 443,026 |   |
| Total revenues                                                                                                                                                                                     |   | 162,987 |   | 155,097 |   | 130,318 |   | 26,670 |   | 475,072 |   |
| Cost of Goods Sold:                                                                                                                                                                                |   |    |   |    |   |    |   |   |   |    |   |
| Intersegment                                                                                                                                                                                       |   | 5,988   |   | 7,643   |   | 10,901  |   | 3,360  |   | 27,892  |   |
| External                                                                                                                                                                                           |   | 60,762  |   | 25,541  |   | 43,916  |   | 4,642  |   | 134,861 |   |
| Total Cost of Goods Sold                                                                                                                                                                           |   | 66,750  |   | 33,184  |   | 54,817  |   | 8,002  |   | 162,753 |   |
| Contribution:                                                                                                                                                                                      |   |    |   |    |   |    |   |   |   |    |   |
| Intersegment                                                                                                                                                                                       |   | (5,929  | )      | (879    | )      | 13,754  |   | (2,792 | )      | 4,154   |   |
| External                                                                                                                                                                                           |   | 102,166 |   | 122,792 |   | 61,747  |   | 21,460 |   | 308,165 |   |
| Total contribution                                                                                                                                                                                 |   | 96,237  |   | 121,913 |   | 75,501  |   | 18,668 |   | 312,319 |   |
| Less SG&A                                                                                                                                                                                      |   | 73,286  |   | 33,943  |   | 32,376  |   | 15,937 |   | 155,542 |   |
| Less Restructuring charge                                                                                                                                                                          |   | 660     |   | 737     |   | 417     |   | 153    |   | 1,967   |   |
| Less loss on termination of capital lease                                                                                                                                                          |   | 921     |   | 1,089   |   | 562     |   | 225    |   | 2,797   |   |
| Plus share-based compensation                                                                                                                                                                      |   | 180     |   | 212     |   | 110     |   | 44     |   | 546     |   |
| Earnings from external operations before depreciation,                            amortization, net interest expense, income taxes and share-based                            compensation expense | $      | 27,479  |   | 87,235  |   | 28,502  |   | 5,189  |   | 148,405 |   |

 

 

                                                                                                                 115                                                                     (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

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

             

| Years ended December 31,                                                          |   | 2007    |   | 2006    |   | 2005    |   |
|-----------------------------------------------------------------------------------|--------|---------|--------|---------|--------|---------|--------|
| Reportable segment revenues                                                       | $      | 528,760 |   | 482,817 |   | 475,072 |   |
| Less intersegment revenues eliminated in                            consolidation |   | 8,449   |   | 5,335   |   | 32,046  |   |
| Consolidated revenues                                                             | $      | 520,311 |   | 477,482 |   | 443,026 |   |

             

A reconciliation of reportable segment earnings from external operations            before depreciation and amortization expense, net interest expense, income taxes and            share-based compensation expense to consolidated net income before income taxes and            cumulative effect of a change in accounting principle follows (amounts in            thousands):

             

| Years ended December 31,                                                                                                                                                                                                |   | 2007    |   | 2006    |   | 2005    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|---------|--------|---------|--------|
| Reportable segment earnings from operations before                            depreciation and amortization expense, net interest expense, income                            taxes and share-based compensation expense | $      | 153,740 |   | 156,253 |   | 148,405 |   |
| Less depreciation and amortization expense                                                                                                                                                                              |   | 86,327  |   | 82,099  |   | 74,126  |   |
| Less share-based compensation expense                                                                                                                                                                                   |   | 4,944   |   | 6,365   |   | 546     |   |
| Plus loss on termination of capital lease                                                                                                                                                                               |   | ---     |   | ---     |   | 2,797   |   |
| Less other income                                                                                                                                                                                                       |   | 36      |   | 463     |   | ---     |   |
| Consolidated operating income                                                                                                                                                                                           |   | 62,433  |   | 67,326  |   | 76,530  |   |
| Less other expense, net                                                                                                                                                                                                 |   | 36,968  |   | 33,073  |   | 39,695  |   |
| Consolidated income before income taxes and cumulative                            effect of a change in accounting principle                                                                                            | $      | 25,465  |   | 34,253  |   | 36,835  |   |

             

Assets at December 31, 2007, 2006 and 2005 and capital expenditures for            the years ended December 31, 2007, 2006 and 2005 are not allocated to reportable            segments as our Chief Operating Decision Maker does not review a balance sheet or            capital expenditures by segment to make decisions about resource allocations or to            evaluate segment performance.

             

We earn revenues included in the Network Access segment from Verizon            (formerly MCI), a major customer. We earned revenues from Verizon, net of discounts, of            $71.6 million, $93.4 million and $85.4 million for the years ended December 31, 2007,            2006 and 2005, respectively. As a percentage of total revenues, Verizon revenues            totaled 13.8%, 19.6% and 19.3% for the years ended December 31, 2007, 2006 and 2005,            respectively.

             

In July 2002, MCI and substantially all of its active United States            subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the            United States Bankruptcy Code in the United States Bankruptcy Court. In July 2003, the            United States Bankruptcy Court approved a settlement agreement for pre-petition amounts            owed to us by MCI and affirmed all of our existing contracts with MCI. MCI emerged from            bankruptcy protection in April 2004. The remaining pre-petition accounts receivable            balance owed by MCI to us after this settlement was $11.1 million (“MCI            credit”) which we have used as a credit against amounts payable for services            purchased from MCI.

             

After settlement, we began reducing the MCI credit as we utilized it for            services otherwise payable to MCI. We have accounted for our use of the MCI credit as a            gain contingency, and, accordingly,

             

                                                                                                                 116                                                                     (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

recognized a reduction of bad debt expense as services were provided by            MCI and the credit was realized. During the years ended December 31, 2007, 2006 and            2005 we realized $0, $370,000, $3.3 million, respectively, of the MCI credit against            amounts payable for services received from MCI.

             

The MCI credit was completely used at December 31, 2006. The credit            balance was not recorded on the Consolidated Balance Sheet as we recognized recovery of            bad debt expense as the credit was realized.

             

In the fourth quarter of 2005 we recognized a decrease in Cost of Goods            Sold upon the receipt of $9.1 million from the settlement of four separate claims with            AT&T Corp. and AT&T Alascom, Inc. pursuant to a master agreement.

             

| (12) | Restructuring Charge |
|------|----------------------|

In August 2005, we committed to a reorganization plan to more            efficiently meet the demands of technological and product convergence by realigning            along customer lines rather than product lines. The reorganization plan included            integration of several functions resulting in the layoff of 76 employees by November            30, 2005. The reorganization was completed and became effective on January 1, 2006.            Beginning January 1, 2006 we are reorganized under Consumer, Commercial, Network Access            and Managed Broadband segments, replacing the Long-distance, Cable, Local Access and            Internet services segments.

             

Charges incurred in relation to the reorganization plan were accounted            for under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal            Activities.” The total costs incurred under the plan were $2.2 million which were            recognized primarily during the year ended December 31, 2005 in accordance with SFAS            No. 146.

             

The following table sets forth the restructuring charges by segment            during the years ended December 31, 2006 and 2005 (amounts in thousands):

             

|                                                                                               |   | Consumer |   | Network Access |   | Commer-cial |   | Managed Broadband |   | Total Reportable Segments |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|----------------|--------|-------------|--------|-------------------|--------|---------------------------|--------|
| Restructuring charge incurred through the year ending                            December 31, 2005 | $      | 660      |   | 737            |   | 417         |   | 153               |   | 1,967                     |   |
| Restructuring charge incurred through the year ending                            December 31, 2006 | $      | 39       |   | 118            |   | 84          |   | 8                 |   | 249                       |   |

             

 

                                                                                                                 117                                                          (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

Following is a reconciliation of our beginning and ending liability            related to the reorganization plan at December 31, 2007, 2006 and 2005 (amounts in            thousands):

             

| Balance at December 31, 2004  | $      | ---    |   |   |   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|
| Restructuring charge incurred |   | 1,967  |   |   |   |   |
| Cash paid                     |   | (1,554 | )      |   |   |   |
| Non-cash charges              |   | (282   | )      |   |   |   |
| Balance at December 31, 2005  |   | 131    |   |   |   |   |
| Restructuring charge incurred |   | 249    |   |   |   |   |
| Cash paid                     |   | (345   | )      |   |   |   |
| Non-cash charges              |   | (19    | )      |   |   |   |
| Balance at December 31, 2006  |   | 16     |   |   |   |   |
| Cash paid                     |   | (2     | )      |   |   |   |
| Adjustment to accrual         |   | (14    | )      |   |   |   |
| Balance at December 31, 2007  | $      | ---    |   |   |   |   |

             

| (13) | Financial Instruments |
|------|-----------------------|

             

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the            instrument could be exchanged in a current transaction between willing parties. At            December 31, 2007 and 2006 the fair values of cash and cash equivalents, restricted            cash, net receivables, current portion of notes receivable from related parties,            accounts payable, accrued payroll and payroll related obligations, accrued interest,            accrued liabilities, and subscriber deposits approximate their carrying value due to            the short-term nature of these financial instruments. The carrying amounts and            estimated fair values of our financial instruments at December 31, 2007 and 2006 follow            (amounts in thousands):

             

|                                                                                |   | 2007            |    | 2006       |   |
|-------------------------------------------------------------------------------------|--------|-----------------|---------|------------|--------|
|                                                                                |   | Carrying Amount |    | Fair Value |   | Carrying Amount |   | Fair Value |   |
| Current and long-term debt and capital lease                            obligations | $      |            | 541,249 |       |   | 512,853 |   |   | 492,319 |   |   | 492,527 |   |
| Other liabilities                                                                   |   |            | 11,596  |       |   | 11,380 |   |   | 11,915 |   |   | 11,808 |   |

             

The following methods and assumptions were used to estimate fair            values:

             

Current and long-term debt and capital lease obligations: The fair value            of our Senior Notes is estimated based on the quoted market price for the same issue.            The fair value of our Senior Credit Facility is estimated to approximate the carrying            value because these instruments are subject to variable interest rates. The fair value            of our capital leases and capital leases due to related party are estimated based upon            the discounted amount of future cash flows using our current incremental rate of            borrowing on our Senior Credit Facility.

             

Other Liabilities: Deferred compensation liabilities have no defined            maturity dates therefore the fair value is the amount payable on demand as of the            balance sheet date. Asset retirement obligations are recorded at their fair value and,            over time, the liability is accreted to its present value each period. Lease escalation            liabilities are valued at the discounted amount of future cash flows using the Senior            Credit Facility interest rate at December 31, 2007. Our non-employee share-based            compensation awards are reported at their fair value at each reporting            period.

             

                                                                                                                 118                                                          (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

| (14) | Related Party Transactions |
|------|----------------------------|

We entered into a long-term capital lease agreement in 1991 with the            wife of our President and CEO for property occupied by us. The leased asset was            capitalized in 1991 at the owner’s cost of $900,000 and the related obligation            was recorded in the accompanying financial statements. The lease agreement was amended            in September 2002. The amended lease terminates on September 30, 2011. Through            September 30, 2006 our monthly payment was $20,860 and increased to $21,532 per month            on October 1, 2006, and will continue at that rate through September 30,            2011.

             

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. The lease term is month-to-month and may be terminated            at any time upon one hundred and twenty days written notice. The monthly lease rate is            $75,000. Upon signing the lease, the lessor was granted an option to purchase 250,000            shares of GCI Class A common stock at $6.50 per share, of which 150,000 shares remain            and are exercisable at December 31, 2007. We paid a deposit of $1.5 million in            connection with the lease. The deposit will be repaid to us upon the earlier of six            months after the agreement terminates, or nine months after the date of a termination            notice. The lessor may sell to us the stock arising from the exercise of the stock            option or surrender the intrinsic value of the right to purchase all or a portion of            the stock option to repay the deposit, if allowed by our debt instruments in effect at            such time.

             

| (15) | Commitments and Contingencies   |
|------|--------------------------------------|

 

Leases

Operating Leases as Lessee. We lease            business offices, have entered into site lease agreements and use satellite transponder            and fiber capacity and certain equipment pursuant to operating lease arrangements.            Rental costs, including immaterial amounts of contingent rent expense, under such            arrangements amounted to $34.6 million, $32.8 million and $32.0 million for the years            ended December 31, 2007, 2006 and 2005, respectively.

             

Capital Leases

In August 2005 we used proceeds from our Senior Credit Facility to pay            off our satellite transponder capacity capital lease. Outstanding principal of $35.8            million was repaid and we incurred a $2.8 million charge due to the early termination            of the capital lease which is classified as Loss on Early Extinguishment of Capital            Lease during the year ended December 31, 2005 on our Consolidated Income            Statement.

             

We entered into a long-term capital lease agreement in 1991 with the            wife of our President and CEO for property occupied by us as further described in note            14.

             

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 is expected to be launched May 3,            2008. We will also lease capacity on the Horizons 1 satellite, which is owned jointly            by Intelsat and JSAT International, Inc. The leased capacity is expected to replace our            existing transponder capacity on Intelsat’s Galaxy XR satellite when it reaches            its end of life which is estimated to be May 18, 2008.

             

We will lease C-band and Ku-Band transponders over an expected term of            14 years once the satellite is placed into commercial operation in its assigned orbital            location, and the transponders meet specific performance specifications and are made            available for our use. The present value of the lease payments, excluding telemetry,            tracking and command services and back-up protection, is expected to total $98.6            million. We will record the capital lease obligation and the addition to our Property            and Equipment when the satellite is made available for our use which is expected to            occur on May 18, 2008.

 

                                                                                                                 119                                                                     (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

             

A summary of estimated future minimum lease payments for this lease            assuming a May 3, 2008 launch date follows (amounts in thousands):

             

| Years ending December 31:    |   |    |   |
|------------------------------|--------|---------|--------|
| 2008                         | $      | 6,510   |   |
| 2009                         |   | 11,160  |   |
| 2010                         |   | 11,160  |   |
| 2011                         |   | 11,160  |   |
| 2012                         |   | 11,160  |   |
| 2013 and thereafter          |   | 105,090 |   |
| Total minimum lease payments | $      | 156,240 |   |

             

A summary of future minimum lease payments for all leases except the            Galaxy 18 capital lease described above follows (amounts in thousands):

 

| Years ending December                            31:                                              |   | Operating |   | Capital |   |
|---------------------------------------------------------------------------------------------------|--------|-----------|--------|---------|--------|
| 2008                                                                                              | $      | 10,979    |   | 471     |   |
| 2009                                                                                              |   | 8,412     |   | 530     |   |
| 2010                                                                                              |   | 7,123     |   | 540     |   |
| 2011                                                                                              |   | 6,156     |   | 485     |   |
| 2012                                                                                              |   | 4,444     |   | 347     |   |
| 2013 and thereafter                                                                               |   | 18,315    |   | 4,586   |   |
| Total minimum lease payments                                                                      | $      | 55,429    |   | 6,959   |   |
| Less amount representing interest                                                                 |   |      |   | 4,108   |   |
| Less current maturity of obligations under capital                            leases              |   |      |   | 92      |   |
| Long-term obligations under capital leases, excluding                            current maturity |   |      | $      | 2,759   |   |

 

The leases generally provide that we pay the taxes, insurance and            maintenance expenses related to the leased assets. Several of our leases include            renewal options, escalation clauses and immaterial amounts of contingent rent expense.            We have no leases that include rent holidays. We expect that in the normal course of            business leases that expire will be renewed or replaced by leases on other            properties.

             

Telecommunication Services Agreement and Capacity            Leases

A summary of minimum future service revenues primarily including the            lease of capacity on one of our fiber optic cable systems and the provision of certain            other services follows (amounts in thousands):

 

| Years ending December 31,             |   |   |   |
|---------------------------------------|--------|--------|--------|
| 2008                                  | $      | 14,573 |   |
| 2009                                  |   | 9,114  |   |
| 2010                                  |   | 5,574  |   |
| 2011                                  |   | 3,720  |   |
| 2012                                  |   | 3,720  |   |
| 2013 and thereafter                   |   | 45,260 |   |
| Total minimum future service revenues | $      | 81,961 |   |

 

The cost of assets that are leased to customers is $22.9 million as of            December 31, 2007 and 2006. The carrying value of assets leased to customers is $13.1            million and $12.1 million as of December 31, 2007 and 2006, respectively.

 

                                                                                                                 120                                                                     (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

Letters of Credit

We have letters of credit totaling $4.2 million outstanding under our            Senior Credit Facility as follows:

             

|   | **•** | $3.4 million to secure payment of certain access charges                            associated with our provision of telecommunications services within the                            State of Alaska, |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | $653,000 to meet obligations associated with our                            insurance arrangements, and |
|--------|------------|---------------------------------------------------------------------------------------------------------|

|   | **•** | $100,000 to secure right of way access. |
|--------|------------|-----------------------------------------|

             

Alaska Airlines Miles Agreement

We have an agreement with Alaska Airlines to offer our consumer and            commercial customers who make qualifying purchases from us the opportunity to accrue            mileage awards in the Alaska Airlines Mileage Plan. The agreement as amended requires            the purchase of Alaska Airlines miles during the year ended December 31, 2007 and in            future years. The agreement has a remaining commitment at December 31, 2007 totaling            $3.8 million.

             

Wireless Service Equipment Obligation

We have entered into an agreement to purchase hardware and software            capable of providing wireless service to small markets in rural Alaska as a reliable            substitute for standard wire line service. The agreement has a total commitment of            $20.6 million. We paid a $3.5 million down payment in 2007 and expect to pay $4.3            million, $9 million, and $3.8 million during the years ended December 31, 2008, 2009,            and 2010, respectively.

             

Submarine Cable Obligation

In September 2007 we entered into several agreements to purchase the            submarine cable, amplifiers and line terminal equipment for our Southeast Alaska            submarine fiber optics project. In addition to providing the equipment for the new            submarine line, the contracts include additional equipment to upgrade the Alaska United            West submarine cable system and also include an option to increase capacity on the            Alaska United East submarine cable system. The agreements have a total commitment of            $25.3 million. We paid a $2.5 million down payment in 2007 and expect to pay the            remaining $22.8 million in 2008.

             

IRU Purchase Commitment

On July 31, 2006, through our subsidiary GCC we entered into an            agreement to purchase an IRU in the Kodiak-Kenai Cable Company, LLC’s            marine-based fiber optic cable system linking Anchorage to Kenai, Homer, Kodiak and            Seward, Alaska. The new system was placed into service in December 2006. We accepted            the first installment of our IRU capacity in December 2006. We have committed to            purchase a minimum of $5.0 million to $5.5 million in additional IRU capacity in two            installments through 2011.

             

Deferred Compensation Plan

During 1995, we adopted a non-qualified, unfunded deferred compensation            plan to provide a means by which certain employees may elect to defer receipt of            designated percentages or amounts of their compensation and to provide a means for            certain other deferrals of compensation. We may contribute matching deferrals at a rate            selected by us. Participants immediately vest in all elective deferrals and all income            and gain attributable thereto. Matching contributions and all income and gain            attributable thereto vest over a six-year period. Participants may elect to be paid in            either a single lump sum payment or annual installments over a period not to exceed 10            years. Vested balances are payable upon termination of employment, unforeseen            emergencies, death and total disability. Participants are general creditors of us with            respect to deferred compensation plan benefits. Compensation deferred pursuant to the            plan totaled $0, $3,000 and $37,000 for the years ended December 31, 2007, 2006 and            2005, respectively.

             

Performance Based Incentive Compensation Plan

During 2003 we adopted and in 2005 we amended a non-qualified,            performance based incentive compensation plan. The amended incentive compensation plan            provides additional compensation to

             

                                                                                                                 121                                                                     (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

certain officers and key employees based upon the Company’s            achievement of specified financial performance goals. The Compensation Committee of            GCI’s Board of Directors establishes goals on which executive officers are            compensated, and management establishes the goals for other covered employees. The            amended incentive compensation plan goals were met as of December 31, 2005. All awards            were paid during the year ended December 31, 2006, except 12,500 shares of GCI Class A            common stock valued and issued in 2007. Under this plan we recognized no expenses            during the years ended December 31, 2007 and 2006 and $1.2 million during the year            ended December 31, 2005.

             

Guaranteed Service Levels

Certain customers have guaranteed levels of service with varying terms.            In the event we are unable to provide the minimum service levels we may incur penalties            or issue credits to customers.

             

Self-Insurance

We are self-insured for losses and liabilities related primarily to            health and welfare claims up to $150,000 per incident and $2.0 million per lifetime per            beneficiary above which third party insurance applies. A reserve of $1.4 million and            $1.1 million was recorded at December 31, 2007 and 2006, respectively, to cover            estimated reported losses, estimated unreported losses based on past experience            modified for current trends, and estimated expenses for settling claims. We are            self-insured for losses and liabilities related to workers’ compensation claims            up to $500,000 above which third party insurance applies. A reserve of $330,000 and            $487,000 was recorded at December 31, 2007 and 2006, respectively, to cover estimated            reported losses and estimated expenses for investigating and settling claims. Actual            losses will vary from the recorded reserves. While we use what we believe is pertinent            information and factors in determining the amount of reserves, future additions to the            reserves may be necessary due to changes in the information and factors            used.

             

We are self-insured for damage or loss to certain of our transmission            facilities, including our buried, under sea, and above-ground transmission lines. If we            become subject to substantial uninsured liabilities due to damage or loss to such            facilities, our financial position, results of operations or liquidity may be adversely            affected.

             

CDMA Network Build-out Agreement

During 2007 Alaska DigiTel and GCI signed an agreement with Sprint            Nextel to build-out Alaska DigiTel's CDMA network to provide expanded roaming area            coverage. If we fail to meet the schedule of this build-out, Sprint Nextel has the            right to terminate the agreement and we may be required to pay up to $16.0 million as            liquidated damages. We expect to meet the deadlines imposed by the build-out schedule.            To complete the CDMA network build-out, we signed an agreement to purchase CDMA network            equipment for $12.5 million which is expected to be paid in 2008.

             

Access to ACS Unbundled Network Elements

On May 22, 2006, the ACS subsidiary serving Anchorage filed a petition            with the FCC, seeking forbearance from regulation of interstate broadband and access            services. On August 20, 2007, the FCC granted in part and denied in part the requested            relief, requiring that ACS comply with certain safeguards to ensure the relief granted            would not result in harm to consumers or competition. On 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.

             

                                                                                                                 122                                                                     (Continued)

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

The Federal State Joint Board on Universal Service (“Joint            Board”) has recommended the imposition of a state-by-state interim cap on high            cost funds to be distributed to ETCs. If the Joint Board recommendation is adopted by            the FCC, this cap will reduce the high cost fund amounts available to competitive ETCs,            such as us, as new competitive ETCs are designated and as existing competitive ETCs            acquire new customers. In addition, 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.

             

Cable Service Rate Reregulation

Federal law permits regulation of basic cable programming services            rates. However, Alaska law provides that cable television service is exempt from            regulation by the RCA unless 25% of a system’s subscribers request such            regulation by filing a petition with the RCA. At December 31, 2007, only the Juneau            system is subject to RCA regulation of its basic service rates. No petition requesting            regulation has been filed for any other system. The Juneau system serves 7% of our            total basic service subscribers at December 31, 2007.

             

UUI and Unicom Acquisition 

In October 2007 we signed an agreement to purchase the stock of the            United Utilities, Inc. (“UUI”) and Unicom Telecommunications            (“Unicom”) subsidiaries of United Companies, Inc. (“UCI”) for            $40.0 million expected to be paid upon closing. Additionally we may assume            approximately $37.0 million in net debt as part of the acquisition. We will fund the            transaction from cash on hand, by drawing down additional debt, or a combination of the            two. 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. This transaction is subject to customary closing            conditions, including regulatory approval. We have filed applications with the RCA and            FCC seeking the requisite regulatory consent for the transaction. The FCC comment cycle            is completed, and the parties are awaiting FCC action. GCI is currently filing replies            to comments and the statutory date for a final RCA decision is May 16, 2008. The            transaction will close upon regulatory approval which is expected in the second or            third quarter of 2008.

             

Alaska Wireless Acquisition

In August 2007 we signed a memorandum of understanding to acquire all of            the interests in Alaska Wireless, LLC (“Alaska Wireless”) for $13.0 million            to $14.0 million, expected to be paid upon closing. 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. We will fund the transaction            from cash on hand, by drawing down additional debt, or a combination of the two. Alaska            Wireless is a GSM cellular provider serving approximately 4,000 subscribers in the            Dutch Harbor, Alaska area. In addition to the acquisition, we will enter into a            management agreement with the existing owners of Alaska Wireless. The business will            continue to operate under the Alaska Wireless name and the current management team will            continue to manage the day-to-day operations. This transaction is subject to customary            closing conditions, including regulatory approval. We filed the application with the            FCC seeking the requisite regulatory consent to the transaction on January 18, 2008.            This transaction will close upon regulatory approval which is expected in the second or            third quarter of 2008.

             

Dobson Resale Agreement

AT&T acquired 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

             

                                                                                                                 123                                                                     (Continued)

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

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 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 will terminate as of July 1, 2008. AT&T will provide us            with a large block of wireless network usage at no charge to facilitate the transition            of our customers. We will pay for usage in excess of that base transitional amount.            This grant of service will reduce the Cost of Goods Sold during the four-year period            ended June 30, 2012, that we would have otherwise recognized in accordance with the new            agreement, however we are unable to estimate the impact this agreement will have on our            Cost of Goods Sold.

             

Acquisition of Remaining Alaska DigiTel Interest

In December 2007, we signed a definitive agreement to acquire the            remaining minority interest in Alaska DigiTel for a total consideration of            approximately $10.0 million. On January 22, 2008, the FCC initiated its proceedings to            review the application seeking requisite regulatory approval of the proposed change in            control. Following FCC approval of the change in control expected by the third quarter            of 2008, we will own 100% of Alaska DigiTel.

             

IRU Purchase Commitment

On July 31, 2006, we entered into an agreement to purchase an IRU in the            Kodiak-Kenai Cable Company, LLC’s marine-based fiber optic cable system linking            Anchorage to Kenai, Homer, Kodiak and Seward, Alaska. The new system was placed into            service in December 2006. We accepted the first installment of our IRU capacity in            December 2006. We have committed to purchase a minimum of $5.0 million to $5.5 million            in additional IRU capacity in two installments through 2011.

             

Litigation and Disputes

We are routinely involved in various lawsuits, billing disputes, legal            proceedings and regulatory matters that have arisen in the normal course of business            and are not expected to have a material affect on our statement of financial position            or income statement.

 

                                                                                                                 124                                                          (Continued)

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

 

| (16) | Fluctuations in Fourth Quarter Results of Operations                            (Unaudited) |
|------|---------------------------------------------------------------------------------------------|

             

The following is a summary of unaudited quarterly results of operations            for the years ended December 31, 2007 and 2006 (amounts in thousands):

             

|  

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | First

Quarter1 | Second Quarter1 | Third

Quarter1 | Fourth

Quarter1 | Total

Year |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|-----------------|-----------------|------------------|-------------|--------|
| 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |            |            |            |             |        |   |
| Revenues, as originally reported                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | $      | 124,579         | 129,592         | 133,864         | 132,276          | 520,311     |   |
| Immaterial error corrections                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 452             | 298             | 226             | (976)            | ---         |   |
| Revenues, as adjusted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | $      | 125,031         | 129,890         | 134,090         | 131,300          | 520,311     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |            |            |            |             |        |   |
| Operating income, as originally reported                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | $      | 11,488          | 18,126          | 14,193          | 18,626           | 62,433      |   |
| Immaterial error corrections                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 532             | 1,050           | 150             | (1,732)          | ---         |   |
| Operating income, as adjusted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | $      | 12,020          | 19,176          | 14,343          | 16,894           | 62,433      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |            |            |            |             |        |   |
| Net income, as originally reported                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | $      | 1,530           | 5,015           | 2,213           | 4,746            | 13,504      |   |
| Immaterial error corrections                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 282             | 556             | 80              | (918)            | ---         |   |
| Net income, as adjusted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | $      | 1,812           | 5,571           | 2,293           | 3,828            | 13,504      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |            |
| 1 Includes the correction of immaterial                            errors caused by (1) the fourth quarter correction of our unified                            billing system interface to our general ledger that resulted in                            incorrect amounts being recorded in revenue and accounts receivable,                            (2) the fourth quarter correction of incorrectly calculated share-based                            compensation expense related to options and awards, (3) the fourth                            quarter correction of revenue that had not been correctly recorded                            throughout the year, and (4) the fourth quarter correction of                            depreciation expense due to an adjustment of the Alaska DigiTel                            purchase price allocation. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |        |                 |                 |                 |                  |             |        |  |

 

|  

                                                                                  |   | First

Quarter | Second Quarter | Third

Quarter | Fourth

Quarter | Total

Year |
|------------------------------------------------------------------------------------------------|--------|----------------|----------------|----------------|-----------------|-------------|
| 2006                                                                                           |   |           |           |           |            |        |
| Total revenues                                                                                 | $      | 112,822        | 118,220        | 125,081        | 121,359         | 477,482     |
| Operating income                                                                               | $      | 15,221         | 18,698         | 19,777         | 13,630          | 67,326      |
| Income before cumulative effect of a change in                            accounting principle | $      | 3,250          | 5,656          | 6,482          | 3,068           | 18,456      |
| Net income                                                                                     | $      | 3,314          | 5,656          | 6,482          | 3,068           | 18,520      |
|                                                                                           |   |
|                                                                                                |        |                |                |                |                 |             |  |

No significant, unusual or infrequently occurring items were recognized            in the fourth quarter of 2007 or 2006.

             

 

                                                                                                        125

 

----

***Item 15(b). Exhibits***

 

Listed below are the exhibits that are filed as a part of this Report            (according to the number assigned to them in Item 601 of Regulation S-K):

                                   

| **Exhibit No.** | **Description**                                                                                                                                                                                                                                                           |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             | Articles of Incorporation                            of the Registrant (12)                                                                                                                                                                                               |
| 3.2             | Bylaws of the Registrant                            (12)                                                                                                                                                                                                                  |
| 4.1             | Certified copy of the General Communication, Inc.                            Amendment No. 1, dated as of June 25, 2007, to the Amended and Restated                            1986 Stock Option Plan (33)                                                               |
| 10.3            | Westin Building Lease (3)                                                                                                                                                                                                                                                 |
| 10.4            | Duncan and Hughes Deferred Bonus Agreements                            (4)                                                                                                                                                                                                |
| 10.5            | Compensation Agreement                            between General Communication, Inc. and William C. Behnke dated January                            1, 1997 (13)                                                                                                         |
| 10.6            | Order approving Application                            for a Certificate of Public Convenience and Necessity to operate as a                            Telecommunications (Intrastate Interexchange Carrier) Public Utility                            within Alaska (2) |
| 10.13           | MCI Carrier Agreement                            between MCI Telecommunications Corporation and General Communication,                            Inc. dated January 1, 1993 (5)                                                                                          |
| 10.14           | Contract for Alaska Access                            Services Agreement between MCI Telecommunications Corporation and                            General Communication, Inc. dated January 1, 1993 (5)                                                                  |
| 10.15           | Promissory Note Agreement                            between General Communication, Inc. and Ronald A. Duncan, dated August                            13, 1993 (6)                                                                                                       |
| 10.16           | Deferred Compensation                            Agreement between General Communication, Inc. and Ronald A. Duncan,                            dated August 13, 1993 (6)                                                                                                 |
| 10.17           | Pledge Agreement between                            General Communication, Inc. and Ronald A. Duncan, dated August 13, 1993                            (6)                                                                                                                |
| 10.20           | The GCI Special                            Non-Qualified Deferred Compensation Plan (7)                                                                                                                                                                                   |
| 10.21           | Transponder Purchase                            Agreement for Galaxy X between Hughes Communications Galaxy, Inc. and                            GCI Communication Corp. (7)                                                                                              |
| 10.25           | Licenses: (3)                                                                                                                                                                                                                                                             |
| 10.25.1         | 214                            Authorization                                                                                                                                                                                                                              |
| 10.25.2         | International Resale                            Authorization                                                                                                                                                                                                             |
| 10.25.3         | Digital Electronic                            Message Service Authorization                                                                                                                                                                                               |
| 10.25.11        | Certificate of                            Convenience and Public Necessity – Telecommunications Service                            (Local Exchange) dated July 7, 2000 (29)                                                                                         |
| 10.26           | ATU Interconnection                            Agreement between GCI Communication Corp. and Municipality of                            Anchorage, executed January 15, 1997 (12)                                                                                         |
| 10.29           | Asset Purchase Agreement,                            dated April 15, 1996, among General Communication, Inc., ACNFI, ACNJI                            and ACNKSI (8)                                                                                                      |
| 10.30           | Asset Purchase Agreement,                            dated May 10, 1996, among General Communication, Inc., and Alaska                            Cablevision, Inc. (8)                                                                                                   |
| 10.31           | Asset Purchase Agreement,                            dated May 10, 1996, among General Communication, Inc., and McCaw/Rock                            Homer Cable System, J.V. (8)                                                                                        |
| 10.32           | Asset Purchase Agreement,                            dated May 10, 1996, between General Communication, Inc., and McCaw/Rock                            Seward Cable System, J.V. (8)                                                                                     |
| 10.33           | Amendment No. 1 to                            Securities Purchase and Sale Agreement, dated October 31, 1996, among                            General Communication, Inc., and the Prime Sellers Agent (9)                                                               |
| 10.34           | First Amendment to Asset                            Purchase Agreement, dated October 30, 1996, among General                            Communication, Inc., ACNFI, ACNJI and ACNKSI (9)                                                                                 |
| 10.36           | Order Approving Arbitrated                            Interconnection Agreement as Resolved and Modified by Order U-96-89(5)                            dated January 14, 1997 (12)                                                                                       |

 

 

                                                                                                                 126

 

----

 

| 10.37 | Amendment to the MCI                            Carrier Agreement executed April 20, 1994 (12)                                                                                                                                                                                                                                                                                               |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.38 | Amendment No. 1 to MCI                            Carrier Agreement executed July 26, 1994 (11)                                                                                                                                                                                                                                                                                              |
| 10.39 | MCI Carrier                            Addendum—MCI 800 DAL Service effective February 1, 1994                            (11)                                                                                                                                                                                                                                                         |
| 10.40 | Third Amendment to MCI                            Carrier Agreement dated as of October 1, 1994 (11)                                                                                                                                                                                                                                                                                         |
| 10.41 | Fourth Amendment to MCI                            Carrier Agreement dated as of September 25, 1995 (11)                                                                                                                                                                                                                                                                                     |   |
| 10.42 | Fifth Amendment to the MCI                            Carrier Agreement executed April 19, 1996 (12)                                                                                                                                                                                                                                                                                         |   |
| 10.43 | Sixth Amendment to MCI                            Carrier Agreement dated as of March 1, 1996 (11)                                                                                                                                                                                                                                                                                           |   |
| 10.44 | Seventh Amendment to MCI                            Carrier Agreement dated November 27, 1996 (14)                                                                                                                                                                                                                                                                                           |   |
| 10.45 | First Amendment to Contract                            for Alaska Access Services between General Communication, Inc. and MCI                            Telecommunications Corporation dated April 1, 1996 (14)                                                                                                                                                                             |   |
| 10.46 | Service Mark License                            Agreement between MCI Communications Corporation and General                            Communication, Inc. dated April 13, 1994 (13)                                                                                                                                                                                                        |   |
| 10.47 | Radio Station Authorization                            (Personal Communications Service License), Issue Date June 23, 1995                            (13)                                                                                                                                                                                                                                   |   |
| 10.50 | Contract No. 92MR067A                            Telecommunications Services between BP Exploration (Alaska), Inc. and                            GCI Network Systems dated April 1, 1992 (14)                                                                                                                                                                                               |   |
| 10.51 | Amendment No. 03 to BP                            Exploration (Alaska) Inc. Contract No. 92MRO67A effective August 1,                            1996 (14)                                                                                                                                                                                                                                   |   |
| 10.52 | Lease Agreement dated                            September 30, 1991 between RDB Company and General Communication, Inc.                            (2)                                                                                                                                                                                                                                       |   |
| 10.54 | Order Approving Transfer                            Upon Closing, Subject to Conditions, and Requiring Filings dated                            September 23, 1996 (13)                                                                                                                                                                                                                      |   |
| 10.55 | Order Granting Extension of                            Time and Clarifying Order dated October 21, 1996 (13)                                                                                                                                                                                                                                                                                 |   |
| 10.58 | Employment and Deferred                            Compensation Agreement between General Communication, Inc. and John M.                            Lowber dated July 1992 (13)                                                                                                                                                                                                             |   |
| 10.59 | Deferred Compensation                            Agreement between GCI Communication Corp. and Dana L. Tindall dated                            August 15, 1994 (13)                                                                                                                                                                                                                         |   |
| 10.60 | Transponder Lease Agreement                            between General Communication Incorporated and Hughes Communications                            Satellite Services, Inc., executed August 8, 1989 (6)                                                                                                                                                                                 |   |
| 10.61 | Addendum to Galaxy X                            Transponder Purchase Agreement between GCI Communication Corp. and                            Hughes Communications Galaxy, Inc. dated August 24, 1995                            (13)                                                                                                                                                       |   |
| 10.62 | Order Approving                            Application, Subject to Conditions; Requiring Filing; and Approving                            Proposed Tariff on an Inception Basis, dated February 4, 1997                            (13)                                                                                                                                                      |   |
| 10.66 | Supply Contract Between                            Submarine Systems International Ltd. And GCI Communication Corp. dated                            as of July 11, 1997. (15)                                                                                                                                                                                                               |   |
| 10.67 | Supply Contract Between                            Tyco Submarine Systems Ltd. And Alaska United Fiber System Partnership                            Contract Variation No. 1 dated as of December 1, 1997. (15)                                                                                                                                                                             |   |
| 10.71 | Third Amendment to Contract                            for Alaska Access Services between General Communication, Inc. and MCI                            Telecommunications Corporation dated February 27, 1998 (16)                                                                                                                                                                         |   |
| 10.80 | Fourth Amendment to                            Contract for Alaska Access Services between General Communication, Inc.                            and its wholly owned subsidiary GCI Communication Corp., and MCI                            WorldCom. (17)                                                                                                                                 |   |
| 10.89 | Fifth Amendment to Contract for Alaska Access Services                            between General Communication, Inc. and its wholly owned subsidiary GCI                            Communication Corp., and MCI WorldCom Network Services, Inc., formerly                            known as MCI Telecommunications Corporation dated August 7, 2000 #                            (18)    |   |
| 10.90 | Sixth Amendment to Contract                            for Alaska Access Services between General Communication, Inc. and its                            wholly owned subsidiary GCI Communication Corp., and MCI WorldCom                            Network Services, Inc., formerly known as MCI Telecommunications                            Corporation dated February 14, 2001 # (18) |   |

 

 

                                                                                                                 127

 

----

 

| 10.91  | Seventh Amendment to Contract for Alaska Access Services                            between General Communication, Inc. and its wholly owned subsidiary GCI                            Communication Corp., and MCI WorldCom Network Services, Inc., formerly                            known as MCI Telecommunications Corporation dated March 8, 2001 #                            (18)                                                                 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.100 | Contract for Alaska Access                            Services between Sprint Communications Company L.P. and General                            Communication, Inc. and its wholly owned subsidiary GCI Communication                            Corp. dated March 12, 2002 # (21)                                                                                                                                                                        |
| 10.102 | First Amendment to Lease                            Agreement dated as of September 2002 between RDB Company and GCI                            Communication Corp. as successor in interest to General Communication,                            Inc. (22)                                                                                                                                                                                                |
| 10.103 | Agreement and plan of                            merger of GCI American Cablesystems, Inc. a Delaware corporation and                            GCI Cablesystems of Alaska, Inc. an Alaska corporation each with and                            into GCI Cable, Inc. an Alaska corporation, adopted as of December 10,                            2002 (22)                                                                                               |
| 10.104 | Articles of merger between                            GCI Cablesystems of Alaska, Inc. and GCI Cable, Inc., adopted as of                            December 10, 2002 (22)                                                                                                                                                                                                                                                                                |
| 10.105 | Aircraft lease agreement                            between GCI Communication Corp., and Alaska corporation and 560                            Company, Inc., an Alaska corporation, dated as of January 22, 2001                            (22)                                                                                                                                                                                                          |
| 10.106 | First amendment to aircraft                            lease agreement between GCI Communication Corp., and Alaska corporation                            and 560 Company, Inc., an Alaska corporation, dated as of February 8,                            2002 (22)                                                                                                                                                                                       |
| 10.108 | Bonus Agreement between                            General Communication, Inc. and Wilson Hughes (23)                                                                                                                                                                                                                                                                                                                                                      |
| 10.109 | Eighth Amendment to                            Contract for Alaska Access Services between General Communication, Inc.                            and its wholly owned subsidiary GCI Communication Corp., and MCI                            WorldCom Network Services, Inc. # (23)                                                                                                                                                                       |
| 10.110 | Settlement and Release                            Agreement between General Communication, Inc. and WorldCom, Inc.                            (23)                                                                                                                                                                                                                                                                                                         |
| 10.112 | Waiver letter agreement                            dated as of February 13, 2004 for Credit, Guaranty, Security and Pledge                            Agreement (24)                                                                                                                                                                                                                                                                                       |
| 10.113 | Indenture dated as of February 17, 2004 between GCI,                            Inc. and The Bank of New York, as trustee (24)                                                                                                                                                                                                                                                                                                                             |
| 10.114 | Registration Rights                            Agreement dated as of February 17, 2004, among GCI, Inc., and Deutsche                            Bank Securities Inc., Jefferies & Company, Inc., Credit Lyonnais                            Securities (USA), Inc., Blaylock & Partners, L.P., Ferris, Baker                            Watts, Incorporated, and TD Securities (USA), Inc., as Initial                            Purchasers (24) |
| 10.121 | First amendment to contract for Alaska Access Services                            between Sprint Communications Company L.P. and General Communication,                            Inc. and its wholly owned subsidiary GCI Communication Corp. dated July                            24, 2002 # (26)                                                                                                                                                      |
| 10.122 | Second amendment to contract for Alaska Access Services                            between Sprint Communications Company L.P. and General Communication,                            Inc. and its wholly owned subsidiary GCI Communication Corp. dated                            December 31, 2003 (26)                                                                                                                                                   |
| 10.123 | Third amendment to contract for Alaska Access Services                            between Sprint Communications Company L.P. and General Communication,                            Inc. and its wholly owned subsidiary GCI Communication Corp. dated                            February 19, 2004 # (26)                                                                                                                                                  |
| 10.124 | Fourth amendment to contract for Alaska Access Services                            between Sprint Communications Company L.P. and General Communication,                            Inc. and its wholly owned subsidiary GCI Communication Corp. dated June                            30, 2004 # (26)                                                                                                                                                     |
| 10.126 | Audit Committee Charter (as revised by the board of                            directors of General Communication, Inc. effective as of February 3,                            2005) (27)                                                                                                                                                                                                                                                                  |
| 10.127 | Nominating and Corporate Governance Committee Charter                            (as revised by the board of directors of General Communication, Inc.                            effective as of February 3, 2005) (27)                                                                                                                                                                                                                                    |
| 10.128 | Fifth amendment to contract for Alaska Access Services                            between Sprint Communications Company L.P. and General Communication,                            Inc. and its wholly owned subsidiary GCI Communication Corp. dated                            January 22, 2005 # (27)                                                                                                                                                   |

 

 

                                                                                                                 128

 

----

 

| 10.129 | Ninth Amendment to Contract for Alaska Access Services                            between General Communication, Inc. and its wholly owned subsidiary GCI                            Communication Corp., and MCI WorldCom Network Services, Inc. #                            (28)                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.130 | Amended and Restated Credit Agreement among GCI                            Holdings, Inc. and Calyon New York Branch as Administrative Agent, Sole                            Lead Arranger, and Co-Bookrunner, The Initial Lenders and Initial                            Issuing Bank Named Herein as Initial Lenders and Initial Issuing Bank,                            General Electric Capital Corporation as Syndication Agent, and Union                            Bank of California, N.A., CoBank, ACB, CIT Lending Services Corporation                            and Wells Fargo Bank, N.A. as Co-Documentation Agents, dated as of                            August 31, 2005 (28) |
| 10.131 | Amended and Restated 1986 Stock Option Plan of General                            Communication, Inc. as of June 7, 2005 (28)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | 10.132                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Amendment No. 1 to $150 Million EBITDA Incentive Program                            dated December 30, 2005 (29) |
|   | 10.134                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Full-time Transponder Capacity Agreement with PanAmSat                            Corporation dated March 31, 2006 # (30) |
|   | 10.135                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Tenth 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 formerly known as MCI WorldCom Network                            Services) # (31) |
|   | 10.136                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Reorganization Agreement among General Communication,                            Inc., Alaska DigiTel, LLC, The Members of Alaska DigiTel, LLC, AKD                            Holdings, LLC and The Members of Denali PCS, LLC dated as of June 16,                            2006 (Nonmaterial schedules and exhibits to the Reorganization                            Agreement have been omitted pursuant to Item 601b.2 of Regulation S-K.                            We agree to furnish supplementally to the Commission upon request a                            copy of any omitted schedule or exhibit.) # (32) |
|   | 10.137                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Second Amended and Restated Operating Agreement of                            Alaska DigiTel, LLC dated as of January 1, 2007 (We agree to furnish                            supplementally to the Commission upon request a copy of any omitted                            schedule or exhibit.) # (32) |
|   | 10.138                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Sixth amendment to contract for Alaska Access Services                            between Sprint Communications Company L.P. and General Communication,                            Inc. and its wholly owned subsidiary GCI Communication Corp. dated                            September 20, 2006 (33) |
|   | 10.139                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Seventh amendment to contract for Alaska Access Services                            between Sprint Communications Company L.P. and General Communication,                            Inc. and its wholly owned subsidiary GCI Communication Corp. dated                            January 17, 2007 # (33) |
|   | 10.140                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | General Communication, Inc. Director Compensation Plan                            dated June 29, 2006 (33) |
|   | 10.141                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Eleventh 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 formerly known as MCI WorldCom                            Network Services) # (35) |
| 10.142 | Third Amendment to the Amended and Restated Credit                            Agreement among GCI Holdings, Inc., GCI Communication Corp., GCI Cable,                            Inc., GCI Fiber Communication Co., Potter View Development Co., Inc.,                            and Alaska United Fiber System Partnership, GCI, Inc., the banks,                            financial institutions, and other lenders party hereto and Calyon New                            York Branch as Administrative Agent, dated as of September 14, 2007                            (36)                                                                                                                |
| 10.143 | Joinder Agreement dated as of September 28, 2007 among                            BNP Paribas, U.S. Bank National Association, GCI Holdings, Inc., GCI                            Communication Corp., GCI Cable, Inc., GCI Fiber Communication Co.,                            Potter View Development Co., Inc., and Alaska United Fiber System                            Partnership, GCI, Inc., and Calyon New York Branch as Administrative                            Agent (36)                                                                                                                                                                                                            |
| 10.144 | Strategic Roaming Agreement dated as of October 30, 2007                            between Alaska DigitTel, LLC. And WirelessCo L.P. # *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |  |

 

 

                                                                                                                 129

 

----

 

| 10.145 | CDMA Build-out Agreement dated as of October 30, 2007                            between Alaska DigitTel, LLC. and WirelessCo L.P. (Nonmaterial                            schedules and exhibits to the Reorganization Agreement have been                            omitted pursuant to Item 601b.2 of Regulation S-K. We agree to furnish                            supplementally to the Commission upon request a copy of any omitted                            schedule or exhibit.) # * |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.146                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Long-term de Facto Transfer Spectrum Leasing agreement                            between Alaska DigitTel, LLC. and SprintCom, Inc. # * |
|   | 10.147                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Twelfth 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 formerly known as MCI WorldCom Network                            Services) dated November 19, 2007 (Nonmaterial schedules and exhibits                            to the Reorganization Agreement have been omitted pursuant to Item                            601b.2 of Regulation S-K. We agree to furnish supplementally to the                            Commission upon request a copy of any omitted schedule or exhibit.) #                            * |
|   | 10.148                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Stock Purchase Agreement                            dated as of October 12, 2007 among GCI Communication Corp., United                            Companies, Inc., Sea Lion Corporation and Togiak Natives LTD.                            (Nonmaterial schedules and exhibits to the Reorganization Agreement                            have been omitted pursuant to Item 601b.2 of Regulation S-K. We agree                            to furnish supplementally to the Commission upon request a copy of any                            omitted schedule or exhibit.) * |
|   | 14                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Code Of Business Conduct                            and Ethics (originally reported as exhibit 10.118) (25) |
|   | 21.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Subsidiaries of the                            Registrant * |
|   | 31                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Certifications Pursuant to Section 302 of the                            Sarbanes-Oxley Act of 2002 * |
|   | 32                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Certifications Pursuant to 18 U.S.C. Section 1350, as                            Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                            * |
|   | 99                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Additional                            Exhibits: |
|   | 99.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The Articles of                            Incorporation of GCI Communication Corp. (1) |
|   | 99.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The Bylaws of GCI                            Communication Corp. (1) |
|   | 99.7                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The Bylaws of GCI                            Cable, Inc. (10) |
|   | 99.8                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | The Articles of                            Incorporation of GCI Cable, Inc. (10) |
|   | 99.15                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Bylaws of GCI                            Holdings, Inc. (13) |
|   | 99.16                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Articles of                            Incorporation of GCI Holdings, Inc. (13) |
|   | 99.17                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Articles of                            Incorporation of GCI, Inc. (12) |
|   | 99.18                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Bylaws of GCI,                            Inc. (12) |
|   | 99.27                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Partnership                            Agreement of Alaska United Fiber System (15) |
|   | 99.28                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Bylaws of Potter View Development Co., Inc.                            (19) |
|   | 99.29                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Articles of Incorporation of Potter View Development                            Co., Inc. (19) |
|   | 99.34                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Bylaws of GCI Fiber Communication, Co., Inc.                            (20) |
|   | 99.35                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | The Articles of Incorporation of GCI Fiber                            Communication, Co., Inc. (20) |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |  |

 

| ________________

                              |
|------------------------------------------------------|
| #                                                    | CONFIDENTIAL PORTION has                            been omitted pursuant to a request for confidential treatment by us to,                            and the material has been separately filed with, the Securities and                            Exchange Commission. Each omitted Confidential Portion is marked by                            three asterisks. |
| *                                                    | Filed herewith. |
|                                                 |   |
| ________________                                     |

             

             

| Exhibit Reference | Description                                                                                                                                                    |
|-------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1                 | Incorporated by reference                            to GCI’s Annual Report on Form 10-K for the year ended December                            31, 1990 |
| 2                 | Incorporated by reference                            to GCI’s Annual Report on Form 10-K for the year ended December                            31, 1991 |

 

 

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| 3  | Incorporated by reference                            to GCI’s Registration Statement on Form 10 (File No. 0-15279),                            mailed to the Securities and Exchange Commission on December 30,                            1986 |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4  | Incorporated by reference                            to GCI’s Annual Report on Form 10-K for the year ended December                            31, 1989.                                                                                       |
| 5  | Incorporated by reference                            to GCI’s Current Report on Form 8-K dated June 4,                            1993.                                                                                                         |
| 6  | Incorporated by reference                            to GCI’s Annual Report on Form 10-K for the year ended December                            31, 1993.                                                                                       |
| 7  | Incorporated by reference                            to GCI’s Annual Report on Form 10-K for the year ended December                            31, 1995.                                                                                       |
| 8  | Incorporated by reference                            to GCI’s Form S-4 Registration Statement dated October 4,                            1996.                                                                                                 |
| 9  | Incorporated by reference                            to GCI’s Current Report on Form 8-K dated November 13,                            1996.                                                                                                    |
| 10 | Incorporated by reference                            to GCI’s Annual Report on Form 10-K for the year ended December                            31, 1996.                                                                                       |
| 11 | Incorporated by reference                            to GCI’s Current Report on Form 8-K dated March 14, 1996, filed                            March 28, 1996.                                                                                 |
| 12 | Incorporated by reference                            to GCI’s Form S-3 Registration Statement (File No. 333-28001)                            dated May 29, 1997.                                                                               |
| 13 | Incorporated by reference                            to GCI’s Amendment No. 1 to Form S-3/A Registration Statement                            (File No. 333-28001) dated July 8, 1997.                                                          |
| 14 | Incorporated by reference                            to GCI’s Amendment No. 2 to Form S-3/A Registration Statement                            (File No. 333-28001) dated July 21, 1997.                                                         |
| 15 | Incorporated by reference                            to The Company’s Annual Report on Form 10-K for the year ended                            December 31, 1997.                                                                               |
| 16 | Incorporated by reference                            to The Company’s Annual Report on Form 10-K for the year ended                            December 31, 1998.                                                                               |
| 17 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended June 30, 1999.                                                                              |
| 18 | Incorporated by reference to The Company’s                            Quarterly Report on Form 10-Q for the period ended March 31,                            2001.                                                                             |
| 19 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended June 30, 2001.                                                                              |
| 20 | Incorporated by reference                            to The Company’s Annual Report on Form 10-K for the year ended                            December 31, 2001.                                                                               |
| 21 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended June 30, 2002.                                                                              |
| 22 | Incorporated by reference                            to The Company’s Annual Report on Form 10-K for the year ended                            December 31, 2002.                                                                               |
| 23 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended June 30, 2003.                                                                              |
| 24 | Incorporated by reference                            to The Company’s Annual Report on Form 10-K for the year ended                            December 31, 2003.                                                                               |
| 25 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended March 31, 2004.                                                                             |
| 26 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended June 30, 2004.                                                                              |
| 27 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended March 31, 2005.                                                                             |
| 28 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended September 30, 2005.                                                                         |
| 29 | Incorporated by reference                            to The Company’s Annual Report on Form 10-K for the year ended                            December 31, 2005 filed March 16, 2006.                                                          |

 

 

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| 30 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended March 31, 2006.                    |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended June 30, 2006.                     |
| 32 | Incorporated by reference                            to The Company’s Annual Report on Form 10-K for the year ended                            December 31, 2006 filed March 19, 2007. |
| 33 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended March 31, 2007.                    |
| 34 | Incorporated by reference                            to The Company’s Form S-8 filed with the SEC on July 27,                            2007.                                         |
| 35 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended June 30, 2007.                     |
| 36 | Incorporated by reference                            to The Company’s Quarterly Report on Form 10-Q for the period                            ended September 30, 2007.                |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities            Exchange Act of 1934, the registrant has duly caused this report to be signed on its            behalf by the undersigned thereunto duly authorized.

             

|   | GCI, INC. |
|--------|-----------|

             

|   | By:    | /s/ Ronald A. Duncan        |   |
|--------|--------|-----------------------------|--------|
|   |   | Ronald A. Duncan, President |   |
|   |   | (Chief Executive Officer)   |   |

             

| Date: | March 6, 2008 |   |
|-------|---------------|--------|

             

Pursuant to the requirements of the Securities Exchange Act of 1934,            this report has been signed below by the following persons on behalf of the registrant            and in the capacities and on the date indicated.

 

| Signature            |   | Title                                        |   | Date          |
|----------------------|--------|----------------------------------------------|--------|---------------|
|                 |   |                                         |   |          |
| /s/ Ronald A. Duncan |   | President and Director                       |   | March 6, 2008 |
| Ronald A. Duncan     |   | (Principal Executive Officer)                |   |          |
|                 |   |                                         |   |          |
| /s/ G. Wilson Hughes |   | Vice President and Director                  |   | March 6, 2008 |
| G. Wilson Hughes     |   |                                         |   |          |
|                 |   |                                         |   |          |
| /s/ John M. Lowber   |   | Secretary, Treasurer and Director            |   | March 6, 2008 |
| John M. Lowber       |   | (Principal Financial and Accounting Officer) |   |          |

 

 

 

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