|   |   |   |   |   |
|--------|--------|--------|--------|--------|

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

 

**(Mark One)**

 

xQUARTERLY REPORT PURSUANT TO SECTION 13            OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For            the quarterly period ended September 30, 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**

             

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

 

Indicate by check mark whether the registrant (1) has filed all reports            required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934            during the preceding 12 months (or for such shorter period that the registrant was            required to file such reports), and (2) has been subject to such filing requirements            for the past 90 days. YesxNoo

 

Indicate by check mark whether the registrant is a large accelerated            filer, an accelerated filer, or a non-accelerated filer. See definition of            “accelerated filer and large accelerated filer” in Rule 12b-2 of the            Exchange Act. (Check one):

 

| Large accelerated filero | Accelerated filero | Non-accelerated filerx |
|--------------------------|--------------------|------------------------|

 

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

 

 

|   | 1 |
|--------|---|

 

----

**GCI, INC.**

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

**FORM 10-Q**

**FOR THE QUARTER ENDED SEPTEMBER 30, 2007**

 

**TABLE OF CONTENTS**

 

|                                                                                 |                                                                            |                                                                                         |   |   | **Page No.** |
|--------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|--------|--------|--------------|
|                                                                                 |                                                                            |                                                                                         |   |   |         |
| Cautionary Statement Regarding Forward-Looking                            Statements | 3                                                                               |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
| **Part I. FINANCIAL INFORMATION**                                                    |                                                                            |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 | Item I.                                                                         | Financial Statements                                                                         |   |   |         |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 |                                                                            | Consolidated Balance Sheets as of September 30,                            2007              |   |   |         |
|                                                                                 |                                                                            | (unaudited) and December 31, 2006                                                            |   |   | 4            |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 |                                                                            | Consolidated Income Statement for the three and nine                            months       |   |   |         |
|                                                                                 |                                                                            | ended September 30, 2007 (unaudited) and 2006                            (unaudited)         |   |   | 6            |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 |                                                                            | Consolidated Statements of Cash Flows for the nine                            months         |   |   |         |
|                                                                                 |                                                                            | ended September 30, 2007 (unaudited) and 2006                            (unaudited)         |   |   | 7            |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 |                                                                            | Notes to Interim Consolidated Financial Statements                            (unaudited)    |   |   | 8            |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 | Item 2.                                                                         | Management’s Discussion and Analysis of Financial                            Condition |   |   |         |
|                                                                                 |                                                                            | and Results of Operations                                                                    |   |   | 21           |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 | Item 3.                                                                         | Quantitative and Qualitative Disclosures About Market                            Risk        |   |   | 45           |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 | Item 4.                                                                         | Controls and Procedures                                                                      |   |   | 46           |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
| **Part II. OTHER INFORMATION**                                                       |                                                                            |                                                                                         |   |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 | Item 1.                                                                         | Legal Proceedings                                                                            |   |   | 47           |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 | Item 6.                                                                         | Exhibits                                                                                     |   |   | 47           |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
|                                                                                 | Other items are omitted, as they are not                            applicable. |                                                                                         |   |
|                                                                                 |                                                                            |                                                                                         |   |   |         |
| **SIGNATURES**                                                                       |                                                                            |                                                                                         | 48     |
|                                                                                      |                                                                                 |                                                                                              |        |        |              |  |  |  |  |  |

 

 

 

 

 

|   | 2 |
|--------|---|

 

----

 

**Cautionary Statement Regarding Forward-Looking            Statements**

 

You            should carefully review the information contained in this Quarterly Report, but should            particularly consider any risk factors that we set forth in this Quarterly Report and            in other reports or documents that we file from time to time with the Securities and            Exchange Commission (“SEC”). In this Quarterly Report, in addition to            historical information, we state our future strategies, plans, objectives or goals and            our beliefs of future events and of our future operating results, financial position            and cash flows. In some cases, you can identify 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” in Item 1A of our December            31, 2006 annual report on Form 10-K, and elsewhere in this Quarterly 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 the related risks, uncertainties and other factors speak            only as of the date on which they were originally made and we expressly disclaim any            obligation or undertaking to update or revise any forward-looking statement to reflect            any change in our expectations with regard to 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.

 

 

 

 

 

 

 

 

             

             

             

             

             

|   | 3 |
|--------|---|

 

----

**PART I. FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

             

**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCESHEETS**

 

 

| (Amounts in thousands)                                                               |   | (Unaudited)   |   |         |   |
|--------------------------------------------------------------------------------------|--------|---------------|--------|--------------|--------|
|                                                                                 |   | September 30, |   | December 31, |   |
| ASSETS                                                                               |   | 2007          |   | 2006         |   |
|                                                                                 |   |          |   |         |   |
| Current assets:                                                                      |   |          |   |         |   |
| Cash and cash equivalents                                                            | $      | 24,945        |   | 57,647       |   |
|                                                                                 |   |          |   |         |   |
| Receivables                                                                          |   | 90,168        |   | 78,811       |   |
| Less allowance for doubtful receivables                                              |   | 2,681         |   | 2,922        |   |
| Net receivables                                                                      |   | 87,487        |   | 75,889       |   |
|                                                                                 |   |          |   |         |   |
| Deferred income taxes                                                                |   | 12,559        |   | 20,685       |   |
| Prepaid expenses                                                                     |   | 5,349         |   | 5,729        |   |
| Inventories                                                                          |   | 4,310         |   | 3,362        |   |
| Property held for sale                                                               |   | 1,280         |   | 2,316        |   |
| Notes receivable from related parties                                                |   | 44            |   | 1,080        |   |
| Other current assets                                                                 |   | 1,034         |   | 1,988        |   |
| Total current assets                                                                 |   | 137,008       |   | 168,696      |   |
|                                                                                 |   |          |   |         |   |
| Property and equipment in service, net of                            depreciation    |   | 478,805       |   | 454,879      |   |
| Construction in progress                                                             |   | 65,071        |   | 29,994       |   |
| Net property and equipment                                                           |   | 543,876       |   | 484,873      |   |
|                                                                                 |   |          |   |         |   |
| Cable certificates                                                                   |   | 191,565       |   | 191,565      |   |
| Goodwill                                                                             |   | 42,181        |   | 42,181       |   |
| Wireless certificates                                                                |   | 26,925        |   | 1,497        |   |
| Other intangible assets, net of amortization                                         |   | 11,328        |   | 7,011        |   |
| Deferred loan and senior notes costs, net of                            amortization |   | 6,353         |   | 7,091        |   |
| Other assets                                                                         |   | 8,419         |   | 6,456        |   |
| Total other assets                                                                   |   | 286,771       |   | 255,801      |   |
| Total assets                                                                         | $      | 967,655       |   | 909,370      |   |

 

See            accompanying notes to interim consolidated financial statements.

 

 

 

 

 

 

 

|   | 4 | (Continued) |
|--------|---|-------------|

 

----

**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCESHEETS**

**(Continued)**

 

| (Amounts in thousands)                                                                                                                                                                   |   |   | (Unaudited)   |    |         |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------------|---------|--------------|---------|
|                                                                                                                                                                                     |   |   | September 30, |    | December 31, |    |
| LIABILITIES, MINORITY INTEREST, AND STOCKHOLDER'S                            EQUITY                                                                                                      |   |   | 2007          |    | 2006         |    |
|                                                                                                                                                                                     |   |   |          |    |         |    |   |
| Current liabilities:                                                                                                                                                                     |   |   |          |    |         |    |   |
| Current maturities of obligations under long-term debt                            and capital leases                                                                                     |   | $      |          | 2,368   |         | 1,792   |   |
| Accounts payable                                                                                                                                                                         |   |   |          | 34,149  |         | 28,404  |   |
| Deferred revenue                                                                                                                                                                         |   |   |          | 16,057  |         | 16,566  |   |
| Accrued payroll and payroll related                            obligations                                                                                                               |   |   |          | 14,407  |         | 14,598  |   |
| Accrued liabilities                                                                                                                                                                      |   |   |          | 8,252   |         | 8,166   |   |
| Accrued interest                                                                                                                                                                         |   |   |          | 3,010   |         | 8,710   |   |
| Subscriber deposits                                                                                                                                                                      |   |   |          | 766     |         | 489     |   |
| Total current liabilities                                                                                                                                                                |   |   |          | 79,009  |         | 78,725  |   |
|                                                                                                                                                                                     |   |   |          |    |         |    |   |
| Long-term debt                                                                                                                                                                           |   |   |          | 526,565 |         | 487,737 |   |
| Obligations under capital leases, excluding current                            maturities                                                                                                |   |   |          | 2,275   |         | 2,229   |   |
| Obligation under capital lease due to related party,                            excluding current maturity                                                                               |   |   |          | 495     |         | 561     |   |
| Deferred income taxes                                                                                                                                                                    |   |   |          | 86,331  |         | 86,998  |   |
| Other liabilities                                                                                                                                                                        |   |   |          | 13,544  |         | 12,725  |   |
| Total liabilities                                                                                                                                                                        |   |   |          | 708,219 |         | 668,975 |   |
|                                                                                                                                                                                     |   |   |          |    |         |    |   |
| Minority interest                                                                                                                                                                        |   |   |          | 6,485   |         | ---     |   |
|                                                                                                                                                                                     |   |   |          |    |         |    |   |
| Commitments and contingencies                                                                                                                                                            |   |   |          |    |         |    |   |
| Stockholder's equity:                                                                                                                                                                    |   |   |          |    |         |    |   |
| Class A common stock (no par). Authorized 10 shares;                            issued and outstanding 0.1 shares at September 30, 2007 and December                            31, 2006 |   |   |          | 206,622 |         | 206,622 |   |
| Paid-in capital                                                                                                                                                                          |   |   |          | 36,182  |         | 27,744  |   |
| Retained earnings                                                                                                                                                                        |   |   |          | 10,147  |         | 6,029   |   |
| Total stockholder's equity                                                                                                                                                               |   |   |          | 252,951 |         | 240,395 |   |
| Total liabilities, minority interest, and stockholder's                            equity                                                                                                |   | $      |          | 967,655 |         | 909,370 |   |

 

See accompanying notes to interim consolidated financial            statements.

 

|   | 5 |
|--------|---|

 

----

**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATEDINCOMESTATEMENT**

**(Unaudited)**

 

|                                                                                                                  |   | Three Months Ended |    | Nine Months Ended |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------|--------|
|                                                                                                                  |   | September 30,      |    | September 30,     |   |
|  

                             

(Amounts in thousands)                                                    |   |               | 2007    |              |   | (as amended) 2006 |   |   | 2007 |   |   | (as amended)

2006 |   |
| Revenues                                                                                                              |   | $                  | 133,864 |              |   | 125,081 |   |   | 388,035 |   |   | 356,123 |   |
|                                                                                                                  |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Cost of goods sold (exclusive of depreciation and                            amortization shown separately below)     |   |               | 47,878  |              |   | 41,523 |   |   | 133,229 |   |   | 116,065 |   |
| Selling, general and administrative expenses                                                                          |   |               | 48,956  |              |   | 43,391 |   |   | 144,966 |   |   | 125,639 |   |
| Depreciation and amortization expense                                                                                 |   |               | 22,837  |              |   | 20,390 |   |   | 66,033 |   |   | 60,723 |   |
| Operating income                                                                                                      |   |               | 14,193  |              |   | 19,777 |   |   | 43,807 |   |   | 53,696 |   |
|                                                                                                                  |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                                                                               |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                      |   |               | (9,042  | )                 |   | (8,995 | ) |   | (26,683 | ) |   | (26,245 | ) |
| Loan and senior note fees                                                                                             |   |               | (751    | )                 |   | (251 | ) |   | (1,147 | ) |   | (753 | ) |
| Interest income                                                                                                       |   |               | 82      |              |   | 759 |   |   | 427 |   |   | 1,398 |   |
| Minority interest                                                                                                     |   |               | 37      |              |   | 181 |   |   | 26 |   |   | 350 |   |
| Other expense, net                                                                                                    |   |               | (9,674  | )                 |   | (8,306 | ) |   | (27,377 | ) |   | (25,250 | ) |
|                                                                                                                  |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Income before income tax expense and cumulative effect                            of a change in accounting principle |   |               | 4,519   |              |   | 11,471 |   |   | 16,430 |   |   | 28,446 |   |
|                                                                                                                  |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Income tax expense                                                                                                    |   |               | 2,306   |              |   | 4,989 |   |   | 7,672 |   |   | 13,058 |   |
|                                                                                                                  |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Income before cumulative effect of a change in                            accounting principle                        |   |               | 2,213   |              |   | 6,482 |   |   | 8,758 |   |   | 15,388 |   |
|                                                                                                                  |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Cumulative effect of a change in accounting principle,                            net of income tax expense of $44    |   |               | ---     |              |   | --- |   |   | --- |   |   | 64 |   |
|                                                                                                                  |   |               |    |              |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                            |   | $                  | 2,213   |              |   | 6,482 |   |   | 8,758 |   |   | 15,452 |   |

 

See accompanying notes to interim consolidated financial            statements.

|   | 6 |
|--------|---|

 

----

**GCI, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

**(Unaudited)**

 

| (Amounts in thousands)                                                                                                                       |   |   | 2007     |   |   | 2006(as amended) |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------|--------|--------|------------------|--------|
| Cash flows from operating activities:                                                                                                        |   |   |     |   |   |             |   |
| Net income                                                                                                                                   |   | $      | 8,758    |   |   | 15,452           |   |
| Adjustments to reconcile net income to net cash provided                            by operating activities (net of effects of acquisition): |   |   |     |   |   |             |   |
| Depreciation and amortization expense                                                                                                        |   |   | 66,033   |   |   | 60,723           |   |
| Deferred income tax expense                                                                                                                  |   |   | 7,453    |   |   | 12,574           |   |
| Bad debt expense                                                                                                                             |   |   | 4,654    |   |   | 2,606            |   |
| Share-based compensation expense                                                                                                             |   |   | 4,133    |   |   | 4,410            |   |
| Other noncash income and expense items                                                                                                       |   |   | 2,071    |   |   | 2,003            |   |
| Change in operating assets and liabilities, net of                            acquisition                                                    |   |   | (18,765  | )      |   | (17,548          | )      |
| Net cash provided by operating activities                                                                                                    |   |   | 74,337   |   |   | 80,220           |   |
|                                                                                                                                         |   |   |     |   |   |             |   |
| Cash flows from investing activities:                                                                                                        |   |   |     |   |   |             |   |
| Purchases of property and equipment                                                                                                          |   |   | (105,236 | )      |   | (63,983          | )      |
| Purchase of business                                                                                                                         |   |   | (19,530  | )      |   | ---              |   |
| Purchases of other assets and intangible                            assets                                                                   |   |   | (4,996   | )      |   | (2,621           | )      |
| Other                                                                                                                                        |   |   | 25       |   |   | 643              |   |
| Net cash used in investing activities                                                                                                        |   |   | (129,737 | )      |   | (65,961          | )      |
|                                                                                                                                         |   |   |     |   |   |             |   |
| Cash flows from financing activities:                                                                                                        |   |   |     |   |   |             |   |
| Borrowing on Senior Credit Facility                                                                                                          |   |   | 50,000   |   |   | ---              |   |
| Repayment of debt and capital lease                            obligations                                                                   |   |   | (26,655  | )      |   | (1,355           | )      |
| Payment of debt issuance costs                                                                                                               |   |   | (402     | )      |   | ---              |   |
| Net distribution to General Communication,                            Inc.                                                                   |   |   | (245     | )      |   | (23,402          | )      |
| Net cash provided by (used in) financing                            activities                                                               |   |   | 22,698   |   |   | (24,757          | )      |
| Net decrease in cash and cash equivalents                                                                                                    |   |   | (32,702  | )      |   | (10,498          | )      |
| Cash and cash equivalents at beginning of                            period                                                                  |   |   | 57,647   |   |   | 44,362           |   |
|                                                                                                                                         |   |   |     |   |   |             |   |
| Cash and cash equivalents at end of period                                                                                                   |   | $      | 24,945   |   |   | 33,864           |   |
|                                                                                                                                              |        |        |          |        |        |                  |        |  |

 

See accompanying notes to interim consolidated financial            statements.

|   | 7 |
|--------|---|

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

The            accompanying unaudited interim consolidated financial statements include the accounts            of GCI, Inc. and its subsidiaries and have been prepared in accordance with generally            accepted accounting principles for interim financial information. Accordingly, they do            not include all of the information and footnotes required by accounting principles            generally accepted in the United States of America for complete financial statements.            They should be read in conjunction with our audited consolidated financial statements            for the year ended December 31, 2006, filed as part of our annual report on Form 10-K.            In the opinion of management, all adjustments (consisting of normal recurring accruals)            considered necessary for a fair presentation have been included. The results of            operations for interim periods are not necessarily indicative of the results that may            be expected for an entire year or any other period.

             

| (l) | Business and Summary of Significant Accounting                            Principles |
|-----|--------------------------------------------------------------------------------------|

             

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

             

Basis of Presentation

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

             

|   | (a) | Business |
|--------|-----|----------|

We offer the following services:

|   | **•** | Long-distance telephone service between Alaska and the                            remaining United States and foreign countries, |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Cable television services throughout Alaska, |
|--------|------------|----------------------------------------------|

|   | **•** | Facilities-based competitive local access services in                            Anchorage, Fairbanks, Juneau, Wasilla, Eagle River, Kodiak, and                            Ketchikan, Alaska as of September 30, 2007 with on-going expansion into                            additional Alaska communities, |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Internet access services, |
|--------|------------|---------------------------|

|   | **•** | Origination and termination of traffic in Alaska for                            certain common carriers, |
|--------|------------|----------------------------------------------------------------------------------------------------------|

|   | **•** | Private line and private network services, |
|--------|------------|--------------------------------------------|

|   | **•** | Managed services to certain commercial                            customers, |
|--------|------------|------------------------------------------------------------------------------|

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

|   | **•** | 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, |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Distribution of white and yellow pages directories to                            residential and business customers in certain markets we serve and                            on-line directory products, and |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Resale and sale of postpaid and sale of prepaid wireless                            telephone services and sale of wireless telephone handsets and                            accessories. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | (b) | Principles of Consolidation |
|--------|-----|-----------------------------|

The consolidated financial statements include the consolidated accounts            of GCI, Inc. and its wholly owned subsidiaries as well as a variable interest entity in            which we are the primary beneficiary as defined by Financial Accounting Standards Board            ("FASB") Interpretation ("FIN") No. 46R, “Consolidation of Variable Interest            Entities, an interpretation of ARB No. 51.” FIN 46R 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

             

|   | 8 | (Continued) |
|--------|---|-------------|

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

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.

             

Alaska DigiTel, LLC ("Alaska DigiTel") Acquisition

On January 2, 2007, we acquired 81.9% 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 46R. We view our investment as an incremental way to            participate in future growth of the Alaska wireless industry. We consolidated Alaska            DigiTel in accordance with FIN 46R and their results of operations are included in the            Consolidated Income Statement for the entire nine months ended September 30, 2007. The            purchase price allocation has not been finalized at September 30, 2007 and it will be            completed when the valuation analysis is final. The Alaska DigiTel purchase price has            been preliminarily allocated as follows: cash $10.0 million, receivables, net $2.4            million, other current assets $850,000, property and equipment $12.8 million, wireless            certificates $25.4 million, other intangible assets $4.4 million, current liabilities            $4.1 million, debt $15.7 million and minority interest $6.5 million. The total assets            of Alaska DigiTel were $54.6 million at September 30, 2007. Alaska DigiTel’s            revenues for the nine months ended September 30, 2007 were $21.3 million and are            primarily included in our consumer segment. Alaska DigiTel had outstanding debt of            $538,000 at September 30, 2007 that is collateralized by $801,000 of its property in            service. Alaska DigiTel’s creditors do not have recourse to GCI, Inc.’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 three and nine months ended September 30, 2006 would have been as follows (amounts            in thousands):

             

|                                                                                                     |   | Three Months Ended |   |   | Nine Months Ended |   |
|----------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                                                                                                     |   | September 30, 2006 |   |
| Pro forma consolidated revenue                                                                           | $      | 130,951            |   |   | 371,061           |   |
| Pro forma income before cumulative effect of a change in                            accounting principle | $      | 6,405              |   |   | 14,790            |   |

             

|   | (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.

 

|   | 9 | (Continued) |
|--------|---|-------------|

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

|   | (d) | Asset Retirement Obligations |
|--------|-----|------------------------------|

Following is a reconciliation of the beginning and ending aggregate            carrying amount of our asset retirement obligations at September 30, 2007 and 2006            (amounts in thousands):

 

| Balance at December 31, 2005                                  | $      | 3,210  |   |   |   |   |
|---------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Accretion expense for the nine months endedSeptember 30, 2006 |   | 129    |   |   |   |   |
| Liability settled                                             |   | (4     | )      |   |   |   |
| Balance at September 30, 2006                                 | $      | 3,335  |   |   |   |   |
|                                                          |   |   |   |   |   |   |
| Balance at December 31, 2006                                  | $      | 3,408  |   |   |   |   |
| Liability incurred                                            |   | 85     |   |   |   |   |
| Accretion expense for the nine months endedSeptember 30, 2007 |   | 106    |   |   |   |   |
| Liability settled                                             |   | (3     | )      |   |   |   |
| Balance at September 30, 2007                                 | $      | 3,596  |   |   |   |   |

 

Our asset retirement obligations are included in Other            Liabilities.

 

|   | (e) | 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, valuation            allowances for deferred income tax assets, depreciable and amortizable lives of assets,            the carrying value of long-lived assets including goodwill and cable and wireless            certificates, and the accrual of cost of goods sold (exclusive of depreciation and            amortization expense) (“Cost of Goods Sold”). Actual results could differ            from those estimates.

 

|   | (f) | 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.

 

|   | (g) | Accounting for Uncertainty in Income                            Taxes |
|--------|-----|-----------------------------------------------------------------------|

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 FASB            Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes 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.

             

GCI files 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            1995 and following 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 September 30, 2007 and 2006, and, accordingly, we            did not recognize any interest expense.

             

|   | 10 | (Continued) |
|--------|----|-------------|

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

Additionally, we did not record any penalties during the nine months            ended September 30, 2007 and 2006.

 

|   | (h) | 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 certain            immaterial surcharges on a gross basis in our income statement.

             

|   | (i) | Reclassifications and Immaterial Error                            Corrections |
|--------|-----|-------------------------------------------------------------------------------|

Reclassifications have been made to the 2006 financial statements to            make them comparable with the 2007 presentation.

             

We corrected immaterial errors for the three and nine months ended            September 30, 2006 as follows (amounts in thousands):

             

|                                                                                       |   |   | Three Months Ended |   |   | Nine Months Ended |   |   |
|--------------------------------------------------------------------------------------------|--------|--------|--------------------|--------|--------|-------------------|--------|--------|
|                                                                                       |   |   | September 30, 2006 |   |   |
| Revenues decrease                                                                          | $      |   | (740               | )      |   | (740              | )      |   |
| Cost of Goods Sold increase                                                                |   |   | (240               | )      |   | ---               |   |   |
| Selling, general and administrative expense (increase)                            decrease |   |   | (902               | )      |   | 111               |   |   |
| Income tax expense decrease                                                                |   |   | 1,293              |   |   | 290               |   |   |
| Net income decrease                                                                        | $      |   | (589               | )      |   | (339              | )      |   |

             

The corrections included reversing a change in estimate relating to a            discount owed by a service provider recorded during the third quarter which should have            been recorded in the second quarter, reducing certain payroll liabilities in the second            quarter which were previously reported as reduced during the third quarter, correcting            a duplicate payment to a service provider made during the second quarter previously            reported as corrected during the third quarter, capitalization of associated benefits            on capitalized labor during the second quarter previously reported as recorded during            the third quarter, adjusting income tax expense in the third quarter to properly            present the correction of an error in the second quarter income tax provision, and            application of a statutory change to the rates charged to our common carrier customers            during the third quarter, along with the associated effect on our company-wide success            sharing accrual during the three and nine months ended September 30, 2006 previously            corrected during the fourth quarter of 2006. We also recorded the impact of these            adjustments on our income tax expense. Additionally, we reclassified $1.1 million of            expenses for the nine months ended September 30, 2006 related to a stock option award            from cumulative effect of a change in accounting principle to selling, general and            administrative expenses, and the related tax effect.

             

| (2) | Consolidated Statements of Cash Flows Supplemental                            Disclosures |
|-----|-------------------------------------------------------------------------------------------|

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

             

| Nine month period ended September 30,       |   | 2007   |    | 2006

(as amended) |   |    |
|---------------------------------------------|--------|--------|---------|--------------------|--------|---------|
| Increase in accounts receivable             | $      |   | (12,478 | )                  |   | (13,245 | ) |   |
| Decrease in prepaid expenses                |   |   | 1,393   |               |   | 1,716   |   |   |
| Increase in inventories                     |   |   | (314    | )                  |   | (1,137  | ) |   |
| (Increase) decrease in other current assets |   |   | 960     |               |   | (30     | ) |   |
| Increase in accounts payable                |   |   | 1,041   |               |   | 5,984   |   |   |
| Decrease in deferred revenues               |   |   | (2,705  | )                  |   | (782    | ) |   |

 

 

|   | 11 | (Continued) |
|--------|----|-------------|

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

 

| Nine month period ended September 30,                                                  |        |        | 2007    |        |        | 2006 (as amended) |        |        |
|----------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|-------------------|--------|--------|
| Decrease in accrued payroll and payroll related                            obligations |   |   | (1,388  | )      |   | (5,568            | )      |   |
| Increase (decrease) in accrued liabilities                                             |   |   | (548    | )      |   | 1,732             |   |   |
| Decrease in accrued interest                                                           |   |   | (5,700  | )      |   | (6,681            | )      |   |
| Increase in subscriber deposits                                                        |   |   | 83      |   |   | 93                |   |   |
| Increase in components of other long-term                            liabilities       |   |   | 891     |   |   | 370               |   |   |
|                                                                                   | $      |   | (18,765 | )      |   | (17,548           | )      |   |

 

We paid interest totaling approximately $32.3 million and $32.8 million            during the nine months ended September 30, 2007 and 2006, respectively.

             

We received $213,000 and $0 income tax refunds during the nine months            ended September 30, 2007 and 2006. We paid income taxes of $80,000 and $312,000 during            the nine months ended September 30, 2007 and 2006, respectively.

             

During the nine months ended September 30, 2006 we financed $2.2 million            for the acquisition of two buildings through a capital lease obligation.

             

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 $12.8 million in            property and equipment, $25.4 million in wireless certificates, $4.4 million in other            intangible assets, and $15.7 million in debt.

             

During the nine months ended September 30, 2007, $8.2 million in            non-cash additions to property and equipment were recorded consisting of $6.7 million            in unpaid purchases as of September 30, 2007 and $1.5 million in buildings that were            transferred from property held for sale.

             

During the nine months ended September 30, 2006, we had $2.2 million in            non-cash additions for unpaid purchases of property and equipment as of September 30,            2006.

             

| (3) | Intangible Assets |
|-----|-------------------|

Our wireless certificates increased $25.4 million and other intangible            assets increased $4.4 million upon the consolidation of Alaska DigiTel during the nine            months ended September 30, 2007 as further described in note 1(b). Our wireless            certificates are indefinite-lived assets. The increase in other intangible assets is            due to the recognition of customer relationships with a weighted average amortization            period of forty-six months.

             

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

 

|                 |   | Three Months Ended |   | Nine Months Ended |   |
|----------------------|--------|--------------------|--------|-------------------|--------|
|                 |   | September 30,      |   | September 30,     |   |
|                 |   | 2007               |   | 2006              |   | 2007 |   | 2006 |   |
| Amortization expense | $      |               | 908    |              |   | 560 |   |   | 2,666 |   |   | 1,348 |   |
|                      |        |                    |        |                   |        |  |  |  |  |  |  |  |  |

 

 

|   | 12 | (Continued) |
|--------|----|-------------|

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

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, |   |   |   |
|---------------------------|--------|--------|--------|
| 2007                      | $      | 3,324  |   |
| 2008                      |   | 2,986  |   |
| 2009                      |   | 2,667  |   |
| 2010                      |   | 2,146  |   |
| 2011                      |   | 738    |   |

             

| (4) | Share-Based Compensation |
|-----|--------------------------|

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

             

We use a Black-Scholes-Merton option pricing model to estimate the fair            value of share-based awards. The Black-Scholes-Merton option pricing model incorporates            various and highly subjective assumptions, including expected term and expected            volatility. We have reviewed our historical pattern of option exercises and have            determined that meaningful differences in option exercise activity existed among            employee job categories. Therefore, for all stock options, we have categorized these            awards into two groups for valuation purposes.

             

The weighted average grant date fair value of awards granted during the            nine months ended September 30, 2007 and 2006 was $9.56 per share and $6.43 per share,            respectively. The total fair value of awards vesting during the nine months ended            September 30, 2007 and 2006 was $2.9 million and $2.8 million, respectively.

             

Share-based compensation expense is classified as selling, general and            administrative expense in our consolidated income statement. Unrecognized share-based            compensation expense was approximately $17.2 million as of September 30, 2007, relating            to a total of 3.1 million unvested awards. We expect to recognize this share-based            compensation expense over a weighted average period of approximately 3.2            years.

             

|   | 13 | (Continued) |
|--------|----|-------------|

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

The following is a summary of Stock Option Plan activity for the nine            months ended September 30, 2007:

 

|                                       | Shares(in thousands) |   | WeightedAverageExercise Price |
|--------------------------------------------|----------------------|--------|-------------------------------|
| Outstanding at December 31, 2006           | 5,867                |   | $ 8.22                        |
|                                       |                 |   |                          |
| Options                            granted | 849                  |   | $13.04                        |
| Restricted stock awards granted            | 502                  |   | $ 13.04                       |
| Exercised                                  | (449                 | )      | $ 6.95                        |
| Forfeited                                  | (67                  | )      | $ 8.63                        |
| Outstanding at September 30, 2007          | 6,702                |   | $ 9.03                        |
|                                       |                 |   |                          |
| Available for grant at September 30, 2007  | 1,684                |   |                          |

 

The following is a summary of activity for stock option grants that were            not made pursuant to the Stock Option Plan for the nine months ended September 30,            2007:

 

|                                                                               | Shares(in thousands) |   | WeightedAverageExercise Price |
|------------------------------------------------------------------------------------|----------------------|--------|-------------------------------|
| Outstanding at December 31, 2006 and September 30,                            2007 | 150                  |   | $6.50                         |   |
|                                                                               |                 |   |                          |   |
| Available for grant at September 30, 2007                                          | ---                  |   |                          |   |

 

In January 2001 we entered into an aircraft operating lease agreement            with a company owned by our President and Chief Executive Officer. The lease was            amended effective January 1, 2002 and February 25, 2005. Upon signing the lease, the            lessor was granted an option to purchase 250,000 shares of GCI Class A common stock at            $6.50 per share, of which 150,000 shares remain and are exercisable at September 30,            2007.

             

The total intrinsic values, determined as of the date of exercise, of            options exercised during the nine months ended September 30, 2007 and 2006 were $3.4            million and $6.4 million, respectively. We received $3.1 million and $8.5 million from            GCI in cash from stock option exercises during the nine months ended September 30, 2007            and 2006, respectively. On GCI's behalf, we used cash of $0 and $5.5 million to settle            stock option agreements during the nine months ended September 30, 2007 and 2006,            respectively. GCI discontinued offering a cash-settlement exercise option to employees            on October 23, 2006 and does not intend to cash-settle option exercises in the            future.

 

| (5) | Long-term Debt |
|-----|----------------|

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 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

             

|   | 14 | (Continued) |
|--------|----|-------------|

             

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

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%             |   |

             

$55.0 million was drawn on the term loan component of the Incremental            Facility at the time of the debt modification. Our term loan is fully drawn and we have            letters of credit outstanding totaling $4.2 million at September 30, 2007, which leaves            $95.8 million available for unconditional immediate borrowing under the revolving            credit facility.

             

This transaction was a substantial modification of a portion of our            existing Senior Credit Facility resulting in a $343,000 write-off of previously            deferred loan fees during the three and nine months ended September 30, 2007 in our            Consolidated Income Statement. Deferred loan fees of $317,000 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 $403,000 during the three and nine months ended September 30, 2007 of which            $208,000 were written-off in the three and nine months ended September 30, 2007 and            $195,000 were deferred and will be amortized over the remaining life of the Senior            Credit Facility.

             

As of September 30, 2007 maturities of long-term debt under the Senior            Credit Facility were as follows (amounts in thousands):

             

| Years ending December 31, |   |    |   |
|---------------------------|--------|---------|--------|
| 2007                      | $      | 537     |   |
| 2008                      |   | 2,146   |   |
| 2009                      |   | 2,140   |   |
| 2010                      |   | 2,135   |   |
| 2011                      |   | 102,702 |   |
| 2012 and thereafter       |   | 101,637 |   |
|                      | $      | 211,297 |   |

             

| (6) | Industry Segments Data |
|-----|------------------------|

Our reportable segments are business units that offer different            products. The reportable segments are each managed separately and serve distinct types            of customers.

             

A description of our 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.

             

|   | 15 | (Continued) |
|--------|----|-------------|

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

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

             

Corporate related expenses including engineering, operations and            maintenance of our core network, information technology, accounting, legal and            regulatory, human resources, and other general and administrative expenses for the            three and nine months ended September 30, 2007 and 2006 are allocated to our segments            using segment margin for the years ended December 31, 2006 and 2005, respectively. Bad            debt expense for the three and nine months ended September 30, 2007 and 2006 is            allocated to our segments using a combination of specific identification and            allocations based upon segment revenue for the three and nine months ended September            30, 2007 and 2006, respectively.

             

We evaluate performance and allocate resources based on earnings from            operations before depreciation and amortization expense, net interest expense, income            tax expense and share-based compensation expense. The accounting policies of the            reportable segments are the same as those described in the summary of significant            accounting policies in note 1 in the “Notes to Consolidated Financial            Statements” included in Part II of our December 31, 2006 annual report on Form            10-K. Intersegment sales are recorded at cost plus an agreed upon intercompany            profit.

             

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

             

Summarized financial information for our reportable segments for the            three and nine months ended September 30, 2007 and 2006 follows (amounts in            thousands):

             

| Three months ended September 30,                                                                                                                                                                   |   | Consumer |   | Network Access |   | Commer-cial |   | Managed Broadband |   | Total Reportable Segments |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------------|--------|-------------|--------|-------------------|--------|---------------------------|
| 2007                                                                                                                                                                                               |   |     |   |           |   |        |   |              |   |                      |
| Revenues:                                                                                                                                                                                          |   |     |   |           |   |        |   |              |   |                      |
| Intersegment                                                                                                                                                                                       | $      | ---      |   | 831            |   | 1,343       |   | ---               |   | 2,174                     |
| External                                                                                                                                                                                           |   | 56,623   |   | 42,657         |   | 27,215      |   | 7,369             |   | 133,864                   |
| Total revenues                                                                                                                                                                                     | $      | 56,623   |   | 43,488         |   | 28,558      |   | 7,369             |   | 136,038                   |
| Earnings from external operations before depreciation,                            amortization, net interest expense, income taxes and share-based                            compensation expense | $      | 11,135   |   | 20,790         |   | 4,522       |   | 2,248             |   | 38,695                    |
|                                                                                                                                                                                               |   |     |   |           |   |        |   |              |   |                      |
| 2006 (as amended)                                                                                                                                                                                  |   |     |   |           |   |        |   |              |   |                      |
| Revenues:                                                                                                                                                                                          |   |     |   |           |   |        |   |              |   |                      |
| Intersegment                                                                                                                                                                                       | $      | ---      |   | ---            |   | 1,257       |   | ---               |   | 1,257                     |
| External                                                                                                                                                                                           |   | 45,243   |   | 44,899         |   | 28,511      |   | 6,428             |   | 125,081                   |
| Total revenues                                                                                                                                                                                     | $      | 45,243   |   | 44,899         |   | 29,768      |   | 6,428             |   | 126,338                   |
| Earnings from external operations before depreciation,                            amortization, net interest expense, income taxes and share-based                            compensation expense | $      | 8,009    |   | 25,597         |   | 5,086       |   | 2,665             |   | 41,357                    |

 

 

|   | 16 | (Continued) |
|--------|----|-------------|

 

----

**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

 

|                                                                                                                                                                                               |   | Consumer |   | Network Access |   | Commer-cial |   | Managed Broadband |   | Total Reportable Segments |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------------|--------|-------------|--------|-------------------|--------|---------------------------|
| Nine months ended September 30,                                                                                                                                                                    |   |     |   |           |   |        |   |              |   |                      |
| 2007                                                                                                                                                                                               |   |     |   |           |   |        |   |              |   |                      |
| Revenues:                                                                                                                                                                                          |   |     |   |           |   |        |   |              |   |                      |
| Intersegment                                                                                                                                                                                       | $      | ---      |   | 2,194          |   | 3,972       |   | ---               |   | 6,166                     |
| External                                                                                                                                                                                           |   | 164,788  |   | 124,599        |   | 77,405      |   | 21,243            |   | 388,035                   |
| Total revenues                                                                                                                                                                                     | $      | 164,788  |   | 126,793        |   | 81,377      |   | 21,243            |   | 394,201                   |
| Earnings from external operations before depreciation,                            amortization, net interest expense, income taxes and share-based                            compensation expense | $      | 31,858   |   | 63,131         |   | 12,590      |   | 6,420             |   | 113,999                   |
|                                                                                                                                                                                               |   |     |   |           |   |        |   |              |   |                      |
| 2006 (as amended)                                                                                                                                                                                  |   |     |   |           |   |        |   |              |   |                      |
| Revenues:                                                                                                                                                                                          |   |     |   |           |   |        |   |              |   |                      |
| Intersegment                                                                                                                                                                                       | $      | ---      |   | ---            |   | 3,981       |   | ---               |   | 3,981                     |
| External                                                                                                                                                                                           |   | 132,129  |   | 124,099        |   | 80,652      |   | 19,243            |   | 356,123                   |
| Total revenues                                                                                                                                                                                     | $      | 132,129  |   | 124,099        |   | 84,633      |   | 19,243            |   | 360,104                   |
| Earnings from external operations before depreciation,                            amortization, net interest expense, income taxes and share-based                            compensation expense | $      | 25,273   |   | 69,494         |   | 17,645      |   | 6,767             |   | 119,179                   |

 

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

             

|                                                                              |   | Three Months Ended |              | Nine Months Ended |
|-----------------------------------------------------------------------------------|--------|--------------------|-------------------|-------------------|
|                                                                              |   | September 30,      |              | September 30,     |
|                                                                              |   | 2007               | 2006 (as amended) |              | 2007 | 2006 (as amended) |
| Reportable segment revenues                                                       | $      | 136,038            | 126,338           |              | 394,201 | 360,104 |
| Less intersegment revenues eliminated in                            consolidation |   | 2,174              | 1,257             |              | 6,166 | 3,981 |
| Consolidated revenues                                                             | $      | 133,864            | 125,081           |              | 388,035 | 356,123 |

             

 

|   | 17 | (Continued) |
|--------|----|-------------|

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

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 income before income taxes and            cumulative effect of a change in accounting principle follows (amounts in            thousands):

             

|                                                                                                                                                                                                                             |   | Three Months Ended |              | Nine Months Ended |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-------------------|-------------------|
|                                                                                                                                                                                                                             |   | September 30,      |              | September 30,     |
|                                                                                                                                                                                                                             |   | 2007               | 2006 (as amended) |              | 2007 | 2006 (as amended) |
| Reportable segment earnings from external operations                            before depreciation and amortization expense, net interest expense,                            income taxes and share-based compensation expense | $      | 38,695             | 41,357            |              | 113,999 | 119,179 |
| Less depreciation and amortization expense                                                                                                                                                                                       |   | 22,837             | 20,390            |              | 66,033 | 60,723 |
| Less share-based compensation expense                                                                                                                                                                                            |   | 1,628              | 1,009             |              | 4,133 | 4,410 |
| Less other income                                                                                                                                                                                                                |   | 37                 | 181               |              | 26 | 350 |
| Consolidated operating income                                                                                                                                                                                                    |   | 14,193             | 19,777            |              | 43,807 | 53,696 |
| Less other expense, net                                                                                                                                                                                                          |   | 9,674              | 8,306             |              | 27,377 | 25,250 |
| Consolidated income before income tax expense and                            cumulative effect of a change in accounting principle                                                                                               | $      | 4,519              | 11,471            |              | 16,430 | 28,446 |

             

| (7) | Commitments and Contingencies   |
|-----|--------------------------------------|

             

|   | Litigation, Disputes, and Regulatory                            Matters |
|--------|-------------------------------------------------------------------------|

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

             

Wireless Service Equipment Obligation

Through our subsidiary GCI Communication Corp. ("GCC") 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 $23.1 million. We paid a $2.1            million down payment in 2007 and expect to pay $2.3 million, $8.8 million, $6.9            million, and $3.0 million during the years ended December 31, 2007, 2008, 2009, and            2010, respectively.

             

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 March 5,            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 10R satellite when it reaches            its end of life, which is expected in mid-May 2008.

             

We will lease C-band and Ku-Band transponders over an expected term of            approximately 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 $77.0 million to $82.0 million. We will record the capital lease            obligation

             

|   | 18 | (Continued) |
|--------|----|-------------|

             

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

and the addition to our Property and Equipment when the satellite is            made available for our use which is expected to occur approximately one month after the            launch.

             

Submarine Cable Obligation

In September 2007 through our subsidiary GCC we entered into an            agreement 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 contract includes additional equipment to            upgrade the Alaska United West submarine cable system and also includes an option to            increase capacity on the Alaska United East submarine cable system.  The agreement            has a total commitment of $11.2 million. We paid a $1.2 million down payment in October            2007 and expect to pay the remaining $10.0 million in 2008.

             

Anchorage Unbundled Network Elements Arbitration

On September 30, 2005, the Alaska Communications Systems Group, Inc.            (“ACS”) subsidiary serving Anchorage filed a petition with the Federal            Communications Commission (“FCC”), seeking forbearance from the requirement            that it provide access to unbundled network elements (“UNE”), 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 the transition period, at            the same rates, terms and conditions as those negotiated between GCI and ACS for            Fairbanks, until commercially negotiated rates are reached. A one-year transition            period applies, until December 28, 2007, before the forbearance grant takes            effect.

             

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 (subject to the review and approval of the Regulatory            Commission of Alaska (“RCA”)) 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 interconnection agreement that            incorporated the terms of the settlement. Under the Settlement Agreement, we expect            cost of goods sold to increase approximately $1.0 million during the year ended            December 31, 2007. Due to the conversion of lines from ACS' facilities to our own the            increased per UNE loop cost will be partially off-set by the purchase of fewer such            loops therefore we do not expect this settlement to have a material adverse effect on            our financial results for future years.

             

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.

|   | 19 | (Continued) |
|--------|----|-------------|

 

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**GCI, INC. AND SUBSIDIARIES**

**Notes to Interim Consolidated Financial Statements**

**(Unaudited)**

 

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, and Ketchikan 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 (“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 is reviewinglong-term options for curbing growth in the fund to make additional            recommendations for FCC action. We cannot predict at this time the outcome of the FCC            proceeding to consider the interim cap proposal, the ongoing Joint Board review, 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.

             

United Utilities ("UUI") and Unicom Telecommunications Agreement to            Purchase

We have signed an agreement to purchase the stock of the UUI and Unicom            telecommunications subsidiaries of United Communications, Inc. ("UCI") for $40.0            million. Additionally we may assume approximately $37.0 million in 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. This transaction will close upon            regulatory approval which is expected in the third quarter of 2008.

             

Alaska Wireless Communications, LLC. ("Alaska Wireless") Memorandum            of Understanding

We have signed a memorandum of understanding to purchase Alaska Wireless            for approximately $15.0 million to $16.0 million. This transaction is subject to            customary closing conditions, including regulatory approval. We have not yet filed            applications with the FCC seeking the requisite regulatory consent to the transaction.            This transaction will close upon regulatory approval which is expected in the third            quarter of 2008.

 

|   | 20 |
|--------|----|

 

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**PART            I.**

**ITEM            2.**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF            FINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

             

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

Management’s Discussion and Analysis of Financial Condition and            Results of Operations discusses our consolidated financial statements, which have been            prepared in accordance with U.S. generally accepted accounting principles. 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 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.

 

Immaterial Error Corrections

We            corrected immaterial errors for the three and nine months ended September 30, 2006 as            follows (amounts in thousands):

             

|                                                                                       |   |   | Three Months Ended |   |   | Nine Months Ended |   |   |
|--------------------------------------------------------------------------------------------|--------|--------|--------------------|--------|--------|-------------------|--------|--------|
|                                                                                       |   |   | September 30, 2006 |   |   |
| Revenues decrease                                                                          | $      |   | (740               | )      |   | (740              | )      |   |
| Cost of Goods Sold increase                                                                |   |   | (240               | )      |   | ---               |   |   |
| Selling, general and administrative expense (increase)                            decrease |   |   | (902               | )      |   | 111               |   |   |
| Income tax expense decrease                                                                |   |   | 1,293              |   |   | 290               |   |   |
| Net income decrease                                                                        | $      |   | (589               | )      |   | (339              | )      |   |

 

The            corrections included reversing a change in estimate relating to a discount owed by a            service provider recorded during the third quarter which should have been recorded in            the second quarter, reducing certain payroll liabilities in the second quarter which            were previously reported as reduced during the third quarter, correcting a duplicate            payment to a service provider made during the second quarter previously reported as            corrected during the third quarter, capitalization of associated benefits on            capitalized labor during the second quarter previously reported as recorded during the            third quarter, adjusting income tax expense in the third quarter to properly present            the correction of an error in the second quarter income tax provision, and application            of a statutory change to the rates charged to our common carrier customers during the            third quarter, along with the associated effect on our company-wide success sharing            accrual during the three and nine months ended September 30, 2006 previously corrected            during the fourth quarter of 2006. We also recorded the impact of these adjustments on            our income tax expense. Additionally, we reclassified $1.1 million of expenses for the            nine months ended September 30, 2006 related to a stock option award from

 

|   | 21 |
|--------|----|

 

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cumulative effect of a change in accounting principle to selling,            general and administrative expenses, and the related tax effect.

 

**General Overview**

 

Through            our focus on long-term results, acquisitions, and strategic capital investments, we            strive to consistently grow our revenues and expand our margins. We have historically            met our cash needs for operations, regular capital expenditures and maintenance capital            expenditures through our cash flows from operating activities. Historically, cash            requirements for significant acquisitions and major capital expenditures have been            provided largely through our financing activities.

 

The            Network Access segment provides services to other common carrier customers and the            Managed Broadband segment provides services to rural school districts and rural            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.

 

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

 

In June            2007 AT&T Inc. announced its acquisition of Dobson Communications Corporation            (“Dobson”), a significant Network Access segment customer, subject to            regulatory approval. We are unable to predict the acquisition’s effect upon our            Network Access segment revenues, but we are in discussions with AT&T Inc. to            renegotiate our service and wireless resale contract.

 

|   | 22 |
|--------|----|

 

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

 

Our            long-distance service faces significant competition from ACS, AT&T Alascom, Inc.            (“Alascom”), long-distance resellers, and other local telephone companies            that have entered the long-distance market. We believe our approach to developing,            pricing, and providing long-distance services and bundling different business segment            services will continue to allow us to be competitive in providing those            services.

 

Local Access 

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

 

We            estimate that our September 30, 2007 and 2006 total lines in service represent a            statewide market share of approximately 27% and 26%, respectively. At September 30,            2007 and 2006 approximately 53% and 34%, respectively, of our lines are provided on our            own facilities including digital local phone service (“DLPS”).

 

Our            local access service faces significant competition in Anchorage, Fairbanks, and Juneau            from ACS, which is the largest incumbent local exchange carrier (“ILEC”) in            Alaska, and from Alascom in Anchorage for consumer services. 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 Matanuska Telephone            Association (“MTA”) exchanges and face significant competition from MTA. 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 the Northland, Alaska            Telephone Company, Interior Telephone Company, United-KUC and Mukluk Telephone Company.            The affected rural local exchange carriers have appealed various aspects of the            certification rulings. We cross-appealed on 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. The            Superior Court issued a ruling on October 5, 2007 holding that the RCA’s approval            had been untimely and that our authority to serve those areas was effective immediately            by operation of law. We are uncertain when the rulings will be received on the            remaining issues in the appeal.

 

In            accordance with our interconnection agreement with MTA we began offering            facilities-based local access services in Eagle River, Chugiak and Wasilla on February            16, 2007, April 5, 2007, and September 24, 2007, respectively. We intend to initiate            service in an additional exchange in the MTA study area in 2007. In accordance with our            interconnection agreement with MTA we began offering resale services in Eagle River,            Chugiak, and the remainder of the MTA study area on February 16, 2007, April 5, 2007,            and September 24, 2007, respectively. We began offering local access services in            Ketchikan and Kodiak on June 18, 2007, and August 13, 2007, respectively.

 

We are            offering and plan to 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            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.

 

|   | 23 |
|--------|----|

 

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We plan            to have deployed 55,000 DLPS lines which utilize our coaxial cable facilities by            December 31, 2007. 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, the Matanuska-Susitna Valley, and Ketchikan 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 is currently reviewing options for            curbing growth in the fund and plans to make recommendations to the FCC. We cannot            predict at this time the outcome of this proceeding or its impact on us. This 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 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 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 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.

 

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.

 

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.

 

**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.

 

|   | 24 |
|--------|----|

 

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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 Internet Protocol-based            data services on a secured shared network to businesses linking multiple enterprise            locations. The factor that has the greatest impact on year-to-year changes in private            line and private network services revenues is the number of private lines and private            networks in use. We compete against Alascom, ACS and other local telecommunication            service providers.

 

Managed Services

We            design, sell, install, service and operate, on behalf of certain customers,            communications and computer networking equipment and provide field/depot, third party,            technical support, communications consulting and outsourcing services. We also supply            integrated voice and data communications systems incorporating interstate and            intrastate digital 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. 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 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

 

|   | 25 |
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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.

 

**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. We provide limited wireless local            access and Internet services using our own facilities. We compete against Dobson, ACS,            Alaska DigiTel, and resellers of those services in Anchorage and other            markets.

 

On            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 view our            investment as an incremental way to participate in future growth of the wireless            industry in Alaska. Our existing distribution agreement with Dobson remains in full            effect and our existing wireless products will continue to compete with Alaska DigiTel            in the Alaska market.

 

In June            2007 AT&T Inc. announced its acquisition of Dobson to include Dobson’s Alaska            wireless facilities subject to regulatory approval. We are unable at this time to            predict the acquisition’s effect upon our agreement to resell Dobson services,            but we are in discussions with AT&T Inc. to renegotiate our service and wireless            resale contract.

 

Beginning in 2008 we plan to provide facilities-based wireless service            to small markets in rural Alaska as a reliable substitute for standard wire line            service.

 

We have            signed a memorandum of understanding to purchase Alaska Wireless for approximately            $15.0 million to $16.0 million. This transaction is subject to customary closing            conditions, including regulatory approval. We have not yet filed applications with the            FCC seeking the requisite regulatory consent to the transaction. The results of            operations generated by the acquired company will impact our wireless services in our            Consumer and Commercial segments. This transaction will close upon regulatory approval            which is expected in the third quarter of 2007.

 

|   | 26 |
|--------|----|

 

----

**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 |
|-------------------------------------------------------------------------------------------------------------------------------|------------------------|--------------------------------------------------------|-----------------------|----------|--------------------------------------------------------|
|                                                                                                                          | **Three Months Ended** | **2007**                                               | **Nine Months Ended** | **2007** |
|                                                                                                                          | **September 30,**      | **vs.**                                                | **September 30,**     | **vs.**  |
|                                                                                                                          | **2007**               | **2006****(as**                                        | **2006****(as**       | **2007** | **2006****(as**                                        | **2006****(as** |
| (Unaudited)                                                                                                                   |                   | **amended)**                                           | **amended)**          |     | **amended)**                                           | **amended)** |
| ***Statements of                            Operations Data:***                                                               |                   |                                                   |                  |     |                                                   |   |
| Revenues:                                                                                                                     |                   |                                                   |                  |     |                                                   |   |
| Consumer segment                                                                                                              | 42.3%                  | 36.2%                                                  | 25.2%                 | 42.5%    | 37.1%                                                  | 24.7% |
| Network Access segment                                                                                                        | 31.9%                  | 35.9%                                                  | (5.0 %)               | 32.1%    | 34.9%                                                  | 0.4% |
| Commercial segment                                                                                                            | 20.3%                  | 22.8%                                                  | (4.6%)                | 20.0%    | 22.6%                                                  | (4.0%) |
| Managed Broadband segment                                                                                                     | 5.5%                   | 5.1%                                                   | 14.6%                 | 5.4%     | 5.4%                                                   | 10.4% |
| Total revenues                                                                                                                | 100.0%                 | 100.0%                                                 | 7.0%                  | 100.0%   | 100.0%                                                 | 9.0% |
| Selling, general and administrative expenses                                                                                  | 36.6%                  | 34.7%                                                  | 12.8%                 | 37.4%    | 35.3%                                                  | 15.4% |
| Depreciation and amortization expense                                                                                         | 17.1%                  | 16.3%                                                  | 12.0%                 | 17.0%    | 17.1%                                                  | 8.7% |
| Operating income                                                                                                              | 10.6%                  | 15.8%                                                  | (28.2%)               | 11.3%    | 15.1%                                                  | (18.4%) |
| Other expense, net                                                                                                            | 7.2%                   | 6.6%                                                   | 16.5%                 | 7.1%     | 7.1%                                                   | 8.4% |
| Income before income tax expense and cumulative effect                            of a change in accounting principle in 2006 | 3.4%                   | 9.2%                                                   | (60.6%)               | 4.2%     | 8.0%                                                   | (42.2%) |
| Income before cumulative effect of a change in                            accounting principle in 2006                        | 1.7%                   | 5.2%                                                   | (65.9%)               | 2.3%     | 4.3%                                                   | (43.1%) |
| Net income                                                                                                                    | 1.7%                   | 5.2%                                                   | (65.9%)               | 2.3%     | 4.3%                                                   | (43.3%) |

 

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

             

**Three Months Ended September 30, 2007 (“third quarter of            2007”) Compared to Three Months Ended September 30, 2006 (as amended)            (“third quarter of 2006”)**

 

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

Total            revenues increased 7.0% from $125.1 million in the third quarter of 2006 to $133.9            million in the third quarter of 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 15.3% from $41.5 million in the third quarter of 2006 to            $47.9 million in the third quarter of 2007. Cost of Goods Sold increases in our            Consumer, Network Access and Managed Broadband segments were partially offset by a            decrease in our Commercial segment. See the discussion below for more information by            segment.

 

|   | 27 |
|--------|----|

 

----

 

**Consumer Segment Overview**

Consumer segment revenue represented 42.3% of third quarter 2007            consolidated revenues. The components of Consumer segment revenue are as follows            (amounts in thousands):

 

|                           |   | Third quarter |   | Percentage |
|--------------------------------|--------|---------------|--------|------------|
|                           |   | 2007          |   | 2006       |   | Change |
| Voice                          | $      | 11,714        |   | 11,679     |   | 0.3% |
| Video                          |   | 23,834        |   | 22,486     |   | 6.0% |
| Data                           |   | 8,704         |   | 7,450      |   | 16.8% |
| Wireless                       |   | 12,371        |   | 3,628      |   | 241.0% |
| Total Consumer segment revenue | $      | 56,623        |   | 45,243     |   | 25.2% |

 

Consumer segment Cost of Goods Sold represented 44.5% of third quarter            2007 consolidated Cost of Goods Sold. The components of Consumer segment Cost of Goods            Sold are as follows (amounts in thousands):

 

|                                      |   | Third quarter |   |              |
|-------------------------------------------|--------|---------------|--------|-------------------|
|                                      |   | 2007          |   | 2006 (as amended) |   | Percentage Change |
| Voice                                     | $      | 4,600         |   | 4,841             |   | (5.0%) |
| Video                                     |   | 8,727         |   | 7,597             |   | 14.9% |
| Data                                      |   | 713           |   | 547               |   | 30.3% |
| Wireless                                  |   | 7,262         |   | 3,653             |   | 98.8% |
| Total Consumer segment Cost of Goods Sold | $      | 21,302        |   | 16,638            |   | 28.0% |

 

Selected key performance indicators for our Consumer segment            follow:

 

|                                                                        |   | September 30, |   | Percentage |
|-----------------------------------------------------------------------------|--------|---------------|--------|------------|
|                                                                        |   | 2007          |   | 2006       |   | Change |
| Voice:                                                                      |   |          |   |       |   |   |
| Long-distance subscribers1                                                  |   | 89,700        |   | 91,200     |   | (1.6%) |
| Long-distance minutes carried (in millions)                                 |   | 33.2          |   | 34.3       |   | (3.2%) |
| Total local access lines in                            service2             |   | 69,500        |   | 67,400     |   | 3.1% |
| Local access lines in service on GCI                            facilities2 |   | 45,900        |   | 27,500     |   | 66.9% |
|                                                                        |   |          |   |       |   |   |
| Video:                                                                      |   |          |   |       |   |   |
| Basic subscribers3                                                          |   | 125,600       |   | 121,800    |   | 3.1% |
| Digital programming tier                            subscribers4            |   | 62,600        |   | 56,500     |   | 10.8% |
| HD/DVR converter boxes5                                                     |   | 43,600        |   | 22,800     |   | 91.2% |
| Homes passed                                                                |   | 222,100       |   | 218,100    |   | 1.8% |
| Average monthly gross revenue per                            subscriber6    |   | $63.44        |   | $61.66     |   | 2.9% |
|                                                                        |   |          |   |       |   |   |
| Data:                                                                       |   |          |   |       |   |   |
| Cable modem subscribers7                                                    |   | 84,100        |   | 76,800     |   | 9.5% |
|                                                                        |   |          |   |       |   |   |
| Wireless:                                                                   |   |          |   |       |   |   |
| Wireless lines in service8                                                  |   | 66,100        |   | 21,700     |   | 204.6% |
| Average monthly gross revenue per                            subscriber9    |   | $58.25        |   | $49.27     |   | 29.2% |
|                                                                        |   |
|                                                                             |        |               |        |            |  |  |  |

 

 

|   | 28 |
|--------|----|

 

----

 

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

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                            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.

6 Quarter-to-date average monthly consumer                            video revenues divided by the average of consumer video basic                            subscribers at the beginning and ending of the period.

7 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. Cable modem                            subscribers may also be basic subscribers though basic cable service is                            not required to receive cable modem service.

8 A wireless line in service is defined as a                            revenue generating wireless device and includes Alaska DigiTel lines in                            service in 2007.

9 Quarter-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 $358,000 or 5.7% increase in local            service revenue due to an increase in the monthly network access fee and increased            local access lines. The increase is partially off-set by a $108,000 or 6.7% decrease in            support from the Universal Service Program and decreased long-distance subscribers and            decreased long-distance billable minutes carried for these subscribers.

 

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

 

|   | **•** | A 3.1% increase in programming services revenue to $19.4                            million primarily resulting from an increase in digital programming                            tier subscribers and increased rates charged for certain cable services                            effective in the fourth quarter of 2006, and |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A 22.5% increase in equipment rental revenue to $4.1                            million primarily resulting from our customers’ increased use of                            digital distribution technology. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            increase in data revenue is primarily due to a 17.2% increase in cable modem revenue to            $7.2 million. The cable modem revenue increase is primarily due to increased            subscribers and their selection of more value-added premium features in the third            quarter of 2007 as compared to the third quarter of 2006.

 

The            increase in wireless revenue is due to our January 1, 2007 acquisition of Alaska            DigiTel and a $3.0 million or 81.4% increase in the wireless revenue from our resale            agreement primarily due to increased subscribers. Consumer segment wireless revenues            from our Alaska DigiTel investment totaled $5.8 million in the third quarter of            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 provision of                            services through our own facilities in the last three months of 2006                            and the first nine months of 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 $0.055 per minute for originating and terminating interstate and                            intrastate traffic, respectively. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Due to            the Settlement Agreement, as further described above in Part I, Item I, Note 7, we            expect Consumer voice Cost of Goods Sold to increase approximately $523,000 during the            year ended December 31, 2007. Due to the conversion of lines from ACS' facilities to            our own the increased per UNE loop cost will be partially off-set by the purchase of            fewer such loops therefore we do not expect this settlement to have a material adverse            effect on our financial results for future years.

 

|   | 29 |
|--------|----|

 

----

The            video Cost of Goods Sold increase is primarily due to increased channels offered to our            subscribers in three of the state’s five largest population centers, the fourth            quarter 2006 expiration of arrangements with suppliers from which we earned rebates and            refunds upon us meeting specified goals, and increased rates paid to programmers and            increased subscribers.

 

The            wireless Cost of Goods Sold increase is primarily due to our January 1, 2007            acquisition of Alaska DigiTel and a $1.4 million or 37.6% 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 $2.2 million in the third quarter of 2007.

 

**Network Access Segment Overview**

Network            access segment revenue represented 31.9% of third quarter 2007 consolidated revenues.            The components of Network Access segment revenue are as follows (amounts in            thousands):

 

|                                 |   | Third quarter |   | Percentage |
|--------------------------------------|--------|---------------|--------|------------|
|                                 |   | 2007          |   | 2006       |   | Change |
| Voice                                | $      | 25,856        |   | 31,772     |   | (18.6%) |
| Data                                 |   | 14,920        |   | 13,127     |   | 13.7% |
| Wireless                             |   | 1,881         |   | ---        |   | NM |
| Total Network Access segment revenue | $      | 42,657        |   | 44,899     |   | (5.0%) |
|                                 |   |          |   |       |   |   |
| NM – Not meaningful.           |   |          |   |       |   |   |   |
|                                      |        |               |        |            |  |  |  |

 

Network            Access segment Cost of Goods Sold represented 24.1% of third quarter 2007 consolidated            Cost of Goods Sold. The components of Network Access segment Cost of Goods Sold are as            follows (amounts in thousands):

 

|                                                                       |   | Third quarter |   | Percentage |
|----------------------------------------------------------------------------|--------|---------------|--------|------------|
|                                                                       |   | 2007          |   | 2006       |   | Change |
| Voice                                                                      | $      | 8,291         |   | 7,452      |   | 11.3% |
| Data                                                                       |   | 3,169         |   | 2,434      |   | 30.2% |
| Wireless                                                                   |   | 94            |   | ---        |   | NM |
| Total Network Access segment Cost of Goods                            Sold | $      | 11,554        |   | 9,886      |   | 16.9% |
|                                                                       |   |          |   |       |   |   |
| NM – Not meaningful.                                                 |   |          |   |       |   |   |   |
|                                                                            |        |               |        |            |  |  |  |

 

Selected key performance indicators for our Network Access segment            follow:

 

|                                                                                                                                                                                                                                                         |   | September 30, |   | Percentage |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|--------|------------|
|                                                                                                                                                                                                                                                         |   | 2007          |   | 2006       |   | Change |
| Voice:                                                                                                                                                                                                                                                       |   |          |   |       |   |   |
| Long-distance minutes carried (in millions)                                                                                                                                                                                                                  |   | 321.4         |   | 373.6      |   | (14.0%) |
|                                                                                                                                                                                                                                                         |   |          |   |       |   |   |
| Data:                                                                                                                                                                                                                                                        |   |          |   |       |   |   |
| 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 4.0%            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.

 

|   | 30 |
|--------|----|

 

----

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

 

**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 a $523,000 unfavorable rate            adjustment from a vendor. In the course of business we estimate unbilled long-distance            services Cost of Goods Sold based upon minutes of use processed through our network and            established rates. Such estimates are revised when subsequent billings are received,            payments are made, billing matters are researched and resolved, tariffed billing            periods lapse, or when disputed charges are resolved.

 

The            increase in data Cost of Goods Sold is primarily due to costs associated with the            increased circuits sold discussed above and $754,000 in costs to repair breaks in our            undersea and terrestrial fiber-optic cable systems.

 

**Commercial Segment Overview**

Commercial segment revenue represented 20.3% of third quarter 2007            consolidated revenues. The components of Commercial segment revenue are as follows            (amounts in thousands):

 

|                             |   | Third quarter |   | Percentage |
|----------------------------------|--------|---------------|--------|------------|
|                             |   | 2007          |   | 2006       |   | Change |
| Voice                            | $      | 7,803         |   | 8,204      |   | (4.9%) |
| Video                            |   | 2,148         |   | 2,122      |   | 1.2% |
| Data                             |   | 15,949        |   | 17,523     |   | (9.0%) |
| Wireless                         |   | 1,315         |   | 662        |   | 98.6% |
| Total Commercial segment revenue | $      | 27,215        |   | 28,511     |   | (4.6%) |

 

Commercial segment Cost of Goods Sold represented 27.9% of third quarter            2007 consolidated Cost of Goods Sold. The components of Commercial segment Cost of            Goods Sold are as follows (amounts in thousands):

 

|                                        |   | Third quarter |   |              |
|---------------------------------------------|--------|---------------|--------|-------------------|
|                                        |   | 2007          |   | 2006 (as amended) |   | Percentage Change |
| Voice                                       | $      | 4,836         |   | 4,828             |   | 0.2% |
| Video                                       |   | 408           |   | 359               |   | 13.6% |
| Data                                        |   | 6,951         |   | 8,016             |   | (13.3%) |
| Wireless                                    |   | 1,157         |   | 734               |   | 57.6% |
| Total Commercial segment Cost of Goods Sold | $      | 13,352        |   | 13,937            |   | (4.2%) |

 

Selected key performance indicators for our Commercial segment            follow:

 

|                                                                         |   | September 30, |   | Percentage |
|------------------------------------------------------------------------------|--------|---------------|--------|------------|
|                                                                         |   | 2007          |   | 2006       |   | Change |
| Voice:                                                                       |   |          |   |       |   |   |
| Long-distance subscribers1                                                   |   | 10,800        |   | 11,500     |   | (6.1%) |
| Long-distance minutes carried (in millions)                                  |   | 33.5          |   | 33.8       |   | (0.9%) |
| Total local access lines in                            service2              |   | 42,700        |   | 41,700     |   | 2.4% |
| Local access lines in service on GCI facilities                            2 |   | 11,900        |   | 8,000      |   | 48.8% |
|                                                                         |   |          |   |       |   |   |
| Data:                                                                        |   |          |   |       |   |   |
| Cable modem subscribers3                                                     |   | 8,300         |   | 7,200      |   | 15.3% |
|                                                                         |   |          |   |       |   |   |
| Wireless:                                                                    |   |          |   |       |   |   |
| Wireless lines in service4                                                   |   | 7,200         |   | 4,100      |   | 75.6% |
|                                                                         |   |          |   |       |   |   |   |
|                                                                              |        |               |        |            |  |  |  |

 

 

|   | 31 |
|--------|----|

 

----

 

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

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.

4 A 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 primarily due to decreased long-distance subscribers and            decreased minutes carried for our Commercial segment customers. Revenues associated            with increased local access lines in service partially off-set these            decreases.

 

The            decrease in data revenue is primarily due to a $2.9 million or 67.7% 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 a $1.1            million increase in managed services project revenue.

 

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            increase in voice Cost of Goods Sold is primarily due to increased local access lines            in service. Savings resulting from increased provision of services through our own            facilities in the last three months of 2006 and the first nine months of 2007,            decreased voice minutes carried, and decreased costs associated with decreased            long-distance subscribers largely off-set the increase.

 

The            decrease in data Cost of Goods Sold resulted primarily from a 93.0% decrease in Cost of            Goods Sold to $168,000 resulting from the 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 discussed above. The decrease was partially off-set by an            increase in contract labor and internal labor due to the increase in managed services            project revenue discussed above.

 

Due to            the Settlement Agreement, as further described above in Part I, Item I, Note 7, we            expect Commercial voice Cost of Goods Sold to increase approximately $497,000 during            the year ended December 31, 2007. Due to the conversion of lines from ACS' facilities            to our own the increased per UNE loop cost will be partially off-set by the purchase of            fewer such loops therefore we do not expect this settlement to have a material adverse            effect on our financial results for future years.

 

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 represented 5.5% of third quarter 2007 consolidated revenues            and Cost of Goods Sold represented 3.5% of third quarter 2007 consolidated Cost of            Goods Sold. The Managed Broadband segment includes data products only.

 

|   | 32 |
|--------|----|

 

----

 

Selected key performance indicators for our Managed Broadband segment            follow:

 

|                        |   | September 30, |   | Percentage |
|-----------------------------|--------|---------------|--------|------------|
|                        |   | 2007          |   | 2006       |   | Change |
| Managed Broadband segment:  |   |          |   |       |   |   |
| SchoolAccess® customers |   | 51            |   | 48         |   | 6.3% |
| Rural health customers      |   | 21            |   | 22         |   | (4.5%) |

 

**Managed Broadband Segment Revenues**

Managed            Broadband segment revenue increased 14.6% to $7.4 million in the third quarter of 2007.            The increase is due to several product sales that did not occur in third quarter 2006            and increased circuits purchased by our rural health and school access            customers.

 

**Managed Broadband Segment Cost of Goods Sold**

Managed            Broadband segment Cost of Goods Sold increased 57.3% to $1.7 million in the third            quarter of 2007 primarily due to costs associated with the product sales and increased            circuits purchased as discussed above.

 

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses increased 12.8% to $49.0            million in the third quarter of 2007 primarily due to the following:

 

|   | **•** | Recognition of $4.4 million in additional expense                            resulting from our January 1, 2007 acquisition of Alaska                            DigiTel, |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $2.1 million increase in labor costs, and |
|--------|------------|---------------------------------------------|

|   | **•** | A $1.3 million increase in bad debt expense primarily                            due to increases in allowances established for certain Managed                            Broadband services customers in the third quarter of 2007 and decreases                            in allowances established for certain Managed Broadband services                            customers in the third quarter of 2006. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            selling, general and administrative expenses increase is partially offset by a $1.3            million decrease related to certain promotion expenses in the third quarter of 2006            which did not occur in the third quarter of 2007, and a $688,000 decrease in our            company-wide success sharing bonus accrual

 

As a            percentage of total revenues, selling, general and administrative expenses increased to            36.6% in 2007 from 34.7% in 2006, primarily due to the increases described above            without a proportional increase in revenues.

 

**Depreciation and Amortization Expense**

Depreciation and amortization expense increased 12.0% to $22.8 million            in the third quarter of 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 is being recorded in 2007 and the $73.2 million investment in            equipment and facilities placed into service during the nine months ended September 30,            2007 for which a partial year of depreciation will be recorded in 2007.

 

**Other Expense, Net**

Other            expense, net of other income, increased 16.5% to $9.7 million in the third quarter of            2007 primarily due to the following:

 

|   | **•** | In the third quarter of 2007, we substantially modified                            our Senior Credit Facility resulting in loan fee expense of                            $551,000, |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $677,000 or 89.2% 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 |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $607,000 or 6.7% increase in interest costs due to an                            increase in our average outstanding debt balance in 2007 as compared to                            2006. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | 33 |
|--------|----|

 

----

The            increases described above are partially offset by an increase in capitalized interest            from $0 in the third quarter of 2006 to $560,000 in the third quarter of            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 $2.3 million and $5.0 million in the third quarter of 2007 and            2006, respectively. Our effective income tax rate increased from 43.5% in the third            quarter of 2006 to 51.0% in the third quarter of 2007 due primarily to the lower            pre-tax net income without a comparable decrease in non-deductible items.

 

At            September 30, 2007, we have (1) tax net operating loss carryforwards of approximately            $128.3 million that will begin expiring in 2010 if not utilized, and (2) alternative            minimum tax credit carryforwards of approximately $2.8 million available to offset            regular income taxes payable in future years. We estimate that we will utilize net            operating loss carryforwards of $12.0 million to $16.0 million during the year ended            December 31, 2007. 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 $52.5 million associated with income tax            net operating losses that were generated from 1995 to 2005, and that expire from 2010            to 2027, and with charitable contributions that were converted to net operating losses            in 2006 and 2007, and that expire in 2026 and 2027, respectively.

 

Tax            benefits associated with recorded deferred tax assets are considered to be more likely            than not realizable through future reversals of existing taxable temporary differences            and future taxable income exclusive of reversing temporary differences and            carryforwards. The amount of deferred tax assets considered realizable, however, could            be reduced if estimates of future taxable income during the carryforward period are            reduced which would result in additional income tax expense. We estimate that our            effective annual income tax rate for financial statement purposes will be 44% to 47% in            the year ended December 31, 2007.

 

**Nine            Months Ended September 30, 2007 (“2007”) Compared to Nine Months Ended            September 30, 2006 (as amended) (“2006”)**

 

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

Total            revenues increased 9.0% from $356.1 million in 2006 to $388.0 million in 2007. Revenue            increases in our Consumer, Network Access, and Managed Broadband segments were            partially off-set by a decrease in our Commercial segment. See the discussion below for            more information by segment.

 

Total            Cost of Goods Sold increased 14.8% from $116.1 million in 2006 to $133.2 million in            2007. Cost of Goods Sold increased in all of our segments.

 

**Consumer Segment Overview**

Consumer segment revenue represented 42.5% of 2007 consolidated            revenues. The components of Consumer segment revenue are as follows (amounts in            thousands):

 

|                           |   |    |   | Percentage |
|--------------------------------|--------|---------|--------|------------|
|                           |   | 2007    |   | 2006       |   | Change |
| Voice                          | $      | 34,549  |   | 34,443     |   | 0.3% |
| Video                          |   | 71,372  |   | 66,816     |   | 6.8% |
| Data                           |   | 24,807  |   | 21,669     |   | 14.5% |
| Wireless                       |   | 34,060  |   | 9,201      |   | 270.2% |
| Total Consumer segment revenue | $      | 164,788 |   | 132,129    |   | 24.7% |

 

 

|   | 34 |
|--------|----|

 

----

Consumer segment Cost of Goods Sold represented 46.9% of 2007            consolidated Cost of Goods Sold. The components of Consumer segment Cost of Goods Sold            are as follows (amounts in thousands):

 

|                                      |   | 2007   |   | 2006 (as amended) |   | Percentage Change |
|-------------------------------------------|--------|--------|--------|-------------------|--------|-------------------|
| Voice                                     | $      | 13,599 |   | 15,588            |   | (12.8%)           |
| Video                                     |   | 26,181 |   | 22,684            |   | 15.4%             |
| Data                                      |   | 2,087  |   | 1,624             |   | 28.5%             |
| Wireless                                  |   | 20,570 |   | 9,584             |   | 114.6%            |
| Total Consumer segment Cost of Goods Sold | $      | 62,437 |   | 49,480            |   | 26.2%             |

 

Selected key performance indicators for our Consumer segment            follow:

 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   | Percentage |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 2007   |   | 2006       |   | Change |
| Voice:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |       |   |   |
| Long-distance minutes carried (in millions)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 101.0  |   | 107.1      |   | (5.4%) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |       |   |   |
| Video:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |       |   |   |
| Average monthly gross revenue per                            subscriber1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $63.54 |   | $60.94     |   | 4.0% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |       |   |   |
| Wireless:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |   |       |   |   |
| Average monthly gross revenue per                            subscriber2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $55.87 |   | $49.86     |   | 12.1% |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 1 Year-to-date average monthly consumer video                            revenues divided by the average of consumer video basic subscribers at                            the beginning and ending of the period.

2 Year-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. |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        |        |        |            |  |  |  |  |

Please            refer to our three-month results of operations discussion for additional selected key            performance indicators as of September 30, 2007 and 2006.

 

**Consumer Segment Revenues**

The            increase in voice revenue is primarily due to a $620,000 or 16.5% increase in support            from the Universal Service Program and increased local access lines. The increase is            partially off-set by decreased long-distance subscribers and decreased long-distance            billable minutes carried for these subscribers.

 

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

 

|   | **•** | A 4.1% increase in programming services revenue to $58.4                            million in 2007 primarily resulting from an increase in digital                            programming tier subscribers in 2007 and increased rates charged for                            certain cable services effective in the fourth quarter of 2006,                            and |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A 23.1% increase in equipment rental revenue to $11.9                            million in 2007 primarily resulting from our customers’ increased                            use of digital distribution technology. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            increase in data revenue is primarily due to a 15.0% increase in cable modem revenue to            $20.9 million. The increase in cable modem revenue is primarily due to increased            subscribers and their selection of more value-added premium features.

 

The            increase in wireless revenue is due to our January 1, 2007 acquisition of Alaska            DigiTel and a $8.5 million or 92.3% increase in the wireless service revenue from our            resale agreement primarily due to an increase in subscribers. Consumer segment wireless            revenues from our Alaska DigiTel investment totaled $16.4 million in 2007.

 

|   | 35 |
|--------|----|

 

----

**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 provision of                            services through our own facilities in the last three months of 2006                            and the first nine months of 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 $0.055 per minute for originating and terminating interstate and                            intrastate traffic, respectively. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            video Cost of Goods Sold increase is primarily due to increased channels offered to our            subscribers in three of the state’s five largest population centers, the fourth            quarter 2006 expiration of arrangements with suppliers from which we earned rebates and            refunds upon meeting specified goals, increased rates paid to programmers and increased            subscribers.

 

The            wireless Cost of Goods Sold increase is primarily due to our January 1, 2007            acquisition of Alaska DigiTel and a $4.6 million or 48.2% increase in our wireless            service Cost of Goods Sold related to increased wireless services 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 32.1% of 2007 consolidated revenues. The components            of Network Access segment revenue are as follows (amounts in thousands):

 

|                                 |   |    |   | Percentage |
|--------------------------------------|--------|---------|--------|------------|
|                                 |   | 2007    |   | 2006       |   | Change |
| Voice                                | $      | 74,704  |   | 84,100     |   | (11.2%) |
| Data                                 |   | 45,317  |   | 39,999     |   | 13.3% |
| Wireless                             |   | 4,578   |   | ---        |   | NM |
| Total Network Access segment revenue | $      | 124,599 |   | 124,099    |   | 0.4% |
|                                 |   |    |   |       |   |   |
| NM – Not meaningful.           |   |    |   |       |   |   |   |
|                                      |        |         |        |            |  |  |  |

 

Network            Access segment Cost of Goods Sold represented 22.3% 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                                                                      | $      | 21,490 |   | 21,393     |   | 0.5% |
| Data                                                                       |   | 7,947  |   | 6,063      |   | 31.1% |
| Wireless                                                                   |   | 315    |   | ---        |   | NM |
| Total Network Access segment Cost of Goods                            Sold | $      | 29,752 |   | 27,456     |   | 8.4% |

 

Selected key performance indicators for our Network Access segment            follow:

 

|                                        |   |   |   | Percentage |
|---------------------------------------------|--------|--------|--------|------------|
|                                        |   | 2007   |   | 2006       |   | Change |
| Voice:                                      |   |   |   |       |   |   |
| Long-distance minutes carried (in millions) |   | 954.9  |   | 993.2      |   | (3.9%) |

 

Please            refer to our three-month results of operations discussion for additional selected key            performance indicators as of September 30, 2007 and 2006.

 

|   | 36 |
|--------|----|

 

----

 

**Network Access Segment Revenues**

The            decrease in voice revenue is primarily due to decreased billable minutes and a 6.3%            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.

 

**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 a $523,000 unfavorable rate            adjustment from a vendor. This increase is partially off-set by an $879,000 favorable            adjustment based upon a refund for which negotiations were completed in 2007. In the            course of business we estimate unbilled long-distance services Cost of Goods Sold based            upon minutes of use processed through our network and established rates. Such estimates            are revised when subsequent billings are received, payments are made, billing matters            are researched and resolved, tariffed billing periods lapse, or when disputed charges            are resolved.

 

The            increase in data Cost of Goods Sold is primarily due to costs associated with the            increased circuits sold discussed above and $754,000 in costs to repair breaks in our            undersea and terrestrial fiber-optic cable systems.

 

**Commercial Segment Overview**

Commercial segment revenue represented 20.0% of 2007 consolidated            revenues. The components of Commercial segment revenue are as follows (amounts in            thousands):

 

|                             |   |   |   | Percentage |
|----------------------------------|--------|--------|--------|------------|
|                             |   | 2007   |   | 2006       |   | Change |
| Voice                            | $      | 23,583 |   | 24,324     |   | (3.0%) |
| Video                            |   | 5,918  |   | 5,781      |   | 2.4% |
| Data                             |   | 44,421 |   | 48,833     |   | (9.0%) |
| Wireless                         |   | 3,483  |   | 1,714      |   | 103.2% |
| Total Commercial segment revenue | $      | 77,405 |   | 80,652     |   | (4.0%) |

 

Commercial segment Cost of Goods Sold represented 27.4% of 2007            consolidated Cost of Goods Sold. The components of Commercial segment Cost of Goods            Sold are as follows (amounts in thousands):

 

|                                        |   | 2007   |   | 2006 (as amended) |   | Percentage Change |
|---------------------------------------------|--------|--------|--------|-------------------|--------|-------------------|
| Voice                                       | $      | 13,816 |   | 15,135            |   | (8.7%)            |
| Video                                       |   | 1,214  |   | 1,054             |   | 15.2%             |
| Data                                        |   | 18,368 |   | 17,850            |   | 2.9%              |
| Wireless                                    |   | 3,091  |   | 1,892             |   | 63.4%             |
| Total Commercial segment Cost of Goods Sold | $      | 36,489 |   | 35,931            |   | 1.6%              |

 

Selected key performance indicators for our Commercial segment            follow:

 

|                                        |   |   |   | Percentage |
|---------------------------------------------|--------|--------|--------|------------|
|                                        |   | 2007   |   | 2006       |   | Change |
| Voice:                                      |   |   |   |       |   |   |
| Long-distance minutes carried (in millions) |   | 100.6  |   | 103.2      |   | (2.5%) |

 

Please            refer to our three-month results of operations discussion for additional selected key            performance indicators as of September 30, 2007 and 2006.

 

|   | 37 |
|--------|----|

 

----

**Commercial Segment Revenues**

The            decrease in data revenue is primarily due to a $7.6 million or 64.2% 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. The decrease is partially off-set by a $3.0            million increase in managed services project revenue.

 

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 primarily due to decreased long-distance            subscribers, savings resulting from increased provision of services through our own            facilities in the last three months of 2006 and the first nine months of 2007, and            decreased voice minutes carried. Costs associated with increased local access lines in            service partially off-set these decreases.

 

The            increase in data Cost of Goods Sold resulted primarily from an increase in contract            labor and internal labor classified as Cost of Goods Sold due to the increase in            managed services project revenue discussed above. The increase was partially off-set by            a 90.8% decrease in Cost of Goods Sold to $274,000 resulting from the 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 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 represented 5.4% of 2007 consolidated revenues and Cost of            Goods Sold represented 3.4% of 2007 consolidated Cost of Goods Sold. The Managed            Broadband segment includes data products only.

 

Please            refer to our three-month results of operations discussion for additional selected key            performance indicators as of September 30, 2007 and 2006.

 

**Managed Broadband Segment Revenues**

Managed            Broadband segment revenue increased 10.4% to $21.2 million in 2007. The increase is            primarily due to increased circuits purchased by our rural health and school access            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 42.3% to $4.6 million in 2007 primarily            due to costs associated with the product sales and increased circuits purchased as            discussed above.

 

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses increased 15.4% to $145.0            million in 2007 primarily due to the following:

 

|   | **•** | Recognition of $11.3 million in additional expense                            resulting from our January 1, 2007 acquisition of Alaska                            DigiTel, |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $4.4 million increase in labor costs, and |
|--------|------------|---------------------------------------------|

|   | **•** | A $1.5 million increase in bad debt expense due to                            increased revenues and subscriber counts in certain of our Consumer and                            Commercial segment products, increases in allowances established for                            certain Managed Broadband services customers, and the realization of a                            recovery from 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 offset by a $1.6            million decrease related to certain promotion expenses in 2006 which did not occur in            2007.

 

|   | 38 |
|--------|----|

 

----

As a            percentage of total revenues, selling, general and administrative expenses increased to            37.4% in 2007 from 35.3% in 2006, primarily due to the increases described above            without a proportional increase in revenues.

 

**Depreciation and Amortization Expense**

Depreciation and amortization expense increased 8.7% to $66.0 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 will            be recorded in 2007 and the $73.2 million investment in equipment and facilities placed            into service during the nine months ended September 30, 2007 for which a partial year            of depreciation will be recorded in 2007.

 

**Other Expense, Net**

Other            expense, net of other income, increased 8.4% to $27.4 million in 2007 primarily due to            the following:

 

|   | **•** | In the third quarter of 2007, we substantially modified                            our Senior Credit Facility resulting in loan fee expense of                            $551,000, |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $971,000 or 69.5% 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 |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A $1.5 million or 5.7% increase in interest costs                            primarily due to an increase in our average outstanding debt balance in                            2007 as compared to 2006. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The            increases described above are partially offset by an increase in capitalized interest            from $0 in 2006 to $1.1 million in 2007

 

**Income Tax Expense**

Income            tax expense totaled $7.7 million and $13.1 million in 2007 and 2006, respectively. Our            effective income tax rate increased from 45.9% in 2006 to 46.7% in 2007.

 

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

On            January 1, 2006 we adopted SFAS No. 123(R), “Share-Based Payment.” SFAS            123(R) required 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 (as amended), which was            reduced by income tax expense of $44,000 (as amended), and is reported as a cumulative            effect of a change in accounting principle during 2006.

 

**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.

 

|   | 39 |
|--------|----|

 

----

Our            capital expenditures by standard reporting category for the nine months ended September            30, 2007 and 2006 follows (amounts in thousands):

 

|                                                                          |   | 2007           |   | 2006           |   |                                       |   |
|-------------------------------------------------------------------------------|--------|----------------|--------|----------------|--------|--------------------------------------------|--------|
| Line extensions                                                               | $      | 46,775         |   | 12,712         |   |                                       |   |
| Customer premise equipment                                                    |   | 16,289         |   | 9,869          |   |                                       |   |
| Scalable infrastructure                                                       |   | 3,404          |   | 634            |   |                                       |   |
| Support capital                                                               |   | 1,092          |   | 890            |   |                                       |   |
| Upgrade/rebuild                                                               |   | 897            |   | 3,743          |   |                                       |   |
| Commercial                                                                    |   | 181            |   | 55             |   |                                       |   |
| Sub-total                                                                     |   | 68,638         |   | 27,903         |   |                                       |   |
| Remaining reportable segments capital                            expenditures |   |  

36,598 |   |  

36,449 |   |  

                              |   |
|                                                                          | $      | 105,236        |   | 64,352         |   |                                       |   |

 

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 September 30, 2007 and 2006 we had 125,200 and 123,700 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 September 30, 2007 and 2006 we had 284,500 and 248,600 revenue generating            units, respectively.

 

***Liquidity and Capital Resources***

 

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

 

Cash            flows from operating activities totaled $74.3 million for the nine months ended            September 30, 2007 as compared to $80.2 million for the nine months ended September 30,            2006.

 

Other            sources of cash during the nine months ended September 30, 2007 included a $50.0            million borrowing on our Senior Credit Facility, $4.6 million of collateral released            and returned to us on behalf of GCI and $3.1 million from GCI's issuance of its Class A            common stock. Uses of cash during the nine months ended September 30, 2007 included            expenditures of $105.2 million for property and equipment, including construction in            progress, $19.5 million to acquire Alaska DigiTel, $15.1 million to repay a note            payable and convertible debenture previously owed by Alaska DigiTel, repayment of $11.6            million of our Senior Credit Facility, purchase of $8.0 million of common stock to be            retired on behalf of GCI, and the purchase of $5.0 million of other assets and            intangible assets.

 

Working            capital totaled $58.0 million at September 30, 2007, a $32.0 million decrease as            compared to $90.0 million at December 31, 2006. The decrease is primarily due to cash            paid for capital expenditures, the Alaska DigiTel acquisition and debt repayment as            previously described.

 

Net            receivables increased $11.6 million from December 31, 2006 to September 30, 2007            primarily due to timing of payments on trade receivables from several large customers,            the addition of $3.5 million net receivables due to the acquisition of Alaska DigiTel,            and a seasonal increase in trade receivables for Managed Broadband services provided to            hospitals and health clinics.

 

|   | 40 |
|--------|----|

 

----

Senior Notes

At            September 30, 2007 we were in compliance with all loan covenants relating to our 7.25%            senior notes due 2014.

 

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            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%             |   |

 

$55.0            million was drawn on the term loan component of the Incremental Facility at the time of            the debt modification and at September 30, 2007. Our term loan is fully drawn and we            have letters of credit outstanding totaling $4.2 million at September 30, 2007, which            leaves $95.8 million available for unconditional immediate borrowing under the            revolving credit facility.

 

This            transaction was a substantial modification of our existing Senior Credit Facility and            we therefore recognized $343,000 in Loan and Senior Note Fees during the three and nine            months ended September 30, 2007 in our Consolidated Income Statement. Deferred loan            fees of $317,000 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            $403,000 during the three and nine months ended September 30, 2007 of which $208,000            were written off in the three and nine months ended September 30, 2007 and $195,000 was            capitalized and will be amortized over the remaining life of the Senior Credit            Facility.

 

As of            September 30, 2007 maturities of long-term debt under the Senior Credit Facility were            as follows (amounts in thousands):

 

| Years ending December 31, |   |    |   |
|---------------------------|--------|---------|--------|
| 2007                      | $      | 537     |   |
| 2008                      |   | 2,146   |   |
| 2009                      |   | 2,140   |   |
| 2010                      |   | 2,135   |   |
| 2011                      |   | 102,702 |   |
| 2012 and thereafter       |   | 101,637 |   |
|                      | $      | 211,297 |   |

 

At            September 30, 2007 we were in compliance with all loan covenants relating to our Senior            Credit Facility.

 

|   | 41 |
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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 March 5, 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 10R            satellite when it reaches its end of life.

 

We will            lease C-band and Ku-Band transponders over an expected term of approximately 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 $77.0            million to $82.0 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 approximately one month after the launch.

 

Capital Expenditures

Our            expenditures for property and equipment, including construction in progress, totaled            $105.2 million and $64.0 million during the nine months ended September 30, 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 2007 expenditures for property and            equipment for our core operations, including construction in progress, to total $145.0            million to $150.0 million, depending on available opportunities and the amount of cash            flow we generate during 2007.

 

Through            our subsidiary GCC 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            $23.1 million. We paid a $2.1 million down payment in 2007 and expect to pay $2.3            million, $8.8 million, $6.9 million, and $3.0 million during the years ended December            31, 2007, 2008, 2009, and 2010, respectively.

 

In            September 2007 through our subsidiary GCC we entered into an agreement 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 contract includes additional equipment to upgrade the Alaska United            West submarine cable system and also includes an option to increase capacity on the            Alaska United East submarine cable system. The agreement has a total commitment of            $11.2 million. We paid a $1.2 million down payment in October 2007 and expect to pay            the remaining $10.0 million in 2008.

 

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            their 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 to make up to            $75.0 million of repurchases through September 30, 2007, under which we have made            repurchases of $63.5 million through September 30, 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 nine months ended September 30, 2007 we repurchased on GCI's behalf 724,000 shares            of GCI's common stock at a cost of approximately $9.7 million. We expect to continue            the repurchases for an indefinite period subject to the availability of free cash flow,            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 in December 2006.

 

|   | 42 |
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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 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 in 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.            The acquisition will be finalized upon RCA and FCC approval. This transaction will            close upon regulatory approval which is expected in the third quarter of            2008.

 

In            August 2007 we signed a memorandum of understanding to acquire all of the interests in            Alaska Wireless for $12.0 million to $13.0 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. The acquisition will be finalized upon FCC approval. This            transaction will close upon regulatory approval which is expected in the 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 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.

 

**Schedule of Certain Known Contractual Obligations**

The            following table details future projected payments associated with certain known            contractual obligations as of December 31, 2006, the date of our most recent fiscal            year-end balance sheet. Our schedule of certain known contractual obligations has been            updated to reflect the following:

 

|   | **•** | Modification of our Senior Credit Facility, |
|--------|------------|---------------------------------------------|

|   | **•** | Previously described agreements to: |
|--------|------------|-------------------------------------|

|   | **•** | Purchase hardware and software capable of providing                            wireless service to small markets in rural Alaska, |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Purchase the submarine cable, amplifiers and line                            terminal equipment for our Southeast Alaska submarine fiber optics                            project and additional equipment to upgrade the Alaska United West                            submarine cable system, |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Acquire the stock of the UUI and Unicom                            telecommunications subsidiaries of UCI, and |
|--------|------------|----------------------------------------------------------------------------------------------------------------|

|   | **•** | Acquire Alaska Wireless. |
|--------|------------|--------------------------|

 

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|--------|----|

 

----

|   | **•** | The completion of our Alaska DigiTel acquisition in                            January 2007, and |
|--------|------------|--------------------------------------------------------------------------------------------------|

|   | **•** | The Intelsat Galaxy 18 launch date change. |
|--------|------------|--------------------------------------------|

 

|                                          |   | 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                                | $      | 532,825                | 1,965 | 4,386 | 104,837 | 421,637 |
| Interest on long-term debt                    |   | 252,955                | 36,341 | 77,141 | 76,480 | 62,993 |
| Capital lease obligations, including interest |   | 135,776                | 467 | 17,044 | 19,361 | 98,904 |
| Operating lease commitments                   |   | 68,564                 | 16,866 | 17,903 | 11,480 | 22,315 |
| Purchase obligations                          |   | 68,579                 | 28,730 | 34,849 | 5,000 | --- |
| Other                                         |   | 55,500                 | --- | 52,500 | 3,000 | --- |
| Total contractual obligations                 | $      | 1,114,199              | 84,369 | 203,823 | 220,158 | 605,849 |

 

For            long-term debt included in the above table, we have included principal payments on our            Senior Credit Facility and Senior Notes. Interest on amounts outstanding under our            Senior Credit Facility is based on variable rates. We used the current rate paid in            September 2007 on our modified 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 “Notes to Consolidated Financial Statements”included in Part II of our December 31, 2006 annual report on Form 10-K.            For a discussion of our modified Senior Credit Facility see note 5 in the accompanying            “Notes to Interim Consolidated Financial Statements.”

 

For a            discussion of our capital and operating leases, see note 15 in the “Notes to            Consolidated Financial Statements” included in Part II of our December 31, 2006            annual report on Form 10-K. Capital lease obligations include the future projected            payments expected for the Intelsat Galaxy 18 transponder capacity lease as described            above.

 

Purchase obligations include a remaining commitment to purchase a            certain number of outdoor, network powered multi-media adapters and other vendor            equipment of $5.1 million and a remaining $6.2 million commitment for our Alaska            Airlines agreement as further described in note 15 in the “Notes to Consolidated            Financial Statements” included in Part II of our December 31, 2006 annual report            on Form 10-K. The contracts associated with these commitments are non-cancelable.            Purchase obligations also include a commitment to purchase a minimum of $5.0 million to            $5.5 million in additional IRU capacity in two installments through 2011, our $23.1            million agreement to purchase hardware and software capable of providing wireless            service to small markets in rural Alaska as described above, and our $11.2 million            agreement to purchase the submarine cable, amplifiers and line terminal equipment for            our Southeast submarine fiber optics project and additional equipment to upgrade the            Alaska United West submarine cable system. The contracts associated with these            commitments are non-cancelable. Additionally, purchase obligations include open            purchase orders for goods and services for capital projects and normal operations            totaling $16.0 million which are not included in our Consolidated Balance Sheets at            December 31, 2006, because the goods had not been received or the services had not been            performed at December 31, 2006. The open purchase orders are cancelable.

 

The            "Other" line item consists of the $40.0 million agreement to acquire the stock of the            UUI and Unicom telecommunications subsidiaries of UCI and the $15.0 million to $16.0            million agreement to purchase Alaska Wireless as described above.

 

We            believe, but can provide no assurances, that we will be able to fund future projected            payments associated with our certain known contractual obligations through our cash            flows from operating activities, existing cash, cash equivalents, short-term            investments, credit facilities, and other external financing and equity sources. Should            cash flows be insufficient to support additional borrowings and principal payments            scheduled under our existing credit facilities, capital expenditures will likely be            reduced.

 

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***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 nine months ended            September 30, 2007 are the allowance for doubtful accounts, impairment and useful lives            of intangible assets, accruals for unbilled costs, and the valuation allowance for net            operating loss deferred tax assets. A complete discussion of our critical accounting            policies can be found in Item 7 Management's Discussion and Analysis of Financial            Condition and Results of Operations in our December 31, 2006 annual report on Form            10-K.

             

Other            significant accounting policies, not involving the same level of measurement            uncertainties as those listed above, are nevertheless important to an understanding of            the financial statements. Policies related to revenue recognition, share-based            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 included in Part II of our December 31, 2006            annual report on Form 10-K.

 

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

 

We have            one major customer, Verizon Communications, Inc. We also provide services to Sprint            Nextel Corporation and Dobson. 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. 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. 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.

 

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.

 

***Item 3. Quantitative and Qualitative Disclosures About Market            Risk***

 

We are            exposed to interest rate risk, which is our primary risk, as well as various types of            market risk in the normal course of business. We do not hold derivatives for trading            purposes.

 

|   | 45 |
|--------|----|

 

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Our            Senior Credit Facility carries interest rate risk. Amounts borrowed under this            agreement bear interest at LIBOR plus 2.25% 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 September 30, 2007, we have borrowed $211.3 million subject            to interest rate risk. On this amount, each 1% increase in the LIBOR interest rate            would result in $2,113,000 of additional gross interest cost on an annualized            basis.

 

***Item 4. Controls and Procedures***

 

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

 

As of            the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an            evaluation of the effectiveness of the design and operation of our “disclosure            controls and procedures” (as defined in the Securities Exchange Act of 1934            (“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 “Changes            in Internal Controls” (Item 4(b)), we identified a material weakness in our            internal control over financial reporting (as defined in Exchange Act Rule 12b-2 ).            Because of this material weakness, which is in the process of being remediated as            described below under “Changes in Internal Controls” (Item 4(b)), our            management, including our Chief Executive Officer and our Chief Financial Officer,            concluded that our disclosure controls and procedures were not effective as of            September 30, 2007, which is the end of the period covered by this report.

 

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

 

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

 

***(b) Changes in Internal Controls***

 

During            the first quarter of 2007, we corrected billing system rate errors so billings are            being issued and recorded using correct rates. We also initiated processes, procedures            and controls over the review and input of billing rates used in the affected billing            system. During the first quarter of 2007, we implemented policies and procedures for            the effective analysis and implementation of accounting pronouncements as applied to            non-routine transactions by retaining external consultants to advise us on non-routine            accounting transactions. We will continue to vigorously monitor the effectiveness of            these processes, procedures and controls, and will make any further changes as            management determines appropriate.

 

At June            30, 2007, a material weakness existed associated with inadequately designed internal            controls in our financial reporting process related to the calculation of share-based            compensation expense. Specifically, a number of stock option agreements were amended            during the three months ended June 30, 2007 to comply with Internal Revenue Code            section 409A. Share based compensation expense associated with the unusually high            volume of stock option agreement amendments was initially recorded incorrectly but was            corrected after June 30, 2007 but prior to the issuance of our second quarter 2007 Form            10-Q. During the third quarter of 2007, we began remediation of this material weakness            by performing manual recalculations of shared-based compensation expense and reviewing            and approving the recalculations. Due to the low volume of stock options and awards            granted during the third quarter we were unable to demonstrate remediation. We believe            we will be able to demonstrate remediation in the fourth quarter of 2007.

 

Except            as described above, there were no changes in our internal control over financial            reporting during the quarter ended September 30, 2007 that have materially affected, or            are reasonably likely to materially affect, our internal control over financial            reporting.

 

|   | 46 |
|--------|----|

 

----

Internal control over financial reporting is a system designed to            provide reasonable assurance to the Company’s management and board of directors            regarding the preparation and fair presentation of its financial statements. All            internal control systems, no matter how well designed, have inherent limitations.            Therefore, even those systems determined to be effective can provide only reasonable            assurance with respect to financial statement preparation and presentation. Also,            projections of any evaluation of effectiveness to future periods are subject to the            risk that controls may become inadequate because of changes in conditions, or that the            degree of compliance with the policies or procedures may deteriorate.

 

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

 

**PART II**

***Item 1. Legal Proceedings***

 

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

 

| ***Item 6.                            Exhibits*** |
|---------------------------------------------------|

             

| **Exhibit No.** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 |
| 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                                                                                             |
| 31.1            | Certification Pursuant to 18 U.S.C. Section 1350, as                            Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by                            our President and Director                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2            | Certification Pursuant to 18 U.S.C. Section 1350, as                            Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by                            our Senior Vice President, Chief Financial Officer, Secretary and                            Treasurer                                                                                                                                                                                                                                                                                         |
| 32.1            | Certification Pursuant to 18 U.S.C. Section 1350, as                            Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by                            our President and Director                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2            | Certification Pursuant to 18 U.S.C. Section 1350, as                            Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by                            our Senior Vice President, Chief Financial Officer, Secretary and                            Treasurer                                                                                                                                                                                                                                                                                         |

 

 

|   | 47 |
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**SIGNATURES**

 

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

 

 

|   | **GCI, INC.** |
|--------|---------------|

 

 

| Signature            |   | Title                                        |   | Date             |
|----------------------|--------|----------------------------------------------|--------|------------------|
|                 |   |                                         |   |             |
|                 |   |                                         |   |             |
| /s/ Ronald A. Duncan |   | President and Director                       |   | November 5, 2007 |
| Ronald A. Duncan     |   | (Principal Executive Officer)                |   |             |
|                 |   |                                         |   |             |
| /s/ G. Wilson Hughes |   | Vice President and Director                  |   | November 5, 2007 |
| G. Wilson Hughes     |   |                                         |   |             |
|                 |   |                                         |   |             |
| /s/ John M. Lowber   |   | Secretary, Treasurer and Director            |   | November 5, 2007 |
| John M. Lowber       |   | (Principal Financial and Accounting Officer) |   |             |

 

 

 

 

 

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