gci10-qa063008.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

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. 0-15279

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

	State of Alaska		92-0072737
	(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. YesxNo o

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

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

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

The number of shares outstanding of the registrant's classes of common stock as of July 31, 2008 was:

49,950,000 shares of Class A common stock; and

3,255,619 shares of Class B common stock.

Explanatory Note

General Communication, Inc. ("the "Company") is filing this Amendment No. 1 on Form 10-Q/A ("this Amendment") to its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2008, which was originally filed on August 11, 2008 (“Original Filing”).

This Amendment is being filed to

Correct the Company's consolidated financial statements under Part I, Item I contained in this Form 10-Q/A for an error in depreciation expense due to failure to make a change to the estimated useful life of certain assets that were expected to be decommissioned at or near the end of 2008. The error increased depreciation expense $4.0 million and $8.5 million for the three and six months ended June 30, 2008, respectively, decreased minority interest expense $920,000 and $1.9 million for the three and six months ended June 30, 2008, respectively, and decreased income tax expense $1.4 million and $2.8 million for the three and six months ended June 30, 2008, respectively. The error also decreased property and equipment in service $8.5 million, decreased minority interest $1.9 million and decreased deferred income tax liability $2.8 million as of June 30, 2008. Note 1(m) to the consolidated financial statements is added to describe the error correction, and

·	Correct the Company’s disclosure under Part I, Item 4(b) to include the Company’s evaluation of this error on its internal control over financial reporting.

This Form 10-Q/A only amends Part I, Items 1 and 2 as a result of, and to reflect, an error in depreciation expense and Management’s conclusion that this error arose from a material weakness. This Form 10-Q/A includes the Original Filing in its entirety; no other information in the Original Filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the Securities and Exchange Commission (“SEC”), Item 6 of Part II of the Original Filing has been amended to contain the currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except for the foregoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Filing and the Company has not updated the disclosure contained herein to reflect events that occurred at a later date. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events have been addressed in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, and any reports filed with the SEC subsequent to the date of this filing.

1(a)

GENERAL COMMUNICATION, INC.

FORM 10-Q/A (Amendment No. 1)

FOR THE QUARTER ENDED JUNE 30, 2008

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 June 30, 2008 (as restated, unaudited)
	and December 31, 2007		4

	Consolidated Income Statement for the three and six months ended
	June 30, 2008 (as restated, unaudited) and 2007 (as restated, unaudited)		6

	Consolidated Statements of Cash Flows for the six months
	ended June 30, 2008 (as restated, unaudited) and 2007 (as restated, unaudited)		7

	Notes to Interim Consolidated Financial Statements (unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations		29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		56

Item 4.	Controls and Procedures		57

Part II. OTHER INFORMATION

Item 1A.	Risk Factors		59

Item 4.	Submission of Matters to a Vote of Security Holders		59

Item 6.	Exhibits		60

Other items are omitted, as they are not applicable.

SIGNATURES		61

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 SEC. In this Quarterly Report, in addition to historical information, we state our future strategies, plans, objectives or goals and our beliefs of future events and of our future operating results, financial position and cash flows. In some cases, you can identify these so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “project,” or “continue” or the negative of these words and other comparable words. All forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, achievements, plans and objectives to differ materially from any future results, performance, achievements, plans and objectives expressed or implied by these forward-looking statements. In evaluating these statements, you should specifically consider various factors, including those identified under “Risk Factors” in Item 1A of our December 31, 2007 annual report on Form 10-K/A (Amendment No. 2) and in this Quarterly Report. Those factors may cause our actual results to differ materially from any of our forward-looking statements. For these forward looking statements, we claim the protection of the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)	(as restated, unaudited)
	June 30,		December 31,
ASSETS	2008		2007

Current assets:
Cash and cash equivalents	$	95,703		13,074

Receivables		107,502		97,913
Less allowance for doubtful receivables		1,864		1,657
Net receivables		105,638		96,256

Deferred income taxes		6,448		5,734
Prepaid expenses		6,246		5,356
Inventories		5,390		2,541
Investment securities		5,230		---
Other current assets		558		717
Total current assets		225,213		123,678

Property and equipment in service, net of depreciation		684,099		504,273
Construction in progress		115,809		69,409
Net property and equipment		799,908		573,682

Cable certificates		191,565		191,565
Goodwill		48,211		42,181
Wireless licenses		25,907		25,757
Other intangible assets, net of amortization		18,080		11,769
Deferred loan and senior notes costs, net of amortization		6,726		6,202
Other assets		10,685		9,399
Total other assets		301,174		286,873
Total assets	$	1,326,295		984,233

See accompanying notes to interim consolidated financial statements.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Continued)

(Amounts in thousands)	(as restated, unaudited)
	June 30,			December 31,
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS’ EQUITY	2008			2007

Current liabilities:
Current maturities of obligations under long-term debt and capital leases	$	13,830			2,375
Accounts payable		46,094			35,747
Deferred revenue		20,886			16,600
Accrued payroll and payroll related obligations		17,401			16,329
Accrued interest		9,322			8,927
Accrued liabilities		9,219			7,536
Subscriber deposits		1,020			877
Total current liabilities		117,772			88,391

Long-term debt		702,952			536,115
Obligations under capital leases, excluding current maturities		96,254			2,290
Obligation under capital lease due to related party, excluding current maturity		1,864			469
Deferred income taxes		86,565			84,294
Long-term deferred revenue		37,738			845
Other liabilities		19,766			12,396
Total liabilities		1,062,911			724,800

Minority interest		4,556			6,478

Commitments and contingencies
Stockholders’ equity:
Common stock (no par):
Class A. Authorized 100,000 shares; issued 49,930 and 50,437 shares at June 30, 2008 and December 31, 2007, respectively; outstanding 49,461 and 49,425 shares at June 30, 2008 and December 31, 2007, respectively		150,706			155,980
Class B. Authorized 10,000 shares; issued 3,256 and 3,257 shares at June 30, 2008 and December 31, 2007, respectively; outstanding 3,254 and 3,255 shares at June 30, 2008 and December 31, 2007, respectively; convertible on a share-per-share basis into Class A common stock		2,750			2,751
Less cost of 471 and 473 Class A and Class B common shares held in treasury at June 30, 2008 and December 31, 2007, respectively		(3,422	)		(3,448	)
Paid-in capital		23,522			20,132
Retained earnings		85,272			77,540
Total stockholders’ equity		258,828			252,955
Total liabilities, minority interest, and stockholders’ equity	$	1,326,295			984,233

See accompanying notes to interim consolidated financial statements.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENT

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Amounts in thousands, except per share amounts)	(as restated) 2008			(as restated) 2007			(as restated)2008			(as restated) 2007
Revenues	$	142,461			129,890			277,135			254,921

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		52,448			45,579			103,759			93,569
Selling, general and administrative expenses		48,260			43,430			94,666			87,035
Depreciation and amortization expense		27,708			21,437			54,951			42,303
Operating income		14,045			19,444			23,759			32,014

Other income (expense):
Interest expense		(10,899	)		(8,557	)		(19,584	)		(16,875	)
Loan and senior note fees		(879	)		(216	)		(1,102	)		(396	)
Interest income		402			161			483			345
Minority interest		946			(24	)		1,922			(11	)
Other expense, net		(10,430	)		(8,636	)		(18,281	)		(16,937	)

Income before income tax expense		3,615			10,808			5,478			15,077

Income tax expense		1,783			4,890			3,210			6,853

Net income	$	1,832			5,918			2,268			8,224

Basic net income per common share	$	0.04			0.11			0.04			0.15

Diluted net income per common share	$	0.03			0.11			0.04			0.14

See accompanying notes to interim consolidated financial statements.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2008 AND 2007

(Unaudited)

(Amounts in thousands)	(as restated)2008			(as restated) 2007
Cash flows from operating activities:
Net income	$	2,268			8,224
Adjustments to reconcile net income to net cash provided by operating activities (net of effects of acquisition):
Depreciation and amortization expense		54,951			42,303
Deferred income tax expense		2,470			6,663
Share-based compensation expense		2,853			1,748
Other noncash income and expense items		2,142			3,312
Change in operating assets and liabilities, net of effect of acquisition		44,773			(7,015	)
Net cash provided by operating activities		109,457			55,235

Cash flows from investing activities:
Purchases of property and equipment		(113,491	)		(68,455	)
Purchase of business, net of cash received		(40,161	)		(19,530	)
Purchases of other assets and intangible assets		(2,325	)		(4,445	)
Restricted cash		---			4,612
Other		---			25
Net cash used in investing activities		(155,977	)		(87,793	)

Cash flows from financing activities:
Borrowing on Senior Credit Facility		132,100			15,000
Repayment of debt and capital lease obligations		(1,999	)		(26,126	)
Payment of debt issuance costs		(1,626	)		---
Issuance of long-term debt		614			---
Proceeds from common stock issuance		106			2,354
Other		(46	)		(1	)
Purchase of stock to be retired		---			(7,979	)
Net cash provided by (used in) financing activities		129,149			(16,752	)
Net increase (decrease) in cash and cash equivalents		82,629			(49,310	)
Cash and cash equivalents at beginning of period		13,074			57,647

Cash and cash equivalents at end of period	$	95,703			8,337

See accompanying notes to interim consolidated financial statements.

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

The accompanying unaudited interim consolidated financial statements include the accounts of General Communication, Inc. (“GCI”) and its subsidiaries and have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. They should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2007, filed with the SEC on June 11, 2008 as part of our annual report on Form 10-K (Amendment No. 2). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.

(l) Business and Summary of Significant Accounting Principles

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

(a)

Business

GCI, an Alaska corporation, was incorporated in 1979. We offer the following services:

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

·	Cable television services throughout Alaska,

·	Competitive local access services in Anchorage, Fairbanks, Juneau, Wasilla, Eagle River, Kodiak, Palmer, Kenai, Soldotna, Seward, Chugiak, Sitka, Valdez, Ketchikan, Nome and Homer, Alaska with on-going expansion into additional Alaska communities,

·	Incumbent local access services in rural Alaska,

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

Resale and sale of postpaid and sale of prepaid wireless telephone services and sale of wireless telephone handsets and accessories,

Data network services,

·	Internet access services,

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

·	Managed services to certain commercial customers,

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

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

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

(b)

Principles of Consolidation

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

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

(c)

United Utilities, Inc. and Unicom, Inc. Acquisition

Effective June 1, 2008, we closed on our purchase of 100% of the outstanding stock of the United Utilities, Inc. ("UUI") and Unicom, Inc. ("Unicom"), which were subsidiaries of United Companies, Inc. ("UCI"). UUI, together with its subsidiary, United-KUC, Inc. ("United-KUC"), provides local telephone service to 60 rural communities across Alaska. Unicom operates DeltaNet, a long-haul broadband microwave network ringing the Yukon-Kuskokwim Delta. We view this investment as an opportunity to expand our Managed Broadband services in rural Alaska. We recorded our investment in UUI and Unicom in accordance with SFAS No. 141, "Business Combinations" and their results of operations for the month of June 2008 are included in the Consolidated Income Statement for the three and six months ended June 30, 2008. This transaction was a stock purchase but we elected to treat it as an asset purchase for income tax purposes. As a result, goodwill has been recorded for tax purposes and will be amortized over 15 years.

The aggregate purchase price for UUI and Unicom is $40.2 million paid in cash, net of cash received. Additionally, we have agreed to make additional payments in each of the years 2008 through 2012 that are contingent on sequential year-over-year revenue growth for specified customers. We are unable to reasonably estimate the amount of the contingent consideration that may be paid, but do not believe any amount paid will be significant.

We are in the process of determining the value of the tangible and intangible assets, long-term debt, leases, contracts with customers, as well as other assets and liabilities; therefore, the purchase price allocation for our acquisition has not been finalized at June 30, 2008 and all assets acquired and liabilities assumed are subject to refinement. The UUI and Unicom purchase price has been preliminarily allocated as follows (amounts in thousands):

	At June 30, 2008
Current assets	$	14,460
Property and equipment, including construction in progress		68,149
Intangible assets		6,549
Goodwill		6,030
Other assets		2,411
Total assets acquired		97,599
Current liabilities		4,452
Long-term debt, including current portion		42,704
Other long-term liabilities		8,188
Total liabilities assumed		55,344
Net assets acquired	$	42,255

The total assets of UUI and Unicom were $98.0 million at June 30, 2008. UUI and Unicom's revenues, net of intercompany revenue, for the month ended June 30, 2008 were $2.6 million and are primarily allocated as follows: $1.9 million to our Regulated Operations segment, $440,000 to our Managed Broadband segment, and $307,000 to our Network Access segment. UUI and Unicom had outstanding debt of $42.9 million at June 30, 2008 that is collateralized by substantially all of UUI's and Unicom's assets. UUI and Unicom's creditors do not have recourse to GCI's assets.

As a result of the acquisition, we have a new operating segment for our regulated activities. Additionally, the financial results of the long-distance services sold to other common carrier customers and the managed broadband services of UUI and Unicom have been included in the Network Access and Managed Broadband services segments, respectively.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Assuming we had acquired UUI and Unicom on January 1, 2008 and 2007, our revenues, net income and basic and diluted earnings per common share ("EPS") for the three and six months ended June 30, 2008 and 2007 would have been as follows (amounts in thousands, except per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008 (as restated)		2007		2008		2007
Pro forma consolidated revenue	$	146,824		136,223		288,185		267,764
Pro forma net income	$	1,944		6,138		2,651		8,713

EPS:
Basic – pro forma	$	0.04		0.12		0.05		0.16
Diluted – pro forma	$	0.04		0.11		0.04		0.15

(d)	Regulatory Accounting and Regulation

We account for our regulated operations in accordance with the accounting principles for regulated enterprises prescribed by SFAS No. 71. This accounting recognizes the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, under SFAS No. 71, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years. Our cost studies and depreciation rates for our regulated operations are subject to periodic audits that could result in reductions of revenues. Based upon the preliminary purchase price allocation described in note 1(c), the effects of regulation for the three and six months ended June 30, 2008 are not material to the consolidated financial statements.

(e)

Revenue Recognition

Access revenue is recognized when earned. We participate in access revenue pools with other telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the Regulatory Commission of Alaska (“RCA”) within the intrastate jurisdiction and the Federal Communications Commission (“FCC”) within the interstate jurisdiction. Much of the interstate access revenue is initially recorded based on estimates. These estimates are derived from interim financial statements, available separation studies and the most recent information available about achieved rates of return. These estimates are subject to adjustment in future accounting periods as additional operational information becomes available. To the extent that disputes arise over revenue settlements, our policy is to defer revenue collected until settlement methodologies are resolved.

(f)	Earnings per Share

EPS and common shares used to calculate basic and diluted EPS consist of the following (amounts in thousands, except per share amounts):

	Three Months Ended June 30,
	2008 (as restated)						2007 (as restated)
	Income (Num- erator)		Shares (Denom- inator)		Per-share Amounts		Income (Num- erator)		Shares (Denom- inator)		Per-share Amounts
Basic EPS:
Net income	$	1,832		52,320	$	0.04	$	5,918		53,201	$	0.11

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Effect of Dilutive Securities:
Unexercised stock options		---	397		---		---		1,404		---
Unvested restricted stock awards		---	28		---		---		---		---
Diluted EPS:
Effect of share based compensation that may be settled in cash or shares		---	---		---		(213	)	93		---
Net income adjusted for effect of share based compensation that may be settled in cash or shares	$	1,832	52,745	$	0.03	$	5,705		54,698	$	0.11

	Six Months Ended June 30,
	2008 (as restated)							2007 (as restated)
	Income (Num- erator)			Shares (Denom- inator)		Per-share Amounts		Income (Num- erator)			Shares (Denom- inator)		Per-share Amounts
Basic EPS:
Net income	$	2,268			52,289	$	0.04	$	8,224			53,230	$	0.15
Effect of Dilutive Securities:
Unexercised stock options		---			385		---		---			1,488		---
Unvested restricted stock awards		---			25		---		---			---		---
Diluted EPS:
Effect of share based compensation that may be settled in cash or shares		(401	)		251		---		(541	)		97		---
Net income adjusted for effect of share based compensation that may be settled in cash or shares	$	1,867			52,950	$	0.04	$	7,683			54,815	$	0.14

Weighted average shares associated with outstanding share awards for the three and six months ended June 30, 2008 and 2007, which have been excluded from the computations of diluted EPS, because the effect of including these share awards would have been anti-dilutive, consist of the following (shares, in thousands):

	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2008		2007	2008		2007
Weighted average shares associated with unexercised stock options		4,737	1,314		4,735	1,133
Weighted average shares associated with unvested restricted share awards		233	---		249	---
Effect of share-based compensation that may be settled in cash or shares		253	---		---	---

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Additionally, weighted average shares associated with contingent awards of 376,000 for the three and six months ended June 30, 2008 were excluded from the computation of diluted EPS because the contingencies of these awards have not been met at June 30, 2008.

We have not issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings when, and if, we declare dividends on our common stock and, therefore, we do not apply the two-class method of calculating EPS.

(g)

Common Stock

Following are the changes in issued common stock for the six months ended June 30, 2008 and 2007 (shares, in thousands):

	Class A			Class B
Balances at December 31, 2006		50,191			3,370
Class B shares converted to Class A		113			(113	)
Shares issued under stock option plan		332			---
Shares issued under the Director Compensation Plan		23			---
Shares retired		(212	)		---
Balances at June 30, 2007		50,447			3,257

Balances at December 31, 2007		50,437			3,257
Class B shares converted to Class A		1			(1	)
Shares issued under stock option plan		17			---
Shares issued under the Director Compensation Plan		20			---
Shares retired		(540	)		---
Other		(5	)		---
Balances at June 30, 2008		49,930			3,256

GCI's Board of Directors has authorized a common stock buyback program for the repurchase of our Class A and Class B common stock in order to reduce our outstanding shares of Class A and Class B common stock. The Term Loan agreement entered into on May 2, 2008 and described in note 4 allows for the repurchase of our common stock under our buyback program when our total debt leverage is below 4.0 times earnings before depreciation and amortization expense, net interest expense, income taxes and share-based compensation expense ("EBITDAS"). Under the buyback program we had made repurchases of $68.9 million through December 31, 2007. 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 six months ended June 30, 2008 we repurchased no shares of our Class A and B common stock. During the six months ended June 30, 2007 we received in lieu of a cash payment on a note receivable 113,000 shares of our Class A common stock at a cost of $1.7 million. The cost of the repurchased common stock is recorded in Retained Earnings on our Consolidated Balance Sheets. At June 30, 2008, all repurchased shares of our Class A common stock had been retired.

(h)	Investment Securities

We have investment securities of $5.2 million at June 30, 2008 that are classified as trading under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Our investments consist primarily of money market funds and U.S. government securities. Trading securities are recorded at fair value with unrealized holding gains and losses included in net income. We did not have investment securities prior to the quarter ended June 30, 2008.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

(i) Asset Retirement Obligations

Following is a reconciliation of the beginning and ending aggregate carrying amount of our asset retirement obligations at June 30, 2008 and 2007 (amounts in thousands):

Balance at December 31, 2006	$	3,408
Liability incurred		85
Accretion expense for the six months ended June 30, 2007		71
Liability settled		(2	)
Balance at June 30, 2007	$	3,562

Balance at December 31, 2007	$	4,173
Liability incurred		18
Accretion expense for the six months ended June 30, 2008		124
Additions upon acquisition of UUI and Unicom		6,211
Liability settled		(40	)
Balance at June 30, 2008	$	10,486

Our asset retirement obligations are included in Other Liabilities.

(j) Use of Estimates

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

(k) Classification of Taxes Collected from Customers

We report sales, use, excise, and value added taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between us and a customer on a net basis in our income statement. Following are certain surcharges on a gross basis in our income statement for the three and six months ended June 30, 2008 and 2007 (amounts in thousands):

	Three Months Ended			Six Months Ended
	June 30,			June 30,
	2008		2007	2008		2007
Surcharges reported gross		1,062	1,097		2,012	2,065

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

(l) Change in Accounting Policy

Effective January 1, 2008 we prospectively changed our accounting policy for recording depreciation on our property and equipment placed in service. For assets placed in service on or after January 1, 2008 we are using a mid-month convention to recognize depreciation expense. Previous to this change we used the half-year convention to recognize depreciation expense in the year an asset was placed in service, regardless of the month the property and equipment was placed in service. We believe the mid-month convention is preferable because it results in more precise recognition of depreciation expense over the estimated useful life of the asset. No retroactive adjustment has been made. The following table sets forth the impact of this accounting change on depreciation and amortization expense, operating income and net income for the three and six months ended June 30, 2008:

	Three Months Ended June 30, 2008		Six Months Ended June 30, 2008
Increased depreciation and amortization expense	$	419		562
Decreased operating income		419		562
Decreased net income		222		289

Reported EPS would not change had we continued to use our previous accounting policy during the three and six months ended June 30, 2008.

(m)	Restatements, Immaterial Error Correction and Reclassification

On November 5, 2008, we concluded that we should restate our previously issued quarterly results for the quarter ended June 30, 2008 to correct the error described below. The corrections made as part of the restatement of our results of operations for the three and six months ended June 30, 2008 follow:

We increased depreciation expense $4.0 million and $8.5 million for the three and six months ended June 30, 2008, respectively, to correct depreciation expense for a failure to change the estimated useful life of certain assets that were expected to be decommissioned at or near the end of 2008. The assets should have been depreciated over the remaining period they were expected to be used;

·	We decreased minority interest expense $920,000 and $1.9 million for the three and six months ended June 30, 2008, respectively, to record the minority interest portion of the correction described above, and;

·	We decreased income tax expense $1.4 million and $2.8 million for the three and six months ended June 30, 2008, respectively, to record the income tax effect of the corrections described above.

The impact of the restatement as described above for the period presented is as follows (amounts in thousands, except per share amounts):

	June 30, 2008
Consolidated Condensed Balance Sheet	As previously reported1		Adjustments			As restated
Assets
Total current assets	$	225,213		---			225,213

Property and equipment in service, net of depreciation		692,561		(8,462	)		684,099
Construction in progress		115,809		---			115,809
Net property and equipment		808,370		(8,462	)		799,908

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)


Total other assets		301,174		---		301,174
Total assets	$	1,334,757		(8,462	)	1,326,295

Liabilities, Minority Interest, and Stockholders' Equity
Total current liabilities		117,772		---		117,772

Long-term debt		702,952		---		702,952
Obligations under capital leases, excluding current maturities		96,254		---		96,254
Obligation under capital lease due to related party, excluding current maturity		1,864		---		1,864
Deferred income taxes		89,315		(2,750	)	86,565
Long-term deferred revenue		37,738		---		37,738
Other liabilities		19,766		---		19,766
Total liabilities		1,065,661		(2,750	)	1,062,911

Minority interest		6,502		(1,946	)	4,556

Stockholders’ equity:
Class A common stock		150,706		---		150,706
Class B common stock		2,750		---		2,750
Less cost of Class A and Class B common shares held in treasury		(3,422	)	---		(3,422
Paid-in capital		23,522		---		23,522
Retained earnings		89,038		(3,766	)	85,272
Total stockholders’ equity		262,594		(3,766	)	258,828
Total liabilities, minority interest, and stockholders’ equity		1,334,757		(8,462	)	1,326,295

1 As reported on Form 10-Q for the quarter ended June 30, 2008

	Three Months Ended June 30, 2008
	As previously reported1			Adjustments			As restated
Revenues	$	142,461			---			142,461

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		52,448			---			52,448
Selling, general and administrative expenses		48,260			---			48,260
Depreciation and amortization expense		23,707			4,001			27,708
Operating income		18,046			(4,001	)		14,045

Other income (expense):
Interest expense		(10,899	)		---			(10,899	)
Loan and senior note fees		(879	)		---			(879	)
Interest income		402			---			402
Minority interest		26			920			946

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Other expense, net		(11,350	)	920		(10,430	)

Income before income tax expense		6,696		(3,081	)	3,615

Income tax expense		3,191		(1,408	)	1,783

Net income	$	3,505		(1,673	)	1,832

Basic net income per common share	$	0.07		(0.03	)	0.04

Diluted net income per common share	$	0.07		(0.04	)	0.03

1 As reported on Form 10-Q for the quarter ended June 30, 2008

	Six Months Ended June 30, 2008
	As previously reported1			Adjustments			As restated
Revenues	$	277,135			---			277,135

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		103,759			---			103,759
Selling, general and administrative expenses		94,666			---			94,666
Depreciation and amortization expense		46,489			8,462			54,951
Operating income		32,221			(8,462	)		23,759

Other income (expense):
Interest expense		(19,584	)		---			(19,584	)
Loan and senior note fees		(1,102	)		---			(1,102	)
Interest income		483			---			483
Minority interest		(24	)		1,946			1,922
Other expense, net		(20,227	)		1,946			(18,281	)

Income before income tax expense		11,994			(6,516	)		5,478

Income tax expense		5,960			(2,750	)		3,210

Net income	$	6,034			(3,766	)		2,268

Basic net income per common share	$	0.12			(0.08	)		0.04

Diluted net income per common share	$	0.11			(0.07	)		0.04

Cash provided by operating activities	$	109,457			---			109,457
Cash used in investing activities		(155,977	)		---			(155,977	)
Cash used in financing activities		129,149			---			129,149

1 As reported on Form 10-Q for the quarter ended June 30, 2008

On June 11, 2008, we filed a Form 10K/A (Amendment No. 2) with the SEC to reflect the restatement of our summary of unaudited quarterly results of operations for the year ended December 31, 2007. We made the following corrections as part of the restatement of our results of operations for the three and six months ended June 30, 2007:

originally recorded our estimated depreciation expense evenly throughout the year with periodic adjustments based upon improved estimates or actual results. In accordance with GAAP we now initially record depreciation expense in the month an asset is placed in service. Depreciation was improperly allocated among quarters, but the year-end total was correct. Therefore the restatement impacts the quarterly results but not the December 31, 2007 year-end results.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Additionally we corrected the 2007 quarters for errors that have been determined to be immaterial individually and in the aggregate. Other than interest capitalization, these immaterial errors do not impact the December 31, 2007 results. They are as follows:

We decreased interest expense $384,000 and $766,000 for the three and six months ended June 30, 2007, respectively, to correct an interest capitalization error on certain assets. Our capitalized interest policy was too restrictive and resulted in no interest capitalization on certain qualifying capital expenditures. Our capitalized interest policy now conforms to GAAP;

·	We increased depreciation expense $322,000 and $644,000 for the three and six months ended June 30, 2007, respectively, due to the recognition of depreciation on additional capitalized interest;

·	We increased revenue $173,000 and $492,000 for the three and six months ended June 30, 2007, respectively, to correct understated revenue resulting from a configuration error in the automated interface between our unified billing system and our general ledger;

·	We increased revenue $125,000 and $258,000 for the three and six months ended June 30, 2007, respectively, to correct revenue recognition for a majority noncontrolling interest in a subsidiary that was recognizing a certain type of revenue on a cash basis rather than an accrual basis;

·	We decreased share-based compensation expense $715,000 and $757,000 for the three and six months ended June 30, 2007, respectively, to correct expense recognition timing for options that did not vest in equal increments over the vesting period;

·	We decreased depreciation expense $37,000 and $75,000 for the three and six months ended June 30, 2007, respectively, due to a revision of the purchase price allocation of our purchase of Alaska DigiTel, LLC ("Alaska DigiTel") on January 1, 2007; and

·	We increased income tax expense $799,000 and $1.5 million for the three and six months ended June 30, 2007, respectively, to record the income tax effect of the corrections described above.

We reclassified $3.3 million and $8.2 million of network maintenance and operations expense from selling, general and administrative expense to Cost of Goods Sold for the three and six months ended June 30, 2007, respectively. We believe this change in accounting more closely aligns our maintenance and operations components to the nature of expenses included in our financial statement captions, and will improve the comparability of our financial statement presentation with our industry peers.

The impact of the restatement and immaterial error correction adjustments and the reclassification as described above for the periods presented are as follows (amounts in thousands, except per share amounts):

	Three Months Ended June 30, 2007
	As previously reported1		Adjustments			Reclassification			As restated
Revenues	$	129,592		298			---			129,890

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		42,238		---			3,341			45,579
Selling, general and administrative expenses		47,486		(715	)		(3,341	)		43,430
Depreciation and amortization expense		21,742		(305	)		---			21,437
Operating income		18,126		1,318			---			19,444

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)


Other income (expense):
Interest expense		(8,941	)	384	---	(8,557	)
Loan and senior note fees		(216	)	---	---	(216	)
Interest income		161		---	---	161
Minority interest		(24	)	---	---	(24	)
Other expense, net		(9,020	)	384	---	(8,636	)

Income before income tax expense		9,106		1,702	---	10,808

Income tax expense		4,091		799	---	4,890

Net income	$	5,015		903	---	5,918

Basic net income per common share	$	0.09		0.02	---	0.11

Diluted net income per common share	$	0.09		0.01	---	0.10

1 As reported on Form 10-Q for the quarter ended June 30, 2007

	Six Months Ended June 30, 2007
	As previously reported1			Adjustments			Reclassification			As restated
Revenues	$	254,171			750			---			254,921

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		85,351			---			8,218			93,569
Selling, general and administrative expenses		96,010			(757	)		(8,218	)		87,035
Depreciation and amortization expense		43,196			(893	)		---			42,303
Operating income		29,614			2,400			---			32,014

Other income (expense):
Interest expense		(17,641	)		766			---			(16,875	)
Loan and senior note fees		(396	)		---			---			(396	)
Interest income		345			---			---			345
Minority interest		(11	)		---			---			(11	)
Other expense, net		(17,703	)		766			---			(16,937	)

Income before income tax expense		11,911			3,166			---			15,077

Income tax expense		5,366			1,487			---			6,853

Net income	$	6,545			1,679			---			8,224

Basic net income per common share	$	0.12			0.03			---			0.15

Diluted net income per common share	$	0.11			0.03			---			0.14

Cash provided by operating activities	$	54,469			766			---			55,235
Cash used in investing activities		(87,027	)		(766	)		---			(87,793	)
Cash used in financing activities		(16,752	)		---			---			(16,752	)

1 As reported on Form 10-Q for the six months ended June 30, 2007

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

(2)	Consolidated Statements of Cash Flows Supplemental Disclosures

Change in operating assets and liabilities, net of effect of acquisition, consists of (amounts in thousands):

Six month period ended June 30,	2008			2007 (as restated)
(Increase) decrease in accounts receivable	$	7,001			(5,726	)
Decrease in prepaid expenses		114			6
Increase in inventories		(2,030	)		(53	)
Net sale of investment securities		800			---
Decrease in other current assets		89			1,238
Increase in accounts payable		1,979			811
Increase (decrease) in deferred revenues		3,159			(3,251	)
Decrease in accrued payroll and payroll related obligations		(41	)		(757	)
Increase in accrued liabilities		1,314			120
Increase in accrued interest		324			49
Increase in subscriber deposits		115			78
Increase in long-term deferred revenue		36,893			---
Increase (decrease) in components of other long-term liabilities		(4,944	)		470
	$	44,773			(7,015	)

We paid interest, exclusive of capitalized interest, totaling $18.9 million and $17.5 million during the six months ended June 30, 2008 and 2007, respectively.

We paid $478,000 and $0 income taxes during the six months ended June 30, 2008 and 2007, respectively. We received no income tax refunds during the six months ended June 30, 2008 and 2007.

During the six months ended June 30, 2008 and 2007, we capitalized interest of $2.1 million and $514,000, respectively.

During the six months ended June 30, 2008, we financed $98.6 million for the use of satellite transponders through a capital lease obligation. We also financed $1.3 million in capital expenditures through the extension of a previously existing capital lease.

We received net cash of $110.6 million from the $145.0 million term loan that we obtained in May 2008. We used $30.0 million of the term loan to repay the revolver portion of our Senior Credit Facility and our loan proceeds were reduced by $2.9 million for an original issue discount and $1.5 million for bank and legal fees associated with the new term loan.

In June 2008 the Galaxy XR satellite was taken out of service resulting in the removal of the remaining $8.8 million net book value and the recognition of an $8.8 million warranty receivable.

We had $6.3 million and $5.7 million in non-cash additions to property and equipment due to unpaid purchases as of June 30, 2008 and 2007, respectively.

We retired Class A common stock in the amount of $5.5 million and $3.3 million during the six months ended June 30, 2008 and 2007, respectively.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

In February 2007, our President and Chief Executive Officer ("CEO") tendered 112,000 shares of his GCI Class A common stock to us at $15.50 per share for a total value of $1.7 million. The stock tender was in lieu of a cash payment on his note receivable with a related party and a note receivable with a related party issued upon stock option exercise, both of which originated in 2002.

(3)	Intangible Assets

On a preliminary basis our goodwill increased $5.7 million, customer relationships increased $3.1 million, other intangible assets increased $3.3 million, and wireless licenses increased $150,000 upon the acquisition of UUI and Unicom effective June 1, 2008 as further described in note 1(c). Goodwill and the wireless licenses are indefinite-lived assets. The increase in other intangible assets is due to the recognition of customer relationships and contracts with a weighted average amortization period of 3.3 years.

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

		Three Months Ended			Six Months Ended
		June 30,			June 30,
		2008	2007		2008	2007
Amortization expense	$	1,165		937	2,080		1,758

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

Years Ending December 31,
2008	$	4,814
2009		5,486
2010		4,580
2011		1,527
2012		962

On May 2, 2008, we signed an agreement to add an Additional Incremental Term Loan of up to $145.0 million to our existing Senior Credit Facility. The Additional Incremental Term Loan will become due under the same terms and conditions as set forth in the existing Senior Credit Facility.

The Additional Incremental Term Loan increased the interest rate on the term loan component of our Senior Credit Facility from LIBOR plus 2.00% to LIBOR plus 4.25%. The Additional Incremental Term Loan increased the revolving credit facility interest rate for our Senior Credit Facility from LIBOR plus a margin dependent upon our Total Leverage Ratio ranging from 1.50% to 2.25% to LIBOR plus the following Applicable Margin set forth opposite each applicable Total Leverage Ratio below:

Total Leverage Ratio (as defined)	Applicable Margin
>3.75		4.25	%
>3.25 but <3.75		3.75	%
>2.75 but <3.25		3.25	%
<2.75		2.75	%

$145.0 million was drawn on the Additional Incremental Term Loan at the time of the debt modification. The proceeds were used to pay down the $30.0 million outstanding under our revolving credit facility including accrued interest and to pay expenses associated with the transaction at closing with the balance deposited in our bank account. Our term loan is fully drawn and we have letters of credit outstanding totaling $4.0 million, which leaves $96.0 million available for borrowing under the revolving credit facility.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

The Term Loan allows for the repurchase of our common stock under our buyback program when our total debt leverage is below 4.0 times EBITDAS. The amendment revised various financial covenants in the agreement and made conforming changes to various covenants to permit certain previously announced acquisitions. Additionally, our loan proceeds were reduced by $2.9 million for an original issue discount. The discount on the term loan will be amortized into interest expense using the effective interest method.

Borrowings under the Senior Credit Facility are subject to certain financial covenants and restrictions on indebtedness, dividend payments, financial guarantees, business combinations, and other related items. As a result of the Additional Incremental Term Loan, our Senior Credit Facility key debt covenants changed to the following: our Senior Credit Facility Total Leverage Ratio (as defined) may not exceed (i) 5.25:1.00 for the period beginning May 2, 2008 and ending on June 30, 2009, (ii) 5.00:1.00 for the period beginning on July 1, 2009, and ending on December 31, 2009, and (iii) 4.50:1.00 for the period beginning January 1, 2010, and ending on August 31, 2012; the Senior Leverage Ratio (as defined) may not exceed (i) 3.25:1.00 for the period beginning on May 2, 2008 and ending on June 30, 2009, and (ii) 3.00:1.00 for the period beginning July 1, 2009, and ending on August 31, 2012; the Fixed Charge Coverage Ratio (as defined) must be 1.0:1.0 or greater beginning December 31, 2009; and the Interest Coverage Ratio (as defined) must not be less than (i) 2.50:1.00 for the period beginning on May 2, 2008 and ending on September 30, 2009, and (ii) 2.75:1.00 for the period beginning October 1, 2009, and ending on August 31, 2012.

Our Senior Credit Facility also limits the amount of capital expenditures that we can incur each year based on the following (amounts in thousands):

Year Ended:	Maximum Capital Expenditure Amount
2008	$	225,000
2009	$	125,000
2010	$	125,000
2011 and thereafter	$	100,000

If the Company’s capital expenditures for a given year are less than the maximum, the difference between the amount incurred and the maximum capital expenditure limitation may be carried over to the following year.

This transaction was a partial substantial modification of our existing Senior Credit Facility resulting in a $667,000 write-off of previously deferred loan fees during the three and six months ended June 30, 2008 in our Consolidated Income Statement. Deferred loan fees of $58,000 associated with the portion of our existing Senior Credit Facility determined not to have been substantially modified continue to be amortized over the remaining life of the Senior Credit Facility.

In connection with the Additional Incremental Term Loan, we paid bank fees and other expenses of $1.6 million during the three and six months ended June 30, 2008 of which $527,000 were immediately expensed in the three and six months ended June 30, 2008 and $1.1 million were deferred and will be amortized over the remaining life of the Senior Credit Facility.

We acquired long-term debt of $42.7 million upon our acquisition of UUI and Unicom effective June 1, 2008. The long-term debt is due in monthly installments of principal based on a fixed rate amortization schedule. The interest rates on the various loans to which this debt relates range from 2.0% to 11.25%.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

As of June 30, 2008, maturities of long-term debt were as follows (amounts in thousands):

Years ending December 31,
2008 (balance of the year)	$	4,975
2009		8,495
2010		8,738
2011		178,255
2011		176,485
2013 and thereafter		340,786
		717,734
Less unamortized discount paid on the Senior Notes		2,794
Less unamortized discount paid on the Senior Credit Facility		2,777
Less current portion of long-term debt		9,211
	$	702,952

(5) Share-Based Compensation

Our 1986 Stock Option Plan, as amended ("Stock Option Plan"), provides for the grant of options and restricted stock awards (collectively "award") for a maximum of 15.7 million shares of GCI Class A common stock, subject to

adjustment upon the occurrence of stock dividends, stock splits, mergers, consolidations or certain other changes in corporate structure or capitalization. If an award expires or terminates, the shares subject to the award will be

available for further grants of awards under the Stock Option Plan. The Compensation Committee of GCI’s Board of Directors administers the Stock Option Plan. Substantially all restricted stock awards granted vest over periods of up to

five years. Substantially all options vest in equal installments over a period of five years and expire ten years from the date of grant. Options granted pursuant to the Stock Option Plan are only exercisable if at the time of exercise the

option holder is our employee, non-employee director, or a consultant or advisor working on our behalf. New shares are issued when stock option agreements are exercised or restricted stock awards are made. Our share repurchase

program as described above may include the purchase of shares issued pursuant to stock option agreement exercise transactions.

The fair value of restricted stock awards is determined based on the quoted price of our common stock. We use a Black-Scholes-Merton option pricing model to estimate the fair value of stock options issued under SFAS No.123(R).

The Black-Scholes-Merton option pricing model incorporates various and highly subjective assumptions, including expected term and expected volatility. We have reviewed our historical pattern of option exercises and have determined

that meaningful differences in option exercise activity existed among employee job categories. Therefore, for all stock options, we have categorized these awards into two groups for valuation purposes.

The weighted average grant date fair value of options granted during the six months ended June 30, 2008 and 2007 was $4.27 per share and $9.49 per share, respectively. The total fair value of options vesting during the six months

ended June 30, 2008 and 2007 was $2.3 million and $2.8 million, respectively.

We have recorded share-based compensation expense of $2.9 million for the six months ended June 30, 2008, which consists of $3.5 million for employee share-based compensation expense and a $681,000 decrease in the fair value of

liability-classified share-based compensation. We recorded share-based compensation expense of $1.7 million for the six months ended June 30, 2007, which consists of $2.2 million for employee share-based compensation expense

and a $460,000 decrease in the fair value of liability-classified share-based compensation. Share-based compensation expense is classified as selling, general and administrative expense in our consolidated income

statement. Unrecognized share-based compensation expense was $3.4 million relating to 388,000 restricted stock awards and $10.3 million relating to 2.4 million unvested stock options as of June 30, 2008. We expect to recognize

share-based compensation expense over a weighted average period of 2.9 years for stock options and 2.2 years for restricted stock awards.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

The following is a summary of our Stock Option Plan activity for the six months ended June 30, 2008:

	Shares (in thousands)			Weighted Average Exercise Price
Outstanding at December 31, 2007		6,751		$	9.37

Options granted		331		$	7.94
Restricted stock awards granted		43		$	6.94
Exercised		(18	)	$	6.02
Restricted stock awards vested		(131	)	$	12.05
Forfeited		(95	)	$	9.51
Outstanding at June 30, 2008		6,881		$	9.23

Available for grant at June 30, 2008		1,305

The following is a summary of activity for stock option grants that were not made pursuant to the Stock Option Plan for the six months ended June 30, 2008:

	Shares (in thousands)		Weighted Average Exercise Price
Outstanding at December 31, 2007 and June 30, 2008		150	$	6.50

Available for grant at June 30, 2008		---

In January 2001 we entered into an aircraft operating lease agreement with a company owned by our President and CEO. The lease was amended effective January 1, 2002 and February 25, 2005. Upon signing the lease, the lessor was

granted an option to purchase 250,000 shares of GCI Class A common stock at $6.50 per share, of which 150,000 shares remain available for purchase and expire on March 31, 2010.

The total intrinsic values, determined as of the date of exercise, of options exercised during the six months ended June 30, 2008 and 2007 were $38,000 and $2.7 million, respectively. We received $106,000 and $2.4 million in cash from

stock option exercises during the six months ended June 30, 2008 and 2007, respectively.

(6)	Industry Segments Data

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

A description of our five reportable segments follows:

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

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

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

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

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

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

Corporate related expenses including engineering, information technology, accounting, legal and regulatory, human resources, and other general and administrative expenses for the three and six months ended June 30, 2008 and 2007 are allocated to our Consumer, Network Access, Commercial, and Broadband segments using segment margin for the years ended December 31, 2007 and 2006, respectively. Corporate related expenses are specifically identified for our Regulated Operations segment and therefore, are not included in this allocation. Bad debt expense for the three and six months ended June 30, 2008 and 2007 is allocated to our Consumer, Network Access, Commercial and Managed Broadband segments using a combination of specific identification and allocations based upon segment revenue for the three and six months ended June 30, 2008 and 2007, respectively.

We evaluate performance and allocate resources based on earnings from operations before depreciation and amortization expense, net interest expense, income tax expense and share-based compensation expense. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in note 1 in the “Notes to Consolidated Financial Statements” included in Part II of our December 31, 2007 annual report on Form 10-K/A (Amendment No. 2). Intersegment sales are recorded at cost plus an agreed upon intercompany profit.

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

Summarized financial information for our reportable segments for the three and six months ended June 30, 2008 and 2007 follows (amounts in thousands):

Three months ended June 30,	Consumer		Network Access		Commercial		Managed Broadband		Regulated Operations		Total Reportable Segments
2008 (as restated)
Revenues:
Intersegment	$	17		167		1,569		---		116		1,869
External		62,113		41,891		27,444		9,134		1,879		142,461
Total revenues	$	62,130		42,058		29,013		9,134		1,995		144,330
EBITDAS	$	13,423		21,676		5,696		3,138		359		44,292

2007 (as restated)
Revenues:
Intersegment	$	---		1,092		1,004		---		---		2,096
External		55,128		41,616		26,193		6,953		---		129,890
Total revenues	$	55,128		42,708		27,197		6,953		---		131,986
EBITDAS	$	10,965		23,543		4,996		2,116		---		41,620

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

Six months ended June 30,	Consumer		Network Access		Commercial		Managed Broadband		Regulated Operations		Total Reportable Segments
2008 (as restated)
Revenues:
Intersegment	$	17		468		2,918		---		116		3,519
External		123,496		81,065		54,035		16,660		1,879		277,135
Total revenues	$	123,513		81,533		56,953		16,660		1,995		280,654
EBITDAS	$	25,677		41,813		10,021		5,615		359		83,485

2007 (as restated)
Revenues:
Intersegment	$	---		1,363		2,629		---		---		3,992
External		108,731		81,942		50,374		13,874		---		254,921
Total revenues	$	108,731		83,305		53,003		13,874		---		258,913
EBITDAS	$	20,923		43,308		8,075		3,748		---		76,054

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007 (as restated)		2008		2007 (as restated)
Reportable segment revenues	$	144,330		131,986		280,654		258,913
Less intersegment revenues eliminated in consolidation		1,869		2,096		3,519		3,992
Consolidated revenues	$	142,461		129,890		277,135		254,921

A reconciliation of reportable segment earnings from external EBITDAS to consolidated income before income taxes (amounts in thousands):

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008 (as restated)		2007 (as restated)			2008 (as restated)		2007 (as restated)
Reportable segment EBITDAS	$	44,292		41,620			83,485		76,054
Less depreciation and amortization expense		27,708		21,437			54,951		42,303
Less share-based compensation expense		1,593		763			2,853		1,748
Less (plus) minority interest		946		(24	)		1,922		(11	)
Consolidated operating income		14,045		19,444			23,759		32,014
Less other expense, net		10,430		8,636			18,281		16,937
Consolidated income before income tax expense	$	3,615		10,808			5,478		15,077

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

(7)	Indefeasible Right to Use (“IRU”) Capacity Sale

We entered into various IRU sales agreements for which we received cash of $33.9 million and $37.1 million during the three and six months ended June 30, 2008, respectively. These transactions are being accounted for as operating leases with deferred revenue to be recognized over the estimated life of the IRU agreement. We had long-term deferred revenue of $34.7 million related to these IRU transactions at June 30, 2008.

(8)	Commitments and Contingencies

Litigation, Disputes, and Regulatory Matters

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

Access to ACS Unbundled Network Elements

On May 22, 2006, the Alaska Communications Systems Group, Inc. (“ACS”) subsidiary serving Anchorage filed a petition with the FCC, seeking forbearance from regulation of interstate broadband and access services. On August 20, 2007, the FCC granted in part and denied in part the requested relief, requiring that ACS comply with certain safeguards to ensure that the relief granted would not result in harm to consumers or competition. On September 19, 2007, GCI and ACS both filed petitions for reconsideration on discrete findings in the order. The petitions are pending and we cannot predict the final outcome of the proceeding at this time.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

The Universal Service Fund ("USF") pays subsidies to Eligible Telecommunications Carriers ("ETC") to support the provision of local access service in high-cost areas. Under FCC regulations, we have qualified as a competitive ETC in the Anchorage, Fairbanks, Juneau, Matanuska-Susitna Valley, Ketchikan, and Glacier State service areas. Without ETC status, we would not qualify for USF subsidies in these areas or other rural areas where we propose to offer local access services, and our revenue for providing local access services in these areas would be materially adversely affected.

On May 1, 2008, the FCC issued an order adopting the recommendation of the Federal State Joint Board on Universal Service (“Joint Board”) to impose a state-by-state interim cap on high cost funds to be distributed to competitive ETCs. As part of the revised policy, the FCC adopted a limited exception from the cap for competitive ETCs serving tribal lands or Alaska Native regions. While the operation of the cap will generally reduce the high cost fund amounts available to competitive ETCs as new competitive ETCs are designated and as existing competitive ETCs acquire new customers, providers like us who serve tribal lands or Alaska Native regions will be provided some relief. The USF cap will be in place until the FCC takes action on proposals for long-term reform. The FCC and the Universal Service Administrative Company are each considering issues related to the interpretation and implementation of the limited exception from the cap, which may materially affect the scope and extent to which eligible entities may avail themselves of the exception, as well as the timing for eligible entities to exercise the exception.

The Joint Board has recommended for FCC consideration long-term options for reforming USF support, including establishing separate funds for mobility and broadband support. Separately, the FCC has issued two reform proposals for changing the basis for support amounts. We cannot predict at this time the outcome of the FCC proceedings to consider USF reform proposals or their respective impacts on us. Both these and any future regulatory, legislative, or judicial actions could affect the operation of the USF and result in a change in our revenue for providing local access services in new and existing markets and facilities-based wireless services in new markets.

Capital Lease Obligation

On March 31, 2006, through our subsidiary GCI Communication Corp. we entered into an agreement to lease transponder capacity on Intelsat, Ltd.’s (“Intelsat”) Galaxy 18 spacecraft that successfully launched on May 21, 2008. We are also leasing capacity on the Horizons 1 satellite, which is owned jointly by Intelsat and JSAT International, Inc. The leased capacity replaced our existing transponder capacity on Intelsat’s Galaxy XR satellite.

The Intelsat Galaxy 18 C-band and Ku-Band transponders are being leased over an expected term of 14 years. The present value of the lease payments, excluding telemetry, tracking and command services and back-up protection, is $98.6 million. We recorded a capital lease obligation and an addition to our Property and Equipment at June 30, 2008.

In June 2008 Galaxy XR was taken out of service resulting in the removal of the remaining $8.8 million net book value and the recognition of an $8.8 million warranty receivable.

(Continued)

GENERAL COMMUNICATION, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements

(Unaudited)

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

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

Capital Lease Amendment

On April 8, 2008, we signed an amendment to a long-term capital lease agreement with our President and CEO and his wife for property we occupy. The amended lease terminates on September 30, 2026. We increased our existing capital lease asset and liability by $1.3 million at June 30, 2008 to record the extension of this capital lease.

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

Years ending December 31:
2008	$	194
2009		258
2010		258
2011		261
2012		270
2013 and thereafter		4,691
Total minimum lease payments	$	5,932

(9)	Subsequent Event

On July 1, 2008, we completed the acquisition of all the interests in Alaska Wireless, LLC (“Alaska Wireless”) for an initial acquisition payment of $14.2 million. In addition to the initial acquisition payment, we have agreed to a contingent payment of approximately $3.0 million in 2010 if certain financial conditions are met. Alaska Wireless is a Global System for Mobile Communications ("GSM") cellular provider and an Internet service provider serving subscribers in the Dutch Harbor, Sand Point, and Akutan, Alaska areas. It is not practicable to determine the initial purchase price allocation at this time.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to unbilled revenues, Cost of Goods Sold accruals, allowance for doubtful accounts, share-based compensation, depreciation, amortization and accretion periods, intangible assets, income taxes, effective tax rate, purchase price allocation, and contingencies and litigation. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also our “Cautionary Statement Regarding Forward-Looking Statements.”

·	We decreased minority interest expense $920,000 and $1.9 million for the three and six months ended June 30, 2008, respectively, to record the minority interest portion of the correction described above, and;

·	We decreased income tax expense $1.4 million and $2.8 million for the three and six months ended June 30, 2008, respectively, to record the income tax effect of the corrections described above.

The impact of the restatement as described above for the period presented is as follows (amounts in thousands, except per share amounts):

	June 30, 2008
Consolidated Condensed Balance Sheet	As previously reported1		Adjustments			As restated
Assets
Total current assets	$	225,213		---			225,213

Property and equipment in service, net of depreciation		692,561		(8,462	)		684,099
Construction in progress		115,809		---			115,809
Net property and equipment		808,370		(8,462	)		799,908

Total other assets		301,174		---			301,174
Total assets	$	1,334,757		(8,462	)		1,326,295

Liabilities, Minority Interest, and Stockholders' Equity
Total current liabilities		117,772		---			117,772

Long-term debt		702,952		---			702,952

Obligations under capital leases, excluding current maturities	96,254		---		96,254
Obligation under capital lease due to related party, excluding current maturity	1,864		---		1,864
Deferred income taxes	89,315		(2,750	)	86,565
Long-term deferred revenue	37,738		---		37,738
Other liabilities	19,766		---		19,766
Total liabilities	1,065,661		(2,750	)	1,062,911

Minority interest	6,502		(1,946	)	4,556

Stockholders’ equity:
Class A common stock	150,706		---		150,706
Class B common stock	2,750		---		2,750
Less cost of Class A and Class B common shares held in treasury	(3,422	)	---		(3,422
Paid-in capital	23,522		---		23,522
Retained earnings	89,038		(3,766	)	85,272
Total stockholders’ equity	262,594		(3,766	)	258,828
Total liabilities, minority interest, and stockholders’ equity	1,334,757		(8,462	)	1,326,295

1 As reported on Form 10-Q for the quarter ended June 30, 2008

	Three Months Ended June 30, 2008
	As previously reported1			Adjustments			As restated
Revenues	$	142,461			---			142,461

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		52,448			---			52,448
Selling, general and administrative expenses		48,260			---			48,260
Depreciation and amortization expense		23,707			4,001			27,708
Operating income		18,046			(4,001	)		14,045

Other income (expense):
Interest expense		(10,899	)		---			(10,899	)
Loan and senior note fees		(879	)		---			(879	)
Interest income		402			---			402
Minority interest		26			920			946
Other expense, net		(11,350	)		920			(10,430	)

Income before income tax expense		6,696			(3,081	)		3,615

Income tax expense		3,191			(1,408	)		1,783

Net income	$	3,505			(1,673	)		1,832

Basic net income per common share	$	0.07			(0.03	)		0.04

Diluted net income per common share	$	0.07			(0.04	)		0.03

1 As reported on Form 10-Q for the quarter ended June 30, 2008

	Six Months Ended June 30, 2008
	As previously reported1			Adjustments			As restated
Revenues	$	277,135			---			277,135

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		103,759			---			103,759
Selling, general and administrative expenses		94,666			---			94,666
Depreciation and amortization expense		46,489			8,462			54,951
Operating income		32,221			(8,462	)		23,759

Other income (expense):
Interest expense		(19,584	)		---			(19,584	)
Loan and senior note fees		(1,102	)		---			(1,102	)
Interest income		483			---			483
Minority interest		(24	)		1,946			1,922
Other expense, net		(20,227	)		1,946			(18,281	)

Income before income tax expense		11,994			(6,516	)		5,478

Income tax expense		5,960			(2,750	)		3,210

Net income	$	6,034			(3,766	)		2,268

Basic net income per common share	$	0.12			(0.08	)		0.04

Diluted net income per common share	$	0.11			(0.07	)		0.04

Cash provided by operating activities	$	109,457			---			109,457
Cash used in investing activities		(155,977	)		---			(155,977	)
Cash used in financing activities		129,149			---			129,149

1 As reported on Form 10-Q for the quarter ended June 30, 2008

We decreased depreciation expense $590,000 and $1.5 million for the three and six months ended June 30, 2007, respectively, to correct an error in calculating depreciation in the initial year an asset is placed in service. We originally recorded our estimated depreciation expense evenly throughout the year with periodic adjustments based upon improved estimates or actual results. In accordance with GAAP we now initially record depreciation expense in the month an asset is placed in service. Depreciation was improperly allocated among quarters, but the year-end total was correct. Therefore the restatement impacts the quarterly results but not the December 31, 2007 year-end results.

·	We increased depreciation expense $322,000 and $644,000 for the three and six months ended June 30, 2007, respectively, due to the recognition of depreciation on additional capitalized interest;

·	We increased revenue $173,000 and $492,000 for the three and six months ended June 30, 2007, respectively, to correct understated revenue resulting from a configuration error in the automated interface between our unified billing system and our general ledger;

·	We increased revenue $125,000 and $258,000 for the three and six months ended June 30, 2007, respectively, to correct revenue recognition for a majority noncontrolling interest in a subsidiary that was recognizing a certain type of revenue on a cash basis rather than an accrual basis;

·	We decreased share-based compensation expense $715,000 and $757,000 for the three and six months ended June 30, 2007, respectively, to correct expense recognition timing for options that did not vest in equal increments over the vesting period;

·	We decreased depreciation expense $37,000 and $75,000 for the three and six months ended June 30, 2007, respectively, due to a revision of the purchase price allocation of our purchase of Alaska DigiTel on January 1, 2007; and

·	We increased income tax expense $799,000 and $1.5 million for the three and six months ended June 30, 2007, respectively, to record the income tax effect of the corrections described above.

We reclassified $3.3 million and $8.2 million of network maintenance and operations expense from selling, general and administrative expenses to Cost of Goods Sold for the three and six months ended June 30, 2007, respectively. We believe this change in accounting more closely aligns our maintenance and operations components to the nature of expenses included in our financial statement captions, and will improve the comparability of our financial statement presentation with our industry peers.

	Three Months Ended June 30, 2007
	As previously reported1			Adjustments			Reclassification			As restated
Revenues	$	129,592			298			---			129,890

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		42,238			---			3,341			45,579
Selling, general and administrative expenses		47,486			(715	)		(3,341	)		43,430
Depreciation and amortization expense		21,742			(305	)		---			21,437
Operating income		18,126			1,318			---			19,444

Other income (expense):
Interest expense		(8,941	)		384			---			(8,557	)
Loan and senior note fees		(216	)		---			---			(216	)
Interest income		161			---			---			161
Minority interest		(24	)		---			---			(24	)
Other expense, net		(9,020	)		384			---			(8,636	)

Income before income tax expense		9,106			1,702			---			10,808

Income tax expense		4,091			799			---			4,890

Net income	$	5,015			903			---			5,918

Basic net income per common share	$	0.09			0.02			---			0.11

Diluted net income per common share	$	0.09			0.01			---			0.10

1 As reported on Form 10-Q for the quarter ended June 30, 2007

	Six Months Ended June 30, 2007
	As previously reported1		Adjustments			Reclassification			As restated
Revenues	$	254,171		750			---			254,921

Cost of goods sold (exclusive of depreciation and amortization shown separately below)		85,351		---			8,218			93,569
Selling, general and administrative expenses		96,010		(757	)		(8,218	)		87,035

Depreciation and amortization expense		43,196		(893	)	---	42,303
Operating income		29,614		2,400		---	32,014

Other income (expense):
Interest expense		(17,641	)	766		---	(16,875	)
Loan and senior note fees		(396	)	---		---	(396	)
Interest income		345		---		---	345
Minority interest		(11	)	---		---	(11	)
Other expense, net		(17,703	)	766		---	(16,937	)

Income before income tax expense		11,911		3,166		---	15,077

Income tax expense		5,366		1,487		---	6,853

Net income	$	6,545		1,679		---	8,224

Basic net income per common share	$	0.12		0.03		---	0.15

Diluted net income per common share	$	0.11		0.03		---	0.14

Cash provided by operating activities	$	54,469		766		---	55,235
Cash used in investing activities		(87,027	)	(766	)	---	(87,793	)
Cash used in financing activities		(16,752	)	---		---	(16,752	)

1 As reported on Form 10-Q for the six months ended June 30, 2007

All adjustments noted above have been included in the amounts for the three and six months end June 30, 2008 and 2007 shown in Management's Discussion and Analysis.

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

The Network Access segment provides services to other common carrier customers and the Managed Broadband segment provides services to rural school districts and hospitals and health clinics. Effective June 1, 2008, we purchased 100% of the outstanding stock of the UUI and Unicom subsidiaries. The financial results of the long-distance, local access and Internet services sold to consumer and commercial customers of these acquired companies are reported in the Regulated Operations segment. The financial results of the long-distance services sold to other common carrier customers and the managed broadband services components of these acquired companies are included in the Network Access and Managed Broadband Services segments, respectively. Following are our segments and the services and products each offers to its customers:

Reportable Segments

Services and Products

Consumer

Network Access

Commercial

Managed Broadband

Regulated Operations

Voice:

Long-distance

Local Access

Directories

Video

Data:

Internet

Data Networks

Managed Services

Managed Broadband Services

Wireless

An overview of our services and products follows.

Voice Services and Products

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

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

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

AT&T acquired Dobson Communications Corporation (“Dobson”), including its Alaska properties, on November 15, 2007. In December 2007 we signed an agreement with AT&T that provides for an orderly four-year transition of our wireless customers from the Dobson/AT&T network in Alaska to our wireless facilities to be built in 2008 and 2009. The agreement allows our current and future customers to use the AT&T wireless network for local access and roaming during the transition period. The four-year transition period, which expires June 30, 2012, provides us with adequate time to replace the Dobson/AT&T network in Alaska with our own wireless facilities. Under the agreement, AT&T’s obligation to purchase network services from us terminated as of July 1, 2008. AT&T provided us with a large block of wireless network usage at no charge to facilitate the transition of our customers to our facilities. We will pay for usage in excess of that base

transitional amount. Under the previous agreement with Dobson, our margin was fixed. Under the new agreement with AT&T, we will pay for usage in excess of the block of free minutes on a per minute basis. The block of wireless network usage at no charge is expected to substantially reduce our wireless product Cost of Goods Sold paid to AT&T during the approximate four year period beginning June 4, 2008 and ending June 30, 2012. We expect our wireless product Cost of Goods Sold to decrease $11.0 million to $12.0 million during the six months ended December 31, 2008 as compared to the six months ended December 31, 2007.

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

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

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

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

We estimate that our June 30, 2008 and 2007 total lines in service represent a statewide market share of approximately 33% and 27%, respectively. At June 30, 2008 and 2007, 66% and 48%, respectively, of our lines, including the lines of UUI at June 30, 2008, are provided on our own facilities.

Our local access service faces competition in Anchorage, Fairbanks, and Juneau from ACS, which is the largest incumbent local exchange carrier (“ILEC”) in Alaska, and from Alascom in Anchorage for consumer services. Alascom has received certification from the Regulatory Commission of Alaska ("RCA") to provide local access services in Fairbanks and Juneau. In February 2007, we began offering local access service in certain MTA exchanges and face competition from MTA. In October 2007, we began offering local access service in the Kenai-Soldotna area and face competition from the ACS, the ILEC in this area. We compete against other smaller ILECs in certain smaller communities. We believe our approach to developing, pricing, and providing local access services and bundling different services will allow us to be competitive in providing those services.

We are continuing to expand our local access service areas and will offer services in these new areas using a combination of methods. To a large extent, we plan to use our existing coaxial cable network to deliver local access services. Where we do not have cable facilities, we may resell other carriers’ services, lease portions of an existing carrier’s network or seek wholesale discounts.

In 2008 we plan to continue to deploy Digital Local Phone Service ("DLPS") lines which utilize our coaxial cable facilities. This service delivery method allows us to utilize our own cable facilities to provide local access service to our customers and avoid paying local loop charges to the ILEC.

On May 1, 2008, the FCC issued an order adopting the recommendation of the Joint Board to impose a state-by-state interim cap on high cost funds to be distributed to competitive ETCs. As part of the revised policy, the FCC adopted a limited exception from the cap for competitive ETCs serving tribal lands or Alaska Native regions. While the operation of the cap will generally reduce the high cost fund amounts available to competitive ETCs as new competitive ETCs are designated and as existing competitive ETCs acquire new customers, providers like us who serve tribal lands or Alaska Native regions will be provided some relief. The USF cap will be in place until the FCC takes action on proposals for long-

term reform. The FCC and the Universal Service Administrative Company are each considering issues related to the interpretation and implementation of the limited exception from the cap, which may materially affect the scope and extent to which eligible entities may avail themselves of the exception, as well as the timing for eligible entities to exercise the exception.

UUI and its subsidiary, United-KUC, which were acquired by us effective June 1, 2008, are ILECs and therefore are subject to regulation by the RCA. UUI and United-KUC do not face significant competition.

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

Video Services and Products

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

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

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

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

Data Services and Products

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

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

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

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

We generate data network services revenue from two primary sources: (1) leasing capacity on our facilities that utilize voice and data transmission circuits, dedicated to particular subscribers, which link a device in one location to another in a

different location, and (2) through the sale of Internet Protocol-based data services on a secured shared network to businesses linking multiple enterprise locations. The factor that has the greatest impact on year-to-year changes in data network services revenues is the number of data networks in use. We compete against Alascom, ACS and other local telecommunication service providers.

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

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

Managed Broadband Services

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

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

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

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

Unicom, one of the companies that we acquired effective June 1, 2008, operates DeltaNet, a long-haul broadband microwave network ringing the Yukon-Kuskokwim Delta – a region of approximately 30,000 square miles in western Alaska. In the third quarter of 2008, DeltaNet, which is still under construction but has already commenced operations where completed microwave towers have been placed into service, will link more than 40 villages to Bethel, the region’s hub. We will use this facility, in addition to our other facilities, to offer our SchoolAccess®, ConnectMD® and managed video conferencing products.

Wireless Services and Products

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

We offer wireless services by reselling AT&T services under our brand name and Alaska DigiTel's services under its brand name. We provide limited wireless local access and Internet services using our own facilities. We compete against AT&T, ACS, MTA, and resellers of those services in Anchorage and other markets. The GCI and Alaska DigiTel brands compete against each other.

In 2008 we are constructing a GSM network throughout the terrestrially served portions of Alaska including the cities of Anchorage, Fairbanks, and Juneau. Alaska DigiTel operates the Code-Division Multiple Access ("CDMA") CDMA portion of our statewide wireless platform and is expanding this network in 2008.

We had a distribution agreement with Dobson allowing us to resell Dobson wireless services. For a discussion of AT&T’s acquisition of Dobson please see "Part I – Item II – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Voice Services and Products – Long Distance".

On July 1, 2008, we completed the acquisition of all of the interests in Alaska Wireless for an initial acquisition payment of $14.2 million. In addition to the initial acquisition payment, we have agreed to a contingent payment of approximately $3.0 million in 2010 if certain financial conditions are met. Alaska Wireless is a GSM cellular provider and an Internet service provider serving subscribers in the Dutch Harbor, Sand Point, and Akutan, Alaska areas. In addition to the acquisition, we entered into a management agreement with the previous owners of Alaska Wireless. The business will continue to operate under the Alaska Wireless name and the previous owners will continue to manage the day-to-day operations. The results of operations generated by Alaska Wireless will impact our wireless services in our Consumer segment.

We have signed a definitive agreement to acquire the remaining minority interest in Alaska DigiTel for a total consideration of approximately $10.3 million. On January 22, 2008, the FCC initiated its proceedings to review the application seeking requisite regulatory approval of the proposed change in control caused by this acquisition. Following FCC approval of the change in control, which we expect to occur in the third or fourth quarter of 2008, we will own 100% of Alaska DigiTel.

Results of Operations

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

							Percentage									Percentage
	Three Months Ended						Change 1			Six Months Ended						Change 1
	June 30,						2008			June 30,						2008
	2008			2007			vs. 2007			2008			2007			vs. 2007
(Unaudited)
Statements of Operations Data:
Revenues:
Consumer segment		43.6	%		42.4	%		12.7	%		44.5	%		42.7	%		13.6	%
Network Access segment		29.4	%		32.0	%		0.7	%		29.3	%		32.1	%		(0.7	%)
Commercial segment		19.3	%		20.2	%		4.8	%		19.5	%		19.8	%		7.3	%
Managed Broadband segment		6.4	%		5.4	%		31.4	%		6.0	%		5.4	%		20.0	%
Regulated Operations segment		1.3	%	NA			NA				0.7	%	NA			NA
Total revenues		100.0	%		100.0	%		9.7	%		100.0	%		100.0	%		8.7	%
Selling, general and administrative expenses		33.9	%		33.4	%		11.1	%		34.2	%		34.1	%		8.8	%
Depreciation and amortization expense		19.5	%		16.5	%		29.3	%		19.8	%		16.6	%		29.9	%
Operating income		9.9	%		15.0	%		(27.8	%)		8.6	%		12.6	%		(25.8	%)
Other expense, net		7.3	%		6.7	%		20.8	%		6.6	%		6.6	%		7.9	%
Income before income taxes		2.5	%		8.3	%		(66.6	%)		2.0	%		5.9	%		(63.7	%)
Net income		1.3	%		4.6	%		(69.0	%)		0.8	%		3.2	%		(72.4	%)

1 Percentage change in underlying data.
NA – Not Applicable

Three Months Ended June 30, 2008 (“second quarter of 2008”) Compared to Three Months Ended June 30, 2007 (“second quarter of 2007”)

Overview of Revenues and Cost of Goods Sold

Total revenues increased 9.7% from $129.9 million in the second quarter of 2007 to $142.5 million in the second quarter of 2008. Revenue increased in all of our segments. See the discussion below for more information by segment.

	Second Quarter of				Percentage
	2008		2007		Change
Voice	$	12,117		11,608		4.4	%
Video		25,668		23,907		7.4	%
Data		10,386		8,269		25.6	%
Wireless		13,942		11,344		22.9	%
Total Consumer segment revenue	$	62,113		55,128		12.7	%

	Second Quarter of				Percentage
	2008		2007		Change
Voice	$	4,682		5,112		(8.4	%)
Video		9,936		8,931		11.3	%
Data		1,877		1,282		46.4	%
Wireless		7,194		7,050		2.0	%
Total Consumer segment Cost of Goods Sold	$	23,689		22,375		5.9	%

	2008		2007		Percentage Change
Voice	$	23,978		22,961		4.4	%
Video		51,315		47,538		8.0	%
Data		20,482		16,216		26.3	%
Wireless		27,721		22,016		25.9	%
Total Consumer segment revenue	$	123,496		108,731		13.6	%


Video:
Average monthly gross revenue per subscriber1	$	66.19	$	63.76	3.8	%

Wireless:
Average monthly gross revenue per subscriber2	$	58.25	$	54.59	6.7	%

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.

	2008		2007		Percentage Change
Voice	$	45,155		48,848		(7.6	%)
Data		34,827		30,397		14.6	%
Wireless		1,083		2,697		(59.8	%)
Total Network Access segment revenue	$	81,065		81,942		(0.7	%)

	2008		2007
Line extensions	$	9,706		18,730
Customer premise equipment		4,897		4,286
Scalable infrastructure		580		1,042
Support capital		304		599
Upgrade/rebuild		747		264
Commercial		80		99
Sub-total		16,314		25,020
Remaining reportable segments capital expenditures		97,177		43,435
	$	113,491		68,455

	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	$	719,704		6,584		17,240		355,094		340,786
Interest on long-term debt		251,125		45,020		93,776		77,529		34,800
Capital lease obligations, including interest		167,401		6,947		23,300		23,400		113,754
Operating lease commitments		55,429		10,979		15,535		10,600		18,315
Purchase obligations		74,828		60,028		14,800		---		---
Other		66,500		63,500		3,000		---		---
Total contractual obligations	$	1,334,987		193,058		167,651		466,623		507,655

Description of Matter	For	Against	Withheld	Abstentions	Broker Nonvotes
1. Election of Director:
Jerry A. Edgerton	66,425,730	9,368,445	---	---	---

Exhibit No.	Description
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

Signature	Title	Date


/s/ Ronald A. Duncan	President and Director	November 20, 2008
Ronald A. Duncan	(Principal Executive Officer)

/s/ John M. Lowber	Senior Vice President, Chief Financial	November 20, 2008
John M. Lowber	Officer, Secretary and Treasurer (Principal Financial Officer)

/s/ Lynda L. Tarbath	Vice President, Chief Accounting	November 20, 2008
Lynda L. Tarbath	Officer (Principal Accounting Officer)