GCI INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

or

( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-5890

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

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

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

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

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

Securities registered pursuant to Section 12(g) of the Act:

$180,000,000 9.75% Senior Notes due August 2007

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .

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

Indicate by check mark whether the registrant is an accelerated filer. Yes X No

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

1

GCI, INC.
A WHOLLY-OWNED SUBSIDIARY OF GENERAL COMMUNICATION, INC.
2003 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

Glossary....................................................................................................................3

Cautionary Statement Regarding Forward-Looking Statements..................................................................10

Part I.....................................................................................................................12

Item 1. Business.......................................................................................................12

Item 2. Properties.....................................................................................................56

Item 3. Legal Proceedings..............................................................................................58

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

Part II....................................................................................................................59

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................59

Item 6. Selected Financial Data........................................................................................60

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................61

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................................89

Item 8. Consolidated Financial Statements and Supplementary Data.......................................................89

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure...........................89

Item 9A. Controls and Procedures........................................................................................89

Part III...................................................................................................................90

Items 10, 11, 12, 13 and 14 are are omitted per General Instruction I(1)(a) and (b) of Form 10-K.....................90

Part IV....................................................................................................................91

Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K..................................91

Item 15(b). Reports on Form 8-K.......................................................................................133

Item 15(c). Exhibits..................................................................................................133

SIGNATURES................................................................................................................139

This Annual Report on Form 10-K is for the year ending December 31, 2003. This
Annual Report modifies and supersedes documents filed prior to this Annual
Report. The Securities and Exchange Commission ("SEC") allows us to "incorporate
by reference" information that we file with them, which means that we can
disclose important information to you by referring you directly to those
documents. Information incorporated by reference is considered to be part of
this Annual Report. In addition, information that we file with the SEC in the
future will automatically update and supersede information contained in this
Annual Report.

2

Glossary

Access Charges -- Expenses incurred by an IXC and paid to LECs for accessing the
local networks of the LECs in order to originate and terminate long-distance
calls and provide the customer connection for Private Line services.

ACS -- Alaska Communications Systems Group, Inc., previously ALEC Holdings, Inc.
- -- ACS, one of our competitors, includes acquired properties from Century
Telephone Enterprises, Inc. and the Anchorage Telephone Utility ("ATU"). ATU
provided local telephone and long distance services primarily in Anchorage and
cellular telephone services in Anchorage and other Alaska markets.

Alaska United or AULP -- Alaska United Fiber System Partnership -- an Alaska
partnership, indirectly wholly owned by the Company. Alaska United was organized
to construct and operate fiber optic cable systems connecting various locations
in Alaska and the Lower 49 States and foreign countries through Seattle,
Washington.

AT&T -- AT&T Corp. -- A long distance carrier, parent company to AT&T Alascom.

AT&T Alascom -- Alascom, Inc. -- A wholly owned subsidiary of AT&T and one of
our competitors.

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

AULP West -- A new undersea fiber optic cable system under construction
connecting Seward, Alaska to Warrenton, Oregon with a scheduled ready for
service date of April 30, 2004.

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

BOC -- Bell System Operating Company -- A LEC owned by any of the remaining
Regional Bell Operating Companies, which are holding companies established
following the AT&T Divestiture Decree to serve as parent companies for the BOCs.

Backbone -- A centralized high-speed network that interconnects smaller,
independent networks.

Bandwidth -- A range or band of the frequency spectrum, measured in Hertz (Hz).
It has become vogue, though strictly a misuse of the term, to say bandwidth is
the number of bits of data per second that can move through a communications
medium.

Broadband -- A high-capacity communications circuit/path, usually implying
speeds of 256 kilobits per second ("kbps") or better.

CAP -- Competitive Access Provider -- A company that provides its customers with
an alternative to the LEC for local transport of Private Line and special access
communications services.

Central Offices -- The switching centers or central switching facilities of the
LECs.

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

Co-Carrier Status -- A regulatory scheme under which the ILEC is required to
integrate new, competing providers of local exchange service, into the systems
of traffic exchange, inter-carrier compensation, and other inter-carrier
relationships that already exist among LECs in most jurisdictions.

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

The Company -- GCI, Inc. and its direct and indirect subsidiaries, also referred
to as "we," "us" and "our."

Compression or Decompression -- A method of encoding, decoding and processing
signals that allows transmission (or storage) of more information than the
medium would otherwise be able to support. Both compression and decompression
require processing capacity, but with many products, the signal delay time due
to processing is not noticeable.

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

Dark Fiber -- An inactive fiber-optic strand without electronics or optronics.
Dark fiber is not connected to transmitters, receivers and regenerators.

DBS -- Direct Broadcast Satellite -- Subscription television service obtained
from satellite transmissions using frequency bands that are internationally
allocated to the broadcast satellite services. Direct-to-home service such as
DBS has its origins in the large direct-to-home satellite antennas that were
first introduced in the 1970's for the reception of video programming
transmitted via satellite. Because these first-generation direct-to-home
satellites operated in the C-band frequencies at low power, direct-to-home
satellite antennas, or dishes, as they are also known, generally needed to be
seven to ten feet in diameter in order to receive the signals being transmitted.
More recently, licensees have been using the Ku and extended Ku-bands to provide
direct-to-home services enabling subscribers to use a receiving home satellite
parabolic dish typically less than one meter in diameter. The major providers of
DBS are currently DirecTV and EchoStar (marketed as the DISH Network).

DS-0 -- A data communications circuit that carries data at the rate of 64 kbps.

DS-1 -- A data communications circuit that carries data at the rate of 1.544
Megabits per second (Mb/s), often interchangeably referred to as a T-1.

DS-3 -- A data communications circuit that is equivalent to 28 multiplexed T-1
channels capable of transmitting data at 44.736 Mbps (sometimes called a T-3).

Dedicated -- Communications lines dedicated or reserved for use by particular
customers.

Digital -- A method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. Digital transmission is advantageous in that it is more
resistant to the signal degrading effects of noise (such as graininess or snow
in the case of video transmission, or static or other background distortion in
the case of audio transmission).

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

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

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DOCSIS 1.1 -- Data-Over-Cable Service Interface Specification 1.1 -- An industry
specification that provides for high-speed Internet service tiers, using
techniques known as data fragmentation and quality of service. Under this
specification, which is compatible with the existing DOCSIS 1.0 specification,
cable operators can deliver high-speed Internet services simultaneously over the
same plant and in a path parallel to core video services.

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

Equal Access -- Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the customer
dials "1". Also refers to a generic concept under which the BOCs must provide
access services to AT&T's competitors that are equivalent to those provided to
AT&T.

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

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

FTC -- Federal Trade Commission -- A federal regulatory body empowered to
establish and enforce rules and regulations governing companies involved in
trade and commerce.

GCC -- GCI Communication Corp. -- An Alaska corporation and a wholly owned
subsidiary of Holdings.

GCI -- General Communication, Inc. -- An Alaska corporation.

GCI, Inc. -- A wholly owned subsidiary of GCI, an Alaska corporation, the
Registrant, and issuer of $180 million of senior notes (increased to $250
million in the first quarter of 2004).

GFCC -- GCI Fiber Communication Co., Inc. -- An Alaska corporation and a wholly
owned subsidiary of Holdings. Holdings acquired all minority ownership interests
in GFCC in the third and fourth quarters of 2002. GFCC owns and operates a fiber
optic cable system constructed along the trans-Alaska oil pipeline corridor
extending from Prudhoe Bay to Valdez, Alaska. See Kanas.

Holdings -- GCI Holdings, Inc. -- A wholly owned subsidiary of GCI, Inc., an
Alaska corporation and party to the Company's Senior Credit Facility.

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

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

Interexchange -- Communication between two different LATAs or, in Alaska,
between two different local exchange serving areas.

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

5

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

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

Internet -- A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.

IXC -- Interexchange Carrier -- A long-distance carrier providing services
between local exchanges.

Kanas -- Kanas Telecom, Inc. -- An Alaska corporation that was renamed GFCC in
2001.

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

LATA -- Local Access and Transport Area -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree. The BOCs were
historically prohibited from providing long-distance service between the LATA in
which they provide local exchange services, and any other LATA.

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

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

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

Local Number Portability -- The ability of an end user to change Local Exchange
Carriers while retaining the same telephone number.

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

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

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

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

MDU -- Multiple Dwelling Unit -- MDUs include multiple-family buildings, such as
apartment and condominium complexes.

6

MMDS -- Multichannel Multipoint Distribution Service -- Also known as wireless
cable. The FCC established the Multipoint Distribution Service (MDS) in 1972.
Originally, the FCC thought MDS would be used primarily to transmit business
data. However, the service became increasingly popular in transmitting
entertainment programming. Unlike conventional broadcast stations whose
transmissions are received universally, MDS programming is designed to reach
only a subscriber based audience. In 1983, the FCC reassigned eight channels
from the Instructional Television Fixed Service (ITFS) to MDS. These eight
channels make up the MMDS. Frequently, MDS and MMDS channels are used in
combination with ITFS channels to provide video entertainment programming to
subscribers.

MVPD -- Multi-channel Video Programming Distribution -- The distribution of
video programming over multiple platforms, such as cable and satellite.

MWNS -- MCI WorldCom Network Services -- A subsidiary of WorldCom, which had
previously entered into service agreements with the Company on behalf of
WorldCom.

Notes -- $250 million, 7.25% Senior Notes, due February 15, 2014 -- GCI, Inc.
issued $250 million in notes during the first quarter of 2004. The Notes are
senior unsecured and unsubordinated obligations and rank equally with all of
GCI's existing and future senior unsecured debts. The Notes pay interest on a
semi-annual basis.

OCC -- Other Common Carrier -- A long-distance carrier other than the Company.

OC-n -- An optical communications circuit that optically signals at a data rate
of n times 51.84 Mbps, where n can be 1, 3, 12, 24, 48, 96, or 192.

Pay-per-view -- Offering television broadcasts to viewers in a manner whereby
they pay only for the programs they watch rather than having to subscribe to the
whole channel or station on a full-time basis.

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

PBX -- Private Branch Exchange -- A customer premise communication switch used
to connect customer telephones (and related equipment) to LEC central office
lines (trunks), and to switch internal calls within the customer's telephone
system. Modern PBXs offer numerous software-controlled features such as call
forwarding and call pickup. A PBX uses technology similar to that used by a
central office switch (on a smaller scale). (The acronym PBX originally stood
for "Plug Board Exchange.")

POP -- Point of Presence -- The physical access location interface between a LEC
and an IXC network. The point to which the telephone company terminates a
subscriber's circuit for long-distance service or leased line communications.

PRI -- Primary Rate Interface -- An ISDN circuit transmitting at T-1 (DS-1)
speed (equivalent to 24 voice-grade channels). One of the channels ("D") is used
for signaling, leaving 23 ("B") channels for data and voice communication.

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

7

Private Network -- A communications network with restricted (controlled) access
usually made up of Private Lines (with some PBX switching).

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

Reciprocal Compensation -- The same compensation of a CLEC for termination of a
local call by the ILEC on its network, as the new competitor pays the ILEC for
termination of local calls on the ILEC network.

Rogers -- Rogers American Cablesystems, Inc -- A cable television service
provider in Palmer and Wasilla, Alaska, that we acquired in 2001.

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

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

Securities Reform Act -- The Private Securities Litigation Reform Act of 1995.

Senior Credit Facility -- Holding's $220.0 million credit facility. On October
30, 2003 we closed a $220.0 million bank facility to refinance the previously
outstanding Holding's credit facility. The new Senior Credit Facility includes a
term loan of $170.0 million and a revolving credit facility of $50.0 million.
The new Senior Credit Facility matures on October 31, 2007 and bears interest at
LIBOR plus 3.25%. You should see note 8 to the accompanying "Notes to
Consolidated Financial Statements" included in Part II of this Report for more
information.

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

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

Sprint -- Sprint Corporation -- One of our significant customers.

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

Tariff -- The schedule of rates and regulations set by communications common
carriers and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communications service or facility, which functions in lieu of a
contract between the subscriber or user and the supplier or carrier.

8

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

TDM -- Time Division Multiplex -- A means by which multiple signals are combined
and carried on one transport medium by sequentially sharing the medium in slices
of time (time slots) for each of the various signals.

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

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

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

World Wide Web or Web -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.

WorldCom -- WorldCom, Inc., d/b/a MCI ("MCI") -- Owns approximately 9% of GCI's
common stock, presently has one representative on GCI's Board, and is a major
customer. Prior to May 1, 2000, the company was named MCI WorldCom, Inc. See
also MWNS. On July 21, 2002 WorldCom and substantially all of its active United
States subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code in the United States Bankruptcy Court.
You should see note 15 to the accompanying "Notes to Consolidated Financial
Statements" included in Part II of this Report for more information.

1984 Cable Act -- The Cable Communications Policy Act of 1984.

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

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

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

The 1996 Telecom Act substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act of 1934 including certain of the rate regulation provisions
previously imposed by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"). The 1996 Telecom Act eliminated rate
regulation of the

9

cable programming service tier in 1999. Further, the regulatory environment will
continue to change pending, among other things, the outcome of legal challenges,
legislative activity, and FCC rulemaking and enforcement activity in respect of
the 1992 Cable Act and the completion of a significant number of continuing FCC
rulemakings under the 1996 Telecom Act.

Cautionary Statement Regarding Forward-Looking Statements

You should carefully review the information contained in this Annual Report, but
should particularly consider any risk factors that we set forth in this Annual
Report and in other reports or documents that we file from time to time with the
Securities and Exchange Commission ("SEC"). In this Annual Report, in addition
to historical information, we state our future strategies, plans, objectives or
goals and our beliefs of future events and of our future operating results,
financial position and cash flows. In some cases, you can identify those
so-called "forward-looking statements" by words such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," "project," or "continue" or the negative of those words and other
comparable words. All forward-looking statements involve known and unknown
risks, uncertainties and other important factors that may cause our actual
results, performance, achievements, plans and objectives to differ materially
from any future results, performance, achievements, plans and objectives
expressed or implied by these forward-looking statements. In evaluating those
statements, you should specifically consider various factors, including those
outlined below. Those factors may cause our actual results to differ materially
from any of our forward-looking statements. For these statements, we claim the
protection of the safe harbor for forward-looking statements provided by the
Securities Reform Act. Such risks, uncertainties and other factors include but
are not limited to those identified below.

o Material adverse changes in the economic conditions in the markets we
serve and in general economic conditions, including the continuing
impact of the current depressed communications industry due to high
levels of competition in the long-distance market resulting in
pressures to reduce prices, an oversupply of long-haul capacity,
excessive debt loads; several high-profile company failures and
potentially fraudulent accounting practices by some companies;
o The efficacy of laws enacted by Congress and the State of Alaska
legislature; rules and regulations to be adopted by the Federal
Communications Commission ("FCC") and state public regulatory agencies
to implement the provisions of the 1996 Telecom Act; the outcome of
litigation relative thereto; and the impact of regulatory changes
relating to access reform;
o Our responses to competitive products, services and pricing, including
pricing pressures, technological developments, alternative routing
developments, and the ability to offer combined service packages that
include long-distance, local, cable and Internet services;
o The extent and pace at which different competitive environments develop
for each segment of our business;
o The extent and duration for which competitors from each segment of the
communications industries are able to offer combined or full service
packages prior to our being able to do so;
o The degree to which we experience material competitive impacts to our
traditional service offerings prior to achieving adequate local service
entry;
o Competitor responses to our products and services and overall market
acceptance of such products and services;
o The outcome of our negotiations with ILECs and state regulatory
arbitrations and approvals with respect to interconnection agreements;
o Our ability to purchase network elements or wholesale services from
ILECs at a price sufficient to permit the profitable offering of local
telephone service at competitive rates;
o Success and market acceptance for new initiatives, many of which are
untested;
o The level and timing of the growth and profitability of existing and
new initiatives, particularly yellow page directories, local telephone
services expansion including deploying digital local telephone service,
Internet services expansion and wireless services;
o Start-up costs associated with entering new markets, including
advertising and promotional efforts;

10

o Risks relating to the operations of new systems and technologies and
applications to support new initiatives;
o Local conditions and obstacles;
o The impact on our industry and indirectly on us of oversupply of
capacity resulting from excessive deployment of network capacity in
certain markets we do not serve;
o Uncertainties inherent in new business strategies, new product launches
and development plans, including local telephone services, Internet
services, wireless services, digital video services, cable modem
services, digital subscriber line services, transmission services, and
yellow page directories, and the offering of these services in
geographic areas with which we are unfamiliar;
o The risks associated with technological requirements, technology
substitution and changes and other technological developments;
o Prolonged service interruptions which could affect our business;
o Development and financing of communications, local telephone, wireless,
Internet and cable networks and services;
o Future financial performance, including the availability, terms and
deployment of capital; the impact of regulatory and competitive
developments on capital outlays, and the ability to achieve cost
savings and realize productivity improvements and the consequences of
increased leverage;
o Availability of qualified personnel;
o Changes in, or failure, or inability, to comply with, government
regulations, including, without limitation, regulations of the FCC, the
RCA, and adverse outcomes from regulatory proceedings;
o Changes in regulations governing UNEs;
o Uncertainties in federal military spending levels and military base
closures in markets in which we operate;
o The ongoing global and domestic trend towards consolidation in the
communications industry, which may result in our competitors being
larger and better financed, and provide these competitors with
extensive resources and greater geographic reach, allowing them to
compete more effectively;
o The financial, credit and economic impacts of the MCI bankruptcy filing
on the industry in general and on us in particular;
o A significant delay in MCI's emergence from bankruptcy or a migration
of MCI's traffic off our network without it being replaced by other
common carriers that interconnect with our network;
o The effect on us of pricing pressures, new program offerings and market
consolidation in the markets served by our significant customers, MCI
and Sprint;
o The effect on us of industry consolidation including the potential
acquisition of one or more of our large wholesale customers by a
company with commercial relationships with other providers;
o Under Statement of Financial Accounting Standard ("SFAS") 142, we must
test our intangibles for impairment at least annually, which may result
in a material, non-cash write-down of goodwill and could have a
material adverse impact on our financial position, results of
operations or liquidity; and
o Other risks detailed from time to time in our periodic reports filed
with the SEC.

You should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement, and such risks, uncertainties and other
factors speak only as of the date on which they were originally made and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement to reflect any change in our
expectations with regard to those statements or any other change in events,
conditions or circumstances on which any such statement is based, except as
required by law. 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.

11

Part I

Item 1. Business

General

In this Annual Report, "we," "us" and "our" refer to GCI, Inc. and its direct
and indirect subsidiaries.

GCI, Inc. was incorporated in 1997 to effect the issuance of Senior Notes as
further described in note 12 to the accompanying "Consolidated Financial
Statements" included in Part II of this Report. GCI, Inc., as a wholly owned
subsidiary of GCI, received through its initial capitalization all ownership
interests in subsidiaries previously held by GCI. GCI, Inc. has its principal
executive offices at 2550 Denali Street, Suite 1000, Anchorage, AK 99503-2781
(telephone number 907-868-5600).

GCI, Inc. is primarily a holding company and together with its direct and
indirect subsidiaries, is a diversified communications provider with a leading
position in facilities-based long-distance service in the State of Alaska and is
Alaska's leading cable television and Internet services provider.

We are the leading integrated, facilities-based communications provider in
Alaska, offering local and long-distance voice, cable video, data and Internet
communications services to residential and business customers under our GCI
brand. A substantial number of our customers subscribe to product bundles that
include two or more of our services.

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

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

Availability of Reports and Other Information

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

Financial Information About Industry Segments

We have four reportable segments: long-distance services, cable services, local
access services and Internet services. For information required by this section,
you should see Part II, Item 7, Management's Discussion

12

and Analysis of Financial Condition and Results of Operations. Also refer to
Note 13 included in Part II, Item 8, Consolidated Financial Statements and
Supplementary Data.

Recent Developments

New Senior Notes -- In February 2004, GCI, Inc. issued $250 million principal
amount of senior notes. These senior notes bear interest at 7.25% and are due in
February 2014. GCI, Inc. intends to use the net proceeds from the issuance of
these senior notes to retire or repay other indebtedness. In connection with the
issuance of these senior notes, GCI, Inc. offered to purchase all of its
outstanding 9.75% Senior Notes due 2007 (the "2007 Notes") for cash at 103.5% of
the principal amount. Approximately $114.6 million principal amount of the 2007
Notes were tendered and accepted pursuant to this offer. GCI, Inc. called for
redemption of the remaining outstanding 2007 Notes at the redemption price of
103.25% of the principal amount. In addition to the purchase and redemption of
the 2007 Notes, approximately $53.8 million of proceeds received from the
issuance of the new senior notes were used to repay indebtedness under our
Senior Credit Facility.

Senior Credit Facility Waiver -- Compliance with the redemption notice
requirements in the 2007 Notes Indenture has resulted in a delay of up to sixty
days between the date the new senior notes were issued and the final redemption
date of the 2007 Notes. As a result of such delay, our total debt will
temporarily increase during the overlap period between the redemption of the
outstanding 2007 Notes and the issuance of the new senior notes. This temporary
increase does not comply with certain provisions of our Senior Credit Facility.
We have received a waiver of these provisions from the lenders under our Senior
Credit Facility until April 30, 2004.

Fiber System Taken out of Service -- We own a portion of the capacity of an
undersea fiber optic cable system linking Alaska to the Lower 48 states known as
the Alaska spur of the North Pacific Cable ("NPC"). The Alaska spur of the NPC
was removed from service in January 2004 by PT Cable, Inc. due to a dispute over
billings between PT Cable, Inc. and AT&T. We determined that the recorded value
for our NPC fiber asset was impaired at December 31, 2003 and recorded a $5.4
million charge in the fourth quarter in the financial statements included in
Part II of this report.

Free Cable Modem Service -- On January 26, 2004, we began offering new and
current customers free LiteSpeed cable modem Internet service when they sign up
for certain of our other services. LiteSpeed uses cable modems and is designed
for dial-up Internet access customers who want more Internet download speed and
greater convenience. Cable modems transmit data reliably at a much faster rate
than dial-up connections and do not tie up the telephone line. Our cable modem
service is available to a high percentage of Alaska homes in Anchorage, Bethel,
Cordova, Fairbanks, Homer, Juneau, Kenai, Ketchikan, Kodiak, Nome, Palmer,
Petersburg, Seward, Sitka, Soldotna, Valdez, Wasilla, and Wrangell.

Alaska Supreme Court Decision -- ACS, through subsidiary companies, provides
local telephone services in Fairbanks and Juneau, Alaska. The ACS subsidiaries
are classified as Rural Telephone Companies under the 1996 Telecom Act, which
entitles them to an exemption of certain material interconnection terms of the
1996 Telecom Act, until and unless such "rural exemption" is examined and not
continued by the RCA. On October 11, 1999, the RCA issued an order terminating
rural exemptions for the ILECs operating in the Fairbanks and Juneau markets so
that we could compete with these companies in the provision of local telephone
service. Upon appeal by ACS, on December 12, 2003, the Alaska Supreme Court
issued a decision in which it reversed the RCA's rural exemption decision on the
procedural ground that the competitor, not the incumbent, must shoulder the
burden of proof. The Court remanded the matter to the RCA for reconsideration
with the burden of proof assigned to us. Additionally, the Court left it to the
RCA to decide as a matter of discretion whether to change the state of
competition during the remand period. In accordance with the Court's ruling, the
RCA has re-opened the rural exemption dockets and scheduled a hearing to
commence on April 19, 2004. Additionally, the RCA issued a ruling on January 16,
2004, in which the RCA determined that we can continue to rely on unbundled
network elements from ACS to serve our existing customers in Juneau and
Fairbanks but that we may not serve new customers through purchase of unbundled
network elements pending the completion of the remand proceeding. Until this
matter is resolved, we may serve new customers using wholesale resale. We
believe it is unlikely that the rural exemptions will be restored in these
markets; however, if they are

13

restored, we could be forced to discontinue providing service to residential
customers and perhaps to commercial customers in these locations. See "Part I --
Item 1 -- Business -- Regulation, Franchise Authorizations and Tariffs --
Communications Operations -- Rural Exemption" for more information.

Historical Development of our Business During the Past Fiscal Year

Rural Internet -- We began a program in 2001 to bring affordable Internet access
service to 150 rural Alaska communities. In addition to deploying cable modem
service in all regional centers, we deployed wireless Internet access service,
including service at broadband data rates, to over 70 rural communities in 2003.
We now provide Internet access service to 85 communities across Alaska and
expect to provide service in the remaining communities in 2004.

Rural Health Program -- We completed service expansion and delivery of our Rural
Health program in 2003 to several rural Alaska health corporations that included
various service levels to villages in the Arctic Slope Native Association area,
as well as in Chenega Bay, Kotzebue, Nanwalek, Platinum, Port Graham, Seward,
and Tatitlek, and completed service expansion to Diomede Island in January 2004.

Directory Assistance -- During the fourth quarter of 2003, we began
self-providing interstate directory assistance for our retail customers, certain
wholesale customers, and for MCI, as an overflow Alaska directory assistance
provider.

Cable Television Changes -- We made significant changes and additions to our
cable television lineup in 2003, including new networks and, in Anchorage, we
introduced our first HDTV programming.

Hotel Broadband -- We introduced a new hotel broadband product in 2003 which
provides high-speed in-room cable modem Internet access to hotel customers.

State of Alaska Microwave System Contract -- On December 31, 2003, we were
awarded a time-and-materials contract from the State of Alaska to operate and
maintain their statewide private microwave system.

State of Alaska Communications Contract -- On December 17, 2003, we were awarded
a contract from the State of Alaska to provide communications services for an
initial term of 18 months, with two 12-month extensions possible thereafter.
Communications services include long-distance, IP telephony, voice and data
network management and maintenance, Internet, audio and video conferencing and
help desk. The total value of the contract was approximately $10 million. This
contract award followed the termination of the State of Alaska's prior contract
with an ILEC due to non-performance.

Pipeline Communications -- In December 2003, we successfully concluded a
three-year effort to upgrade our GFCC network and prove the system reliable. The
final stage of reliability testing and circuit conversion was completed,
bringing voice, data, Internet and cable television traffic onto the fiber
system serving the Alaskan oil industry. GFCC now carries a significant portion
of all communications between Valdez, Anchorage and the North Slope oil fields.

New Phone Directory -- On November 24, 2003, we began distribution of the
inaugural edition of the GCI Anchorage Directory and yellow pages to residential
and business customers in Anchorage, and launched our on-line directory product.
We worked with ALLTEL Publishing, a division of ALLTEL Corporation of Little
Rock, Arkansas, to produce and distribute the official GCI Anchorage phone
directory. ALLTEL Publishing produces approximately 408 directory titles in 38
states, including directories for its own telephone operations, and was formerly
the sales agent for the incumbent directories provider.

New Retail Store -- On November 22, 2003, we opened a new retail store serving
our south Anchorage market. The new store allows customers to pay their bills,
sign up for new services and experience our full range of products including
cable modem Internet access, digital cable television, local and long distance
telephone service, and cellular phone services. The new store allows customers
to purchase any of our services, pay bills and interact with customer service
representatives.

14

Senior Credit Facility -- On October 30, 2003, we refinanced our Senior Credit
Facility. The new facility, among other things, reduced the interest rate from
LIBOR plus 6.50% to LIBOR plus 3.25%. The new facility included a term loan of
$170.0 million and a revolving credit facility of $50.0 million. In February,
2004, we repaid approximately $43.8 million of the term loan, which cannot be
reborrowed.

ConnectMD -- On September 16, 2003, we introduced ConnectMD, a private medical
network that reaches clinics and hospitals in 110 rural Alaska communities and
currently offers healthcare providers access to continuing education courses
from two leading Seattle institutions. ConnectMD has partnered with
Seattle-based Children's Hospital and Regional Medical Center (Children's) and
Virginia Mason Medical Center. ConnectMD links primary healthcare providers in
Alaska to specialists and sub-specialists allowing them to securely share
information, such as confidential patient records and lab results, diagnose and
prescribe treatment for patients located in remote communities, and obtain
continuing medical education credits. Using Private Line and secure Internet,
ConnectMD has created a private medical network that we believe is
revolutionizing the way health care is provided in Alaska.

Airlines Mileage Program -- On September 2, 2003, we announced that we have
become a mileage plan partner with Alaska Airlines, offering new and existing
customers opportunities to earn frequent flyer miles. Our customers can earn
Alaska Airlines mileage plan miles by using qualifying local or long distance
telephone, Internet, cable television, cellular, GCI directories or cable
advertising services. Our residential and small business customers can earn one
mileage plan mile for every dollar spent on qualifying services. New customers
enrolling in a combination of services can earn up to 10,000 miles and current
customers are eligible for up to 7,500 bonus miles when adding or upgrading
services. In addition customers can earn up to 500 anniversary miles every six
months. The agreement requires the purchase of Alaska Airlines miles during the
year ended December 31, 2003 and in future years. The agreement has a remaining
commitment at December 31, 2003 totaling $16.0 million.

New Communications Policy for Alaska Areas -- On August 6, 2003, the FCC issued
a Report and Order eliminating a policy that prohibited the installation or
operation of more than one satellite earth station in any Alaska rural community
for competitive carriage of interstate message telephone service ("MTS")
communications. The FCC found that through a series of regulatory steps, the
environment that once called for restrictions on competitive facilities-based
entry had changed. This policy change allows us to install facilities and
provide competitive interstate MTS and other communications services over our
own equipment and network in rural communities where we presently have no
facilities.

Email Filter for Businesses -- On August 6, 2003, we introduced our eMail Guard
for Business product. Email Guard is an email filter that puts business owners
and employees in control of screening unwanted junk emails. We estimate that
more than 75% of email delivered to businesses today is spam. Our eMail Guard
product keeps unwanted messages off of the customer's network, Internet
connection and mail servers. Our Email Guard residential and business products
filtered approximately 31,000 messages containing suspected viruses and
1,991,000 messages containing suspected junk mail during a representative
24-hour period in February 2004.

MCI Settlement -- On July 24, 2003, following bankruptcy court approval, we
signed a settlement and release agreement with MWNS. The agreement affirmed
contractual terms and conditions between the two companies, settled MWNS'
pre-petition liabilities, settled billing disputes between the two companies,
and established a right to setoff our pre-petition payables. MWNS is a
subsidiary of MCI, which had previously entered into service agreements with GCI
on behalf of MCI.

Under terms of the agreement, MWNS settled its outstanding liability of $12.9
million for $12.1 million net of adjustments. In addition, the agreement reduced
our pre-petition claim to $12.1 million and further allowed us the right to
setoff approximately $1 million in prepetition payables owed by us to MWNS. MWNS
agreed to pay the remaining $11 million to us as a credit against our future
purchase of services from MWNS. Further, we agreed to pay to MWNS, and did pay,
the outstanding pre-petition payables balance of approximately

15

$649,000 in August 2003. Remaining credits available to us as of December 31,
2003 totaled approximately $7.9 million.

Extended Supply Contract -- On July 24, 2003 MCI extended its Contract of Alaska
Access Services for five years to July 2008. This agreement sets the terms and
conditions under which we originate and terminate certain types of long distance
and data services in Alaska on MCI's behalf. In exchange for extending the term
of the contract, MCI receives a series of rate reductions implemented in phases
over the life of the contract.

AULP West -- On June 30, 2003, we announced our plan to build a second undersea
fiber optic cable system between Seward, Alaska and Warrenton, Oregon. The cable
will complement our existing AULP East fiber optic cable system between
Whittier, Alaska and Seattle, Washington. The two systems will provide
physically diverse nearly instant backup to each other in the event of an
outage. Fiber production was completed in January 2004 and began to be deployed
in February 2004. We expect to complete construction and testing in April 2004.
The 1,544-statute mile cable has a total design capacity of 640 Gigabits per
second access speed and is expected to be operational by May 2004.

RCA Renewal -- On May 21, 2003, the Senate of the State of Alaska passed and the
Governor later signed House Bill 111 which extended the life of the RCA until
2007. We believe that renewal of the RCA is important for consumers and
competition alike. The Alaska Senate voted to renew the Agency for four-years
without any statutory changes that affect the manner by which utilities in
Alaska are regulated.

Narrative Description of our Business

General

We are the largest Alaska-based and operated integrated communications provider.
A pioneer in bundled service offerings, we provide facilities-based local and
long distance voice, cable video, Internet and data communications services, and
resell wireless telephone services, to residential and business customers under
our GCI brand.

We generated consolidated revenues of $390.8 million in 2003. We ended the year
with approximately 85,600 long-distance customers, 106,100 local access lines in
service, 134,400 basic cable subscribers, and 95,700 total Internet subscribers,
including 46,000 cable modem subscribers. A substantial number of our customers
subscribe to product bundles that include two or more of our services.

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

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

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

16

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

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

We are Alaska's leading provider of long-distance, cable television and data and
Internet services, as measured by revenues, and we are the second largest local
access provider, as measured by local access lines. We attribute our leadership
position to our commitment to provide our customers with high-quality products
in bundled offerings that maximize their satisfaction. We maintain a strong
competitive position, however there is active competition in the sale of
substantially all products and services we offer.

Competition in the Communications Industry

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

Competitive Strengths

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

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

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

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

17

Favorable Alaskan Market Dynamics. The Alaskan communications market is
characterized by its large geographic size and isolated markets that include a
combination of major metropolitan areas and small, dense population clusters,
which create a deterrent to potential new entrants. Due to the remote nature of
its communities, the state's residents and businesses rely extensively on our
systems to meet their communications needs. We believe that, when compared to
national averages, Alaskan households spend more on communications services.
According to the United States Census Bureau, the median household income in
Alaska was 28% higher than the three-year United States national average from
2000 to 2002, and according to the Alaska Department of Revenue, in 2002,
federal spending in Alaska was up 18%, year over year. We believe there is a
positive outlook for continued growth.

Experienced Management Team. Our experienced management team has a proven track
record and has consistently expanded our business and improved our operations.
Our senior management averages more than 23 years of experience in the
communications industry and more than 18 years with GCI.

Business Strategy

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

Continue to Offer Bundled Products. We offer innovative service bundles to meet
the needs of our residential and business customers. Bundling our services
significantly improves customer retention, increases revenue per customer and
reduces customer acquisition expenses. Our experience indicates that our bundled
customers are significantly less likely to churn, and we experience less price
erosion when we effectively combine our offerings. Bundling improves our top
line growth, provides operating cost efficiencies that expand our margins and
drives our overall business performance. As a measure of success to date,
substantially all of our local customers subscribe to our long-distance service
and approximately one-third of our cable video subscribers also purchase our
high-speed Internet service.

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

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

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

Expand Our Product Portfolio and Footprint in Alaska. Throughout our history, we
have successfully added and will continue to add new products to our product
portfolio. Management has a demonstrated history of evaluating potential new
products for our customers, and we will continue to assess revenue-enhancing
opportunities that create value for our customers. In addition to new services
such as digital video recorders, HDTV and video-on-demand, we are also expanding
the reach of our core products to new markets. Where

18

feasible and where economic analysis supports geographic expansion of our
network coverage, we will pursue opportunities to increase the scale of our
facilities, enhance our ability to serve our existing customers' needs and
attract new customers.

Alaska Voice, Video and Data Markets

We estimate that the aggregate communications, cable television, and Internet
markets in Alaska generated revenues in 2003 of approximately $1.1 billion. Of
this amount, approximately $480 million was attributable to interstate and
intrastate long-distance service, $348 million was attributable to local
exchange services, $102 million was attributable to wireless phone service, $92
million was attributable to cable television, and $78 million was attributable
to all other services, including wireless and Internet services. We report
revenues from certain services, such as cable modem Internet access services, in
different reporting segments as compared to those used in this market data
presentation.

The Alaskan voice, video and data markets are unique within the United States.
Alaska is geographically distant from the rest of the United States and is
generally characterized by large geographical size and relatively small, dense
population clusters (with the exception of population centers such as Anchorage,
Fairbanks and Juneau). It lacks a well-developed terrestrial transportation
infrastructure, and the majority of Alaska's communities are accessible only by
air or water. As a result, Alaska's communication networks are different from
those found in the Lower 49 States.

Alaskans continue to rely extensively on satellite-based long-distance
transmission for intrastate calling between remote communities where investment
in a terrestrial network would be uneconomic or impractical. Also, given the
geographic isolation of Alaska's communities and lack, in many cases, of major
civic institutions such as hospitals, libraries and universities, Alaskans are
dependent on communications services to access the resources and information of
large metropolitan areas in Alaska, the rest of the United States and elsewhere.
In addition to satellite-based communications, the communications services
infrastructure in Alaska includes fiber optic cables between Anchorage, Valdez,
Fairbanks, Prudhoe Bay, and Juneau, traditional copper wire, and digital
microwave radio on the Kenai Peninsula and other locations. For interstate and
international communications, Alaska is connected to the Lower 48 States by
three fiber optic cables, one of which was taken out of service in January 2004.
See "Part I -- Item 1 -- Business -- Historical Development of our Business
During the Past Fiscal Year -- Fiber System Taken out of Service" for more
information.

Fiber optics is the preferred method of carrying Internet, voice, video, and
data communications over long-distances, eliminating the delay commonly found in
satellite connections. Widespread use of high capacity fiber optic facilities is
expected to allow continued expansion of business, government, educational, and
health care infrastructure in Alaska.

Long-Distance Services

Industry. Until the 1970s, AT&T had a virtual monopoly on long distance service
in the United States. In the 1970s, competitors such as MCI and Sprint began to
offer long distance service. With the gradual emergence of competition, basic
rates dropped, calling surged, and AT&T's dominance declined. More than 1,000
companies now offer wire-line long distance service. AT&T's 1984 toll revenues
were approximately 90% of those reported by all long distance carriers. The
FCC's regulation of AT&T as a "dominant" carrier ended in 1995. By 2002, AT&T's
revenues had declined to approximately 33% of all toll revenues. The two largest
market entrants, MCI and Sprint, have obtained a 30% combined market share
through 2002.

The FCC reports that approximately $84 billion was derived from toll services in
2002. In 2001, residential customers generated over 45% of toll revenues, and
35% of residential toll phone calls were interstate as opposed to 47% of
minutes. In 2001, approximately 30% of total toll services revenues was derived
from intrastate, 51% was derived from domestic interstate, and 19% was derived
from international toll services. Interstate long distance toll revenues
increased approximately 92% from $26 billion in 1984 to $50 billion in 2001, and
intrastate toll revenues increased approximately 38% from $21 billion in 1984 to
$29 billion in 2001, despite significant rate reductions in both categories
during this period.

19

The FCC reports that average revenue per minute of long distance calling dropped
from $0.32 in 1984, when competitive discount and promotional long distance
plans were introduced, to $0.10 in 2001. This average price per minute
represents a mix of international calling (an average of 35 cents per minute)
and domestic interstate calling (an average of 8 cents per minute). The decline
in prices since 1984 is more than 80% after adjusting for the impact of
inflation. The average annual rate of change in the consumer price index for
telephone services between 1990 and 2002 was reported to be 0.6% as compared to
3.6% for all services. The average revenue per minute for interstate and
international calls in 1990 was $0.27 (adjusted for inflation) as compared to
$0.10 in 2001.

The FCC reports that through July 2003 more than twenty-eight million households
have been added to the nation's telephone system since November 1983. An
estimated 3.6 million households were added between July 2002 and July 2003. As
of July 2003, 106.8 million households had telephone service. The FCC reports
that approximately 2% of all consumer expenditures are devoted to telephone
service. This percentage has remained relatively constant over the past 15
years, despite major changes in the industry and in telephone usage. Average
annual expenditures for telephone service increased from $877 per household in
2000 to $1,001 in 2002.

The FCC reports that approximately 104 million households had telephone services
as of November 2002, an increase of 25 million households since 1983. An
estimated 95.2% of households and virtually all businesses in the United States
subscribed to telephone service in July 2003. Approximately 92.9% of households
subscribed to telephone service in 1980.

The FCC reports that primary lines in service have grown over time, averaging
approximately 3% per year, which has historically reflected growth in the
population and the economy. The percentage of additional lines for households
with telephone service has increased significantly, from approximately 3% in
1988 to approximately 25% in 2001. The total number of lines, however, has
declined since 2000 because of the recession, because some consumers are
substituting wireless service for wireline service, and because some households
are eliminating second lines when they move from dial-up Internet service to
broadband service.

International communications has become an increasingly important segment of the
communications market. The FCC reports that the number of calls made from the
United States to other countries increased from 200 million in 1980 to 6.3
billion in 2001, and that Americans spent approximately $11.4 billion on
international calls in 2001. Consistent with domestic toll rates per minute,
international toll rates per minute have decreased significantly. On average,
carriers billed 34 cents per minute for international calls in 2001, a decline
of more than 74% since 1980. Five markets, Canada, Mexico, the United Kingdom,
Germany, and Japan, accounted for approximately 41% of the international calls
billed in the United States in 2001. AT&T, MCI, and Sprint combined accounted
for 88% of the international service billed in the United States in 2001.

While the 1996 Telecom Act has facilitated competition and rapid growth in the
communications market, the last three years have been a tumultuous time for that
marketplace. Industry analysts believe that overly optimistic projections of
data growth spurred companies to invest large amounts of capital to boost
network capacity. While demand for communications services grew, it did not grow
at a sufficient pace to justify the substantial build-out of fiber capacity. A
wide gap developed between the supply of network capacity and the demand for
data transmission. Network owners refocused their efforts to demonstrate
profitability over a much shorter time horizon than initially projected. A
downward spiral ensued, as some communications carriers went out of business
after failing to generate sufficient revenues to service their accelerating debt
loads. The resultant slowdown in capital expenditures left equipment
manufacturers with surplus inventory and personnel.

Industry analysts believe that the communications industry stabilized in 2003
and has begun to show signs of recovery. Growth in data is expected to continue
to be a key component of industry revenue growth. We believe that the data
communications business will eventually rival and perhaps become larger than the
traditional voice telephony market. The continuing migration of voice and other
traffic from analog to digital

20

transmission and the growth in data attributed to broadband applications are
expected to fuel the growth in data.

The FCC issued a Report and Order (FCC 03-197) in 2003 eliminating a policy that
prohibited the installation or operation of more than one satellite earth
station in any Alaska rural community for competitive carriage of interstate MTS
communications. The FCC found that through a series of regulatory steps, the
environment that once called for restrictions on competitive facilities-based
entry had changed. This policy change allows us to install facilities and
provide competitive interstate MTS and other communications services over our
own equipment and network in rural communities where we presently have no
facilities.

We believe that federal and state legislators, courts and regulators will
continue to influence the communications industry in 2004. Consummation of
mergers between and spin-offs from long-distance companies, local access
services companies, ISPs and cable television companies have occurred which blur
the distinction between product lines and competitors.

Industry analysts believe companies will be successful in the long-term if they
can achieve and maintain a superior operating cost position, minimize regulatory
battles, offer a full suite of integrated services to their customers using a
network that is largely under their control, and continue to offer new and
enhanced services that customers wish to purchase.

See "Part I -- Item I -- Business -- Regulation, Franchise Authorizations and
Tariffs -- Long-Distance Services" for more information.

General. We supply a full range of common carrier long-distance and other
communications products and services. We operate a modern, competitive
communications network employing the latest digital transmission technology
based upon fiber optic facilities within and between Anchorage, Fairbanks and
Juneau, Alaska. Our facilities include a self-constructed and financed digital
fiber optic cable and additional owned capacity on another undersea fiber optic
cable (which was taken out of service in January 2004, (see "Part I -- Item 1 --
Business -- Historical Development of our Business During the Past Fiscal Year
- -- Fiber System Taken out of Service"), linking our Alaska terrestrial networks
to the networks of other carriers in the Lower 49 States. We use satellite
transponders to transmit voice and data traffic to remote areas of Alaska. We
operate digital microwave systems to link Anchorage with the Kenai Peninsula,
and our Prudhoe Bay Earth Station with Deadhorse. Digital microwave facilities
also are used to backup our fiber facilities from Anchorage to our Eagle River
earth station, and to our Fairbanks earth station from our Fairbanks
distribution center. Virtually all switched services are computer controlled,
digitally switched, and interconnected by a packet switched SS7 signaling
network.

We provide interstate and intrastate long-distance services throughout Alaska
using our own facilities or facilities leased from or swapped with other
carriers. We also provide (or join in providing with other carriers)
communications services to and from Alaska, Hawaii, the Lower 48 States, and
many foreign nations and territories.

We offer cellular services by reselling another cellular provider's services. We
offer wireless local access services over our own facilities, and have purchased
PCS and LMDS wireless broadband licenses in FCC auctions covering markets in
Alaska.

Products. Our long-distance services industry segment is engaged in the
transmission of interstate and intrastate-switched message telephone service and
Private Line and Private Network communications service between the major
communities in Alaska, and the remaining United States and foreign countries.
Our message toll services include intrastate, interstate and international
direct dial, toll-free 800, 888, 877 and 866 services, GCI calling card,
operator and enhanced conference calling, frame relay, SDN, ISDN technology
based services, as well as terminating northbound MTS traffic for MCI, Sprint
and several large resellers who do not have facilities of their own in Alaska.
We also provide origination of southbound calling card and toll-free 800, 888,
877 and 866 toll services for MCI, Sprint, and other IXCs. We offer our message
services to commercial, residential, and government subscribers. Subscribers
generally may cancel service at any time.

21

Toll, Private Line, broadband and related services account for approximately
49.6%, 53.5% and 53.5% of our 2003, 2002 and 2001 revenues, respectively.
Broadband services include our SchoolAccess(TM) and Rural Health initiatives.
Private Line and Private Network services utilize voice and data transmission
circuits, dedicated to particular subscribers, which link a device in one
location to another in a different location.

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

In addition to providing communications services, we also design, sell, install,
service and operate, on behalf of certain customers, communications and computer
networking equipment and provide field/depot, third party, technical support,
communications consulting and outsourcing services through our Network Solutions
business. We also supply integrated voice and data communications systems
incorporating interstate and intrastate digital Private Lines, point-to-point
and multipoint Private Network and small earth station services. Our Network
Solutions sales and services revenue totaled $11.9 million, $12.4 million, and
$16.3 million in the years ended December 31, 2003, 2002 and 2001, respectively,
or approximately 3.0%, 3.4% and 4.6% of total revenues, respectively. Presently,
there are a number of competing companies in Alaska that actively sell and
maintain data and voice communications systems. Network Solutions' managed
services and product sales results are reported in the All Other category in the
Consolidated Financial Statements included in Part IV of this report.

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.

Facilities. Our communication facilities include an undersea fiber optic cable
system connecting Whittier, Valdez and Juneau, Alaska and Seattle, Washington,
which was placed into service in February 1999. As of the date of this report we
are constructing a new undersea fiber optic cable system connecting Seward,
Alaska to Warrenton, Oregon that we expect to be operational by May 2004. This
fiber optic cable system is designated AULP West and the original undersea fiber
optic cable system is now designated AULP East. The Seward cable landing station
will connect to our network in Anchorage and the Warrenton cable landing station
will connect to our network in Seattle via long-term leased capacity. The
combination of AULP West and AULP East will provide us with the ability to
provide fully protected geographically diverse routing of service between Alaska
and the Lower 48 States.

We also own a portion of the capacity on a second undersea fiber optic cable
system linking Alaska to the Lower 48 States known as the Alaska spur of the
NPC, which was taken out of service in January 2004. See "Part I -- Item 1 --
Business -- Historical Development of our Business During the Past Fiscal Year
- -- Fiber System Taken out of Service" for more information.

These undersea fiber optic cable systems allow us to carry our military base
traffic and our Anchorage, Delta Junction, Eagle River, Fairbanks, Girdwood,
Glenallen, Healy, Juneau, Kenai Peninsula, Ketchikan, Palmer, Prudhoe Bay,
Sitka, Valdez, Wasilla, and Whittier, Alaska traffic to and from the contiguous
Lower 48 States and between these instate locations over terrestrial circuits,
eliminating the one-quarter second delay associated with satellite circuits.

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

We use SONET as a service delivery method for our terrestrial metropolitan area
networks as well as our long-haul terrestrial and undersea fiber optic cable
networks. As of December 31, 2003 we have completed

22

interconnection of approximately 70 businesses and co-location facilities within
the Anchorage, Juneau and Fairbanks metropolitan areas, as well as the 800-mile
long Alyeska pipeline right of way that connects Valdez to Prudhoe Bay, Alaska.
We currently connect Anchorage, Whittier, Juneau and Seattle through our AULP
East undersea fiber network. We use SONET-based next generation multi-service
nodes for purposes of delivering traditional TDM services (at DS-0, DS-1 and
DS-3 data rates) as well as next generation services, such as optical OC-n and
Ethernet. We have expanded our digital cross-connect capacity through the
addition of three large 3:1 cross connects located in Anchorage and Seattle.

We completed construction of a fiber optic cable system from the Anchorage
distribution center to the Matanuska Telephone Association Eagle River central
office and to our major hub earth station in Eagle River in the second quarter
of 2000. The Issaquah earth station is connected with the Seattle distribution
center by means of diversely routed leased fiber optic cable transmission
systems, each having the capability to restore the other in the event of
failure. The Juneau earth station and distribution centers are collocated. We
have digital microwave facilities serving the Kenai Peninsula communities. We
maintain earth stations in Fairbanks (linked by digital microwave to the
Fairbanks distribution center), Juneau (collocated with the Juneau distribution
center), Anchorage (Benson earth station), and in Prudhoe Bay as fiber network
restoration earth stations. Our Benson earth station also uplinks our statewide
video service; such service may be pre-empted if earth station capacity is
needed to restore our fiber network between Anchorage and Prudhoe Bay.

In 2002, we constructed a 3.6-meter earth station at St. Paul, 6-meter earth
stations at Unalakleet and Mountain Village, and a 9-meter earth station at Ft.
Yukon, all in Alaska. These stations were constructed to support our
SchoolAccessTM distance learning and telemedicine networks, and primarily serve
surrounding villages.

We use our DAMA facilities to serve 57 additional locations throughout Alaska.
DAMA is a digital satellite earth station technology that allows calls to be
made between remote villages using only one satellite hop thereby reducing
satellite delay and capacity requirements while improving quality. In 1996, GCI
obtained the necessary RCA and FCC approvals waiving prohibitions against
construction of competitive facilities in certain rural Alaska communities,
allowing for deployment of DAMA technology in 56 sites in rural Alaska on a
demonstration basis. These prohibitions were removed by the FCC on August 6,
2003 allowing us to begin deploying earth stations in more locations in Alaska
(see "Part I -- Item 1 -- Business -- Historical Development of our Business
During the Past Fiscal Year -- New Communications Policy for Alaska Areas" for
more information). In addition, 69 (for a total of 126) C-band facilities
provide dedicated Internet access, Telehealth and Private Network services to
rural public schools, hospitals, health clinics, and natural resource
development industries throughout Alaska and in several locations in the Lower
48 States.

Our Anchorage, Fairbanks, and Juneau distribution centers contain electronic
switches to route calls to and from local exchange companies and, in Seattle, to
obtain access to MCI, Sprint and other carriers to distribute our southbound
traffic to the remaining 49 states and international destinations. In Anchorage,
a Lucent Technologies Inc. ("Lucent") 5ESS digital host switch is connected by
fiber to seven remote facilities that are co-located in the ILEC switching
centers, to provide both local and long-distance service. Our extensive
metropolitan area fiber network in Anchorage supports cable television, Internet
and telephony services. The Anchorage, Fairbanks, and Juneau facilities also
include digital access cross-connect systems, frame relay data switches,
Internet platforms, and in Anchorage and Fairbanks, co-location facilities for
interconnecting and hosting equipment for other carriers. We also maintain an
operator and customer service center in Wasilla, Alaska.

In 2001 we constructed a new switching center in Fairbanks and installed a new
Lucent switch to enable the provisioning of local telephone access services in
the Fairbanks market. The existing Fairbanks long-distance toll switch was
decommissioned in December 2001. Substantially all toll traffic originating in
Fairbanks is now routed to Anchorage. The first ILEC collocation office was also
constructed during 2001 to enable access to a portion of the Fairbanks ILEC UNE
loop facilities. Fairbanks UNE loop provisioning began in early 2002.
Construction of a second collocation office was completed in 2002.

23

We installed a new Lucent switch in our Juneau distribution center, also
enabling local services to be launched in the Juneau market in 2002. This new
switch also replaced the existing toll switch in Juneau, which we decommissioned
in 2002. One collocation office and a second adjacent collocation facility were
completed at two of the Juneau ILEC central offices. We placed these collocation
facilities in service in 2002 enabling UNE loop access to a portion of the
Juneau ILEC's loop facilities. Provisioning customers via UNE in Fairbanks and
Juneau is presently subject to certain restrictions. See "Part I -- Item 1 --
Business -- Historical Development of our Business During the Past Fiscal Year
- -- Alaska Supreme Court Decision" for more information.

Our Alcatel DSC DEX toll switch in Seattle was also decommissioned in 2002 after
its traffic was transitioned to our Lucent 5ESS switch in Seattle, which was
placed into service in 2000. Our Alcatel DSC DEX toll switch in Anchorage was
removed from service in the second quarter of 2003 and its traffic was moved to
our existing Lucent 5ESS network. Installation of a second Lucent 5ESS in
Anchorage began in the fourth quarter of 2003 to support network expansion and
enable additional network efficiencies. This switch is expected to be integrated
into our network by the second quarter of 2004.

Our operator services traffic was moved in early 2003 to our Lucent 5ESS switch
platform as an interim step to decommission our existing digital operator
switch. Our operator services traffic was moved in the fourth quarter of 2003 to
an integrated services platform that hosts operator services, answering
services, directory assistance and internal conferencing services.

We employ satellite transmission for rural intrastate and interstate traffic and
certain other major routes. We acquired satellite transponders on PanAmSat
Corporation ("PanAmSat") Galaxy XR satellite in March 2000 to meet our long-term
satellite capacity requirements. We further augmented capacity on Galaxy XR with
the lease of a seventh C-band transponder in October, 2002.

As demand for redundant, geographically diverse capacity on our network
increases, we will need to further augment our facilities between Alaska and the
Lower 48 States. In June 2003 we began the construction of AULP West connecting
Seward, Alaska and Warrenton, Oregon, with leased backhaul facilities to connect
it to our switching and distribution centers in Anchorage, Alaska and Seattle,
Washington. A consortium of companies has been selected to design, engineer,
manufacture, and install the undersea fiber optic cable system and a contract
has been signed at a total cost to us of $35.2 million. We expect the total cost
of the new fiber system to be approximately $51 million. We expect to fund
construction of the fiber optic cable system through our operating cash flows
and, to the extent necessary, with draws on our new Senior Credit Agreement. Our
capital expenditures for this project totaled approximately $16.5 million in
2003, all of which has been funded through our operating cash flows.

In 2000 we began deploying a new packet data satellite transmission technology
for the efficient transport of broadband data in support of our rural health and
SchoolAccessTM initiatives. We continued to deploy and upgrade this network
during 2003 and expect to further expand and upgrade this network during 2004.
An upgrade of the packet data satellite transmission equipment to a more
bandwidth efficient modulation scheme is expected to occur during the second
half of 2004. In addition, our SchoolAccessTM and rural wireless Internet
service is partially provisioned over a satellite based digital video broadcast
carrier that is scheduled to convert to a more efficient modulation scheme
during the second quarter of 2004. These projects reduce the requirement for new
satellite transponder bandwidth to support expected growth in rural health,
distance learning and rural Internet services.

Emerging technology that facilitates more efficient transport of fixed assigned
point-to-point satellite transmissions may become available during the second
quarter of 2004. This technology would allow fixed point-to-point transmissions
between two earth stations to transmit at the same frequency. Successful
development and implementation of this new technology may reduce the requirement
for new satellite bandwidth to meet our needs as expected growth in demand for
our services occurs. We are investigating the possible use of this new
technology to further increase the bandwidth utilization for a portion of our
satellite network.

24

We employ advanced digital transmission technologies to carry as many voice
circuits as possible through a satellite transponder without sacrificing voice
quality. Other technologies such as terrestrial microwave systems, metallic
cable, and fiber optics tend to be favored more for point-to-point applications
where the volume of traffic is substantial. With a sparse population spread over
a large geographic area, neither terrestrial microwave nor fiber optic
transmission technology is considered to be economically feasible in rural
Alaska in the foreseeable future.

Customers. We had approximately 85,600, 88,200 and 87,900 active Alaska
long-distance message telephone service subscribers at December 31, 2003, 2002
and 2001, respectively. Approximately 11,300, 11,600 and 12,200 of these were
business and government users at December 31, 2003, 2002 and 2001, respectively,
and the remainder were residential customers. Reductions in our business and
government customer counts were primarily attributed to continuing competitive
pressures in Anchorage and other markets we serve. Message telephone service
revenues (excluding broadband, operator services and Private Line revenues)
averaged approximately $10.6 million per month during 2003.

Equal access conversions have been completed in all communities we serve with
owned facilities. We estimate that we carry slightly over 50% of combined
business and residential traffic as a statewide average for both originating
interstate and intrastate message telephone service traffic.

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

Interstate Minutes
---------------------------------------
Combined
Interstate
Inter- and Inter- Intra-
South- North- Calling national national state Total
For Quarter ended bound (1) bound Card Minutes Minutes Minutes Minutes
- -----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)

March 31, 2001 126,681 74,252 2,087 1,424 204,444 38,763 243,207
June 30, 2001 141,091 76,256 1,926 1,530 220,803 40,407 261,210
September 30, 2001 160,600 87,230 1,961 1,634 251,425 39,355 290,780
December 31, 2001 130,638 90,812 1,946 1,362 224,758 39,246 264,004
------------------------------------------------------------------------------------------
Total 2001 559,010 328,550 7,920 5,950 901,430 157,771 1,059,201
==========================================================================================

March 31, 2002 133,455 91,061 1,683 1,413 227,612 40,781 268,393
June 30, 2002 144,143 105,001 1,582 1,462 252,188 44,528 296,716
September 30, 2002 159,564 90,839 1,463 1,527 253,393 46,860 300,253
December 31, 2002 138,735 78,483 1,341 1,506 220,065 43,595 263,660
------------------------------------------------------------------------------------------
Total 2002 575,897 365,384 6,069 5,908 953,258 175,764 1,129,022
==========================================================================================

March 31, 2003 132,172 78,882 1,186 1,487 213,727 45,345 259,072
June 30, 2003 142,333 83,749 1,107 1,508 228,697 52,489 281,186
September 30, 2003 159,439 96,512 1,055 1,514 258,520 55,918 314,438
December 31, 2003 144,829 107,620 1,013 1,546 255,008 49,553 304,561
------------------------------------------------------------------------------------------
Total 2003 578,773 366,763 4,361 6,055 955,952 203,305 1,159,257
==========================================================================================

--------------------------

(1) The 2001 Interstate Southbound minutes include traffic that originates
and terminates in Washington by us on behalf of an OCC customer.

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

25

GCI entered into a significant business relationship with MCI in 1993 that
included the following agreements, among others.

o GCI agreed to terminate all Alaska-bound MCI long-distance traffic and
MCI agreed to terminate all of GCI's long-distance traffic terminating in
the Lower 49 States excluding Washington, Oregon and Hawaii.
o The parties agreed to share certain communications network resources and
various marketing, engineering and operating resources. We also carry
MCI's 800, 888, 877 and 866 traffic originating in Alaska and terminating
in the Lower 49 States and handle traffic for MCI's calling card
customers when they are traveling in Alaska.

Concurrently with these agreements, MCI purchased approximately 31% (which
represented approximately 9% as of December 31, 2003) of GCI's Common Stock and
presently one representative serves on GCI's Board. In conjunction with our
acquisition of cable television companies in 1996, MCI purchased an additional
two million shares at a premium to the then current market price for $13 million
or $6.50 per share. MCI sold 4.5 million shares of GCI Class A common stock in
2002.

Revenues attributed to MCI's message telephone traffic from these agreements
(excluding Private Line and other revenues) in 2003, 2002 and 2001 totaled $57.8
million, $54.7 million and $44.8 million, or 14.8%, 14.9% and 12.6% of total
revenues, respectively. The contract was amended in March 2001 extending its
term five years to March 2006. The amendment reduced the rate to be charged by
us for certain traffic over the extended term of the contract.

On July 21, 2002 MCI and substantially all of its active United States
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court. Chapter
11 allows a company to continue operating in the ordinary course of business in
order to maximize recovery for the company's creditors and shareholders.

On July 24, 2003, our contract to provide interstate and intrastate
long-distance services to MCI was extended for a minimum of five years to July
2008. The agreement sets the terms and conditions under which we originate and
terminate certain types of long-distance and data services in Alaska on MCI's
behalf. In exchange for extending the term of this exclusive contract, MCI will
receive a series of rate reductions implemented in phases over the life of the
contract.

On October 31, 2003, MCI's reorganization plan was approved by the United States
Bankruptcy Court. MCI requested in February 2004 that the United States
Bankruptcy Court for the Southern District of New York approve a 60-day
extension to the February 28, 2004 deadline to emerge from bankruptcy. An
extension to the deadline would give MCI time to complete financial filings with
the SEC. The financial filings are reported to be the last major task left for
MCI to emerge from bankruptcy.

See "Part I -- Item 1 -- Risks Relating to our Business and Operations -- Our
significant customer, MCI, is in bankruptcy," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Long-Distance
Services Overview" for additional information.

In 1993 GCI entered into a long-term agreement with Sprint, pursuant to which
GCI agreed to terminate all Alaska-bound Sprint long-distance traffic and Sprint
agreed to handle substantially all of GCI's international traffic. Services
provided pursuant to the contract with Sprint resulted in message telephone
service revenues (excluding Private Line and other revenues) in 2003, 2002 and
2001 of approximately $18.3 million, $23.5 million and $29.7 million, or
approximately 4.7%, 6.4% and 8.3% of total revenues, respectively. The contract
was amended in March 2002 extending its term five years to March 2007, with two
one-year automatic extensions thereafter. The amendment reduces the rate to be
charged by us for certain traffic over the extended term of the contract.

With the contracts and amendment described above, we believe that MCI, subject
to successful emergence from the bankruptcy process, and Sprint, our two largest
customers, will continue to make use of our services

26

during the extended term. MCI was a major customer of our long-distance services
industry segment through 2003. Sprint met the threshold for classification as a
major customer through 1998, and met the threshold again in 2001.

Other common carrier traffic routed to us for termination in Alaska is largely
dependent on traffic routed to our carrier customers by their customers. Pricing
pressures, new program offerings, revised business plans, and market
consolidation continue to evolve in the markets served by our carrier customers.
If, as a result, their traffic is reduced, or if their competitors' costs to
terminate or originate traffic in Alaska are reduced, our traffic will also
likely be reduced, and we may have to reduce our pricing to respond to
competitive pressures. We are unable to predict the effect of such changes on
our business; however the loss of one or both of MCI or Sprint as customers, a
material adverse change in our relationships with them or a material loss of or
reduction in their long-distance customers would have a material adverse effect
on our financial position, results of operations or liquidity.

We provide various services to the State of Alaska, BP Alaska, Wells Fargo Bank
Alaska, and Alyeska Pipeline Service Company. Although these customers do not
meet the threshold for classification as major customers, we do derive
significant revenues and gross profit from them. There are no other individual
customers, the loss of which would have a material impact on our revenues or
gross profit.

We provided broadband, Private Line and Private Network communications products
and services, including SchoolAccessTM and rural health Private Line facilities,
to 359 commercial and government customers at the end of 2003. These products
and services generated approximately 15.9%, 14.8% and 14.1% of total revenues
during the years ended December 31, 2003, 2002 and 2001, respectively.

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

Competition. The long-distance industry is intensely competitive and subject to
constant technological change. Competition is based upon price and pricing
plans, the type of services offered, customer service, billing services,
performance, perceived quality, reliability and availability. AT&T Alascom, as a
subsidiary of AT&T, has access to greater financial, technical and marketing
resources than we have. Future competitors could also be substantially larger
than we are, and have greater financial, technical and marketing resources than
we have.

In the long-distance market, we compete against AT&T Alascom, ACS, the Matanuska
Telephone Association, and certain smaller rural local telephone carrier
affiliates. There is also the possibility that new competitors will enter the
Alaska market. In addition, wireless services continue to grow as an alternative
to wireline services as a means of reaching customers.

Historically, we have competed in the long-distance market by offering discounts
from rates charged by our competitors and by providing desirable packages of
services. Discounts have been eroded in recent years due to lowering of prices
by AT&T Alascom and entry of other competitors into the long-distance markets we
serve. In addition, our competitors have also begun to offer their own packages
of services. If competitors lower their rates further or develop more attractive
packages of services, we may be forced to reduce our rates or add additional
services, which would have a material adverse effect on our financial position,
results of operations or liquidity.

Under the terms of the acquisition of Alascom by AT&T Corp., AT&T Alascom rates
and services must mirror those offered by AT&T Corp., so changes in AT&T Corp.
prices indirectly affect our rates and services. AT&T Corp.'s and AT&T Alascom's
interstate prices are regulated under a price cap plan whereby their rate of
return is not regulated or restricted. Price increases by AT&T Corp. and AT&T
Alascom generally improve our ability to raise prices while price decreases
pressure us to follow. We believe we have, so far, successfully adjusted our
pricing and marketing strategies to respond to AT&T Corp. and other competitors'
pricing practices. However,

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if competitors significantly lower their rates, we may be forced to reduce our
rates, which could have a material adverse effect on our financial position,
results of operations or liquidity.

ACS and other LECs have entered the interstate and international long-distance
market, and pursuant to RCA authorization, entered the intrastate long-distance
market. ACS and other LECs generally lease or buy long-haul capacity on
long-distance carriers' facilities to provide their interstate and intrastate
long-distance services.

Another carrier completed construction of fiber optic facilities connecting
points in Alaska to the Lower 48 States in 1999. The additional fiber system
provides direct competition to services we provide on our owned fiber optic
facilities, however the fiber system provides an alternative routing path for us
in case of a major fiber outage in our systems. This carrier filed for Chapter
11 bankruptcy in 2001 and its assets were sold in 2002. We are currently in the
process of constructing the AULP West fiber optic cable system. If successfully
completed, it will provide us with owned capacity for route diversity.

In the wireless communications services market, we expect our PCS business
license in the future may be used to compete against Dobson Communications
Corporation ("Dobson"), ACS, Alaska DigiTel LLC, and resellers of those services
in Anchorage and other markets. The wireless communications industry continues
to experience significant consolidation. In February 2004 Cingular Wireless was
reported to have been successful in its bid to acquire AT&T Wireless for $41
billion, subject to shareholder approval. Dobson acquired its Anchorage wireless
properties in a 2003 asset exchange with AT&T Wireless. Dobson has acquired
wireless companies and negotiated roaming arrangements that give it a national
presence. Mergers and joint ventures in the industry have created large,
well-capitalized competitors with substantial financial, technical, marketing
and other resources. These competitors may be able to offer nationwide services
and plans more quickly and more economically than we can, and obtain roaming
rates that are more favorable than those that we obtain. We currently resell
Dobson analog and digital cellular services and provide limited wireless local
access and Internet services using our own facilities.

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

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

Cable Services

Industry. The programmed video services industry includes traditional broadcast
television, cable television, satellite systems such as DBS, private cable
operators, LEC entry, broadband service providers, wireless cable, open video
systems, home video sales and rentals, Internet video, and electric and gas
utilities. Cable television providers have added non-broadcast programming,
utilized improved technology to digitize signals and increase channel capacity,
and expanded service markets to include more densely populated areas and

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those communities in which off-air reception is not problematic. Broadcast
television stations including network affiliates and independent stations
generally serve the urban centers. One or more local television stations may
serve smaller communities. Rural communities may not receive local broadcasting
or have cable systems but