UNITED STATES SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

Washington, D.C. 20549

FORM 10-Q

(Mark One)
	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________

(Mark One)

~~ALASKA~~x ~~COMMUNICATIONS~~QUARTERLY ~~SYSTEMS~~REPORT ~~HOLDINGS,~~PURSUANT ~~INC. (Exact~~TO ~~name~~SECTION of13 ~~registrant~~OR as15(d) ~~specified~~OF inTHE ~~its~~SECURITIES ~~charter)~~ EXCHANGE ACT OF 1934

~~Delaware~~For ~~(State~~the orquarterly ~~Other~~period ~~Jurisdiction~~ended ofJune 30, ~~Incorporation or Organization) 91-1921377 (I.R.S. Employer Identification No.)~~2003


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

For the transition period from __________ to

Commission file number 333-82363

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		91-1921377
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

600 Telephone Avenue, Anchorage, Alaska 99503
(Address of Principal Executive Offices) (Zip Code)

(907) 297-3000 (Registrant’s Telephone Number, Including Area Code~~: (907~~) ~~297-3000~~

Not Applicable (Former name, former address and former three months, if changed since last report~~: Not Applicable~~)

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 ü þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


Yes o		No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes o No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

DOCUMENTS INCORPORATED BY REFERENCE
None

TABLE OF CONTENTS

		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
PART II
	ITEM 1. LEGAL PROCEEDINGS.
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION.
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
EXHIBIT 10.16
EXHIBIT 99.1
EXHIBIT 31.1
EXHIBIT 99.2
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

TABLE OF CONTENTS

		Page	~~Page~~
		Number	~~Number~~
PART I.	Financial Information	~~Financial Information~~
Item 1.	Financial Statements:	~~Financial Statements:~~
		Consolidated Balance Sheets (unaudited) As of September 30, 2002 and December 31, 2001		3
	Consolidated Balance Sheets (unaudited) As of June 30, 2003 and December 31, 2002	3
		Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2002 and 2001		4
	Consolidated Statements of Operations (unaudited) For the Three and Six Months Ended June 30, 2003 and 2002	4
		Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 30, 2002 and 2001		5
	Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended June 30, 2003 and 2002	5
	Notes to Consolidated Financial Statements (unaudited)	~~Notes to Consolidated Financial Statements (unaudited)~~6		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~25		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~Quantitative and Qualitative Disclosures About Market Risk~~40		29
Item 4.	Controls and Procedures	~~Controls and Procedures~~40		29
PART II.	Other Information	~~Other Information~~
Item 1.	Legal Proceedings	~~Legal Proceedings~~41		30
Item 2.	Changes in Securities and Use of Proceeds	~~Changes in Securities and Use of Proceeds~~42		31
Item 3.	Defaults upon Senior Securities	~~Defaults upon Senior Securities~~42		31
Item 4.	Submission of Matters to a Vote of Security Holders	~~Submission of Matters to a Vote of Security Holders~~42		31
Item 5.	Other Information	~~Other Information~~42		31
Item 6.	Exhibits and Reports on Form 8-K	~~Exhibits and Reports on Form 8-K~~42		31
Signatures		43		32
Certifications				33

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. ~~Consolidated Balance Sheets~~ ~~(Unaudited, In Thousands Except Per Share Amounts)~~

			September 30,			December 31,
			2002			2001
Assets
Current assets:
	Cash and cash equivalents		$	21,040		$	41,012
	Restricted cash			3,428			6,932
	Accounts receivable-trade, net of allowance of $5,386 and $4,944			46,812			46,912
	Accounts receivable-affiliates			2,906			2,475
	Materials and supplies			10,438			8,723
	Prepayments and other current assets			8,561			6,032
	Assets held for sale			271			—
		Total current assets		93,456			112,086
Property, plant and equipment				1,077,843			1,036,829
Less: accumulated depreciation				610,311			557,849
	Property, plant and equipment, net			467,532			478,980
Goodwill				141,980			250,495
Intangible assets				23,146			26,785
Debt issuance costs, net of amortization of $15,296 and $12,126				22,187			25,321
Deferred charges and other assets				25,155			9,875
Total assets			$	773,456		$	903,542
Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations		$	5,832		$	5,107
	Accounts payable-affiliates			989			1,303
	Accounts payable, accrued and other current liabilities			53,586			62,765
	Advance billings and customer deposits			9,531			9,190
		Total current liabilities		69,938			78,365
Long-term obligations, net of current portion				585,666			591,496
Other deferred credits and long-term liabilities				27,875			25,003
Commitments and contingencies				—			—
Stockholder’s equity:
	Common stock, $.01 par value; 1,000 shares authorized, 1 share issued and outstanding			—			—
	Paid in capital in excess of par value			287,242			287,242
	Accumulated deficit			(179,650	)		(64,735	)
	Accumulated other comprehensive loss			(17,615	)		(13,829	)
		Total stockholder’s equity		89,977			208,678
Total liabilities and stockholder’s equity			$	773,456		$	903,542

Consolidated Balance Sheets
(Unaudited, In Thousands Except Per Share Amounts)


			June 30,			December 31,
			2003			2002

Assets
Current assets:
	Cash and cash equivalents		$	64,560		$	18,565
	Restricted cash			110			3,440
	Accounts receivable-trade, net of allowance of $5,407 and $6,075			46,032			48,820
	Accounts receivable-affiliate			4,766			3,761
	Materials and supplies			11,603			11,203
	Prepayments and other current assets			5,753			6,172
	Assets held for sale			—			261

		Total current assets		132,824			92,222
Investment				1,097			—
Property, plant and equipment				1,100,073			1,090,365
Less: accumulated depreciation				662,128			625,276

	Property, plant and equipment, net			437,945			465,089
Goodwill				38,403			77,225
Intangible assets				22,804			23,269
Debt issuance costs, net of amortization of $21,200 and $15,883				15,813			21,130
Deferred charges and other assets				25,850			26,047

Total assets			$	674,736		$	704,982

		Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations		$	4,909		$	5,933
	Accounts payable-affiliates			3,524			1,319
	Accounts payable, accrued and other current liabilities			41,477			49,480
	Advance billings and customer deposits			9,146			9,804

		Total current liabilities		59,056			66,536
Long-term obligations, net of current portion				477,183			586,898
Other deferred credits and long-term liabilities				30,961			32,930
Commitments and contingencies				—			—
Stockholder’s equity:
	Common stock, $.01 par value; 1,000 shares authorized, 1 share issued and outstanding			—			—
	Contributed capital			287,242			287,242
	Accumulated deficit			(164,460	)		(249,738	)
	Accumulated other comprehensive loss			(15,246	)		(18,886	)

		Total stockholder’s equity		107,536			18,618

Total liabilities and stockholder’s equity			$	674,736		$	704,982

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. ~~Consolidated Statements of Operations~~ ~~(Unaudited, In Thousands Except Per Share Amounts)~~

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2002			2001			2002			2001
Operating revenue:
	Local telephone		$	52,815		$	53,860		$	172,128		$	163,018
	Cellular			11,903			11,437			32,420			31,802
	Directory			8,360			8,705			25,382			24,857
	Internet			6,422			3,584			14,815			9,898
	Interexchange			4,830			5,395			14,500			16,557
		Total operating revenue		84,330			82,981			259,245			246,132
Operating expense:
	Local telephone			28,650			29,259			90,219			88,582
	Cellular			7,116			6,347			20,227			18,569
	Directory			3,408			3,616			10,366			10,478
	Internet			8,157			4,583			20,602			11,592
	Interexchange			6,797			6,678			20,409			23,043
	Depreciation and amortization			22,458			19,790			61,690			58,754
	Loss of disposal of assets, net			1,835			—			2,108			—
		Total operating expense		78,421			70,273			225,621			211,018
Operating income				5,909			12,708			33,624			35,114
Other income (expense):
	Interest expense			(12,744	)		(14,000	)		(36,462	)		(43,910	)
	Interest income and other			578			1,019			1,626			2,844
		Total other expense		(12,166	)		(12,981	)		(34,836	)		(41,066	)
Loss before income taxes				(6,257	)		(273	)		(1,212	)		(5,952	)
Income tax benefit				—			48			—			147
Loss from continuing operations				(6,257	)		(225	)		(1,212	)		(5,805	)
Loss from discontinued operations, net of tax				(136	)		(526	)		(7,523	)		(1,327	)
Loss before cumulative effect of change in accounting principle				(6,393	)		(751	)		(8,735	)		(7,132	)
Cumulative effect of change in accounting principle				—			—			(105,350	)		—
Net loss			$	(6,393	)	$	(751	)	$	(114,085	)	$	(7,132	)

Consolidated Statements of Operations
(Unaudited, In Thousands)


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2003			2002			2003			2002

Operating revenue:
	Local telephone		$	55,210		$	63,991		$	109,211		$	119,313
	Wireless			11,947			11,162			22,277			20,517
	Directory			3,353			8,381			11,631			17,022
	Internet			9,037			4,551			16,193			8,393
	Interexchange			5,239			4,820			10,005			9,670

		Total operating revenue		84,786			92,905			169,317			174,915
Operating expense:
	Local telephone (exclusive of depreciation and amortization)			27,487			32,571			55,334			61,569
	Wireless (exclusive of depreciation and amortization)			7,019			7,069			13,583			13,111
	Directory (exclusive of depreciation and amortization)			1,800			3,532			5,249			6,958
	Internet (exclusive of depreciation and amortization)			13,050			7,317			23,186			12,445
	Interexchange (exclusive of depreciation and amortization)			7,124			6,997			13,713			13,612
	Depreciation and amortization			22,091			19,973			44,691			39,232

		Total operating expense		78,571			77,459			155,756			146,927
Gain (loss) on disposal of assets				97,285			(273	)		96,539			(273	)

Operating income				103,500			15,173			110,100			27,715
Other income (expense):
	Interest expense			(14,920	)		(10,975	)		(27,607	)		(23,718	)
	Interest income and other			4,787			548			4,979			1,048

		Total other expense		(10,133	)		(10,427	)		(22,628	)		(22,670	)

Income before income taxes, discontinued operations and cumulative effect of change in accounting principle				93,367			4,746			87,472			5,045
Income taxes				—			—			—			—

Income from continuing operations				93,367			4,746			87,472			5,045
Loss from discontinued operations				—			(515	)		(52	)		(7,387	)

Income (loss) before cumulative effect of change in accounting principle				93,367			4,231			87,420			(2,342	)
Cumulative effect of change in accounting principle				—			—			—			(105,350	)

Net income (loss)			$	93,367		$	4,231		$	87,420		$	(107,692	)

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. ~~Consolidated Statements of Cash Flows~~ ~~(Unaudited, In Thousands)~~

			Nine Months Ended
			September 30,
			2002			2001
Cash Flows from Operating Activities:
Net loss			$	(114,085	)	$	(7,132	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Loss on discontinued operations			7,523			1,327
	Cumulative effect of change in accounting principle			105,350			—
	Depreciation and amortization			61,690			58,754
	Loss on disposal of assets, net			2,108			—
	Amortization of debt issuance costs			3,134			3,256
	Investment tax credits			—			(147	)
	Capitalized interest			(1,078	)		(1,114	)
	Other deferred credits			(914	)		(119	)
	Changes in components of working capital:
		Accounts receivable and other current assets		(4,774	)		(4,218	)
		Accounts payable and other current liabilities		(8,899	)		6,502
		Other		(280	)		749
	Net cash used in discontinued operations			(596	)		(789	)
Net cash provided by operating activities				49,179			57,069
Cash Flows from Investing Activities:
Construction and capital expenditures, net of capitalized interest				(50,253	)		(74,559	)
Release of funds from escrow				3,706			—
Issuance of note receivable				(15,000	)		—
Proceeds from liquidation of minority interest investment				—			1,370
Issuance of note receivable from officer				—			(335	)
Cost of acquisitions, net of cash received				—			(1,000	)
Net cash used by investing activities				(61,547	)		(74,524	)
Cash Flows from Financing Activities:
Payments on long-term debt				(6,774	)		(2,820	)
Dividends				(830	)		—
Net cash used by financing activities				(7,604	)		(2,820	)
Decrease in cash				(19,972	)		(20,275	)
Cash and cash equivalents at beginning of the period				41,012			61,896
Cash and cash equivalents at the end of the period			$	21,040		$	41,621
Supplemental Cash Flow Data:
Interest paid			$	30,795		$	35,870
Income taxes paid				—			—
Supplemental Noncash Transactions:
Property acquired under capital lease			$	2,306		$	—
Interest rate swap marked to market			$	3,786		$	13,195

Consolidated Statements of Cash Flows
(Unaudited, In Thousands)


			Six Months Ended
			June 30,

			2003			2002

Cash Flows from Operating Activities:
Net income (loss)			$	87,420		$	(107,692	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Loss on discontinued operations			52			7,387
	Cumulative effect of change in accounting principle			—			105,350
	Depreciation and amortization			44,691			39,232
	Loss (gain) on disposal of assets			(96,539	)		273
	Amortization of debt issuance costs and original issue discount			5,317			2,078
	Capitalized interest			(92	)		(767	)
	Other deferred credits			1,671			(1,891	)
	Changes in components of working capital:
		Accounts receivable and other current assets		1,725			(7,664	)
		Accounts payable and other current liabilities		(9,085	)		(9,730	)
		Other		(122	)		98
	Net cash used by discontinued operations			(41	)		(477	)

Net cash provided by operating activities				34,997			26,197
Cash Flows from Investing Activities:
Construction and capital expenditures, net of capitalized interest				(15,211	)		(31,975	)
Net proceeds from sale of business				138,091			—
Release of funds from escrow				3,539			—
Placement of funds in restricted account				(200	)		—

Net cash provided (used) by investing activities				126,219			(31,975	)
Cash Flows from Financing Activities:
Payments on long-term debt				(113,079	)		(6,640	)
Dividends				(2,142	)		—

Net cash used by financing activities				(115,221	)		(6,640	)
Increase (decrease) in cash and cash equivalents				45,995			(12,418	)
Cash and cash equivalents at beginning of the period				18,565			41,012

Cash and cash equivalents at the end of the period			$	64,560		$	28,594

Supplemental Cash Flow Data:
Interest paid			$	23,862		$	24,914
Income taxes paid				—			—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages			$	2,340		$	2,306
Interest rate swap marked to market			$	(3,640	)	$	577

See Notes to Consolidated Financial Statements

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Alaska Communications Systems Holdings, Inc. and Subsidiaries (the “Company” or “ACS Holdings”), a Delaware corporation, is an integrated communications provider engaged principally in providing local telephone, ~~directory~~wireless, ~~cellular,~~ Internet, and interexchange services to its customers in the state of Alaska through its telecommunications subsidiaries. The Company was formed in October of 1998 for the purpose of acquiring and operating ~~telecommunications~~ telecommunications properties. The principal activities in 1998 and through May 14, 1999 were the preparation of systems and obtaining financing for pending acquisitions. On May 14, 1999, the Company was acquired and became a wholly owned subsidiary of Alaska Communications Systems Group, Inc. (the “Parent” or “ACS Group”).

The financial statements for the Company represent the consolidated financial position, results of operations and cash flows principally of the following entities:

• Alaska Communications Systems Holdings, Inc. • ACS of Alaska, Inc. (“ACSAK”) • ACS of the Northland, Inc. (“ACSN”) • ACS of Fairbanks, Inc. (“ACSF”) • ACS of Anchorage, Inc. (“ACSA”) • ACS Wireless, Inc. (“ACSW”) • ACS Long Distance, Inc. (“ACSLD”) • ACS Internet, Inc. (“ACSI”) ~~• ACS InfoSource, Inc. (ACSIS”)~~

~~Certain~~ On ~~information~~May 8, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. However2003, the Company ~~believes~~completed the ~~disclosures~~sale ~~which~~of ~~are~~a ~~made~~majority ~~are adequate~~interest ~~to make the information presented not misleading. The consolidated financial statements and footnotes included~~ in ~~this Form 10-Q should be read in~~ ~~conjunction~~its ~~with~~directory ~~the~~business, ~~consolidated~~as ~~financial~~described ~~statements and notes thereto included~~ in ~~the~~Note ~~Company’s~~4, ~~Annual~~Gain ~~Report~~ on ~~Form 10-K~~Disposal ~~for~~of ~~the year ended December 31, 2001~~Assets. ~~Certain reclassifications have been made to the 2001~~ ~~financial statements to make them conform to the current presentation.~~

In Certain ~~the~~information ~~opinion~~and offootnote ~~management,~~disclosures ~~the~~normally included in financial statements ~~contain~~prepared ~~all~~in accordance with accounting principles ~~adjustments~~generally ~~(consisting~~accepted in the United States of ~~normal~~America ~~recurring~~have ~~adjustments)~~been ~~necessary~~condensed or omitted pursuant to ~~present fairly~~rules and regulations of the ~~consolidated~~Securities ~~financial~~and ~~position~~Exchange Commission. However, ~~results~~the ofCompany ~~operations~~believes ~~and~~the ~~cash~~disclosures which are made are ~~flows~~adequate ~~for~~to ~~all~~make ~~periods~~the information presented not misleading. The ~~results~~consolidated financial ofstatements ~~operations~~and ~~for~~footnotes ~~the~~included ~~three~~in ~~and nine~~this ~~months~~Form 10-Q ~~ended~~should ~~September 30,~~be ~~2002~~read ~~and~~in conjunction ~~2001~~with ~~are~~the ~~not~~consolidated ~~necessarily~~financial ~~indicative~~statements ofand notes thereto ~~the~~included ~~results~~in ofthe ~~operations~~Company’s ~~which~~Annual ~~might~~Report beon ~~expected~~Form 10-K for the ~~entire~~ year orended December 31, ~~any~~2002. Certain reclassifications have been made to the 2002 ~~other~~financial ~~interim~~statements ~~periods~~to make them conform to the current presentation.

In the opinion of management, the financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position, results of operations and cash flows for all periods presented. The results of operations for the three and six months ended June 30, 2003 and 2002 are not necessarily indicative of the results of operations which might be expected for the entire year or any other interim periods.

Revenue Recognition

Access revenue is recognized when earned. The Company participates in toll revenue pools with other telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the Regulatory Commission of Alaska (“RCA”) within the intrastate jurisdiction and the Federal Communications Commission (“FCC”) within the interstate jurisdiction. Much of the interstate access revenue is initially recorded based on estimates. These estimates are derived from interim financial statements, available separations studies and the most recent information available about achieved rates of return. These estimates are subject to adjustment in future accounting periods, as additional operational information becomes available. To the extent that disputes arise over revenue settlements, the Company’s policy is to defer revenue collected until settlement methodologies are resolved and finalized. During the second quarter of 2002, the Company recognized as revenue $11,066 of previously deferred interstate access revenue and reversed $1,673 of interest expense previously accrued thereon as a result of a favorable ruling by the District of Columbia Court of Appeals related to a dispute on interstate access rates for the Anchorage market. At June 30, 2003 and 2002, the Company had liabilities of $15,423 and $20,656, respectively, related to its estimate of refundable access revenue.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Regulatory Accounting and Regulation

The local telephone exchange operations of the Company account for costs in accordance with the accounting principles for regulated enterprises prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 71, Accounting for the Effects of Certain Types of Regulation. This accounting recognizes the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, under SFAS No. 71, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years. Historically, lives approved for regulatory purposes have approximated economically useful lives. On July 21, 2002, the Company received an order from the RCA which ~~appears~~extended ~~to extend~~ lives approved for ratemaking ~~rate-making~~ purposes beyond the economically useful lives of the underlying assets. Management ispetitioned ~~awaiting~~for ~~further~~reconsideration ~~clarification~~on ~~from~~the ACSA order and the RCA has ~~necessary~~accepted ~~to evaluate~~additional ~~the~~testimony ~~effects~~and held a hearing in June of ~~this~~2003. A final order on the ~~financial~~matter ~~statements~~is ofnot expected until the ~~Company~~second half of 2003. The Company implemented, effective January 1, 2003, higher depreciation rates for its regulated telephone plant for the interstate jurisdiction. As ofa ~~September~~result, the Company has recorded a regulatory asset under SFAS No. 71 of $5,466 as of June 30, ~~2002~~2003 related to depreciation of the regulated telephone plant allocable to its intrastate and local jurisdictions. The Company has also deferred as a regulatory asset $894 of costs incurred in connection with regulatory rate making proceedings, which ~~will~~ beis being amortized over three years starting in ~~future~~2003. The ~~periods~~balance of this regulatory asset was $745 at June 30, 2003. If the Company were not following SFAS No. 71, it would have recorded additional depreciation ~~these~~expense of $5,466 for the intrastate and local jurisdictions and the deferred costs incurred in connection with regulatory rate making proceedings would have been charged to expense as incurred. Non-regulated revenues and costs incurred by the local telephone exchange operations and non-regulated operations of the Company are not accounted for under SFAS No. 71 principles.

~~Change~~Stock inIncentive ~~Accounting Estimate~~Plans

~~During~~ The ~~the~~Company’s ~~period,~~employees ~~the~~participate in various plans of ACS Group. The Company ~~changed~~applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its ~~estimate~~stock incentive plans. Accordingly, no compensation cost has been recognized for options with exercise prices equal to or greater than fair value on the date of grant. No compensation costs were charged to operations for the ~~useful~~six ~~lives~~months ofended June 30, ~~certain~~2003 ~~classes~~or of2002. ~~assets~~If ~~resulting~~compensation incosts ~~additional~~had ~~depreciation~~been ~~expense~~determined ofconsistent with SFAS $2No. 123,~~206~~ Accounting for Stock-Based Compensation, the ~~nine~~Company’s net income (loss) on a pro forma basis for the six months ended ~~September~~June 30, 2003 and 2002. would have been as follows:

Comprehensive loss


		For the six months ended June 30,
		2003		2002

Net income (loss):
	As reported	$	87,420	$	(107,692	)
	Pro forma		87,499		(108,574	)

~~Comprehensive loss for the nine months ended September 30, 2002 and 2001 was $117,871 and $20,327, respectively.~~ The ~~difference~~fair ~~between~~value ~~net loss and comprehensive loss resulted from the adoption of SFAS 133, Accounting~~ for ~~Derivative~~ ~~Instruments~~these ~~and~~options ~~Hedging~~was ~~Activities,~~estimated ~~as amended. The accumulated other comprehensive loss of $17,615~~ at ~~June 30,~~the ~~2002~~date ~~consists~~ of ~~$2,392~~grant ofusing ~~minimum~~a ~~pension~~Black-Scholes ~~liability~~option ~~adjustment~~pricing ~~and~~model ~~$15,223~~with ofthe ~~interest~~following ~~rate~~weighted ~~swap mark to~~average ~~market.~~assumptions ~~The~~for ~~accumulated other comprehensive loss of $13,829 at December 31,~~grants: ~~2001 consists of $2,392 of minimum pension liability adjustment and $11,437 of~~ ~~interest rate swap mark to market.~~

2. NEW ACCOUNTING STANDARDS


	2003			2002

Risk free rate		2.56	%		4.13	%
Dividend yield		0.0	%		0.0	%
Expected volatility factor		65.7	%		54.0	%
Expected option life (years)		6.1			6.1

On August 15, 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective for the Company’s fiscal year beginning January 1, 2003. This statement requires, among other things, the accounting and reporting of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The Company has not yet determined the impact of the adoption of this standard on its financial position, results of operations and cash flows.

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses accounting and reporting of all long-lived assets, except goodwill, that are either held and used or disposed of through sale or other means (see Note 4).

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

2. NEW ACCOUNTING STANDARDS ~~(Continued)~~

In On ~~April~~August 15, ~~2002~~2001, ~~FASB~~the Financial Accounting Standards Board (“FASB”) issued SFAS No. ~~145~~143, ~~Rescission~~Accounting offor ~~FASB~~Asset ~~Statements~~Retirement NoObligations. 4, This ~~44,~~statement ~~and~~is ~~62,~~effective ~~Amendment~~for offinancial ~~FASB~~statements ~~Statement~~issued ~~No. 13,~~for ~~and~~fiscal ~~Technical~~years ~~Corrections~~beginning after June 15, 2002. SFAS No. ~~145~~143 ~~will~~addresses ~~generally~~financial ~~require~~accounting ~~gains~~ and reporting ~~losses~~obligations onassociated ~~extinguishments~~with ofthe ~~debt to~~retirement beof ~~classified~~tangible aslong-lived assets ~~income~~and orthe ~~loss~~associated ~~from~~asset ~~continuing~~retirement ~~operations~~costs. ~~rather~~This ~~than~~standard asgenerally ~~extraordinary~~applies ~~items~~to aslegal ~~previously~~obligations ~~required~~associated ~~under~~with ~~SFAS~~the ~~No. 4.~~retirement ~~Extraordinary~~of long-lived ~~treatment~~assets ~~will~~that beresult ~~required~~from ~~for~~the ~~certain~~acquisition, ~~extinguishments as provided in APB Opinion No. 30. Accordingly~~construction, ~~gains~~development and/or ~~losses~~the normal ~~from~~operation ~~extinguishments~~ of ~~debt~~a ~~for fiscal~~long-lived ~~years~~asset. ~~beginning~~Under ~~after~~the ~~May 15,~~new ~~2002~~accounting ~~will~~method, ~~not~~asset retirement beobligations ~~reported~~are asrecognized ~~extraordinary items~~in ~~unless~~ the ~~extinguishment~~period ~~qualifies~~in aswhich anthey ~~extraordinary~~are ~~item~~incurred if ~~under~~a ~~the provisions~~reasonable estimate of ~~APB~~fair ~~Opinion~~value ~~No. 30.~~can ~~Upon~~be ~~adoption,~~made. ~~any~~When ~~gain~~the orliability ~~loss on~~is ~~extinguishment~~initially ofrecorded, ~~debt~~the ~~previously~~cost ~~classified~~is ascapitalized anand ~~extraordinary~~increases ~~item~~the incarrying ~~prior periods~~value ~~presented that does not meet~~ of the ~~criteria~~related oflong-lived ~~APB Opinion No~~asset. 30 ~~for such~~The ~~classification~~liability ~~will~~is bethen ~~reclassified~~accreted to ~~conform~~its ~~with the provisions of SFAS~~present ~~No. 145.~~value ~~Earlier~~each ~~application~~period ofand the ~~provisions~~capitalized ofcost ~~SFAS~~is ~~No. 145~~depreciated ~~related~~over to the estimated ~~rescission~~useful life of ~~SFAS~~the ~~No. 4~~related ~~is encouraged~~asset. ~~SFAS~~At ~~No. 145~~the ~~does~~settlement ~~not~~date, ~~have~~the ~~any~~obligation ~~impact~~is onsettled ~~the~~for ~~Company’s~~its ~~results~~recorded ofamount ~~operations~~or ~~for~~a ~~the~~gain ~~current~~or ~~periods~~loss ~~reported~~is recognized upon settlement.

On In ~~July 30,~~accordance ~~2002,~~with ~~FASB~~federal ~~issued~~and ~~SFAS~~state ~~No. 146~~regulations, ~~Accounting~~depreciation expense for the ~~Costs~~Company’s local exchange carriers regulated operations have historically ~~Associated~~included ~~with~~an ~~Exit~~additional orprovision ~~Disposal~~for ~~Activities~~cost of removal. Under SFAS No. ~~146~~143, ~~requires companies~~the ~~recognize~~additional ~~costs~~cost ~~associated~~of ~~with~~removal ~~exit~~provision orwould ~~disposal~~no ~~activities~~longer ~~when~~be ~~they~~included ~~are~~in ~~incurred~~depreciation ~~rather~~expense, ~~than~~because atit does not meet the ~~date~~recognition and measurement principles of aan ~~commitment~~asset toretirement anobligation. ~~exit~~On orDecember 20, ~~disposal~~2002, ~~plan.~~the FCC ~~SFAS~~notified ~~No. 146~~local isexchange tocarriers bethat ~~applied~~they ~~prospectively~~should tonot ~~exit~~adopt orthe ~~disposal~~provisions ~~activities~~of ~~initiated~~SFAS ~~after December~~No. ~~31,~~143 ~~2002.~~unless ~~The~~specifically ~~Company~~required ~~does~~by ~~not~~the ~~believe~~FCC in the ~~adoption~~future. As a result of ~~this~~the ~~statement~~FCC ruling, the Company will ~~have~~continue to record a ~~material~~regulatory ~~impact~~liability for oncost of removal for its ~~financial~~local ~~position, results~~exchange ofcarriers ~~operations,~~subsidiaries orthat ~~cash~~follow SFAS ~~flows~~No. 71 accounting.

3 The Company applied the provisions of SFAS No. 143 ~~GOODWILL~~to ~~AND~~its ~~OTHER~~nonregulated subsidiaries ~~INTANGIBLE~~effective ~~ASSETS~~January 1, 2003. The Company has cell site leases which typically have terms of 10 years that contain contractual obligations to restore the site to its original condition. Since the Company plans to renew these leases indefinitely, it is unable to determine when it might have to perform the restoration of the cell sites to their original condition. The Company is therefore unable to estimate the fair value of these asset retirement obligations and has not recorded a liability under SFAS No. 143.

~~Effective~~ In ~~January 1,~~June 2002, ~~the~~FASB ~~Company~~issued ~~adopted~~ SFAS No. ~~142~~146, ~~Goodwill~~Accounting ~~and Other~~for ~~Intangible~~Costs ~~Assets.~~Associated with InExit ~~accordance~~or ~~with~~Disposal ~~the~~Activities. ~~guidelines~~SFAS ofNo. 146 ~~this~~requires ~~accounting~~that companies ~~principle,~~recognize ~~goodwill~~costs ~~and~~associated ~~indefinite-lived~~with ~~intangible~~exit ~~assets~~or ~~are~~disposal noactivities ~~longer~~when they are ~~amortized~~incurred ~~but~~rather ~~will~~than beat ~~assessed~~the ~~for~~date ~~impairment~~of ona atcommitment ~~least~~to an ~~annual~~exit ~~basis.~~or ~~SFAS~~disposal plan. SFAS No. ~~142~~146 ~~also~~is ~~requires~~to ~~that~~be ~~intangible~~applied ~~assets~~prospectively ~~with~~to ~~estimable~~exit ~~useful~~or ~~lives~~disposal beactivities ~~amortized~~initiated ~~over~~after ~~their~~December 31, ~~respective~~2002. ~~estimated~~The ~~useful~~Company’s ~~lives~~adoption toof ~~their~~this ~~estimated~~statement did ~~residual~~not ~~values~~have a material impact on its financial position, ~~and~~results ~~reviewed~~of ~~for~~operations, ~~impairment~~or cash flows.

~~Goodwill~~ On ~~amortization~~December 31, ~~which~~2002, ~~was~~FASB $7issued SFAS No. 148,~~741~~ Accounting for ~~the~~Stock-Based Compensation—Transition ~~year~~and ~~ended~~Disclosure. ~~December~~SFAS No. 31148 amends SFAS No. 123, ~~2001,~~Accounting ~~ceased~~for ~~effective~~Stock-Based ~~January 1~~Compensation, ~~2002.~~to Inprovide alternative methods of transition for a voluntary change to the ~~first~~fair ~~quarter~~value based method of ~~2002~~accounting for stock-based employee compensation. In addition, ~~pursuant~~SFAS No. 148 amends the todisclosure requirements of SFAS No. ~~142,~~123 ~~the~~to ~~Company~~require ~~completed~~prominent ~~its~~disclosures ~~reassessment~~in both annual and interim financial statements about the method of ~~previously~~accounting for ~~recognized~~stock-based ~~intangible~~employee ~~assets,~~compensation and ~~ceased~~the ~~amortization~~effect of ~~indefinite-lived~~the method used on reported ~~intangible~~results. ~~assets~~The Company does not currently have plans to change to the fair value method of accounting for our stock based compensation. The disclosure requirements are now effective.

~~SFAS~~ On ~~No.~~April ~~142~~30, ~~requires~~2003, ~~that~~FASB ~~goodwill~~issued beStatement ~~tested~~No. 149, ~~for~~Amendment ~~impairment~~of atStatement ~~the~~133 on ~~reporting~~Derivative ~~unit~~Instruments ~~level upon adoption~~ and atHedging ~~least annually thereafter, utilizing a two-step methodology~~Activities. The ~~initial~~Statement ~~step~~amends ~~requires~~and clarifies ~~the~~accounting ~~Company~~for toderivative ~~determine~~instruments, ~~the fair~~including ~~value~~certain ofderivative instruments ~~each~~embedded ~~reporting~~in ~~unit~~other contracts, and ~~compare~~for ithedging toactivities ~~the carrying value,~~under ~~including~~Statement ~~goodwill,~~133. ofThis ~~such~~Statement ~~unit.~~is Ifeffective ~~the~~for ~~fair~~contracts ~~value~~entered ~~exceeds~~into ~~the~~or modified ~~carrying~~after ~~value~~June 30, no ~~impairment loss would be recognized. However~~2003, ifand ~~the~~for ~~carrying~~hedging ~~value~~relationships ofdesignated ~~the~~after ~~reporting~~June 30, ~~unit~~2003. ~~exceeds~~The ~~its~~Company ~~fair~~does ~~value,~~not believe the ~~goodwill~~adoption of ~~the~~this ~~unit~~statement ~~may be~~will ~~impaired.~~have ~~The~~a ~~amount,~~material ifimpact ~~any,~~on ofits ~~the~~financial ~~impairment~~position, isresults ~~then~~of ~~measured~~operations, ~~in the second~~or ~~step~~cash flows.

The Company has determined that its business segments constitute reporting units, with the exception of the Internet segment, which includes two reporting units. Those reporting units are (1) Internet service and (2) IP based private network service. The Company completed the initial step of impairment testing during the second quarter which indicated that goodwill recorded in the local telephone, Internet, and interexchange segments was impaired as of January 1, 2002. Due to the potential impairment, the Company then completed the second step of the test to measure the amount of the impairment. The Company determined the fair value of each reporting unit for purposes of this test primarily by using a discounted cash flow valuation technique. Significant estimates used in the valuation include estimates of future cash flows, both future short-term and long-term growth rates, and estimated cost of capital for purposes of arriving at a discount factor. Based on that analysis, a transitional impairment loss of $105,350 was recognized as the cumulative effect of a change in accounting principle in the consolidated statement of operations. On an ongoing basis, the Company expects to perform its annual impairment test during the fourth quarter absent any impairment indicators.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

32. ~~GOODWILL~~NEW ~~AND~~ACCOUNTING ~~OTHER~~STANDARDS ~~INTANGIBLE ASSETS~~ (Continued)

In On ~~connection~~May 15, ~~with~~2003, ~~the~~FASB ~~Company’s~~issued ~~adoption~~Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of aboth ~~plan~~Liabilities toand ~~discontinue~~Equity. ~~its~~The ~~wireless~~new ~~cable~~Statement ~~television~~requires ~~service~~that ~~segment~~certain ~~during~~financial ~~the~~instruments ~~first~~that, ~~quarter~~under ofprevious guidance, ~~2002~~issuers could account for as equity, ~~the~~be classified as liabilities in ~~goodwill~~statements of ~~that~~financial ~~segment~~position. ~~was~~Most ~~considered~~of ~~impaired~~the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and anotherwise ~~impairment~~is ~~charge~~effective at the beginning of the first interim period $3beginning after June 15,~~165~~ is2003. ~~included~~The ~~with~~adoption of SFAS No. 150 has no effect on the Company’s financial position, results of ~~discontinued~~ operations or cash flows.

~~The~~ In ~~changes~~November in2002, the ~~carrying~~FASB issued FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of ~~goodwill~~the obligation it assumes under that guarantee. FIN 45 also requires additional disclosures by ~~segment~~a ~~for~~guarantor in its interim and annual financial statements about the ~~nine~~obligations associated with guarantees issued. The ~~months~~disclosure ~~ended~~requirements ~~September~~are effective for financial statements of interim or annual periods ending after December 3015, 2002. The recognition and measurement provisions are aseffective ~~follows:~~on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 had no effect on the Company’s financial position, results of operations or cash flows.

	Local													All
	Telephone			Cellular		Directory		Internet			Interexchange			Other			Total
Balance, December 31, 2001	$	191,351		$	8,851	$	38,831	$	8,146		$	151		$	3,165		$	250,495
Impairment losses included in discontinued operations		—			—		—		—			—			(3,165	)		(3,165	)
Impairment losses		(97,053	)		—		—		(8,146	)		(151	)		—			(105,350	)
Balance, September 30, 2002	$	94,298		$	8,851	$	38,831	$	—		$	—		$	—		$	141,980

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 addresses when a company should include in its financial statements the assets, liabilities and activities of a variable interest entity. FIN 46 defines variable interest entities as those entities with a business purpose that either do not have any equity investors with voting rights, or have equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN 46 consolidation requirements are effective for all variable interest entities created after January 31, 2003, and to pre-existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain disclosure requirements are effective for financial statements issued after January 31, 2003. The adoption of FIN 46 has no effect on the Company’s financial position, results of operations or cash flows.

~~Provided~~3. ~~below is a reconciliation of previously reported financial statement information to pro forma amounts that reflect the elimination of goodwill and indefinite~~LONG-~~lived~~TERM ~~intangible amortization for the comparable nine months ended September 30, 2001 prior to adoption of SFAS No. 142:~~ OBLIGATIONS

	Nine Months Ended
	September 30,
	2002			2001
Reported net loss	$	(114,085	)	$	(7,132	)
Add back:
Goodwill amortization		—			5,803
Indefinite-lived intangible amortization		—			396
Cumulative effect of change in accounting principle		105,350			—
Adjusted net loss	$	(8,735	)	$	(933	)

During the first quarter of 2003, the Company’s lenders approved an amendment and waiver to its Senior Credit Facility that, among other things, permitted the Company to sell its directory business and required that in the event the sale was completed, 75% of proceeds would be used to repay outstanding Senior Credit Facility term loans. This amendment and waiver became effective on May 8, 2003, and on May 13, 2003, the Company paid down $106,650 of the outstanding Senior Credit Facility term loans. Long-term obligations consists of the following at June 30, 2003 and December 31, 2002:

The following table provides the gross carrying value and accumulated amortization for each major class of intangible asset as of September 30, 2002 based on the Company’s reassessment of previously recognized intangible assets and their remaining amortization lives in accordance with the adoption of SFAS No. 142:


	2003		2002

Senior credit facility term loan – tranche A	$	105,727	$	148,500
Senior credit facility term loan – tranche B		113,158		148,500
Senior credit facility term loan – tranche C		101,842		133,650
9 3/8% senior subordinated notes due 2009		150,000		150,000
Capital leases and other long-term obligations		11,365		12,181

		482,092		592,831
Less current portion		4,909		5,933

Long-term obligations, net of current portion	$	477,183	$	586,898

	Gross
	Carrying		Accumulated			Amortizable
	Amount		Amortization			Life
Amortizable intangible assets:
Customer list	$	915	$	(229	)		5
Other intangible assets		2,625		(1,462	)		5
Total amortizable intangible assets	$	3,540	$	(1,691	)
Indefinite-lived intangible assets:
Cellular licenses	$	18,194
PCS licenses		3,023
Domain names and trade names		80
Total indefinite-lived intangible assets	$	21,297

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

3. ~~GOODWILL~~LONG-TERM ~~AND~~OBLIGATIONS ~~OTHER INTANGIBLE ASSETS~~ (Continued)

The ~~total~~aggregate ~~intangible~~maturities ~~amortization~~of ~~expense~~long-term ~~for~~obligations ~~the nine months ended September 30, 2002 and 2001 was $516 and $904, respectively. The estimated amortization expense~~ for each of the ~~next~~ five years ~~ending~~and ~~December~~thereafter subsequent to June 3130, is2003 are as follows:

2002		$	708
	2003 (July 1-December 31)			$	729
2003		$	708
2004 (January 1 - December 31)					4,979
2004		$	690
2005 (January 1 - December 31)					4,178
2005		$	183
2006 (January 1 - December 31)					106,755
2006		$	92
2007 (January 1 - December 31)					111,786
		Thereafter			253,665
				$	482,092

4. ~~DISCONTINUED~~GAIN ~~OPERATIONS~~ON DISPOSAL OF ASSETS

On ~~March~~April 3028, ~~2002~~2003, the Company ~~approved~~entered into an underwriting agreement with a ~~plan~~syndicate toof ~~sell~~Canadian ~~its~~investment ~~wireless~~banks ~~cable television~~to ~~service~~complete ~~segment.~~the Assale of a ~~result~~majority interest ofin ~~this~~the ~~decision~~newly formed ACS Media, LLC (the ~~operating~~“Directories ~~revenue~~Business”). The ~~and~~Company ~~expense~~subsequently offiled ~~this~~on ~~segment~~April 29, ~~has~~2003, ~~been~~a ~~classified~~final asprospectus ~~discontinued~~with ~~operations~~Canadian ~~under~~securities ~~SFAS~~regulators ~~No. 144,~~to ~~Accounting~~sell ~~for~~a ~~the~~majority ~~Impairment~~interest orin ~~Disposal~~its ofDirectories ~~Long-Lived~~Business ~~Assets,~~in ~~for~~a ~~all~~public ~~periods~~offering ~~presented~~in ~~and~~Canada to the ~~assets~~ACS ~~and~~Media ~~liabilities~~Income ofFund (the “Fund”), which ~~disposal~~is ~~group~~a ~~have~~Canadian ~~been~~income ~~written~~fund. ~~down~~The asoffering ofwas ~~March 30,~~sponsored ~~2002~~by tothe ~~their~~Company. ~~fair~~The transaction ~~value~~closed on May 8, ~~net~~ of2003, ~~expected~~with the Company selling ~~expense~~an 87.42% ~~The~~interest and ~~following~~retaining ~~discloses~~a ~~the~~12.58% ~~results~~interest ofin the ~~discontinued~~ ~~operations~~Directories Business. The Company is accounting for ~~the~~its ~~nine~~12.58% ~~months~~interest ~~ended~~in ~~September 30,~~the ~~2002~~Directories ~~and~~Business ~~2001:~~under the equity method.

	Nine Months Ended
	September 30,
	2002			2001
Operating revenue	$	594		$	733
Operating expense		1,025			1,967
Operating loss		(431	)		(1,234	)
Interest expense		(32	)		(93	)
Loss from operations of discontinued segment		(463	)		(1,327	)
Write down of net assets to fair value		(7,060	)		—
Loss from discontinued operations	$	(7,523	)	$	(1,327	)

The Fund sold 17,500 units on May 8, 2003 for net proceeds of $110,435, after deducting its underwriters’ fees and transaction expenses of $10,246. The Fund’s net proceeds were used to acquire from the Company an 87.42% interest in the Directories Business. The Company received net proceeds of $105,059 after deducting its fees and expenses associated with the transaction of $5,376.

~~Assets~~ The ~~held~~Company ~~for~~entered ~~sale~~into atan ~~September~~arrangement with the Metropolitan Life Insurance Company (MetLife) to provide a credit facility to its Directories Business on May 308, ~~2002~~2003 ~~consist~~immediately prior to the sale of its Directories Business to the ~~following:~~Fund. The Directories Business then drew $35,000 of term loans against the facility, using $1,468 to pay fees and expenses related to the debt issuance and $87 to prepay an annual agency fee to MetLife. Of the $33,445 in net cash proceeds, $413 was deposited into the Directories Business as cash working capital and $33,032 was distributed to the Company as a dividend. The credit facility is non-recourse to the Company.

Accounts receivable, net of allowance of $38	$	52
Other current assets		10
Property, plant and equipment		211
Intangible assets		100
Current liabilities		(102	)
Assets held for sale	$	271

The Company’s retained 12.58% minority interest was recorded at an initial book value of $1,077 representing the pro-rata retained ownership at historical book value. The Company’s retained 12.58% interest in ACS Media LLC is subject to an exchange rights agreement that permits its conversion to units of the Fund after the expiration of a 90 day lockup period. Units of the Fund are traded on the Toronto Stock Exchange under the symbol AYP.UN. The Company can sell its exchanged units to a qualified investor or investors in a private placement transaction or offer them in a secondary public offering at its option after the expiration of a 180 day lockup agreement that expires on November 4, 2003 with the underwriters of the Fund’s offering in Canada.

The Company realized a gain on foreign exchange of $4,104 as a result of currency fluctuation from April 28, 2003, the date the underwriting and investment agreements were executed, to May 8, 2003, the date the offering closed and the transaction was consummated. The foreign exchange gain is included in Interest and other income in the Consolidated Statement of Operations. The Company recognized a gain on disposition of $97,578 on a pre-tax basis, exclusive of the $4,104 exchange gain. The income tax expense associated with the gain on disposition of $40,114 was offset by a reduction in the valuation allowance that had been established for the tax benefit of prior net operating losses.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

54. ~~STOCK~~GAIN ~~INCENTIVE~~ON ~~PLANS~~DISPOSAL OF ASSETS (Continued)

The ~~Company’s~~following ~~employees~~table ~~participate~~indicates ~~in various plans of ACS Group, which through its Compensation Committee of~~ the ~~Board~~Company’s ofbasis ~~Directors,~~in ~~may~~assets ~~grant~~sold ~~stock options, stock appreciation rights and other awards~~ to ~~officers, employees~~ and ~~non-employee~~liabilities ~~directors.~~assumed At September 30, 2002, ACS Group has reserved a total of 6,060 shares of authorized common stock for issuance under the various plans. The plans terminate in approximately 10 years from the date of adoption and allow forfeited options to be reissued. Unless otherwise determined by the ~~Compensation~~ ~~Committee,~~Fund ~~options will vest ratably on each of the first four anniversaries after the grant date~~ and ~~will~~its ~~have~~retained aninterest ~~exercise~~in ~~price equal to the fair market value of the common stock on the date of grant. The term of options granted under the plan may not exceed 10 years. On April 3, 2002,~~ ACS ~~Group merged~~Media ~~the ALEC Holdings, Inc~~LLC. ~~1999 Stock Incentive Plan into the Alaska~~ ~~Communications Systems Group, Inc. 1999 Stock Incentive Plan.~~

Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan


Net proceeds of the Transaction			$	105,059

Basis in directories business sold:
	Assets sold to the Fund:
		Current assets	$	4,214
		Property, plant and equipment, net		90
		Goodwill		38,821
		Debt issue costs		1,468
		Current liabilities		(1,035	)
		Long-term debt		(35,000	)

Basis of Directories Business				8,558
Equity in minority interest retained				1,077

Basis in net assets sold to the Fund			$	7,481

Gain on sale of Directories Business			$	97,578

~~ACS~~ The ~~Group~~Company has ~~reserved~~entered ~~4,910~~into ~~shares~~several ~~under~~long-term ~~this~~contracts ~~plan~~with the Directories Business, ~~which~~including ~~was~~a ~~adopted~~50-year inpublishing agreement, a 50-year ~~November~~license ~~1999~~agreement, ina ~~connection~~45-year ~~with~~non-compete ~~its~~agreement, ~~initial~~and ~~public~~a ~~offering~~10-year billing and collection agreement. AtThe ~~September 30,~~Company will also maintain minority representation ~~2002,~~through ~~5,712~~up ~~options~~to ~~have~~three ~~been~~Managers ~~granted~~of the permitted nine Managers of ACS Media LLC so long as it owns an interest of 10% or more in the Directories Business. Currently, 1Charles E. Robinson,~~618~~ ~~have~~the ~~been~~Company’s ~~forfeited~~Chairman and CEO, ~~441~~and ~~have~~W. ~~been~~Dexter ~~exercised~~Paine, III and ~~816~~Wray ~~shares~~T. ~~are~~Thorn, ~~available~~both ~~for~~Directors ~~grant~~of ~~under~~the Company and employees of Fox Paine & Company, the ~~plan~~Company’s majority shareholder, are Managers of ACS Media LLC.

On5. ~~February 11,~~DISCONTINUED 2002, the Parent’s Board of Directors approved the grant of options to purchase 150 shares under the plan to an employee at an exercise price equal to the fair market value of the common stock on the date of grant, vesting over four years ratably. OPERATIONS

On ~~February~~March 2030, 2002, the ~~Parent’s~~Company ~~Board~~approved a plan to sell its wireless cable television service segment. As a result of ~~Directors~~this ~~approved~~decision, the ~~grant~~operating revenue and expense of ~~options~~this tosegment ~~purchase~~has 80been ~~shares~~classified as discontinued operations under SFAS No. 144, Accounting for the ~~plan~~Impairment toor ~~employees~~Disposal atof anLong-Lived Assets, ~~exercise~~for all periods presented and the assets and liabilities of the ~~price~~disposal ~~equal~~group have been written down to ~~the~~their fair ~~market~~ value, net of ~~the~~expected selling ~~common~~expenses. ~~stock~~The onincome ~~the~~tax ~~date~~benefit in all periods was offset by a valuation allowance. The Company completed its disposal of ~~grant,~~its wireless cable ~~vesting~~television ~~over~~segment ~~three~~as ~~years~~of ~~ratably~~March 31, 2003.

On The ~~March 19,~~following ~~2002,~~discloses the ~~Parent’s~~results ~~Board~~ of ~~Directors approved~~ the ~~grant~~discontinued ~~of options~~operations tofor ~~purchase 22 shares under~~ the ~~plan to employees at an exercise price~~ ~~equal~~six tomonths ~~the~~ended ~~fair market value of the common stock on the date of grant~~June 30, ~~vesting~~ ~~over~~2003 ~~three~~and ~~years ratably.~~2002:

On May 8, 2002, the Parent’s Board of Directors approved the grant of options to purchase 25 shares under the plan to an employee at an exercise price equal to the fair market value of the common stock on the date of grant, vesting over four years.


	Six Months Ended June 30,
	2003			2002

Operating revenue	$	110		$	425
Operating expense		162			720

Operating loss		(52	)		(295	)
Interest expense		—			(32	)

Loss from operations of discontinued segment		(52	)		(327	)
Write down of net assets to fair value		—			(7,060	)

Loss from discontinued operations	$	(52	)	$	(7,387	)

Alaska Communications Systems Group, Inc. 1999 Non-Employee Director Stock Compensation Plan

ACS Group adopted its non-employee director stock compensation plan in November 1999 in connection with its initial public offering. ACS Group has reserved 150 shares under this plan. At September 30, 2002, 68 shares have been awarded and 82 shares are available for grant under the plan. Directors are required to receive not less than 25% of their annual retainer and meeting fees in the form of ACS Group’s stock, and may elect to receive up to 100% of director’s compensation in the form of stock.

On March 29, 2002, seven shares under the plan were awarded to ACS Group’s directors, of which five were elected to be deferred until termination of service by the directors.

On June 28, 2002, 10 shares under the plan were awarded to ACS Group’s directors, of which seven were elected to be deferred until termination of service by the directors.

On September 28, 2002, 24 shares under the plan were awarded to ACS Group’s directors, of which 17 were elected to be deferred until termination of service by the directors.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

56. ~~STOCK~~CUMULATIVE ~~INCENTIVE~~EFFECT ~~PLANS~~OF ~~(Continued)~~CHANGE IN ACCOUNTING PRINCIPLE

~~Alaska~~ Effective ~~Communications~~January 1, ~~Systems~~2002, ~~Group~~the Company adopted SFAS No. 142, ~~Inc~~Goodwill and Other Intangible Assets. ~~1999~~SFAS ~~Employee~~No. 142 ~~Stock~~requires ~~Purchase~~that ~~Plan~~goodwill be tested for impairment at the reporting unit level upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is then measured in the second step. The second step of the goodwill impairment test compares the implied fair value goodwill of the reporting unit with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is the excess of the fair value of a reporting unit over the amounts assigned to assets and liabilities. If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

~~This~~ The ~~plan~~Company ~~was~~has ~~also~~determined ~~adopted~~that inits ~~connection~~business segments constitute reporting units, with ~~ACS~~the ~~Group’s~~exception ~~initial~~of ~~public offering~~the inInternet ~~November~~segment, ~~1999~~which includes two reporting units. AtThose ~~September 30,~~reporting ~~2002,~~units ~~270~~are ~~shares~~(1) Internet ~~have~~service ~~been~~and ~~issued~~(2) IP based private ~~under~~network service. The Company completed the ~~plan~~initial ~~and~~step ~~730~~of ~~shares~~impairment ~~are~~testing which ~~available~~indicated ~~for~~that ~~issuance~~goodwill ~~and~~recorded ~~sale.~~in ~~The~~the ~~plan~~local telephone, Internet, and ~~will~~interexchange ~~terminate~~segments onwas ~~December~~impaired as of January 311, ~~2009~~2002. ~~All~~Due ~~ACS~~to ~~Group~~the ~~employees~~potential impairment, ~~and~~the ~~all~~Company then completed the second step of the test to measure ~~employees~~the amount of ~~designated~~the ~~subsidiaries~~impairment. ~~generally~~The ~~will~~Company bedetermined ~~eligible~~the tofair ~~participate~~value of each reporting unit for purposes of this test primarily by using a discounted cash flow valuation technique. Significant estimates used in the ~~purchase~~valuation ~~plan,~~include estimates ~~other~~of ~~than~~future ~~employees~~cash ~~whose~~flows, ~~customary~~both ~~employment~~future isshort-term 20and long-term growth ~~hours~~rates, orand ~~less~~the ~~per~~Company’s ~~week~~estimated orcost isof capital for ~~not~~purposes ~~more~~of ~~than~~arriving ~~five~~at a ~~months~~discount infactor. aBased ~~calendar~~on ~~year~~that analysis, a transitional impairment loss of or$105,350 ~~who~~was ~~are~~recognized ~~ineligible~~as tothe ~~participate~~cumulative ~~due~~effect toof ~~restrictions~~a ~~under~~change in accounting principle in the ~~Internal~~consolidated statement of operations. The income tax benefit ~~Revenue~~of ~~Code~~$39,540 was offset by a valuation allowance.

On7. ~~June 28,~~STOCK ~~2002,~~INCENTIVE ~~53 shares were issued under the plan.~~PLANS

The Company’s employees participate in various plans of ACS Group, which through its Compensation Committee of the Board of Directors, may grant stock options, stock appreciation rights and other awards to officers, employees and non-employee directors. At June 30, 2003, ACS Group has reserved a total of 6,060 shares of authorized common stock for issuance under the plans. ~~BUSINESS~~The ~~SEGMENTS~~plans terminate in approximately 10 years from the date of adoption and allow forfeited options to be reissued. In general, options under the plans vest ratably over three, four or five years and will have an exercise price equal to the fair market value of the common stock on the date of grant. The term of options granted under the plan may not exceed 10 years.

~~The~~Alaska ~~Company~~Communications ~~has~~Systems ~~five reportable segments: local telephone~~Group, ~~cellular, directory, Internet and interexchange~~Inc. ~~Local~~1999 ~~telephone~~Stock ~~provides~~Incentive ~~landline~~Plan ~~telecommunications services, and consists of local telephone service, network~~ ~~access and deregulated and other revenue; cellular provides wireless~~ telecommunications service; directory provides yellow page advertising and other related products; Internet provides Internet service and advanced IP based private networks; and interexchange provides switched and dedicated long distance services. Each reportable segment is a strategic business under separate management and offering different services than those offered by the other segments. The Company also has a wireless cable television service segment that did not meet the criteria for a reportable segment and was previously included in “All Other” that is now reported as discontinued operations.

~~The~~ ACS ~~Company~~Group ~~also~~has ~~incurs~~reserved ~~interest expense~~4,910 ~~interest~~shares ~~income,~~under ~~equity~~this ~~in earnings of investments~~plan, ~~goodwill amortization in 2001 on the original May 14, 1999 purchases, and other operating and non operating income and expense at the corporate level~~ which ~~are~~was ~~not~~adopted ~~allocated to the business segments, nor are they evaluated~~ by the ~~chief~~Parent ~~operating decision maker~~ in ~~analyzing~~November ~~the performance of the business segments~~1999. ~~These~~At ~~non~~June 30 ~~operating~~2003, ~~income~~5,712 ~~and~~options ~~expense~~have ~~items~~been ~~are~~granted, ~~provided~~2,420 inhave ~~the~~been ~~accompanying~~forfeited, ~~table~~441 ~~under~~have ~~the~~been ~~caption~~exercised, ~~“All Other” in order to assist the users of these financial statements in reconciling the operating results~~ and ~~total~~1,618 ~~assets~~shares ~~of the business segments to the consolidated financial statements. Common use assets~~ are ~~held at the Company and are allocated to the~~ ~~business~~available ~~segments based on operating revenue. Included in the caption “All Other” are also the net assets held~~ for ~~sale~~grant ofunder ~~$271 and other net liabilities of~~ the ~~discontinued operation that would not be sold of $5,865~~plan. ~~The accounting~~ ~~policies of the segments are the same as those described in the summary of~~ ~~significant accounting policies.~~

~~The~~Alaska ~~following~~Communications ~~table~~Systems ~~illustrates~~Group, ~~selected~~Inc. ~~financial~~1999 ~~data~~Non-Employee ~~for~~Director ~~each segment~~Stock asCompensation ~~of and for the nine months ended September 30, 2002:~~Plan

	Local													All
	Telephone		Cellular			Directory		Internet			Interexchange			Other			Eliminations			Total
Operating revenue	$	172,128	$	32,455		$	25,382	$	14,815		$	22,361		$	18,714		$	(26,610	)	$	259,245
Depreciation and amortization		41,401		4,134			28		4,773			1,700			9,654			—			61,690
Operating income (loss)		24,071		3,553			14,975		(15,286	)		(599	)		6,969			(59	)		33,624
Interest expense		627		(3	)		—		(95	)		(226	)		(36,765	)		—			(36,462	)
Interest income		2		3			—		—			2			1,734			—			1,741
Income tax provision (benefit)		10,010		1,452			6,145		—			—			(17,607	)		—			—
Income (loss) from continuing operations		14,690		2,100			8,830		(15,381	)		(823	)		(10,569	)		(59	)		(1,212	)
Total assets		607,288		102,957			45,650		(14,520	)		19,354			12,727			—			773,456
Capital expenditures		20,937		8,554			512		15,583			—			6,973			—			52,559

The non-employee director stock compensation plan was adopted by ACS Group in November 1999. ACS Group has reserved 150 shares under this plan. At June 30, 2003, 110 shares have been awarded and 40 shares are available for grant under the plan. Prior to 2003, directors were required to receive not less than 25% of their annual retainer and meeting fees in the form of ACS Group’s stock, and may have elected to receive up to 100% of director’s compensation in the form of stock. Starting in 2003, directors no longer have the option of receiving stock and receive all of their annual retainer and meeting fees in cash.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

67. ~~BUSINESS~~STOCK ~~SEGMENTS~~INCENTIVE PLANS (Continued)

~~Operating~~Alaska ~~revenue~~Communications ~~disclosed~~Systems ~~above includes intersegment operating revenue of $16~~Group,~~586~~ ~~for local telephone, $1,350 for cellular, $1,092 for directory and $10,623 for interexchange~~Inc. In1999 ~~accordance~~Employee ~~with~~Stock ~~SFAS~~Purchase ~~No. 71, intercompany revenue~~Plan ~~between local telephone and all other segments is not eliminated above.~~

~~The~~ This ~~following~~plan ~~table~~was ~~illustrates~~also ~~selected~~adopted ~~financial~~by ~~data~~ACS Group in November 1999. ACS Group has reserved 1,000 shares under this plan. At June 30, 2003, 547 shares are available for ~~each~~issuance ~~segment~~and sale. On June 30, 2003, 87 shares were issued under asthe ofplan. The plan will terminate on December 31, 2009. All ACS Group employees and ~~for~~all of the ~~nine~~employees of designated subsidiaries generally will be eligible to participate in the purchase plan, other than employees whose customary employment is 20 hours or less per week or is for not more than five months ~~ended~~in a ~~September 30~~calendar year, ~~2001:~~or who are ineligible to participate due to restrictions under the Internal Revenue Code.

	Local														All
	Telephone			Cellular			Directory		Internet			Interexchange			Other			Eliminations			Total
Operating revenue	$	163,018		$	31,824		$	24,857	$	9,900		$	23,718		$	12,604		$	(19,789	)	$	246,132
Depreciation and amortization		39,613			4,373			1		1,709			1,711			11,347			—			58,754
Operating income (loss)		24,567			4,504			14,349		(7,018	)		(1,586	)		298			—			35,114
Interest expense		(1,291	)		(34	)		—		(77	)		(227	)		(42,281	)		—			(43,910	)
Interest income		4			14			—		—			—			2,845			—			2,863
Income tax provision (benefit)		9,470			1,917			5,900		—			—			(17,434	)		—			(147	)
Income (loss) from continuing operations		13,822			2,626			8,449		(7,078	)		(1,810	)		(21,814	)		—			(5,805	)
Total assets		673,745			115,266			47,623		8,928			36,181			23,942			—			905,685
Capital expenditures		30,962			5,953			21		16,971			19,504			1,148			—			74,559

8. BUSINESS SEGMENTS

~~Operating~~ The ~~revenue~~Company ~~disclosed~~has ~~above~~four ~~include~~reportable ~~intersegment~~segments: ~~operating~~local ~~revenue~~telephone, wireless, ofInternet ~~$15~~and interexchange. Local telephone provides landline telecommunications services,~~981~~ ~~for~~and consists of local telephone, $1service,~~018~~ ~~for~~network access ~~cellular,~~and ~~$950~~deregulated ~~for~~and ~~directory~~other revenue; wireless provides wireless telecommunications service; Internet provides Internet service and advanced IP ~~$10,609~~based ~~for~~private networks; and interexchange. Inprovides ~~accordance~~switched ~~with~~and ~~SFAS~~dedicated Nolong distance services. ~~71,~~ ~~intercompany~~Each ~~revenue between~~reportable ~~local~~segment ~~telephone~~is a strategic business under separate management and ~~all~~offering different services than those offered by the other segments. isThe ~~not~~Company ~~eliminated~~evaluates ~~above~~the performance of its segments based on operating income (loss).

~~The~~ Previously, ~~following~~the ~~table~~Company ~~illustrates~~reported ~~selected~~its ~~financial~~Directories ~~data~~Business ~~for~~as ~~each~~a separate segment. As discussed in Note 4, the Company sold an 87.42% interest in its asDirectories Business during the second quarter of 2003 and ~~for~~is no longer directly engaged in day-to-day management of that business. Therefore, the Directories ~~three~~Business ~~months~~no ~~ended~~longer ~~September 30~~constitutes a reportable segment. Accordingly, the ~~2002:~~historical operating results for the Directories Business are included in “All Other” in the accompanying tables.

	Local														All
	Telephone			Cellular			Directory		Internet			Interexchange			Other			Eliminations			Total
Operating revenue	$	52,815		$	11,919		$	8,360	$	6,422		$	7,723		$	8,818		$	(11,727	)	$	84,330
Depreciation and amortization		13,926			1,379			26		1,799			562			4,766			—			22,458
Operating income (loss)		1,126			1,627			4,919		(5,354	)		(33	)		3,646			(22	)		5,909
Interest expense		(182	)		(1	)		—		(40	)		(75	)		(12,446	)		—			(12,744	)
Interest income		1			2			—		—			2			565			—			570
Income tax provision (benefit)		439			656			2,011		—			—			(3,106	)		—			—
Income (loss) from continuing operations		506			967			2,908		(5,394	)		(106	)		(5,116	)		(22	)		(6,257	)
Total assets		592,926			105,852			45,166		(10,394	)		19,951			19,955			—			773,456
Capital expenditures		7,642			3,443			76		5,484			—			1,360			—			18,005

The Company also incurs interest expense, interest income, equity in earnings of investments, and other operating and non operating income and expense at the corporate level which are not allocated to the business segments, nor are they evaluated by the chief operating decision maker in analyzing the performance of the business segments. These non operating income and expense items are provided in the accompanying table under the caption “All Other” in order to assist the users of these financial statements in reconciling the operating results and total assets of the business segments to the consolidated financial statements. Common use assets are held at the Company and are allocated to the business segments based on operating revenue. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

~~Operating~~ The ~~revenue~~following ~~disclosed~~table ~~above~~illustrates ~~includes~~selected ~~intersegment~~financial ~~operating~~data ~~revenue of $5,263~~ for ~~local~~each ~~telephone,~~segment as ~~$468~~of ~~for cellular, $390 for directory~~ and ~~$3,814~~ for ~~interexchange.~~the Insix ~~accordance~~months ~~with~~ended ~~SFAS No.~~June 7130, ~~intercompany revenue between~~2003: ~~local telephone and all other segments is not eliminated above.~~

The following table illustrates selected financial data for each segment as of and for the three months ended September 30, 2001:


	Local
	Telephone		Wireless		Internet			Interexchange			All Other			Eliminations			Total

Operating revenue	$	109,211	$	22,318	$	16,193		$	15,197		$	24,239		$	(17,841	)	$	169,317
Depreciation and amortization		28,738		2,929		4,832			1,117			7,075			—			44,691
Operating income (loss)		14,438		1,764		(14,845	)		(197	)		108,949			(9	)		110,100
Interest expense		279		2		67			148			27,111			—			27,607
Interest income		1		—		—			—			596			—			597
Equity in earnings of minority investments		—		—		—			—			303			—			303
Income tax provision (benefit)		5,881		724		—			—			(6,605	)		—			—
Income (loss) from continuing operations		8,279		1,038		(14,912	)		(345	)		93,421			(9	)		87,472
Total assets		476,228		76,261		(42,816	)		(1,052	)		166,115			—			674,736
Capital expenditures		8,728		542		3,250			10			5,021			—			17,551

	Local														All
	Telephone			Cellular			Directory		Internet			Interexchange			Other			Eliminations			Total
Operating revenue	$	53,860		$	11,446		$	8,705	$	3,586		$	8,062		$	4,366		$	(7,044	)	$	82,981
Depreciation and amortization		13,384			1,530			1		463			567			3,845			—			19,790
Operating income (loss)		7,508			1,826			5,087		(2,654	)		617			324			—			12,708
Interest expense		(406	)		(31	)		—		(1	)		(75	)		(13,487	)		—			(14,000	)
Interest income		1			2			—		—			—			1,100			—			1,103
Income tax provision (benefit)		2,821			763			2,268		—			—			(5,900	)		—			(48	)
Income (loss) from continuing operations		4,319			1,008			2,819		(2,652	)		546			(6,265	)		—			(225	)
Total assets		667,822			118,264			48,916		9,974			36,326			24,383			—			905,685
Capital expenditures		9,417			5,507			21		3,447			—			—			—			18,392

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

68. BUSINESS SEGMENTS (Continued)

Operating revenue disclosed above ~~include~~includes intersegment operating revenue of $512,~~482~~692 for local telephone, $~~413~~ 883 for ~~cellular~~wireless, $~~450~~6,863 for ~~directory~~ interexchange and $313,~~841~~ 101 for ~~interexchange~~all other. In accordance with SFAS No. 71, intercompany revenue ~~between~~ between local telephone and all other segments is not eliminated above.

7. The ~~RELATED~~following ~~PARTY~~table ~~TRANSACTIONS~~illustrates selected financial data for each segment as of and for the six months ended June 30, 2002:

On April 17, 2001, the Company issued an interest bearing note receivable to an officer totaling $328. The note bears interest at the Mid-Term Applicable Federal Rate, which was 3.69% as of September 30, 2002, and is due on April 15, 2005. The note is secured by a pledge of 100 shares of ACS Group’s stock held in the officer’s name. In accordance with an addendum to the officer’s employment agreement dated May 3, 2001, the loan will be forgiven ratably over a three year period ending April 16, 2004. Accordingly, $114 was forgiven on April 16, 2002 and recognized as compensation expense. The note balance, including accrued interest, was $233 as of September 30, 2002.


	Local
	Telephone		Wireless			Internet			Interexchange			All Other			Eliminations			Total

Operating revenue	$	119,313	$	20,536		$	8,393		$	14,638		$	26,918		$	(14,883	)	$	174,915
Depreciation and amortization		27,475		2,755			2,974			1,138			4,890			—			39,232
Operating income (loss)		22,945		1,926			(9,932	)		(566	)		13,379			(37	)		27,715
Interest expense		809		(2	)		(55	)		(151	)		(24,319	)		—			(23,718	)
Interest income		1		1			—			—			1,169			—			1,171
Income tax provision (benefit)		9,571		796			—			—			(10,367	)		—			—
Income (loss) from continuing operations		14,184		1,133			(9,987	)		(717	)		469			(37	)		5,045
Total assets		614,346		100,154			(8,516	)		19,660			53,392			—			779,036
Capital expenditures		13,295		5,111			10,099			—			5,776			—			34,281

~~Fox~~ Operating ~~Paine~~revenue &disclosed ~~Company,~~above ~~the~~include ~~majority~~intersegment ~~stockholder~~operating revenue of ~~the Parent~~$11,323 ~~receives~~for ~~an annual~~local ~~management~~telephone, ~~fee~~$881 infor ~~the~~wireless, ~~amount of one percent of the Company’s net income before interest expense~~$6,809 ~~income~~for ~~taxes~~interexchange and ~~depreciation and amortization,~~ ~~calculated~~$10,598 ~~without~~for ~~regard~~all ~~to the fee~~other. ~~The~~In ~~management~~accordance ~~fee~~with ~~expense~~SFAS ~~for~~No. 71, ~~the~~intercompany ~~nine~~revenue ~~months~~between ~~ended~~local ~~September 30,~~telephone ~~2002~~ and ~~2001~~all ~~was~~other ~~$986~~segments ~~and~~is ~~$939,~~not ~~respectively~~eliminated above.

8. The ~~SEVERANCE~~following ~~AND~~table ~~RESTRUCTURING~~illustrates ~~CHARGES~~selected financial data for each segment as of and for the three months ended June 30, 2003:

In connection with the completion of the 2000 restructuring plans in the second quarter of 2002, the Company adopted another restructuring plan in June 2002. Employee force reductions which will result in a severance payout under this restructuring plan, are expected to total approximately 30 and are expected to be completed by December 31, 2002. The Company recorded $523 related to severance charges under this plan. The Company also recorded $339 in lease termination costs of office space in Anchorage, Alaska. As of September 30, 2002, 11 terminated employees have been eligible for severance and the Company has paid out $128 accrued under this plan.


	Local
	Telephone		Wireless		Internet			Interexchange			All Other			Eliminations			Total

Operating revenue	$	55,210	$	11,965	$	9,037		$	8,358		$	9,640		$	(9,424	)	$	84,786
Depreciation and amortization		14,046		1,484		2,422			562			3,577			—			22,091
Operating income (loss)		8,112		1,735		(8,392	)		378			101,667			—			103,500
Interest expense		143		1		33			74			14,669			—			14,920
Interest income		—		—		—			—			351			—			351
Equity in earnings of minority investments		—		—		—			—			303			—			303
Income tax provision (benefit)		3,374		720		—			—			(4,094	)		—			—
Income (loss) from continuing operations		4,595		1,014		(8,425	)		304			95,879			—			93,367
Total assets		476,324		76,557		(42,456	)		(764	)		165,075			—			674,736
Capital expenditures		4,734		421		2,018			2			1,922			—			9,097

9 Operating revenue disclosed above includes intersegment operating revenue of $7,329 for local telephone, $470 for wireless, $3,990 for interexchange and $6,430 for all other. ~~COMMITMENTS~~In ~~AND~~accordance ~~CONTINGENCIES~~with SFAS No. 71, intercompany revenue between local telephone and all other segments is not eliminated above.

The ~~Company~~following istable ~~involved~~illustrates inselected ~~various~~financial ~~claims,~~data ~~legal~~for ~~actions~~each ~~and regulatory~~segment ~~proceedings~~as ~~arising in the ordinary course~~ of ~~business.~~and ~~The~~for ~~Company believes that~~ the ~~disposition~~three ofmonths ~~these~~ended ~~matters will not have a material adverse effect on the Company’s consolidated financial position~~June 30, ~~results of operations or cash~~2002: ~~flows.~~

A class action lawsuit was filed against the Company on March 14, 2001. The litigation alleges various contract and tort claims concerning the Company’s decision to terminate its Infinite Minutes long distance plan. Although the Company believes this suit is without merit and intends to vigorously defend its position, it is impossible to determine at this time the actual number of plaintiffs or the claims that will actually continue to be in dispute.


	Local
	Telephone		Wireless			Internet			Interexchange			All Other			Eliminations			Total

Operating revenue	$	63,991	$	11,172		$	4,551		$	7,504		$	13,436		$	(7,749	)	$	92,905
Depreciation and amortization		13,794		1,390			1,721			564			2,504			—			19,973
Operating income (loss)		14,356		1,169			(6,068	)		(287	)		6,018			(15	)		15,173
Interest expense		1,242		(1	)		(48	)		(76	)		(12,092	)		—			(10,975	)
Interest income		—		1			—			—			606			—			607
Income tax provision (benefit)		6,882		502			—			—			(7,384	)		—			—
Income (loss) from continuing operations		8,716		668			(6,116	)		(363	)		1,856			(15	)		4,746
Total assets		616,321		100,929			(8,240	)		18,947			51,080			—			779,037
Capital expenditures		7,325		4,156			6,973			—			2,581			—			21,035

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. Notes to Consolidated Financial Statements, Continued (Unaudited, ~~Dollars~~Amounts In Thousands ~~Except Per Share Amounts~~)

98. ~~COMMITMENTS~~BUSINESS ~~AND~~SEGMENTS ~~CONTINGENCIES~~(Continued)

On Operating ~~July 15,~~revenue ~~2002~~disclosed ~~the~~above ~~Company~~include ~~fulfilled~~intersegment aoperating ~~commitment to Neptune~~revenue ~~Communications, L.L.C. (“Neptune”) to provide a loan in the form~~ of ~~an unsecured note receivable totaling~~ $155,~~000~~947 ~~in return~~ for ~~certain~~local ~~consideration. The note bears interest at the applicable federal rate~~telephone, ~~which~~$477 ~~was~~for ~~5.61% at the date of issuance~~wireless, ~~and~~$351 ~~matures~~for ~~on July 15~~directory, ~~2022. Interest is payable semiannually~~$3, ~~but Neptune may elect to add the interest to the principal in~~611 ~~lieu~~for ofinterexchange ~~cash~~and ~~payments. The commitment was funded with cash on hand. In connection with this note~~$5,055 ~~Neptune~~for ~~has~~all ~~granted the Company an option to purchase certain network assets of Neptune, no later than January 2, 2006 at a price equal to the then outstanding loan balance~~other. ~~The~~In ~~Company~~accordance ~~has also entered into a strategic agreement~~ with ~~Neptune~~ ~~for~~SFAS ~~the life of the fiber optic cable system owned by Neptune~~No. ~~The significant provisions of this agreement are: i)~~ ~~purchase commitments by the Company for capacity in 2005 and 2007~~71, ~~the final price and quantity of which are subject to future~~ ~~events,~~intercompany ~~ii) Neptune’s~~revenue ~~restoration of the Company’s traffic carried on another cable system, iii) and specific interconnection arrangements~~ between ~~the~~local ~~Company~~telephone and ~~Neptune,~~all ~~should the~~other ~~Company~~segments ~~exercise~~is ~~its option to purchase certain network assets~~not ~~from~~eliminated ~~Neptune~~above.

9. RELATED PARTY TRANSACTIONS

On April 17, 2001, the Company issued an interest bearing note receivable to an officer totaling $328. The note bore interest at the Mid-Term Applicable Federal Rate and was due on April 15, 2005. The note was secured by a pledge of 100 shares of ACS Group’s stock held in the officer’s name. In accordance with an addendum to the officer’s employment agreement dated May 3, 2001, the loan was to be forgiven ratably over a three year period ending April 16, 2004. Accordingly, $114 was forgiven on April 16, 2002 and recognized as compensation expense. Upon the closing of the sale of the Company’s Directories Business on May 8, 2003 for which the officer received a fee of $840, he waived certain rights under his employment agreement, including the forgiveness terms of this indebtedness that would have occurred during 2003 and 2004. On May 8, 2003, the officer paid off the note balance of $238, including accrued interest.

Fox Paine & Company, the majority stockholder, receives an annual management fee in the amount of one percent of the Company’s net income before interest expense, income taxes and depreciation and amortization, calculated without regard to the fee. The management fee expense for the six months ended June 30, 2003 and 2002 was $571 and $656, respectively.

The board of directors approved the payment of a fee equal to 1% of the gross proceeds generated from the sale of the Company’s Directories Business to Fox Paine & Company upon closing such sale, plus expenses in connection with such transaction, including the reimbursement by the Company of the $250 consulting fee and transaction bonus paid to an officer under the agreement described below. The Company paid Fox Paine & Company $2,095 on May 8, 2003.

Fox Paine & Company entered into a consulting agreement with an officer of the Company for services rendered for the benefit of the Company related to the sale of the Company’s Directories Business. Under this agreement, the officer was paid a lump sum consulting fee and transaction bonus of $250 in May 2003. As described above, Fox Paine & Company was reimbursed for this expense.

As previously described, the Company has entered into several long-term contracts with ACS Media LLC, including a 50-year publishing agreement, a 50-year license agreement, a 45-year non-compete agreement, and a 10-year billing and collection agreement. At June 30, 2003, the Company had recorded in accounts payable – affiliates $2,933 due to ACS Media, LLC under these contracts, primarily under the billing and collection agreement. The Company will also maintain minority representation through up to three Managers of the permitted nine Managers of ACS Media LLC as long as it owns an interest of 10% or more. Currently, Charles E. Robinson, the Company’s Chairman and CEO, and W. Dexter Paine, III and Wray T. Thorn, both Directors of the Company and employees of Fox Paine & Company, the Company’s majority shareholder, are Managers of ACS Media LLC.

10. SEVERANCE AND RESTRUCTURING CHARGES

In June 2002, the Company adopted a restructuring plan and recorded $862 of associated charges, including $523 of severance costs and $339 of lease termination costs for office space. The Company completed this plan as of June 30, 2003. The Company has paid out $434 accrued under this plan for 13 employees who were terminated and eligible for severance. The Company also reversed the remaining restructuring charges of $428 during the quarter ended June 30, 2003. This amount substantially related to a planned early termination of a real property operating lease, which the Company has subsequently determined to retain through its original term.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

ACS Holdings and it subsidiaries are guarantors of the ACS Group’s senior discount debentures. Additionally, ACS Group and ACS Holdings’ subsidiaries are guarantors under ACS Holdings’ 9 3/8 % senior subordinated notes. All ACS Group’s and Holdings’ subsidiaries (the “Subsidiaries”) are 100% owned. The guarantees are full and unconditional. In addition, all guarantees are joint and several. Accordingly, the interim condensed consolidating financial statements are presented below. Additionally, see ACS Group’s 10-Q (Commission File Number 000-28167) for ACS Group only financial statements.

Condensed Consolidated Balance Sheet
June 30, 2003


			Combined		ACS Holdings						ACS Holdings
			Subsidiaries		Parent Only			Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	214	$	64,346		$	—		$	64,560
	Restricted cash			—		110			—			110
	Accounts receivable-trade, net			18,700		27,332			—			46,032
	Accounts receivable-affiliates			206,523		(201,757	)		—			4,766
	Materials and supplies			11,534		69			—			11,603
	Prepayments and other current assets			2,046		3,707			—			5,753

		Total current assets		239,017		(106,193	)		—			132,824
Investments				1,097		614,275			(614,275	)		1,097
Property, plant and equipment				992,586		107,487			—			1,100,073
Less: accumulated depreciation				618,996		43,132			—			662,128

	Property, plant and equipment, net			373,590		64,355			—			437,945
Goodwill				—		—			38,403			38,403
Intangible assets				22,146		658			—			22,804
Debt issuance costs, net				—		15,813			—			15,813
Deferred charges and other assets				3,229		22,621			—			25,850

Total assets			$	639,079	$	611,529		$	(575,872	)	$	674,736

Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations		$	1,350	$	3,559		$	—		$	4,909
	Accounts payable-affiliates			—		3,524			—			3,524
	Accounts payable, accrued and other current liabilities			20,608		20,870			(1	)		41,477
	Advance billings and customer deposits			9,146		—			—			9,146

		Total current liabilities		31,104		27,953			(1	)		59,056
Long-term obligations, net of current portion				6,175		471,008			—			477,183
Deferred income taxes				11,765		(11,765	)		—			—
Other deferred credits and long-term liabilities				14,164		16,797			—			30,961
Commitments and contingencies				—		—			—			—
Stockholder’s equity:
	Common stock			25					(25	)		—
	Treasury stock			—		—			—			—
	Paid in capital in excess of par value			361,124		287,242			(361,124	)		287,242
	Retained earnings (accumulated deficit)			214,722		(164,460	)		(214,722	)		(164,460	)
	Accumulated other comprehensive loss			—		(15,246	)		—			(15,246	)

		Total stockholder’s equity		575,871		107,536			(575,871	)		107,536

Total liabilities and stockholder’s equity			$	639,079	$	611,529		$	(575,872	)	$	674,736

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Balance Sheet
December 31, 2002


			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	(73	)	$	18,638		$	—		$	18,565
	Restricted cash			—			3,440			—			3,440
	Accounts receivable-trade, net			28,713			20,107			—			48,820
	Accounts receivable-affiliates			34,625			(30,864	)		—			3,761
	Materials and supplies			11,176			27			—			11,203
	Prepayments and other current assets			2,941			3,231			—			6,172
	Assets held for sale			261			—			—			261

		Total current assets		77,643			14,579			—			92,222
Investments				—			550,964			(550,964	)		—
Property, plant and equipment				987,132			103,233			—			1,090,365
Less: accumulated depreciation				588,536			36,740			—			625,276

	Property, plant and equipment, net			398,596			66,493			—			465,089
Goodwill				38,821			—			38,404			77,225
Intangible assets				22,237			1,032			—			23,269
Debt issuance costs, net				—			21,130			—			21,130
Deferred charges and other assets				32,278			(6,231	)		—			26,047

Total assets			$	569,575		$	647,967		$	(512,560	)	$	704,982

Liabilities and Stockholder’s Equity
Current liabilities:
	Current portion of long-term obligations		$	1,312		$	4,621		$	—		$	5,933
	Accounts payable-affiliates			—			1,319			—			1,319
	Accounts payable, accrued and other current liabilities			18,834			30,646			—			49,480
	Advance billings and customer deposits			9,804			—			—			9,804

		Total current liabilities		29,950			36,586			—			66,536
Long-term obligations, net of current portion				6,899			579,999			—			586,898
Deferred income taxes				7,673			(7,673	)		—			—
Other deferred credits and long-term liabilities				12,493			20,437			—			32,930
Stockholder’s equity:
	Common stock			25						(25	)		—
	Treasury stock			—			—			—			—
	Paid in capital in excess of par value			355,574			287,242			(355,574	)		287,242
	Retained earnings (accumulated deficit)			156,961			(249,738	)		(156,961	)		(249,738	)
	Accumulated other comprehensive loss			—			(18,886	)		—			(18,886	)

		Total stockholder’s equity		512,560			18,618			(512,560	)		18,618

Total liabilities and stockholder’s equity			$	569,575		$	647,967		$	(512,560	)	$	704,982

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Operations
Three Months Ended June 30, 2003


			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated

Operating revenue:
	Local telephone		$	55,210		$	—		$	—		$	55,210
	Wireless			11,965			—			(18	)		11,947
	Directory			3,353			—			—			3,353
	Internet			9,037			—			—			9,037
	Interexchange			8,358			—			(3,119	)		5,239
	Other			—			6,287			(6,287	)		—

		Total operating revenue		87,923			6,287			(9,424	)		84,786
Operating expense:
	Local telephone			32,759			142			(5,414	)		27,487
	Wireless			8,746			—			(1,727	)		7,019
	Directory			1,832			—			(32	)		1,800
	Internet			15,007			—			(1,957	)		13,050
	Interexchange			7,418			—			(294	)		7,124
	Depreciation and amortization			18,514			3,577			—			22,091

		Total operating expense		84,276			3,719			(9,424	)		78,571
Gain on disposal of assets				97,285			—			—			97,285

Operating income				100,932			2,568			—			103,500
Other income (expense):
	Interest expense			(251	)		(14,669	)		—			(14,920	)
	Interest income and other			4,407			58,833			(58,453	)		4,787

		Total other expense		4,156			44,164			(58,453	)		(10,133	)

Income (loss) before income taxes and discontinued operations				105,088			46,732			(58,453	)		93,367
Income tax expense (benefit)				46,635			(46,635	)		—			—

Income (loss) from continuing operations				58,453			93,367			(58,453	)		93,367
Loss from discontinued operations				—			—			—			—

Net income (loss)			$	58,453		$	93,367		$	(58,453	)	$	93,367

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Operations
Three Months Ended June 30, 2002


			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated

Operating expense:
	Local telephone		$	63,991		$	—		$	—		$	63,991
	Wireless			11,172			—			(10	)		11,162
	Directory			8,381			—			—			8,381
	Internet			4,551			—			—			4,551
	Interexchange			7,504			—			(2,684	)		4,820
	Other			211			5,055			(5,266	)		—

		Total operating revenue		95,810			5,055			(7,960	)		92,905
Operating expense:
	Local telephone			35,841			1,234			(4,504	)		32,571
	Wireless			8,509			—			(1,440	)		7,069
	Directory			3,535			—			(3	)		3,532
	Internet			8,874			—			(1,557	)		7,317
	Interexchange			7,227			—			(230	)		6,997
	Other			315			—			(315	)		—
	Depreciation and amortization			17,492			2,503			(22	)		19,973

		Total operating expense		81,793			3,737			(8,071	)		77,459
Gain (loss) on disposal of assets				(128	)		(145	)		—			(273	)

Operating income				13,889			1,173			111			15,173
Other income (expense):
	Interest expense			1,113			(12,092	)		4			(10,975	)
	Interest income and other			2			(2,523	)		3,069			548

		Total other expense		1,115			(14,615	)		3,073			(10,427	)

Income (loss) before income taxes and and discontinued operations				15,004			(13,442	)		3,184			4,746
Income tax expense (benefit)				9,376			(9,376	)		—			—

Income (loss) from continuing operations				5,628			(4,066	)		3,184			4,746
Loss from discontinued operations				(400	)		—			(115	)		(515	)

Net income (loss)			$	5,228		$	(4,066	)	$	3,069		$	4,231

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Operations
Six Months Ended June 30, 2003


			Combined			ACS Holdings						ACS Holdings
			Subsidiaries			Parent Only			Eliminations			Consolidated

Operating revenue:
	Local telephone		$	109,211		$	—		$	—		$	109,211
	Wireless			22,318			—			(41	)		22,277
	Directory			11,631			—			—			11,631
	Internet			16,193			—			—			16,193
	Interexchange			15,197			—			(5,192	)		10,005
	Other			110			12,608			(12,718	)		—

		Total operating revenue		174,660			12,608			(17,951	)		169,317
Operating expense:
	Local telephone			65,738			434			(10,838	)		55,334
	Wireless			16,883			—			(3,300	)		13,583
	Directory			5,359			—			(110	)		5,249
	Internet			26,206			—			(3,020	)		23,186
	Interexchange			14,277			—			(564	)		13,713
	Other			160			—			(160	)		—
	Depreciation and amortization			37,628			7,073			(10	)		44,691

		Total operating expense		166,251			7,507			(18,002	)		155,756
Gain on disposal of assets				96,538			—			1			96,539

Operating income				104,947			5,101			52			110,100
Other income (expense):
	Interest expense			(496	)		(27,111	)		—			(27,607	)
	Interest income and other			4,408			58,332			(57,761	)		4,979

		Total other expense		3,912			31,221			(57,761	)		(22,628	)

Income (loss) before income taxes and discontinued operations				108,859			36,322			(57,709	)		87,472
Income tax expense (benefit)				46,635			(46,635	)		—			—

Income (loss) from continuing operations				62,224			82,957			(57,709	)		87,472
Loss from discontinued operations				—			—			(52	)		(52	)

Net income (loss)			$	62,224		$	82,957		$	(57,761	)	$	87,420

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Operations
Six Months Ended June 30, 2002


				Combined			ACS Holdings						ACS Holdings
				Subsidiaries			Parent Only			Eliminations			Consolidated

Operating revenue:
		Local telephone		$	119,313		$	—		$	—		$	119,313
		Wireless			20,536			—			(19	)		20,517
		Directory			17,022			—			—			17,022
		Internet			8,393			—			—			8,393
		Interexchange			14,638			—			(4,968	)		9,670
		Other			425			9,896			(10,321	)		—

			Total operating revenue		180,327			9,896			(15,308	)		174,915
Operating expense:
		Local telephone			68,893			1,540			(8,864	)		61,569
		Wireless			15,751			—			(2,640	)		13,111
		Directory			6,964			—			(6	)		6,958
		Internet			15,327			—			(2,882	)		12,445
		Interexchange			14,066			—			(454	)		13,612
		Other			657			—			(657	)		—
		Depreciation and amortization			34,444			4,888			(100	)		39,232

			Total operating expense		156,102			6,428			(15,603	)		146,927
Gain (loss) on disposal of assets					(128	)		(145	)		—			(273	)

Operating income					24,097			3,323			295			27,715
Other income (expense):
		Interest expense			569			(24,319	)		32			(23,718	)
		Interest income and other			6			(3,894	)		4,936			1,048

			Total other expense		575			(28,213	)		4,968			(22,670	)

Income (loss) before income taxes, discontinued operations and cumulative effect of change in accounting principle					24,672			(24,890	)		5,263			5,045
Income tax expense (benefit)					14,501			(14,501	)		—			—

Income (loss) from continuing operations					10,171			(10,389	)		5,263			5,045
Loss from discontinued operations					(6,810	)		(250	)		(327	)		(7,387	)

Income (loss) before cumulative effect
	of change in accounting principle				3,361			(10,639	)		4,936			(2,342	)
Cumulative effect of change in accounting principle					(8,297	)		(97,053	)		—			(105,350	)

Net income (loss)				$	(4,936	)	$	(107,692	)	$	4,936		$	(107,692	)

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)


Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2003

	Combined			ACS Holdings					ACS Holdings
	Subsidiaries			Parent Only			Eliminations		Consolidated

Net cash provided (used) by operating activities	$	(124,533	)	$	159,530		$	—	$	34,997
Cash Flows from Investing Activities:
Construction and capital expenditures		(10,245	)		(4,966	)		—		(15,211	)
Net proceeds from sale of business		138,091			—			—		138,091
Other investing activities		—			3,339			—		3,339

Net cash provided (used) by investing activities		127,846			(1,627	)		—		126,219
Cash Flows from Financing Activities:
Payments on long-term debt		(3,026	)		(110,053	)		—		(113,079	)
Dividends		—			(2,142	)		—		(2,142	)

Net cash used by financing activities		(3,026	)		(112,195	)		—		(115,221	)
Increase in cash and cash equivalents		287			45,708			—		45,995
Cash and cash equivalents, beginning of the period		(73	)		18,638			—		18,565

Cash and cash equivalents, end of the period	$	214		$	64,346		$	—	$	64,560

Supplemental Cash Flow Data:
Interest paid	$	531		$	23,331		$	—	$	23,862
Income taxes paid	$	—		$	—		$	—	$	—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages	$	2,340		$	—		$	—	$	2,340
Interest rate swap marked to market	$	—		$	(3,640	)	$	—	$	(3,640	)

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

11. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)


Condensed Consolidated Statement of Cash Flows
Six Months Ended June 30, 2002

	Combined			ACS Holdings					ACS Holdings
	Subsidiaries			Parent Only			Eliminations		Consolidated

Net cash provided (used) by operating activities	$	29,373		$	(3,176	)	$	—	$	26,197
Cash Flows from Investing Activities:
Construction and capital expenditures		(26,635	)		(5,340	)		—		(31,975	)

Net cash used by investing activities		(26,635	)		(5,340	)		—		(31,975	)
Cash Flows from Financing Activities:
Payments on long-term debt		(2,172	)		(4,468	)		—		(6,640	)

Net cash used by financing activities		(2,172	)		(4,468	)		—		(6,640	)
Increase (decrease) in cash and cash equivalents		566			(12,984	)		—		(12,418	)
Cash and cash equivalents, beginning of the period		1,239			39,773			—		41,012

Cash and cash equivalents, end of the period	$	1,805		$	26,789		$	—	$	28,594

Supplemental Cash Flow Data:
Interest paid	$	(532	)	$	25,446		$	—	$	24,914
Income taxes paid	$	—		$	—		$	—	$	—
Supplemental Noncash Transactions:
Property acquired under capital leases and mortgages	$	2,306		$	—		$	—	$	2,306
Interest rate swap marked to market	$	—		$	577		$	—	$	577

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands)

12. COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims, legal actions and regulatory proceedings arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

In December 2001, the Company entered into a material contract with the State of Alaska to provide it with comprehensive telecommunications services for a period of five years. This contract obligates the Company to, among other things, provide on the state’s behalf customer premise equipment and other capital assets that the Company believes will range between $45,000 and $55,000 over the term of the agreement, of which approximately $14,188 has been expended through June 30, 2003. The Company intends to fund this commitment with cash on hand and cash flows from operations. The contract with the State of Alaska contains specific completion dates for certain implementation aspects by as early as April 1, 2003, as well as specific ongoing service level agreements which, if not met, may result in revenue credits and/or penalties which in the aggregate could amount to as much as $325 per month. Both parties to the contract have alleged failures to perform by the other party. The parties are, however, actively engaged in dispute resolution processes and are seeking to renegotiate certain provisions of the contract including the aforementioned specific completion dates and service level agreements. The Company is unable to determine the outcome of the dispute resolution processes and contract renegotiations at this time.

On July 15, 2002 the Company fulfilled a commitment to Neptune Communications, L.L.C. (“Neptune”) to provide a loan in the form of an unsecured note receivable totaling $15,000 in return for certain consideration. The note, which is included in deferred charges and other assets on the Company’s Consolidated Balance Sheets, bears interest at the applicable federal rate, which was 4.84% at June 30, 2003, and matures on July 15, 2022. Interest is payable semiannually, but Neptune may elect to add the interest to the principal in lieu of cash payments. The commitment was funded with cash on hand. In connection with this note, Neptune has granted the Company an option to purchase certain network assets of Neptune, no later than January 2, 2006 at a price equal to the then outstanding loan balance. The Company has also entered into a strategic agreement with Neptune for the life of the fiber optic cable system owned by Neptune. The significant provisions of this agreement are: i) purchase commitments by the Company for capacity in 2005 and 2007, the final price and quantity of which are subject to future events, ii) Neptune’s restoration of the Company’s traffic carried on another cable system, iii) and specific interconnection arrangements between the Company and Neptune, should the Company exercise its option to purchase certain network assets from Neptune. The Company is currently renegotiating the terms and conditions of this agreement and it is not possible to determine the ultimate outcome of these negotiations at this time.

In May 2003, the Company entered into a four-year purchase commitment with a telecommunications equipment supplier to acquire approximately $19 million of wireless switches, cell sites and related equipment.


Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS AND ANALYSTS’ REPORTS

This Form 10-Q and future filings by the Company on Forms 10-K, 10-Q and 8-K and future oral and written statements by the Company and its management may include, certain “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995, including (without limitation) statements with respect to anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestitive opportunities, business prospects, strategic alternatives, business strategies, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and statements of expectation. Words such as “aims,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “should,” and “will,” and variations of these words and similar expressions, are intended to identify these forward-looking statements. These forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company’s historical experience and our present expectations or projections. Forward-looking statements by the Company and its management are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

Actual future performance, outcomes and results may differ materially ~~from~~ from those expressed in forward-looking statements made by the Company and its management as a result of a number of important factors. Examples of these factors include (without limitation) rapid technological developments and changes in the telecommunications industries; ongoing deregulation (and the resulting likelihood of significantly increased price and product/service competition) in the telecommunications industry as a result of the Telecommunications Act of 1996 (“the “1996 Act”) and other similar federal and state legislation and the federal and state rules and regulations enacted pursuant to that legislation; regulatory limitations on the Company’s ability to to change its pricing for communications services; the possible future unavailability of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, to the Company’s wireline subsidiaries; and possible changes in the demand for the Company’s products and services. In addition to these factors, actual future performance, outcomes and results may differ materially because of other, more general, factors including (without limitation) changes in general industry and market conditions and growth rates; changes in interest rates or other general national, regional or local economic conditions; governmental and public policy changes; changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States of America; and the continued availability of financing in the amounts, at the terms and on the conditions necessary to support the Company’s future business.

Investors should also be aware that while ~~the~~ACS ~~Company~~Holdings does, at various times, communicate with securities analysts, it is against the Company’s policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that ~~the~~ACS ~~Company~~Holdings agrees with any statement or report issued by an analyst irrespective of the content of the statement or report. To the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of ~~the~~ACS ~~Company~~Holdings.

INTRODUCTION

On May 14, 1999, the Company acquired the incumbent providers of local telephone services in Anchorage, Juneau, Fairbanks and approximately 70 rural communities in Alaska, making it the largest provider of local telephone service in the state and the ~~fourteenth~~13th largest provider of local exchange ~~services~~ services in the United States. The Company also acquired on May 14, 1999 ~~interexchange~~ interexchange operations primarily serving the Anchorage market and ~~cellular~~ wireless and Internet services providing statewide coverage. The Company has unified its ~~statewide~~ statewide branding under the ACS name.

1625

Today, the Company generates revenue primarily through the provision of:

•

local telephone services, including:

• basic local service to retail customers within ~~the~~ACS ~~Company~~Holdings’s service areas, • wholesale service to ~~competitive local exchange carriers (“~~CLECs”), • network access services to interexchange carriers for origination and termination of interstate and intrastate long distance phone calls, • enhanced services, • ancillary services, such as billing &and ~~collections~~collection (“B&C”), and • universal service payments;

• ~~cellular~~wireless services; • ~~directory advertising; •~~ Internet services; and • interexchange network long-distance and data services.

~~Local~~ On ~~Telephone~~May 8, —2003, ~~Within~~the Company completed the ~~telecommunications~~sale ~~industry,~~of ~~local~~a ~~exchange carriers~~majority interest (~~“LECs”~~87.42%) ~~have~~in ~~historically~~its ~~enjoyed~~Directories ~~stable~~Business, ~~revenue~~which ~~and~~previously ~~cash~~represented ~~flow~~a ~~from~~reportable ~~local~~segment. ~~exchange~~See ~~operations~~Note ~~resulting~~4, ~~from~~Gain on Disposal of Assets, in the ~~need~~footnotes to the financial statements for ~~basic~~additional ~~telecommunications~~information on this transaction. For ~~services,~~periods ~~the~~starting ~~highly~~May 8, ~~regulated~~2003 ~~nature~~and offorward, the ~~telecommunications~~Company ~~industry~~will ~~and,~~record its 12.58% minority interest in the ~~case~~earnings of ~~rural~~the ~~LECs,~~Directories Business under the ~~underlying~~equity method ~~cost~~of ~~recovery~~accounting ~~settlement~~so ~~and~~long ~~support mechanisms~~as ~~applicable~~it toretains ~~local~~a ~~exchange~~minority ~~operations~~interest. ~~Increasing~~The ~~levels of~~Company’s ~~competition,~~retained ~~regulatory~~interest ~~decisions~~is subject to ~~open~~an ~~high~~exchange ~~cost~~rights ~~areas~~agreement tothat ~~new~~permits ~~entrants,~~its ~~portability~~conversion ofto ~~high~~2.5 million ~~cost~~units ~~support~~of ~~payments,~~the ~~and~~ACS ~~interconnection~~Media ~~rates established~~Income byFund (“the ~~Regulatory~~Fund”) ~~Commission~~after the expiration of ~~Alaska~~a ~~(“RCA”)~~90-day ~~that~~lockup period. Units of the Fund are ~~below~~traded on the ~~companies~~Toronto ~~cost~~Stock toExchange ~~provide~~under ~~certain~~the ~~services~~symbol ~~have~~AYP.UN. ~~eroded~~The ~~the~~Company ~~stability~~can ofsell ~~revenue~~its ~~and~~exchanged ~~cash~~units ~~flow.~~to ~~Basic~~a ~~local~~qualified ~~service~~investor isor ~~generally~~investors ~~provided~~in at a ~~flat~~private ~~monthly rate~~placement ~~and~~transaction ~~allows~~or ~~the~~offer ~~user~~them toin ~~place~~a ~~unlimited~~secondary ~~calls~~public ~~within~~offering aat ~~defined~~its ~~local~~option ~~calling~~after ~~area.~~the ~~Access~~expiration ~~revenue~~of isa ~~generated~~180 day bylockup ~~providing~~agreement ~~interexchange~~with ~~carriers~~the ~~access~~underwriters ~~to the~~of ~~LEC~~the Fund’s ~~local~~offering ~~network~~in ~~and~~Canada. ~~its~~The ~~customers.~~Company’s ~~Universal~~retained ~~service~~interest ~~revenue~~was isrecorded aat an ~~subsidy~~initial ~~paid~~book tovalue ~~rural~~of ~~LECs~~$1.1 million torepresenting ~~support~~ the ~~high~~pro-rata ~~cost~~retained ofownership at ~~providing~~historical ~~service~~book value. The retained interest in ~~rural~~ ~~markets.~~the ~~Revenue~~Directories isBusiness, ~~also~~if it ~~generated~~were ~~from~~not ~~ancillary~~subject ~~and~~to ~~enhanced~~the ~~services~~90-day lockup agreement, would be exchangeable to ~~such~~units of the Fund with a market value of $18.4 million as ~~call~~of ~~waiting~~June 30, 2003.

~~Changes~~ Local Telephone in- Within the telecommunications industry, local exchange carriers (“LECs”) have historically enjoyed stable revenue ~~are~~and ~~largely~~cash ~~attributable~~flow tofrom local ~~changes~~exchange inoperations resulting from the ~~number~~need for basic telecommunications services, the highly regulated nature of the telecommunications industry and, ~~access~~in ~~lines~~the case of rural LECs, the underlying cost recovery settlement and support mechanisms applicable to local exchange operations. Basic local service ~~rates,~~is generally ~~competition~~provided at a flat monthly rate and ~~minutes~~allows the user to place unlimited calls within a defined local calling area. Access revenues are generated in part by billing interexchange carriers for access to the LEC’s local network and its customers and in part by billing the local customers themselves. Universal service revenues are a subsidy paid to rural LECs to support the high cost of ~~use~~providing service in rural markets. Other service ~~factors~~revenue ~~can~~is ~~also~~generated ~~impact~~from ~~revenue,~~ancillary ~~including:~~services and enhanced services.

• Changes ~~intrastate~~in ~~and interstate~~ revenue ~~pricing~~are ~~and~~largely ~~settlement~~attributable ~~methodologies,~~to •changes ~~authorized~~in ~~rates~~the ofnumber ~~return for regulated services, • whether an~~ of access ~~line is used by a business or residential subscriber~~lines, •local ~~whether~~service anrates ~~access line is used by a retail or wholesale subscriber, • intrastate~~ and ~~interstate~~minutes ~~calling patterns, • customers’ selection~~ of ~~various~~use. ~~local~~Other ~~rate~~factors ~~plan~~can ~~options,~~also impact ~~• selection of enhanced calling services~~revenue, ~~such as voice mail, or other packaged products, such as cellular and Internet and • other subscriber usage characteristics.~~including:

	•		intrastate and interstate revenue settlement methodologies,

	•		authorized rates of return for regulated services,

	•		whether an access line is used by a business or residential subscriber,

	•		intrastate and interstate calling patterns,

	•		customers’ selection of various local rate plan options,

	•		selection of enhanced calling services, such as voice mail, and

	•		other subscriber usage characteristics.

LECs have three basic tiers of customers:

• business and residential ~~end user~~ customers located in their local service areas that pay for local phone service, ~~• interexchange carriers that pay for access to long distance calling customers located within its local service areas~~ and ~~• CLEC’s that pay for wholesale access to the Company’s network in order to provide competitive local service on either~~ a ~~wholesale~~portion orof ~~unbundled~~ network ~~element (“UNE”) basis as prescribed under the 1996 Act.~~access,

~~LECs provide access service to numerous interexchange carriers and may~~26 ~~also bill and collect long distance charges from interexchange carrier~~ customers on behalf of the interexchange carriers. The amount of access charge revenue associated with a particular interexchange carrier varies depending upon long distance calling patterns and the relative market share of each long distance carrier.

The Company’s service rates for end users, CLECs and interexchange carriers are authorized by the RCA. Authorized rates are set by the Federal Communications Commission (“FCC”) and the RCA for interstate and intrastate access charges, respectively, and may change from time to time.

	•		interexchange carriers that pay for access to long distance calling customers located within its local service areas, and

	•		competitive local exchange carriers (“CLECs”) that pay for wholesale access to the Company’s network in order to provide competitive local service on either a wholesale or unbundled network element (“UNE”) basis as prescribed under the 1996 Act.

~~Cellular~~ LECs -provide ~~The~~access ~~Company~~service isto ~~the~~numerous ~~largest~~interexchange carriers and ~~only statewide provider of~~may ~~cellular~~also ~~services~~bill inand ~~Alaska,~~collect ~~currently~~long ~~serving~~distance ~~approximately~~charges ~~82,000 subscribers.~~from ~~Its~~interexchange ~~cellular network covers over 470,000 residents, including all~~carrier ~~major~~customers ~~population~~on ~~centers~~behalf ~~and~~of ~~highway~~the ~~corridors~~interexchange carriers. The ~~Company~~amount ~~operates~~of aaccess ~~TDMA~~charge ~~digital~~revenue ~~network~~associated inwith ~~substantially~~a ~~all~~particular ofinterexchange ~~its~~carrier ~~service~~varies ~~areas,~~depending upon ~~and~~long ~~intends~~distance ~~to upgrade~~calling ~~this~~patterns ~~network~~and tothe arelative ~~new~~market ~~generation~~share of ~~digital~~each ~~network~~long distance ~~known as CDMA~~carrier.

~~Directory~~ ACS -Holdings’ ~~The~~local ~~Company~~service isrates ~~the~~for ~~largest~~end ~~provider~~users ofare ~~published~~authorized ~~directory advertising~~by inthe ~~Alaska~~RCA. ~~The Company serves approximately 12,000 advertisers~~ ~~through~~Authorized ~~eight~~rates ~~regional~~are ~~directories~~set ~~tailored~~by tothe ~~serve~~FCC and the ~~needs~~RCA offor ~~each~~interstate ofand ~~its~~intrastate ~~local~~access ~~exchange~~charges, ~~markets.~~respectively, ~~The Company also provides an online directory product~~ and ~~other~~may ~~specialized~~change ~~advertising~~from ~~vehicles~~time to ~~its customers~~time.

~~Internet~~ Wireless - The Company is ~~the~~one ~~second~~of the largest ~~provider~~statewide ofproviders ~~Internet access~~of wireless services in Alaska, ~~with~~currently serving approximately 4783,000 ~~customers~~ subscribers. ~~The~~Its ~~Company~~wireless ~~offers dial-up~~network ~~and~~covers ~~dedicated~~over ~~digital~~478,000 ~~subscriber line~~residents, ~~(“DSL”)~~including ~~Internet~~all major ~~access~~population tocenters ~~its customers~~and highway corridors. The Company isoperates ~~also~~a ~~the~~TDMA digital ~~only~~network ~~single~~in ~~source~~substantially ~~provider~~all of ~~advanced~~its IPservice areas, and intends to ~~based~~upgrade ~~private~~this ~~networks~~network into ~~Alaska~~a new generation of digital network known as CDMA.

~~Interexchange~~ Internet - The Company ~~provides~~is ~~switched~~the ~~and~~second ~~dedicated~~largest ~~long~~provider ~~distance~~of Internet access services toin Alaska with approximately 6745,000 customers ~~in Alaska~~. The ~~traffic~~Company ~~from~~offers dial-up ~~these~~and dedicated digital subscriber line (“DSL”) Internet access to its customers. ~~are~~The ~~carried~~Company ~~over~~is ~~the~~a ~~Company’s~~single ~~owned~~source orprovider ~~leased~~of ~~facilities~~advanced IP based private networks in Alaska.

Interexchange - The Company provides switched and dedicated long distance services to approximately 44,000 customers in Alaska. The traffic from these customers is carried over the Company’s owned or leased facilities.

RESULTS OF OPERATIONS

Three Months Ended ~~September~~June 30, ~~2002~~2003 Compared to Three Months Ended ~~September~~ June 30, ~~2001~~ 2002

All amounts are discussed at the consolidated level after the elimination of intercompany revenue and expense.

Operating Revenue

Operating revenue ~~increased~~decreased $18.31 million, or 18.67%, for the three months ended ~~September~~June 30, ~~2002~~2003 compared to the three months ended ~~September~~June 30, ~~2001~~2002. Wireless, ~~Cellular~~Internet and ~~Internet~~interexchange revenue increased compared to the corresponding period of ~~2001~~ 2002, while local telephone, ~~directory advertising and interexchange revenue~~ decreased compared to the corresponding period of ~~2001~~2002.

Local Telephone

Local telephone revenue, which ~~consist~~consists of local network service, network access revenue and deregulated and other revenue, decreased $18.08 million, or 1 13.97%, for the three months ended ~~September~~June 30, ~~2002~~2003 compared to the same period in ~~2001~~2002. The following table summarizes the Company’s consolidated local telephone revenue by category.

			Three Months Ended
		Three Months Ended June 30,
			September 30,
		2003			2002
			2002			2001
		(In Thousands)
			(In Thousands)
Local telephone revenue:
Local telephone revenue:
Local network		$	25,219		$	25,040
	Local network		$	24,186		$	24,388
Network access			25,140			34,929
	Network access			23,862			24,993
Deregulated and other			4,851			4,022
	Deregulated and other			4,767			4,479
Total local telephone revenue		$	55,210		$	63,991
Total local telephone revenue			$	52,815		$	53,860

1827

The following table summarizes the Company’s local telephone access lines.

	As of September 30,
	As of June 30,
	2002		2001
	2003		2002
Retail		~~241~~227,~~583~~604		~~266~~246,~~040~~310
Wholesale		2518,~~074~~868		2024,~~858~~970
Unbundled network elements		60,504		46,268
Unbundled network elements - platform (UNE - P)		4,892		—
Total local telephone access lines		327,161		333,166
Unbundled network elements - loop (UNE - L)		66,864		57,633
Total local telephone access lines		318,228		328,913

The local network service component of local telephone revenue was $2425.2 million for the three months ended ~~September~~June 30, ~~2002~~2003 compared with $2425.4 0 million for the three months ended ~~September~~June 30, ~~2001~~2002. Revenue ~~decreased~~increased $0.2 million or 0.87% from the prior year. This ~~decrease~~increase reflects the ~~impact~~net effect of retail ~~competition~~market ~~exacerbated~~share bylosses ~~below cost UNE rates,~~ offset by ~~approximately $1.0 million of rate~~ increases ~~for~~in ~~both~~unbundled ~~retail~~network ~~and~~element ~~UNE local service rates~~revenue ~~implemented during the fourth quarter of 2001 at ACSA, as discussed below,~~ and ~~approximately~~ ~~$0.6 million~~local inprivate ~~additional~~line ~~feature~~revenue and ~~service~~reduced ~~order~~uncollectible revenue ~~compared to the prior year~~.

The Company ~~believes~~continued itto isexperience ~~earning~~loss ~~less~~of ~~than~~retail ~~its~~market ~~required~~share ~~rate of return~~ for local network service in ~~several of~~ its ~~markets~~Anchorage, Fairbanks and ~~filed~~Juneau service areas during the year. Generally, when the Company loses a retail local network service line to ~~rate~~a ~~cases~~competitor, ~~for~~it ~~all~~continues ofto ~~its~~provide ~~LEC~~the ~~businesses~~line ~~with~~to the ~~RCA~~competitor on ~~July 2,~~a ~~2001~~wholesale basis ~~aimed~~ at ~~making~~ upreduced ~~this~~revenue ~~deficiency~~per line. ~~Subsequently,~~Management believes that the continuing loss of market share it has experienced in ~~October~~certain ~~2001,~~of ~~the~~its ~~Company~~markets ~~filed~~is ~~for~~partially ~~interim~~attributable ~~and~~to ~~refundable~~below ~~local~~cost ~~service~~interconnection rates inmandated by the RCA for UNEs. During the first quarter of 2000, the Company reopened interconnection proceedings for its Anchorage market and in ~~order~~the tosecond quarter of 2001, filed ~~expedite~~for aan ~~partial~~interim ~~recovery~~and refundable UNE rate increase of ~~the~~approximately ~~total~~$10 ~~revenue~~per ~~deficiency~~month per loop. On ~~November~~October 1525, 2001, the RCA ~~approved~~granted ACSA an interim and refundable UNE rate increase ~~for~~of ~~ACSA~~$1.07, ofincreasing ~~24% for~~the ~~certain~~UNE ~~services~~rates from $13.85 ~~This~~to $14.92. The interim and refundable rate increase was implemented in November 2001 and generated ~~is expected to generate~~ approximately $4.0 ~~to $5~~.07 million in ~~annual~~additional revenue during 2002. The Company expects the RCA to hold hearings during ~~2002 and~~ 2003 and to adjudicate final Anchorage ~~local~~UNE ~~service~~ rates during 2003 or 2004.

The Company ~~continued~~believes toit ~~experience~~is ~~loss~~earning ofless ~~retail~~than ~~market~~its ~~share~~authorized rate of return for local network service in ~~its~~several ~~Anchorage,~~of ~~Fairbanks~~its markets and ~~Juneau~~in ~~service~~compliance ~~areas~~with ~~during~~ the ~~quarter.~~Alaska ~~Generally,~~Public ~~when~~Utilities ~~the~~Commission ~~Company~~(“APUC”) ~~loses~~orders arelated ~~retail local network service line~~ to athe ~~competitor,~~approval ~~it continues to provide~~ of the ~~line~~acquisition toof the ~~competitor~~four onLECs ~~a wholesale~~in ~~basis~~1999, atfiled ~~reduced~~local ~~revenue~~service ~~per~~rate ~~line.~~cases ~~Management believes that the~~for ~~continuing~~all ~~loss~~ of ~~market share it has experienced in certain of~~ its ~~markets~~LEC ~~is partially~~businesses ~~attributable~~with ~~to below cost interconnection rates mandated by~~ the RCA ~~for~~ ~~UNEs.~~on ~~During~~July 2, ~~the second quarter of~~ 2001, ~~the~~aimed ~~Company~~at ~~reopened interconnection~~making ~~proceedings~~up ~~for its Anchorage market and filed for an interim~~this ~~and refundable UNE rate increase of approximately $10 per month per loop~~deficiency. ~~On October 25,~~The ~~2001, the~~ RCA’s ~~granted~~decisions ~~ACSA~~on anrevenue ~~interim~~requirements ~~and~~will ~~refundable~~have ~~UNE~~a ~~rate~~direct ~~increase~~impact ofon ~~$1.07, increasing~~ the ~~UNE~~retail rates ~~from $13.85 to $14.92. The interim~~ and ~~refundable~~intrastate ~~rate~~access ~~increase~~rates ~~was~~that ~~implemented~~the inCompany ~~November 2001 and~~ is ~~expected~~ toallowed ~~generate approximately $0.6 million~~ to $0charge.~~7 million~~ inA ~~annual~~RCA ~~revenue.~~finding ~~The Company~~of ~~expects~~over ~~the~~earnings ~~RCA~~generally leads to ~~hold~~rate reductions ~~hearings~~while ~~during~~a ~~2002~~RCA ~~and~~finding ~~2003~~of ~~and~~under ~~adjudicate final~~earnings ~~Anchorage~~generally ~~UNE~~results ~~rates~~in ~~during 2003~~rate increases.

~~Network~~ In ~~access~~October ~~revenue~~2001, ~~decreased~~the byCompany $1filed for increased interim and refundable local service rates in its Anchorage market in order to expedite a partial recovery of the total revenue deficiency.1 On November ~~million~~15, or2001, ~~4.5~~the RCA approved an interim and refundable rate increase for ACSA of 24%, ~~from~~for ~~$25.0~~certain ~~million~~services. This interim and refundable rate increase was implemented in November 2001 toand generated approximately $234.92 million in additional revenue in 2002. ~~Network~~On December 16, ~~access~~2002, the RCA reopened the revenue isrequirement ~~based~~phase onof athe ~~regulated~~hearing ~~return~~for onACSA ~~rate~~to ~~base~~take ~~and~~additional ~~recovery~~testimony ofregarding ~~allowable~~ACSA’s ~~expense~~service ~~associated with~~lives. ~~the~~The ~~origination~~ACSA ~~and~~hearing ~~termination~~revisited ofthe ~~toll~~RCA’s ~~calls~~decision ~~for~~to lengthen the ~~Company’s~~service ~~retail~~lives ~~and~~of ~~resale~~specific ~~customers.~~assets ~~The~~and ~~decrease~~thereby inreduced ~~network~~depreciation ~~access~~expense. ~~revenue~~If ~~compared~~the toRCA ~~the~~corrects ~~corresponding~~the ~~period~~service inlives ~~2001~~at isissue, ~~due~~it ~~primarily~~will toincrease athe ~~shift~~amount ~~from~~by ~~retail~~which ~~and wholesale~~ACSA ~~lines~~is ~~to UNEs~~under earning. ~~Management~~The Company expects ~~that~~the ~~network~~RCA ~~access~~to ~~revenue~~continue ~~will decline~~to ashold ahearings ~~component~~during of2003 and ~~local~~to ~~telephone~~adjudicate ~~revenue~~final ~~for~~local ~~the~~service ~~foreseeable~~rates ~~future~~during 2004.

~~Deregulated~~ On ~~and~~March 25, ~~other revenue~~2003, ~~which~~the ~~increased~~RCA ~~slightly~~issued toan ~~$4.8 million~~order approving new revenue ~~compared~~requirements tofor $4ACSF, ACSAK, and ACSN.~~5 million~~ inThe ~~the~~RCA ~~prior~~found ~~year,~~over ~~consists~~earnings ~~principally~~by ofACSF ~~B&C~~and ~~services,~~ACSN ~~space~~ and ~~power~~under ~~rents,~~earning ~~deregulated~~by ~~equipment~~ACSAK. ~~sales~~In compliance with RCA orders, ~~paystation revenue~~ACSF, ~~regulated~~ACSAK, ACSN ~~directory~~have ~~listing~~filed ~~revenue,~~cost of service and ~~other~~rate ~~miscellaneous~~design ~~telephone~~studies, and supporting testimony, consistent with the RCA revenue requirements orders. Final rates are expected in 2004.

~~Cellular~~ Network access revenue decreased from $34.9 million for the three months ended June 30, 2002 to $25.1 million for the same period in 2003. During the second quarter of 2002, the Company recognized as revenue $11.1 million of previously deferred interstate access revenues related to a dispute on interstate

~~Cellular revenue increased $0.5 million, or 4.1%, to $11.9 million for the~~28 ~~three months ended September 30, 2002 compared to $11.4 million for the three~~ months ended September 30, 2001. This increase was due to a growth in average subscribers of 3.4% from 78,666 in 2001 to 81,334 in 2002. The average revenue per unit, or ARPU, increased to $48.78 in 2002 compared to $48.46 during 2001.

~~Directory~~access rates for the Anchorage market based on a favorable ruling by the District of Columbia Court of Appeals. Network access revenues are based on a regulated return on rate base and recovery of allowable expenses associated with the origination and termination of toll calls for the Company’s retail and resale customers. After consideration of the revenue recognized as a result of the favorable ruling by the court, the increase in network access revenues of $1.3 million compared to the corresponding period in 2002 is due primarily to updated access studies. Management expects that network access revenues will generally be on a declining trend for the foreseeable future.

~~Directory~~ Deregulated and other revenue, ~~decreased~~which ~~slightly~~increased to $8.4.9 million incompared ~~2002 from~~ to $84.7 0 million in ~~2001,~~the ~~but~~prior ~~the~~year, ~~directory~~consists ~~business~~principally ~~continued~~of ~~its~~B&C ~~solid~~services, ~~profitable~~space and ~~performance.~~power ~~Management~~rents, ~~expects~~deregulated ~~the~~equipment ~~growth~~sales, inpaystation ~~directory~~ revenue, ~~to slow due to~~regulated ~~the~~directory ~~recent~~listing ~~economic~~revenue, ~~uncertainty~~ and ~~its impacts on the advertising and publishing marketplace and as~~ other ~~advertising~~miscellaneous ~~media,~~telephone ~~such as the Internet, compete for this business~~revenue.

Wireless

Wireless revenue increased $0.7 million, or 7.0%, to $11.9 million for the three months ended June 30, 2003 compared to $11.2 million for the three months ended June 30, 2002. This increase was due to a growth in average subscribers of 2.7% from 80,354 in 2002 to 82,560 in 2003. Subscriber average minutes of use also increased from 207 minutes in 2002 to 243 minutes in 2003. Primarily as a result of increased minutes of use, the monthly average revenue per unit, or ARPU, increased to $48.24 in 2003 compared to $46.30 during 2002.

Internet

Internet revenue increased from $34.6 million in ~~2001~~2002 to $69.40 million in ~~2002~~2003 — an increase of $24.84 million, or 7998.26%. This increase is primarily due to revenue associated with the Company’s contract with the State of Alaska and approximately $1.5 million of this increase was earned in prior periods but could not be estimated and therefore was not recorded until the current period. Internet also experienced growth in DSL subscribers of 8750.73% from 59,~~884~~856 in ~~2001~~ 2002 to 1114,~~045~~817 in ~~2002~~2003.

On December 10, 2001, the Company entered into a five year contract with the State of Alaska to provide a broad range of telecommunications services, many of which will be provided over an IP network owned and operated by ACSI. Services under this contract began to be implemented during the second quarter of 2002 ~~and continued to increase in the third quarter of 2002~~. The Company anticipates that revenue for this segment will increase in future periods as additional services are added under the contract. ~~The Company anticipates~~ ~~substantial capital investments will be made over the first two years of the~~ ~~contract to support the telecommunications needs of this customer, including~~ ~~$15 to $20 million during 2002, of which it has expended approximately $10.3 million through September 30, 2002.~~

Interexchange

Interexchange revenue ~~decreased~~increased from $5.4.8 million in ~~2001~~2002 to $45.82 million in 2003. Long distance subscribers decreased from 64,958 in 2002 —to a44,289 in 2003. The decrease in subscribers was substantially due to database grooming to remove approximately 20,000 non-revenue generating inactive subscribers from the subscriber list in connection with the conversion of $0long distance billing from an outside service bureau to an in-house system during the first and second quarters of 2003.~~6 million~~ The average revenue per unit, or 10ARPU, increased to $34.~~5%.~~25 ~~Long~~in ~~distance~~2003 ~~subscribers~~compared ~~were essentially~~to ~~flat~~$24.44 atduring ~~67,230~~2002 ~~while~~and total minutes of use decreased ~~declined~~ from 4938.4 9 million in ~~2001~~2002 to 3836.7 million in ~~2002~~2003.

Operating Expense

Operating expense increased $81.1 million, or 111.64%, from $7077.35 million for the three months ended ~~September~~June 30, ~~2001~~2002 to $78.46 million for the three months ended ~~September~~June 30, ~~2002~~2003. The Company also recorded a gain on the sale of a majority interest in its Directories Business during the quarter ended June 30, 2003 of $97.6 million. Depreciation and amortization associated with the operation of each of the Company’s segments has been included in total depreciation and amortization.

Local Telephone

The components of local telephone expense are plant specific operations, plant non-specific operations, customer operations, corporate operations and property and other operating tax expense. ~~Depreciation and amortization associated with the operation of the local telephone segment is included in total depreciation and amortization.~~ Local ~~telephone expense decreased to $28.7~~ ~~million for the three months ended September 30, 2002 from $29.3 million for~~ ~~the three months ended September 30, 2001. The decrease in local telephone~~ ~~expense was substantially attributable to actions the Company took under a restructuring program adopted during the second quarter of 2002.~~

~~Cellular~~29

Cellular expense increased $0.8 million, or 12.1%, for the three months ended September 30, 2002 compared to the three months ended September 30, 2001. This increase is due substantially to an increase in minutes of use from 45.3 million minutes in 2001 to 55.5 million minutes in 2002.

CellularTable expense increased $1.7 million, or 8.9%, for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. This increase is due substantially to an increase in minutes of use from 120.3 million minutes in 2001 to 147.1 million minutes in 2002. Contents

~~Directory~~ Wireless

~~Directory~~ Wireless expense ~~decreased~~increased $0.15 million, ~~from~~or ~~$10~~3.~~5 million~~6%, infor ~~2001~~the tosix months ended ~~$10.4~~June ~~million~~30, in2003 ~~2002.~~compared Asto athe ~~percent~~six ofmonths ~~directory~~ended ~~revenue~~June 30, ~~expense~~2002. ~~was~~This ~~42.2%~~increase ~~for~~is ~~2001~~due ~~compared~~substantially to 40an increase in minutes of use from 91.8%6 million ~~for~~minutes in 2002 to 107.6 million ~~This~~minutes ~~margin~~in ~~improvement~~2003. isAs ~~due~~a topercentage ~~stable~~of ~~fixed~~revenue, wireless ~~costs~~expense ~~combined~~decreased ~~with~~from ~~increasing~~63.9% ~~directory~~in ~~revenue~~2002 to 61.0% in 2003.

Internet

Internet expense increased by $910.08 million, or 7786.73%, from $1112.64 million in ~~2001~~in 2002 to $2023.62 million in ~~2002~~2003. The increase in Internet expense was due principally to ~~start-up~~transition expenses and operating costs associated with commencing services under the State of Alaska telecommunications contract. State of Alaska contract related expense totaling $1.5 million was incurred in previous periods but was recorded in the current period as it was the first point in which the expense could be matched to the associated revenue, as discussed above in Internet revenue. As a percentage of revenue, Internet expense decreased from 148.3% in 2002 to 143.2% in 2003. On December 10, 2001, the Company entered into a five -year contract with the State of Alaska to provide a broad range of telecommunications services, many of which will be provided over an IP network and supported by a service center owned and operated by ACSI. The Company anticipates expense as a percent of revenue for this segment ~~will~~to ~~increase~~level out or decline as it ~~provides additional~~completes ~~services~~the tointegration of the State of Alaska services.

Interexchange

Interexchange expense ~~decreased~~increased byslightly from $213.6 million in 2002 to $13.7 million in 2003. As a percentage of revenue, orinterexchange 11expense decreased from 140.48% in 2002 to 137.1% in 2003. The ~~majority~~Company ofconverted its long ~~this~~distance ~~decrease~~billing ~~was~~from ~~the~~an ~~result~~outside ofservice ~~the~~bureau ~~decline~~to an in-house ~~long~~system ~~distance~~during the ~~minutes~~first quarter of ~~use~~2003. asThis billing conversion is expected to result in ~~discussed~~annual ~~under~~cost ~~interexchange~~savings ~~service~~of ~~revenue~~approximately $0.6 million and improved customer service.

Depreciation and Amortization

Depreciation and amortization expense increased $25.95 million, or 513.09%, ~~due~~ due principally to increases in plant in service ~~for~~and ~~the~~to ~~nine months ended September 30, 2002 over~~ the ~~corresponding period of 2001 and the~~ adoption of ~~shorter~~ shorter depreciable lives for certain classes of assets ~~offset~~compared byto ~~ceasing goodwill amortization with~~ the ~~adoption~~corresponding period of ~~SFAS No~~2002. ~~142,~~ ~~Goodwill~~Management ~~and Intangible~~adopted ~~Assets~~the onhigher ~~January 1,~~depreciation ~~2002.~~rates ~~Depreciation~~on ~~and~~these classes ~~amortization~~of ~~expense~~assets ~~in 2001~~as ~~included~~a ~~$5.8 million~~result of ~~goodwill~~an ~~amortization.~~evaluation ~~Under~~of ~~SFAS~~the ~~No. 142, goodwill~~expected isuseful nolives ~~longer~~of its ~~amortized~~underlying ~~but~~assets, isprimarily ~~instead~~in ~~subjected~~its toregulated anlocal ~~annual impairment~~telephone ~~test~~segment.

~~Loss~~ Gain (loss) on disposal of assets

On April 28, 2003, the Company signed an underwriting agreement to sell a majority interest in its directory business and on April 29, 2003 filed a final prospectus to offer this majority interest to investors through a Canadian income fund. The transaction closed on May 8, 2003, with the Company ~~recorded~~selling an 87.42% interest and retaining a ~~non-cash~~12.58% ~~loss~~interest in its Directories Business. The Company recognized a gain on ~~disposal~~disposition of ~~assets~~this majority interest of its directory business of $297.16 million ~~during~~ ~~the~~on ~~nine~~a ~~months~~pre-tax ~~ended~~basis. ~~September 30,~~The ~~2002~~Company asalso recorded a ~~result~~non-cash ofloss ~~retiring~~on the disposal of certain fixed assets noof ~~longer~~$1.1 million induring ~~use~~2003, the majority of which were wireless assets.

Interest Expense and Interest Income and Other

Interest expense ~~decreased~~increased to $727.56 million, ~~or 17.0%,~~ for the ~~nine~~six months ended ~~September~~ June 30, ~~2002~~2003 compared to $23.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2001, principally~~2002. asAs a result of ~~market~~the ~~effects~~early onextinguishments ~~the~~of ~~Company’s~~outstanding ~~variable~~debt ~~interest~~of $106,650 during ~~rate~~second ~~debt.~~quarter Inof ~~addition~~2003, ~~during~~$3.4 million of debt issuance cost was charged to interest expense. During the second quarter of 2002, the Company reversed $1.7 million of previously accrued interest expense ~~of $1.7 million~~ as a result of a favorable ruling by the District of Columbia Court of Appeals related to a dispute on interstate access rates for the Anchorage market. ~~Interest~~After ~~income~~consideration ~~and~~of ~~other~~these ~~also declined by $1.2 million~~items, ~~or 42.8%, as a result of a lower average~~ ~~invested cash balance and lower market interest rates during 2002 compared to~~ ~~2001.~~

the decrease in interest expense is the result of market interest rate effects on the Company’s variable interest rate debt. Interest income and other increased to $5.0 million for the six months ended June 30, 2003 compared to $1.0 million for the six months ended June 30, 2002, substantially due to a $4.1 million gain on foreign exchange on the directory transaction.

Income Taxes

Discontinued Operations

On March 30, 2002, the Company’s management approved a plan to offer for sale its wireless cable television service segment. As a result of this decision, the operating revenue and expense of this segment ~~has~~have been ~~classified~~ classified as discontinued operations under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for all periods presented and the assets and liabilities of the disposal group have been written down ~~as of March 30, 2002~~ to their fair value, net of expected selling expense. The ~~write down and~~ results of operations of this discontinued segment resulted in a charge to discontinued operations of $~~7.5 million~~52 thousand and $17.34 million for the ~~periods~~six months ended ~~September~~ June 30, ~~2002~~2003 and ~~2001~~2002, respectively. The Company has fully reserved in the form of a valuation allowance the income tax benefit ofresulting from this discontinuance. The Company completed its disposal of its wireless cable television segment as of March 31, 2003.

Cumulative Effect of Change in Accounting Principle

~~During~~ Effective ~~the~~January 1, ~~second~~2002, ~~quarter~~the ofCompany ~~fiscal~~adopted ~~2002~~SFAS No. 142, ~~the~~Goodwill ~~Company~~and Other ~~also~~Intangible ~~completed~~Assets. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level upon adoption and at least annually thereafter, utilizing a two-step methodology. The transitional review for goodwill impairment required under SFAS No. 142. ~~This review~~ indicated that goodwill recorded in the local telephone, Internet and interexchange segments was impaired as of January 1, 2002. Accordingly, the Company measured and recognized in the first quarter of 2002 a transitional impairment loss of $105.4 million as athe cumulative effect of a change in accounting principle in the consolidated statement of operations. The income tax benefit of $39.5 million was offset by a valuation allowance. See Note 3 6 “Cumulative Effect of Change in Accounting Principle” in the “Notes to Consolidated Financial Statements” ofincluded elsewhere in this ~~quarterly~~10-Q ~~report~~ for additional discussion of the ~~impact of~~ this statement ~~on the Company’s consolidated financial statements~~.

Net Income (Loss)

The ~~increase~~change in net ~~loss~~income (loss) is primarily a result of the factors ~~discussed~~ discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company has satisfied its operational and capital cash requirements primarily through internally generated funds, the sale of stock and debt financing. For the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003, the Company’s cash ~~flows~~ flows from operating activities were $4935.20 million. At ~~September~~June 30, ~~2002~~2003, the Company had approximately $2373.58 million in net working capital, including $64.6 million in unrestricted cash. As of ~~September~~ June 30, ~~2002~~2003, the Company had $75.0 million of remaining capacity under its revolving credit facility, representing 100% of available capacity.

The Company has outstanding a $~~430~~320.7 million bank credit agreement (“Senior Credit Facility”), and $150.0 million in 9.375% senior subordinated notes due 2009, representing substantially all of the Company’s long-term debt of $~~591~~482.51 million as of ~~September~~June 30, ~~2002~~2003. In addition, $17.3 million in ~~senior~~ senior discount debentures are recorded at ACS Group and are collateralized by substantially all assets of the Company. Interest on ACS Group’s senior discount debentures and ACS Holdings’ senior subordinated notes are payable semiannually. Interest on borrowings under the Senior Credit Facility is payable monthly, bi-monthly, quarterly or semi-annually at the Company’s option. The Senior Credit Facility requires 1% annual principal payments that commenced on May 14, 2002, with balloon payments in each of 2006, ~~2007, and 2008. The Senior Credit~~ ~~Facility contains a number of restrictive covenants and events of default,~~ ~~including covenants limiting capital expenditures, incurrence of debt, and the~~ ~~payment of dividends, and requires the Company to achieve certain financial~~ ratios. The Company is in compliance with all of its debt covenants. During the second quarter, the Company’s lenders approved an amendment to its Senior Credit Facility that, among other things, permits the Company to repurchase up to $15 million of its outstanding common stock over the term of the Senior Credit Facility.

2007, and 2008. The Senior Credit Facility contains a number of restrictive covenants and events of default, including covenants limiting capital expenditures, incurrence of debt, and the payment of dividends, and requires the Company to achieve certain financial ratios. The Company is in compliance with all of its debt covenants. During the first quarter of 2003, the Company’s lenders approved an amendment and waiver to its Senior Credit Facility that, among other things, permitted the Company to sell its directory business and that 75% of such proceeds would be used to repay outstanding Senior Credit Facility term loans. This amendment and waiver became effective on May 8, 2003, and on May 13, 2002, the Company paid down $106.7 million of the outstanding Senior Credit Facility term loans.

With the company’s improved credit profile, we are currently exploring opportunities to raise additional capital to support the future growth of the business and to refinance our senior secured credit facilities with some combination of new senior and senior secured indebtedness that we expect would loosen certain restrictive covenants, including with respect to the payment of dividends. Such financing would be expected to extend the maturities of a portion of the Company’s debt facilities and may include increasing the Company’s total indebtedness by approximately $50 million.

The Company employs an interest rate hedge transaction, which fixes at 5.99% the underlying variable rate on $217.5 million of the borrowings under the Senior Credit Facility, expiring in June 2004. The underlying variable rate for the Senior Credit Facility is based on the London Interbank Offer Rate (“LIBOR”), which is adjusted at each monthly, quarterly or semi-annual rollover date.

On In ~~July 15~~December 2001, ~~2002~~ the Company ~~fulfilled~~entered into a ~~commitment~~material tocontract ~~Neptune~~with the ~~Communications,~~State ~~L.L.C.~~of ~~(“Neptune”)~~Alaska to provide ait ~~loan~~with incomprehensive ~~the~~telecommunications ~~form of an~~services ~~unsecured note receivable totaling $15 million in return~~ for ~~certain consideration.~~a ~~The~~period ~~note bears interest at the applicable federal rate, which was 5.61% at the date~~ of ~~issuance,~~five ~~and matures on July 15, 2022~~years. ~~Interest~~This ~~is payable~~contract ~~semiannually,~~obligates ~~but Neptune may elect to add~~ the ~~interest~~Company to, ~~the principal~~among ~~in lieu of cash payments. The commitment was funded with cash on~~other ~~hand. In connection with this note~~things, ~~Neptune~~provide ~~has~~on ~~granted~~ the ~~Company an~~state’s ~~option~~behalf tocustomer ~~purchase~~premise ~~certain~~equipment ~~network~~and ~~assets of Neptune, no later~~other ~~than~~capital ~~January~~assets 2,which ~~2006 at a price equal to~~ the ~~then outstanding loan balance. The~~ Company ~~has~~believes ~~also~~will ~~entered~~range ~~into~~between a$45 million ~~strategic agreement with~~and ~~Neptune~~$55 million ~~for~~over the ~~life~~term of the ~~fiber~~agreement, ~~optic cable system owned by Neptune. The significant provisions~~ of ~~this~~which ~~agreement~~approximately ~~are: i)~~$14.2 ~~purchase~~million ~~commitments~~has bybeen ~~the~~expended ~~Company~~through ~~for capacity in 2005 and 2007~~June 30, ~~the~~ ~~final~~2003. ~~price~~The ~~and~~Company ~~quantity~~intends ~~of which are subject~~ to ~~future events,~~fund ~~ii)~~this ~~Neptune’s~~commitment ~~restoration~~with ofcash ~~the Company’s traffic carried~~ on ~~another cable~~hand ~~system, iii)~~ and ~~specific~~cash ~~interconnection~~flows ~~arrangements between the Company and Neptune, should the Company exercise its option to purchase certain network assets~~ from ~~Neptune~~operations.

~~The~~ On ~~local~~July 15, ~~telephone~~2002 ~~network~~the ~~requires~~Company ~~the~~fulfilled ~~timely~~a ~~maintenance~~commitment ofto ~~plant~~Neptune ~~and~~to provide ~~infrastructure.~~to ~~The~~that ~~Company’s~~party ~~historical~~a ~~capital~~loan ~~expenditures~~in ~~have~~the ~~been significant.~~form ~~The~~of ~~construction~~an ~~and~~unsecured ~~geographic~~note ~~expansion~~receivable oftotaling ~~the Company’s~~$15.0 ~~cellular~~million ~~network~~in ~~has~~return ~~required~~for ~~significant~~certain ~~capital~~consideration. The ~~implementation~~note ofbears interest at the ~~Company’s~~applicable ~~interexchange~~federal ~~network~~rate, ~~and~~which ~~data~~was ~~services~~4.84% ~~strategy~~at isJune 30, ~~also~~2003 ~~capital~~and matures on July ~~intensive~~15, 2022. InInterest ~~1999~~is payable semiannually, but the ~~Company~~borrower ~~purchased~~may ~~fiber~~elect ~~capacity~~to ~~for $19.5 million,~~add ~~which~~the ~~was~~interest ~~funded~~to ~~with~~the ~~monies~~principal ~~borrowed~~in tolieu ~~finance~~of ~~the~~cash ~~1999 acquisitions~~payments. ~~Capital~~The commitment was ~~expenditures~~funded ~~for~~with ~~2000~~cash ~~were~~on ~~$72~~hand.~~3 million~~ In connection with this note, ~~including~~Neptune ~~$3.2 million~~has ingranted ~~capital~~the ~~leases.~~Company ~~Capital~~an ~~expenditures~~option ~~for~~to ~~2001~~purchase ~~were~~certain ~~$87.6~~network assets of Neptune, no later than January ~~million~~2, ~~including~~2006, ~~$19~~at a price equal to the then outstanding loan balance.5 The ~~million~~Company ~~for~~has ~~additional~~also ~~fiber~~entered ~~capacity~~into ~~and~~a ~~$15 million~~strategic ~~for~~agreement anwith IPNeptune ~~based~~for ~~network~~the life ~~and~~of ~~service~~the ~~center~~fiber optic cable system owned by Neptune. The ~~Company~~significant ~~anticipates~~provisions ~~capital~~of this ~~spending~~agreement are: i) purchase commitments by the Company for ~~2002~~capacity ofin 2005 ~~approximately~~and ~~$75 million~~2007, ~~including~~the ~~approximately~~final ~~$15~~price and quantity of which are subject to ~~$20 million~~future ~~necessary~~events, toii) ~~meet~~Neptune’s ~~its~~restoration ~~obligations~~of ~~under~~the aCompany’s ~~contract~~traffic ~~with~~carried ~~the~~on ~~State~~another ofcable system, ~~Alaska~~iii) and ~~approximately~~ ~~$7 million~~specific ~~for~~interconnection arrangements between the ~~first~~Company ~~phase~~and Neptune, ofshould the Company exercise its ~~buildout~~option ofto ~~PCS~~purchase ~~licenses.~~certain network assets from Neptune. The Company ~~intends~~is tocurrently ~~fund~~renegotiating ~~its~~the ~~future~~terms ~~capital~~and conditions ~~expenditures~~of ~~with~~this ~~cash~~agreement onand ~~hand, through~~it ~~internally~~is ~~generated~~not ~~cash~~possible ~~flows,~~to ~~and~~determine ifthe ~~necessary,~~ultimate outcome ~~through~~of ~~borrowings under~~these ~~the~~negotiations ~~revolving~~at ~~credit~~this ~~facility~~time.

The local telephone network requires the timely maintenance of plant and infrastructure. The Company’s historical capital ~~requirements~~expenditures ~~may~~have ~~change~~been significant. ~~due~~The ~~to,~~construction ~~among~~and ~~other~~geographic ~~things: impacts~~expansion of ~~regulatory~~the ~~decisions~~Company’s wireless ~~that~~network ~~affect~~has ~~the~~required significant capital. The implementation of the Company’s ~~ability~~interexchange network and data services strategy is also capital intensive. In 1999, the Company purchased fiber capacity for $19.5 million, which was funded with monies borrowed to ~~recover~~finance the 1999 acquisitions. Capital expenditures for fiscal year 2000 were $72.3 million, including $3.2 million in capital leases. Capital expenditures for fiscal year 2001 were $87.6 million, including $19.5 million for additional fiber capacity and $15.0 million for an IP based network and service center. Capital expenditures for fiscal year 2002 were $71.4 million, including $4.2 million in capital leases, approximately $12.4 million necessary to meet its ~~investments~~obligations under a contract with the State of Alaska and approximately $5.0 million for the first phase of its build out of PCS licenses. The Company anticipates capital spending of between $50 million and $60 million for 2003, ~~changes~~and has spent $17.6 million in ~~technology~~the six months ended June 30, 2003, including property acquired under a mortgage of $2.3 million. The Company intends to fund its future capital expenditures with cash on hand, through internally generated cash flows, and if necessary, through borrowings under the revolving credit facility.

2636

~~effects~~ On May 8, 2003 the Company completed the sale of ~~competition,~~a ~~changes~~majority interest in the newly formed ACS Media, LLC (the ~~Company’s~~“Directories ~~business~~Business”) ~~strategy~~to the ACS Media Income Fund (the “Fund”). The Fund sold 17,500 units on May 8, 2003 for net proceeds of $110.4 million, after deducting its underwriters’ fees and ~~the~~transaction ~~Company~~expenses of $10.2 million. The Fund’s ~~decision~~net proceeds were used to acquire ~~pursue~~from ~~specific~~the ~~acquisition~~Company ~~opportunities~~an 87.42% interest in the Directories Business. The Company received net proceeds of $105.1 million after deducting its fees and expenses associated with the transaction of $5.3 million.

The Company entered into an arrangement with the Metropolitan Life Insurance Company (MetLife) to provide a credit facility to its Directories Business on May 8, 2003 immediately prior to the sale of its Directories Business to the Fund. The Directories Business then drew $35.0 million of term loans against the facility, using $1.5 million to pay fees and expenses related to the debt issuance and $0.1 million to prepay an annual agency fee to MetLife. Of the $33.4 million in net cash proceeds, $0.4 million was deposited into the Directories Business as cash working capital and $33.0 million was distributed to the Company as a dividend. The credit facility is non-recourse to the Company.

As discussed above, as a condition of obtaining an amendment and waiver to the Company’s senior bank credit facility obtained to permit the sale of its Directories Business, the Company was required to use a specified amount of the proceeds to prepay a portion of the outstanding term loans under the facility. To fulfill this requirement, the Company prepaid $106.7 million of outstanding bank debt on May 13, 2003.

The Company’s capital requirements may change due to, among other things, impacts of regulatory decisions that affect the Company’s ability to recover its investments, changes in technology, the effects of competition, changes in the Company’s business strategy, and the Company’s decision to pursue specific acquisition opportunities.

The Company believes that it will have sufficient working capital provided by operations and available borrowing capacity under the existing revolving credit facility to service its debt and fund its operations, capital expenditures and other obligations over the next 12 months. The Company’s ability to service its debt and fund its operations, capital expenditures and other obligations will be dependent upon its future financial performance, which is, in turn, subject to future economic conditions and to financial, business, regulatory and other factors, many of which are beyond the Company’s control.

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

Management is responsible for the financial statements presented elsewhere in this Form 10-Q and has evaluated the accounting policies used in their preparation. Management believes these policies to be reasonable and appropriate. The Company’s significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2001~~2002. The following discussion identifies those accounting policies that management believes are critical in the preparation of the Company’s financial statements, the ~~judgements~~judgments and uncertainties affecting the application of those policies, and the possibility that materially different amounts would be reported under different conditions or using different assumptions.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Among the significant estimates affecting the financial statements are those related to the realizable value of accounts receivable, long-lived assets, income taxes and network access revenue reserves. Actual results may differ from those estimates.

Access revenue is recognized when earned. The Company participates in toll revenue pools with other telephone companies. Such pools are funded by toll revenue and/or access charges regulated by the RCA within the intrastate jurisdiction and the FCC within the interstate jurisdiction. Much of the interstate access ~~service~~ revenue is initially recorded based on estimates. ~~These~~ These estimates are derived from interim financial statements, available ~~separations~~ separations studies and the most recent information available about achieved ~~rates~~ of return. These estimates are subject to adjustment in future accounting periods as refined operational information becomes available. To the extent that disputes arise over revenue settlements, the Company’s policy is to defer revenue collected until settlement methodologies are resolved and finalized. During the second quarter of 2002, the Company recognized as revenue $11.1 million of previously deferred interstate access revenue and reversed $1.7 million of interest expense previously accrued thereon as a result of a favorable ruling by the District of Columbia Court of Appeals related to a dispute on interstate access rates ~~for the Anchorage market. At September 30, 2002, the Company had recorded liabilities~~ of ~~$20.7 million related to~~ ~~potentially refundable access revenue.~~

~~The Company utilizes the liability method of accounting for income taxes.~~37 ~~Under the liability method, deferred taxes reflect the temporary differences~~ between the financial and tax bases of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that such deferred tax assets will not be realized. The cumulative valuation allowance against deferred tax assets was $66.2 million as of September 30, 2002.

~~Historically,~~return. ~~lives~~These ~~approved~~estimates ~~for~~are ~~regulatory~~subject ~~purposes~~to ~~have~~adjustment ~~approximated economically~~in ~~useful~~future ~~lives.~~accounting Onperiods as ~~July 21,~~additional ~~2002,~~operational ~~the~~information ~~Company~~becomes ~~received~~available. anTo ~~order from~~ the ~~Regulatory~~extent ~~Commission of Alaska which appears to extend lives approved for~~that ~~rate-making~~disputes ~~purposes~~arise ~~beyond~~over ~~the~~revenue ~~economically~~settlements, ~~useful lives of~~ the ~~underlying assets.~~Company’s ~~Management~~policy is ~~awaiting further clarification from the RCA necessary~~ to defer ~~evaluate~~revenue ~~the~~collected ~~effects~~until ofsettlement ~~this~~methodologies ~~order~~are onresolved ~~the~~and ~~financial statements of the Company~~finalized. As ~~of September~~At June 30, ~~2002~~2003, the Company ~~has~~had ~~deferred~~recorded asliabilities aof ~~regulatory asset~~ $015.9 4 million ofrelated ~~costs incurred in connection with regulatory rate making~~to ~~proceedings,~~its ~~which~~estimate ~~will~~of berefundable ~~amortized~~access ~~in future periods~~revenue. IfActual ~~the~~results ~~Company~~could ~~were~~vary ~~not following~~from ~~SFAS 71, these costs would have been charged to expense as incurred~~this estimate.

The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes reflect the temporary differences between the financial and tax basis of assets and liabilities using the enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that such deferred tax assets will not be realized. The cumulative valuation allowance against deferred tax assets is $57.1 million as of June 30, 2003.

The local telephone exchange operations of the Company account for costs in accordance with the accounting principles for regulated enterprises prescribed by SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. This accounting recognizes the economic effects of rate regulation by recording cost and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, under SFAS No. 71, plant and equipment is depreciated over lives approved by regulators and certain costs and obligations are deferred based upon approvals received from regulators to permit recovery of such amounts in future years. Historically, lives approved for regulatory purposes have approximated economically useful lives. On July 21, 2002, the Company received an order from the RCA which extended lives approved for ratemaking purposes beyond the economically useful lives of the underlying assets. Management petitioned for reconsideration and the RCA has accepted additional testimony and held a hearing in June of 2003. A final order on the matter is not expected until the second half of 2003. The Company implemented, effective January 1, 2003, higher depreciation rates for its regulated telephone plant for the interstate jurisdiction. As a result, the Company has recorded a regulatory asset under SFAS No. 71 of $5.5 million as of June 30, 2003. The Company has also deferred as a regulatory asset $0.9 million of costs incurred in connection with regulatory rate making proceedings, which is being amortized over three years starting in 2003. The balance of this regulatory asset was $0.8 million at June 30, 2003. If the Company were not following SFAS No. 71, it would have recorded additional depreciation expense of $5.5 million for the intrastate and local jurisdictions and the deferred costs incurred in connection with regulatory rate making proceedings would have been charged to expense as incurred.

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with the guidelines of this accounting principle, goodwill and indefinite-lived intangible assets are no longer amortized but will be assessed for impairment on at least an annual basis. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is then measured in the second step. The Company determines the fair value of each reporting unit for purposes of this test primarily by using a discounted cash flow valuation technique. Significant estimates used in the valuation include estimates of future cash flows, both future short-term and long-term growth rates, and estimated cost of capital for purposes of arriving at a discount factor. The Company recognized in the first quarter of 2002 a transitional impairment loss of $105.4 million under SFAS No. 142 as the cumulative effect of a change in accounting principle in the consolidated statement of operations. At June 30, 2003, the Company had recorded goodwill of $38.4 million.

OUTLOOK

The Company expects that, overall, the demand for telecommunications services in Alaska to grow, particularly as a result of:

• increasing demand for private network services by government and business on a statewide basis on either a circuit switched or IP basis, • increasing demand for wireless voice and data services, and • growth in demand for DSL and Internet access services due to higher business and consumer bandwidth needs for Internet and data services.38

	•		increasing demand for private network services by government and business on a statewide basis on either a circuit switched or IP basis,

	•		increasing demand for wireless voice and data services, and

	•		growth in demand for DSL and Internet access services due to higher business and consumer bandwidth needs.

The Company believes that it will be able to capitalize on this demand through its diverse service offerings on its owned circuit switched and IP facilities and new sales and marketing initiatives directed toward basic voice, enhanced and data services.

There are currently a number of regulatory proceedings underway at the state and federal levels that could have a significant impact on the Company’s operations. The Company cannot predict with certainty the impact of current or future regulatory developments on any of its businesses.

The telecommunications industry is extremely competitive, and the Company expects competition to intensify in the future. As an incumbent local exchange carrier (“ILEC”), the Company faces competition mainly from resellers, local providers who lease its UNEs and, to a lesser degree, from facilities-based providers of local telephone services. In addition, as a result of the RCA’s recent affirmation of the APUC’s termination of the Company’s rural exemptions, the Company may be required to provide interconnection elements and/or wholesale discounted services to competitors in all or some of its rural service areas. Moreover, while ~~cellular~~wireless telephone services have historically complemented traditional LEC services, the Company anticipates that existing and emerging wireless technologies may increasingly compete with LEC services. In ~~cellular~~wireless services, the Company currently competes with at least one other wireless ~~cellular~~ provider in each of its ~~cellular~~wireless service areas. In the ~~interexchange~~highly competitive ~~market~~business for Internet access services, the Company currently competes ~~has~~with ~~less~~a ~~than~~number ~~10%~~ of ~~total~~ ~~revenue~~established inonline ~~Alaska~~service ~~and~~companies, ~~faces competition from the two major~~ interexchange ~~providers~~carriers inand ~~Alaska~~cable companies. In the ~~highly~~interexchange ~~competitive business for Internet access services~~market, the Company believes it currently ~~competes~~has ~~with~~less athan ~~number~~10% of ~~established~~total ~~online service~~revenue ~~companies,~~in ~~interexchange~~Alaska ~~carriers~~ and ~~cable~~faces ~~companies~~competition from the two major interexchange providers.

The telecommunications industry is subject to continuous technological change. The Company expects that new technological developments in the future will generally serve to enhance its ability to provide service to its customers. However, these developments may also increase competition or require the Company to make significant capital investments to maintain its leadership position in Alaska.

~~On December 10, 2001, the Company entered into a material contract with~~39 ~~the State of Alaska to provide it with comprehensive telecommunications~~ ~~services. The Company expects that this contract will generate approximately~~ ~~$92 million in revenue over its term, including an estimated $10 million in~~ ~~2002. The contract also obligates the Company to provide customer premise and~~ ~~other capital assets to the state estimated to require an investment of $25 to~~ ~~$30 million over the term of the agreement, including $15 to $20 million during 2002, of which it has expended approximately $10.3 million through September 30, 2002.~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has issued senior subordinated notes and has entered into a bank credit facility. These on-balance sheet financial instruments, to the extent they provide for variable rates of interest, expose the Company to interest rate risk, with the primary interest rate risk exposure resulting from changes in LIBOR or the prime rate, which are used to determine the interest rates that are applicable to borrowings under the Company’s bank credit facilities. The Company uses derivative financial instruments, in particular an interest rate swap agreement, to partially hedge variable interest transactions. The Company’s derivative financial instrument transaction has been entered into for hedging purposes. The terms and characteristics of the derivative financial instruments are matched with the underlying on-balance sheet instrument or anticipated transactions and do not constitute speculative or leveraged positions independent of these exposures. ~~There~~During ~~have~~the ~~been~~quarter noended ~~material~~June 30, ~~changes~~2003, to the Company’s ~~outstanding~~prepaid ~~debt~~$106.7 million ~~instruments~~of ~~since~~its ~~December 31,~~bank ~~2001~~credit facility as disclosed in Note 3 of the financial statements attached hereto.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Within the 90 days prior to the date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-14(c) and 15d-14(c)) under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and its Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that our disclosure controls and procedures are effective.

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

Changes in internal controls

There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the date the Company carried out this evaluation.

2940

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As previously reported, the Company filed a formal appeal of the RCA’s order terminating the rural exemption for Fairbanks, Juneau and the rural communities in the Glacier State study area on November 10, 1999. This matter has been fully briefed and argued and is currently pending before the Alaska ~~Supreme~~ Supreme Court.

~~General~~ The ~~Communication, Inc. (“GCI”), requested a new interconnection agreement for the rural communities in ACSN~~Company’s ~~Glacier~~LECs ~~State study area on November 29~~(ACSN, ~~2001. On April 5~~ACSF, ~~2002,~~ACSAK ~~ACSN~~and ~~filed~~ACSA) aare ~~complaint~~currently ~~seeking a~~negotiating ~~declaratory~~and ~~ruling~~seeking ~~from~~arbitration ~~the federal district court in Alaska that it had satisfied its statutory obligation to arbitrate an interconnection agreement for this area for the remainder~~ of ~~the~~new ~~term~~interconnections ofagreements ~~the~~with ~~existing agreement. On~~General ~~August 21~~Communication, ~~2002,~~Inc. ~~the~~(“GCI”). ~~federal~~A ~~district~~hearing ~~court~~is ~~dismissed~~scheduled ~~the~~in ~~complaint on~~ the ~~grounds~~ ~~the~~Anchorage ~~dispute~~matter ~~was not yet ripe. Shortly thereafter, the RCA ordered ACSN~~for toNovember ~~proceed with arbitration~~2003. ~~ACSN~~The ~~intends~~Company tois ~~comply with RCA orders. Nevertheless, on October 21, 2002, ACSN filed a new complaint in federal district court~~ seeking anconsolidation ~~injunction~~of ~~against~~the ~~further~~arbitrations ~~RCA~~for ~~action during~~ the ~~term~~ ofother ~~its~~companies ~~existing~~with ~~agreement~~the ~~with~~Anchorage ~~GCI~~arbitration.

~~The~~ On ~~Company~~March 25, ~~completed~~2003, the ~~hearing~~RCA ~~for~~issued ~~Phase~~an Iorder ~~(revenue~~approving ~~requirements)~~new ofrevenue ~~its~~requirements ~~rate cases~~ for ~~all~~ACSF, ~~its~~ACSAK, ~~local~~and ~~exchange~~ACSN. ~~companies~~The inorder ~~March~~reduces ~~2002.~~the ~~The RCA~~revenue ~~issued~~requirements afor ~~decision~~ACSF ~~regarding~~and ~~depreciation~~ACSN onwhile ~~June 6,~~slightly ~~2002~~increasing ~~that~~the ~~arguably extended~~revenue ~~the~~requirement ~~Company’s~~for ~~asset~~ACSAK. ~~lives~~During ~~beyond~~ the ~~time~~second ~~period~~quarter, ~~for~~the ~~which~~Company ~~they~~filed ~~will~~its becost of ~~economically~~service ~~useful.~~and ~~The~~rate ~~Company~~designs ~~sought clarification~~ and ~~reconsideration~~testimony of for the ~~June 6,~~three ~~2002~~rural ~~order~~LECs. OnIn ~~July 21~~addition, in ~~2002~~May 2003, the RCA ~~clarified~~held ~~that~~a itlimited ~~intended to~~rehearing ~~choose~~in ~~service~~the ~~lives~~revenue ~~without~~requirement ~~any~~phase of ~~regard~~the hearing for ACSA. The ACSA hearing reviewed the ~~resulting~~RCA’s ~~low~~decision ~~depreciation~~to reduce ~~rates~~the ~~and~~revenue ~~confirmed~~requirement ~~its~~for ~~decisions.~~ACSA ~~The~~by ~~Company~~lengthening isthe ~~seeking~~service ~~further~~lives ~~relief~~of ~~from~~specific ~~this~~assets ~~Order~~ and isthereby ~~awaiting~~reducing ~~RCA~~depreciation ~~action~~expense. ~~Once~~The ~~the~~RCA’s ~~LEC~~decision ~~revenue~~on revenue requirements ~~are adjudicated,~~will ~~Phase~~have IIa ~~(cost~~direct ofimpact ~~service~~on ~~and~~the ~~rate~~retail ~~design)~~rates ~~proceedings~~and ~~will~~intrastate ~~commence.~~access ~~The~~rates ~~Company~~that ~~intends~~ACSA is allowed to ~~vigorously~~charge. ~~pursue~~Once ~~these~~a ~~matters~~revenue inrequirements order is issued by the ~~coming months~~RCA, ~~but~~ACSA ~~does~~will ~~not~~file ~~expect~~cost ~~final~~of ~~rates~~service toand berate ~~decided~~design orstudies consistent ~~implemented~~with ~~this~~that ~~year~~order.

The Company ~~also~~ previously reported that ~~on February 7, 2001,~~ it ~~filed~~had ~~an appeal in the United States Court of Appeals for the District of Columbia Circuit of~~ a ~~January 24,~~dispute ~~2001~~with ~~FCC Order to pay $2.7 million plus interest to~~ GCI for excess interstate access charges. On April 4, 2001, the FCC released an order granting the Company’s request for a stay of the payment and allowed the Company to place the funds in question, already fully reserved, in escrow pending ~~the outcome of the appeal. On March 4, 2002, the District of Columbia~~ ~~Circuit~~before ~~Court of Appeals heard oral argument in~~ the ~~matter. On May 21, 2002, the court issued its decision finding that the~~ FCC ~~could~~concerning ~~rule~~interstate ~~that~~access ~~ISP traffic is intrastate in nature, but that the FCC could not order refunds for those periods during which the Company’s tariffs were deemed lawful~~charges. ~~The~~This matter ~~was remanded~~has ~~back to the FCC for recalculation of any refunds that may be appropriate given the tariffs that have~~ been ~~deemed lawful and for~~ ~~reconsideration of the interest rate imposed in the FCC’s original order on any refunds that may eventually be ordered~~resolved.

On The ~~May 14, 2001, the~~ Company ~~was~~has ~~served~~been involved with a ~~class~~number ~~action~~of ~~lawsuit~~service-oriented disputes ~~concerning~~with ~~its~~GCI. ~~interstate~~The ~~Infinite~~RCA ~~Minutes~~has ~~long~~ordered ~~distance~~the ~~plan.~~Company ~~The~~to, ~~court~~amongst other things, construct ~~certified~~new ~~the~~facilities ~~class~~for onGCI ~~March 19,~~to ~~2002~~serve GCI customers and ~~denied~~to ~~reconsideration~~provide ofGCI ~~that decision~~with onaccess ~~April 22,~~to the ~~2002.~~ACS Itordering isand ~~impossible~~provisioning tosystems. ~~determine~~The atCompany ~~this~~is ~~time~~currently ~~the~~seeking ~~actual~~review ~~number~~ of ~~plaintiffs~~these ordecisions. ~~the~~In ~~claims~~May ~~that~~2003, ~~will~~however, ~~actually~~GCI ~~continue~~filed toa becomplaint inagainst ~~dispute.~~the ~~The~~ Company ~~believes~~with ~~this~~the ~~suit~~FCC isconcerning ~~without~~service ~~merit~~issues. ~~and~~While ~~intends~~the toCompany intends to vigorously defend its ~~position~~actions, the potential for some liability exists and the Company cannot predict the final outcome of this proceeding.

~~The~~ On ~~Company~~May 14, is2001, ~~involved~~the inCompany ~~various~~was ~~other~~served ~~claims,~~with ~~legal~~a ~~actions~~class ~~and~~action lawsuit ~~regulatory~~concerning ~~proceedings~~its ~~arising~~interstate inInfinite ~~the~~Minutes ~~ordinary~~long ~~course~~distance ~~of business~~plan. ~~The~~A ~~Company~~trial is ~~believes~~scheduled ~~that~~for September 2004. It is impossible to determine at this time the actual ~~disposition~~number of ~~these~~plaintiffs ~~matters~~or the claims that will ~~not~~actually ~~have~~continue ato ~~material~~be ~~adverse~~in ~~effect~~dispute. onThe ~~the~~ Company’s ~~consolidated~~believes ~~financial~~this ~~position,~~suit ~~results~~is ofwithout ~~operations~~merit and intends to orvigorously ~~cash~~defend ~~flows~~its position.

30 ACSW has petitioned the RCA for Eligible Telecommunications Carrier (“ETC”) status in two high cost areas of Alaska. The RCA has yet to take action on this petition. Meanwhile, Dobson Communications has also petitioned the RCA for ETC status in various parts of Alaska and has further sought to have the RCA redefine ILEC service areas based on wire centers.

The Company is involved in various other claims, legal actions and regulatory proceedings arising in the ordinary course of business. See Note 12, Commitments and Contingencies, in the footnotes to the financial statements for additional information. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits:

	99.1	Certification of Charles R. Robinson, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The Sarbanes-Oxley Act of 2002
10.16			Directory Publication and Distribution Agreement, dated May 8, 2003 effective as of January 1, 2001 by and among ACS of Anchorage, Inc., ACS of Fairbanks, Inc., ACS of Alaska, Inc., and ACS of the Northland, Inc.
	99.2	Certification of Kevin P. Hemenway, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The Sarbanes-Oxley Act of 2002
31.1			Certification of Charles R. Robinson, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Kevin P. Hemenway, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification of Charles R. Robinson, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The Sarbanes-Oxley Act of 2002.
32.2			Certification of Kevin P. Hemenway, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K:

NoThe ~~reports~~following item was reported on Form 8-K, ~~were~~filed May 13, 2003 and amended on July 7, 2003: Item 2. Acquisition or Disposition of Assets — On April 28, 2003, the Company entered into an underwriting agreement with a syndicate of Canadian investment banks to complete the sale of a majority interest in the newly formed ACS Media, LLC, the Company’s directory business. The Company subsequently filed ~~during~~on April 29, 2003, a final prospectus with Canadian securities regulators to sell a majority interest in ACS Media, LLC in a public offering in Canada to the ~~quarter~~ACS ~~ended~~Media ~~September 30~~Income Fund, ~~2002~~ which is a Canadian income fund. The offering was sponsored by the Company. The transaction closed on May 8, 2003, with the Company selling an 87.42% interest and retaining a 12.58% interest in ACS Media, LLC.

3142

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: ~~October~~ July 31, ~~2002~~ 2003 ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

/s/ Charles E. Robinson Charles E. Robinson Chief Executive Officer and Chairman of the Board /s/ Kevin P. Hemenway Kevin P. Hemenway Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

~~/s/ Wesley E. Carson Wesley E. Carson President and Chief Administrative Officer~~43

/s/ Kevin P. Hemenway Kevin P. Hemenway Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

CERTIFICATIONS

Form of Sarbanes-Oxley Section 302(a) Certification

I, Charles E. Robinson, Chief Executive Officer of Alaska Communications Systems Holdings, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Alaska Communications Systems Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: October 31, 2002 /s/ Charles E. Robinson Charles E. Robinson Chief Executive Officer and Chairman of the Board Alaska Communications Systems Holdings, Inc.

Form of Sarbanes-Oxley Section 302(a) Certification

I, Kevin P. Hemenway, Chief Financial Officer of Alaska Communications Systems Holdings, Inc, certify that:

Date: October 31, 2002 /s/ Kevin P. Hemenway Kevin P. Hemenway Senior Vice President and Chief Financial Officer Alaska Communications Systems Holdings, Inc.

		Nine Months Ended
		Six Months Ended
		September 30,
		June 30,
		2002		2001
		2003		2002
		(In Thousands)
Local telephone revenue:
	Local network	$	7449,~~870~~348	$	7050,~~530~~684
	Network access		8350,~~827~~201		7659,~~258~~965
	Deregulated and other		139,~~431~~662		168,~~230~~664
Total local telephone revenue		$	~~172~~109,~~128~~211	$	~~163~~119,~~018~~313

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CellularTable expense increased $1.7 million, or 8.9%, for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. This increase is due substantially to an increase in minutes of use from 120.3 million minutes in 2001 to 147.1 million minutes in 2002. Contents

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Filing Compare · ALASKA COMMUNICATIONS SYSTEMS HOLDINGS INC