##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K

(Mark One)



|[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
|--- | ---------------------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2001
 
OR



|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|----- | -----------------------------------------------------------------------------------------------

For the transition period from                      to
                    
 Commission file number 000-28167



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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   |  | 99503-6091
|(Address of principal executive offices) |  | (Zip Code)

(907) 297-3000
(Registrants telephone number, including area code)



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

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  |                                          

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

|                    |  | 
|------------------- |  | 
|Title of each class |  | 
|None                |  | 



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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 such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]          No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [    ] (Not Applicable)

State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.) (Not Applicable)

Documents Incorporated by Reference

Portions of Alaska Communications Systems Group, Inc.s proxy statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
for the registrants 2002 annual meeting of stockholders are incorporated by
reference into Part III of this Form 10-K.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
 ANNUAL REPORT ON FORM 10-K
 FOR THE YEAR ENDED DECEMBER 31, 2001

|                                                        |  |                                                                                       |  |     
|------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                                                        |  |                                                                                       |  | Page
|PART I                                                  |  |                                                                                       |  |     
|                                                       
|Item 1.                                                 |  | Business                                                                              |  | 2   
|Item 2.                                                 |  | Properties                                                                            |  | 25  
|Item 3.                                                 |  | Legal Proceedings                                                                     |  | 25  
|Item 4.                                                 |  | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|                                                       
|PART II                                                 |  |                                                                                       |  |     
|                                                       
|Item 5.                                                 |  | Market for the Registrants Common Equity and
Related Stockholder Matters             |  | 26  
|Item 6.                                                 |  | Selected Financial Data                                                               |  | 27  
|Item 7.                                                 |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  | 33  
|Item 7A.                                                |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 48  
|Item 8.                                                 |  | Financial Statements and Supplementary Data                                           |  | 49  
|Item 9.                                                 |  | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  | 49  
|                                                       
|PART III                                                |  |                                                                                       |  |     
|                                                       
|Item 10.                                                |  | Directors and Executive Officers of the Registrant                                    |  | 50  
|Item 11.                                                |  | Executive Compensation                                                                |  | 52  
|Item 12.                                                |  | Security Ownership of Certain Beneficial Owners and
Management                        |  | 52  
|Item 13.                                                |  | Certain Relationships and Related Transactions                                        |  | 52  
|                                                       
|PART IV                                                 |  |                                                                                       |  |     
|                                                       
|Item 14.                                                |  | Exhibits, Financial Statement Schedules and Reports
on Form 8-K                       |  | 53  
|                                                       
|SIGNATURES                                              |  |                                                                                       |  | 55  
|                                                       
|Index to Combined and Consolidated Financial Statements |  | F-1                                                                                  



1



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TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                             
|              | Item 2. Properties                                                                           
|              | Item 3. Legal Proceedings                                                                    
|              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6. Selected Financial Data                                                              
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                          
|              | Item 8. Financial Statements and Supplementary Data                                          
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                  
|              | Item 11. Executive Compensation                                                              
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13. Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES   
|Exhibit 10.11
|Exhibit 21.1 



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##### Table of Contents






PART I




Item 1. Business

Forward Looking Statements and Analysts Reports

This Form 10-K and future filings by Alaska Communications Systems
Holdings, Inc. (ACS Holdings or 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
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 change its pricing for communications services; the possible future
unavailability of Statement of Financial Accounting Standards (SFAS) No. 71
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 ACS 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 ACS 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 ACS Holdings.



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Introduction

ACS Holdings is a wholly owned subsidiary of Alaska Communications Systems
Group, Inc. (ACS Group). ACS Holdings was formed in 1998 by Fox Paine &
Company, members of the former senior management team of Pacific Telecom, Inc.,
and other experienced telecommunications industry executives. In May 1999, the
Company acquired Century Telephone Enterprises, Inc.s Alaska properties
(CenturyTels Alaska Properties) and Anchorage Telephone Utility or ATU
(collectively the Predecessor Entities). CenturyTels Alaska Properties were
the incumbent provider of local telephone services in Juneau, Fairbanks and
more than 70 rural communities in Alaska and provided Internet services to
customers statewide. CenturyTels Alaska Properties included ACS of Fairbanks,
Inc., ACS of Alaska, Inc., and ACS of the Northland, Inc. ATU was the largest
local exchange carrier (LEC) in Alaska and provided local telephone and long
distance services primarily in Anchorage and cellular services statewide. ATU
provided long distance services through ATU Long Distance, Inc. and cellular
services through MACtel, Inc. These companies are now known as ACS of
Anchorage, Inc., ACS Long Distance, Inc. and ACS Wireless, Inc.

The consolidated financial statements for ACS Holdings represent the
operations 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 InfoSource, Inc. (ACSIS)              
|
| |  |  | ACS Internet, Inc. (ACSI)                 
|
| |  |  | ACS Long Distance, Inc. (ACSLD)           
|
| |  |  | ACS Television, L.L.C. (ACSTV)            

ACS Holdings is the leading diversified, facilities-based
telecommunications provider in Alaska, offering local telephone, cellular, long
distance, data and Internet services to business and residential customers
throughout the state. ACS Holdings is the largest telecommunications provider
in Alaska using its own network facilities to provide full service end-to-end
communications to its customers.

At various times, ACS Holdings evaluates opportunities for establishing or
acquiring other telecommunications businesses through acquisitions or otherwise
in Alaska and elsewhere in the United States, and may make investments in such
businesses in the future. ACS Holdings has focused its attention on local
telephone, cellular, directory, Internet, and interexchange businesses.

Local Telephone. With over 330,000 access lines, representing
approximately 68% of the access lines provisioned in Alaska, ACS Holdings is
the largest LEC in Alaska and the 14th largest in the U.S. The Company provides
service to most of the states major population centers, including Anchorage,
Juneau and Fairbanks.

Cellular. ACS Holdings is the largest and only statewide provider of
cellular services in Alaska, currently serving approximately 80,000
subscribers. Its cellular network covers over 468,000 residents, including all
major population centers and highway corridors. The Company has upgraded to a
fully digital network in substantially all of its service areas.

Directory. ACS Holdings, through its subsidiary ACSIS, is the largest
provider of published directory advertising in Alaska. The Company serves
approximately 12,000 advertisers through eight regional directories tailored to
serve the needs of each of its local exchange markets. ACS Holdings also
provides an online directory product and other specialized advertising vehicles
to its customers.



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Internet. ACS Holdings is the second largest provider of Internet access
services in Alaska with over 46,000 customers. ACS Holdings offers dedicated
and dial-up Internet access and digital subscriber line, (DSL) Internet
access to its customers.

Interexchange.ACS Holdings provides long distance and other interexchange
services to over 65,000 customers in Alaska. ACS Holdings has migrated long
distance traffic from leased circuits onto its own network infrastructure where
possible, principally between its major markets of Anchorage, Fairbanks and
Juneau.

Other. ACS Holdings provides wireless cable television services in the
Fairbanks and Anchorage service areas over UHF frequencies. ACS Holdings is
evaluating opportunities to expand its offering of wireless cable television
services.

Products, Services and Revenue Sources

ACS Holdings offers a broad portfolio of telecommunications services to
residential and business customers in its markets. The Company believes that,
as the communications marketplace continues to converge and competition
continues to enter the market, the ability to offer an integrated package of
communications products will provide a distinct competitive advantage, as well
as increase customer loyalty, and thereby decrease customer turnover. The
Company complements its local telephone services by actively marketing its
cellular, directory, Internet, interexchange and other service offerings.

Profit or loss and total assets for each of the Companys segments is
disclosed in Note 14 Business Segments of the Alaska Communications Systems
Holdings, Inc. Consolidated Financial Statements. The following table sets
forth the components of ACS Holdings consolidated revenues for the years ended
December 31, 2001 and December 31, 2000 and pro forma combined revenues for the
year ended December 31, 1999 (dollars in millions). For the year ended December
31, 1999, the combined revenues represents the historical combined revenues of
the Predecessor Entities  prior to their ownership by ACS Holdings, from
January 1, 1999 through May 14, 1999, plus the consolidated results of ACS
Holdings from May 15, 1999 through December 31, 1999.

|                   |                               |                 |   |                                         |       |              |  |                   |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |      |       |  
|------------------ | ----------------------------- | --------------- | - | --------------------------------------- | ----- | ------------ |  | ----------------- | ----- | ------- | - | ------ | ----- | ------- |  | ---- | ----- | - | - | ----- | ----- |  |  | ---- | ----- | -
|                   |                               |                 |   | Revenue for the Year Ended December 31,
|                   |                               |                 |   |                                        
|                   |                               |                 |   | 2001                                    |       | 2000         |  | 1999             
|                   |                               |                 |   | Consolidated                            |       | Consolidated |  | Proforma Combined
|                   |                               |                 |   |                                         |       |              |  |                  
|                   |                               |                 |   | Amount                                  |       | Percent      |  | Amount            |       | Percent |   | Amount |       | Percent
|                   |                               |                 |   |                                         |       |              |  |                   |       |         |   |        |       |        
|Revenue by Source: |                               |                 |   |                                         |       |              |  |                   |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |     
|                   | Local network service         |                 | $ | 96.3                                    |       |              |  | 29.0              | %     |         | $ | 94.1   |       |         |  | 30.1 | %     |   | $ | 94.5  |       |  |  | 31.5 | %    
|                   | Network access                |                 |   | 103.0                                   |       |              |  | 31.0              |       |         |   | 105.2  |       |         |  | 33.6 |       |   |   | 105.4 |       |  |  | 35.1 |      
|                   | Deregulated and other revenue |                 |   | 22.1                                    |       |              |  | 6.7               |       |         |   | 23.0   |       |         |  | 7.3  |       |   |   | 22.5  |       |  |  | 7.5  |      
|                   |                               |                 |   |                                         |       |              |  |                   |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |      |      
|                   |                               | Local telephone |   |                                         | 221.4 |              |  |                   | 66.8  |         |   |        | 222.3 |         |  |      | 71.0  |   |   |       | 222.4 |  |  |      | 74.2  |  
|                   | Cellular                      |                 |   | 40.4                                    |       |              |  | 12.2              |       |         |   | 39.5   |       |         |  | 12.6 |       |   |   | 36.0  |       |  |  | 12.0 |      
|                   | Directory                     |                 |   | 33.9                                    |       |              |  | 10.2              |       |         |   | 29.1   |       |         |  | 9.3  |       |   |   | 26.6  |       |  |  | 8.9  |      
|                   | Internet                      |                 |   | 13.7                                    |       |              |  | 4.1               |       |         |   | 9.2    |       |         |  | 2.9  |       |   |   | 4.9   |       |  |  | 1.6  |      
|                   | Interexchange                 |                 |   | 21.3                                    |       |              |  | 6.4               |       |         |   | 11.8   |       |         |  | 3.8  |       |   |   | 9.6   |       |  |  | 3.2  |      
|                   | Other                         |                 |   | 1.0                                     |       |              |  | 0.3               |       |         |   | 1.1    |       |         |  | 0.4  |       |   |   | 0.4   |       |  |  | 0.1  |      
|                   |                               |                 |   |                                         |       |              |  |                   |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |      |      
|                   |                               | Total           |   | $                                       | 331.7 |              |  |                   | 100.0 | %       |   | $      | 313.0 |         |  |      | 100.0 | % |   | $     | 299.9 |  |  |      | 100.0 | %
|                   |                               |                 |   |                                         |       |              |  |                   |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |      |      

Local Telephone

The Company provides local telephone service through its four LECs. Local
telephone revenue consists of local network service, network access (including
universal service revenue), and deregulated and other revenue, each of which is
described below.



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Local Network Service

Basic Local Network Service. Basic local network service enables
customers to originate and receive telephone calls within a defined exchange
area. The Company provides basic local services on a retail basis to
residential and business customers, generally for a fixed monthly charge. The
maximum amount that can be charged to a customer for basic local services is
determined by rate proceedings involving the Regulatory Commission of Alaska
(RCA). The Company charges business customers higher rates to recover a
portion of the costs of providing local service to residential customers, as is
customary in the industry. On average, U.S. business rates for basic local
services have been over two times the rates of residential customers. Basic
local service also includes non-recurring charges to customers for the
installation of new products and services and recurring charges for enhanced
features such as call waiting and caller identification.

At December 31, 2001, approximately 57% of ACS Holdings retail access
lines served residential customers and 43% served business customers.
Currently, monthly charges for basic local service for residential customers
range from $9.42 to $16.30 in ACS Holdings service areas compared to the
national average for urban areas of $13.70. Monthly charges for business
customers range from $17.65 to $35.00 in ACS Holdings service areas compared
to the national average for urban areas of $33.88. In November 2001, the
Company was authorized by the RCA to increase on an interim basis certain rates
in its largest market, Anchorage, by 24%. As a result, the Company increased
residential service rates in Anchorage from $9.70 to $12.05 per month. See
Business  Regulation for further discussion of regulatory matters including
the Companys local network service rate proceedings.

The table below sets forth the annual growth in access lines for ACS
Holdings and its Predecessor Entities from December 31, 1997 to December 31,
2001. The number of access lines shown for 1997 includes approximately 37,000
access lines that were acquired by CenturyTels Alaska Properties as part of
its acquisition of the City of Fairbanks Telephone Operation in October 1997.
The number of access lines shown represents all revenue producing access lines
connected to both retail and wholesale customers.

|                                   |  |                    |         |      |  |      |         |      |  |      |         |   |  |  |         |   |  |  |         |  
|---------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | - |  |  | ------- | -
|                                   |  | As of December 31,
|                                   |  |                   
|                                   |  | 2001               |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                   |  |                    |         |      |  |      |         |      |  |     
|Retail access lines                |  |                    | 261,002 |      |  |      | 272,936 |      |  |      | 281,726 |   |  |  | 266,704 |   |  |  | 275,549 |  
|Wholesale access lines             |  |                    | 22,859  |      |  |      | 17,303  |      |  |      | 15,680  |   |  |  | 13,010  |   |  |  | 5,106   |  
|Unbundled network elements         |  |                    | 49,062  |      |  |      | 39,221  |      |  |      | 28,202  |   |  |  | 20,680  |   |  |  | 2,700   |  
|                                   |  |                    |         |      |  |      |         |      |  |      |         |   |  |  |         |   |  |  |         |  
|Total Local Telephone Access Lines |  |                    | 332,923 |      |  |      | 329,460 |      |  |      | 325,608 |   |  |  | 300,394 |   |  |  | 283,355 |  
|Percentage Growth                  |  |                    | 1.1     | %    |  |      | 1.2     | %    |  |      | 8.4     | % |  |  | 6.0     | % |  |  | 19.2    | %

On June 1, 1999, as part of the consolidation of its operating and billing
systems, ACS Holdings conformed the methodology by which the number of access
lines is calculated across all of its local exchanges to that previously used
for CenturyTels Alaska Properties. The Company intends to use the method used
to calculate access lines in service for CenturyTels Alaska Properties to
calculate its access lines in all future periods. In the table above, for the
year ended December 31, 1999, the Company shows ATUs number of access lines
calculated using this method. If the number of ATUs access lines in service at
December 31, 1998 was computed under this same method, the number of access
lines at ATU would increase by 4,940 and the total number of access lines would
equal 305,334 and the combined growth percentage would be 7.8% for 1999. Due to
limited data available to ACS Holdings, no adjustments to the access lines in
service for 1997 have been computed.

Management believes that future access line growth is dependent on among
other things, the economic outlook in Alaska and the United States, the impact
of technology and competition on line demand and population growth in the
Companys service areas.

Competitive Local Network Service.The Company also provides
interconnection through wholesale access to its basic local service and through
leasing unbundled network elements (UNEs) to its competitors as required by
the 1996 Act. Revenues for these services are included in local network service
revenues. The Company provided 68,068 lines to competitors in the Anchorage
service area on either a



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wholesale or UNE basis as of December 31, 2001. In November of 2001 the
Company was authorized by the RCA to implement an interim and refundable rate
increase of $1.07 per UNE loop for its Anchorage serving area, increasing the
total rate to $14.92 from $13.85. The RCA has also lifted the Companys rural
exemption for the Fairbanks and Juneau serving areas and awarded
interconnection rates to a competitor on a UNE basis of $19.19 and $16.71,
respectively. The Company believes the UNE rates in place in all of its markets
are below its embedded and forward looking cost and are therefore
non-compensatory. As of December 31, 2001, the Company provided 3,853 lines to
competitors in the Fairbanks service area on either a wholesale or UNE basis.
The Company has not yet provided lines on either a wholesale or UNE basis to
competitors in Juneau, although competition is expected in 2002. See Business
 Regulation for further discussion of regulatory matters, including
interconnection under the 1996 Act.

While there is some seasonality in local network service, represented
primarily by reduced line demand in the Alaskan winter as seasonal workers
leave the state, operating results for local telephone services are not
materially impacted by seasonal factors.

Network Access

Network access services arise in connection with the origination and
termination of long distance, or toll, calls and typically involve more than
one company in the provision of such long distance service on an end-to-end
basis. Since toll calls are generally billed to the customer originating the
call, a mechanism is required to compensate each company providing services
relating to the call. This mechanism is the access charge, which the Company
bills to each interexchange carrier for the use of its facilities to access the
customer. The Company also receives universal service revenue, which it
includes in its reported network access revenue. These components of network
access revenue are described below.

Intrastate Access Charges. ACS Holdings generates intrastate access
revenue when an intrastate long distance call that involves an ACS Holdings
LEC and an interexchange carrier is originated and terminated within the same
state. The interexchange carrier pays the Company an intrastate access payment
for either terminating or originating the call. The Company records the details
of the call through its carrier access billing system and receives the access
payment from the interexchange carrier. The Company also provides billing and
collection (B&C) services for interexchange carriers through negotiated B&C
agreements for certain types of toll calls placed by the Companys local
customers. ACS Holdings LECs in competitive areas are under their own
stand-alone tariffs for intrastate access. In non-competitive areas, ACS
Holdings LECs participate in a statewide tariff and access charge pooling
arrangement that is administered by the Alaska Exchange Carriers Association
(AECA). The access charge for ACS Holdings intrastate service is regulated
by the RCA.

Interstate Access Charges. ACS Holdings generates interstate access
revenue when an interstate long distance call is originated from an Alaskan
local calling area served by an ACS Holdings LEC and is terminated in a local
calling area in another state, and vice versa. The Company bills interstate
access charges in a manner similar to intrastate access charges. However,
interstate access charges are regulated by the Federal Communications
Commission (FCC) rather than the RCA. ACS Holdings LECs participate in a
nationwide tariff and access charge pooling arrangement that is administered by
the National Exchange Carrier Association (NECA) for all ACS Holdings LECs
except ACSA. ACSA participates in the NECA common line tariff, but has its own
interstate access tariff for traffic sensitive and special access services.

Universal Service Revenue.Universal service revenue supplements the
amount of local service revenue the Company receives to ensure that basic local
service rates for customers in high cost rural areas are not significantly
higher than rates charged in lower cost urban and suburban areas. The 1996 Act
prescribed new standards applicable to universal service, including mechanisms
for defining the types of services to be provided as part of a universal
service program, specific goals or criteria applicable to universal service
programs, new qualifications for receipt of universal service funding and new
requirements for contributions to universal service funding. The FCC, in
conjunction with a federal-state joint board composed of FCC and state
commission members, has been working since passage of the 1996 Act to implement
these new statutory provisions. The FCC has chosen to address universal service
matters, initially for non-rural telephone companies, and subsequently for
rural telephone companies. While new cost-identification models for non-rural
local carriers were adopted effective on January 1, 2000, similar



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models for rural carriers were rejected by the FCC, leaving previous
Universal Service Fund (USF) calculations in place. While the Joint Board and
the FCC continue to examine modifications to the universal service funding
mechanisms, it is unlikely that any changes will have a near-term impact on ACS
Holdings revenue.

Operating results for network access services are not materially impacted
by seasonal factors.

Deregulated and Other Revenue

Deregulated and other revenues consist of B&C contracts, space and power
rents, pay telephone service, customer premise equipment sales, and other
miscellaneous revenues generated by the Companys LECs. ACS Holdings seeks to
capitalize on its local presence and network infrastructure by offering these
additional services to customers and interexchange carriers. Deregulated and
other revenue is generally not subject to seasonal impacts on operating
results.

Cellular

ACS Holdings cellular business is currently managed separately from its
LEC business and is subject to a different regulatory framework and cost
structure. Cellular services are provided statewide under the ACS Wireless
brand name. The primary sources of cellular revenue include subscriber access
charges, airtime usage, toll charges, connection fees, roaming revenues, and
enhanced features, such as caller identification and call waiting. A subscriber
may purchase services separately or may purchase rate plans that package these
services in different ways to fit different calling patterns and desired
features.

The table below sets forth the annual growth in the number of cellular
subscribers served and total covered population for ACS Holdings and its
Predecessor Entities from December 31, 1997 to December 31, 2001.

|                             |  |                    |         |      |  |      |         |      |  |      |         |   |  |  |         |   |  |  |         |  
|---------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | - |  |  | ------- | -
|                             |  | As of December 31,
|                             |  |                   
|                             |  | 2001               |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                             |  |                    |         |      |  |      |         |      |  |     
|Estimated covered population |  |                    | 468,622 |      |  |      | 462,057 |      |  |      | 460,802 |   |  |  | 460,162 |   |  |  | 453,361 |  
|Ending subscribers           |  |                    | 80,120  |      |  |      | 75,933  |      |  |      | 73,068  |   |  |  | 66,572  |   |  |  | 55,131  |  
|Ending penetration           |  |                    | 17.1    | %    |  |      | 16.4    | %    |  |      | 15.9    | % |  |  | 14.5    | % |  |  | 12.2    | %

Although ACS Holdings has achieved cellular penetration rates of
approximately 17% in Anchorage, 19% in Fairbanks and 20% in the Kenai
peninsula, penetration rates in the Companys other service areas are
significantly lower. Management believes there are opportunities to improve the
penetration rates of its cellular operations in Southeastern Alaska, and in
particular, Juneau. Management also believes that the market for cellular
services will continue to grow with the expansion of the cellular industry as a
whole.

ACS Holdings also owns 10 megahertz E Block PCS licenses covering
Anchorage, Fairbanks and Juneau which were purchased by CenturyTels Alaska
Properties in 1997 and acquired by the Company when it purchased CenturyTels
Alaska Properties on May 14, 1999. Management is analyzing the build out of
these licenses and technical alternatives for using this spectrum to enhance
the Companys service offerings in its overall business.

Cellular revenue declines in the winter months and increases in the summer
months due to Alaskas northern latitude and the wide swing in available
daylight and changes in weather patterns between summer and winter and their
effect on business, tourism and subscriber calling patterns. However, operating
results for cellular services are not materially impacted by seasonal factors.



7



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Directory

ACS Holdings is the largest provider of yellow page advertising
directories in the State of Alaska. The Company currently publishes eight
different books in its local telephone markets throughout the state. Directory
advertising revenues are derived by ACS Holdings principally from yellow pages
advertising in the local telephone books of each of the Companys local
exchange service areas. The Company provides this service under a contractual
arrangement with a directory publishing company. Directory advertising is
billed in conjunction with local telephone service under a B&C agreement. ACS
Holdings competes for directory advertising services with at least one other
publisher in substantially all of its service areas. Directory revenues are not
materially effected by seasonality.

Internet

ACS Holdings provides Internet access services to approximately 46,000
customers as of December 31, 2001. In order to offer Internet access, the
Company provides local dial-up telephone numbers for its customers. ACS
Holdings also offers high speed DSL to its customers in its major LEC service
territories. These local dial-up numbers and dedicated DSL connections allow
customers access, through a modem connection on their computer, to a series of
computer servers ACS Holdings owns and maintains. These servers allow customers
to access their e-mail accounts and to be routed to local access points that
connect customers to the Internet. ACS Holdings charges customers either a flat
rate for unlimited Internet usage or a usage sensitive rate, which, in either
case, can be billed on customers local telephone bills. Operating results for
Internet access services are not materially impacted by seasonal factors.

Interexchange

Long Distance Services.ACS Holdings predecessors began offering long
distance services on a resale basis in October 1997, primarily in Anchorage.
The Company currently has approximately 65,000 long distance customers and less
than 10% of total long distance revenues in Alaska. Before August 1998,
CenturyTels Alaska Properties were precluded from entering the long distance
business by a non-competition agreement with AT&T Alascom which was signed when
Pacific Telecom sold Alascom, Inc. to AT&T in 1995.

In April 1999, ACS Holdings entered into a settlement agreement with
General Communication, Inc. (GCI) under which the Company agreed to enter
into a number of new business arrangements and to settle a number of
outstanding disputes, including GCIs opposition to ACS Holdings acquisitions
of CenturyTels Alaska Properties and ATU. As part of this agreement and to
support other aspects of the Companys business strategy, ACS Holdings
purchased from GCI $19.5 million of fiber capacity for high-speed links within
Alaska and for termination of traffic in the lower 49 states. Subsequently, the
Company entered into an amendment to the purchase agreement with GCI, whereby,
among other things, ACS Holdings agreed to purchase additional capacity for
$19.5 million. The Company fulfilled this commitment to purchase additional
capacity on January 12, 2001.

ACS Holdings is subject to numerous conditions imposed by the RCA and, to
a lesser degree, by the FCC on the manner in which the Company conducts its
long distance operations. The restrictions are intended to prohibit
cross-subsidization from the regulated LEC to the long distance affiliate and
discrimination against other long distance providers in favor of a LECs long
distance affiliate. Among the conditions applied to ACS Holdings long distance
affiliate are those which:



| |  |  | require the Company to hold all books and records,
management, employees and administrative services separate,
except that services may be provided among affiliates through
arms length affiliated interest agreements,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | prohibit ACSA, ACSAK, ACSN and ACSF from bundling
local and intra-state long distance services until competition
develops in their local markets and                                                                     
|
| |  |  | prevent the Company from joint ownership of telephone
transmission or switching facilities with the LEC and from using
the LECs assets as collateral for its own indebtedness.                                          



8



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Although there is some seasonal impact on customer usage patterns for long
distance, operating results are not materially impacted by seasonal factors.

Other

ACS Holdings owns ACSTV, a wireless cable television provider. ACSTV
provides wireless cable television services over assigned UHF frequencies to
approximately 1,900 customers in the Companys Anchorage and Fairbanks service
areas. ACS Holdings is evaluating opportunities to expand its offering of
wireless cable television services.

Network Facilities

As of December 31, 2001, ACS Holdings owned 66 host switches serving over
330,000 access lines. All of the Companys access lines are served by digital
switches provided predominately by Nortel Networks. ACS Holdings switches are
linked through a combination of extensive aerial, underground and buried cable,
including 640 sheath miles of fiber optic cable, as well as digital microwave
and satellite links. The Company has 100% single-party services (one customer
per access line), and believes substantially all of its major switches have
current generic software upgrades installed, allowing for the full range of
enhanced customer features.

ACS Holdings has integrated numerous network elements to offer a variety
of services and applications that meet the increasingly sophisticated needs of
customers. These elements include Signal System 7 signaling networks, voice
messaging platforms, digital switching, DSL and, in some communities,
integrated service digital network access. As the telecommunications industry
experiences significant changes in technology, customer demand and competition,
the Company intends to introduce additional enhancements.

Network operations and monitoring are provided by ACS Holdings network
operating control center located in Anchorage. The network operating control
center has technicians staffed seven days a week, 24 hours a day. The Company
also has customer care call center facilities in Anchorage and Fairbanks along
with additional customer care facilities in Juneau, Sitka, Kenai/Soldotna and
Kodiak. All of these facilities offer extended business hours to efficiently
handle customer inquiries and orders for service.

ACS Holdings cellular operations consist of three digital switching
centers, 94 cell sites and four repeaters covering substantially all major
population centers and highway corridors in Alaska plus one analog switch and
cell site covering Barrow, Alaska. The Company uses Ericsson switches and
radios for its cellular operations. The Companys switching and cell site
infrastructure is linked by fiber and digital microwave. ACS Holdings network
operating control center located in Anchorage also supports all cellular
switches in ACS Holdings markets. Customer care centers are located in
Anchorage, Fairbanks, Juneau and Kenai/Soldotna.

The Company is enhancing its network to accommodate developing products
and technology. The Company is working with Cisco Systems and other vendors to
implement a Multi-Protocol Label Switching over Asynchronous Transfer Mode
network or MPLS/ATM. ACS Holdings believes the implementation of an MPLS/ATM
network will enhance its capability to provide a complete suite of converged
telecommunications, data and video services and achieve significant operating
efficiencies. The Company completed the first phase of the implementation in
2001. Core MPLS/ATM nodes were installed in Anchorage, Fairbanks, Kenai, Juneau
and Seattle. ACS Holdings expects to complete the implementation of its
MPLS/ATM network early in the second quarter of 2002.

Completion of the MPLS/ATM network will enable the Company to provide an
array of products and services over Internet Protocol or IP. ACS Holdings
currently offers a variety of products and services and will be able to
converge them all over its MPLS core network:



9



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| |  |  | virtual private networks,                     
| | - |  | ----------------------------------------------
|
| |  |  | virtual private lines,                        
|
| |  |  | voice over IP services,                       
|
| |  |  | transparent local area networks (LAN),        
|
| |  |  | proprietary LANs and wide area networks (WAN),
|
| |  |  | high speed Internet access,                   
|
| |  |  | managed services,                             
|
| |  |  | video and                                     
|
| |  |  | video conferencing.                           

Customers

ACS Holdings has three basic types of customers for the services of its
LECs:



| |  |  | business and residential 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 the Companys 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 UNE
basis as prescribed under the 1996 Act.

Approximately 57% of ACS Holdings retail access lines served residential
customers, while 43% served business customers.

ACS Holdings also has approximately 80,000 cellular subscribers, 46,000
Internet subscribers and 65,000 long-distance subscribers consisting
substantially of retail residential and business consumers.

No single ACS Holdings customer represented more than 10% of its total
2001 consolidated revenue.

Competition

Local Telephone Service

Incumbent local exchange carriers (ILECs) may be subject to any of three
types of competition:



| |  |  | facilities-based competition from providers with
their own local service network,                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | resale competition from resale interconnection, or
providers who purchase local service from the ILEC at wholesale
rates and resell these services to their customers and
|
| |  |  | competition from UNE interconnection, that is,
providers who lease UNEs from the ILEC.                                                                                   

The geographic characteristics of rural areas presently make the entrance
of most facilities-based competitors uneconomical because of the significant
capital investment required and the limited market size. Therefore, ACS
Holdings believes competition is likely to come from resale interconnection or
UNE interconnection. However, in the future, competition though other means,
such as cable or wireless telephony may become economically feasible. There are
no regional Bell operating companies in Alaska.

In September 1997, GCI and AT&T Alascom, the two largest long distance
carriers in Alaska, began providing competitive local telephone services in
Anchorage. GCI competes principally through UNE interconnection with ACSA
facilities, while AT&T Alascom competes primarily by reselling ACSAs services.
Competition is based upon price and pricing plans, types of services offered,
customer service, billing services, and quality and reliability of service. GCI
has focused principally on advertising
discount



10



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plans for bundled services. AT&T Alascoms strategy has been to
resell ACSAs service as part of a package of local and long distance services.
As a result, ACSA now has approximately 43% competitive market penetration as
of December 31, 2001. The Company expects GCI and AT&T Alascom to continue to
compete for local telephone business.

As rural telephone companies under the 1996 Act, ACS Holdings rural
LECs have historically been exempt from the obligation to lease their
facilities or resell their services on a wholesale discount basis to CLECs
seeking interconnection. However, on June 30, 1999 the Alaska Public Utilities
Commission (APUC) ordered these exemptions terminated for certain rural
service areas of ACS Holdings, and on October 11, 1999, the RCA, which replaced
the APUC on July 1, 1999, sustained the APUCs order. As a result, ACS
Holdings rural LECs entered into interconnection arbitration with GCI. This
arbitration resulted in arbitration agreements for certain rural service areas
of ACS Holdings. See Business  Regulation for further discussion.

In October 2000, the RCA approved interconnection agreements under the
1996 Act ACSF, ACSN and ACSAK and GCI for its Fairbanks and Juneau markets.
Commencing in April 2001, the Company received its first orders for resale of
local services in Fairbanks. As of December 31, 2001, ACS Holdings estimates
that it now has approximately 90% market share in Fairbanks. Through December
31, 2001, GCI has competed in Fairbanks primarily through reselling ACSF and
ACSN services, however, the Company expects GCI to compete in this market
primarily through UNE interconnection in the future. ACSAK has experienced no
competition in its Juneau market as of February 2002, although the Company
anticipates competition in the future. While GCI claims the right to resell
local service in portions of the ACSN territory, it has yet to place any orders
to do so.

ACS Holdings expects increasing competition from providers of various
services that provide users the means to bypass its network. Long distance
companies may construct, modify or lease facilities to transmit traffic
directly from a user to a long distance company. Cable television companies
also may be able to modify their networks to partially or completely bypass the
Companys local network.

In addition, while cellular telephone services have historically
complemented traditional LEC services, the Company anticipates that existing
and emerging wireless technologies may increasingly compete with LEC services.
For example, AT&T had introduced its fixed wireless product to the Anchorage
market. Although AT&Ts fixed wireless product was subsequently abandoned,
communications technology manufacturers continue to work on alternatives to
traditional LEC service. At this time it is not possible to predict the impact
of this product on the Companys share of the local market. Technological
developments in cellular telephone features, personal communications services,
digital microwave and other wireless technologies are expected to further
permit the development of alternatives to traditional wireline services.

Cellular Services

The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of improvements in
the capacity and quality of digital technology, shorter cycles for new products
and enhancements, and changes in consumer preferences and expectations. ACS
Holdings believes that the demand for wireless telecommunications services is
likely to increase significantly as equipment costs and service rates continue
to decline and equipment becomes more convenient and functional. Competition is
based on price, quality, network coverage, packaging features and brand
reputation. In addition, there are six PCS licensees in each of the Companys
cellular service areas. ACS Holdings holds PCS licenses covering Anchorage,
Fairbanks and Juneau. ACS Holdings currently competes with at least one other
wireless provider in each of its cellular service areas, including AT&T
Wireless Services, Alaska DigiTel, and Dobson Communications. At least one new
wireless competitor is expected to enter the Alaska market in 2002. The Company
believes that the unique and vast terrain and the high cost of PCS system
buildout make entrance into markets outside Anchorage uneconomical at this
time.



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As the market for simple cellular voice services approaches maturity,
providers are experiencing downward pressure on price. ACS Holdings is
positioning itself to offset this impact by bringing new higher margin services
to market. By developing products for targeted market segments, the Company is
leveraging the advantage in market share and geographical coverage to attract
new customers and increase monthly revenues from existing customers. The
Company continuously evaluates new service offerings in order to differentiate
it from its competitors, produce additional revenues and increase margins.

Internet Services

The market for Internet access services is highly competitive in most
markets in the state. There are few significant barriers to entry, and the
Company expects that competition will intensify in the future. ACS Holdings
currently competes with a number of established online services companies,
interexchange carriers, local exchange carriers with Internet subsidiaries,
satellite service providers and cable television companies. The Company
believes that its ability to compete successfully will depend upon a number of
factors, including the reliability and security of its network infrastructure,
the ease of access to the Internet, and the pricing policies of its
competitors. During 2001, the Company continued to feature its DSL services in
Anchorage, Fairbanks, Juneau, Kenai/Soldotna, Homer and Sitka, Alaska for both
residential and business applications.

Long Distance Services

The long distance telecommunications market is highly competitive.
Competition in the long distance business is based primarily on price, although
branding, customer service, billing services and quality play a role in
customers choices to some extent. The Company currently offers long distance
service to customers located primarily in the more populous communities within
its service territory. AT&T Alascom and GCI are currently the two major
competing long distance providers in Alaska. The Company currently has less
than 10% of total long distance revenues in Alaska. The Company provides
traditional 1+ direct distance dialing (DDD), toll-free services, calling
cards and private line services for data and voice applications. In Spring
2001, the Company discontinued its long distance Infinite Minutes program,
and introduced several new flat-fee programs marketed as Easy Choices. The
new programs allow customers to purchase interstate minutes of use in blocks of
time for a single monthly fee. ACS Holdings expects to continue offering
innovative products of this nature in the future.

Sales and Marketing

The Predecessor Entities have historically conducted their sales and
marketing operations for each of their respective products on a stand-alone
basis, with each product line having its own sales force and marketing
department. ACS Holdings has consolidated its product and service offerings
under the Alaska Communications Systems and ACS brands, subject to
regulatory and strategic business considerations.

Key components of the Companys sales and marketing strategy include:



| |  |  | establishing name recognition of the ACS brand across
all product and service offerings,           
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | marketing current and future service offerings aggressively,                                       
|
| |  |  | providing simplified packaged service offerings,                                                   
|
| |  |  | centralizing marketing functions,                                                                  
|
| |  |  | improving quality, reliability and customer service,                                               
|
| |  |  | developing and delivering to the market new products
and services in line with strategic goals, and
|
| |  |  | enhancing direct sales efforts.                                                                    

ACS Holdings believes that it can leverage its position as an integrated,
one-stop provider of telecommunications services with strong positions in local
access, cellular, directory, Internet, and interexchange long distance and data
markets. By pursuing, within the bounds of any applicable regulatory
constraints, a marketing strategy that takes advantage of these characteristics
and that facilitates cross-selling and packaging of its products and services, the Company believes it can
increase penetration of new



12



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product offerings, improve customer retention
rates, increase its share of its customers overall telecommunications
expenditures, and achieve continued revenue and operating cash flow growth.

ACS Holdings has begun, to a limited extent, within regulatory bounds,
marketing local telephone services in attractively priced, packaged service
offerings with cellular, long distance and Internet services. ACS Holdings
believes packaged offerings are popular with customers because they allow
customers to enjoy pricing for a number of services at a substantial discount
to a la cartepricing of individual services. Subject to regulatory
limitations, the Company intends to expand this strategy, which it expects will
increase the average revenue per customer, and result in a more loyal and
satisfied customer base and in reduced churn.

The Company has established a sales and marketing organization where
marketing strategies are centralized and sales functions are based locally. To
enhance its direct selling efforts, the Company has established additional
customer and retail service centers in its larger service areas, such as Juneau
and Kenai/Soldotna, and intends to enhance its call center operations through a
combination of technology investments, training, and incentive compensation
programs for call center employees.

Employees

ACS Holdings considers employee relations to be good. As of December 31,
2001, the Company employed a total of 1,168 regular full-time employees, 924 of
whom were represented by the International Brotherhood of Electrical Workers,
Local 1547 (IBEW). On November 2, 1999, the IBEW membership for ACS Holdings
ratified the terms of a master collective bargaining agreement that governs the
terms and conditions of employment for all IBEW represented employees working
for ACS Holdings in the State of Alaska. The master agreement embraces a
labor-management relationship that is founded on trust, cooperation and shared
goals. The November 1999 agreement, which expires December 31, 2006, provides
for wage increases up to 4% in specified years based on the annual increases in
the consumer price index for Anchorage as reported by the U.S. Department of
Labor CPI-U. The last wage increase under the agreement was implemented in July
2001 and the next scheduled wage review is in January 2003. The master
agreement also limits ACS Holdings health and welfare contributions for
represented employees to 4% annually. There have been no work stoppages or
strikes, and none are anticipated.

ACS Holdings also enjoys good relations with the non-represented employee
group. Non-represented employees qualify for wage increases based on individual
and Company performance, and key employees are also eligible for
performance-based incentives and equity compensation. Additionally, ACS
Holdings provides a total benefits package, including health, welfare, and
retirement components, that is competitive in ACS Holdings market.



13



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Regulation

Overview

The Companys local telephone operating subsidiaries, ACSA, ACSF, ACSAK,
and ACSN, are each telecommunications carriers and ILECs under the
Communications Act of 1934 (the Communications Act), which was amended by the
1996 Act, and are subject to the jurisdiction of the FCC and the RCA. ACSLD,
ACS Holdings long distance subsidiary, is also subject to both the FCC and
RCAs regulatory jurisdiction. ACS Holdings cellular and PCS companies are
also subject to FCC jurisdiction because they are telecommunications carriers
and because they hold FCC-issued licenses.

Federal Regulation

Under the federal regulatory scheme, ILECs are required to comply with the
Communications Act and the applicable rules and regulations of the FCC. In
substantially overhauling the Communications Act, the 1996 Act was intended to,
among other things, eliminate unproductive regulatory burdens and promote
competition. Despite this, telecommunications carriers are still subject to
extensive ongoing regulatory requirements. For instance, ACS Holdings ILEC
subsidiaries are required to maintain accounting records in accordance with the
Uniform System of Accounts, to structure interstate access charges according to
FCC rules, and to charge for interstate services at a rate of return not to
exceed a rate prescribed by the FCC. The FCC also must give prior consent to
transfers of control and assignments of radio frequency licenses. The FCC
requires ILECs providing interstate access services to file tariffs with the
FCC reflecting the rates, terms and conditions of those services. These tariffs
are subject to review and potential objection by the FCC or third parties.
Additionally, all of the Companys LECs are ILECs within the meaning of the
1996 Act. As such, they are subject to various additional requirements under
the 1996 Act, including specific interconnection duties such as providing
requesting telecommunications carriers with UNEs and wholesale discounted end
user services for resale.

As of 2001, long distance companies are precluded from filing tariffs for
interstate domestic services. Similar detariffing of international services
will be implemented in early 2002. Federal tariffing has been replaced with
Internet web site posting of offers, terms and prices. ACSLDs interstate
services were fully detariffed prior to the end of 2000.

State Regulation

Telecommunications companies subject to the RCAs jurisdiction are
required to obtain certificates of public convenience and necessity prior to
operating as a public utility in Alaska. The RCA is responsible for approving
new certificates and any transfers of existing certificates. In addition, the
RCA is responsible for implementing a portion of the competitive requirements
of the 1996 Act, as well as for regulating intrastate access and rates for
local and other services of local telephone companies. After passage of the
1996 Act, the RCAs predecessor, APUC adopted a plan to address competition
issues across Alaska. The APUC established multiple dockets to investigate
different competition-related issues, including revising local and long
distance market structures, reforming its intrastate access charge system and
establishing a state universal service fund. In addition to its preliminary
actions to mandate access charge depooling for ILECs operating in competitive
markets, the RCA made operational the new Alaska Universal Service Fund
(AUSF). In a subsequent rulemaking, the RCA revised its eligibility standards
for companies receiving high-cost switching support from the AUSF. These new
rules resulted in a loss of support to ACS Holdings rural affiliates. Rather
than seeking interim local relief for this cost recovery shift, ACS Holdings
has opted to include consideration of this issue in the more comprehensive rate
proceedings described below.

In connection with regulatory approval of ACS Holdings acquisitions of
CenturyTels Alaska Properties and ATU in 1999, the APUC imposed several
conditions on its operating companies. Among those conditions was a requirement
that ACSA, ACSF, ACSAK, and ACSN each file revenue requirement, cost of service
and rate design studies no later than July 2001. All of these companies except
ACSF were also required to file updated depreciation analyses concurrently with
the rate case filings. The revenue
requirement studies were subsequently bifurcated from the cost of service
and rate design studies. In



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conformance with RCA orders, all revenue
requirement studies and testimonies have been filed. Following a hearing and
decisions as to revenue requirements, the companies will file their cost of
service and rate design studies and testimony. In
addition, restrictions were
placed on the ability of ACS Holdings LECs to bundle service offerings with
ACSLD.

Having secured both LEC certification and interconnection agreements to
serve the local exchange markets in Juneau and Fairbanks, Alaska, and numerous
smaller communities in Alaska, GCIs CLEC operation has been designated an
Eligible Telecommunications Carrier (ETC) by the RCA for Juneau, Fairbanks
and Fort Wainwright. ETC designation is an essential first step in securing
portable or shared universal service support. ACS Holdings operating
companies are currently designated as ETCs in the same markets for which GCI
has received this designation.

Under existing FCC regulations, ILECs may seek, through filings with state
commissions, the disaggregation of study areas into multiple zones for purposes
of universal service support. The ACS Holdings group of companies currently
receiving such support are reviewing opportunities for such disaggregation and
may file such plans during 2002.

Cost Recovery and Revenue Recognition

As a regulated common carrier, the operating subsidiary companies of ACS
Holdings have the right to an opportunity to set maximum rates at a level that
allows the Company to recover the reasonable costs incurred in the provision of
regulated telecommunications services and to earn a reasonable rate of return
on the investment required to provide these services.

These costs are recovered through:



| |  |  | monthly charges to end users for basic local
telephone services and enhanced service offerings,                                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | access charges to interexchange carriers for
originating and terminating interstate and intrastate
interexchange calls, along with an end-user access charge
referred to as a Subscriber Line Charge
|
| |  |  | interconnection charges, wholesale service charges,
UNE charges, and other rates to competing carriers
interconnecting with the Companys networks or reselling its
services and                    
|
| |  |  | high-cost support mechanisms, such as the federal
Universal Service Fund and the AUSF.                                                                                                              

In conjunction with the recovery of costs and establishment of rates for
regulated services, a LEC must first determine its aggregate costs and then
allocate those costs between regulated and nonregulated services. After
identifying the regulated costs of providing local telephone service, a LEC
must allocate those costs between state and federal jurisdictions and among its
various interstate and intrastate services. This process is complicated by the
necessity to allocate specific pieces of plant and equipment to a particular
service because a LECs plant and equipment are utilized for different
jurisdictional services, such as local telephone and interstate and intrastate
access. This process is referred to as separations and is governed primarily
by the FCCs rules and regulations. The underlying legal purpose of separations
rules is to define how a carriers expenses are allocated and recovered from
federal and state jurisdictions. The FCC is considering whether to modify or
eliminate the current separations process. This decision could indirectly
increase or reduce earnings of carriers subject to separations rules by
reallocating costs between the federal and state jurisdictions. However,
maximum rates for regulated services and the amount of high-cost support are
set by the FCC with respect to interstate services and by the RCA with respect
to intrastate services.

Interstate End-User Rates

The deployment of the local telephone network from the switching facility
to the customer is known as the local loop and is one of the most significant
costs incurred by a LEC in providing telephone service. The FCC has established
a rate structure that provides for the recovery of a portion of the cost of the
local loop allocated to the interstate jurisdiction directly from the end user
customer through the



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assessment of a subscriber line charge. The remaining
portion of the local loop costs are recovered from interstate access charges to
an interexchange carrier or, in some circumstances, from the federal Universal
Service Fund. The FCC recently increased the cap for subscriber line charges
assessed by the Companys LECs as part of a comprehensive review of its rules
that also lowered carrier-paid interstate access charges and created explicit
universal service support for interstate-allocated local loop costs.

As a result of the market and geographic conditions in rural areas, the
costs of providing local loop and switching services are often higher than in
urban areas. In the absence of an accommodation in the FCC rules to address
this fact, a substantial portion of the costs of smaller LECs would remain
allocated to the intrastate jurisdiction placing substantial pressure on such
carriers to charge higher rates for intrastate services. Accordingly, the FCC
provides for additional interstate cost recovery by eligible telecommunications
carriers through the federal Universal Service Fund. The federal Universal
Service Fund is available to carriers whose local loop costs are significantly
above the national average as calculated pursuant to FCC rules. Recent FCC
rulings have made this high-cost support available to a competitive carrier, on
an averaged per line basis, for those lines serving customers switching to the
competitive carrier. See Promotion of Universal Service, below.

Interstate Access Rates

Interstate access rates are developed on the basis of a LECs measurement
of its interstate costs for the provision of access service to interexchange
carriers divided by its projected demand for access service. The resulting
rates are published in a companys interstate access tariff and filed with the
FCC, at which time they are subject to challenge by third parties and to review
by the FCC.

The FCC recognized that this rate making and tariff filing process may be
administratively burdensome for small LECs. Accordingly, the FCC established
NECA, in 1983 to, among other things, develop common interstate access service
rates, terms and conditions. NECA develops interstate access rates on the basis
of data that are provided individually by participating LECs and blended to
yield average rates. These rates are intended to generate revenue equal to the
aggregate costs plus a return on the investment of all of the participants.
Currently, the authorized maximum rate of return used in setting interstate
access rates is 11.25%.

On August 24, 2000, GCI filed a formal complaint with the FCC under
various provisions of the Communications Act (as amended), alleging that ACSA
(formerly known as ATU) exceeded its federally authorized rates of return
related to the 1997-1998 monitoring period. The principal issue raised in the
complaint focuses on the proper jurisdictional recognition (federal versus
state) of minutes of use associated with Internet service provider traffic. On
January 24, 2001, the FCC issued an order finding for GCI on the matter and
ordering the Company to pay GCI approximately $2.7 million plus interest. The
Company has filed an appeal in the United States Court of Appeals for the
District of Columbia Circuit and the FCC issued a stay concerning the
obligation to pay GCI during the pendency of the appeal. The Company believes
it has adhered to applicable legal requirements and is actively defending its
position, but cannot predict the ultimate outcome of the proceedings. Amounts
potentially refundable under the FCCs order are fully reserved at December 31,
2001. GCI has also raised the same issues for the subsequent 1999-2000
monitoring period, the resolution of which will be determined by the outcome of
the pending appeal of the FCCs decision concerning the 1997-1998 monitoring
period.

Individual participating LECs are likely to have costs of providing
service that are either higher or lower than the revenues generated by applying
the overall NECA tariff rate. To rectify this result, the revenues generated by
applying the NECA rates are pooled from all of the participating companies and
redistributed on the basis of each individual companys costs. The result of
this process not only eliminates
the burden of individual tariff filing, but also produces a system in which
small companies can share and spread risk. For example, if a smaller LEC filed
its own tariff and subsequently suffered the loss of major customers that
utilize interstate access service, the LEC could suffer significant
under-recovery of its costs. In the NECA pool environment, the impact of this
loss is reduced because it is spread over all of the pool participants.



16



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NECA operates separate pools for traffic sensitive costs, which are
primarily switching costs, and non-traffic sensitive costs, which are primarily
loop costs. Companies are also free to develop and administer their own
interstate access charges if the choose not to participate in the pools. ACS
Holdings rural LECs participate in both the traffic sensitive and non-traffic
sensitive NECA pools. ACSA files its own traffic sensitive access tariffs with
the FCC but participates in the NECA non-traffic sensitive pool.

On October 26, 2000, the FCC granted the petition of a subsidiary of ACS
Holdings, ACSA (previously filed under the name of ATU), seeking a waiver of
certain federal access charge rules. The effect of the waiver is to permit ACSA
pricing flexibility through the ability to offer term and volume discount
pricing in connection with its switched access services. The FCC waiver was
granted, in part, upon findings concerning the level of competition in the
Anchorage marketplace, as demonstrated in the record of the proceedings.

End User Local Rates

The levels of rates charged to end-users for the provision of basic local
service are generally subject to rate-of-return regulation administered by the
RCA. Local rates have historically been set at a level that will allow recovery
of embedded costs for local service divided by the number of services and
customers. Competitive forces, however, may prevent local rates from being
sufficient to recover costs for local service in the future. Recognized costs
include an allowance for a rate of return on investment in plant used to
provide local service. Rate cases are typically infrequent, carrier-initiated
and require the carrier to meet substantial burdens of proof. The last
APUC-authorized rates of return were 12.55% and 11.70% for ACSAK and ACSN,
respectively. These rates were ordered in 1989. ACSAs last authorized rate of
return was 8.97% for retail local exchange and 10.85% for intrastate access,
ordered in 1991. ACSF was previously not regulated by the APUC and instead was
regulated by the City of Fairbanks Public Utilities Board. As a condition of
the acquisition of the City of Fairbanks Telephone Operation by a predecessor
company, the APUC required that a general rate proceeding be initiated for ACSF
by June 1999. This proceeding has been delayed and combined with revenue
requirement studies filed by all ACS Holdings affiliate LECs on July 1, 2001.
A hearing commenced on the revenue requirement for these LECs on March 4, 2002.
After a decision is rendered on the LECs revenue requirements, the LECs will
file cost of service and rate design studies and testimony and have a second
hearing that will result in adjudicated rates. In the meantime, the RCA, on
November 15, 2001, approved an interim and refundable rate increase for ACSA of
24% for most services.

Competitive Local Exchange Regulations

The former APUC adopted regulations to govern competition in the local
exchange marketplace. The transitional regulations provide for, among other
things:



| |  |  | initial classification of all ILECs, including the
Companys rural properties and ACSA, as dominant carriers,                                                                                                                                                                                                                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | symmetrical requirements that all carriers, both
dominant and nondominant, offer all retail services for resale
at wholesale rates,                                                                                                                                                                                                                                  
|
| |  |  | substantial dominant carrier pricing flexibility in
competitive areas, under which carriers may reduce retail rates,
offer new or repackaged services and implement special contracts
for retail service upon 30 days notice. Only rate increases
affecting existing services are subject to full cost support
showings for LECs in areas with local competition and
|
| |  |  | application limited initially to the ACSA market, and
in February 2002, extended to the ACSF market. ACSAK and ACSN
anticipate filing petitions with the RCA to extend application
upon the commencement of facilities-based competition.                                                                                                                            

Intrastate Access Rates

In the past, the APUC had required all local companies in Alaska to pool
their access costs and has set an annual statewide average price for access
service. Each LEC charges interexchange carrier fees for originating or
terminating long distance calls on its network based on the statewide average
cost of access



17



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rather than on its individual costs of access. Access revenues
are collected in a pool administered by the AECA and then redistributed to the
LECs based on their actual costs. With the passage of the 1996 Act and
increased competition in the local exchange market, the APUC began a process of
reforming intrastate access charges.

Under recent revisions to the Alaska access system, LECs not yet subject
to local competition continue to participate in the AECA pool. Participants in
this pool recover their costs based on the embedded cost of services most
recently authorized by the RCA. In the event of competitive entry into a
dominant incumbent carriers service area, these revisions also require the
dominant LEC to exit the pool and initiate separate access charge tariffs.
Dominant LECs subjected to competitive entry have the right to propose that
their access charges be based on market rates. The RCA is currently advancing a
proceeding to examine whether changes to the current annual process for
establishing access charges are warranted. The RCA issued a new access charge
reform Notice of Inquiry in early 2001 which will target further substantive
changes in access charge derivation.

An additional consequence of this access reform is the continued removal
of subsidies implicit in access pricing. The RCA, for example, has adopted
regulations which limit switching support to local companies with access lines
of 20,000 or less. This change has reduced the amount of AUSF which the
Companys rural LECs receive and the resulting cost recovery shift will be
addressed in the local service rate cases commenced in 2001.

The AUSF serves as a complement to the federal Universal Service Fund, but
must meet federal statutory criteria concerning consistency with federal rules
and regulations. Currently, the AUSF subsidizes a portion of higher cost
carriers switching costs, and the costs of lifeline service, which supports
rates of low income customers. Recent proposals have targeted the AUSF as a
source of funding for cost shifts that are likely to occur as a result of
in-state access charge reform. It is unclear the degree to which the AUSF might
be used to absorb cost shifts that result if federal universal service support
is scaled back in the future.

The Telecommunications Act of 1996

Among other things, the 1996 Act was enacted to enhance competition
without jeopardizing the availability of nationwide universal service at
affordable rates. These two objectives have resulted in a complex set of rules
intended to promote competitive entry in the provision of local telephone
services except where entry would adversely affect the provision of universal
service or the public interest.

Promotion of Local Service Competition and Rural Exemptions

The 1996 Act made competitive entry into the local telephone business more
attractive to other carriers by removing barriers to competition. In order to
promote competition, the 1996 Act established new interconnection rules
generally requiring LECs to allow competing carriers to interconnect with their
local networks. Congress recognized, however, that when the desire to promote
competition conflicted with the ability of existing carriers to provide
universal service to higher cost customers, LECs classified as Rural Telephone
Companies should be exempted from interconnection requirements until the
continuation of the exemption was no longer required by the public interest, as
defined in the 1996 Act.

Under the 1996 Act, all LECs, including both ILECs and new competitive
carriers, are required to:



| |  |  | offer reasonable and nondiscriminatory resale of their telecommunications services,                                                                                                                       
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ensure that customers can keep their telephone numbers when changing carriers,                                                                                                                            
|
| |  |  | ensure that competitors customers can use the same
number of digits when dialing and receive nondiscriminatory
access to telephone numbers, operator service, directory
assistance and directory listing,
|
| |  |  | provide access to telephone poles, ducts, conduits
and rights of way, to the extent required by the Communications
Act, and                                                                               



18



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##### Table of Contents





| |  |  | compensate competitors for the costs of transporting
and terminating telecommunications traffic.
| | - |  | ------------------------------------------------------------------------------------------------

The 1996 Act also requires ILECs to:



| |  |  | negotiate in good faith the terms and conditions of
interconnection with any competitive carrier making a request
for same,                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | interconnect their facilities and equipment with any
requesting telecommunications carrier at any technically
feasible point,                                                                                                                         
|
| |  |  | unbundle and provide nondiscriminatory access to
UNEs, such as local loops, switches and transport facilities, at
nondiscriminatory rates and on nondiscriminatory terms and
conditions, unless such carriers are exempt as rural telephone
companies,
|
| |  |  | offer resale interconnection at wholesale rates,                                                                                                                                                                                                      
|
| |  |  | provide reasonable notice of changes in the
information necessary for transmission and routing of services
over the ILECs facilities or in the information necessary for
interoperability and                                                        
|
| |  |  | provide for the physical collocation of equipment
necessary for interconnection or access to UNEs at the premises
of the ILEC, at rates, terms and conditions that are just,
reasonable and nondiscriminatory.                                        

In order to implement interconnection requirements, ILECs generally enter
into negotiated interconnection arrangements with competing carriers. ILECs may
also offer interconnection tariffs, available to all competitors.

Competitors are required to compensate a LEC for the cost of providing
interconnection services. In the case of resale interconnection, the rules
provide that the rates charged should be on a wholesale basis and reflect the
current retail rates of the ILEC, excluding the portion of costs avoided by the
ILEC. In the case of UNE interconnection, rates are based on costing
methodologies that employ a forward-looking economic cost pricing methodology
known as Total Element Long Run Incremental Cost (TELRIC).

On January 25, 1999, in AT&T Corp. et al. v. Iowa Utilities Board et al.
525 U.S. 366 (1999), the U.S. Supreme Court affirmed the FCCs authority to
develop national pricing guidelines, but the Supreme Court did not evaluate the
substance of these rules. Some ILECs argued that the FCC improperly placed upon
them the burden of proof in rural exemption proceedings and improperly defined
the meaning of the term not unduly economically burdensome as used in the
1996 Act. In addition, some ILECs argued that the FCCs forward-looking TELRIC
pricing methodology does not allow adequate compensation for the provision of
UNEs.

On July 18, 2000, in Iowa Utilities Board, et al. v. Federal
Communications Commission 219 F.3d 744 (8th Cir. 2000) (Iowa II), the Eighth
Circuit Court of Appeals ordered some of these FCC rules to be vacated on the
grounds they were inconsistent with the 1996 Act. The Eighth Circuit said the
FCCs rural exemption rules were contrary to the plain language of the 1996
Act. On March 5, 2001, the ACS Holdings rural LECs petitioned the FCC to adopt
a new national rule consistent with the Iowa II decision, placing the burden of
proof on CLECs in proceedings to terminate a companys rural
exemption. On
August 27, 2001, the FCC denied the petition, explaining it was unnecessary as
the FCC is already bound by the Iowa II decision. The ACS Holdings rural
companies requested reconsideration of that decision on September 26, 2001 and
the matter is still pending.

As to the FCCs TELRIC pricing methodology, the Eighth Circuit in Iowa II
upheld the use of a forward-looking economic model but vacated the FCCs rule
requiring the pricing model to assume a
hypothetical network based upon the most efficient technology currently
available and the lowest cost network configuration.

On September 22, 2000, the Eighth Circuit stayed that portion of its
mandate which vacated the FCC hypothetical network rule (set out at 47 C.F.R.
§51.505(b)(1)).This suspension was ordered by the Court to permit parties to
the proceeding to seek review of its Iowa II decision by the U.S. Supreme
Court.



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On January 22, 2001, the U.S. Supreme Court granted certiorarito review
the Eighth Circuits decision requiring the FCC to vacate its hypothetical
network rule. The Eighth Circuit did not suspend other portions of its
decision, including those portions vacating FCC rules addressing the rural
exemption provisions of 47 U.S.C. §251(f)(1), and the U.S. Supreme Court
declined to review the Eighth Circuits rural exemption decision.

Subsequent to staying its mandate concerning the hypothetical network
rule, on January 8, 2001, the Eighth Circuit, in Southwestern Bell v. Missouri
Public Service Commission, 2001 W.L. 13289 (8th Cir. 2001), vacated an
interconnection agreement approved by the Missouri PSC on the grounds that it
relied on the hypothetical network rule that the Eighth Circuit had previously
found invalid. The Eighth Circuit, in that case, specifically held that despite
staying its mandate in Iowa II, all interconnection agreements must be based on
use of a pricing methodology that is consistent with the courts ruling in Iowa
II.

The 1996 Act also specifies that resale and UNE rates are to be negotiated
among the parties, or, if the parties fail to reach an agreement, arbitrated by
the relevant state regulatory commission. Once the parties have come to
agreement, the proposed rates are subject to final approval by the state
regulatory commission.

In January 1997, ACSAs predecessor, ATU, entered into an interconnection
agreement with GCI, which provides for resale and UNE interconnection, and with
AT&T Alascom, which provides for resale interconnection. Neither
interconnection agreement contained a defined term or a termination date. Near
the end of 1999, the Company notified GCI and AT&T of its view that the
interconnection agreements pertaining to ACSA had reached the end of a
reasonable period of availability. In January of 2000, the Company filed a
motion with the RCA to reopen the original GCI arbitration proceedings
involving ACSA for the purpose of establishing an appropriate forward looking
cost model and the re-pricing various interconnection services and UNEs in the
Anchorage market. The RCA subsequently granted the essence of the Companys
motion and has reopened the docket for such purposes. No action was taken in
2000. On October 25, 2001, the RCA granted ACSA an interim UNE rate increase of
$1.07, bringing the UNE rate up from $13.85 to $14.92. The Company expects the
RCA to hold hearings and adjudicate final Anchorage UNE rates during 2002.

Certain of ACS Holdings local operating utilities, ACSAK, ACSN, and ACSF,
are defined as rural telephone companies under the 1996 Act. As rural
telephone companies, they were granted rural exemptions from the requirements
relating to both resale interconnection and UNE interconnection. The rural
exemptions were to continue until the APUC or the RCA determined that
interconnection was technically feasible, not unduly economically burdensome
and consistent with the 1996 Acts universal service provisions.

On June 30, 1999, the APUC issued an order terminating the rural
exemptions of ACSN, ACSAK and ACSF. On October 11, 1999, the RCA affirmed the
APUCs order. As a result, these rural LECs are no longer exempt from the 1996
Acts interconnection requirements applicable to ILECs, and the Companys
competitors immediately requested interconnection agreements.

Separately, on September 1, 1999, ACS Holdings filed petitions with the
RCA seeking suspension or modification of interconnection duties and addressing
market structure reforms for the Fairbanks and Juneau-Douglas markets. In those
petitions, the Companys rural LECs proposed tariffed terms and conditions,
including pricing, for resale of their services at wholesale discounts, for
certain UNEs, and for the interconnection of their facilities and those of
CLECs in the Fairbanks and Juneau-Douglas markets, effective January 1, 2000.
Further, as part of that proposal, ACS Holdings also requested that the RCA
permit its LECs to operate subject to competitive regulation and that the RCA
remove or reduce other
regulatory limitations in those markets, effective January 1, 2001.
Subsequently, on October 26, 1999, the RCA dismissed the Companys petitions
seeking to establish open competitive markets in Fairbanks and Juneau through
tariffed interconnection terms and conditions.

On November 10, 1999, the Company filed a formal appeal of the RCAs order
terminating the rural exemptions in the Alaska Superior Court. On November 12,
1999, the Company filed a parallel appeal



20



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of the RCAs order dismissing its
petitions for tariffed interconnection in the Alaska Superior Court. The issues
in the case were fully briefed during the year 2000. The court denied the
Companys request to stay the RCAs order terminating the rural exemptions on
February 9, 2001 and subsequently upheld the RCAs orders on November 26, 2001.
The Company filed an appeal with the Alaska Supreme Court on December 26, 2001.
Although ACS Holdings believes that the appeals are well founded, it cannot
predict the timing and outcome of this litigation. The Company believes that
the RCAs order is inconsistent with the pronouncements of the Eighth Circuit
and that tariffing terms and conditions for interconnection will promote more
open competitive markets and thus eventually promote regulatory flexibility
and/or reduced regulation.

Subsequent to terminating the rural exemptions for the Fairbanks,
Juneau-Douglas and ACSNs Glacier State study area markets, the Company entered
into unsuccessful negotiations for interconnection agreements with GCI.
Interconnection issues, including the pricing for UNEs, were subject to an RCA
arbitration during the year 2000. On September 5, 2000, the RCA issued orders
largely ratifying the findings of the arbiter in these interconnection
arbitration proceedings involving the Company and GCI. On September 25, 2000,
the Company filed a protective appeal in the State Superior Court and a
complaint in the Federal District Court for the District of Alaska, alleging
various errors in the RCA orders. On October 5, 2000, the RCA issued final
orders affirming the interconnection agreements arbitrated in these
proceedings. Although ACS Holdings believes that its appeal and complaint are
well founded, it cannot predict the timing and outcome of this litigation. The
Company has and will continue to vigorously defend its proposed cost models and
interconnection charges but it cannot be certain that it will be able to charge
rates that provide fair compensation for providing UNEs and/or schedule
discounted resale services.

In 1999, the Company also received requests for interconnection from
Alaska Fiber Star, L.L.C. (AFS). In 2000, the Company executed
interconnection agreements with AFS with terms tied to the Companys
interconnection agreements with GCI. The Company expects other interconnection
requests in the future as evidenced by the Anchorage interconnection request
received from TelAlaska Long Distance, Inc. (TALD) on October 17, 2001. The
RCA ordered ACSA to provide TALD with the terms and conditions set forth in the
AFS agreement in February 2002.

The rural exemption previously enjoyed by ACS Holdings ACSF, ACSAK and
ACSN have been lifted by the RCA, with the exception of the Companys Sitka
study area within ACSN. The loss of the rural exemptions, absent compensating
measures, such as rate increases or market structure reforms, including the
replacement of implicit subsidies by explicit support mechanisms, rate
deaveraging, or regulatory flexibility, could adversely affect the Companys
operating results.

Promotion of Universal Service

While the 1996 Act promoted Congress policy of ensuring that affordable
service is provided to consumers universally in rural, high-cost areas of the
country, the 1996 Act altered the framework for providing universal service by:



| |  |  | providing for the identification of those services eligible for universal service support,        
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | requiring the FCC to make implicit subsidies explicit,                                            
|
| |  |  | expanding the types of communications carriers
required to pay universal service contributions and
|
| |  |  | allowing CLECs to be eligible for funding.                                                        

These and other provisions were intended to make provision of universal
service support compatible with a competitive market.

Pursuant to the 1996 Act, federal Universal Service Fund payments are only
available to carriers that are designated as eligible telecommunications
carriers by a state public utilities commission. In areas served by rural LECs,
the 1996 Act provides that a state public utilities commission may designate
more than one eligible telecommunications carrier, in addition to the ILEC,
only after determining that the designation of an additional eligible
telecommunications carrier is consistent with the public interest. As a



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result,
an incumbent rural LEC has an opportunity to maintain its status as the sole
recipient of federal Universal Service Fund payments in its service area, even
if it is subsequently subjected to competition. The RCA, however, has granted
GCIs request that it be designated an eligible telecommunications carrier in
Fairbanks, Juneau, and Fort Wainwright, all of which are currently served by
the Companys subsidiaries. The addition of a second eligible
telecommunications carrier in the service areas of ACS Holdings properties
could have the effect of reducing the amount of funds available from the
federal Universal Service Fund and could materially adversely affect the
Companys ability to achieve a reasonable rate of return on the capital
invested in its network.

The FCC has adopted new universal service rules for non-rural LECs, such
as ACSA, effective January 1, 2000. These rules, like those previously in
effect, provide no federal universal service fund support to ACSA.

Rules for rural telephone companies are still being developed by the FCC,
in consultation with a Federal-State Joint Board on Universal Service (Joint
Board). The RCA Chairman is a member of this Joint Board, and the Companys
remaining LEC subsidiaries are rural telephone companies as defined in the 1996
Act. On May 23, 2001, after considering recommendations from the Joint Board
and a Rural Task Force formed to study universal service issues, the FCC issued
rules that, for an interim period of five years, will: (1) increase the overall
funding of the universal service support fund for high-cost rural carriers; (2)
permit disaggregation of universal service support so that greater amounts of
support would be targeted to the highest-cost areas the rural carrier serves;
and (3) create additional support for significant investments in rural
telecommunications plant and equipment.

Because the operating subsidiary companies of ACS Holdings provide
interstate and international services, they are required to contribute to the
federal Universal Service Fund a percentage of their revenue earned from their
interstate and international services. Although the Companys rural LECs
receive subsidies from the federal Universal Service Fund, they cannot be
certain of how, in the future, the Companys contributions to the fund will
compare to the subsidies they receive from the fund.

FCC Regulation of Wireless Services

The FCC regulates the licensing, construction, operation, acquisition and
sale of personal communications services and cellular systems in the United
States. All cellular and personal communications services licenses have a
10-year term, at the end of which they must be renewed. Licenses may be revoked
for cause, and license renewal applications may be denied if the FCC determines
that renewal would not serve the public interest. In addition, all personal
communications services licensees must satisfy certain coverage requirements.
Licensees that fail to meet the coverage requirements may be subject to
forfeiture of the license.

The FCC restricts the amount of wireless spectrum that a single entity may
hold in a market. Currently, the FCCs rules prohibit an entity from holding
more than 55 MHz of spectrum in any particular market, but this rule will
sunset on January 1, 2003, at which time there will be no upper limit on the
amount of commercial mobile radio service (CMRS) spectrum a single entity may
hold.

The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of commercial mobile radio service
which includes personal communications services and cellular services and the
FCC does not regulate such rates. The FCC imposes, however, a variety of
additional regulatory requirements on commercial mobile radio service
operators. For example, CMRS operators must be able to transmit 911 calls from
any qualified handset without credit check or validation, are required to
provide the location of the 911 caller, within an increasingly narrow
geographic tolerance
over time, and in the future, will be required to provide 911 service for
individuals with speech and hearing disabilities.



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FCC Regulation of Interstate Long Distance Services

The Companys interstate long distance services are currently not subject
to rate regulation by the FCC, and the Company is not required to obtain FCC
authorization for the installation, acquisition or replacement of its domestic
interexchange network facilities. However, the Company must comply with the
requirements of common carriage under the Communications Act. ACSLD is subject
to the general requirement that its charges and terms for its
telecommunications services be just and reasonable and that it not make any
unjust or unreasonable discrimination in its charges or terms, as well as to
a number of other requirements of the Communications Act and the FCCs rules.
The FCC has jurisdiction to act upon complaints against any common carrier for
failure to comply with its statutory obligations, and it has recently levied
substantial fines on carriers that have engaged in slamming, which is the
industry term for unauthorized switching of a customers telecommunications
service provider.

In 1996, the FCC issued an order that required nondominant interexchange
carriers, like ACSLD, to cease filing tariffs for its domestic interexchange
services. The order required mandatory detariffing and gave carriers nine
months to withdraw federal tariffs and move into contractual relationships with
their customers. This order subsequently was upheld by the United States Court
of Appeals for the District of Columbia Circuit. As a result, all interstate
interexchange carriers, including ACSLD, were required to detariff
contract-type interstate, interexchange services by January 31, 2001, and were
required to detariff interstate consumer long distance services by April 30,
2001. These rules also require ACSLD to post the rates, terms, and conditions
of its service on its Internet web site, and engage in other public disclosure
activities. The FCC has recently adopted rules that require nondominant
international carriers to detariff international services. ACSLD timely
complied with these FCC requirements.

FCC Policy on Internet Services

The 1996 Act establishes a distinction between telecommunications
services, which are regulated by the FCC, and information services, which
remain unregulated. ACS Holdings Internet services are considered information
services and are not regulated by the FCC. Because the regulatory boundaries in
this area are somewhat unclear and subject to dispute, however, the FCC could
seek to characterize some of the Companys information services as
telecommunications services. If that happens, those services would become
subject to FCC regulations. The impact of a reclassification of ACS Holdings
Internet services is difficult to predict.

In June 2000, the United States Court of Appeals for the Ninth Circuit
held that AT&Ts high-speed Internet access service, delivered using cable
television facilities, constituted both a telecommunications and an
information service. In response to this holding, in September 2000, the FCC
launched a proceeding to examine whether providers of high-speed Internet
access over such cable facilities should be required to provide open access
to their facilities to competing Internet service providers on a
nondiscriminatory basis. If the FCC implements such a requirement, the Company
may be able to supplement its own high-speed Internet access offerings by
obtaining access to GCIs high-speed Internet access cable lines for its own
Internet service provider.

Other Regulatory Proceedings

In addition to the foregoing matters, a number of other FCC, state and
judicial proceedings are currently pending or may be initiated in the future
which could materially affect the Companys business. Some of these proceedings
include:



| |  |  | The 1996 Act placed statutory restrictions on the ability of
telecommunications carriers to use and disclose certain types of
customer information in marketing different types of services. The
U.S. Court of Appeals for the Tenth Circuit has held that the FCCs
rule limiting the ILECs
ability to do so without obtaining affirmative consent from the
customer was an unconstitutional abridgment of the carriers freedom of
speech. In June 2000, the United States Supreme Court denied a petition
to review the Tenth Circuits decision. On September 7, 2001, the FCC
released an order clarifying the requirements for a carrier to obtain
customer consent to the use
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |   |  | of such information, including the use of
procedures under which the customer must affirmatively request
protection of this information.                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The FCC has adopted new rules designed to make it easier for
customers to understand the bills of telecommunications carriers.
These new rules, among other things, establish certain requirements
regarding the formatting of bills and the information that must be
included on bills. In response to several petitions for
reconsideration, in March 2000, the FCC largely reaffirmed its rules.                                                                                                         
|
| |  |  | The FCC has adopted an order that requires telecommunications
service providers to make their services accessible to individuals
with disabilities, if readily achievable. It is unclear the effect
that this order will have on ACS Holdings businesses.                                                                                                                                                                                                                                                  
|
| |  |  | The FCC has ordered telecommunications service providers to
provide law enforcement personnel with a sufficient number of ports
and technical assistance in connection with wiretaps. In August 2000,
the United States Court of Appeals for the District of Columbia
Circuit vacated portions of these FCC rules and remanded the matter
to the FCC for further consideration. The FCC has not yet taken
action on remand. The Company cannot predict its costs of complying
with these rules at this time.
|
| |  |  | The USA Patriot Act, signed into law in late 2001, imposes
additional duties on the Company to make information available to law
enforcement personnel.                                                                                                                                                                                                                                                                                                                                                     

The foregoing is not an exhaustive list of proceedings that could
materially affect ACS Holdings business. The Company cannot predict the
outcome of these or any other proceeding before the FCC, the RCA or the courts.

Environmental Regulations

ACS Holdings operations are subject to federal, state and local laws and
regulations governing the use, storage, disposal of, and exposure to, hazardous
materials, the release of pollutants into the environment and the remediation
of contamination. As an owner or operator of property and a generator of
hazardous wastes, the Company could be subject to environmental laws that
impose liability for the entire cost of cleanup at contaminated sites,
regardless of fault or the lawfulness of the activity that resulted in
contamination. The Company believes, however, that its operations are in
substantial compliance with applicable environmental laws and regulations.

Many of ACS Holdings properties formerly contained, or currently contain,
underground and above ground storage tanks used for the storage of fuel or
wastes. Some of these tanks have leaked. The Company believes that known
contamination caused by these leaks has been, or is being, investigated or
remediated. The Company cannot be sure, however, that it has discovered all
contamination or that the regulatory authorities will not request additional
remediation at sites that have previously undergone remediation.

ACS Holdings cellular and television operations are also subject to
regulations and guidelines that impose a variety of operational requirements
relating to radio frequency emissions. The potential connection between radio
frequency emissions and negative health effects, including some forms of
cancer, has been the subject of substantial study by the scientific community
in recent years. To date, the results of these studies have been inconclusive.
Although the Company has not been named in any lawsuits alleging damages from
radio frequency emissions, it is possible it could be in the future,
particularly if scientific studies conclusively determine that radio frequency
emissions are harmful.



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##### Table of Contents






Item 2. Properties

At December 31, 2001, ACS Holdings telecommunications network includes
over 640 sheath miles of fiber optic cable, over 189 switching facilities and a
statewide cellular network. In addition, the Company purchased fiber capacity
in May of 1999 and in January of 2001 for high-speed links within Alaska and
for termination of traffic in the lower 49 states. The Company plans to
continue enhancing its network to meet customer demand for increased bandwidth
and advanced services. See Business  Network Facilities.

Local Telephone.ACS Holdings primary local telephone properties consist
of 189 switching facilities. The Company owns most of its administrative and
maintenance facilities, customer service center, central office and remote
switching platforms and transport and distribution network facilities. The
Companys local telephone assets are located in Alaska.

ACS Holdings transport and distribution network facilities include a
fiber optic backbone and copper wire distribution facilities that connect
customers to remote switch locations or to the central office and to points of
presence or interconnection with interexchange carriers. These facilities are
located on land pursuant to permits, easements, right of ways or other
agreements.

Cellular.ACS Holdings has three cellular switches, 94 cell sites and
four repeaters covering substantially all major population centers and highway
corridors in Alaska plus one analog switch and cell site covering Barrow,
Alaska. In most cases, the Company leases the land on which these sites are
located.

Internet.ACS Holdings has point of presence facilities in over 25
communities serving the majority of Alaskas populated areas. These communities
are linked over both owned and leased facilities to the Internet at Seattle,
Washington.

Interexchange. ACS Holdings is a facilities based interexchange carrier.
The Company has invested in fiber optic capacity through an indefeasible right
of use that provides bandwidth between the Companys Anchorage, Fairbanks, and
Juneau locations and Seattle, Washington. The Company also leases transport
facilities and has arrangements with other interexchange carriers to terminate
traffic in the lower 49 states.

Substantially all of the Companys assets (including those of its
subsidiaries) are pledged as collateral for its senior obligations. See Note 7
Long-term Obligations to the Alaska Communications Systems Holdings, Inc.
Consolidated Financial Statements for further discussion.




Item 3. Legal Proceedings

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

Some of the legal proceedings involving regulatory matters are described
under Business  Regulation. In addition, 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.




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

| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | There were no matters submitted to a vote of security holders
during the fourth quarter of 2001.



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##### Table of Contents






PART II






|Item 5. | Market for Registrants Common Equity and Related Stockholder Matters
|------- | ---------------------------------------------------------------------

The Company is a wholly owned subsidiary of ACS Group and as such has no
publicly traded equity securities. ACS Groups common stock, $.01 par value,
was first listed on the NASDAQ National Market on November 18, 1999 under the
symbol ALSK. Prior to November 18, 1999, there was no public market for ACS
Groups Common Stock. The following table sets forth quarterly market price
ranges for ACS Groups Common Stock in 2001 and 2000:

|              |  |      |      |     |  |   |      | 
|------------- |  | ---- | ---- | --- |  | - | ---- | 
|2001 Quarters |  | High |      | Low
|              |  |      |      |    
|1st           |  | $    | 7.38 |     |  | $ | 4.53 | 
|2nd           |  | $    | 9.81 |     |  | $ | 4.06 | 
|3rd           |  | $    | 9.26 |     |  | $ | 6.50 | 
|4th           |  | $    | 8.22 |     |  | $ | 6.50 | 

|              |  |      |       |     |  |   |       | 
|------------- |  | ---- | ----- | --- |  | - | ----- | 
|2000 Quarters |  | High |       | Low
|              |  |      |       |    
|1st           |  | $    | 16.75 |     |  | $ | 12.06 | 
|2nd           |  | $    | 14.50 |     |  | $ | 9.88  | 
|3rd           |  | $    | 11.00 |     |  | $ | 5.44  | 
|4th           |  | $    | 9.00  |     |  | $ | 4.63  | 

The approximate number of holders of record of the Companys parent, ACS
Groups Common Stock as of February 22, 2002 was 39. Management believes that
actual holders exceed 1,500, including those held in the broker/dealers name on
behalf of their clients.

Dividends

The Companys parent, ACS Group, has never declared or paid any cash
dividends on its common stock. The Company intends to retain its earnings, if
any, to finance the development and expansion of its business, and, therefore,
it does not anticipate paying any cash dividends in the foreseeable future.
Moreover, the ACS Groups ability to declare and pay cash dividends on its
common stock is restricted by covenants in ACS Holdings bank credit agreement
and in the indentures governing its senior discount debentures and ACS
Holdings senior subordinated notes. ACS Holdings bank credit agreement and
indentures also have restrictions governing its ability to pay dividends to ACS
Group.



26



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##### Table of Contents






Item 6. Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth selected historical consolidated financial
data of ACS Holdings. Consider the following points in connection with the
table:



| |  |  | The selected historical consolidated operating data for the year
ended December 31, 1999 represents the consolidated results of ACS
Holdings from May 15, 1999 through December 31, 1999. Certain
reclassifications have been made to the 1999 consolidated operations to
conform to the current presentation of ACS Holdings consolidated
operations.                                                                                                                                                                                                                                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | EBITDA is net income before interest expense, taxes on income,
depreciation and amortization and extraordinary items. EBITDA is not
intended to represent cash flow from operations as defined under
accounting principles generally accepted in the United States of
America and should not be considered as an alternative to net income as
an indicator of the Companys operating performance or cash flows.
EBITDA is presented because management believes it is a useful
financial performance measure for comparing companies in the
telecommunications industry in terms of operating performance and
ability to satisfy debt service, capital expenditures and working
capital requirements.
|
| |  |  | EBITDA margin is EBITDA divided by total operating revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

The selected historical consolidated financial data below should be read
in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and the audited consolidated financial
statements of ACS Holdings and the related notes.See Index to Financial
Statements and Schedule which appears on page F-1 hereof.



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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC. AND SUBSIDIARIES
For the Years Ended December 31, 2001, 2000 and 1999
(dollars in thousands, except per share amounts)

|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |         |  
|---------------------------------- | -------------------------------------------- | ---------------------------- | ------ | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | -------- | ------- | -
|                                   |                                              |                              |        | 2001    |         | 2000 |         | 1999   
|                                   |                                              |                              |        |         |         |      |         |        
|Operating Data:                    |                                              |                              |        |         |         |      |         |         |         |   |         |         
|Operating revenues:                |                                              |                              |        |         |         |      |         |         |         |   |         |         
|                                   | Local telephone                              |                              | $      | 221,411 |         |      | $       | 222,268 |         |   | $       | 142,255  |        
|                                   | Cellular                                     |                              |        | 40,398  |         |      |         | 39,490  |         |   |         | 24,836   |        
|                                   | Directory                                    |                              |        | 33,870  |         |      |         | 29,156  |         |   |         | 16,896   |        
|                                   | Internet                                     |                              |        | 13,724  |         |      |         | 9,170   |         |   |         | 2,853    |        
|                                   | Interexchange                                |                              |        | 21,316  |         |      |         | 11,778  |         |   |         | 5,946    |        
|                                   | Other                                        |                              |        | 960     |         |      |         | 1,131   |         |   |         | 359      |        
|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |        
|                                   |                                              | Total operating revenues     |        |         | 331,679 |      |         |         | 312,993 |   |         |          | 193,145 |  
|Operating expenses:                |                                              |                              |        |         |         |      |         |         |         |   |         |         
|                                   | Local telephone                              |                              |        | 120,659 |         |      |         | 130,875 |         |   |         | 98,663   |        
|                                   | Cellular                                     |                              |        | 24,153  |         |      |         | 24,641  |         |   |         | 15,494   |        
|                                   | Directory                                    |                              |        | 14,490  |         |      |         | 14,001  |         |   |         | 7,603    |        
|                                   | Internet                                     |                              |        | 15,677  |         |      |         | 11,785  |         |   |         | 5,121    |        
|                                   | Interexchange                                |                              |        | 29,509  |         |      |         | 19,749  |         |   |         | 9,185    |        
|                                   | Other                                        |                              |        | 1,852   |         |      |         | 1,458   |         |   |         | 486      |        
|                                   | Unusual charges                              |                              |        |        |         |      |         | 5,288   |         |   |         |         |        
|                                   | Depreciation and amortization                |                              |        | 79,811  |         |      |         | 72,265  |         |   |         | 40,306   |        
|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |        
|                                   |                                              | Total operating expenses     |        |         | 286,151 |      |         |         | 280,062 |   |         |          | 176,858 |  
|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |        
|Operating income                   |                                              |                              | 45,528 |         |         |      | 32,931  |         |         |   | 16,287  |         
|Other income and expense:          |                                              |                              |        |         |         |      |         |         |         |   |         |         
|                                   | Interest expense                             |                              |        | (57,691 | )       |      |         | (62,109 | )       |   |         | (37,517  | )      
|                                   | Interest income and other                    |                              |        | 3,252   |         |      |         | 3,631   |         |   |         | 426      |        
|                                   | Equity in income (loss) of investments       |                              |        | 70      |         |      |         | (303    | )       |   |         | (198     | )      
|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |        
|                                   |                                              | Total other income (expense) |        |         | (54,369 | )    |         |         | (58,781 | ) |         |          | (37,289 | )
|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |        
|Loss before income taxes           |                                              |                              | (8,841 | )       |         |      | (25,850 | )       |         |   | (21,002 | )       
|Income tax benefit                 |                                              |                              | 195    |         |         |      | 197     |         |         |   | 301     |         
|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |        
|Net loss                           |                                              | $                            | (8,646 | )       |         | $    | (25,653 | )       |         | $ | (20,701 | )       
|                                   |                                              |                              |        |         |         |      |         |         |         |   |         |          |        
|Other Financial Data:              |                                              |                              |        |         |         |      |         |         |         |   |         |         
|                                   | Cash provided (used) by operating activities |                              | $      | 76,638  |         |      | $       | 143,547 |         |   | $       | (50,648  | )      
|                                   | Cash used by investing activities            |                              |        | (94,483 | )       |      |         | (74,699 | )       |   |         | (774,368 | )      
|                                   | Cash provided (used) by financing activities |                              |        | (3,039  | )       |      |         | (15,958 | )       |   |         | 833,741  |        
|                                   | EBITDA                                       |                              |        | 128,661 |         |      |         | 108,524 |         |   |         | 56,821   |        
|                                   | EBITDA margin                                |                              |        | 38.8    | %       |      |         | 34.7    | %       |   |         | 29.4     | %      
|                                   | Capital expenditures                         |                              |        | (87,582 | )       |      |         | (72,253 | )       |   |         | (74,792  | )      
|Other Data (end of period)         |                                              |                              |        |         |         |      |         |         |         |   |         |         
|                                   | Access lines in service                      |                              |        | 332,923 |         |      |         | 329,460 |         |   |         | 325,608  |        
|                                   | Cellular subscribers                         |                              |        | 80,120  |         |      |         | 75,933  |         |   |         | 73,068   |        
|                                   | Cellular penetration                         |                              |        | 17.1    | %       |      |         | 16.4    | %       |   |         | 15.9     | %      
|Balance Sheet Data (end of period) |                                              |                              |        |         |         |      |         |         |         |   |         |         
|                                   | Total assets                                 |                              | $      | 903,542 |         |      | $       | 909,306 |         |   | $       | 937,711  |        
|                                   | Long-term debt including current portion     |                              |        | 596,603 |         |      |         | 599,642 |         |   |         | 598,407  |        
|                                   | Stockholders equity                         |                              |        | 208,678 |         |      |         | 231,153 |         |   |         | 266,541  |        



28



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SELECTED HISTORICAL COMBINED FINANCIAL DATA CENTURYTELS ALASKA PROPERTIES

The following table sets forth selected historical combined financial data
of CenturyTels Alaska Properties. Consider the following points in connection
with the table:



| |  |  | The Company derived the selected historical combined
financial data for each of the two years in the period ended
December 31, 1998 and as of December 31, 1997 and 1998 from the
audited combined financial statements and the related notes of
CenturyTels Alaska Properties.                                                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | CenturyTel acquired its Alaska properties on December 1, 1997
as part of its acquisition of Pacific Telecom. This acquisition was
accounted for as a purchase, resulting in a pushdown of $248 million
of goodwill to CenturyTels Alaska Properties.                                                                                                                                          
|
| |  |  | The selected historical combined financial data for the
11-month period ended November 30, 1997 has been presented on
Pacific Telecoms basis of accounting, while the selected historical
combined financial data as of December 31, 1998 and 1997, the
one-month period ended December 31, 1997 and the year ended December
31, 1998 have been presented on CenturyTels basis of accounting.
|
| |  |  | The selected historical combined financial data of
CenturyTels Alaska Properties include the results of the City of
Fairbanks Telephone Operation from October 6, 1997, the date of its
acquisition. This acquisition was accounted for as a purchase.                                                                                                                                        
|
| |  |  | On December 31, 1997, the cellular operations in Fairbanks
were sold to ATU. The Fairbanks cellular property had 5,497
subscribers at the time of the sale.                                                                                                                                                                                                                                    



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|                                         |                               |                          |         |                                |         |                 |         |              |        |   |         |        |        | 
|---------------------------------------- | ----------------------------- | ------------------------ | ------- | ------------------------------ | ------- | --------------- | ------- | ------------ | ------ | - | ------- | ------ | ------ | 
|                                         |                               |                          |         | CenturyTel's Alaska Properties
|                                         |                               |                          |         |                               
|                                         |                               |                          |         | Century Telephone              |         |                 |         |             
|                                         |                               |                          |         | Enterprises, Inc.              |         | Pacific Telecom
|                                         |                               |                          |         |                                |         |                
|                                         |                               |                          |         | Year                           |         | Dec. 1, 1997    |         | Jan. 1, 1997
|                                         |                               |                          |         | Ended                          |         | to Dec 31,      |         | to Nov. 30, 
|                                         |                               |                          |         | 1998                           |         | 1997            |         | 1997        
|                                         |                               |                          |         |                                |         |                 |         |             
|                                         |                               |                          |         | (Dollars in Thousands)        
|Operating Data:                          |                               |                          |         |                                |         |                 |         |              |        |   |         |       
|Operating revenues:                      |                               |                          |         |                                |         |                 |         |              |        |   |         |       
|                                         | Local telephone               |                          | $       | 121,933                        |         |                 | $       | 10,255       |        |   | $       | 79,330 |       
|                                         | Cellular                      |                          |         | 2,576                          |         |                 |         | 181          |        |   |         | 5,120  |       
|                                         |                               |                          |         |                                |         |                 |         |              |        |   |         |        |       
|                                         |                               | Total operating revenues |         |                                | 124,509 |                 |         |              | 10,436 |   |         |        | 84,450 | 
|Operating expenses:                      |                               |                          |         |                                |         |                 |         |              |        |   |         |       
|                                         | Local telephone               |                          |         | 72,008                         |         |                 |         | 6,434        |        |   |         | 42,404 |       
|                                         | Cellular                      |                          |         | 2,128                          |         |                 |         | 147          |        |   |         | 3,082  |       
|                                         | Depreciation and amortization |                          |         | 30,459                         |         |                 |         | 2,466        |        |   |         | 15,823 |       
|                                         |                               |                          |         |                                |         |                 |         |              |        |   |         |        |       
|                                         |                               | Total operating expenses |         |                                | 104,595 |                 |         |              | 9,047  |   |         |        | 61,309 | 
|Operating income                         |                               |                          | 19,914  |                                |         |                 | 1,389   |              |        |   | 23,141  |       
|Interest expense, net                    |                               |                          | (1,405  | )                              |         |                 | (171    | )            |        |   | (2,169  | )     
|Other income (expense)                   |                               |                          | 356     |                                |         |                 | 53      |              |        |   | (298    | )     
|                                         |                               |                          |         |                                |         |                 |         |              |        |   |         |        |       
|Income before income taxes               |                               |                          | 18,865  |                                |         |                 | 1,271   |              |        |   | 20,674  |       
|Income taxes                             |                               |                          | 9,218   |                                |         |                 | 736     |              |        |   | 7,746   |       
|                                         |                               |                          |         |                                |         |                 |         |              |        |   |         |        |       
|Net income                               |                               | $                        | 9,647   |                                |         | $               | 535     |              |        | $ | 12,928  |       
|                                         |                               |                          |         |                                |         |                 |         |              |        |   |         |        |       
|Other Financial Data:                    |                               |                          |         |                                |         |                 |         |              |        |   |         |       
|Cash provided by operating activities    |                               | $                        | 38,291  |                                |         | $               | 5,588   |              |        | $ | 21,213  |       
|Cash used by investing activities        |                               |                          | (26,664 | )                              |         |                 | (3,279  | )            |        |   | (13,554 | )     
|Cash used by financing activities        |                               |                          | (6,770  | )                              |         |                 | (2,563  | )            |        |   | (8,209  | )     
|EBITDA                                   |                               |                          | 50,729  |                                |         |                 | 3,908   |              |        |   | 38,666  |       
|EBITDA margin                            |                               |                          | 40.7    | %                              |         |                 | 37.4    | %            |        |   | 45.8    | %     
|Capital expenditures                     |                               |                          | 26,799  |                                |         |                 | 1,825   |              |        |   | 14,575  |       
|Other Data (end of period):              |                               |                          |         |                                |         |                 |         |              |        |   |         |       
|Access lines in service                  |                               |                          | 131,858 |                                |         |                 | 124,869 |              |        |   |        |       
|Cellular subscribers                     |                               |                          | 2,945   |                                |         |                 | 2,096   |              |        |   |        |       
|Cellular penetration                     |                               |                          | 5.2     | %                              |         |                 | 3.7     | %            |        |   |        |       
|Balance Sheet Data (end of period):      |                               |                          |         |                                |         |                 |         |              |        |   |         |       
|Total assets                             |                               | $                        | 472,660 |                                |         | $               | 459,175 |              |        |   |        |       
|Long-term debt including current portion |                               |                          | 43,408  |                                |         |                 | 42,950  |              |        |   |        |       
|Stockholders equity                     |                               |                          | 400,962 |                                |         |                 | 391,314 |              |        |   |        |       



30



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##### Table of Contents



SELECTED HISTORICAL FINANCIAL DATA ATU

The following table sets forth selected historical financial data of ATU.
Consider the following points in connection with the table:



| |  |  | ACS Holdings derived the selected historical financial data
for each of the two years in the period ended December 31, 1998 and
as of December 31, 1997 and 1998 from the audited financial
statements and the related notes of ATU.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Other income (expense) includes the equity in earnings
(losses) from minority investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | During the periods presented, ATU was a public utility of the
Municipality of Anchorage and was exempt from federal and state
taxes on income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Net cash data includes information from ATU financial
statements prepared in accordance with governmental accounting
standards. Under Governmental Accounting Standards Board (GASB)
Statement No. 20, Accounting And Financial Reporting For Proprietary
Funds And Other Governmental Entities That Use Proprietary Fund
Accounting, ATU applied all applicable GASB pronouncements and all
Financial Accounting Standards Board (FASB) Statements and
Interpretations, Accounting Principles, Board Opinions and
Accounting Research Bulletins, unless they conflict with or
contradict GASB pronouncements. ATU followed the provisions of GASB
Statement No. 27 to account for pension and post-retirement costs,
which differs from FASB Statement No. 87 and FASB Statement No. 106
regarding the methodology for calculation of such costs and how they
are recorded and disclosed. It is not practicable to quantify the
differences between the statements without an additional complete
actuarial valuation because the actuarial calculations for FASB
Statement No. 87 purposes require different assumptions and
represent different measurement basis. Other differences between
GASB and FASB have been evaluated and have been determined not to be
material for the periods presented.



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|                                         |                               |                          |         |                        |         |      |         |         |         | 
|---------------------------------------- | ----------------------------- | ------------------------ | ------- | ---------------------- | ------- | ---- | ------- | ------- | ------- | 
|                                         |                               |                          |         | ATU                   
|                                         |                               |                          |         |                       
|                                         |                               |                          |         | 1998                   |         | 1997
|                                         |                               |                          |         |                        |         |     
|                                         |                               |                          |         | (Dollars in Thousands)
|Operating Data:                          |                               |                          |         |                        |         |      |         |        
|Operating revenues:                      |                               |                          |         |                        |         |      |         |        
|                                         | Local telephone               |                          | $       | 121,057                |         |      | $       | 116,555 |        
|                                         | Cellular                      |                          |         | 29,225                 |         |      |         | 21,845  |        
|                                         | Long distance                 |                          |         | 6,815                  |         |      |         | 1,541   |        
|                                         |                               |                          |         |                        |         |      |         |         |        
|                                         |                               | Total operating revenues |         |                        | 157,097 |      |         |         | 139,941 | 
|Operating expenses:                      |                               |                          |         |                        |         |      |         |        
|                                         | Local telephone               |                          |         | 74,240                 |         |      |         | 74,994  |        
|                                         | Cellular                      |                          |         | 19,961                 |         |      |         | 14,455  |        
|                                         | Long distance                 |                          |         | 10,395                 |         |      |         | 4,644   |        
|                                         | Depreciation and amortization |                          |         | 29,608                 |         |      |         | 26,839  |        
|                                         |                               |                          |         |                        |         |      |         |         |        
|                                         |                               | Total operating expenses |         |                        | 134,204 |      |         |         | 120,932 | 
|Operating income                         |                               |                          | 22,893  |                        |         |      | 19,009  |        
|Interest expense, net                    |                               |                          | (6,427  | )                      |         |      | (6,768  | )      
|Other income (expense)                   |                               |                          | (2,896  | )                      |         |      | (123    | )      
|                                         |                               |                          |         |                        |         |      |         |         |        
|Income before income taxes               |                               |                          | 13,570  |                        |         |      | 12,118  |        
|Income taxes                             |                               |                          |        |                        |         |      |        |        
|                                         |                               |                          |         |                        |         |      |         |         |        
|Net income                               |                               | $                        | 13,570  |                        |         | $    | 12,118  |        
|                                         |                               |                          |         |                        |         |      |         |         |        
|Other Financial Data:                    |                               |                          |         |                        |         |      |         |        
|Cash provided by operating activities    |                               | $                        | 53,207  |                        |         | $    | 46,641  |        
|Cash used by investing activities        |                               |                          | (5,659  | )                      |         |      | (3,665  | )      
|Cash used by financing activities        |                               |                          | (33,580 | )                      |         |      | (46,916 | )      
|EBITDA                                   |                               |                          | 49,605  |                        |         |      | 45,725  |        
|EBITDA margin                            |                               |                          | 31.6    | %                      |         |      | 32.7    | %      
|Capital expenditures                     |                               |                          | 29,644  |                        |         |      | 35,187  |        
|Other Data (end of period):              |                               |                          |         |                        |         |      |         |        
|Access lines in service                  |                               |                          | 168,536 |                        |         |      | 158,486 |        
|Cellular subscribers                     |                               |                          | 63,627  |                        |         |      | 53,035  |        
|Cellular penetration                     |                               |                          | 15.8    | %                      |         |      | 13.3    | %      
|Balance Sheet Data (end of period):      |                               |                          |         |                        |         |      |         |        
|Total assets                             |                               | $                        | 350,245 |                        |         | $    | 323,124 |        
|Long-term debt including current
portion |                               |                          | 172,521 |                        |         |      | 151,945 |        
|Stockholders equity                     |                               |                          | 141,884 |                        |         |      | 136,414 |        



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|Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward Looking Statements and Analysts Reports

This Form 10-K 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
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 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 change its pricing for communications services; the
possible future unavailability of SFAS No. 71 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 ACS 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 ACS 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 ACS Holdings.



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Introduction

This discussion and analysis should be read in conjunction with the
financial statements and related notes and the other financial information
included elsewhere in this Form 10-K.

Alaska Communications Systems Holdings

ACS Holdings is a wholly owned subsidiary of ACS Group. ACS Holdings was
formed in 1998 by Fox Paine & Company, members of the former senior management
team of Pacific Telecom, Inc., and other experienced telecommunications
industry executives. In May 1999, the Company acquired CenturyTels Alaska
Properties and Anchorage Telephone Utility or ATU.CenturyTels Alaska
Properties were the incumbent provider of local telephone services in Juneau,
Fairbanks and more than 70 rural communities in Alaska and provided Internet
services to customers statewide. CenturyTels Alaska Properties included ACS of
Fairbanks, Inc., ACS of Alaska, Inc., and ACS of the Northland, Inc. ATU was
the largest LEC in Alaska and provided local telephone and long distance
services primarily in Anchorage and cellular services statewide. ATU provided
long distance services through ATU Long Distance, Inc. and cellular services
through MACtel, Inc.These companies are now known as ACS of Anchorage, Inc.,
ACS Long Distance, Inc. and ACS Wireless, Inc.

The consolidated financial statements for ACS Holdings represent the
operations principally of the following entities:



| |  |  | Alaska Communications Systems Holdings, Inc.
| | - |  | --------------------------------------------
|
| |  |  | ACS of Alaska, Inc.                         
|
| |  |  | ACS of the Northland, Inc.                  
|
| |  |  | ACS of Fairbanks, Inc.                      
|
| |  |  | ACS of Anchorage, Inc.                      
|
| |  |  | ACS Wireless, Inc.                          
|
| |  |  | ACS Long Distance, Inc.                     
|
| |  |  | ACS Television, L.L.C.                      
|
| |  |  | ACS Internet, Inc.                          
|
| |  |  | ACS InfoSource, Inc.                        

Prior to the consummation of the acquisitions of CenturyTels Alaska
Properties and ATU in May 1999, ACS Holdings had no operations.

Today, ACS Holdings generates revenue primarily through:



| |  |  | the provision of local telephone services, including:
| | - |  | -----------------------------------------------------



| |  |  | basic local service to retail customers within ACS Holdings service areas,                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | wholesale service to 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 B&C, and                                                                                                     
|
| |  |  | universal service payments;                                                                                                              



| |  |  | the provision of cellular services;                                    
| | - |  | -----------------------------------------------------------------------
|
| |  |  | the provision of directory advertising;                                
|
| |  |  | the provision of Internet services; and                                
|
| |  |  | the provision of interexchange network long-distance and data services.

ACS Holdings also recognizes its proportionate share of the net income or
loss of its minority-owned investments.

Within the telecommunications industry, LECs have historically enjoyed
stable revenue and cash flow from local exchange operations resulting from the
need for basic telecommunications services, the



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highly regulated nature of the telecommunications industry and, in the case of
rural LECs, the underlying cost recovery settlement and support mechanisms
applicable to local exchange operations. Basic local service is generally
provided at a flat monthly rate and allows the user to place unlimited calls
within a defined local calling area. Access revenues are generated by providing
interexchange carriers access to the LECs local network and its customers.
Universal service revenues are a subsidy paid to rural LECs to support the high
cost of providing service in rural markets. Other service revenue is generated
from ancillary services, enhanced services and Internet access.

Changes in revenue are largely attributable to changes in the number of
access lines, local service rates and minutes of use. Other factors can also
impact revenue, 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, or other packaged products, such as cellular and Internet
and
|
| |  |  | other subscriber usage characteristics.                                                                                  

LECs have three basic tiers of customers:



| |  |  | business and residential 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 or UNE basis as prescribed under the 1996 Act.

LECs provide access service to numerous interexchange carriers and may
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.

ACS Holdings local service rates for end users are authorized by the RCA.
Authorized rates are set by the FCC and the RCA for interstate and intrastate
access charges, respectively, and may change from time to time.



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Critical Accounting Policies and Accounting Estimates

Management is responsible for the financial statements presented elsewhere
in this 10-K 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 elsewhere in this
10-K. The following discussion identifies those accounting policies that
management believes are critical in the preparation of the Companys financial
statements, the judgements 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 revenues and
expenses 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 revenues are 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 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 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. At
December 31, 2001, the Company had recorded liabilities of $31.7 million
related to potentially refundable access revenue, of which $18.0 million
relates to a pending complaint of alleged over-earnings. If the Company thought
it was more likely than not that it will prevail on this complaint, its
previously reported net losses for the three years ended December 31, 2001
would decrease by up to $18.0 million and its accumulated deficit would
decrease from $61.9 million to $43.9 million.

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 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. If the Company thought it was more likely than not that all of its
deferred tax assets would be realized in future periods, the Companys
previously reported net losses for the three years ended December 31, 2001
would decrease by up to $20.7 million and its accumulated deficit would
decrease from $64.7 million to $42.1 million.

The local telephone exchange operations of the Company account for costs
in accordance with the accounting principles for regulated enterprises
prescribed by Statements 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. Depreciable lives of plant and equipment
approximate their estimated economic lives. Unregulated 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.
Management believes that the effect of adopting SFAS No. 101,Regulated
Enterprises  Accounting for the Discontinuation of Application of FASB
Statement No. 71,would not be material to the Companys financial position,
results of operations or cash flows.



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Results of Operations

The following unaudited table summarizes ACS Holdings operations for the
years ended December 31, 2001, 2000 and 1999. For the year ended December 31,
1999, the summary information represents the historical combined operating
results of the Predecessor Entities prior to their ownership by ACS Holdings,
from January 1, 1999 through May 14, 1999, plus the consolidated results of ACS
Holdings from May 15, 1999 through December 31, 1999. Certain reclassifications
have been made to the 2000 consolidated and 1999 combined operations to conform
to the current presentation of ACS Holdings consolidated operations.

|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |         | 
|---------------------------- | -------------------------------------- | ----------------------------- | ------------------------ | ------- | ----------------------- | ------- | -------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                             |                                        |                               |                          |         | Year Ended December 31,
|                             |                                        |                               |                          |         |                        
|                             |                                        |                               |                          |         | Consolidated            |         | Combined
|                             |                                        |                               |                          |         |                         |         |         
|                             |                                        |                               |                          |         | 2001                    |         | 2000     |         | 1999   
|                             |                                        |                               |                          |         |                         |         |          |         |        
|                             |                                        |                               |                          |         | (in thousands)         
|Operating revenues:          |                                        |                               |                          |         |                         |         |          |         |         |         |         |        
|                             | Local telephone:                       |                               |                          |         |                         |         |          |         |         |         |         |         |        
|                             |                                        | Local network service         |                          | $       | 96,270                  |         |          | $       | 94,098  |         |         | $       | 94,499  |        
|                             |                                        | Network access revenue        |                          |         | 102,977                 |         |          |         | 105,172 |         |         |         | 105,366 |        
|                             |                                        | Deregulated revenue and other |                          |         | 22,164                  |         |          |         | 22,998  |         |         |         | 22,494  |        
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        
|                             | Total local telephone                  |                               |                          | 221,411 |                         |         |          | 222,268 |         |         |         | 222,359 |        
|                             | Cellular                               |                               |                          | 40,398  |                         |         |          | 39,490  |         |         |         | 36,041  |        
|                             | Directory                              |                               |                          | 33,870  |                         |         |          | 29,156  |         |         |         | 26,615  |        
|                             | Internet                               |                               |                          | 13,724  |                         |         |          | 9,170   |         |         |         | 4,948   |        
|                             | Interexchange                          |                               |                          | 21,316  |                         |         |          | 11,778  |         |         |         | 9,587   |        
|                             | Other                                  |                               |                          | 960     |                         |         |          | 1,131   |         |         |         | 359     |        
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        
|                             |                                        |                               | Total operating revenues |         |                         | 331,679 |          |         |         | 312,993 |         |         |         | 299,909 | 
|Operating expenses:          |                                        |                               |                          |         |                         |         |          |         |         |         |         |        
|                             | Local telephone                        |                               |                          | 120,659 |                         |         |          | 130,875 |         |         |         | 146,858 |        
|                             | Cellular                               |                               |                          | 24,153  |                         |         |          | 24,641  |         |         |         | 23,748  |        
|                             | Directory                              |                               |                          | 14,490  |                         |         |          | 14,001  |         |         |         | 13,342  |        
|                             | Internet                               |                               |                          | 15,677  |                         |         |          | 11,785  |         |         |         | 7,612   |        
|                             | Interexchange                          |                               |                          | 29,509  |                         |         |          | 19,749  |         |         |         | 14,023  |        
|                             | Other                                  |                               |                          | 1,852   |                         |         |          | 1,458   |         |         |         | 486     |        
|                             | Unusual charges                        |                               |                          |        |                         |         |          | 5,288   |         |         |         |        |        
|                             | Depreciation and amortization          |                               |                          | 79,811  |                         |         |          | 72,265  |         |         |         | 63,487  |        
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        
|                             |                                        | Total operating expenses      |                          |         | 286,151                 |         |          |         | 280,062 |         |         |         | 269,556 |        
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        
|Operating income             |                                        |                               | 45,528                   |         |                         |         | 32,931   |         |         |         | 30,353  |        
|Other income and expense:    |                                        |                               |                          |         |                         |         |          |         |         |         |         |        
|                             | Interest expense                       |                               |                          | (57,691 | )                       |         |          | (62,109 | )       |         |         | (42,043 | )      
|                             | Interest income and other              |                               |                          | 3,252   |                         |         |          | 3,631   |         |         |         | 2,899   |        
|                             | Equity in income (loss) of investments |                               |                          | 70      |                         |         |          | (303    | )       |         |         | (1,569  | )      
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        
|                             |                                        | Total other income (expense)  |                          |         | (54,369                 | )       |          |         | (58,781 | )       |         |         | (40,713 | )      
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        
|Loss before income taxes     |                                        |                               | (8,841                   | )       |                         |         | (25,850  | )       |         |         | (10,360 | )      
|Income tax (expense) benefit |                                        |                               | 195                      |         |                         |         | 197      |         |         |         | (3,643  | )      
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        
|Net loss                     |                                        | $                             | (8,646                   | )       |                         | $       | (25,653  | )       |         | $       | (14,003 | )      
|                             |                                        |                               |                          |         |                         |         |          |         |         |         |         |         |         |        



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Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended
December 31, 2000

Operating Revenues

Operating revenues increased $18.7 million, or 6.0%, for the year ended
December 31, 2001 compared to the year ended December 31, 2000. Cellular,
Directory, Internet and interexchange revenues increased compared to the prior
period.

Local Telephone

Local telephone revenues, which consist of local network service, network
access revenue, and deregulated revenue and other, decreased $0.9 million, or
0.4%, for the year ended December 31, 2001 compared to the same period in 2000.

The local network service component of local telephone revenues was $96.3
million during 2001 compared with $94.1 million during 2000.Revenue increased
$2.2 million or 2.3% from the prior year, while average access lines in service
increased 1.1% to 331,192. The net increase was due primarily to lower charges
for uncollectible accounts as the Company improved its collection processes.
The charges for uncollectible accounts recorded against local network service
revenue in 2000 were $2.7 million in excess of those recorded during 2001,
accounting for more than 100% of the increase in local network service revenue.

The Company continued to experience loss of retail market share for local
network service in its Anchorage and Fairbanks service areas during the year.
Generally, when the Company loses a retail local network service line to a
competitor, it continues to provide the line to the competitor on a wholesale
basis at reduced revenue per line. Management believes that the continuing loss
of market share experienced in Anchorage and Fairbanks is partially
attributable to below cost interconnection rates for UNEs currently in place.
The RCA has approved arbitrated interconnection rates for UNEs for the
Companys Juneau market which management believes are below cost, although
there has been no competitive market penetration in Juneau through February
2002. During the second quarter of 2001, the Company reopened interconnection
proceedings for its Anchorage market and filed for an interim and refundable
UNE rate increase of approximately $10 per month per loop. On October 25, 2001,
the RCA granted ACSA an interim and refundable UNE rate increase of $1.07,
bringing the UNE rate up from $13.85 to $14.92.The Company expects the RCA to
hold hearings and adjudicate final Anchorage UNE rates during 2002. See
Business  Regulation under Item 1 of Part I of this report for further
discussion.

The Company believes it is also earning less than its required rate of
return for local network service in several of its markets and filed local
service rate cases for all of its LEC businesses with the RCA on July 2, 2001
aimed at making up this deficiency. Subsequently, in October 2001, the Company
filed for interim and refundable local service rates in its Anchorage market in
order to expedite a partial recovery of the total revenue deficiency. On
November 15, 2001 the RCA approved an interim and refundable rate increase for
ACSA of 24% for certain services.This interim and refundable rate increase is
expected to generate approximately $4.0 million in annual revenue requirement.
See Business  Regulation under Item 1 of Part I of this report for further
discussion.

Network access revenues decreased by $2.2 million, or 2.1%, from $105.2
million in 2000 to $103.0 million in 2001. 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. The decrease in network
access revenues from the corresponding period in 2000 is due primarily to
changes relating to cost allocation factors, rate base, expenses and a shift
from retail lines to UNEs as a result of competition, from period to period.
Management expects that network access revenues will decline as a component of
local telephone revenues for the foreseeable future.

Deregulated and other revenues, which declined $0.8 million, or 3.6% from
2000, consists principally of B&C services, space and power rents, deregulated
equipment sales, paystation revenues, regulated directory listing revenue, and
other miscellaneous telephone revenues. The decline in deregulated



38



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and other revenue was due primarily to a $2.2 million reduction in
deregulated equipment sales in 2001 offset by a $1.2 million increase in space
and power rents over 2000.

Cellular

Cellular revenues increased $0.9 million, or 2.3%, to $40.4 million for
the year ended December 31, 2001 compared to $39.5 million for the year ended
December 31, 2000. This growth in revenue is due to growth in average cellular
subscribers to 78,027 in 2001 from 74,501 in 2000, or 4.7%, and a decrease in
average revenue per unit, or ARPU, from $44.17 in 2000 to $43.15 in 2001. The
decrease in ARPU is the result of competitive digital statewide and national
pricing programs implemented during 2001 that offer more minutes and free
features than the previous plans for the same price, coupled with other sales
promotions. These competitive plans have resulted in increased total revenues
and market share but lower revenue per unit.

Directory

Directory revenues increased by $4.7 million, or 16.2%, from $29.2 million
in 2000 to $33.9 million in 2001. This growth reflects improved penetration and
revenue per advertiser for the current directory phone book cycles compared
with 2000. Management expects the growth in directory revenues to slow as
competing directories and other advertising vehicles, such as the Internet,
television and radio, compete for this business and the market matures.

Internet

Internet revenues increased from $9.2 million in 2000 to $13.7 million in
2001  an increase of $4.5 million, or 49.7%. This increase is primarily due
to the additional revenues from Internet Alaska, Inc. (IAI), which was
acquired in June of 2000 and MosquitoNet, which was acquired in July of 2001.
Internet revenues were also favorably impacted by growth in DSL subscribers. 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 or supported by a service center
owned and operated by ACSI. Accordingly, the Company anticipates revenues for
this segment will increase in future periods.

Interexchange

Interexchange revenues increased from $11.8 million in 2000 to $21.3
million in 2001  an increase of $9.5 million, or 81.0%. The increase was due
to growth in long distance subscribers from 57,537 in 2000 to 65,705 in 2001.
The Company also experienced growth in long distance minutes of use from 95.3
million in 2000 to 219.6 million in 2001. The growth in both subscribers and
minutes of use was due to high customer acceptance of and satisfaction with the
Companys flat rate long distance product offerings, which it began rolling out
in the fourth quarter of 2000.

Other

Other revenues, which consist principally of wireless cable television,
decreased marginally from 2000 to 2001.

Operating Expenses

Operating expenses increased $6.1 million, or 2.2%, from $280.1 million
for the year ended December 31, 2000 to $286.2 million for the year ended
December 31, 2001. Operating expenses decreased as a percentage of operating
revenues from 89.5% in 2000 to 86.3% in 2001.

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.



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Depreciation and amortization associated with the operation of the local
telephone segment is included in total depreciation and amortization. Local
telephone expense decreased from $130.9 million for the year ended December 31,
2000 to $120.7 million for the year ended December 31, 2001  a decrease of
$10.2 million or 7.8%.As a percentage of local telephone revenue, local
telephone expense decreased from 58.9% for 2000 to 54.5% for 2001. These
results reflect continued improvements in the Companys cost structure,
including workforce reductions, benefits derived from the deployment of
information systems, and other synergies realized through the consolidation of
the operations the Company acquired in 1999.

Cellular

Cellular expense decreased $0.5 million, or 2.0%, for the year ended
December 31, 2001 compared to the year ended December 31, 2000. Cellular
expense was 62.4% of cellular revenues for 2000 and 59.8% of cellular revenues
for 2001.

Directory

Directory expenses increased $0.5 million from $14.0 million in 2000 to
$14.5 million in 2001. As a percent of directory revenue, expenses were 42.8%
for 2001 compared to 48.0% for 2000. This margin improvement is due to stable
fixed cost combined with increasing directory revenue.

Internet

Internet expenses increased by $3.9 million, or 33.0%, and decreased as a
percentage of revenue from 128.5% in 2000 to 114.2% in 2001. The increase in
Internet expenses was due principally to the acquisition in June of 2000 of IAI
and the acquisition in July, 2001 of MosquitoNet, for which comparable costs
are not included for the full year of 2000. Costs associated with developing
the Companys statewide Internet infrastructure, preparation for providing
services under the State of Alaska telecommunications contract, and the rollout
of the Companys DSL product also contributed to the increase in Internet
expense. 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 or supported by a
service center owned and operated by ACSI. Accordingly, the Company anticipates
expenses for this segment will increase in future periods.

Interexchange

Interexchange expenses increased by $9.8 million, or 49.4%, and decreased
as a percentage of revenue from 167.7% in 2000 to 138.4% in 2001. The majority
of this increase was the result of additional traffic sensitive costs incurred
as a result of the increase in customers and minutes of use with the rollout of
the Companys flat rate calling plans as discussed under interexchange service
revenues.

Unusual charges

During the year ended December 31, 2000, ACS Holdings recorded $5.3
million of unusual charges, consisting of the write-off of approximately $1.5
million of costs related to the attempted acquisition of Matanuska Telephone
Association, $0.8 million in a legal settlement and $3.0 million related to
severance and restructuring plans. Employee force reductions resulting from
these restructuring plans are expected to total approximately 200 by their
completion, of which approximately 150 were completed by December 31, 2001.

Depreciation and Amortization

Depreciation and amortization expense increased $7.5 million, or 10.4%,
due principally to increases in plant in service for the year ended December
31, 2001 over the corresponding period of 2000. Depreciation and amortization
expense includes $7.7 million of goodwill amortization for each of 2001 and
2000. The Company adopted on January 1, 2002, SFAS No. 142, Goodwill and
Intangible Assets. Goodwill will no longer be amortized in 2002 and will
instead be subjected to an annual impairment test, the effect of which the
Company is currently evaluating.



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Interest Expense and Interest Income and Other

Interest expense decreased $4.4 million, or 7.1%, for the year ended
December 31, 2001 compared to the year ended December 31, 2000, principally as
a result of market effects on the Companys variable interest rate debt.
Interest income and other also declined by $0.4 million, or 10.4%, as a result
of a lower average invested cash balance and lower market interest rates during
2001 compared to 2000.

Income Taxes

ACS Holdings has fully reserved the income tax benefit resulting from the
consolidated losses it has incurred since May 14, 1999  the date of the
acquisition of substantially all of its operations.

Net Loss

The decrease in net loss is primarily a result of the factors discussed
above.

Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December
31, 1999

Operating Revenues

Operating revenues increased $13.1 million, or 4.4%, for the year ended
December 31, 2000 compared to the year ended December 31, 1999. Cellular,
directory, Internet and interexchange network and other revenues all increased
compared to the prior period.

Local Telephone

Local telephone revenues, which consist of local network service, network
access revenue, and deregulated and other revenues, was essentially flat for
the year ended December 31, 2000 compared to the same period in 1999.

The local network service component of local telephone revenues was $94.1
million during 2000 compared with $94.5 million during 1999. Revenue decreased
$0.4 million or 0.4% from the prior year, despite growth in average total
access lines in service of 4.6% and increased penetration of enhanced features.
The net decrease was due primarily to charges for uncollectible accounts and
increased market penetration of lower margin wholesale lines in the Anchorage
market. The charges for uncollectible accounts recorded against local network
service revenue in 2000 were $4.1 million in excess of those recorded during
1999, accounting for more than 100% of the decrease in local network service
revenue. Management has taken aggressive steps to address collection issues and
expects charges for uncollectible accounts will be reduced in the future.
Management also believes that the continued loss of market share experienced in
the Anchorage market is attributable to below cost interconnection rates for
UNEs currently in place.

Network access revenues decreased by $0.2 million, or 0.2%, from $105.4
million in 1999 to $105.2 million in 2000. Network access revenues were reduced
by $3.6 million in the third quarter of 2000 as a result of a complaint filed
with the FCC during the third quarter alleging that one of the Companys
subsidiaries exceeded its federally authorized rate of return. See Business -
Regulatory under Item 1 of Part I of this report for further discussion of
this matter. 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. The decrease in telephone access revenues from the
corresponding period in 1999 is due primarily to changes relating to cost
allocation factors, rate base, expenses, and a shift from retail lines to UNEs
as a result of competition, from period to period. Management expects that
network access revenues will decline as a component of local telephone revenues
for the foreseeable future.

Deregulated and other revenues, which grew $0.5 million, or 2.2% over
1999, consists principally of B&C services, space and power rents, deregulated
equipment sales, paystation revenues and other



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miscellaneous telephone revenues. The revenue increase was due primarily
to increased deregulated equipment sales in 2000.

Cellular

Cellular revenues increased $3.4 million, or 9.6%, to $39.5 million for
the year ended December 31, 2000 compared to $36.0 million for the year ended
December 31, 1999. This growth in revenue is due to growth in average cellular
subscribers to 74,501 in 2000 from 69,820 in 1999, or 6.7%, and an increase in
average revenue per unit from $43.02 in 1999 to $44.17 in 2000. The increase in
average revenue per unit is due to the rollout of statewide digital service
during 2000 and the introduction of new statewide and national pricing
programs.

Directory

Directory revenues increased by $2.6 million from $26.6 million in 1999 to
$29.2 million in 2000. This growth corresponds with the growth in average
access lines in service during 2000 over 1999 from 313,001 during 1999 to
327,534 during 2000, or an increase of 4.6%, combined with additional
penetration for the current directory phone book cycles.

Internet

Internet revenues increased from $4.9 million in 1999 to $9.2 million in
2000  an increase of $4.3 million, or 85.3%. This increase is primarily due
to the additional revenues from IAI, which was acquired in June of 2000.
Internet revenues were also impacted by growth in DSL and dial-up subscribers.

Interexchange

Interexchange revenues increased from $9.6 million in 1999 to $11.8
million in 2000  an increase of $2.2 million, or 22.9%. Long distance
revenues increased due to increases in long distance minutes of use from 67.7
million to 95.3 million and increases in circuit rent revenues, coupled with
the rollout of competitive long-distance product offerings.

Other

Other revenues, which increased $0.8 million compared to 1999, consist
principally of television revenues from ACSTV. The Company included ACSTV in
its consolidated revenues for the full year of 2000 compared to three months
for 1999, accounting for substantially all of the increase.

Operating Expenses

Operating expenses increased $10.5 million, or 3.9%, from $269.6 million
for the year ended December 31, 1999 to $280.1 million for the year ended
December 31, 2000. As a percentage of operating revenues, operating expenses
decreased from 89.9% in 1999 to 89.5% in 2000.

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 expenses decreased from
$146.9 million for the year ended December 31, 1999 to $130.9 million for the
year ended December 31, 2000  a decrease of $16.0 million or 10.9%. During
1999, the Company incurred one-time and transaction related costs associated
with the acquisitions of the Predecessor Entities of $7.1 million. The Company
also incurred $5.7 million of compensation expense related to telephone
operations as a result of options granted below fair value at the date of
grant, which vested fully upon the completion of ACS Groups initial public
offering. Adjusted for these non-recurring items, telephone operating expenses
would have been $134.1 million for 1999. As a percentage of local telephone
revenue, local telephone expense decreased from 60.3% for 1999, adjusted



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for the non-recurring items, to 58.9% for 2000. This change in local telephone
expense as a percentage of local telephone revenue improved despite
approximately $4.1 million in charges for uncollectible accounts recorded
against revenues during 2000 in excess of those recorded during 1999, as
previously discussed. During 2000, ACS Holdings also incurred $1.1 million of
local telephone expense resulting from interconnection proceedings with CLECs
for which comparable costs were not incurred during the corresponding year of
1999.

Cellular

Cellular expenses increased $0.9 million, or 3.8%, for the year ended
December 31, 2000 compared to the year ended December 31, 1999. Cellular
expense was 65.9% of cellular revenues for 1999 and 62.4% of cellular revenues
for 2000.

Directory

Directory expenses increased $0.7 million, or 4.9%, from $13.3 million in
1999 to $14.0 million in 2000. As a percentage of revenue, directory expenses
were 48.0% for 2000 compared to 50.1% for 1999.

Internet

Internet expenses increased by $4.2 million, or 54.8%, and decreased as a
percentage of revenue from 153.8% in 1999 to 128.5% in 2000. The increase in
Internet expenses was due to the acquisition in June of 2000 of IAI for which
comparable costs are not included for 1999, and costs associated with
developing the Companys statewide Internet infrastructure and the rollout of
the DSL product.

Interexchange

Interexchange expenses increased by $5.7 million, or 40.8%, and increased
as a percentage of revenue from 146.3% in 1999 to 167.7% in 2000. The majority
of this increase was the result of additional circuit and other costs
associated with developing the Companys statewide network and increases in
minutes of use for long distance as discussed above.

Other

Other expenses, which consist principally of wireless cable expenses,
increased due to the acquisition of ACSTV, which was completed in September
1999.

Unusual charges

During the year ended December 31, 2000, ACS Holdings recorded $5.3
million of unusual charges, consisting of the write-off of approximately $1.5
million of costs related to the attempted acquisition of Matanuska Telephone
Association, $0.8 million in a legal settlement and $3.0 million related to
severance and restructuring plans. Employee force reductions resulting from
these restructuring plans are expected to total approximately 200 by their
completion, of which approximately 100 were completed by December 31, 2000.

Depreciation and Amortization

Depreciation and amortization expense increased $8.8 million, or 13.8%,
due principally to increases in plant in service for the year ended December
31, 2000 over the corresponding period of 1999.

Interest Expense, Interest Income and Other

Interest expense increased $20.1 million, or 47.7%, for the year ended
December 31, 2000 as compared to the year ended December 31, 1999.This
increase is due to $591.7 million of debt incurred by ACS Holdings in
connection with the acquisitions on May 14, 1999 of substantially all of its
operations. Interest income and other increased $0.7 million, or 25.3%, as a
result of increases in invested cash



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resulting from additional contributed capital from ACS Groups initial public
offering completed during November 1999.

Income Taxes

ACS Holdings has fully reserved the income tax benefit resulting from the
consolidated losses it has incurred since May 14, 1999  the date of the
acquisition of substantially all of its operations. Income taxes reflected in
the combined financial statements are substantially those of the Predecessor
Entities.

Net Loss

The increase in net loss is primarily a result of the factors discussed
above.

Liquidity and Capital Resources

ACS Holdings has satisfied its operational and capital cash requirements
primarily through internally generated funds, the sale of stock and subsequent
contribution of capital by ACS Group, and debt financing. For the twelve months
ended December 31, 2001 the Companys cash flows from operating activities were
$76.6 million. At December 31, 2001, the Company had approximately $33.7
million in net working capital, with approximately $41.0 million represented by
cash and cash equivalents and $6.9 million of restricted cash. As of December
31, 2001 the Company had $75.0 million of remaining capacity under its
revolving credit facility, representing 100% of available capacity.

The Company has a $435.0 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 $596.6
million as of December 31, 2001. In addition, $17.3 million in 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, quarterly or
semi-annually at the Companys option. The Senior Credit Facility requires 1%
annual principal payments commencing 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. See Note 7
Long-term Obligations in the Notes to Consolidated Financial Statements
included elsewhere in this 10-K.

The Company employs an interest rate hedge transaction, which fixes at
5.99% the underlying variable rate on one-half of the borrowings under the
Senior Credit Facility, or $217.5 million, expiring in June 2002. The buyer has
the right at their option to extend the agreement for an additional two years,
and, based on current market interest rates, management expects this option to
be exercised, extending the contract to 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.

The local telephone network requires the timely maintenance of plant and
infrastructure. The Company believes its local network is of high quality, is
technically advanced and will have relatively predictable annual capital needs.
The Companys historical capital expenditures have been significant. The
construction and geographic expansion of ACS Holdings cellular network has
required significant capital. The implementation of the Companys 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 finance the 1999 acquisitions. Capital expenditures for 2000
were $72.3 million, including $3.2 million in capital leases. Capital
expenditures for 2001 were $87.6 million, including $19.5 million for
additional fiber capacity and $15 million for an IP based network and service
center. The Company anticipates capital spending for 2002 of approximately $85
million, including approximately $20 to $25 million necessary to meet its
obligations under a material contract with the State of Alaska and
approximately $7 million for the buildout of PCS licenses. The Company intends
to fund its future capital



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expenditures with cash on hand, through internally generated cash flows, and if
necessary, through additional borrowings under the revolving credit facility.

ACS Holdings capital requirements may change, however, due to, among
other things: the Companys decision to pursue specific acquisition
opportunities, changes in technology, the effects of competition or changes in
the Companys business strategy. ACS Holdings ability to satisfy its capital
requirements will be dependent upon its future financial performance, which is,
in turn, subject to future economic conditions and to financial, business and
other factors, many of which are beyond the Companys control.

On July 6, 2001, ACS Holdings acquired the assets and business of Internet
Plus. L.L.C., dba MosquitoNet, a Fairbanks based Internet service provider with
approximately 5,000 customers. The acquisition was funded entirely with cash on
hand.

The Company has entered into an agreement with a third party to provide to
that party a financing commitment for an amount ranging from $10 million to $15
million contingent upon the third party achieving certain objectives. Such
financing would be in the form of an unsecured loan. The Company believes such
financing may occur during 2002 and it intends to fund it with cash on hand and
cash flow from operations.

ACS Holdings 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. ACS Holdings
ability to satisfy its capital requirements 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.

Effect of New Accounting Standards

On June 29, 2001, the FASB approved for issuance SFAS No. 141, Business
Combinations,which supercedes APB Opinion No, 16, Business Combinationsand
SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises.This statement establishes new standards for accounting and
reporting requirements for business combinations and requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. The adoption of this statement did not have a
material impact on the Companys financial position, results of operations or
cash flows.

On June 29, 2001, the FASB approved for issuance SFAS No. 142, Goodwill
and Intangible Assets, which supercedes APB Opinion No. 17, Intangible Assets.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead will be tested for impairment
at least annually in accordance with the provisions of SFAS No. 142. SFAS No.
142 will also require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of.

The Company adopted SFAS No. 142 effective January 1, 2002. Goodwill and
intangible assets determined to have an indefinite useful life acquired in a
purchase business combination completed after June 30, 2001, but before SFAS
No. 142 was adopted, were not amortized. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 were amortized
in accordance with the appropriate pre-SFAS No. 142 accounting
literature. Upon
adoption of SFAS No. 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by the end of the first interim
period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of
a change in accounting principle in the first interim period.



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In connection with SFAS No. 142s transitional goodwill impairment
evaluation, SFAS No. 142 will require the Company to perform an assessment of
whether there is an indication that goodwill impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the carrying amount of the reporting unit. To
the extent the carrying amount of a reporting unit exceeds the fair value of
the reporting unit, an indication exists that the reporting unit goodwill may
be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of
the reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. This
second step is required to be completed as soon as possible, but no later than
the end of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle in the
Companys statement of earnings.

At the date of adoption of SFAS No. 142, the Company had unamortized
goodwill of $250,495 and unamortized identifiable intangible assets of $26,784,
all of which will be subject to the transition provisions of SFAS No. 142.
Amortization expense related to goodwill was $7,741, $7,510 and $4,243, for the
years ended December 31, 2001, 2000 and 1999, respectively. Because of the
extensive effort needed to comply with adopting SFAS No. 142, it is not
practicable to reasonably estimate the impact of adopting this Statement on the
Companys financial position, results of operations and cash flows at the date
of this report, including whether the Company will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.

On August 15, 2001, the 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.

On October 3, 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,which is effective for the
Companys fiscal year beginning January 1, 2002. 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. The Company is
evaluating the impact of the adoption of this statement on its financial
position, results of operations and cash flows.

Outlook

ACS Holdings expects the demand for telecommunications services in Alaska
to grow, particularly as a result of:



| |  |  | continuing growth in demand for core telephone services and
enhanced service offerings,                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increased line demand from expected growth in the Alaskan
economy and population growth in ACS Holdings service areas,                  
|
| |  |  | increasing demand for private network services by government
and business in the Companys service areas,                                
|
| |  |  | increasing demand for cellular services and                                                                                              
|
| |  |  | growth in demand for DSL and Internet access services due to
higher business and consumer bandwidth needs for Internet and data
services.



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The Company believes that it will be able to capitalize on this demand
through its diverse service offerings on its owned facilities and new sales and
marketing initiatives directed toward basic, 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.See Business 
Regulation under Part I, Item 1of this report for further discussion.

The telecommunications industry is extremely competitive, and ACS Holdings
expects competition to intensify in the future. As an 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, ACS Holdings 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 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 services, ACS Holdings currently
competes with at least one other cellular provider in each of its cellular
service areas. In long distance, the Company currently has less than 10% of
total long distance revenues in Alaska and faces competition from the two major
long distance providers in Alaska. In the highly competitive business for
Internet access services, ACS Holdings currently competes with a number of
established online service companies, interexchange carriers and cable
companies.

The telecommunications industry is subject to continuous technological
change. ACS Holdings 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
the State of Alaska to provide it with comprehensive telecommunications
services. The Company expects that this contract will generate approximately
$92 million in revenues 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 $20 to $25 million during
2002. The contract has been filed as Exhibit 10.11 to this 10-K.

Impact of Inflation

The effect of inflation on ACS Holdings financial results has not been
significant in the periods presented.



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|Item 7A. | 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, specifically 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 only. The terms and characteristics of
the derivative financial instruments are matched with the underlying on-balance
sheet instrument and do not constitute speculative or leveraged positions
independent of these exposures.

The information below provides information about the Companys sensitivity
to market risk associated with fluctuations in interest rates as of December
31, 2001. To the extent that the Companys financial instruments expose the
Company to interest rate risk, they are presented within each market risk
category in the table below. The table presents principal cash flows and
related expected interest rates by year of maturity for the Companys bank
credit facilities, senior subordinated notes and capital leases and other
long-term obligations outstanding at December 31, 2001. Weighted average
variable rates for the bank credit facilities are based on implied forward
rates in the LIBOR yield curve as of December 31, 2001. For the interest rate
swap agreement, the table presents the notional amount and the related
reference interest rates by year of maturity. The Company assumed that an
option to extend the term of the swap by two years would be exercised based on
the LIBOR rates in effect at December 31, 2001 and the implied forward yield
curve. Fair values included herein have been determined based on (i) the
carrying value for the bank credit facility at December 31, 2001, as interest
rates are reset periodically; (ii) quoted market prices for senior subordinated
notes; and (iii) quoted prices from a financial institution for the Companys
swap agreement. Alaska Communications Systems Holdings, Inc.s Consolidated
Financial Statements contain descriptions of the senior subordinated notes,
credit facility, capital leases and other long-term obligations and the
interest rate swap agreement and should be read in conjunction with the table
below.

|                                                     |                                           |   |                        |      |      |   |       |      |      |   |         |      |            |   |       |      |       |   |         |      |   |   |         |      |   |   |         |      |   |   |         |  | 
|---------------------------------------------------- | ----------------------------------------- | - | ---------------------- | ---- | ---- | - | ----- | ---- | ---- | - | ------- | ---- | ---------- | - | ----- | ---- | ----- | - | ------- | ---- | - | - | ------- | ---- | - | - | ------- | ---- | - | - | ------- |  | 
|                                                     |                                           |   |                        |      |      |   |       |      |      |   |         |      |            |   |       |      |       |   |         |      |   |   |         |      |   |   |         |      |   |   | Fair   
|                                                     |                                           |   | 2002                   |      | 2003 |   | 2004  |      | 2005 |   | 2006    |      | Thereafter |   | Total |      | Value
|                                                     |                                           |   |                        |      |      |   |       |      |      |   |         |      |            |   |       |      |      
|                                                     | Interest Bearing Liabilities:             |   | (dollars in thousands)
|Bank credit facility  tranche A                     |                                           | $ | 1,500                  |      |      | $ | 1,500 |      |      | $ | 1,500   |      |            | $ | 1,500 |      |       | $ | 144,000 |      |   | $ |        |      |   | $ | 150,000 |      |   | $ | 150,000 | 
|                                                     | Average interest rate (variable)          |   |                        | 4.42 | %    |   |       | 6.34 | %    |   |         | 7.96 | %          |   |       | 8.42 | %     |   |         | 8.63 | % |   |         |     |   |   |         | 5.96 | % |   |         |  | 
|Bank credit facility  tranche B                     |                                           | $ | 1,500                  |      |      | $ | 1,500 |      |      | $ | 1,500   |      |            | $ | 1,500 |      |       | $ | 1,500   |      |   | $ | 142,500 |      |   | $ | 150,000 |      |   | $ | 150,000 | 
|                                                     | Average interest rate (variable)          |   |                        | 5.17 | %    |   |       | 7.09 | %    |   |         | 8.71 | %          |   |       | 9.17 | %     |   |         | 9.39 | % |   |         | 9.52 | % |   |         | 8.17 | % |   |         |  | 
|Bank credit facility  tranche C                     |                                           | $ | 1,350                  |      |      | $ | 1,350 |      |      | $ | 1,350   |      |            | $ | 1,350 |      |       | $ | 1,350   |      |   | $ | 128,250 |      |   | $ | 135,000 |      |   | $ | 135,000 | 
|                                                     | Average interest rate (variable)          |   |                        | 5.42 | %    |   |       | 7.34 | %    |   |         | 8.96 | %          |   |       | 9.42 | %     |   |         | 9.64 | % |   |         | 9.83 | % |   |         | 8.43 | % |   |         |  | 
|Senior subordinated notes                            |                                           | $ |                       |      |      | $ |      |      |      | $ |        |      |            | $ |      |      |       | $ |        |      |   | $ | 150,000 |      |   | $ | 150,000 |      |   | $ | 148,500 | 
|                                                     | Average interest rate (fixed)             |   |                        | 9.38 | %    |   |       | 9.38 | %    |   |         | 9.38 | %          |   |       | 9.38 | %     |   |         | 9.38 | % |   |         | 9.38 | % |   |         | 9.38 | % |   |         |  | 
|Capital leases and other long-term                   |                                           | $ | 756                    |      |      | $ | 652   |      |      | $ | 701     |      |            | $ | 771   |      |       | $ | 842     |      |   | $ | 7,881   |      |   | $ | 11,603  |      |   | $ | 11,603  | 
|                                                     | Average interest rate (fixed)             |   |                        | 8.67 | %    |   |       | 8.58 | %    |   |         | 8.55 | %          |   |       | 8.51 | %     |   |         | 8.46 | % |   |         | 9.31 | % |   |         | 8.68 | % |   |         |  | 
|                                                     | Interest Rate Derivatives:                |   |                        |      |      |   |       |      |      |   |         |      |            |   |       |      |       |   |         |      |   |   |         |      |   |   |         |      |   |   |         |  | 
|Variable to Fixed Interest Rate Swap
Notional amount |                                           |   |                        |      |      |   |       |      |      | $ | 217,500 |      |            |   |       |      |       |   |         |      |   |   |         |      |   |   |         |      |   | $ | 11,437  | 
|                                                     | Fixed Rate Payable                        |   |                        | 5.99 | %    |   |       | 5.99 | %    |   |         | 5.99 | %          |   |       |     |       |   |         |     |   |   |         |     |   |   |         | 5.99 | % |   |         |  | 
|                                                     | Weighted average Variable
Rate Receivable |   |                        | 2.17 | %    |   |       | 4.09 | %    |   |         | 5.56 | %          |   |       |     |       |   |         |     |   |   |         |     |   |   |         | 3.94 | % |   |         |  | 



48



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The information below provides information about the Companys sensitivity
to market risk associated with fluctuations in interest rates as of December
31, 2000. To the extent that the Companys financial instruments expose the
Company to interest rate risk, they are presented within each market risk
category in the table below. The table presents principal cash flows and
related expected interest rates by year of maturity for the Companys bank
credit facilities, senior subordinated notes senior, and capital leases and
other long-term obligations outstanding at December 31, 2000. Weighted average
variable rates for the bank credit facilities are based on implied forward
rates in the LIBOR yield curve as of December 31, 2000. For the interest rate
swap agreement, the table presents the notional amount and the related
reference interest rates by year of maturity. Fair values included herein have
been determined based on (i) the carrying value for the bank credit facility at
December 31, 2000, as interest rates are reset periodically; (ii) quoted market
prices for senior subordinated notes; and (iii) quoted prices from a financial
institution for the Companys swap agreement. Alaska Communications Systems
Holdings, Inc.s Consolidated Financial Statements contain descriptions of the
senior subordinated notes, credit facility, capital leases and other long-term
obligations and the interest rate swap agreement and should be read in
conjunction with the table below.

|                                                     |                                           |   |                        |      |      |   |         |      |      |   |       |      |            |   |       |      |       |   |       |      |   |   |         |       |   |   |         |      |   |   |         |   | 
|---------------------------------------------------- | ----------------------------------------- | - | ---------------------- | ---- | ---- | - | ------- | ---- | ---- | - | ----- | ---- | ---------- | - | ----- | ---- | ----- | - | ----- | ---- | - | - | ------- | ----- | - | - | ------- | ---- | - | - | ------- | - | 
|                                                     |                                           |   |                        |      |      |   |         |      |      |   |       |      |            |   |       |      |       |   |       |      |   |   |         |       |   |   |         |      |   |   | Fair   
|                                                     |                                           |   | 2001                   |      | 2002 |   | 2003    |      | 2004 |   | 2005  |      | Thereafter |   | Total |      | Value
|                                                     |                                           |   |                        |      |      |   |         |      |      |   |       |      |            |   |       |      |      
|                                                     | Interest Bearing Liabilities:             |   | (dollars in thousands)
|Bank credit facility  tranche A                     |                                           | $ |                       |      |      | $ | 1,500   |      |      | $ | 1,500 |      |            | $ | 1,500 |      |       | $ | 1,500 |      |   | $ | 144,000 |       |   | $ | 150,000 |      |   | $ | 150,000 |  
|                                                     | Average interest rate (variable)          |   |                        | 8.50 | %    |   |         | 8.41 | %    |   |       | 8.81 | %          |   |       | 9.09 | %     |   |       | 9.24 | % |   |         | 9.32  | % |   |         | 8.89 | % |   |         |   | 
|Bank credit facility  tranche B                     |                                           | $ |                       |      |      | $ | 1,500   |      |      | $ | 1,500 |      |            | $ | 1,500 |      |       | $ | 1,500 |      |   | $ | 144,000 |       |   | $ | 150,000 |      |   | $ | 150,000 |  
|                                                     | Average interest rate (variable)          |   |                        | 8.75 | %    |   |         | 8.66 | %    |   |       | 9.06 | %          |   |       | 9.34 | %     |   |       | 9.49 | % |   |         | 9.65  | % |   |         | 9.16 | % |   |         |   | 
|Bank credit facility  tranche C                     |                                           | $ |                       |      |      | $ | 1,350   |      |      | $ | 1,350 |      |            | $ | 1,350 |      |       | $ | 1,350 |      |   | $ | 129,600 |       |   | $ | 135,000 |      |   | $ | 135,000 |  
|                                                     | Average interest rate (variable)          |   |                        | 9.00 | %    |   |         | 8.91 | %    |   |       | 9.31 | %          |   |       | 9.59 | %     |   |       | 9.74 | % |   |         | 9.93  | % |   |         | 9.41 | % |   |         |   | 
|Senior subordinated notes                            |                                           | $ |                       |      |      | $ |        |      |      | $ |      |      |            | $ |      |      |       | $ |      |      |   | $ | 150,000 |       |   | $ | 150,000 |      |   | $ | 126,375 |  
|                                                     | Average interest rate (fixed)             |   |                        | 9.38 | %    |   |         | 9.38 | %    |   |       | 9.38 | %          |   |       | 9.38 | %     |   |       | 9.38 | % |   |         | 9.38  | % |   |         | 9.38 | % |   |         |   | 
|Capital leases and other long-term                   |                                           | $ | 2,869                  |      |      | $ | 845     |      |      | $ | 664   |      |            | $ | 722   |      |       | $ | 794   |      |   | $ | 8,747   |       |   | $ | 14,641  |      |   | $ | 14,641  |  
|                                                     | Average interest rate (fixed)             |   |                        | 8.47 | %    |   |         | 8.60 | %    |   |       | 8.56 | %          |   |       | 8.54 | %     |   |       | 8.50 | % |   |         | 10.36 | % |   |         | 8.85 | % |   |         |   | 
|                                                     | Interest Rate Derivatives:                |   |                        |      |      |   |         |      |      |   |       |      |            |   |       |      |       |   |       |      |   |   |         |       |   |   |         |      |   |   |         |   | 
|Variable to Fixed Interest Rate Swap
Notional amount |                                           | $ |                       |      |      | $ | 217,500 |      |      | $ |      |      |            | $ |      |      |       | $ |      |      |   | $ |        |       |   |   |         |      |   | $ | (1,243  | )
|                                                     | Fixed Rate Payable                        |   |                        | 5.99 | %    |   |         | 5.99 | %    |   |       |     |            |   |       |     |       |   |       |     |   |   |         |      |   |   |         | 5.99 | % |   |         |   | 
|                                                     | Weighted average Variable
Rate Receivable |   |                        | 5.75 | %    |   |         | 5.66 | %    |   |       |     |            |   |       |     |       |   |       |     |   |   |         |      |   |   |         | 5.72 | % |   |         |   | 




Item 8. Financial Statements and Supplementary Data

Consolidated financial statements of Alaska Communications Systems
Holdings, Inc. and Subsidiaries are submitted as a separate section of this
Form 10-K.See Index to Consolidated Financial Statements and Schedule, which
appears on page F-1 hereof.






|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



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PART III




Item 10. Directors and Executive Officers of the Registrant

Except for the following information regarding ACS Holdings executive
officers and directors, the information required by this item will be included
in ACS Groups definitive proxy statement for its 2002 Annual Meeting of
Stockholders (the Proxy Statement), or by an amendment to this report to be
filed on or before April 30, 2002 and such information is incorporated herein
by reference.

Executive Officers and Directors of the Registrant

Set forth below are the executive officers and directors of ACS Holdings
as of the date hereof:

|                     |  |     |    |          |  |                                                              
|-------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Charles E. Robinson  |  |     | 68 |          |  | Chairman and Chief Executive Officer                         
|                    
|Wesley E. Carson     |  |     | 51 |          |  | President and Chief Operating Officer                        
|                    
|Kevin P. Hemenway    |  |     | 41 |          |  | Senior Vice President, Chief Financial Officer, and Treasurer
|                    
|Kathryn Anderson     |  |     | 50 |          |  | Senior Vice President, Sales and Marketing                   
|                    
|Leonard A. Steinberg |  |     | 48 |          |  | Vice President, General Counsel and Corporate Secretary      
|                    
|Carl H. Marrs        |  |     | 53 |          |  | Director                                                     
|                    
|Byron I. Mallott     |  |     | 59 |          |  | Director                                                     
|                    
|W. Dexter Paine, III |  |     | 41 |          |  | Director                                                     
|                    
|Saul A. Fox          |  |     | 48 |          |  | Director                                                     
|                    
|Wray T. Thorn        |  |     | 30 |          |  | Director                                                     
|                    
|Brian Rogers         |  |     | 51 |          |  | Director                                                     

Charles E. Robinson, ACS Holdings Chairman and Chief Executive Officer
since May 1999, has over four decades of experience in the telecommunications
industry. Mr. Robinson was instrumental in creating Alaskas long distance
communications systems, including the White Alice Communications System,
beginning in the late 1950s. Between 1979 and 1982, Mr. Robinson served as
President of Alascom, the states primary long distance carrier at the time.
Under his guidance, Alascom developed the first statewide long distance service
network in Alaska, connecting with more than 27 independent local companies.
Mr. Robinson served as President and Chief Operating Officer of Pacific Telecom
from 1981 until its sale to CenturyTel in 1997 and was appointed Chairman and
Chief Executive Officer in 1989. Mr. Robinson remained as President and Chief
Executive officer at Pacific Telecom until February 1999. Mr. Robinson has been
a member of the National Security Telecommunications Advisory Committee for the
last 18 years, having been appointed by President Reagan. Mr. Robinson has also
served on the Board of Directors of the United States Telecommunications
Association from 1993 to 1995 and from 1999 to the present. Since January 2000,
Mr. Robinson has served on the Board of Directors of WJ Communications, Inc.

Wesley E. Carson, ACS Groups President and Chief Operating Officer, has
been with the Company since its inception. Mr. Carson has held his current
position since January 2002, prior to that Mr. Carson was President and Chief
Administrative Officer. On October 7, 1999, Mr. Carson (previously an Executive
Vice President) was appointed President and Chief Operating Officer, and served
in that capacity until becoming the Chief Administrative Officer in November
2000. Mr. Robinson had previously held the title of President. Mr. Carson has
over 20 years of telecommunications experience. He began his career in
telecommunications in 1980 with TRT Telecommunications Corporation, an
international data and voice carrier located in Washington, D.C. that was
acquired by Pacific Telecom in 1988. From 1989 to 1998, Mr. Carson served as
the Vice President of



50



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##### Table of Contents



Human Resources for Pacific Telecom. From July 1998 to May 1999, Mr.
Carson served as the Executive Vice President of LEC Consulting. Mr. Carson
holds a B.A. in International Relations from Brigham Young University, a Master
of Public Administration degree from the University of Illinois-Springfield and
a J.D. from Georgetown University.

Kevin P. Hemenwayis Senior Vice President, Treasurer and Chief Financial
Officer, a position he has held since November 2000. Mr. Hemenway joined ACS
Holdings as Vice President and Treasurer in July 1999 and served in that
capacity until assuming his current role. Mr. Hemenway has over 10 years of
prior experience in the telecommunications industry. Before joining the
Company, Mr. Hemenway served as the Chief Financial Officer and Treasurer of
Atlantic Tele-Network, Inc. based in the U.S. Virgin Islands. From January 1990
to October 1998, as an independent consultant, Mr. Hemenway performed
financial, accounting, management and rate making consulting services for the
telecommunications industry, principally for Atlantic Tele-Network, Inc. and
its subsidiaries. From 1986 through 1989, Mr. Hemenway was employed by Deloitte
& Touche LLP as a CPA and manager, performing both audit and consulting
services and from 1983 to 1986, was employed by Grant Thornton as a CPA and
senior staff accountant. Mr. Hemenway graduated from Creighton University in
1982 with a B.S.B.A., majoring in accounting, and is a non-practicing CPA
certificate holder registered in the State of Nebraska.

Kathryn Andersonis Senior Vice President, Sales and Marketing, a position
she has held since joining the Company in December 2001. Prior to joining ACS
Holdings, she was President of Pescatore Systems International, LLC, a
management consulting company that specializes in marketing and strategic
planning for Internet technology and information systems companies. In 2000,
Kathy served as President and COO of the Metrus Group, a consulting firm
specializing in Strategic Performance Measurement. Prior to establishing her
consultancy, Ms. Anderson was a vice president at AT&T, serving in each of the
three pre-trivestiture units: Lucent, NCR, and AT&T. Most recently with AT&T,
she was Vice President of Business Internet Services from 1997 to 1998. In
that role, she had responsibility for product marketing, product management,
and service planning. Ms Anderson has 27 years in the telecommunications and
computer industries, including several years in Bell Laboratories and over 10
years as a senior executive in marketing, strategy, and product development
roles. Ms. Anderson holds a Bachelor of Science degree in Mathematics from
Arizona State University and a Master of Science in Computer Science from
Rutgers University. She completed the Harvard Business School Advanced
Management Program, a three month general management course for executives, in
1995.

Leonard A. Steinbergis Vice President, General Counsel and Corporate
Secretary, a position he has held since January 2001. Mr. Steinberg left
private practice in June 2000 to join ACS Holdings as a Senior Attorney in the
Corporate Legal Department. From 1998 to 2000, Mr. Steinberg used his expertise
in regulatory and administrative matters to represent telecommunications and
energy clients of Brena, Bell & Clarkson, P.C., an Anchorage,
Alaska law firm. Prior to that, Mr. Steinberg was a Partner in the firm of Hoise, Wes, Sacks &
Brelsford with offices in Anchorage, Alaska and San Francisco, California. Mr.
Steinberg practiced in the firms Anchorage office from 1996-1998 and in the
firms San Francisco office from 1988-1996 where he primarily represented large
clients in oil and gas royalty and tax disputes. Mr. Steinberg holds a Masters
in Public Administration degree from Harvard Universitys Kennedy School of
Government, Masters of Business Administration degree from U.C. Berkeleys Haas
School of Business and a J.D. from the University of Californias Hastings
College of Law.

Carl H. Marrs, a director since July 1999, is President and Chief
Executive Officer of Cook Inlet Region, Inc. Mr. Marrs has been with of Cook
Inlet Region, Inc. for approximately 25 years. During that period Mr. Marrs has
been employed in a series of management positions, culminating in his
appointment as President in 1986. Mr. Marrs attended the Stanford University
School of Business for Executives in 1983 and the Amos Tuck School of Business
at Dartmouth College in 1986.

Byron I. Mallott, a director since January 2000, is the President and
Chief Executive Officer of the First Alaskans Institute. From 1995 until
January 2000, Mr. Mallott served as the Executive Director of the Alaska
Permanent Fund Corporation. Prior to joining the Alaska Permanent Fund
Corporation, Mr. Mallott served in various capacities, including Director,
Chairman and President and Chief Executive Officer of



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Sealaska Corporation over a period of nearly 20 years. Mr. Mallott has
also served in various political appointments and elected positions.

W. Dexter Paine, III, a director since July 1998, was a co-founder and has
been President of Fox Paine & Company since its inception in 1997. From 1994
until founding Fox Paine, Mr. Paine served as a senior partner of Kohlberg &
Company. Prior to joining Kohlberg & Company, Mr. Paine served as a general
partner at Robertson Stephens & Company. Mr. Paine has a B.A. in economics from
Williams College. Since January 2000, Mr. Paine has served as the Chairman of
the Board of Directors of WJ Communications, Inc.

Saul A. Fox, a director since May 1999, was a co-founder and has been
Chief Executive Officer of Fox Paine & Company since its inception in 1997.
From 1984 until founding Fox Paine & Company, Mr. Fox was at Kohlberg Kravis &
Roberts & Co (KKR). Mr. Fox was a senior general partner of KKR prior to
retiring from the firm to form Fox Paine & Company. Prior to joining KKR, Mr.
Fox was an attorney at Latham & Watkins, a law firm headquartered in Los
Angeles, California. Mr. Fox has a B.S. in communications and computer science
from Temple University and a J.D. from the University of Pennsylvania Law
School. Since January 2000, Mr. Fox has served on the Board of Directors of WJ
Communications, Inc.

Wray T. Thorn, a director since January 2000, has also been a director
with Fox Paine & Company since January 2000. From 1996 until joining Fox Paine
& Company, Mr. Thorn was a principal and founding member of Dubilier & Company.
Prior to joining Dubilier & Company, Mr. Thorn was an associate in the
Acquisition Finance Group of Chase Securities, Inc. Mr. Thorn is a graduate of
Harvard University. Since January 2000, Mr. Thorn has served on the Board of
Directors of WJ Communications, Inc.

Brian Rogers, a director since February 2001, is currently Principal
Consultant and Chief Financial Officer for Information Insights, Inc., a
management and public policy consulting firm. Mr. Rogers served as Vice
President of Finance for the University of Alaska Statewide System from 1988 to
1995. Mr. Rogers is a former state legislator, who served in the Alaska State
House of Representatives from 1979 to 1982. Mr. Rogers chaired the State of
Alaska Long-Range Planning Commission during 1995 and 1996, and currently, as a
Regent of the University of Alaska, serves as a member of the Universitys
Finance and Audit Committee. He holds a Master in Public Administration degree
from the Kennedy School of Government, Harvard University.

John R. Ayers, Executive Vice President and Chief Operating Officer since
November 2000, retired in May 2001.




Item 11. Executive Compensation

The information required by this item will be included in ACS Groups
definitive Proxy Statement, and such information is incorporated herein by
reference.






|Item 12. | Security Ownership of Certain Beneficial Owners and Management
|-------- | --------------------------------------------------------------

The information required by this item will be included in ACS Groups
definitive Proxy Statement, and such information is incorporated herein by
reference.




Item 13. Certain Relationships and Related Transactions

The information required by this item will be included in ACS Groups
definitive Proxy Statement, and such information is incorporated herein by
reference.



52



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##### Table of Contents






PART IV






|Item 14. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K
|-------- | ----------------------------------------------------------------

(a)  1. Financial Statements

| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Consolidated financial statements of ACS Holdings are submitted as a
separate section of this Form 10-K. See Index to Consolidated Financial
Statements and Schedule which appears on page F-1 hereof.

2. Financial Statement Schedule

| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Financial statement schedules for ACS Holdings and its subsidiaries are
submitted as a separate section of this Form 10-K. See Index to
Consolidated Financial Statements and Schedule which appears on page F-1
hereof.

(b)  Reports on Form 8-K

| |                                                                              
| | -----------------------------------------------------------------------------
| | No reports on Form 8-K were filed during the quarter ended December 31,
2001.

(c)  Exhibits

|            |  |                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                             
|2.1         |  | Purchase Agreement, dated as of August 14, 1998, as amended, by
and among ALEC Acquisition Sub Corp., CenturyTel of the Northwest,
Inc. and CenturyTel Wireless, Inc.*                                                                      
|           
|           
|           
|           
|2.2         |  | Asset Purchase Agreement, dated as of October 20, 1998, by and
between Alaska Communications Systems, Inc. and the Municipality of
Anchorage*                                                                                               
|           
|           
|           
|           
|3.1         |  | Amended and Restated Certificate of Incorporation of the Registrant*****                                                                                                                                                                    
|           
|           
|           
|           
|3.2         |  | Amended and Restated By-Laws of the Registrant*****                                                                                                                                                                                         
|           
|           
|           
|           
|4.1         |  | Specimen of Common Stock Certificate*****                                                                                                                                                                                                   
|           
|           
|           
|           
|4.2         |  | Stockholders Agreement, dated as of May 14, 1999, by and among
the Registrant and the Investors listed on the signature pages
thereto*                                                                                                     
|           
|           
|           
|           
|4.3         |  | First Amendment to Stockholders Agreement, dated as of July 6,
1999, by and among the Registrant and the Stockholders listed on the
signature pages thereto*                                                                               
|           
|           
|           
|           
|4.4         |  | Second Amendment to Stockholders Agreement, dated as of November
16, 1999 by and among the Registrant and the Stockholders listed on
the signature pages thereto*****                                                                      
|           
|           
|           
|           
|4.5         |  | Indenture, dated as of May 14, 1999, by and between Alaska
Communications Systems Holdings, Inc., the Guarantors (as defined
therein) and IBJ Whitehall Bank & Trust Company*                                                               
|           
|           
|           
|           
|4.6         |  | Purchase Agreement, dated as of May 11, 1999, by and among Alaska
Communications Systems Holdings, Inc., the Guarantors, Chase
Securities Inc., CIBC World Markets Corp. and Credit Suisse First
Boston Corporation*                        
|           
|           
|           
|           
|4.7         |  | Indenture, dated as of May 14, 1999, by and between the
Registrant and The Bank of New York*                                                                                                                                                
|           
|           
|           
|           
|4.8         |  | First Amendment, dated as of October 29, 1999, to Indenture
listed as Exhibit No. 4.7**                                                                                                                                                     
|           
|           
|           
|           
|4.9         |  | Form of Second Amendment dated as of November 17, 1999 to
Indenture listed as Exhibit No. 4.7*****                                                                                                                                          
|           
|           
|           
|           
|4.10        |  | Purchase Agreement, dated as of May 11, 1999, by and among the
Registrant, DLJ Investment Partners, L.P., DLJ Investment Funding,
Inc. and DLJ ESC II, L.P.*                                                                                
|           
|           
|           
|           
|10.1        |  | Exchange and Registration Rights Agreement, dated as of May 14,
1999, by and among Alaska Communications Systems Holdings, Inc., the
Guarantors, Chase Securities Inc., CIBC World Markets Corp. and Credit
Suisse First Boston Corporation*



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|            |  |                                                                                                                                                                                                                                                                      
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                      
|           
|           
|           
|           
|10.2        |  | Exchange and Registration Rights Agreement, dated as of May 14,
1999, by and among the Registrant, DLJ Investment Partners, L.P., DLJ
Investment Funding, Inc. and DLJ ESC II L.P.*                                                                                  
|           
|           
|           
|           
|10.3        |  | Credit Agreement, dated as of May 14, 1999, by and among Alaska
Communications Systems Holdings, Inc., the Registrant, the financial
institutions Lenders party thereto, The Chase Manhattan Bank, Credit
Suisse First Boston and Canadian Imperial Bank of Commerce*
|           
|           
|           
|           
|10.4        |  | Amendment No. 1, dated as of October 19, 1999 to Credit Agreement
listed as Exhibit No. 10.3**                                                                                                                                                                       
|           
|           
|           
|           
|10.5        |  | Employment Agreement, dated as of March 12, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Registrant and
Charles E. Robinson*                                                                                                                 
|           
|           
|           
|           
|10.6        |  | Employment Agreement, dated as of March 12, 1999, by and among
Alaska Communications Systems Holdings, Inc., the Registrant and
Wesley E. Carson*                                                                                                                    
|           
|           
|           
|           
|10.7        |  | ALEC Holdings, Inc. 1999 Stock Incentive Plan*                                                                                                                                                                                                                       
|           
|           
|           
|           
|10.8        |  | Alaska Communications Systems Group, Inc. 1999 Stock Incentive
Plan*****                                                                                                                                                                                             
|           
|           
|           
|           
|10.9        |  | Alaska Communications Systems Group, Inc. 1999 Non-Employee
Director Compensation Plan*****                                                                                                                                                                          
|           
|           
|           
|           
|10.10       |  | Alaska Communications Systems Group, Inc. 1999 Employee Stock
Purchase Plan*****                                                                                                                                                                                     
|           
|           
|           
|           
|10.11       |  | Comprehensive Telecommunications Service Agreement Number
99-123-A between the State of Alaska and Alaska Communications Systems
Group, Inc., dated as of December 10, 2001                                                                                          
|           
|           
|           
|           
|21.1        |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                       
|           
|           
|           
|           
|24.1        |  | Powers of Attorney (included on signature page)***                                                                                                                                                                                                                   



---

|*     |  | Filed as an exhibit to the Registrants Registration Statement on
Form S-4 file No. 333-82361 and incorporated by reference thereto.                                         
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|**    |  | Filed as an exhibit to the Registrants Form 8-K filed on
November 5, 1999 and incorporated by reference thereto.                                                            
|     
|***   |  | Previously filed on October 8, 1999 and incorporated by reference
thereto.                                                                                                   
|     
|****  |  | Previously filed on November 1, 1999 and incorporated by
reference thereto.                                                                                                  
|     
|***** |  | Previously filed as an exhibit to the Registrants Registration
Statement on Form S-1/A file No. 333-888753 filed on November 17, 1999
and incorporated by reference thereto.



54



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

|                                               |  |                                                                                             |  |               
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------
|Signature                                      |  | Title                                                                                       |  | Date          
|                                               |  |                                                                                             |  |               
|/s/ Charles E. Robinson

Charles E. Robinson   |  | Chief Executive Officer and Chairman of
the Board                                           |  | March 29, 2002
|                                              
|/s/ Wesley E. Carson

Wesley E. Carson         |  | President and Chief Operating Officer                                                       |  | March 29, 2002
|                                              
|/s/ Kevin P. Hemenway

Kevin P. Hemenway       |  | Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Accounting Officer) |  | March 29, 2002
|                                              
|/s/ Kathryn Anderson

Kathryn Anderson         |  | Senior Vice President, Sales and Marketing                                                  |  | March 29, 2002
|                                              
|/s/ Leonard A. Steinberg

Leonard A. Steinberg |  | Vice President, General Counsel and
Corporate Secretary                                     |  | March 29, 2002
|                                              
|/s/ Carl A. Marrs

Carl A. Marrs               |  | Director                                                                                    |  | March 29, 2002
|                                              
|/s/ Byron I. Mallott

Byron I. Mallott         |  | Director                                                                                    |  | March 29, 2002
|                                              
|/s/ Brian Rogers

Brian Rogers                 |  | Director                                                                                    |  | Marc 29, 2002 
|                                              
|/s/ W. Dexter Paine, III

W. Dexter Paine, III |  | Director                                                                                    |  | March 29, 2002
|                                              
|/s/ Saul A. Fox

Saul A. Fox                   |  | Director                                                                                    |  | March 29, 2002
|                                              
|/s/ Wray T. Thorn

Wray T. Thorn               |  | Director                                                                                    |  | March 29, 2002



55



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

|                                                                                               |  |  |      | 
|---------------------------------------------------------------------------------------------- |  |  | ---- | 
|Independent Auditors Report                                                                   |  |  | F-2  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Consolidated Balance Sheets  December 31, 2001 and 2000                                       |  |  | F-3  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Consolidated Statements of Operations  Years Ended December 31, 2001, 2000 and 1999           |  |  | F-4  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Consolidated Statements of Stockholders Equity  Years Ended December 31, 2001, 2000 and 1999 |  |  | F-5  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Consolidated Statements of Cash Flows  Years Ended December 31, 2001, 2000 and 1999           |  |  | F-6  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Notes to Consolidated Financial Statements  Years Ended December 31, 2001, 2000 and 1999      |  |  | F-7  | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Schedule II  Valuation and Qualifying Accounts                                                |  |  | F-31 | 



F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholders
Alaska Communications Systems Holdings, Inc.
Anchorage, Alaska

We have audited the consolidated balance sheets of Alaska Communications
Systems Holdings, Inc. and Subsidiaries (the Company) as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December
31, 2001. Our audits included the financial statement schedule listed in Item
14(a)2 of Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Alaska Communications Systems
Holdings, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP
 
Portland, Oregon
February 19, 2002



F-2



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 2001 and 2000
(In Thousands Except Per Share Amounts)

|                                                                 |                                                                                       |                            |           |         |         |   |         |         |         | 
|---------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------- | --------- | ------- | ------- | - | ------- | ------- | ------- | 
|Assets                                                           |                                                                                       | 2001                       |           | 2000   
|                                                                 |                                                                                       |                            |           |        
|Current assets:                                                  |                                                                                       |                            |           |         |         |   |         |        
|                                                                 | Cash and cash equivalents                                                             |                            | $         | 41,012  |         |   | $       | 61,896  |        
|                                                                 | Restricted cash                                                                       |                            |           | 6,932   |         |   |         |        |        
|                                                                 | Accounts receivable-trade, net of allowance of $4,944 and $9,831                      |                            |           | 46,912  |         |   |         | 46,337  |        
|                                                                 | Accounts receivable-affiliate                                                         |                            |           | 2,475   |         |   |         | 1,516   |        
|                                                                 | Materials and supplies                                                                |                            |           | 8,723   |         |   |         | 11,103  |        
|                                                                 | Prepayments and other current assets                                                  |                            |           | 6,032   |         |   |         | 4,304   |        
|                                                                 |                                                                                       |                            |           |         |         |   |         |        
|                                                                 |                                                                                       | Total current assets       |           |         | 112,086 |   |         |         | 125,156 | 
|Investment                                                       |                                                                                       |                            |          |         |         |   | 1,370   |        
|Property, plant and equipment                                    |                                                                                       |                            | 1,036,829 |         |         |   | 953,557 |        
|Less: Accumulated depreciation and amortization                  |                                                                                       |                            | 557,849   |         |         |   | 492,822 |        
|                                                                 |                                                                                       |                            |           |         |         |   |         |        
|                                                                 | Property, plant and equipment, net                                                    |                            |           | 478,980 |         |   |         | 460,735 |        
|Goodwill, net of accumulated amortization of $19,494 and $11,753 |                                                                                       |                            | 250,495   |         |         |   | 258,236 |        
|Other assets                                                     |                                                                                       |                            | 61,981    |         |         |   | 63,809  |        
|                                                                 |                                                                                       |                            |           |         |         |   |         |        
|Total assets                                                     |                                                                                       | $                          | 903,542   |         |         | $ | 909,306 |        
|                                                                 |                                                                                       |                            |           |         |         |   |         |        
|                                                                
|Liabilities and Stockholders Equity                            
|                                                                
|Current liabilities:                                             |                                                                                       |                            |           |         |         |   |         |        
|                                                                 | Current portion of long-term obligations                                              |                            | $         | 5,107   |         |   | $       | 2,870   |        
|                                                                 | Accounts payable-affiliate                                                            |                            |           | 1,303   |         |   |         | 1,145   |        
|                                                                 | Accounts payable, accrued and other current liabilities                               |                            |           | 62,765  |         |   |         | 57,725  |        
|                                                                 | Advance billings and customer deposits                                                |                            |           | 9,190   |         |   |         | 8,689   |        
|                                                                 |                                                                                       |                            |           |         |         |   |         |        
|                                                                 |                                                                                       | Total current liabilities  |           |         | 78,365  |   |         |         | 70,429  | 
|Long-term obligations, net of current portion                    |                                                                                       |                            | 591,496   |         |         |   | 596,772 |        
|Unamortized investment tax credits                               |                                                                                       |                            |          |         |         |   | 197     |        
|Other deferred credits and long-term liabilities                 |                                                                                       |                            | 25,003    |         |         |   | 10,755  |        
|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                                                                   |                            |           | (64,735 | )       |   |         | (56,089 | )      
|                                                                 | Accumulated other comprehensive loss                                                  |                            |           | (13,829 | )       |   |         |        |        
|                                                                 |                                                                                       |                            |           |         |         |   |         |        
|                                                                 |                                                                                       | Total stockholders equity |           |         | 208,678 |   |         |         | 231,153 | 
|                                                                 |                                                                                       |                            |           |         |         |   |         |        
|Total liabilities and stockholders equity                       |                                                                                       | $                          | 903,542   |         |         | $ | 909,306 |        
|                                                                 |                                                                                       |                            |           |         |         |   |         |        

See Notes to Consolidated Financial Statements



F-3



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Statements of Operations
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)

|                          |                                        |                              |        |         |         |      |         |         |         |   |         |         |         |  
|------------------------- | -------------------------------------- | ---------------------------- | ------ | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                          |                                        |                              |        | 2001    |         | 2000 |         | 1999   
|                          |                                        |                              |        |         |         |      |         |        
|Operating revenues:       |                                        |                              |        |         |         |      |         |         |         |   |         |        
|                          | Local telephone                        |                              | $      | 221,411 |         |      | $       | 222,268 |         |   | $       | 142,255 |        
|                          | Cellular                               |                              |        | 40,398  |         |      |         | 39,490  |         |   |         | 24,836  |        
|                          | Directory                              |                              |        | 33,870  |         |      |         | 29,156  |         |   |         | 16,896  |        
|                          | Internet                               |                              |        | 13,724  |         |      |         | 9,170   |         |   |         | 2,853   |        
|                          | Interexchange                          |                              |        | 21,316  |         |      |         | 11,778  |         |   |         | 5,946   |        
|                          | Other                                  |                              |        | 960     |         |      |         | 1,131   |         |   |         | 359     |        
|                          |                                        |                              |        |         |         |      |         |         |         |   |         |        
|                          |                                        | Total operating revenues     |        |         | 331,679 |      |         |         | 312,993 |   |         |         | 193,145 |  
|Operating expenses:       |                                        |                              |        |         |         |      |         |         |         |   |         |        
|                          | Local telephone                        |                              |        | 120,659 |         |      |         | 130,875 |         |   |         | 98,663  |        
|                          | Cellular                               |                              |        | 24,153  |         |      |         | 24,641  |         |   |         | 15,494  |        
|                          | Directory                              |                              |        | 14,490  |         |      |         | 14,001  |         |   |         | 7,603   |        
|                          | Internet                               |                              |        | 15,677  |         |      |         | 11,785  |         |   |         | 5,121   |        
|                          | Interexchange                          |                              |        | 29,509  |         |      |         | 19,749  |         |   |         | 9,185   |        
|                          | Other                                  |                              |        | 1,852   |         |      |         | 1,458   |         |   |         | 486     |        
|                          | Unusual charges                        |                              |        |        |         |      |         | 5,288   |         |   |         |        |        
|                          | Depreciation and amortization          |                              |        | 79,811  |         |      |         | 72,265  |         |   |         | 40,306  |        
|                          |                                        |                              |        |         |         |      |         |         |         |   |         |        
|                          |                                        | Total operating expenses     |        |         | 286,151 |      |         |         | 280,062 |   |         |         | 176,858 |  
|                          |                                        |                              |        |         |         |      |         |         |         |   |         |        
|Operating income          |                                        |                              | 45,528 |         |         |      | 32,931  |         |         |   | 16,287  |        
|Other income and expense: |                                        |                              |        |         |         |      |         |         |         |   |         |        
|                          | Interest expense                       |                              |        | (57,691 | )       |      |         | (62,109 | )       |   |         | (37,517 | )      
|                          | Interest income and other              |                              |        | 3,252   |         |      |         | 3,631   |         |   |         | 426     |        
|                          | Equity in income (loss) of investments |                              |        | 70      |         |      |         | (303    | )       |   |         | (198    | )      
|                          |                                        |                              |        |         |         |      |         |         |         |   |         |        
|                          |                                        | Total other income (expense) |        |         | (54,369 | )    |         |         | (58,781 | ) |         |         | (37,289 | )
|                          |                                        |                              |        |         |         |      |         |         |         |   |         |        
|Loss before income taxes  |                                        |                              | (8,841 | )       |         |      | (25,850 | )       |         |   | (21,002 | )      
|Income tax benefit        |                                        |                              | 195    |         |         |      | 197     |         |         |   | 301     |        
|                          |                                        |                              |        |         |         |      |         |         |         |   |         |        
|Net loss                  |                                        | $                            | (8,646 | )       |         | $    | (25,653 | )       |         | $ | (20,701 | )      
|                          |                                        |                              |        |         |         |      |         |         |         |   |         |        

See Notes to Consolidated Financial Statements



F-4



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)

|                                  |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   |             |         |   |   |         |         |  
|--------------------------------- | ------------------------------------ | - | ------ | - | ----------- | - | ----------- | - | ------------- | - | ------------- | ------ | - | - | ----------- | ------- | - | - | ------- | ------- | -
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   | Accumulated |         |   |   |        
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   | Other       |         |   |   |        
|                                  |                                      |   | Common |   | Contributed |   | Accumulated |   | Comprehensive |   | Stockholder's
|                                  |                                      |   | Stock  |   | Capital     |   | Deficit     |   | Loss          |   | Equity       
|                                  |                                      |   |        |   |             |   |             |   |               |   |              
|Balance, December 31, 1998        |                                      | $ |       |   |             | $ |            |   |               | $ |              |        |   | $ |            |         |   | $ |        |        
|Contribution of capital           |                                      |   |       |   |             |   | 287,242     |   |               |   |              |        |   |   |            |         |   |   | 287,242 |        
|Net loss                          |                                      |   |       |   |             |   |            |   |               |   | (20,701       | )      |   |   |            |         |   |   | (20,701 | )      
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   |             |         |   |   |         |         |  
|Balance, December 31, 1999        |                                      |   |       |   |             |   | 287,242     |   |               |   | (20,701       | )      |   |   |            |         |   |   | 266,541 |        
|Dividends                         |                                      |   |       |   |             |   |            |   |               |   | (9,735        | )      |   |   |            |         |   |   | (9,735  | )      
|Net loss                          |                                      |   |       |   |             |   |            |   |               |   | (25,653       | )      |   |   |            |         |   |   | (25,653 | )      
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   |             |         |   |   |         |         |  
|Balance, December 31, 2000        |                                      |   |       |   |             |   | 287,242     |   |               |   | (56,089       | )      |   |   |            |         |   |   | 231,153 |        
|Components of Comprehensive loss: |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   |             |         |   |   |         |        
|                                  | Net loss                             |   |        |  |             |   |             |  |               |   |               | (8,646 | ) |   |             |        |   |   |         | (8,646  | )
|                                  | Minimum pension liability adjustment |   |        |  |             |   |             |  |               |   |               |       |   |   |             | (2,392  | ) |   |         | (2,392  | )
|                                  | Interest rate swap marked to market  |   |        |  |             |   |             |  |               |   |               |       |   |   |             | (11,437 | ) |   |         | (11,437 | )
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   |             |         |   |   |         |         |  
|Total comprehensive loss          |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   |             |         |   |   | (22,475 | )      
|Balance, December 31, 2001        |                                      | $ |       |   |             | $ | 287,242     |   |               | $ | (64,735       | )      |   | $ | (13,829     | )       |   | $ | 208,678 |        
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |        |   |   |             |         |   |   |         |         |  

See Notes to Consolidated Financial Statements



F-5



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)

|                                                                                |                                                       |                                                |         |        |        |      |         |        |        |   |          |        |         |  
|------------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | -------- | ------ | ------- | -
|                                                                                |                                                       |                                                |         | 2001   |        | 2000 |         | 1999  
|                                                                                |                                                       |                                                |         |        |        |      |         |       
|Cash Flows from Operating Activities:                                           |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Net loss                                                                        |                                                       | $                                              | (8,646  | )      |        | $    | (25,653 | )      |        | $ | (20,701  | )     
|Adjustments to reconcile net loss to net cash provided
by operating activities: |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|                                                                                | Depreciation and amortization                         |                                                |         | 79,811 |        |      |         | 72,265 |        |   |          | 40,306 |        
|                                                                                | Amortization of debt issuance costs                   |                                                |         | 4,312  |        |      |         | 4,526  |        |   |          | 2,855  |        
|                                                                                | Amortization of deferred compensation  stock options |                                                |         |       |        |      |         |       |        |   |          | 6,145  |        
|                                                                                | Investment tax credits                                |                                                |         | (195   | )      |      |         | (197   | )      |   |          | (301   | )      
|                                                                                | Capitalized interest                                  |                                                |         | (1,416 | )      |      |         | (1,096 | )      |   |          | (860   | )      
|                                                                                | Other deferred credits                                |                                                |         | 418    |        |      |         | (1,141 | )      |   |          | 2,987  |        
|                                                                                | Changes in components of working capital:             |                                                |         |        |        |      |         |        |        |   |          |        |        
|                                                                                |                                                       | Accounts receivable and other current assets   |         |        | 95     |      |         |        | (6,443 | ) |          |        | 3,196   |  
|                                                                                |                                                       | Accounts receivable  affiliates               |         |        | (959   | )    |         |        | 96,160 |   |          |        | (97,676 | )
|                                                                                |                                                       | Accounts payable and other current liabilities |         |        | 5,604  |      |         |        | 4,126  |   |          |        | 13,968  |  
|                                                                                |                                                       | Other                                          |         |        | (2,386 | )    |         |        | 1,000  |   |          |        | (567    | )
|                                                                                |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Net cash provided (used) by operating activities                                |                                                       |                                                | 76,638  |        |        |      | 143,547 |        |        |   | (50,648  | )     
|Cash Flows from Investing Activities:                                           |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Construction and capital expenditures, net of capitalized interest              |                                                       |                                                | (87,582 | )      |        |      | (69,101 | )      |        |   | (74,052  | )     
|Proceeds from liquidation of minority interest investment                       |                                                       |                                                | 1,370   |        |        |      |        |        |        |   |         |       
|Issuance of note receivable from officer                                        |                                                       |                                                | (339    | )      |        |      |        |        |        |   |         |       
|Cost of acquisitions, net of cash received                                      |                                                       |                                                | (1,000  | )      |        |      | (5,598  | )      |        |   | (697,732 | )     
|Placement of funds in escrow                                                    |                                                       |                                                | (6,932  | )      |        |      |        |        |        |   |         |       
|Other assets                                                                    |                                                       |                                                |        |        |        |      |        |        |        |   | (2,584   | )     
|                                                                                |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Net cash used by investing activities                                           |                                                       |                                                | (94,483 | )      |        |      | (74,699 | )      |        |   | (774,368 | )     
|Cash Flows from Financing Activities:                                           |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Proceeds from the issuance of long-term debt                                    |                                                       |                                                |        |        |        |      |        |        |        |   | 592,927  |       
|Payments on long-term debt                                                      |                                                       |                                                | (3,039  | )      |        |      | (6,223  | )      |        |   | (3,269   | )     
|Debt issuance costs                                                             |                                                       |                                                |        |        |        |      |        |        |        |   | (37,014  | )     
|Contributed capital                                                             |                                                       |                                                |        |        |        |      |        |        |        |   | 281,097  |       
|Dividends                                                                       |                                                       |                                                |        |        |        |      | (9,735  | )      |        |   |         |       
|                                                                                |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Net cash provided (used) by financing activities                                |                                                       |                                                | (3,039  | )      |        |      | (15,958 | )      |        |   | 833,741  |       
|Increase (decrease) in cash                                                     |                                                       |                                                | (20,884 | )      |        |      | 52,890  |        |        |   | 8,725    |       
|Cash and cash equivalents at beginning of the year                              |                                                       |                                                | 61,896  |        |        |      | 9,006   |        |        |   | 281      |       
|                                                                                |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Cash and cash equivalents at the end of the year                                |                                                       | $                                              | 41,012  |        |        | $    | 61,896  |        |        | $ | 9,006    |       
|                                                                                |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Supplemental Cash Flow Data:                                                    |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Interest paid                                                                   |                                                       | $                                              | 49,456  |        |        | $    | 57,418  |        |        | $ | 31,783   |       
|Income taxes paid                                                               |                                                       |                                                |        |        |        |      |        |        |        |   |         |       
|Supplemental Noncash Transactions:                                              |                                                       |                                                |         |        |        |      |         |        |        |   |          |       
|Property acquired under capital leases                                          |                                                       | $                                              |        |        |        | $    | 3,152   |        |        | $ | 740      |       
|Note payable in connection with acquisition                                     |                                                       |                                                |        |        |        |      | 2,250   |        |        |   |         |       
|Minimum pension liability adjustment                                            |                                                       |                                                | 2,392   |        |        |      |        |        |        |   |         |       
|Interest rate swap marked to market                                             |                                                       |                                                | 11,437  |        |        |      |        |        |        |   |         |       

See Notes to Consolidated Financial Statements



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Alaska Communications Systems Holdings, Inc. and Subsidiaries (the
Company or ACS Holdings) (formerly ALEC Holdings, Inc.), a Delaware
corporation, is engaged principally in providing local telephone, wireless,
Internet and interexchange network and other 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 properties. The principal activities in 1998 and through May
14, 1999 were the preparation of systems and obtaining financing for pending
acquisitions (see Note 2, 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 accompanying consolidated financial statements for the Company are as
of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000
and 1999 and represent the operating results principally of the following legal
entities from the date of their respective acquisition (see Note 2,
Acquisitions):



| |  |  | 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 Television, L.L.C. (ACSTV)            
|
|
|
|
| |  |  | ACS Internet, Inc.                          
|
|
|
|
| |  |  | ACS InfoSource, Inc.                        

A summary of significant accounting policies followed by the Company is set forth below:

Basis Of Presentation

The consolidated financial statements include all majority-owned
subsidiaries. All significant intercompany balances have been eliminated.
Certain reclassifications have been made to the 1999 and 2000 financial
statements to make them conform to the current presentation.

Use Of Estimates

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 revenues and
expenses during the reporting period. Among the significant estimates affecting
the financial statements are those related to the realizable value of accounts
receivable, materials and supplies, long-lived assets, income taxes and network
access revenue reserves. Actual results may differ from those estimates.

Cash and Cash Equivalents

For purposes of the consolidated balance sheets and statements of cash
flows, the Company generally considers all highly liquid investments with a
maturity at acquisition of three months or less to be cash equivalents.

Restricted Cash

The Company placed in escrow restricted cash as a judicial requirement of
an appeal of a claim. This claim is expected to be adjudicated in 2002. In the
event the Company prevails, the restriction will be lifted, otherwise, the cash
will be paid to the claimant. Liabilities associated with this claim are
recorded in the Companys accounts payable, accrued and other current
liabilities.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Materials and Supplies

Materials and supplies are carried in inventory at the lower of weighted
average cost or market.

Investments

Investments in unconsolidated subsidiaries and other investees in which
the Company has 20% to 50% interest or otherwise exercises significant
influence are accounted for under the equity method.

The Companys investment at December 31, 2000 consisted of a 47% ownership
in Alaska Network Services, Inc. (ANS) carried at equity with a carrying value
of $1,370. ANS by vote of its Board of Directors elected in 2000 to wind up its
operations, distribute its net assets, and dissolve. During 2000, the Company
wrote down its investment in ANS to its expected realizable value. The
dissolution of ANS was completed during 2001 and the Company received a $1,440
cash payment from the distribution of ANS net assets.

As of December 31, 2001, the Company had no investment in unconsolidated
subsidiaries.

Property, Plant and Equipment

Telephoneplant is stated substantially at original cost of construction.
Telephone plant retired in the ordinary course of business, together with cost
of removal, less salvage, is charged to accumulated depreciation with no gain
or loss recognized. Renewals and betterments of telephone plant are capitalized
while repairs, as well as renewals of minor items, are charged to operating
expense as incurred. The Company provides for depreciation of telephone plant
on the straight-line method, using rates approved by the regulatory
authorities. The composite annualized rate of depreciation for all classes of
property, plant, and equipment was 7.0%, 6.6% and 6.5% for 2001, 2000 and 1999,
respectively.

Non-Telephoneplant is stated at purchased cost and, when sold or retired,
a gain or loss is recognized. Depreciation of such property is provided on the
straight-line method over its estimated service life ranging from two to 20
years.

The company is the lessee of equipment and buildings under capital leases
expiring in various years through 2019. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the assets. The assets are amortized over
the lower of their related lease terms or their estimated productive lives.
Amortization of assets under capital leases is included in depreciation and
amortization expense for 2001, 2000 and 1999.

Cellular, PCS, and UHF Licenses

Cellular, PCS, and UHF licenses are stated at purchased cost. Amortization
is computed on the straight-line method over an estimated useful life of 40
years. These licenses are renewable at the Companys option in perpetuity. The
amortization expense for 2001, 2000 and 1999 was $619, $606 and $347,
respectively.

Goodwill

Goodwill represents the excess of cost of companies acquired over the fair
value of their net assets at dates of acquisition. Goodwill associated with the
purchase of telephone properties is amortized using the straight-line method
over 40 years. Goodwill associated with non-regulated properties is amortized
using the straight-line method over 15 years. The amortization expense for
2001, 2000 and 1999 was $7,741, $7,510 and $4,243, respectively.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Debt Issue Costs

Legal, accounting and financing fees, printing costs, and other expenses
associated with the senior credit facility, senior subordinated notes, and
discount debentures are being amortized on the straight-line method over the
term of the debt, which approximates the effective interest method.
Amortization expense included in interest expense for 2001, 2000 and 1999 was
$4,312, $4,526 and $2,855, respectively.

Revenue Recognition

Substantially all recurring service revenues are billed one month in
advance and are deferred until earned. Nonrecurring and usage sensitive
revenues are billed in arrears and are recognized when earned. Additionally,
the Company establishes estimated bad debt reserves against uncollectible
revenues incurred during the period. During 2001, 2000 and 1999, no customer
accounted for more than 10% of the consolidated revenues of the Company.

In October and November 2001, under two separate regulatory orders, ACSA
was authorized to implement interim and refundable rate increases for both loop
rental rates on unbundled network elements and for local service revenue. The
Company recognized $465 of revenue during 2001 associated with these rate
increase authorizations. Management believes that it is unlikely the Company
will have a refund obligation associated with these interim rate increases.

Access revenues are 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 service 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 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. At
December 31, 2001 and 2000, the Company had liabilities of $31,748 and $17,009,
respectively, related to refundable access revenue.

Income Taxes

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 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. One of the acquired companies had a remaining unamortized regulatory
investment tax credit of $695 at May 14, 1999, of which $195, $197, $301 was
amortized against income in 2001, 2000, and 1999, respectively.

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. Depreciable lives of plant and equipment
approximate their estimated economic lives. As of December 31, 2001, the
Company had deferred as a regulatory asset $1,080 of costs incurred in
connection with regulatory rate making proceedings, which will be amortized in
future periods. If the Company were not following SFAS 71, these costs would
have been charged to expense in the current year. 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.
The Company believes that the effect of adopting SFAS No. 101, Regulated
Enterprises  Accounting for the Discontinuation of Application of FASB
Statement No. 71,would not be material to the Companys financial position,
results of operations or cash flows.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Regulatory Accounting and Regulation (Continued)

The local telephone exchange activities of the Company are subject to rate
regulation by the FCC for interstate telecommunication service, and the RCA for
intrastate and local exchange telecommunication service. The Company, as
required by the FCC, accounts for such activity separately. Long distance
services of the Company are subject to rate regulation as a non-dominant
interexchange carrier by the FCC for interstate telecommunication services and
the RCA for intrastate telecommunication services.

Cellular, directory and Internet operations are not subject to rate
regulation.

Impairment of Long-Lived Assets

The Company evaluates the carrying value of property, plant and equipment
and intangibles if events or changes in circumstances indicate the carrying
amount of such assets may not be fully recoverable on the undiscounted cash
flow basis of the underlying business.

Comprehensive Income (Loss)

The Companys comprehensive loss is equal to its net loss for 2000 and
1999. For 2001, the Company has provided an income tax valuation allowance
equal to the income tax benefit resulting from its other comprehensive loss.

Recent Accounting Pronouncements

On June 29, 2001, the Financial Accounting Standards Board (FASB)
approved for issuance SFAS No. 141,Business Combinations,which supercedes APB
Opinion No, 16, Business Combinationsand SFAS No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises. This statement
establishes new standards for accounting and reporting requirements for
business combinations and requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS No. 141
also specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. The adoption of this statement did not have a material impact on its
financial position, results of operations or cash flows.

On June 29, 2001, the FASB approved for issuance SFAS No. 142,Goodwill
and Intangible Assets, which supercedes APB Opinion No. 17, Intangible Assets.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead will be tested for impairment
at least annually in accordance with the provisions of SFAS No. 142. SFAS No.
142 will also require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of.

The Company adopted SFAS No. 142 effective January 1, 2002. Goodwill and
intangible assets determined to have an indefinite useful life acquired in a
business combination completed after June 30, 2001, but before SFAS No. 142 was
adopted, were not amortized. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 were amortized in
accordance with the appropriate pre-SFAS No. 142 accounting literature. Upon
adoption of SFAS No. 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by the end of the first interim
period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS No. 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of
a change in accounting principle in the first interim period.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

In connection with SFAS No. 142s transitional goodwill impairment
evaluation, SFAS No. 142 will require the Company to perform an assessment of
whether there is an indication that goodwill was impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. The Company will then have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the carrying amount of the reporting unit. To
the extent the carrying amount of a reporting unit exceeds the fair value of
the reporting unit, an indication exists that the reporting unit goodwill may
be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of
the reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. This
second step is required to be completed as soon as possible, but not later than
the end of the year of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle on the
Companys statement of earnings.

At the date of adoption of SFAS No. 142, the Company had unamortized
goodwill in the amount of $250,495 and unamortized identifiable intangible
assets in the amount of $26,784, all of which are subject to the transition
provisions of SFAS No. 142. Amortization expense related to goodwill was
$7,741, $7,510 and $4,243, for the years ended December 31, 2001, 2000 and
1999, respectively. Because of the extensive effort needed to comply with
adopting SFAS No. 142, it is not practicable to reasonably estimate the impact
of adopting this Statement on the Companys financial position, results of
operations and cash flows at the date of this report, including whether it will
be required to recognize any transitional impairment losses as a cumulative
effect of a change in accounting principle.

On August 15, 2001, the 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.

On October 3, 2001, the FASB issued SFAS No. 144,Accounting for the
Impairment or Disposal of Long-Lived Assets,which is effective for the
Companys fiscal year beginning January 1, 2002. 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. The Company is
evaluating the impact of the adoption of this statement on its financial
position, results of operations and cash flows.

2. ACQUISITIONS

On May 14, 1999, the Company acquired Century Telephone Enterprise, Inc.s
Alaska holdings, including ACSAK, ACSN, ACSF, Pacific Telecom of Alaska PCS,
Inc., and Pacific Telecom Cellular of Alaska, Inc., excluding the assets,
liabilities and equity of Alaska RSA#1 (collectively, CenturyTels Alaska
Properties). On the same date, ACS Holdings also acquired from the
Municipality of Anchorage ACSA and its subsidiaries, ACSW and ACSLD
(collectively, ATU). These holdings include local area exchange service, long
distance service, Internet service and cellular operations throughout rural
Alaska and Anchorage. Both acquisitions were accounted for under the purchase
method of accounting. The financial statements reflect the allocation of the
purchase price and assumption of certain liabilities and include the operating
results of both ATU and CenturyTels Alaska Properties from the date of
acquisition. In total, the Company paid Century Telephone Enterprise $411,784
for the stock of CenturyTels Alaska Properties and the Municipality of
Anchorage $265,115 for the ATU assets. Acquisition expenses totaling $19,216
were also allocated to the purchase price.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

2. ACQUISITIONS (Continued)

The following reflects the allocation of the purchase price and the
sources of funds to finance the purchase.

|                              |  |            |         |     |  |       |         |   |  |   |         |  
|----------------------------- |  | ---------- | ------- | --- |  | ----- | ------- | - |  | - | ------- | -
|                              |  | CenturyTel |         |     |  |       |         |   |  |  
|                              |  | Alaska     |         |     |  |       |         |   |  |  
|                              |  | Properties |         | ATU |  | Total
|                              |  |            |         |     |  |      
|Current assets                |  | $          | 16,882  |     |  | $     | 42,146  |   |  | $ | 59,028  |  
|Property, plant and equipment |  |            | 157,758 |     |  |       | 248,648 |   |  |   | 406,406 |  
|Other assets                  |  |            | 13,680  |     |  |       | 20,665  |   |  |   | 34,345  |  
|Liabilities assumed           |  |            | (19,746 | )   |  |       | (41,177 | ) |  |   | (60,923 | )
|                              |  |            |         |     |  |       |         |   |  |   |         |  
|Net assets acquired           |  |            | 168,574 |     |  |       | 270,282 |   |  |   | 438,856 |  
|Goodwill                      |  |            | 250,323 |     |  |       | 6,936   |   |  |   | 257,259 |  
|                              |  |            |         |     |  |       |         |   |  |   |         |  
|Total cost of acquisition     |  |            | 418,897 |     |  |       | 277,218 |   |  |   | 696,115 |  
|Acquisition expenses          |  |            | (7,113  | )   |  |       | (12,103 | ) |  |   | (19,216 | )
|                              |  |            |         |     |  |       |         |   |  |   |         |  
|Total purchase price paid     |  | $          | 411,784 |     |  | $     | 265,115 |   |  | $ | 676,899 |  
|                              |  |            |         |     |  |       |         |   |  |   |         |  

Net assets acquired were purchased for cash provided from the following sources:

|                                          |  |   |         | 
|----------------------------------------- |  | - | ------- | 
|Senior credit facility revolving loan     |  | $ | 6,700   | 
|Senior credit facility term loans         |  |   | 435,000 | 
|9-3/8% senior subordinated notes due 2009 |  |   | 150,000 | 
|Contributed capital                       |  |   | 146,200 | 
|                                          |  |   |         | 
|Total sources                             |  | $ | 737,900 | 
|                                          |  |   |         | 

These sources also provided $12,601 of working capital and included
$48,400 of transaction fees and expenses.

The following are the unaudited pro forma results for the year ended
December 31, 1999, giving effect to the acquisitions as if they had occurred at
the beginning of that period.

|                                |  |      |         |  
|------------------------------- |  | ---- | ------- | -
|                                |  | 1999
|                                |  |     
|Revenues                        |  | $    | 299,909 |  
|Loss from continuing operations |  |      | (26,749 | )
|Net loss                        |  |      | (30,016 | )

On September 30, 1999, the Company acquired a majority interest in Alaskan
Choice Television, L.L.C. (ACTV). The cash purchase price was approximately
$1,900. On February 14, 2000, the Company purchased the remaining one-third
interest of ACTV for $3,042, including a $2,250 note payable. This acquisition
has been accounted for using the purchase method and its operating results have
been included in the consolidated statement of operations from the date of
acquisition. This acquisition is not included in the pro forma results above,
as it would not have had a significant effect.

On June 16, 2000, the Company acquired a 100% interest in Internet Alaska,
Inc. It previously held a minority interest of 28.5%. On July 6, 2001, The
Company acquired the assets and business of Internet Plus. L.L.C., dba
MosquitoNet, a Fairbanks based Internet service provider with approximately
5,000 customers. These acquisitions have been accounted for using the purchase
method and the operating results from these acquisitions have been included in
the consolidated statement of operations from the dates of acquisition. Pro
forma information is not provided since the impact of these acquisitions does
not have a material effect on the Companys financial position, results of
operations and cash flows.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

3. ACCOUNTS RECEIVABLE

Accounts receivable  trade consists of the following at December 31, 2001
and 2000:

|                             |                                      |  |        |        |      |  |        |        | 
|---------------------------- | ------------------------------------ |  | ------ | ------ | ---- |  | ------ | ------ | 
|                             |                                      |  | 2001   |        | 2000
|                             |                                      |  |        |        |     
|Accounts receivable  trade: |                                      |  |        |        |      |  |        |       
|                             | Customers                            |  | $      | 33,613 |      |  | $      | 39,594 | 
|                             | Connecting companies                 |  |        | 13,822 |      |  |        | 13,410 | 
|                             | Other                                |  |        | 4,421  |      |  |        | 3,164  | 
|                             |                                      |  |        |        |      |  |        |       
|                             |                                      |  | 51,856 |        |      |  | 56,168 |       
|                             | Less allowance for doubtful accounts |  |        | 4,944  |      |  |        | 9,831  | 
|                             |                                      |  |        |        |      |  |        |       
|                             | Accounts receivable  trade, net     |  | $      | 46,912 |      |  | $      | 46,337 | 
|                             |                                      |  |        |        |      |  |        |       

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment consists of the following at December 31,
2001 and 2000:

|                                |                                                |  |           |         |      |  |         |         | 
|------------------------------- | ---------------------------------------------- |  | --------- | ------- | ---- |  | ------- | ------- | 
|                                |                                                |  | 2001      |         | 2000
|                                |                                                |  |           |         |     
|Property, plant, and equipment: |                                                |  |           |         |      |  |         |        
|                                | Land, buildings and support assets             |  | $         | 178,736 |      |  | $       | 150,363 | 
|                                | Central office switching and transmission      |  |           | 309,291 |      |  |         | 285,466 | 
|                                | Outside plant cable and wire facilities        |  |           | 486,352 |      |  |         | 455,213 | 
|                                | Cellular switching and transmission systems    |  |           | 40,224  |      |  |         | 33,803  | 
|                                | Other                                          |  |           | 2,359   |      |  |         | 1,631   | 
|                                | Construction work in progress                  |  |           | 19,867  |      |  |         | 27,081  | 
|                                |                                                |  |           |         |      |  |         |        
|                                |                                                |  | 1,036,829 |         |      |  | 953,557 |        
|                                | Less accumulated depreciation and amortization |  |           | 557,849 |      |  |         | 492,822 | 
|                                |                                                |  |           |         |      |  |         |        
|                                | Property, plant and equipment, net             |  | $         | 478,980 |      |  | $       | 460,735 | 
|                                |                                                |  |           |         |      |  |         |        

The following is a summary of property held under capital leases included
in the above property, plant and equipment:

|                                    |                                                |  |        |        |      |  |        |        | 
|----------------------------------- | ---------------------------------------------- |  | ------ | ------ | ---- |  | ------ | ------ | 
|                                    |                                                |  | 2001   |        | 2000
|                                    |                                                |  |        |        |     
|Property held under capital leases: |                                                |  |        |        |      |  |        |       
|                                    | Land, buildings and support assets             |  | $      | 13,318 |      |  | $      | 13,305 | 
|                                    | Outside plant cable and wire facilities        |  |        | 2,710  |      |  |        | 2,710  | 
|                                    |                                                |  |        |        |      |  |        |       
|                                    |                                                |  | 16,028 |        |      |  | 16,015 |       
|                                    | Less accumulated depreciation and amortization |  |        | 4,810  |      |  |        | 3,609  | 
|                                    |                                                |  |        |        |      |  |        |       
|                                    | Property held under capital leases, net        |  | $      | 11,218 |      |  | $      | 12,406 | 
|                                    |                                                |  |        |        |      |  |        |       

Amortization of assets under capital leases included in depreciation
expense in 2001, 2000 and 1999 is $1,202 $1,008 and $331, respectively.



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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

4. PROPERTY, PLANT AND EQUIPMENT (Continued)

The Company leases various land, buildings, right-of-ways, and personal
property under operating lease agreements. Rental expenses under operating
leases for 2001, 2000 and 1999 were $3,971, $4,055 and $1,030, respectively.
Future minimum payments under these leases for the next five years and
thereafter are as follows:

|           |      |   |        |       | 
|---------- | ---- | - | ------ | ----- | 
|           | 2002 |   | $      | 2,598 | 
|           | 2003 |   |        | 2,461 | 
|           | 2004 |   |        | 1,482 | 
|           | 2005 |   |        | 976   | 
|           | 2006 |   |        | 817   | 
|Thereafter |      |   | 2,968  |      
|           |      |   |        |      
|           |      | $ | 11,302 |      
|           |      |   |        |      

5. OTHER ASSETS

Other assets consist of the following at December 31, 2001 and 2000:

|                                                                                                  |  |      |        |      |  |   |        | 
|------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                                                                  |  | 2001 |        | 2000
|                                                                                                  |  |      |        |     
|Debt issue costs, net of accumulated amortization
of $11,693 and $7,381, respectively             |  | $    | 25,321 |      |  | $ | 29,633 | 
|Cellular, PCS, and UHF licenses, net of accumulated
amortization of $1,572 and $953, respectively |  |      | 24,324 |      |  |   | 24,943 | 
|Other intangible assets, net of accumulated
amortization of $1,258 and $642, respectively         |  |      | 2,460  |      |  |   | 2,082  | 
|Prepaid pension asset                                                                             |  |      | 3,775  |      |  |   | 3,862  | 
|Intangible asset  pension                                                                        |  |      | 1,754  |      |  |   |       | 
|Deferred charges and other assets                                                                 |  |      | 4,347  |      |  |   | 3,289  | 
|                                                                                                  |  |      |        |      |  |   |        | 
|Other assets                                                                                      |  | $    | 61,981 |      |  | $ | 63,809 | 
|                                                                                                  |  |      |        |      |  |   |        | 

6. ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES

Accounts payable, accrued and other current liabilities consist of the
following at December 31, 2001 and 2000:

|                                                   |  |      |        |      |  |   |        | 
|-------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                   |  | 2001 |        | 2000
|                                                   |  |      |        |     
|Accounts payable  trade                           |  | $    | 10,138 |      |  | $ | 23,754 | 
|Accrued payroll, benefits, and related liabilities |  |      | 8,379  |      |  |   | 7,048  | 
|Accrued personal time off                          |  |      | 5,207  |      |  |   | 5,241  | 
|Accrued interest                                   |  |      | 6,983  |      |  |   | 3,071  | 
|Refundable access revenue                          |  |      | 22,688 |      |  |   | 6,756  | 
|Other                                              |  |      | 9,370  |      |  |   | 11,855 | 
|                                                   |  |      |        |      |  |   |        | 
|Accrued and other current liabilities              |  | $    | 62,765 |      |  | $ | 57,725 | 
|                                                   |  |      |        |      |  |   |        | 



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##### Table of Contents



7. LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at December 31, 2001 and
2000:

|                                               |  |      |         |      |  |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                               |  | 2001 |         | 2000
|                                               |  |      |         |     
|Senior credit facility term loan  tranche A   |  | $    | 150,000 |      |  | $ | 150,000 | 
|Senior credit facility term loan  tranche B   |  |      | 150,000 |      |  |   | 150,000 | 
|Senior credit facility term loan  tranche C   |  |      | 135,000 |      |  |   | 135,000 | 
|9 3/8% senior subordinated notes due 2009      |  |      | 150,000 |      |  |   | 150,000 | 
|Capital leases and other long-term obligations |  |      | 11,603  |      |  |   | 14,642  | 
|                                               |  |      |         |      |  |   |         | 
|                                               |  |      | 596,603 |      |  |   | 599,642 | 
|Less current portion                           |  |      | 5,107   |      |  |   | 2,870   | 
|                                               |  |      |         |      |  |   |         | 
|Long-term obligations, net of current portion  |  | $    | 591,496 |      |  | $ | 596,772 | 
|                                               |  |      |         |      |  |   |         | 

The aggregate maturities of long-term obligations for each of the five
years and thereafter subsequent to December 31, 2001 are as follows:

|           |      |   |         |         | 
|---------- | ---- | - | ------- | ------- | 
|           | 2002 |   | $       | 5,107   | 
|           | 2003 |   |         | 5,002   | 
|           | 2004 |   |         | 5,051   | 
|           | 2005 |   |         | 5,121   | 
|           | 2006 |   |         | 147,692 | 
|Thereafter |      |   | 428,630 |        
|           |      |   |         |        
|           |      | $ | 596,603 |        
|           |      |   |         |        

Senior Credit Facility

On May 14, 1999, the Company entered into a credit agreement with a
syndicate of commercial banks which provide the Companys senior credit
facility. The senior credit facility provides $435 million of term loans and a
revolving credit facility with a $75 million line of credit. The Companys
obligations under the senior credit facility are unconditionally and
irrevocably guaranteed, joint and severally, by the Company and its
subsidiaries, and secured by collateral that includes substantially all of the
Company and its subsidiaries assets. 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. As of
December 31, 2001 and 2000 the Company was in compliance with all of the
covenants of the senior credit facility.

The tranche A term loan of $150 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on November 14, 2006. The loan bears interest at an annual rate
equal (at the Companys option) to: (1) an adjusted London inter-bank offered
rate (LIBOR) plus 2.25% or (2) a rate equal to 1.75% plus the greater of the
administrative agents prime rate, a certificate of deposit rate plus 1.00% or
the federal funds rate plus .50%, in each case subject to reduction based on
the Companys financial performance. The rate of interest in effect at December
31, 2001 and 2000 was 4.69% and 9.25%, respectively, and is based on the LIBOR
rate option.

The tranche B term loan of $150 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on November 14, 2007. The loan bears interest at an annual rate
equal (at the Companys option) to: (1) LIBOR plus 3.00% or (2) a rate equal to
2.00% plus the greater of the administrative agents prime rate, a certificate
of deposit rate plus 1.00% or the federal funds rate plus .50%. The rate of
interest in effect at December 31, 2001 and 2000 was 5.44% and 9.50%,
respectively, and is based on the LIBOR rate option.



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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

7. LONG-TERM OBLIGATIONS (Continued)

Senior Credit Facility, continued

The tranche C term loan of $135 million is repayable in annual principal
payments of 1% of outstanding principal commencing on May 14, 2002 with the
balance due on May 14, 2008. The loan bears interest at an annual rate equal
(at the Companys option) to: (1) LIBOR plus 3.25% or (2) a rate equal to 2.25%
plus the greater of the administrative agents prime rate, a certificate of
deposit rate plus 1.00% or the federal funds rate plus .50%. The rate of
interest in effect at December 31, 2001 and 2000 was 7.1% and 9.75%,
respectively, and is based on the LIBOR rate option.

The senior credit facility also provides a revolving credit facility in
the amount of $75 million which is available, in part, for up to $25 million in
letters of credit and up to $10 million in the form of swingline loans. This
revolving facility is available for seven years and outstanding balances
thereunder will bear interest at an annual interest rate option equivalent to
that provided under tranche A. There were no amounts outstanding under this
revolving credit facility as of December 31, 2001 and 2000.

On July 24, 1999 the Company entered into an interest rate swap agreement
to reduce the impact of changes in interest rates on its floating rate
long-term debt. This agreement fixed at 5.99% the underlying variable rate on
one-half of the borrowings under the senior credit facility, or $217.5 million,
for a three-year period. The buyer has the right, at their option, to extend
the agreement for an additional two years. The differential to be paid or
received is recorded as interest expense in the consolidated statement of
operations in the period in which it is recognized. The Company is exposed to
credit losses from counterparty nonperformance, but does not anticipate any
such nonperformance.

Senior Subordinated Notes

On May 14, 1999, the Company issued $150 million in aggregate principal
amount of 9 3/8 % senior subordinated notes due 2009. Interest on the notes is
payable semi-annually on May 15 and November 15. The notes will mature on May
15, 2009, and are redeemable, in whole or in part, at the option of the
Company, at any time on or after May 15, 2004 at 104.688% of the principal
amount declining to 100% of the principal amount on or after May 15, 2007. The
notes contain a number of restrictive covenants, including covenants limiting
incurrence of debt and the payment of dividends. As of December 31, 2001 and
2000 the Company was in compliance with all the covenants of the notes.

Capital leases and other long-term obligations

The Company has entered into various capital leases and other debt
agreements totaling $11,603 and $14,642 with a weighted average interest rate
of 8.74% and 8.91% at December 31, 2001 and 2000, respectively.

8. OTHER DEFERRED CREDITS AND LONG-TERM LIABILITIES:

Deferred credits and other long-term liabilities consist of the following
at December 31, 2001 and 2000:

|                             |                                                        |   |        |        |      |   |        |        | 
|---------------------------- | ------------------------------------------------------ | - | ------ | ------ | ---- | - | ------ | ------ | 
|                             |                                                        |   | 2001   |        | 2000
|                             |                                                        |   |        |        |     
|Refundable access revenue    |                                                        | $ | 9,060  |        |      | $ | 10,253 |       
|Interest rate swap           |                                                        |   | 11,437 |        |      |   |       |       
|Additional pension liability |                                                        |   | 4,147  |        |      |   |       |       
|Other deferred credits       |                                                        |   | 359    |        |      |   | 502    |       
|                             |                                                        |   |        |        |      |   |        |        | 
|                             | Total deferred credits and other long-term liabilities |   | $      | 25,003 |      |   | $      | 10,755 | 
|                             |                                                        |   |        |        |      |   |        |        | 



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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

9. LOCAL TELEPHONE OPERATING REVENUE

Local telephone operating revenues consisted of the following for the
years ended December 31, 2001, 2000 and 1999:

|                              |                                          |   |         |         |      |   |         |         |  |   |        |         | 
|----------------------------- | ---------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------- | 
|                              |                                          |   | 2001    |         | 2000 |   | 1999   
|                              |                                          |   |         |         |      |   |        
|Local network service         |                                          | $ | 96,270  |         |      | $ | 94,098  |         |  | $ | 59,891 |        
|Network access revenue        |                                          |   | 102,977 |         |      |   | 105,172 |         |  |   | 67,174 |        
|Deregulated revenue and other |                                          |   | 22,164  |         |      |   | 22,998  |         |  |   | 15,190 |        
|                              |                                          |   |         |         |      |   |         |         |  |   |        |        
|                              | Total local telephone operating revenues |   | $       | 221,411 |      |   | $       | 222,268 |  |   | $      | 142,255 | 
|                              |                                          |   |         |         |      |   |         |         |  |   |        |        

10. UNUSUAL CHARGES

During 2000, the Company recorded $5,288 of unusual charges, consisting of
the following:

|                                        |  |      |       | 
|--------------------------------------- |  | ---- | ----- | 
|                                        |  | 2000
|                                        |  |     
|Costs incurred in attempted acquisition |  | $    | 1,451 | 
|Severance and restructuring costs       |  |      | 3,019 | 
|Legal settlement                        |  |      | 818   | 
|                                        |  |      |       | 
|                                        |  | $    | 5,288 | 
|                                        |  |      |       | 

During 2000, the Company attempted to acquire the Matanuska Telephone
Association, a cooperative telephone association located in Alaska. The
acquisition was subject to approval by a vote of the membership of the
cooperative association requiring a super majority, which was held in September
of 2000. The membership of the association voted to approve the acquisition but
failed to achieve the required super majority. The Company had incurred $1,451
of legal, consulting and other out of pocket costs associated with the
attempted acquisition which were charged to expense during September 2000.

The Company recorded $3,019 related to severance and restructuring charges
under several plans adopted during 2000. Employee force reductions resulting
from these restructuring plans are expected to total approximately 200 by their
completion and include employee groups located in Alaska within the local
telephone, cellular and Internet operations. The Company expects these plans to
be completed by September 30, 2002. The plans also called for the closure of a
branch operation in Vancouver, Washington, which was completed during the
second quarter of 2001. As of December 31, 2001, $2,267 has been paid under the
plans and approximately 150 employees have been terminated.

In December 2000, the Company settled out of court a claim by a vendor
that arose from an undisclosed contractual obligation it incurred in the
purchase of the Companys operations in May 1999, resulting in a charge to
expense of $818.



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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

11. INCOME TAXES

The Companys combined federal income and state effective income tax rate
from continuing operations was a benefit of 2.2%, 0.8% and 1.4% in 2001, 2000
and 1999, respectively. The difference between taxes calculated as if the
statutory federal rate of 34% was applied to loss from continuing operations
before income tax and the recorded tax benefit is reconciled as follows:

|                                                        |                                                                                     |                                               |        |      |       |      |        |        |        |   |        |        |       |  
|------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------------------- | ------ | ---- | ----- | ---- | ------ | ------ | ------ | - | ------ | ------ | ----- | -
|                                                        |                                                                                     |                                               |        | 2001 |       | 2000 |        | 1999  
|                                                        |                                                                                     |                                               |        |      |       |      |        |       
|Computed federal income taxes at the 34% statutory rate |                                                                                     | $                                             | (3,006 | )    |       | $    | (9,048 | )      |        | $ | (7,351 | )     
|                                                        | Increase (reduction) in tax resulting from
State income taxes (net federal benefit) |                                               |        | (486 | )     |      |        | (1,559 | )      |   |        | (1,272 | )    
|                                                        |                                                                                     | Amortization of investment tax credits        |        |      | (195  | )    |        |        | (197   | ) |        |        | (301  | )
|                                                        |                                                                                     | Valuation allowance  book net operating loss |        |      | 3,560 |      |        |        | 10,322 |   |        |        | 8,726 |  
|                                                        |                                                                                     | Other                                         |        |      | (68   | )    |        |        | 285    |   |        |        | (103  | )
|                                                        |                                                                                     |                                               |        |      |       |      |        |        |        |   |        |       
|Total income tax benefit                                |                                                                                     | $                                             | (195   | )    |       | $    | (197   | )      |        | $ | (301   | )     
|                                                        |                                                                                     |                                               |        |      |       |      |        |        |        |   |        |       

The benefit for income taxes is summarized as follows:

|                                       |                    |                |      |      |   |      |      |      |   |   |      |   |   | 
|-------------------------------------- | ------------------ | -------------- | ---- | ---- | - | ---- | ---- | ---- | - | - | ---- | - | - | 
|                                       |                    |                |      | 2001 |   | 2000 |      | 1999
|                                       |                    |                |      |      |   |      |      |     
|Current:                               |                    |                |      |      |   |      |      |      |   |   |      |  
|                                       | Federal income tax |                | $    |     |   |      | $    |     |   |   | $    |  |  
|                                       | State income tax   |                |      |     |   |      |      |     |   |   |      |  |  
|                                       |                    |                |      |      |   |      |      |      |   |   |      |  
|                                       |                    | Total current  |      |      |  |      |      |      |  |   |      |   |  | 
|                                       |                    |                |      |      |   |      |      |      |   |   |      |  
|Deferred:                              |                    |                |      |      |   |      |      |      |   |   |      |  
|                                       | Federal income tax |                |      |     |   |      |      |     |   |   |      |  |  
|                                       | State income tax   |                |      |     |   |      |      |     |   |   |      |  |  
|                                       |                    |                |      |      |   |      |      |      |   |   |      |  
|                                       |                    | Total deferred |      |      |  |      |      |      |  |   |      |   |  | 
|Amortization of investment tax credits |                    |                | (195 | )    |   |      | (197 | )    |   |   | (301 | )
|                                       |                    |                |      |      |   |      |      |      |   |   |      |  
|Total income tax benefit               |                    | $              | (195 | )    |   | $    | (197 | )    |   | $ | (301 | )
|                                       |                    |                |      |      |   |      |      |      |   |   |      |  



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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

11. INCOME TAXES (Continued)

The effect of significant items comprising the Companys net deferred tax
liability at 34% were as follows:

|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |        |        |  
|---------------------------------------- | ------------------------------------------------------------ | ------------------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------ | ------ | ------ | -
|                                         |                                                              |                                      |         | 2001    |         | 2000 |         | 1999   
|                                         |                                                              |                                      |         |         |         |      |         |        
|Deferred tax liabilities  long-term:    |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|                                         |                                                              | Property, plant and equipment        |         | $       | (20,380 | )    |         | $       | (16,338 | ) |        | $      | (4,427 | )
|                                         |                                                              | Intangibles                          |         |         | (13,105 | )    |         |         | (7,235  | ) |        |        | (80    | )
|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|Total long-term deferred tax liabilities |                                                              |                                      | (33,485 | )       |         |      | (23,573 | )       |         |   | (4,507 | )     
|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|Deferred tax assets:                     |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|                                         | Current:                                                     |                                      |         |         |         |      |         |         |         |   |        |        |       
|                                         |                                                              | Accrued compensation                 |         |         | 4,081   |      |         |         | 5,329   |   |        |        | 1,433  |  
|                                         |                                                              | Accrued bad debts                    |         |         | 2,172   |      |         |         | 4,825   |   |        |        | 997    |  
|                                         |                                                              | Deferred investment tax credit       |         |         |        |      |         |         | 80      |   |        |        | 162    |  
|                                         |                                                              | Regulatory liabilities FASB 109      |         |         |        |      |         |         | 70      |   |        |        | 113    |  
|                                         |                                                              | Minimum pension liability adjustment |         |         | 957     |      |         |         |        |   |        |        |       |  
|                                         |                                                              | Interest rate swap mark to market    |         |         | 4,575   |      |         |         |        |   |        |        |       |  
|                                         |                                                              | Other                                |         |         | 516     |      |         |         | 143     |   |        |        |       |  
|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|                                         | Total current deferred tax assets                            |                                      |         | 12,301  |         |      |         | 10,447  |         |   |        | 2,705  |       
|                                         | Long-term  net operating loss carryforwards from operations |                                      |         | 49,324  |         |      |         | 32,324  |         |   |        | 10,803 |       
|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|Total deferred tax assets                |                                                              |                                      | 61,625  |         |         |      | 42,771  |         |         |   | 13,508 |       
|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|                                         | Valuation allowance                                          |                                      |         | (28,140 | )       |      |         | (19,048 | )       |   |        | (8,726 | )     
|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |       
|Net deferred tax asset                   |                                                              | $                                    |        |         |         | $    | 150     |         |         | $ | 275    |       
|                                         |                                                              |                                      |         |         |         |      |         |         |         |   |        |       

The company has available at December 31, 2001 unused operating loss
carryforwards of $123,311 that may be applied against future taxable income and
that expire as shown below. Per the schedule below the total Net Operating Loss
(NOL) is made up of NOLs generated by the consolidated group and NOLs
obtained with the 2000 acquisition of Internet Alaska. The Internet Alaska NOLs
are limited by special rules known as Separate Return Limitation Year or SRLY
rules. SRLY NOLs can only be used in year that both the Consolidated Group and
the entity that created the SRLY NOLs have taxable income. The tax benefits
derived from the utilization of the SRYL NOLs will reduce goodwill.

|           |  |          |       |                    |  |                    |         |       |  |   |         | 
|---------- |  | -------- | ----- | ------------------ |  | ------------------ | ------- | ----- |  | - | ------- | 
|           |  | Internet |       |                    |  |                    |         | Total
|Year of    |  | Alaska's |       | Unused Operating   |  | Unused Operating  
|Expiration |  | SRLY     |       | Loss Carryforwards |  | Loss Carryforwards
|           |  |          |       |                    |  |                   
|2017       |  | $        | 27    |                    |  | $                  |        |       |  | $ | 27      | 
|2018       |  |          | 328   |                    |  |                    |        |       |  |   | 328     | 
|2019       |  |          | 852   |                    |  |                    | 18,674  |       |  |   | 19,526  | 
|2020       |  |          | 2,631 |                    |  |                    | 58,733  |       |  |   | 61,364  | 
|2021       |  |          |      |                    |  |                    | 42,066  |       |  |   | 42,066  | 
|           |  |          |       |                    |  |                    |         |       |  |   |         | 
|           |  | $        | 3,838 |                    |  | $                  | 119,473 |       |  | $ | 123,311 | 
|           |  |          |       |                    |  |                    |         |       |  |   |         | 



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

12. STOCK INCENTIVE PLANS

The Companys employees participate in various plans of ACS Group, which
through the Compensation Committee of the ACS Groups Board of Directors, may
grant stock options, stock appreciation rights and other awards to officers,
employees and non-employee directors of the Company. At December 31, 2001, ACS
Group has reserved a total of 6,060 shares of authorized common stock for
issuance under the various plans. In general, options under the plans vest
ratably over three, four or five years and the plans terminate in approximately
10 years.

The Company applies Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees, in accounting for its 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. Compensation cost charged to
operations in 1999 was $6,145. No compensation costs were charged to operations
in 2001 or 2000. If compensation costs had been determined consistent with
SFAS No. 123 Accounting for Stock-Based Compensation, the Companys net loss
and net loss per share on a pro forma basis for 2001, 2000 and 1999 would have
been as follows:

|          |             |  |      |         |      |  |      |         |   |  |   |         |  
|--------- | ----------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|          |             |  | 2001 |         | 2000 |  | 1999
|          |             |  |      |         |      |  |     
|Net loss: |             |  |      |         |      |  |      |         |   |  |   |        
|          | As reported |  | $    | (8,646  | )    |  | $    | (25,653 | ) |  | $ | (20,701 | )
|          | Pro forma   |  |      | (10,114 | )    |  |      | (27,315 | ) |  |   | (21,367 | )

The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for grants:

|                             |  |      |      |      |  |      |      |   |  |  |      |  
|---------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                             |  | 2001 |      | 2000 |  | 1999
|                             |  |      |      |      |  |     
|Risk free rate               |  |      | 4.45 | %    |  |      | 5.50 | % |  |  | 5.50 | %
|Dividend yield               |  |      | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Expected volatility factor   |  |      | 55.2 | %    |  |      | 52.5 | % |  |  | 40.3 | %
|Expected option life (years) |  |      | 5.9  |      |  |      | 6.1  |   |  |  | 7.0  |  

ALEC Holdings, Inc. 1999 Stock Incentive Plan

ACS Group has reserved 3,410 shares under this plan, which was adopted in
connection with the completion of the acquisitions on May 14, 1999 (see Note 2,
Acquisitions). At December 31, 2001 4,003 options have been granted, 1,112 have
been forfeited, 356 have been exercised and 519 are available for grant under
the plan. The plan allows forfeited options to be reissued. The plan will
terminate on May 14, 2009.

Information on outstanding options for the years ended December 31, 2001,
2000 and 1999 is summarized as follows:

|                                               |  |           |       |          |  |           |      |          |  |           |       |          |  |   |      |  |  |          |       |   |  |   |      | 
|---------------------------------------------- |  | --------- | ----- | -------- |  | --------- | ---- | -------- |  | --------- | ----- | -------- |  | - | ---- |  |  | -------- | ----- | - |  | - | ---- | 
|                                               |  | 2001      |       | 2000     |  | 1999     
|                                               |  |           |       |          |  |          
|                                               |  |           |       |          |  | Weighted  |      |          |  |           |       | Weighted |  |   |      |  |  | Weighted
|                                               |  |           |       |          |  | Average   |      |          |  |           |       | Average  |  |   |      |  |  | Average 
|                                               |  | Number of |       | Exercise |  | Number of |      | Exercise |  | Number of |       | Exercise
|                                               |  | Shares    |       | Price    |  | Shares    |      | Price    |  | Shares    |       | Price   
|                                               |  |           |       |          |  |           |      |          |  |           |       |         
|Outstanding January 1                          |  |           | 2,906 |          |  | $         | 6.05 |          |  |           | 3,154 |          |  | $ | 6.15 |  |  |          |      |   |  | $ |     | 
|Granted                                        |  |           | 75    |          |  |           | 7.00 |          |  |           | 505   |          |  |   | 5.50 |  |  |          | 3,423 |   |  |   | 6.15 | 
|Exercised                                      |  |           | (119  | )        |  |           | 6.07 |          |  |           | (198  | )        |  |   | 6.15 |  |  |          | (39   | ) |  |   | 6.15 | 
|Canceled or expired                            |  |           | (327  | )        |  |           | 6.01 |          |  |           | (555  | )        |  |   | 6.08 |  |  |          | (230  | ) |  |   | 6.15 | 
|                                               |  |           |       |          |  |           |      |          |  |           |       |          |  |   |      |  |  |          |       |   |  |   |      | 
|Outstanding December 31                        |  |           | 2,535 |          |  |           | 6.09 |          |  |           | 2,906 |          |  |   | 6.05 |  |  |          | 3,154 |   |  |   | 6.15 | 
|                                               |  |           |       |          |  |           |      |          |  |           |       |          |  |   |      |  |  |          |       |   |  |   |      | 
|Options exercisable at December 31             |  |           | 1,802 |          |  |           | 6.10 |          |  |           | 1,541 |          |  |   | 6.12 |  |  |          | 1,255 |   |  |   | 6.15 | 
|Weighted average fair value of options granted |  |           |       |          |  |           | 4.00 |          |  |           |       |          |  |   | 3.09 |  |  |          |       |   |  |   | 3.88 | 



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

12. STOCK INCENTIVE PLANS (Continued)

The outstanding options at December 31, 2001 have the following
characteristics:

|                         |  |                     |       |                     |  |          |      |             |  |          |      |  |  |          |       |  |  |   |      | 
|------------------------ |  | ------------------- | ----- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ---- |  |  | -------- | ----- |  |  | - | ---- | 
|                         |  | Outstanding Options |       | Exercisable Options
|                         |  |                     |       |                    
|                         |  |                     |       |                     |  | Weighted |      | Weighted    |  |          |      |  |  | Weighted
|                         |  |                     |       |                     |  | Average  |      | Average     |  |          |      |  |  | Average 
|                         |  | Number of           |       | Remaining           |  | Exercise |      | Number      |  | Exercise
|Range of Exercise Prices |  | Shares              |       | Life (Years)        |  | Price    |      | Exercisable |  | Price   
|                         |  |                     |       |                     |  |          |      |             |  |         
|$5.50 - $7.00            |  |                     | 2,535 |                     |  |          | 6.90 |             |  | $        | 6.09 |  |  |          | 1,802 |  |  | $ | 6.10 | 
|                         |  |                     |       |                     |  |          |      |             |  |          |      |  |  |          |       |  |  |   |      | 

Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan

ACS Group has reserved 1,500 shares under this plan, which was adopted by
ACS Group in November 1999 in connection with its IPO. At December 31, 2001
1,432 options have been granted, 352 have been forfeited, 9 have been exercised
and 420 are available for grant under the plan. The plan allows forfeited
options to be reissued. The term of options granted under the plan may not
exceed 10 years. Unless otherwise determined by the Compensation Committee of
ACS Groups Board of Directors, options will vest ratably on each of the first
four anniversaries after the grant date and will have an exercise price equal
to the fair market value of the common stock on the date of grant.

No shares were awarded under this plan during 1999. Information on
outstanding options for the year December 31, 2001 and 2000 is summarized as
follows:

|                                               |  |           |       |          |  |           |       |          |  |  |       |          |  |   |       | 
|---------------------------------------------- |  | --------- | ----- | -------- |  | --------- | ----- | -------- |  |  | ----- | -------- |  | - | ----- | 
|                                               |  | 2001      |       | 2000    
|                                               |  |           |       |         
|                                               |  |           |       |          |  | Weighted  |       |          |  |  |       | Weighted
|                                               |  |           |       |          |  | Average   |       |          |  |  |       | Average 
|                                               |  | Number of |       | Exercise |  | Number of |       | Exercise
|                                               |  | Shares    |       | Price    |  | Shares    |       | Price   
|                                               |  |           |       |          |  |           |       |         
|Outstanding January 1                          |  |           | 1,092 |          |  | $         | 11.53 |          |  |  |      |          |  | $ |      | 
|Granted                                        |  |           | 185   |          |  |           | 6.74  |          |  |  | 1,247 |          |  |   | 11.86 | 
|Exercised                                      |  |           | (9    | )        |  |           | 5.50  |          |  |  |      |          |  |   |      | 
|Canceled or expired                            |  |           | (197  | )        |  |           | 11.51 |          |  |  | (155  | )        |  |   | 14.20 | 
|                                               |  |           |       |          |  |           |       |          |  |  |       |          |  |   |       | 
|Outstanding December 31                        |  |           | 1,071 |          |  |           | 10.76 |          |  |  | 1,092 |          |  |   | 11.53 | 
|                                               |  |           |       |          |  |           |       |          |  |  |       |          |  |   |       | 
|Options exercisable at December 31             |  |           | 456   |          |  |           | 11.08 |          |  |  | 186   |          |  |   | 11.66 | 
|Weighted average fair value of options granted |  |           |       |          |  |           | 3.74  |          |  |  |       |          |  |   | 6.55  | 

The outstanding options at December 31, 2001 have the following
characteristics:

|                         |  |                     |     |                     |  |          |      |             |  |          |       |  |  |          |     |  |  |   |       | 
|------------------------ |  | ------------------- | --- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  | -------- | --- |  |  | - | ----- | 
|                         |  | Outstanding Options |     | Exercisable Options
|                         |  |                     |     |                    
|                         |  |                     |     |                     |  | Weighted |      | Weighted    |  |          |       |  |  | Weighted
|                         |  |                     |     |                     |  | Average  |      | Average     |  |          |       |  |  | Average 
|                         |  | Number of           |     | Remaining           |  | Exercise |      | Number      |  | Exercise
|Range of Exercise Prices |  | Shares              |     | Life (Years)        |  | Price    |      | Exercisable |  | Price   
|                         |  |                     |     |                     |  |          |      |             |  |         
|$5.50 - $6.86            |  |                     | 444 |                     |  |          | 9.23 |             |  | $        | 5.97  |  |  |          | 170 |  |  | $ | 5.91  | 
|$8.58 - $12.63           |  |                     | 22  |                     |  |          | 8.47 |             |  |          | 12.63 |  |  |          | 9   |  |  |   | 12.63 | 
|$14.20                   |  |                     | 605 |                     |  |          | 8.12 |             |  |          | 14.20 |  |  |          | 277 |  |  |   | 14.20 | 



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

12. STOCK INCENTIVE PLANS (Continued)

ACS Group, Inc. 1999 Non-Employee Director Stock Compensation Plan

The non-employee director stock compensation plan was adopted by ACS Group
in connection with its IPO. ACS Group has reserved 150 shares under this plan.
At December 31, 2001 52 shares have been awarded and 98 shares are available
for grant under the plan. ACS Groups 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.

No shares were awarded under this plan during 1999. During the year ended
December 31, 2000, 26 shares under the plan were awarded to ACS Groups
directors, of which 13 were elected to be deferred until termination of service
by the directors. During the year ended December 31, 2001, 26 shares under the
plan were awarded to ACS Groups directors, of which 19 were elected to be
deferred until termination of service by the directors.

Alaska Communications Systems Group, Inc. 1999 Employee Stock Purchase Plan

This plan was also adopted in connection with ACS Groups IPO in November
1999. ACS Group has reserved 1,000 shares under this plan. At December 31,
2001, 782 shares are available for issuance and sale. The plan will terminate
on December 31, 2009. All ACS Group employees and all of the 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 in a calendar year, or who
are ineligible to participate due to restrictions under the Internal Revenue
Code.

On June 30, 2000, 65 shares were issued under the plan. On December 29,
2000, 67 shares were issued under the plan. On June 29, 2001, 48 shares were
issued under the plan. On December 31, 2001, 38 shares were issued under the
plan.

A participant in the purchase plan may authorize regular salary deductions
of a maximum of 15% and a minimum of 1% of base compensation. The fair market
value of shares which may be purchased by any employee during any calendar year
may not exceed $25. The amounts so deducted and contributed are applied to the
purchase of full shares of common stock at 85% of the lesser of the fair market
value of such shares on the date of purchase or on the offering date for such
offering period. The offering dates are January 1 and July 1 of each purchase
plan year, and each offering period will consist of one six-month purchase
period. The first offering period under the plan commenced on January 1, 2000.
Shares are purchased on the open market or issued from authorized but unissued
shares on behalf of participating employees on the last business days of June
and December for each purchase plan year and each such participant has the
rights of a stockholder with respect to such shares. During the year ended
December 31, 2001 approximately 20% of eligible employees elected to
participate in the plan.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

13. RETIREMENT PLANS

Pension benefits for substantially all of the Companys employees are
provided through the Alaska Electrical Pension Plan (AEPP). The Company pays
a contractual hourly amount based on employee classification or base
compensation. As a multi-employer defined benefit plan, the accumulated
benefits and plan assets are not determined or allocated separately to the
individual employer. The Companys portion of the plans pension cost for 2001,
2000 and 1999 was $11,830, $10,978 and $6,099, respectively.

The Company also has a separate defined benefit plan that covers certain
employees previously employed by Century Telephone Enterprise, Inc.
(CenturyTel Plan). This plan was transferred to the Company in connection
with the acquisition of the CenturyTels Alaska Properties. Existing plan
assets and liabilities of the CenturyTel Plan were transferred to the ACS
Retirement Plan on September 1, 1999. Accrued benefits under the ACS Retirement
Plan were determined in accordance with the provisions of the CenturyTel Plan.
Upon completion of the transfer to the Company, covered employees ceased to
accrue benefits under the plan. On November 1, 2000 the ACS Retirement Plan was
amended to conform early retirement reduction factors and various other terms
to those provided by the AEPP. As a result of this amendment, prior service
cost of $1,992 was recorded and will be amortized over the expected service
life of the plan participants at the date of the amendment. The Company uses
the traditional unit credit method for the determination of pension cost for
financial reporting and funding purposes and complies with the funding
requirements under the Employee Retirement Income Security Act of 1974
(ERISA). Since the plan is adequately funded under ERISA, no contribution was
made in 2001, 2000 or 1999.

The following table represents the net periodic pension expense (benefit)
for the ACS Retirement Plan for 2001, 2000 and 1999:

|                                         |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                         |  | 2001 |      | 2000 |  | 1999
|                                         |  |      |      |      |  |     
|Interest cost                            |  | $    | 627  |      |  | $    | 447  |   |  | $ | 149  |  
|Expected return on plan assets           |  |      | (773 | )    |  |      | (813 | ) |  |   | (170 | )
|Amortization of gain/loss                |  |      | 30   |      |  |      |     |   |  |   |     |  
|Amortization of prior year service costs |  |      | 203  |      |  |      | 34   |   |  |   |     |  
|                                         |  |      |      |      |  |      |      |   |  |   |      |  
|Net periodic pension expense (benefit)   |  | $    | 87   |      |  | $    | (332 | ) |  | $ | (21  | )
|                                         |  |      |      |      |  |      |      |   |  |   |      |  

The following is a reconciliation of the beginning and ending balances
for 2001 and 2000 for the projected benefit obligation and the plan assets for
the ACS Retirement Plan:

|                                                                     |                                                   |   |       |       |      |   |       |       |  
|-------------------------------------------------------------------- | ------------------------------------------------- | - | ----- | ----- | ---- | - | ----- | ----- | -
|                                                                     |                                                   |   | 2001  |       | 2000
|                                                                     |                                                   |   |       |       |     
|Change in projected benefit obligation:                              |                                                   |   |       |       |      |   |       |      
|                                                                     | Projected benefit obligation at beginning of year |   | $     | 8,600 |      |   | $     | 5,724 |  
|                                                                     | Plan amendments                                   |   |       |      |      |   |       | 1,992 |  
|                                                                     | Amortization of prior service cost                |   |       | (203  | )    |   |       | (34   | )
|                                                                     | Service cost                                      |   |       |      |      |   |       |      |  
|                                                                     | Interest cost                                     |   |       | 627   |      |   |       | 447   |  
|                                                                     | Actuarial loss                                    |   |       | 215   |      |   |       | 501   |  
|                                                                     | Benefits paid                                     |   |       | (131  | )    |   |       | (30   | )
|                                                                     |                                                   |   |       |       |      |   |       |      
|                                                                     | Projected benefit obligation at end of year       |   | $     | 9,108 |      |   | $     | 8,600 |  
|                                                                     |                                                   |   |       |       |      |   |       |      
|Change in plan assets
Fair value of plan assets at beginning of year |                                                   | $ | 9,257 |       |      | $ | 9,564 |      
|                                                                     | Return on plan assets                             |   |       | (390  | )    |   |       | (277  | )
|                                                                     | Employer contributions                            |   |       |      |      |   |       |      |  
|                                                                     | Benefits paid                                     |   |       | (131  | )    |   |       | (30   | )
|                                                                     |                                                   |   |       |       |      |   |       |      
|                                                                     | Fair value of plan assets at end of year          |   | $     | 8,736 |      |   | $     | 9,257 |  
|                                                                     |                                                   |   |       |       |      |   |       |      



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

13. RETIREMENT PLANS (Continued)

The following table represents the funded status of the ACS Retirement
Plan at December 31, 2001 and 2000:

|                                  |  |      |        |      |  |   |        |  
|--------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                  |  | 2001 |        | 2000
|                                  |  |      |        |     
|Projected benefit obligation      |  | $    | (9,108 | )    |  | $ | (8,600 | )
|Plan assets at fair value         |  |      | 8,736  |      |  |   | 9,257  |  
|                                  |  |      |        |      |  |   |        |  
|Funded Status                     |  |      | (372   | )    |  |   | 657    |  
|                                  |  |      |        |      |  |   |        |  
|Unrecognized net prior obligation |  |      |       |      |  |   |       |  
|Unrecognized prior service cost   |  |      | 1,755  |      |  |   | 1,958  |  
|Unrecognized net loss (gain)      |  |      | 2,392  |      |  |   | 1,247  |  
|                                  |  |      |        |      |  |   |        |  
|Pension asset at end of year      |  | $    | 3,775  |      |  | $ | 3,862  |  
|                                  |  |      |        |      |  |   |        |  

The net amounts recognized in the balance sheet were classified as follows at
December 31, 2001 and 2000:

|                                       |  |      |       |      |  |   |       | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                       |  | 2001 |       | 2000
|                                       |  |      |       |     
|Prepaid benefit costs                  |  | $    |      |      |  | $ | 3,862 | 
|Accrued benefit liability              |  |      | (372  | )    |  |   |      | 
|Intangible asset                       |  |      | 1,755 |      |  |   |      | 
|Accumulated other comprehensive income |  |      | 2,392 |      |  |   |      | 
|                                       |  |      |       |      |  |   |       | 
|Net amount recognized                  |  | $    | 3,775 |      |  | $ | 3,862 | 
|                                       |  |      |       |      |  |   |       | 

The actuarial assumptions used to account for the plan as of December 31, 2001
and 2000 are as follows:

|                              |  |      |      |      |  |  |      |  
|----------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                              |  | 2001 |      | 2000
|                              |  |      |      |     
|Discount rate                 |  |      | 7.25 | %    |  |  | 7.50 | %
|Expected return on assets     |  |      | 8.50 | %    |  |  | 8.50 | %
|Rate of compensation increase |  |      | 0.00 | %    |  |  | 0.00 | %

The Company also has a separate executive post retirement health benefit
plan. The Alaska Communications Systems Executive Retiree Health Benefit Plan
(The ACS Health Plan) was adopted by the Company in November 2001. The ACS
Health Plan covers a select group of management or highly compensated
employees. The group of eligible employees is selected by a committee appointed
by the Compensation Committee of ACS Groups Board of Directors. Each eligible
employee must complete 10 years of service and be employed by the Company in
the capacity of an executive officer for a minimum of 36 consecutive months
immediately preceding retirement. The ACS Health Plan provides a graded subsidy
for medical, dental, and vision coverage. The Company uses the projected unit
credit method for the determination of post retirement health cost for
financial reporting and funding purposes and complies with the funding
requirements under the Employee Retirement Income Security Act of 1974. The
Company made a contribution of $128 to the ACS Health Plan during 2001.

The following represents the net periodic postretirement benefit expense
for the ACS Health Plan for 2001:

|                                            |  |   |    | 
|------------------------------------------- |  | - | -- | 
|Service cost                                |  | $ | 11 | 
|Interest cost                               |  |   | 6  | 
|Amortization of prior service cost          |  |   | 4  | 
|                                            |  |   |    | 
|Net periodic postretirement benefit expense |  | $ | 21 | 
|                                            |  |   |    | 



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

13. RETIREMENT PLANS (Continued)

The following is a reconciliation of the beginning and ending balances for
2001 for the projected benefit obligation and the plan assets for the ACS
Health Plan:

Change in accumulated postretirement benefit obligation:

|                      |                                                                         |  |   |     |  
|--------------------- | ----------------------------------------------------------------------- |  | - | --- | -
|                      | Accumulated postretirement benefit obligation at beginning of the year: |  | $ |    |  
|                      | Plan adoption                                                           |  |   | 586 |  
|                      | Service cost                                                            |  |   | 11  |  
|                      | Interest cost                                                           |  |   | 6   |  
|                      | Actuarial gain                                                          |  |   | (15 | )
|                      |                                                                         |  |   |    
|                      | Accumulated postretirement benefit obligation at end of the year:       |  | $ | 588 |  
|                      |                                                                         |  |   |    
|Change in plan assets |                                                                        
|                      | Fair value of plan assets at beginning of year                          |  | $ |    |  
|                      | Employer contributions                                                  |  |   | 128 |  
|                      |                                                                         |  |   |    
|                      | Fair value of plan assets at end of year                                |  | $ | 128 |  
|                      |                                                                         |  |   |    

The following table represents the funded status of the ACS Health Plan at
December 31, 2001:

|                                              |  |   |      |  
|--------------------------------------------- |  | - | ---- | -
|Accumulated postretirement benefit obligation |  | $ | (588 | )
|Plan assets at fair value                     |  |   | 128  |  
|                                              |  |   |      |  
|Funded status                                 |  |   | (460 | )
|                                              |  |   |      |  
|Unrecognized prior service cost               |  |   | 582  |  
|Unrecognized net gain                         |  |   | (15  | )
|                                              |  |   |      |  
|Pension asset at end of year                  |  | $ | 107  |  
|                                              |  |   |      |  

The actuarial assumptions used to account for the ACS Health Plan as of
December 31, 2001 is an assumed discount rate of 7.25% and an expected long
term rate of return on plan assets of 8.50%. For measurement purposes, the
assumed annual rates of increases in health care costs is as follows:

|                 |   |                 |      |                  |   |  |      |       |  
|---------------- | - | --------------- | ---- | ---------------- | - |  | ---- | ----- | -
|Year             |   | Pre 65 premiums |      | Post 65 premiums
|                 |   |                 |      |                 
|                 | 1 |                 |      | 7.00             | % |  |      | 10.00 | %
|                 | 2 |                 |      | 7.00             | % |  |      | 9.00  | %
|                 | 3 |                 |      | 7.00             | % |  |      | 8.00  | %
|                 | 4 |                 |      | 7.00             | % |  |      | 7.00  | %
|5 and thereafter |   |                 | 7.00 | %                |   |  | 7.00 | %    

Assumed health care cost trend rates have a significant effect on the
amounts reported for the ACS Health Plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects for 2001:

|                                                        |  |     |     |  |     |  |     |  
|------------------------------------------------------- |  | --- | --- |  | --- |  | --- | -
|                                                        |  | +1% |     |  | -1%
|                                                        |  |     |     |  |    
|Effect on total of service and interest cost components |  |     | 106 |  |     |  | (86 | )
|Effect on accumulated postretirement benefit obligation |  |     | 4   |  |     |  | (3  | )

The Company also provides a 401(k) retirement savings plan covering
substantially all of its employees. The plan allows for discretionary matching
contributions as determined by the Board of Directors, subject to Internal
Revenue Code limitations. There was no matching contribution for 2001, 2000 or
1999.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

14. BUSINESS SEGMENTS

The Company has five reportable segments: local telephone, cellular,
directory, Internet and interexchange. Beginning with the first quarter of
2001, the Company began reporting directory and interexchange as separate
segments. Prior year amounts have been reclassified to conform with the current
presentation. Local telephone provides landline telecommunications services,
and consists of local network service, network access and deregulated and other
revenues; cellular provides wireless telecommunications service; directory
provides yellow page advertising and other related products; Internet provides
Internet service; and interexchange provides long distance and private network
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
does not currently meet the criteria for a reportable segment and is therefore
included in All Other below.

The Company also incurs interest expense, interest income, equity in
earnings of investments, goodwill amortization on the original May 14, 1999
purchases, 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 revenues. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies.

The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 2001:

|                               |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------ |  | --------- | ------- | -------- |  | --------- | ------- | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                               |  | Local     |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |  
|                               |  | Telephone |         | Cellular |  | Directory |         | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                               |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |      
|Operating revenues             |  | $         | 221,411 |          |  | $         | 40,427  |          |  | $             | 33,870 |           |  | $            | 13,726 |       |  | $ | 30,795 |   |  | $ | 18,032  |   |  | $ | (26,582 | ) |  | $ | 331,679 |  
|Depreciation and amortization  |  |           | 53,242  |          |  |           | 5,626   |          |  |               | 2      |           |  |              | 2,606  |       |  |   | 2,284  |   |  |   | 16,051  |   |  |   |        |   |  |   | 79,811  |  
|Operating income (loss)        |  |           | 34,794  |          |  |           | 5,084   |          |  |               | 19,349 |           |  |              | (9,504 | )     |  |   | (1,752 | ) |  |   | (2,443  | ) |  |   |        |   |  |   | 45,528  |  
|Interest expense               |  |           | (1,716  | )        |  |           | (36     | )        |  |               |       |           |  |              | (97    | )     |  |   | (302   | ) |  |   | (55,540 | ) |  |   |        |   |  |   | (57,691 | )
|Interest income                |  |           | 13      |          |  |           | 14      |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 1,963   |   |  |   |        |   |  |   | 1,990   |  
|Income tax provision (benefit) |  |           | 13,534  |          |  |           | 2,164   |          |  |               | 7,966  |           |  |              |       |       |  |   |       |   |  |   | (23,859 | ) |  |   |        |   |  |   | (195    | )
|Net income (loss)              |  |           | 19,560  |          |  |           | 2,966   |          |  |               | 11,383 |           |  |              | (9,591 | )     |  |   | (2,049 | ) |  |   | (30,915 | ) |  |   |        |   |  |   | (8,646  | )
|Total assets                   |  |           | 679,852 |          |  |           | 111,849 |          |  |               | 49,863 |           |  |              | 5,319  |       |  |   | 32,565 |   |  |   | 24,094  |   |  |   |        |   |  |   | 903,542 |  
|Capital expenditures           |  |           | 45,243  |          |  |           | 5,786   |          |  |               | 413    |           |  |              | 16,319 |       |  |   | 19,787 |   |  |   | 34      |   |  |   |        |   |  |   | 87,582  |  

Operating revenues disclosed above include intersegment operating revenues
of $21,677 for local telephone, $1,603 for cellular, $ 1,400 for directory, $2
for Internet and $13,851 for interexchange. In accordance with SFAS No. 71,
intercompany revenues between local telephone and non-local telephone
operations are not eliminated above.

The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 2000:

|                               |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------ |  | --------- | ------- | -------- |  | --------- | ------- | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                               |  | Local     |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |  
|                               |  | Telephone |         | Cellular |  | Directory |         | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                               |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |      
|Operating revenues             |  | $         | 222,268 |          |  | $         | 39,540  |          |  | $             | 29,156 |           |  | $            | 9,172  |       |  | $ | 19,773 |   |  | $ | 17,740  |   |  | $ | (24,656 | ) |  | $ | 312,993 |  
|Depreciation and amortization  |  |           | 56,912  |          |  |           | 5,029   |          |  |               |       |           |  |              | 1,495  |       |  |   | 1,345  |   |  |   | 7,484   |   |  |   |        |   |  |   | 72,265  |  
|Operating income (loss)        |  |           | 31,751  |          |  |           | 6,414   |          |  |               | 15,155 |           |  |              | (8,760 | )     |  |   | (1,325 | ) |  |   | (10,304 | ) |  |   |        |   |  |   | 32,931  |  
|Interest expense               |  |           | (1,046  | )        |  |           | (11     | )        |  |               |       |           |  |              | (109   | )     |  |   | (312   | ) |  |   | (60,631 | ) |  |   |        |   |  |   | (62,109 | )
|Interest income                |  |           | 105     |          |  |           | 215     |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 3,449   |   |  |   |        |   |  |   | 3,769   |  
|Income tax provision (benefit) |  |           | 7,913   |          |  |           | 2,703   |          |  |               | 6,214  |           |  |              |       |       |  |   |       |   |  |   | (17,027 | ) |  |   |        |   |  |   | (197    | )
|Net income (loss)              |  |           | 22,814  |          |  |           | 3,944   |          |  |               | 8,941  |           |  |              | (8,863 | )     |  |   | (1,631 | ) |  |   | (50,858 | ) |  |   |        |   |  |   | (25,653 | )
|Total assets                   |  |           | 661,600 |          |  |           | 111,824 |          |  |               | 33,899 |           |  |              | 26,217 |       |  |   | 46,042 |   |  |   | 29,724  |   |  |   |        |   |  |   | 909,306 |  
|Capital expenditures           |  |           | 53,974  |          |  |           | 11,505  |          |  |               |       |           |  |              | 3,252  |       |  |   | 3,030  |   |  |   | 492     |   |  |   |        |   |  |   | 72,253  |  

Operating revenues disclosed above include intersegment operating revenues
of $9,840 for local telephone, $937 for cellular, $2 for Internet and $13,208
for interexchange. In accordance with SFAS No. 71, intercompany revenues
between local telephone and non-local telephone operations are not eliminated
above.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

14. BUSINESS SEGMENTS (Continued)

The following table illustrates selected financial data for each segment
as of and for the year ended December 31, 1999:

|                               |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |      |   |  |   |         |  
|------------------------------ |  | --------- | ------- | -------- |  | --------- | ------- | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ---- | - |  | - | ------- | -
|                               |  | Local     |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |      |   |  |  
|                               |  | Telephone |         | Cellular |  | Directory |         | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                               |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |      
|Operating revenues             |  | $         | 142,255 |          |  | $         | 24,882  |          |  | $             | 16,896 |           |  | $            | 2,853  |       |  | $ | 5,946  |   |  | $ | 787     |   |  | $ | (474 | ) |  | $ | 193,145 |  
|Depreciation and amortization  |  |           | 32,881  |          |  |           | 2,159   |          |  |               |       |           |  |              | 219    |       |  |   | 666    |   |  |   | 4,381   |   |  |   |     |   |  |   | 40,306  |  
|Operating income (loss)        |  |           | 10,491  |          |  |           | 6,801   |          |  |               | 9,293  |           |  |              | (2,267 | )     |  |   | (3,905 | ) |  |   | (4,126  | ) |  |   |     |   |  |   | 16,287  |  
|Interest expense               |  |           | (240    | )        |  |           | (10     | )        |  |               |       |           |  |              |       |       |  |   |       |   |  |   | (37,267 | ) |  |   |     |   |  |   | (37,517 | )
|Interest income                |  |           | 682     |          |  |           | 88      |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 254     |   |  |   |     |   |  |   | 1,024   |  
|Income tax provision (benefit) |  |           | 3,983   |          |  |           | 2,890   |          |  |               | 3,810  |           |  |              |       |       |  |   |       |   |  |   | (10,984 | ) |  |   |     |   |  |   | (301    | )
|Net income (loss)              |  |           | 6,447   |          |  |           | 4,056   |          |  |               | 5,483  |           |  |              | (2,267 | )     |  |   | (3,905 | ) |  |   | (30,515 | ) |  |   |     |   |  |   | (20,701 | )
|Total assets                   |  |           | 745,002 |          |  |           | 115,074 |          |  |               | 31,089 |           |  |              | 5,250  |       |  |   | 32,592 |   |  |   | 8,704   |   |  |   |     |   |  |   | 937,711 |  
|Capital expenditures           |  |           | 44,310  |          |  |           | 10,962  |          |  |               |       |           |  |              |       |       |  |   | 19,520 |   |  |   |        |   |  |   |     |   |  |   | 74,792  |  

Operating revenues disclosed above include intersegment operating revenues
of $3,177 for local telephone, $479 for cellular, and $853 for interexchange.
In accordance with SFAS No. 71, intercompany revenues between local telephone
and non-local telephone operations are not eliminated above.

15. RELATED PARTY TRANSACTIONS

The Company has various intercompany transactions with the Parent and at
December 31, 2001 and 2000, $2,475 and $1,516, respectively was due from the
Parent.

Fox Paine & Company, ACS Groups majority stockholder, receives an annual
management fee in the amount of 1% of the ACS Groups net income before
interest expense, interest income, income taxes, depreciation and amortization,
and equity in loss of investments, calculated without regard to the fee. The
management fee expense for 2001, 2000 and 1999 was $1,285, $1,169 and $610,
respectively. The management fee payable at 2001 and 2000 was $1,303 and
$1,145, respectively.

In addition, in 1999, Fox Paine & Company received aggregate advisory fees
in the amount of $14,200 upon consummation of the acquisitions of CenturyTels
Alaska Properties and ATU and was reimbursed for pre-closing costs of $9,941.

In connection with stock grants, the Company loaned officers of the
Company $757 with an interest rate of the federal funds rate or 8%, whichever
was greater. The loans were secured by shares of ACS Groups common stock owned
by the individual officers. At December 31, 1999 the balances of the officer
loans were $794. These loans were repaid in their entirety on January 3, 2000.

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 3.90% as of December 31, 2001, and is due on April 15,
2005. The note is secured by a pledge of 100 shares of the ACS Groups common
stock held in the officers name. The note balance, including accrued interest,
was $339 as of December 31, 2001.

16. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Commencing January 1, 2001, The Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activitiesand its corresponding
amendments under SFAS No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities. SFAS No. 133 requires that an entity recognize
all derivatives as either assets or liabilities on the balance sheet and
measure those instruments at fair value. The accounting for changes in fair
value of a derivative depends on the intended use of the derivative, and its
designation as a hedge. Derivatives that are not hedges must be adjusted to
fair value through earnings. If a derivative is a hedge, depending on the
nature of the hedge, changes in fair value of derivatives either offset the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or are recognized in other comprehensive income until the
hedged transaction is recognized in earnings. The change in a derivatives fair
value related to the ineffective portion of a hedge, if any, is immediately
recognized in earnings.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

16. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)

As a result of adopting SFAS No. 133, The Company recognized as an asset
at January 1, 2001, a cumulative transition adjustment of $1,243 related to
marking to fair value a designated cash flow hedge in the form of a variable to
fixed interest rate swap. The cumulative unrealized gain from the transition
adjustment was recorded as a credit to other comprehensive income within the
Consolidated Statement of Stockholders Equity. As of December 31, 2001, the
fair value of the swap has declined to a liability of $11,437, which is
recorded in other deferred credits and long-term liabilities on the Companys
Consolidated Balance Sheets. The realized gains and losses of the swap and its
associated hedged long-term debt are recorded net in interest expense on the
Companys Consolidated Statements of Operations. For the year ended December
31, 2001, realized changes in the fair value of the cash flow hedge amounted to
a charge of $3,653, of which the ineffective portion was $247. Both the
realized effective and ineffective components of the cash flow hedge were
recorded as an increase to interest expense. Assuming a weighted average
variable rate based on implied forward rates in the LIBOR yield curve as of
December 31, 2001, $8,301 would be charged to earnings as interest expense as a
result of projected realized changes in fair value of the cash flow hedge
expected to occur in 2002. The swap agreement currently in place expires on
June 24, 2004, including extension terms which the Company expects to be
exercised based on current LIBOR rates.

The Company maintains an interest rate risk management strategy as a
condition of its bank credit agreement that uses derivatives to minimize
significant, unanticipated earnings and cash flow fluctuations caused by
interest rate volatility. The Companys specific goals are (1) to manage
interest rate sensitivity by modifying the repricing characteristics of certain
of its debt and (2) to lower (where possible) the cost of borrowed funds. The
Company does not enter into derivative financial instruments for speculative or
trading purposes.

By using derivative financial instruments to hedge exposure to changes in
interest rates, the Company exposes itself to credit risk and market risk. The
Company has minimized its credit risk by entering into a transaction with a
high-quality counterparty and monitoring the financial condition of that
counterparty. Market risk is managed through the setting and monitoring of
parameters that limit the types and degree of market risks that are acceptable.

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of cash and short-term investments, accounts receivable
and payable, and other short-term assets and liabilities approximate carrying
values due to their short-term nature.

The fair value for the Companys senior subordinated notes was estimated
based on quoted market prices. The fair value of the Companys term loan
facilities approximates carrying values due to the variable interest rate
nature of the debt. The Company employs an interest rate swap agreement to
manage interest rate exposure. Amounts payable or receivable under the
agreement are recognized as adjustments to interest expense in the periods in
which they accrue. The fair value of the Companys interest rate swap agreement
represents the estimated amount the Company would receive or pay to terminate
the agreement, calculated based on the implied forward rates in the LIBOR yield
curve at the end of the year.

The following table summarizes the Companys carrying values and fair
values of the debt components of its financial instruments at December 31,
2001:

|                                               |  |          |         |       |  |   |         | 
|---------------------------------------------- |  | -------- | ------- | ----- |  | - | ------- | 
|                                               |  | Carrying |         | Fair 
|                                               |  | Value    |         | Value
|                                               |  |          |         |      
|Senior credit facility term debt  tranche A   |  | $        | 150,000 |       |  | $ | 150,000 | 
|Senior credit facility term debt  tranche B   |  |          | 150,000 |       |  |   | 150,000 | 
|Senior credit facility term debt  tranche C   |  |          | 135,000 |       |  |   | 135,000 | 
|9 3/8% senior subordinated notes due 2009      |  |          | 150,000 |       |  |   | 148,500 | 
|Interest Rate Swap Agreement                   |  |          |        |       |  |   | 11,437  | 
|Capital leases and other long-term obligations |  |          | 11,603  |       |  |   | 11,603  | 
|                                               |  |          |         |       |  |   |         | 
|                                               |  | $        | 596,603 |       |  | $ | 606,540 | 
|                                               |  |          |         |       |  |   |         | 



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

The following table summarizes the Companys carrying values and fair
values of the debt components of its financial instruments at December 31,
2000:

|                                               |  |          |         |       |  |   |         |  
|---------------------------------------------- |  | -------- | ------- | ----- |  | - | ------- | -
|                                               |  | Carrying |         | Fair 
|                                               |  | Value    |         | Value
|                                               |  |          |         |      
|Senior credit facility term debt  tranche A   |  | $        | 150,000 |       |  | $ | 150,000 |  
|Senior credit facility term debt  tranche B   |  |          | 150,000 |       |  |   | 150,000 |  
|Senior credit facility term debt  tranche C   |  |          | 135,000 |       |  |   | 135,000 |  
|9 3/8% senior subordinated notes due 2009      |  |          | 150,000 |       |  |   | 126,375 |  
|Interest Rate Swap Agreement                   |  |          |        |       |  |   | (1,243  | )
|Capital leases and other long-term obligations |  |          | 14,642  |       |  |   | 14,641  |  
|                                               |  |          |         |       |  |   |         |  
|                                               |  | $        | 599,642 |       |  | $ | 574,773 |  
|                                               |  |          |         |       |  |   |         |  

18. COMMITMENTS AND CONTINGENCIES

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

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 which the Company believes will range between $25,000 and
$30,000 over the term of the agreement, including $20,000 to $25,000 during
2002. The Company intends to fund this commitment with cash on hand and cash
flow from operations.

The Company has entered into an agreement with a third party to provide to
that party a financing commitment for an amount ranging from $10,000 to
$15,000, contingent upon the third party achieving certain objectives. Such
financing would be provided in the form of an unsecured loan. The Company
believes such financing may occur during 2002 and it intends to fund it with
cash on hand and cash flow from operations.

19. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)

|                   |  |                          |        |         |  |         |        |         |  |   |         |   |  |   |        |  
|------------------ |  | ------------------------ | ------ | ------- |  | ------- | ------ | ------- |  | - | ------- | - |  | - | ------ | -
|                   |  | Quarterly Financial Data
|                   |  |                         
|                   |  | First                    |        | Second  |  | Third   |        | Fourth 
|                   |  | Quarter                  |        | Quarter |  | Quarter |        | Quarter
|                   |  |                          |        |         |  |         |        |        
|2001               |  |                          |        |         |  |         |        |         |  |   |         |   |  |   |        |  
|Operating revenues |  | $                        | 81,234 |         |  | $       | 81,743 |         |  | $ | 82,820  |   |  | $ | 85,882 |  
|Operating income   |  |                          | 10,033 |         |  |         | 11,638 |         |  |   | 12,209  |   |  |   | 11,648 |  
|Net loss           |  |                          | (4,222 | )       |  |         | (2,159 | )       |  |   | (751    | ) |  |   | (1,514 | )
|2000               |  |                          |        |         |  |         |        |         |  |   |         |   |  |   |        |  
|Operating revenues |  | $                        | 78,226 |         |  | $       | 80,728 |         |  | $ | 74,866  |   |  | $ | 79,173 |  
|Operating income   |  |                          | 11,234 |         |  |         | 11,949 |         |  |   | 3,326   |   |  |   | 6,422  |  
|Net loss           |  |                          | (3,848 | )       |  |         | (3,394 | )       |  |   | (10,716 | ) |  |   | (7,695 | )



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Per Share Amounts)

19. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED) (Continued)

|                   |  |                          |   |         |  |         |        |         |  |   |        |   |  |   |         |  
|------------------ |  | ------------------------ | - | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------- | -
|                   |  | Quarterly Financial Data
|                   |  |                         
|                   |  | First                    |   | Second  |  | Third   |        | Fourth 
|                   |  | Quarter                  |   | Quarter |  | Quarter |        | Quarter
|                   |  |                          |   |         |  |         |        |        
|1999               |  |                          |   |         |  |         |        |         |  |   |        |   |  |   |         |  
|Operating revenues |  | $                        |  |         |  | $       | 38,282 |         |  | $ | 75,540 |   |  | $ | 79,323  |  
|Operating income   |  |                          |  |         |  |         | 2,374  |         |  |   | 10,602 |   |  |   | 3,311   |  
|Net loss           |  |                          |  |         |  |         | (5,333 | )       |  |   | (4,030 | ) |  |   | (11,338 | )

The Company had no operations prior to the acquisitions of CenturyTel Alaska
properties and ATU on May 14, 1999. Fourth quarter operating income for 1999
included stock based compensation expense of $6,145.



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Schedule II- Valuation and Qualifying Accounts
(In Thousands)

|                                     |  |            |       |            |  |              |       |                |  |           |       |            |  |   |        |  |  |   |       | 
|------------------------------------ |  | ---------- | ----- | ---------- |  | ------------ | ----- | -------------- |  | --------- | ----- | ---------- |  | - | ------ |  |  | - | ----- | 
|                                     |  | Balance at |       | Charged to |  | Charged to   |       |                |  |           |       | Balance at
|                                     |  | Beginning  |       | costs and  |  | other        |       |                |  |           |       | End       
|Description                          |  | of Period  |       | expenses   |  | accounts (1) |       | Deductions (2) |  | of Period
|                                     |  |            |       |            |  |              |       |                |  |          
|2001 Allowance for doubtful accounts |  | $          | 9,831 |            |  | $            | 4,932 |                |  | $         | 1,576 |            |  | $ | 11,395 |  |  | $ | 4,944 | 
|                                     |  |            |       |            |  |              |       |                |  |           |       |            |  |   |        |  |  |   |       | 
|2000 Allowance for doubtful accounts |  | $          | 5,203 |            |  | $            | 7,839 |                |  | $         | 751   |            |  | $ | 3,962  |  |  | $ | 9,831 | 
|                                     |  |            |       |            |  |              |       |                |  |           |       |            |  |   |        |  |  |   |       | 
|1999 Allowance for doubtful accounts |  | $          |      |            |  | $            | 1,130 |                |  | $         | 4,798 |            |  | $ | 725    |  |  | $ | 5,203 | 
|                                     |  |            |       |            |  |              |       |                |  |           |       |            |  |   |        |  |  |   |       | 

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(1)  Represents the allowance for doubtful accounts at the date of
acquisition, and reserve for accounts receivable collected on the behalf
of others.


(2)  Represents credit losses written off during the period, less collection
of amounts previously written off.



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