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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, 2002

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 333-82363

Alaska Communications Systems Holdings, Inc.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of incorporation or organization) |  | 91-1921377
(I.R.S. Employer Identification No.)

|                                                                                |  |                      
|------------------------------------------------------------------------------- |  | ---------------------
|600 Telephone Avenue
Anchorage, Alaska
(Address of principal executive offices) |  | 99503-6091
(Zip Code)

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

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 60 days prior to the date of filing. (Not
Applicable)

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

Yes [   ]        No [X]

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 last sold, or the average bid and asked price of such common
equity as of as of the last business day of the registrants most recently
completed second fiscal quarter. (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 2003 annual meeting of stockholders are incorporated by
reference into Part III of this Form 10-K.





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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. Controls and Procedures                                                             
|                                                        | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                             
|CERTIFICATIONS                                         
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|EXHIBIT 21.1                                           
|EXHIBIT 99.1                                           
|EXHIBIT 99.2                                           



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2002

|                                                             |  |                                                                                       |     |  |    |      |    | 
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------- | --- |  | -- | ---- | -- | 
|                                                             |  |                                                                                       |     |  |    | Page
|                                                             |  |                                                                                       |     |  |    |      |    | 
|PART I                                                       |  |                                                                                       |     |  |    |      |    | 
|Item 1                                                       |  | Business                                                                              |     |  | 2  |     
|Item 2                                                       |  | Properties                                                                            |     |  | 24 |     
|Item 3                                                       |  | Legal Proceedings                                                                     |     |  | 24 |     
|Item 4                                                       |  | Submission of Matters to a Vote of Security Holders                                   |     |  | 24 |     
|PART II                                                      |  |                                                                                       |     |  |    |      |    | 
|Item 5                                                       |  | Market for the Registrant's Common Equity and Related Stockholder Matters             |     |  | 25 |     
|Item 6                                                       |  | Selected Financial Data                                                               |     |  | 25 |     
|Item 7                                                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |     |  | 28 |     
|Item 7A                                                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |     |  | 44 |     
|Item 8                                                       |  | Financial Statements and Supplementary Data                                           |     |  | 45 |     
|Item 9                                                       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |     |  | 45 |     
|PART III                                                     |  |                                                                                       |     |  |    |      |    | 
|Item 10                                                      |  | Directors and Executive Officers of the Registrant                                    |     |  | 46 |     
|Item 11                                                      |  | Executive Compensation                                                                |     |  | 48 |     
|Item 12                                                      |  | Security Ownership of Certain Beneficial Owners and Management                        |     |  | 48 |     
|Item 13                                                      |  | Certain Relationships and Related Transactions                                        |     |  | 48 |     
|PART IV                                                      |  |                                                                                       |     |  |    |      |    | 
|Item 14                                                      |  | Controls and Procedures                                                               |     |  | 49 |     
|Item 15                                                      |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |     |  | 49 |     
|SIGNATURES                                                   |  |                                                                                       |     |  |    |      | 52 | 
|OFFICERS CERTIFICATIONS UNDER SARBANES-OXLEY SECTION 302(a) |  |                                                                                       | 53  | 
|Index to Consolidated Financial Statements                   |  |                                                                                       | F-1 | 

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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,
Accounting for the Effects of Certain Types of Regulation,to the Companys
wireline subsidiaries; and possible changes in the demand for the Companys
products and services. In addition to these factors, actual future performance,
outcomes and results may differ materially because of other, more general,
factors including (without limitation) changes in general industry and market
conditions and growth rates; changes in interest rates or other general
national, regional or local economic conditions; governmental and public policy
changes; changes in accounting policies or practices adopted voluntarily or as
required by accounting principles generally accepted in the United States of
America; and the continued availability of financing in the amounts, at the
terms and on the conditions necessary to support the Companys future business.

Investors should also be aware that while 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 wireless services statewide. ATU
provided long distance services through ATU Long Distance, Inc. and wireless
services through MACtel, Inc. These companies are now known as ACS of
Anchorage, Inc., ACS Long Distance, Inc. and ACS Wireless, Inc.

On January 1, 2001, the Company established ACS InfoSource, Inc. as a
separate operation and transferred to it the Companys yellow pages directory
advertising business and assets which were previously included as a component
of four different local telephone exchange carriers operating in Alaska which
are also wholly-owned subsidiaries of the Company.

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 Holdings is the leading diversified, facilities-based
telecommunications provider in Alaska, offering local telephone, wireless,
directory, Internet, and interexchange 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, wireless, directory, Internet, and interexchange businesses.

Local Telephone. With over 323,000 access lines, representing
approximately 67% 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.

Wireless. ACS Holdings is the largest and only statewide provider of
wireless services in Alaska, currently serving over 82,000 subscribers. Its
wireless network covers over 478,000 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.

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Directory. ACS Holdings, through its subsidiary ACSIS, is the largest
provider of published directory advertising in Alaska. The Company serves over
13,500 customers through its yellow page directory books tailored to serve the
needs of each of its local exchange markets, with many customers advertising in
multiple books. During 2002, ACSIS published ten different yellow pages, white
pages or combined directory books covering approximately 95% of the State of
Alaskas population. ACSIS publishes the white pages directories under a
publishing agreement with its affiliated LECs. ACSIS also provides an online
directory product and other specialized advertising vehicles to its customers.

Internet. ACS Holdings is the second largest provider of Internet access
services in Alaska with approximately 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
approximately 70,000 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.

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
wireless, directory, Internet, interexchange and other service offerings.

Profit or loss and total assets for each of the Companys segments is
disclosed in Note 15 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, 2002, 2001 and 2000 (dollars in millions).

|                   |                               |                 |   |                                         |       |         |  |        |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |      |       |  
|------------------ | ----------------------------- | --------------- | - | --------------------------------------- | ----- | ------- |  | ------ | ----- | ------- | - | ------ | ----- | ------- |  | ---- | ----- | - | - | ----- | ----- |  |  | ---- | ----- | -
|                   |                               |                 |   | Revenue for the Year Ended December 31,
|                   |                               |                 |   |                                        
|                   |                               |                 |   | 2002                                    |       | 2001    |  | 2000  
|                   |                               |                 |   |                                         |       |         |  |       
|                   |                               |                 |   | Amount                                  |       | Percent |  | Amount |       | Percent |   | Amount |       | Percent
|                   |                               |                 |   |                                         |       |         |  |        |       |         |   |        |       |        
|Revenue by Source: |                               |                 |   |                                         |       |         |  |        |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |     
|                   | Local network service         |                 | $ | 99.5                                    |       |         |  | 29.0   | %     |         | $ | 96.3   |       |         |  | 29.0 | %     |   | $ | 94.1  |       |  |  | 30.0 | %    
|                   | Network access                |                 |   | 108.3                                   |       |         |  | 31.5   |       |         |   | 103.0  |       |         |  | 31.0 |       |   |   | 105.2 |       |  |  | 33.5 |      
|                   | Deregulated and other revenue |                 |   | 18.6                                    |       |         |  | 5.4    |       |         |   | 22.2   |       |         |  | 6.7  |       |   |   | 23.0  |       |  |  | 7.3  |      
|                   |                               |                 |   |                                         |       |         |  |        |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |      |      
|                   |                               | Local telephone |   |                                         | 226.4 |         |  |        | 65.9  |         |   |        | 221.4 |         |  |      | 66.6  |   |   |       | 222.3 |  |  |      | 70.9  |  
|                   | Wireless                      |                 |   | 43.2                                    |       |         |  | 12.6   |       |         |   | 41.9   |       |         |  | 12.6 |       |   |   | 41.2  |       |  |  | 13.1 |      
|                   | Directory                     |                 |   | 33.6                                    |       |         |  | 9.8    |       |         |   | 33.9   |       |         |  | 10.2 |       |   |   | 29.2  |       |  |  | 9.3  |      
|                   | Internet                      |                 |   | 20.8                                    |       |         |  | 6.1    |       |         |   | 13.7   |       |         |  | 4.1  |       |   |   | 9.2   |       |  |  | 2.9  |      
|                   | Interexchange                 |                 |   | 19.4                                    |       |         |  | 5.7    |       |         |   | 21.3   |       |         |  | 6.4  |       |   |   | 11.8  |       |  |  | 3.8  |      
|                   |                               |                 |   |                                         |       |         |  |        |       |         |   |        |       |         |  |      |       |   |   |       |       |  |  |      |      
|                   |                               | Total           |   | $                                       | 343.5 |         |  |        | 100.0 | %       |   | $      | 332.2 |         |  |      | 100.0 | % |   | $     | 313.5 |  |  |      | 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, 2002, approximately 53% of ACS Holdings retail access
lines served residential customers and 47% 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 $14.11. 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 $33.84. 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, 1998 to December 31,
2002. The number of access lines shown represents all revenue producing access
lines connected to both retail and wholesale customers.

|                                   |  |                    |         |      |  |      |         |      |  |      |         |   |  |  |         |   |  |  |         |  
|---------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | - |  |  | ------- | -
|                                   |  | As of December 31,
|                                   |  |                   
|                                   |  | 2002               |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                   |  |                    |         |      |  |      |         |      |  |     
|Retail access lines                |  |                    | 236,148 |      |  |      | 261,002 |      |  |      | 272,936 |   |  |  | 281,726 |   |  |  | 266,704 |  
|Wholesale access lines             |  |                    | 24,768  |      |  |      | 22,859  |      |  |      | 17,303  |   |  |  | 15,680  |   |  |  | 13,010  |  
|Unbundled network elements         |  |                    | 62,091  |      |  |      | 49,062  |      |  |      | 39,221  |   |  |  | 28,202  |   |  |  | 20,680  |  
|                                   |  |                    |         |      |  |      |         |      |  |      |         |   |  |  |         |   |  |  |         |  
|Total Local Telephone Access Lines |  |                    | 323,007 |      |  |      | 332,923 |      |  |      | 329,460 |   |  |  | 325,608 |   |  |  | 300,394 |  
|Percentage Growth                  |  |                    | -3.0    | %    |  |      | 1.1     | %    |  |      | 1.2     | % |  |  | 8.4     | % |  |  | 6.0     | %

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. 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.

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. 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 provided 86,859 lines to
competitors in the Anchorage, Fairbanks and Juneau service areas on either a
wholesale or UNE basis as of December 31, 2002. The Company believes the UNE
rates in place in all of its

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markets are below its embedded and forward looking cost and are therefore
non-compensatory. 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 models for
rural carriers were rejected by the FCC, leaving previous Universal Service
Fund (USF) calculations in place for the Federal High-Cost Fund. In
accordance with the 1996 Acts requirement to eliminate implicit subsidies, the
FCC has created additional USF support mechanisms to compensate for support
that had previously been provided implicitly through access revenue. 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.

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Interstate access, intrastate access, and universal service funding are
all influenced by both LEC cost levels and by competitive local market
penetration. Toll traffic originating or terminating on a competitors network
does not generate access billings to interexchange carriers for ACS Holdings.
Many of the underlying factors in jurisdictional cost separations studies that
allow network costs to be recovered through access charges are diminished as
competitive market penetration increases. Universal service funding may also
diminish as a result of competitive local market penetration. Under FCC rules,
when a competitive local exchange carrier (CLEC) is named an eligible
telecommunications carrier as General Communication, Inc. (GCI) has been in
Anchorage, Fairbanks and Juneau, universal service funding becomes portable to
the CLEC on a per-line basis, further eroding the incumbent local exchange
carriers (ILECs) 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 (CPE) 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.

Wireless

ACS Holdings wireless business is currently managed separately from its
LEC business and is subject to a different regulatory framework and cost
structure. Wireless services are provided statewide under the ACS Wireless
brand name.The primary sources of wireless 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 wireless
subscribers served and total covered population for ACS Holdings and its
Predecessor Entities from December 31, 1998 to December 31, 2002.

|                             |  |                    |         |      |  |      |         |      |  |      |         |   |  |  |         |   |  |  |         |  
|---------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | - |  |  | ------- | -
|                             |  | As of December 31,
|                             |  |                   
|                             |  | 2002               |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                             |  |                    |         |      |  |      |         |      |  |     
|Estimated covered population |  |                    | 478,413 |      |  |      | 468,622 |      |  |      | 462,057 |   |  |  | 460,802 |   |  |  | 460,162 |  
|Ending subscribers           |  |                    | 82,220  |      |  |      | 80,120  |      |  |      | 75,933  |   |  |  | 73,068  |   |  |  | 66,572  |  
|Ending penetration           |  |                    | 17.2    | %    |  |      | 17.1    | %    |  |      | 16.4    | % |  |  | 15.9    | % |  |  | 14.5    | %

Management believes there are opportunities to improve the penetration
rates of its wireless operations in Southeastern Alaska, and in particular,
Juneau. Management also believes that the market for wireless services will
continue to grow with the expansion of the wireless 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. During 2002, the Company purchased 10
megahertz F Block PCS licenses. In 2002, ACS Wireless in accordance with FCC
requirements, deployed a limited turn up of its CDMA 1X services in all E and F
Block markets. Management is analyzing the further build out of these services
to enhance the Companys offerings in its overall business.

Wireless 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 wireless services are not materially impacted by seasonal factors.

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Directory

ACS Holdings provides directory advertising services, commonly known as
yellow pages advertising, to its customers in the State of Alaska. During 2002,
ACSIS published ten different yellow pages, white pages or combined directory
books covering approximately 95% of the State of Alaskas population. ACSIS
publishes the white pages directories under a publishing agreement with its
affiliated LECs. Additionally, ACSIS provides internet-based directory
advertising services. The Company provides these services under a contractual
arrangement with a directory publishing company.Directory advertising is
billed in conjunction with local telephone service under a B&C agreement.
Directory revenues are not materially affected by seasonality.

The
Company has been authorized by its Board of Directors to evaluate the
possible disposition of its directory business, ACSIS. This
transaction, if completed, would result in a de-leveraging of the
Companys balance sheet and generate cash for other corporate
objectives. The Company expects to file on or about March 6,
2003, a preliminary prospectus with Canadian securities regulators
relating to a proposed public offering in Canada of ACSIS through a
Canadian income fund. Any prospective sale of ACSIS is subject to the
approval of the Companys Board of Directors, which is dependent
upon terms and pricing. Any such sale is also contingent upon a
number of conditions including approval by securities regulators, the
approval of an amendment of certain terms and conditions of the
Companys senior credit facility and market conditions. There
can be no assurance that the Company will consummate any transactions
to sell ACSIS.

Internet

ACS Holdings provides Internet access services to approximately 46,000
customers as of December 31, 2002. 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. Operating results
for Internet access services are not materially impacted by seasonal factors.

Interexchange

ACS Holdings predecessors began offering long distance services on a
resale basis in October 1997, primarily in Anchorage. The Company currently has
approximately 70,000 long distance customers and less than 10% of total
interexchange 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 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:

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| |  |  | 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.                                          

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

Network Facilities

As of December 31, 2002, ACS Holdings owned 65 host switches serving over
323,000 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 wireless operations consist of four digital switching
centers, 111 cell sites and three repeaters covering substantially all major
population centers and highway corridors in Alaska plus one analog switch and
cell site covering Barrow, Alaska. 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 wireless
switches in ACS Holdings markets.Customer care centers are located in
Anchorage, Fairbanks, Juneau, North Pole, Homer and Kenai/Soldotna.

The Company has enhanced its network to accommodate developing products
and technology. The Company completed its Multi-Protocol Label Switching over
Asynchronous Transfer Mode network or MPLS/ATM network in early 2002. Core
MPLS/ATM nodes were installed in Anchorage, Fairbanks, Kenai, Juneau, the
Mat-Su valley and Seattle. ACS Holdings believes the MPLS/ATM network enhances
its capability to provide a complete suite of converged telecommunications,
data and video services and achieve significant operating efficiencies. ACS
Holdings currently offers a variety of products and services and is able to
converge them all over its MPLS core network:



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

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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                                             
| |  |  | 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 53% of ACS Holdings retail access lines served residential
customers, while 47% served business customers.

ACS Holdings also has approximately 82,000 wireless subscribers, 13,500
directory advertising customers, 46,000 Internet subscribers and 70,000
long-distance subscribers consisting substantially of retail residential and
business consumers.

During 2002 one customer accounted for 11% of consolidated revenues and no
other customers accounted for more than 10% of consolidated revenue.

Competition

Local Telephone Service

ILECs may be subject to any of several 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,
| |  |  | competition from UNE interconnection, that is,
providers who lease UNEs from the ILEC, and                                                                            
| |  |  | alternatives to local service networks, including
wireless, IP, satellite, and cable telephony.                                                                       

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 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
50% competitive market penetration as of December 31, 2002.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)

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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 interconnection 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 between 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, 2002, ACS Holdings
estimates that it now has approximately 75% market share in Fairbanks. Through
December 31, 2002, GCI has competed in Fairbanks primarily through reselling
services and through UNE interconnection.Similar trends are being experienced
by ACSAK in its Juneau market where, as of December 31, 2002, the Company has
approximately 85% market share. 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. GCI, the dominant cable operator in Alaska and a CLEC,
is currently testing cable telephony service and recently announced plans to
start switching its local phone service customers in Anchorage over to its
cable system in 2004.

In addition, while wireless 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 wireless telephone features, personal communications services,
digital microwave and other wireless technologies are expected to further
permit the development of alternatives to traditional wireline services.

Wireless 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
wireless 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 wireless service areas, including AT&T
Wireless Services, Alaska DigiTel, and Dobson Communications. Recently, Dobson
Communications and AT&T Wireless announced a property swap which the Company
anticipates will remove AT&T Wireless from direct competition and give Dobson
Communications a statewide competition position. 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.

As the market for simple wireless 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.

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Directory

The Alaskan directory advertising industry is competitive. ACSIS competes
in Alaska with other directory businesses and other forms of advertising media,
including newspapers, radio, television, the Internet, billboards and direct
mail. The other directory publishers in Alaska include Phone Directories
Company, Inc., which is an independent directory publisher based in Utah and
GTE Directories Corporation, which is a directory publisher based in Texas.
ACSIS also competes with Alltel Publishing Corporation, which publishes
directories for an incumbent telephone company operating in the region to the
Northwest of Anchorage, known as Matanuska Telephone Association. Alltel also
recently announced that it will publish a directory in Anchorage for GCI, the
dominant cable operator in Alaska and a CLEC, which is expected to be published
in December 2003. Management believes that ACSIS competes effectively against
these providers and that it has a leading market share in each of the areas it
serves.

Internet-based directories have emerged as a new medium for customers.
Although advertising on the Internet still represents only a small part of the
total advertising market, it may become increasingly important as an
advertising medium. Most major yellow pages publishers operate an
Internet-based directory business. ACSIS competes through its Internet site,
acsyellowpages.com, with these publishers, with other Internet sites providing
classified directory information, such as Anchoragedailynews.com,
alaskayellowpages.com, and with search engines such as Yahoo!, Alta Vista and
Excite, some of which have entered into affiliate agreements with other major
directory publishers.

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, LECs 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, the availability of broadband ISP access and the pricing policies
of its competitors.During 2002, 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
service bundling, 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 interexchange 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.

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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, wireless, 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 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 wireless, 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 discount to a la carte
pricing 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,
2002, the Company employed a total of 1,103 regular full-time employees, 869 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. ACS Holdings provides a total benefits package,
including health, welfare, and retirement components, that is competitive in
ACS Holdings market.

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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 wireless operations 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.

Long distance companies are now precluded from filing tariffs for
interstate domestic and international services.Federal tariffing has been
replaced with Internet web site posting of offers, terms and prices.

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 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 conformance
with RCA orders, all revenue requirement studies and testimonies have been filed.Following
a hearing and decisions as to revenue

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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
intrastate 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 Anchorage, 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.Filings reflecting two-zone disaggregation plans
have already been made by ACSF and ACSN for its Glacier State study area.

Cost Recovery and Revenue Recognition

As regulated common carriers, 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 USF and 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 assessment of a subscriber

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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 USF. 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 USF. The federal USF 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 appealed this order 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.On March 4, 2002, the
District of Columbia Circuit Court of Appeals heard oral argument in the
matter. On May 21, 2002, the court issued its decision finding that the FCC
could rule that ISP traffic is intrastate in nature, but that the FCC could not
order refunds for those periods during which the Companys tariffs were deemed
lawful. The matter was remanded back to the FCC for recalculation of any
refunds that may be appropriate given the tariffs that have been deemed lawful
and for reconsideration of the interest rate imposed in the FCCs original
order on any refunds that may eventually be ordered. In March 2003, ACS
entered into a settlement agreement with GCI covering both the 1997-1998
monitoring period and similar issues GCI had raised with respect to the
1999-2000 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

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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.

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 they 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.

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. All ACS
Holdings affiliate LECs filed revenue requirement studies on July 1, 2001.A
hearing commenced on the revenue requirement for these LECs on March 4, 2002.
While a final decision has yet to be rendered on the LECs revenue
requirements, it appears that ACSF and ACSN will face revenue requirement
reductions while ACSAK will have an increased revenue requirement. The likely
revenue requirement for ACSA can not be determined at this time. The ACS LECs
will file cost of service and rate design studies and testimony, and have a
second hearing, to arrive at final adjudicated rates following the final
rulings on revenue requirements.

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 2002, extended to the ACSF and ACSAK markets. ACSN anticipates
filing a petition 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 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

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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 only ACS LEC remaining
in the AECA pool as of December 31, 2002 is ACSN. 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 USF, 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, the costs of lifeline service, which supports rates of low income
customers, and a portion of the cost of Public Interest Pay Telephones. 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                                                                               
| |  |  | compensate competitors for the costs of transporting
and terminating telecommunications traffic.                                                                                                          

The 1996 Act also requires ILECs to:

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| |  |  | 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.
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) (Iowa I), 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. The Supreme Court did hold, however,
that the FCC had not properly applied the statutory necessary and impair
standard for determining which elements of their networks the ILECs must
unbundle. The Supreme Court remanded the case to the FCC for further
consideration of the unbundling standard, and remanded the remainder of the
issues to the Eighth Circuit.

On remand, 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 Groups 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 Group 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.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. On May 13,
2002, the U.S. Supreme Court upheld the FCCs TELRIC regulations in Verizon
Communications, Inc. v. Federal Communications Commission, 535 U.S. 467 (2002).

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In November, 1999, the FCC issued an order addressing the issues the
Supreme Court remanded in Iowa I. In May, 2002, the United States Court of
Appeals for the District of Columbia Circuit held that the FCC again had
improperly applied the statutory unbundling standard, and remanded the
unbundling rules to the FCC for further consideration. In February, 2003, the
FCC adopted a further order governing the network elements that an ILEC must
unbundle, and delegating significant authority to make such determinations to
state public utility commissions. The FCCs order is likely to be the subject
of further appeals.

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.At present time there is
no schedule for the RCA to complete its adjudication of Anchorage UNE rates.

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.

On November 10, 1999, the Company filed a formal appeal of the RCAs order
terminating the rural exemptions 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
and the Court heard oral argument in the matter on February 11, 2003.Although
ACS Holdings believes that the appeals are well founded, it cannot predict the
timing and outcome of this litigation.

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. The RCA also sought to dismiss the claims
against it on the basis of sovereign immunity, and when its request was denied,
it appealed the issue to the Ninth Circuit Court of Appeals. The Ninth Circuit
has yet to render a decision on the RCAs sovereign immunity claims. No court
has ever ruled on the merits of ACS claims. Although ACS Holdings believes
that its appeal

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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.

Since 1999, the Company has also entered into interconnection agreements
with Alaska Fiber Star, LLC, TelAlaska Long Distance, Inc., Level 3, and other
entities.

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 USF 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 result, an incumbent rural
LEC has an opportunity to maintain its status as the sole recipient of federal
USF 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 USF and could materially adversely affect
the Companys ability to achieve a reasonable rate of return on the capital
invested in its network.

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 USF a percentage of their revenue earned from their

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interstate and international services. Although the Companys rural LECs receive subsidies
from the federal USF, 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 has restricted the amount of wireless spectrum that a single
entity may hold in a market.The FCCs rule prohibited an entity from holding
more than 55 MHz of spectrum in any particular market, however, this rule did
sunset on January 1, 2003.

The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of Commercial Mobile Radio Service
(CMRS) 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 CMRS 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.

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

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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.

The Company cannot predict the outcome of these proceedings 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 wireless 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.

23



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Item 2. Properties

At December 31, 2002, ACS Holdings telecommunications network includes
over 640 sheath miles of fiber optic cable, over 188 switching facilities and a
statewide wireless 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 188 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.

Wireless.ACS Holdings has four digital switching centers, 111 cell sites
and three 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 34
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 2002.

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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.

Dividends

The Company paid its parent, ACS Group, dividends of $2,346,906 during
2002. ACS Holdings bank credit agreement and indentures have certain
restrictions governing its ability to pay dividends to ACS Group.




Item 6. Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA

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



| |  |  | Effective January 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets.Upon adoption and completion of
the analysis required under SFAS No, 142, a transitional impairment
loss of $105,350 was recognized as the cumulative effect of a change in
accounting principle in the first quarter of 2002. The Company
performed its required annual goodwill impairment test as of October 1,
2002 and recognized an impairment loss of $64.8 million in operating
expenses for the year ended December 31, 2002.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On March 30, 2002, the Company approved a plan to sell its wireless
cable television service segment. As a result of this decision, the
operating revenue and expense of this segment has been classified as
discontinued operations for all periods presented.                                                                                                                                                                                                                                                                         
|
| |  |  | Certain reclassifications have been made to the 2001 and 2000
financial statements to make them conform to the current years
presentation.                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | 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.                                                                                                                                                                                 

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 Consolidated
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, 2002, 2001, 2000, and 1999
(dollars in thousands, except per share amounts

|                                                                                                                     |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |          |  
|-------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | - | -------- | ------- | ---- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | -------- | -
|                                                                                                                     |                                              |   | 2002     |         | 2001 |   | 2000    |         | 1999
|                                                                                                                     |                                              |   |          |         |      |   |         |         |     
|Operating Data:                                                                                                      |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|Operating revenues                                                                                                   |                                              | $ | 343,502  |         |      | $ | 332,215 |         |      | $ | 313,527 |         |   | $ | 192,786 |         
|Operating expenses                                                                                                   |                                              |   | 366,266  |         |      |   | 285,092 |         |      |   | 279,759 |         |   |   | 176,207 |         
|                                                                                                                     |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|Operating income (loss)                                                                                              |                                              |   | (22,764  | )       |      |   | 47,123  |         |      |   | 33,768  |         |   |   | 16,579  |         
|Other income (expense)                                                                                               |                                              |   | (46,910  | )       |      |   | (54,246 | )       |      |   | (58,701 | )       |   |   | (37,275 | )       
|                                                                                                                     |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|Loss before income taxes, discontinued operations and cumulative
cumulative effect of change in accounting principle |                                              |   | (69,674  | )       |      |   | (7,123  | )       |      |   | (24,933 | )       |   |   | (20,696 | )       
|Income tax benefit                                                                                                   |                                              |   |         |         |      |   | 195     |         |      |   | 197     |         |   |   | 301     |         
|                                                                                                                     |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|Loss from continuing operations                                                                                      |                                              |   | (69,674  | )       |      |   | (6,928  | )       |      |   | (24,736 | )       |   |   | (20,395 | )       
|Loss from discontinued operations                                                                                    |                                              |   | (7,632   | )       |      |   | (1,718  | )       |      |   | (917    | )       |   |   | (306    | )       
|                                                                                                                     |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|Loss before cumulative effect of change in accounting principle                                                      |                                              |   | (77,306  | )       |      |   | (8,646  | )       |      |   | (25,653 | )       |   |   | (20,701 | )       
|Cumulative effect of change in accounting principle                                                                  |                                              |   | (105,350 | )       |      |   |        |         |      |   |        |         |   |   |        |         
|                                                                                                                     |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|Net loss                                                                                                             |                                              | $ | (182,656 | )       |      | $ | (8,646  | )       |      | $ | (25,653 | )       |   | $ | (20,701 | )       
|                                                                                                                     |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|Balance Sheet Data (end of period)                                                                                   |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|                                                                                                                     | Total assets                                 |   | $        | 704,982 |      |   | $       | 903,542 |      |   | $       | 909,306 |   |   | $       | 937,711  |  
|                                                                                                                     | Long-term debt including current portion     |   |          | 592,831 |      |   |         | 596,603 |      |   |         | 599,642 |   |   |         | 598,407  |  
|                                                                                                                     | Stockholders equity                         |   |          | 18,618  |      |   |         | 208,678 |      |   |         | 231,153 |   |   |         | 266,541  |  
|Other Financial Data:                                                                                                |                                              |   |          |         |      |   |         |         |      |   |         |         |   |   |         |         
|                                                                                                                     | Cash provided (used) by operating activities |   | $        | 65,799  |      |   | $       | 76,638  |      |   | $       | 143,547 |   |   | $       | (50,648  | )
|                                                                                                                     | Cash used by investing activities            |   |          | (78,571 | )    |   |         | (94,483 | )    |   |         | (74,699 | ) |   |         | (774,653 | )
|                                                                                                                     | Cash provided (used) by financing activities |   |          | (9,675  | )    |   |         | (3,039  | )    |   |         | (15,958 | ) |   |         | 833,741  |  
|                                                                                                                     | Capital expenditures                         |   |          | 71,464  |      |   |         | 87,582  |      |   |         | 72,253  |   |   |         | 74,792   |  

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SELECTED HISTORICAL FINANCIAL DATA-ATU AND CENTURYTELS ALASKA PROPERTIES

The following table sets forth selected historical combined financial data
of CenturyTels Alaska Properties and ATU for the year ended December 31, 1998
and as of December 31, 1998 (dollars in thousands).

The Company derived the selected historical combined financial data for
CenturyTels Alaska Properties from the audited combined financial statements
and the related notes of CenturyTels Alaska Properties and is presented on
CenturyTels basis of accounting.

ACS Holdings derived the selected historical financial data for ATU from
the audited financial statements and the related notes of ATU. Consider the
following points for ATU in connection with the table:



| |  |  | 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.

|                                         |  |     |         |            |  |              |         |  
|---------------------------------------- |  | --- | ------- | ---------- |  | ------------ | ------- | -
|                                         |  |     |         |            |  | CenturyTel's
|                                         |  |     |         |            |  | Alaska      
|                                         |  | ATU |         | Properties
|                                         |  |     |         |           
|Operating Data:                          |  |     |         |            |  |              |         |  
|Operating revenues                       |  | $   | 157,097 |            |  | $            | 124,509 |  
|Operating expenses                       |  |     | 134,204 |            |  |              | 104,595 |  
|                                         |  |     |         |            |  |              |         |  
|Operating income                         |  |     | 22,893  |            |  |              | 19,914  |  
|Other income (expense)                   |  |     | (9,323  | )          |  |              | (1,049  | )
|                                         |  |     |         |            |  |              |         |  
|Income before income taxes               |  |     | 13,570  |            |  |              | 18,865  |  
|Income taxes                             |  |     |        |            |  |              | 9,218   |  
|                                         |  |     |         |            |  |              |         |  
|Net income                               |  | $   | 13,570  |            |  | $            | 9,647   |  
|                                         |  |     |         |            |  |              |         |  
|Balance Sheet Data (end of period):      |  |     |         |            |  |              |         |  
|Total assets                             |  | $   | 350,245 |            |  | $            | 472,660 |  
|Long-term debt including current portion |  |     | 172,521 |            |  |              | 43,408  |  
|Stockholders equity                     |  |     | 141,884 |            |  |              | 400,962 |  
|Other Financial Data:                    |  |     |         |            |  |              |         |  
|Cash provided by operating activities    |  | $   | 53,207  |            |  | $            | 38,291  |  
|Cash used by investing activities        |  |     | (5,659  | )          |  |              | (26,664 | )
|Cash used by financing activities        |  |     | (33,580 | )          |  |              | (3,770  | )
|Capital expenditures                     |  |     | 29,644  |            |  |              | 26,799  |  

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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, Accounting for the Effects of
Certain Types of Regulation,to the Companys wireline subsidiaries; and
possible changes in the demand for the Companys products and services. In
addition to these factors, actual future performance, outcomes and results may
differ materially because of other, more general, factors including (without
limitation) changes in general industry and market conditions and growth rates;
changes in interest rates or other general national, regional or local economic
conditions; governmental and public policy changes; changes in accounting
policies or practices adopted voluntarily or as required by accounting
principles generally accepted in the United States of America; and the
continued availability of financing in the amounts, at the terms and on the
conditions necessary to support the Companys future business.

Investors should also be aware that while 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 Century Telephone
Enterprises, Inc.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 wireless services
statewide. ATU provided long distance services through ATU Long Distance, Inc.
and wireless services through MACtel, Inc. These companies are now known as ACS
of Anchorage, Inc., ACS Long Distance, Inc. and ACS Wireless, Inc.

On January 1, 2001, the Company established ACS InfoSource, Inc. as a
separate operation and transferred to it the Companys yellow pages directory
advertising business and assets which were previously included as a component
of four different local telephone exchange carriers operating in Alaska which
are also wholly-owned subsidiaries of the Company.

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 wireless services;                 
| | - |  | ----------------------------------------------------
| |  |  | the provision of yellow pages directory advertising;
| |  |  | the provision of Internet services; and             

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| |  |  | 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 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 and
enhanced services.

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             
| |  |  | 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.

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.

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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 revenue is recognized when earned. The Company participates in toll
revenue pools with other telephone companies. Such pools are funded by toll
revenue and/or access charges regulated by the RCA within the intrastate
jurisdiction and the FCC within the interstate jurisdiction. Much of the
interstate access revenue is initially recorded based on estimates. These
estimates are derived from interim financial statements, available separations
studies and the most recent information available about achieved rates of
return. These estimates are subject to adjustment in future accounting periods
as additional operational information becomes available. To the extent that
disputes arise over revenue settlements, the Companys policy is to defer
revenue collected until settlement methodologies are resolved and finalized. At
December 31, 2002, the Company had recorded liabilities of $20.5 million
related to its estimate of refundable access revenue. Actual results could
vary from this estimate.

The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes reflect the temporary differences
between the financial and tax 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, 2002
would decrease by up to $90.4 million and its accumulated deficit would
decrease from $249.7 million to $159.3 million.

The local telephone exchange operations of the Company account for costs
in accordance with the accounting principles for regulated enterprises
prescribed by SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation.This accounting recognizes the economic effects of rate regulation
by recording cost and a return on investment as such amounts are recovered
through rates authorized by regulatory authorities. Accordingly, under SFAS No.
71, plant and equipment is depreciated over lives approved by regulators and
certain costs and obligations are deferred based upon approvals received from
regulators to permit recovery of such amounts in future years. Historically,
lives approved for regulatory purposes have approximated economically useful
lives. On July 21, 2002, the Company received an order from the RCA which
appears to extend lives approved for rate-making purposes beyond the
economically useful lives of the underlying assets. Management petitioned for
reconsideration, and the RCA has agreed to take additional testimony. A final
order on the matter is not expected until the second quarter of 2003. As of
December 31, 2002 the Company has deferred as a regulatory asset $0.9 million
of costs incurred in connection with regulatory rate making proceedings, which
will be amortized in future periods. If the Company were not following SFAS No.
71, these costs would have been charged to expense as incurred.

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. In accordance with the guidelines of this accounting
principle, goodwill and indefinite-lived intangible assets are no longer
amortized but will be assessed for impairment on at least an annual basis. SFAS
No. 142 requires that goodwill be tested for impairment at the reporting unit
level upon adoption and at least annually thereafter, utilizing a two-step
methodology. The initial step requires the Company to determine the fair value
of each reporting unit and compare it to the carrying value, including
goodwill, of such unit. If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be
impaired. The amount, if any, of the impairment is then
measured in the second step. The Company determined the fair value of each
reporting unit for purposes of this test primarily by using a discounted cash
flow valuation technique. Significant estimates used in the valuation include
estimates of future cash flows, both future short-term and long-term growth
rates,

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and estimated cost of capital for purposes of arriving at a discount
factor. At December 31, 2002, the Company had recorded goodwill of $77.2
million and had recorded a transitional impairment loss of $105.4 million and
an impairment loss of $64.8 million based on the annual impairment test.

Results of Operations

The following table summarizes ACS Holdings operations for the years
ended December 31, 2002, 2001, and 2000. Certain reclassifications have been
made to 2001 and 2000 to conform to the current presentation of ACS Holdings
consolidated operations.

|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |         | 
|--------------------------------------------------------------------------------------------------------- | -------------------------------------- | ----------------------------- | ------------------------ | ------- | ----------------------- | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                                          |                                        |                               |                          |         | Year Ended December 31,
|                                                                                                          |                                        |                               |                          |         |                        
|                                                                                                          |                                        |                               |                          |         | 2002                    |         | 2001   |         | 2000   
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |        
|                                                                                                          |                                        |                               |                          |         | (in thousands)         
|Operating revenues:                                                                                       |                                        |                               |                          |         |                         |         |        |         |         |         |         |        
|                                                                                                          | Local telephone:                       |                               |                          |         |                         |         |        |         |         |         |         |         |        
|                                                                                                          |                                        | Local network service         |                          | $       | 99,512                  |         |        | $       | 96,270  |         |         | $       | 94,098  |        
|                                                                                                          |                                        | Network access revenue        |                          |         | 108,335                 |         |        |         | 102,977 |         |         |         | 105,172 |        
|                                                                                                          |                                        | Deregulated revenue and other |                          |         | 18,600                  |         |        |         | 22,164  |         |         |         | 22,998  |        
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|                                                                                                          | Total local telephone                  |                               |                          | 226,447 |                         |         |        | 221,411 |         |         |         | 222,268 |        
|                                                                                                          | Wireless                               |                               |                          | 43,180  |                         |         |        | 41,894  |         |         |         | 41,155  |        
|                                                                                                          | Directory                              |                               |                          | 33,604  |                         |         |        | 33,870  |         |         |         | 29,156  |        
|                                                                                                          | Internet                               |                               |                          | 20,847  |                         |         |        | 13,724  |         |         |         | 9,170   |        
|                                                                                                          | Interexchange                          |                               |                          | 19,424  |                         |         |        | 21,316  |         |         |         | 11,778  |        
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|                                                                                                          |                                        |                               | Total operating revenues |         |                         | 343,502 |        |         |         | 332,215 |         |         |         | 313,527 | 
|Operating expenses:                                                                                       |                                        |                               |                          |         |                         |         |        |         |         |         |         |        
|                                                                                                          | Local telephone                        |                               |                          | 117,277 |                         |         |        | 120,465 |         |         |         | 131,542 |        
|                                                                                                          | Wireless                               |                               |                          | 27,912  |                         |         |        | 25,649  |         |         |         | 26,306  |        
|                                                                                                          | Directory                              |                               |                          | 14,170  |                         |         |        | 14,684  |         |         |         | 13,334  |        
|                                                                                                          | Internet                               |                               |                          | 29,502  |                         |         |        | 15,677  |         |         |         | 11,785  |        
|                                                                                                          | Interexchange                          |                               |                          | 27,547  |                         |         |        | 29,509  |         |         |         | 19,749  |        
|                                                                                                          | Unusual charges                        |                               |                          |        |                         |         |        |        |         |         |         | 5,288   |        
|                                                                                                          | Depreciation and amortization          |                               |                          | 82,940  |                         |         |        | 79,108  |         |         |         | 71,755  |        
|                                                                                                          | Loss on disposal of assets, net        |                               |                          | 2,163   |                         |         |        |        |         |         |         |        |        
|                                                                                                          | Goodwill impairment loss               |                               |                          | 64,755  |                         |         |        |        |         |         |         |        |        
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|                                                                                                          |                                        | Total operating expenses      |                          |         | 366,266                 |         |        |         | 285,092 |         |         |         | 279,759 |        
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|Operating income (loss)                                                                                   |                                        |                               | (22,764                  | )       |                         |         | 47,123 |         |         |         | 33,768  |        
|Other income and expense:                                                                                 |                                        |                               |                          |         |                         |         |        |         |         |         |         |        
|                                                                                                          | Interest expense                       |                               |                          | (49,113 | )                       |         |        | (57,565 | )       |         |         | (61,958 | )      
|                                                                                                          | Interest income and other              |                               |                          | 2,203   |                         |         |        | 3,250   |         |         |         | 3,560   |        
|                                                                                                          | Equity in income (loss) of investments |                               |                          |        |                         |         |        | 69      |         |         |         | (303    | )      
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|                                                                                                          |                                        | Total other income (expense)  |                          |         | (46,910                 | )       |        |         | (54,246 | )       |         |         | (58,701 | )      
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|Loss before income taxes, discontinued operations and cumulative
effect of change in accounting principle |                                        |                               | (69,674                  | )       |                         |         | (7,123 | )       |         |         | (24,933 | )      
|Income tax benefit                                                                                        |                                        |                               |                         |         |                         |         | 195    |         |         |         | 197     |        
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|Loss from continuing operations                                                                           |                                        |                               | (69,674                  | )       |                         |         | (6,928 | )       |         |         | (24,736 | )      
|Loss from discontinued operations                                                                         |                                        |                               | (7,632                   | )       |                         |         | (1,718 | )       |         |         | (917    | )      
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|Loss before cumulative effect of change in accounting principle                                           |                                        |                               | (77,306                  | )       |                         |         | (8,646 | )       |         |         | (25,653 | )      
|Cumulative effect of change in accounting principle                                                       |                                        |                               | (105,350                 | )       |                         |         |       |         |         |         |        |        
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        
|Net loss                                                                                                  |                                        | $                             | (182,656                 | )       |                         | $       | (8,646 | )       |         | $       | (25,653 | )      
|                                                                                                          |                                        |                               |                          |         |                         |         |        |         |         |         |         |         |         |        

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Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December 31, 2001

Operating Revenues

Operating revenues increased $11.3 million, or 3.4%, for the year ended
December 31, 2002 compared to the year ended December 31, 2001. Local
telephone, wireless and Internet revenues increased compared to the prior
period.

Local Telephone

Local telephone revenues, which consist of local network service, network
access revenue, and deregulated revenues and other, increased $5.0 million, or
2.3%, for the year ended December 31, 2002 compared to the same period in 2001.

The local network service component of local telephone revenues was $99.5
million during 2002 compared with $96.3 million during 2001.Revenue increased
$3.2 million or 3.4% from the prior year, while average access lines in service
decreased 1.0% to 327,965. The increase in revenue is due to an increase of
approximately $2.1 million in additional feature, service order, directory
assistance and wireless access revenue and approximately $1.1 million of
additional local private line revenue. The revenue increase from approximately
$4.9 million of rate increases for both retail and UNE local service rates
implemented during the fourth quarter of 2001 at ACSA, as discussed below, was
substantially offset by loss of retail market share to competition exacerbated
by below cost UNE rates coupled with the Companys promotion of discounted term
contracts designed to defend market share.

The Company believes it is 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 was implemented
in November 2001 and generated approximately $4.2 million in additional revenue
in 2002. The Company expects the RCA to continue to hold hearings during 2003
and to adjudicate final local service rates during 2003 or 2004.

The Company continued to experience loss of retail market share for local
network service in its Anchorage, Fairbanks and Juneau 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 it has experienced in certain of its markets is partially
attributable to below cost interconnection rates mandated by the RCA for UNEs.
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,
increasing the UNE rates from $13.85 to $14.92. The interim and refundable
rate increase was implemented in November 2001 and generated approximately $0.7
million in additional revenue during 2002. The Company expects the RCA to hold
hearings during 2003 and adjudicate final Anchorage UNE rates during 2003 or
2004. See Business  Regulation under Item 1 of Part I of this report for
further discussion.

Network access revenues increased by $5.4 million, or 5.2%, from $103.0
million in 2001 to $108.3 million in 2002. Network access revenue is based on a
regulated return on rate base and recovery of allowable expense associated with
the origination and termination of toll calls for the Companys retail and
resale customers. During the second quarter of 2002, the Company recognized as
revenue $11.1 million of previously deferred interstate access revenue related
to a dispute on interstate access rates for the Anchorage market based on a
favorable ruling by the District of Columbia Court of Appeals. After
consideration of the revenue recognized as a result of the favorable ruling by
the court, the decrease in network access revenue compared to the corresponding
period in 2001 is due primarily to a shift from retail and wholesale lines to
UNEs.

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Management expects that network access revenue will decline as a component
of local telephone revenue for the foreseeable future.

Deregulated and other revenues, which declined $3.6 million, or 16.1% from
2001, 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 and other
revenue was due primarily to a decrease in deregulated equipment sales of
approximately $3.0 million. CPE sales tend to fluctuate significantly from
quarter to quarter and management believes they have also been impacted by
recent economic concerns in the marketplace and technology alternatives.

Wireless

Wireless revenues increased $1.3 million, or 3.1%, to $43.2 million for
the year ended December 31, 2002 compared to $41.9 million for the year ended
December 31, 2001.This increase is due primarily to growth in average
subscribers of 4.0% from 78,027 in 2001 to 81,170 in 2002. Average revenue per
unit, or ARPU, decreased slightly from $44.74 in 2001 to $44.33 in 2002.

Directory

Although directory revenues decreased slightly to $33.6 million in 2002
from $33.9 million in 2001, the directory business continued its solid
profitable performance. Management expects the growth in directory revenue to
slow due to the recent economic uncertainty and its impacts on the advertising
and publishing marketplace and as other advertising media, such as the
Internet, compete for this business.

Internet

Internet revenues increased from $13.7 million in 2001 to $20.8 million in
2002  an increase of $7.1 million, or 51.9%.This increase is primarily due
to revenue associated with the Companys contract with the State of Alaska and
growth in DSL subscribers of 71.8% from 7,041 in 2001 to 12,096 in 2002. Also
contributing to the increase was the additional revenues resulting from the
acquisition of MosquitoNet in July of 2001.

On December 10, 2001, the Company entered into a five year contract with
the State of Alaska to provide a broad range of telecommunications services,
many of which will be provided over an IP network and supported by a service
center owned and operated by ACSI. Services under this contract began to be
implemented during the second quarter of 2002. The Company anticipates revenue
for this segment will increase in future periods as additional services are
provisioned under the terms of the contract. The Company anticipates
substantial capital investments of between $25 million and $30 million over the
term of the contract to support the telecommunications needs of this customer,
of which it has expended approximately $12.4 million through December 31, 2002.

Interexchange

Interexchange revenue decreased from $21.3 million in 2001 to $19.4
million in 2002  a decrease of $1.9 million, or 8.9%. The decrease was due to
a decline in long distance minutes of use from 219.6 million in 2001 to 153.4
million in 2002. Long distance subscribers increased from 65,705 at December
31, 2001 to 70,000 at December 31, 2002. The decline in minutes of use was due
to the Companys decision to terminate an unlimited $20 per month interstate
calling plan in May of 2001, increased competition in the marketplace, and the
popularity of discount long distance calling cards.

Operating Expenses

Operating expenses increased $81.2 million, or 28.5%, from $285.1 million
for the year ended December 31, 2001 to $366.3 million for the year ended
December 31, 2002.

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Local Telephone

The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and
property and other operating tax expense.Depreciation and amortization
associated with the operation of the local telephone segment is included in
total depreciation and amortization. Local telephone expense decreased from
$120.5 million for the year ended December 31, 2001 to $117.3 million for the
year ended December 31, 2002  a decrease of $3.2 million or 2.6%.As a
percentage of local telephone revenue, local telephone expense decreased from
54.4% for 2001 to 51.8% for 2002. These results reflect continued improvements
in the Companys cost structure, including workforce reductions and benefits
derived from the deployment of information systems.

Wireless

Wireless expense increased $2.3 million, or 8.8%, for the year ended
December 31, 2002 compared to the year ended December 31, 2001. This increase
is substantially due to an increase of minutes of use from 162.0 million in
2001 to 196.8 million in 2002.

Directory

Directory expense decreased $0.5 million from $14.7 million in 2001 to
$14.2 million in 2002. The decline in expenses is due to a decrease in costs of
goods sold in 2002.

Internet

Internet expenses increased by $13.8 million, or 88.2%. The increase in
Internet expense was due principally to start-up expenses associated with
commencing services under the State of Alaska telecommunications contract. On
December 10, 2001, the Company entered into a five year contract with the State
of Alaska to provide a broad range of telecommunications services, many of
which will be provided over an IP network and supported by a service center
owned and operated by ACSI. The Company anticipates expense for this segment to
level out or decline as it completes the integration of the State of Alaska
services.

Interexchange

Interexchange expenses decreased by $2.0 million, or 6.6%. The majority of
this decrease was the result of the decline in long distance minutes of use as
discussed under interexchange service revenue.

Depreciation and Amortization

Depreciation and amortization expense increased $3.8 million, or 4.8%, due
principally to increases in plant in service in 2002 and the adoption of
shorter depreciable lives for certain classes of assets over the corresponding
period of 2001, offset by ceasing goodwill amortization with the adoption of
SFAS No. 142, Goodwill and Intangible Assetson January 1, 2002. Depreciation
and amortization expense in 2001 included $7.7 million of goodwill
amortization. Under SFAS No. 142, goodwill is no longer amortized but is
instead subjected to an annual impairment test.

Loss on disposal of assets

The Company recorded a non-cash loss on disposal of assets of $2.2 million
during 2002 as a result of retiring certain assets no longer in use which were
not fully depreciated at their retirement date.

Goodwill impairment loss

The Company recorded a non-cash goodwill impairment charge during the
fourth quarter of 2002 of $64.8 million as a result of its annual goodwill
impairment test under SFAS No. 142, Goodwill and Intangible

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Assets. See Note 5 Goodwill and Other Intangible Assets in the Notes to Consolidated Financial
Statements included elsewhere in this 10-K for additional information.

Interest Expense and Interest Income and other

Interest expense decreased $8.5 million, or 14.7%, for the year ended
December 31, 2002 compared to the year ended December 31, 2001, principally as
a result of market effects on the Companys variable interest rate debt.In
addition, during the second quarter of 2002, the Company reversed previously
accrued interest expense of $1.7 million as a result of a favorable ruling by
the District of Columbia Court of Appeals related to a dispute on interstate
access rates for the Anchorage market. Interest income and other also declined
by $1.1 million, or 32.2%, as a result of a lower average invested cash balance
and lower market interest rates during 2002 compared to 2001.

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.

Discontinued Operations

On March 30, 2002, the Companys management approved a plan to offer for
sale its wireless cable television service segment. As a result of this
decision, the operating revenue and expense of this segment has been classified
as discontinued operations under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,for all periods presented and the assets and
liabilities of the disposal group have been written down to their fair value,
net of expected selling expense. The write down and results of operations of
this discontinued segment resulted in a charge to discontinued operations of
$7.6 million and $1.7 million for the periods ended December 31, 2002 and 2001,
respectively. The Company has fully reserved in the form of a valuation
allowance the income tax benefit of this discontinuance.

Cumulative Effect of Change in Accounting Principle

During the second quarter of fiscal 2002, the Company also completed the
transitional review for goodwill impairment required under SFAS No. 142,
Goodwill and Intangible Assets. This review indicated that goodwill recorded in
the local telephone, Internet and interexchange segments was impaired as of
January 1, 2002. Accordingly, the Company measured and recognized a
transitional impairment loss of $105.4 million as a cumulative effect of a
change in accounting principle. See Note 5 Goodwill and Other Intangible
Assets in the Notes to Consolidated Financial Statements included elsewhere in
this 10-K for additional discussion of the impact of this statement on the
Companys consolidated financial statements.

Net Loss

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

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. Wireless,
directory, Internet and interexchange revenues increased compared to the prior
period.

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Local Telephone

Local telephone revenues, which consist of local network service, network
access revenue, and deregulated revenues 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 2000, 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 2001.
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 it has experienced in certain of its markets is partially
attributable to below cost interconnection rates mandated by the RCA for UNEs.
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.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 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.

Wireless

Wireless revenues increased $0.7 million, or 1.8%, to $41.9 million for
the year ended December 31, 2001 compared to $41.2 million for the year ended
December 31, 2000.This growth in revenue is due to growth in average wireless
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 $46.03 in 2000 to $44.74 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.

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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.

Operating Expenses

Operating expenses increased $5.3 million, or 1.9%, from $279.8 million
for the year ended December 31, 2000 to $285.1 million for the year ended
December 31, 2001. Operating expenses decreased as a percentage of operating
revenues from 89.2% in 2000 to 85.8% 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.Depreciation and amortization
associated with the operation of the local telephone segment is included in
total depreciation and amortization. Local telephone expense decreased from
$131.5 million for the year ended December 31, 2000 to $120.5 million for the
year ended December 31, 2001  a decrease of $11.1 million or 8.4%.As a
percentage of local telephone revenue, local telephone expense decreased from
59.2% for 2000 to 54.4% 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.

Wireless

Wireless expense decreased $0.7 million, or 2.5%, for the year ended
December 31, 2001 compared to the year ended December 31, 2000. Wireless
expense was 63.9% of wireless revenues for 2000 and 61.2% of wireless revenues
for 2001.

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Directory

Directory expenses increased $1.4 million from $13.3 million in 2000 to
$14.7 million in 2001. As a percent of directory revenue, expenses were 43.4%
for 2001 compared to 45.7% 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.

Depreciation and Amortization

Depreciation and amortization expense increased $7.4 million, or 10.2%,
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.

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 $0.3 million, or 8.7%, 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.

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Discontinued Operations

On March 30, 2002, the Companys management approved a plan to offer for
sale its wireless cable television service segment. As a result of this
decision, the operating revenue and expense of this segment has been classified
as discontinued operations under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets,for all periods presented and the assets and
liabilities of the disposal group were written down to their fair value, net of
expected selling expense. The results of operations of this discontinued
segment resulted in a charge to discontinued operations of $1.7 million and
$0.9 million for the periods ended December 31, 2001 and 2000, respectively.
The Company has fully reserved in the form of a valuation allowance the income
tax benefit of this discontinuance.

Net Loss

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

Liquidity and Capital Resources

ACS Holdings has satisfied its cash requirements for operations, capital
expenditures and debt service primarily through internally generated funds, the
sale of ACS Group stock and subsequent contribution of capital by ACS Group,
and debt financing. For the twelve months ended December 31, 2002 the Companys
cash flows from operating activities were $65.8 million. At December 31, 2002,
the Company had approximately $25.7 million in net working capital, with
approximately $18.6 million represented by cash and cash equivalents and $3.4
million by restricted cash. As of December 31, 2002 the Company had $75.0
million of remaining capacity under its revolving credit facility, representing
100% of available capacity.

The Company has a $430.7 million bank credit agreement (Senior Credit
Facility) and $150.0 million in 9.375% senior subordinated notes due 2009,
representing substantially all of the Companys long-term debt of $592.8
million as of December 31, 2002.In addition, $17.3 million in 13% senior
discount debentures due 2011 are recorded at ACS Group and are collateralized
by substantially all assets of the Company. Interest on ACS Holdings senior
subordinated notes and ACS Groups senior discount debentures 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 $4.4 million in 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. The Company is in compliance with all of its debt covenants.
See Note 7 Long-term Obligations in the Notes to Consolidated Financial
Statements included elsewhere in this 10-K. During the second quarter of 2002,
the Companys lenders approved an amendment to its Senior Credit Facility that,
among other things, permits the Company to repurchase up to $15 million of its
outstanding common stock over the term of the Senior Credit Facility.

The Company employs an interest rate hedge transaction, which fixes at
5.99% the underlying variable rate on $217.5 million of the borrowings under
the Senior Credit Facility, expiring in June 2004. The underlying variable rate
for the Senior Credit Facility is based on the one, three or six month London
Interbank Offer Rate (LIBOR) at the Companys option, which is adjusted at
each rollover date.

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 CPE and other capital assets which the
Company believes will range between $25 million and $30 million over the term of the
agreement, of which approximately $12.4 million has been expended through
December 31, 2002. The Company intends to fund this commitment with cash on
hand and cash flows from operations.

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On July 15, 2002 the Company fulfilled a commitment to Neptune
Communications, L.L.C. (Neptune) to provide to that party a loan in the form
of an unsecured note receivable totaling $15 million in return for certain
consideration. The note bears interest at the applicable federal rate, which
was 5.61% at the date of issuance, and matures on July 15, 2022. Interest is
payable semiannually, but the borrower may elect to add the interest to the
principal in lieu of cash payments. The commitment was funded with cash on
hand. In connection with this note, Neptune has granted the Company an option
to purchase certain network assets of Neptune, no later than January 2, 2006,
at a price equal to the then outstanding loan balance. The Company has also
entered into a strategic agreement with Neptune for the life of the fiber optic
cable system owned by Neptune. The significant provisions of this agreement
are: i) purchase commitments by the Company for capacity in 2005 and 2007, the
final price and quantity of which are subject to future events, ii) Neptunes
restoration of the Companys traffic carried on another cable system, iii) and
specific interconnection arrangements between the Company and Neptune, should
the Company exercise its option to purchase certain network assets from
Neptune. The Company is currently renegotiating the terms and conditions of
this agreement and it is not possible to determine the ultimate outcome of
these negotiations at this time.

The following table summarizes the Companys contractual obligations and
commitments with quantifiable payment terms as of December 31, 2002:

|                                   |  |       |         |      |  |           |       |           |  |            |        |  |  |   |         |  |  |   |         | 
|---------------------------------- |  | ----- | ------- | ---- |  | --------- | ----- | --------- |  | ---------- | ------ |  |  | - | ------- |  |  | - | ------- | 
|                                   |  | Total |         | 2003 |  | 2004-2005 |       | 2006-2007 |  | Thereafter
|                                   |  |       |         |      |  |           |       |           |  |           
|Long-term debt                     |  | $     | 580,650 |      |  | $         | 4,350 |           |  | $          | 8,700  |  |  | $ | 290,700 |  |  | $ | 276,900 | 
|Capital leases                     |  |       | 12,181  |      |  |           | 1,583 |           |  |            | 2,620  |  |  |   | 2,054   |  |  |   | 5,924   | 
|Operating leases                   |  |       | 9,538   |      |  |           | 2,474 |           |  |            | 3,302  |  |  |   | 1,808   |  |  |   | 1,954   | 
|                                   |  |       |         |      |  |           |       |           |  |            |        |  |  |   |         |  |  |   |         | 
|Total contractual cash obligations |  | $     | 602,369 |      |  | $         | 8,407 |           |  | $          | 14,622 |  |  | $ | 294,562 |  |  | $ | 284,778 | 
|                                   |  |       |         |      |  |           |       |           |  |            |        |  |  |   |         |  |  |   |         | 

The local telephone network requires the timely maintenance of plant and
infrastructure. The Companys historical capital expenditures have been
significant. The construction and geographic expansion of the Companys
wireless 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 $15.0 million for an IP based network
and service center. Capital expenditures for 2002 were $71.4 million, including
4.2 million in capital leases, approximately $12.4 million necessary to meet
its obligations under a contract with the State of Alaska and approximately
$5.0 million for the first phase of its buildout of PCS licenses. The Company
anticipates capital spending of between $60 million and $65 million for 2003.
The Company intends to fund its future capital expenditures with cash on hand,
through internally generated cash flows, and if necessary, through borrowings
under the revolving credit facility.

The
Company has been authorized by its Board of Directors to evaluate the
possible disposition of its directory business, ACSIS. This
transaction, if completed, would result in a de-leveraging of the
Companys balance sheet and generate cash for other corporate
objectives. The Company expects to file on or about March 6,
2003, a preliminary prospectus with Canadian securities regulators
relating to a proposed public offering in Canada of ACSIS through a
Canadian income fund. Any prospective sale of ACSIS is subject to the
approval of the Companys Board of Directors, which is dependent
upon terms and pricing. Any such sale is also contingent upon a
number of conditions including approval by securities regulators, the
approval of an amendment of certain terms and conditions of the
Companys senior credit facility and market conditions. There
can be no assurance that the Company will consummate any transaction
to sell ACSIS.

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

The Company believes that it will have sufficient working capital provided
by operations and available borrowing capacity under the existing revolving
credit facility to service its debt and fund its operations, capital

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expenditures and other obligations over the next 12 months.The Companys
ability to service its debt and fund its operations, capital expenditures and
other obligations will be dependent upon its future financial performance,
which is, in turn, subject to future economic conditions and to financial,
business, regulatory and other factors, many of which are beyond the Companys
control.

Effect of New Accounting Standards

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002, and have been included in Note
20 Commitments, Contingencies and Guarantees in the Notes to Consolidated
Financial Statements included elsewhere in this 10-K. The recognition and
measurement provisions are effective on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company does not believe the
adoption of this interpretation will have a material impact on its financial
position, results of operations, or cash flows.

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 is evaluating, but has
not yet determined the impact of the adoption of this standard on its financial
position, results of operations and cash flows.

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

In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 will generally require gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. Accordingly, gains or losses from extinguishments of debt for
fiscal years beginning after May 15, 2002 will not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary item under the
provisions of APB Opinion No. 30. Upon adoption, any gain or loss on
extinguishment of debt previously classified as an extraordinary item in prior
periods presented that does not meet the criteria of APB Opinion No. 30 for
such classification will be reclassified to conform with the provisions of SFAS
No. 145. Earlier application of the provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 is encouraged. SFAS No. 145 does not have any impact
on the Companys results of operations for the current periods reported.

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities.SFAS No. 146 requires companies recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not believe the adoption of this statement will have a material impact on its
financial position, results of operations, or cash flows.

On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure.SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of

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SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company does not believe the adoption of this statement will have
a material impact on its financial position, results of operations, or cash
flows.

Outlook

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



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

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

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

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

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

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, 2002. 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, 2002. Weighted average
variable rates for the bank credit facilities are based on implied forward
rates in the LIBOR yield curve as of December 31, 2002. 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, 2002, 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.

|                                     |                 |                                           |       |                        |      |      |       |      |      |      |       |         |      |            |         |       |      |            |         |  |      |   |         |  |      |   |         |  |      |   |         |        |  | 
|------------------------------------ | --------------- | ----------------------------------------- | ----- | ---------------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | ------- | ---- | ---------- | ------- | ----- | ---- | ---------- | ------- |  | ---- | - | ------- |  | ---- | - | ------- |  | ---- | - | ------- | ------ |  | 
|                                     |                 |                                           |       | 2003                   |      | 2004 |       | 2005 |      | 2006 |       | 2007    |      | Thereafter |         | Total |      | Fair Value
|                                     |                 |                                           |       |                        |      |      |       |      |      |      |       |         |      |            |         |       |      |           
|                                     |                 |                                           |       | (dollars in thousands)
|Interest Bearing Liabilities:        |                 |                                           |       |                        |      |      |       |      |      |      |       |         |      |            |         |       |      |            |         |  |      |   |         |  |      |   |         |  |      |   |         |       
|Bank credit facility  tranche A     |                 | $                                         | 1,500 |                        |      | $    | 1,500 |      |      | $    | 1,500 |         |      | $          | 144,000 |       |      | $          |        |  |      | $ |        |  |      | $ | 148,500 |  |      | $ | 148,500 |       
|                                     |                 | Weighted average interest rate (variable) |       |                        | 3.62 | %    |       |      | 4.40 | %    |       |         | 5.53 | %          |         |       | 6.25 | %          |         |  |     |   |         |  |     |   |         |  | 4.95 | % |         |        |  | 
|Bank credit facility  tranche B     |                 | $                                         | 1,500 |                        |      | $    | 1,500 |      |      | $    | 1,500 |         |      | $          | 1,500   |       |      | $          | 142,500 |  |      | $ |        |  |      | $ | 148,500 |  |      | $ | 148,500 |       
|                                     |                 | Weighted average interest rate (variable) |       |                        | 4.37 | %    |       |      | 5.15 | %    |       |         | 6.28 | %          |         |       | 7.03 | %          |         |  | 7.52 | % |         |  |     |   |         |  | 6.07 | % |         |        |  | 
|Bank credit facility  tranche C     |                 | $                                         | 1,350 |                        |      | $    | 1,350 |      |      | $    | 1,350 |         |      | $          | 1,350   |       |      | $          | 1,350   |  |      | $ | 126,900 |  |      | $ | 133,650 |  |      | $ | 133,650 |       
|                                     |                 | Weighted average interest rate (variable) |       |                        | 4.62 | %    |       |      | 5.40 | %    |       |         | 6.53 | %          |         |       | 7.28 | %          |         |  | 7.80 | % |         |  | 8.11 | % |         |  | 6.62 | % |         |        |  | 
|Senior subordinated notes            |                 | $                                         |      |                        |      | $    |      |      |      | $    |      |         |      | $          |        |       |      | $          |        |  |      | $ | 150,000 |  |      | $ | 150,000 |  |      | $ | 107,250 |       
|                                     |                 | Average interest rate (fixed)             |       |                        | 9.38 | %    |       |      | 9.38 | %    |       |         | 9.38 | %          |         |       | 9.38 | %          |         |  | 9.38 | % |         |  | 9.38 | % |         |  | 9.38 | % |         |        |  | 
|Capital leases and other long-term   |                 | $                                         | 1,583 |                        |      | $    | 1,710 |      |      | $    | 910   |         |      | $          | 996     |       |      | $          | 1,058   |  |      | $ | 5,924   |  |      | $ | 12,181  |  |      | $ | 12,181  |       
|                                     |                 | Average interest rate (fixed)             |       |                        | 8.06 | %    |       |      | 8.09 | %    |       |         | 8.11 | %          |         |       | 8.13 | %          |         |  | 8.16 | % |         |  | 9.46 | % |         |  | 8.34 | % |         |        |  | 
|Interest Rate Derivatives:           |                 |                                           |       |                        |      |      |       |      |      |      |       |         |      |            |         |       |      |            |         |  |      |   |         |  |      |   |         |  |      |   |         |       
|Variable to Fixed Interest Rate Swap |                 |                                           |       |                        |      |      |       |      |      |      |       |         |      |            |         |       |      |            |         |  |      |   |         |  |      |   |         |  |      |   |         |       
|                                     | Notional amount |                                           |       |                        |      |      |       |      |      |      | $     | 217,500 |      |            |         |       |      |            |         |  |      |   |         |  |      |   |         |  |      |   | $       | 14,152 | 
|                                     |                 | Fixed Rate Payable                        |       |                        | 5.99 | %    |       |      | 5.99 | %    |       |         |     |            |         |       |     |            |         |  |     |   |         |  |     |   |         |  | 5.99 | % |         |        |  | 
|                                     |                 | Weighted average Variable
Rate Receivable |       |                        | 1.37 | %    |       |      | 1.61 | %    |       |         |     |            |         |       |     |            |         |  |     |   |         |  |     |   |         |  | 1.49 | % |         |        |  | 

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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,
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
|                                     |                 |                                           |       |                        |      |      |       |      |      |      |       |         |      |            |       |       |      |      
|                                     |                 |                                           |       | (dollars in thousands)
|Interest Bearing Liabilities:        |                 |                                           |       |                        |      |      |       |      |      |      |       |         |      |            |       |       |      |       |         |  |      |   |         |  |      |   |         |  |      |   |         |       
|Bank credit facility  tranche A     |                 | $                                         | 1,500 |                        |      | $    | 1,500 |      |      | $    | 1,500 |         |      | $          | 1,500 |       |      | $     | 144,000 |  |      | $ |        |  |      | $ | 150,000 |  |      | $ | 150,000 |       
|                                     |                 | Weighted 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 |       
|                                     |                 | Weighted 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 |       
|                                     |                 | Weighted 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 | % |         |        |  | 




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 2003 Annual Meeting of
Stockholders (the Proxy Statement), or by an amendment to this report to be
filed on or before April 30, 2003 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  |  |     | 69 |          |  | Chairman and Chief Executive Officer                         
|                     |  |     |    |          |  |                                                              
|Wesley E. Carson     |  |     | 52 |          |  | President                                                    
|                     |  |     |    |          |  |                                                              
|Kevin P. Hemenway    |  |     | 42 |          |  | Senior Vice President, Chief Financial Officer, and Treasurer
|                     |  |     |    |          |  |                                                              
|Leonard A. Steinberg |  |     | 49 |          |  | Vice President, General Counsel and Corporate Secretary      
|                     |  |     |    |          |  |                                                              
|Byron I. Mallott     |  |     | 60 |          |  | Director                                                     
|                     |  |     |    |          |  |                                                              
|W. Dexter Paine, III |  |     | 42 |          |  | Director                                                     
|                     |  |     |    |          |  |                                                              
|Saul A. Fox          |  |     | 49 |          |  | Director                                                     
|                     |  |     |    |          |  |                                                              
|Wray T. Thorn        |  |     | 31 |          |  | Director                                                     
|                     |  |     |    |          |  |                                                              
|Brian Rogers         |  |     | 52 |          |  | Director                                                     
|                     |  |     |    |          |  |                                                              
|Charles P. Sitkin    |  |     | 68 |          |  | 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 Holdings President, has been with the Company since
its inception.On October 7, 1999, Mr. Carson (previously an Executive Vice
President) was appointed President and Chief Operating Officer. Mr. Robinson
had previously held the title of President. Mr. Carson served as ACSs Chief
Operating Officer during 1999 and 2000, and the President and Chief
Administrative Officer during 2001. 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 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.

46



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Kevin P. Hemenwayis Senior Vice President, Chief Financial Officer and
Treasurer, 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 12 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 Bachelor of Science in Business Administration, majoring in
accounting, and is a non-practicing CPA certificate holder registered in the
State of Nebraska.

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.

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 Sealaska Corporation over
a period of nearly 20 years.Mr. Mallott has also served in various political
appointments and elected positions and presently serves on the Boards of Alaska
Air Group, Inc. and Native American Bank, N.A.

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
Kravis & Roberts & Co (KKR). Prior to joining KKR, 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.

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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 the Board Chair and a member of
all committees, including the Universitys Finance and Audit Committee.He
holds a Master in Public Administration degree from the Kennedy School of
Government, Harvard University.

Charles P. Sitkin, a director since February 2003, is currently an
independent consultant assisting enterprises with strategic and organizational
planning. Prior to 1994, Mr. Sitkins experience includes being the National
Director of Management Consulting at R.W. Beck and Associates, a Partner and
Office Director of Information Technology at Ernest & Young and various
leadership positions at the Boeing Company. Mr. Sitkin is a Certified
Management Consultant and is a graduate from Lafayette College and the
University of Washington.

Carl H. Marrs, a director since July 1999, left the board in October 2002
for personal reasons unrelated to ACS Holdings.




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.

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PART IV




Item 14. Controls and Procedures

Evaluation of disclosure controls and procedures

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

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

Changes in internal controls

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




Item 15. 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,
2002.                                                                                                                                           

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| | (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. (1)                                                                                               
|        |  |                                                                                                                                                                                                                                                                         
|2.2     |  | Asset Purchase Agreement, dated as of October 20, 1998, by and
between Alaska Communications Systems, Inc. and the Municipality of
Anchorage (1)                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|3.1     |  | Amended and Restated Certificate of Incorporation of the Registrant (4)                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                         
|3.2     |  | Amended and Restated By-Laws of the Registrant (4)                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                         
|4.1     |  | Specimen of Common Stock Certificate (4)                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                         
|4.2     |  | Stockholders Agreement, dated as of May 14, 1999, by and among the
Registrant and the Investors listed on the signature pages thereto (1)                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                         
|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 (1)                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|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)                                                                                                   
|        |  |                                                                                                                                                                                                                                                                         
|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 (1)                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|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 (1)                                                 
|        |  |                                                                                                                                                                                                                                                                         
|4.7     |  | Indenture, dated as of May 14, 1999, by and between the Registrant
and The Bank of New York (1)                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                         
|4.8     |  | First Amendment, dated as of October 29, 1999, to Indenture listed
as Exhibit No. 4.7 (2)                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                         
|4.9     |  | Form of Second Amendment dated as of November 17, 1999 to Indenture
listed as Exhibit No. 4.7 (4)                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                         
|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. (1)                                                                                                         
|        |  |                                                                                                                                                                                                                                                                         
|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 (1)                         
|        |  |                                                                                                                                                                                                                                                                         
|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. (1)                                                                                  
|        |  |                                                                                                                                                                                                                                                                         
|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 (1)
|        |  |                                                                                                                                                                                                                                                                         
|10.4    |  | Amendment No. 1, dated as of October 19, 1999 to Credit Agreement
listed as Exhibit No. 10.3 (2)                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|10.5    |  | Employment Agreement, dated as of May 3, 2001 by and among Alaska
Communications Systems Group, Inc., the Registrant and Charles E.
Robinson (6)                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                         
|10.6    |  | Employment Agreement, dated as of May 3, 2001 by and among Alaska
Communications Systems Group, Inc., the Registrant and Wesley E. Carson (6)                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                         
|10.7    |  | ALEC Holdings, Inc. 1999 Stock Incentive Plan (1)                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                         
|10.8    |  | Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan (4)                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                         
|10.9    |  | Alaska Communications Systems Group, Inc. 1999 Non-Employee
Director Compensation Plan (4)                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                         
|10.10   |  | Alaska Communications Systems Group, Inc. 1999 Employee Stock
Purchase Plan (4)                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                         
|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 (5)                                                                                         
|        |  |                                                                                                                                                                                                                                                                         
|10.12   |  | Amendment and waiver, dated as of June 27, 2002 to the Credit
Agreement listed as Exhibit No. 10.3 (7)                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                         
|21.1    |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                         
|24.1    |  | Powers of Attorney (included on signature page) (3)                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                         
|99.1    |  | Certification of Charles R. Robinson, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The
Sarbanes-Oxley Act of 2002.                                                                                                         

50



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|        |  |                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                              
|No.     |  | Description                                                                                                                                                  
|        |  |                                                                                                                                                              
|99.2    |  | Certification of Kevin P. Hemenway, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The
Sarbanes-Oxley Act of 2002.



---

|(1) |  | Filed as an exhibit to the Registrants Registration Statement on
Form S-4 file No. 333-82361 and incorporated by reference thereto.                                         
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an exhibit to the Registrants Form 8-K filed on November
5, 1999 and incorporated by reference thereto.                                                            
|   
|(3) |  | Previously filed on October 8, 1999 and incorporated by reference
thereto.                                                                                                   
|   
|(4) |  | 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.
|   
|(5) |  | Filed as an exhibit to the Registrants Form 10-K filed on March
29, 2002 and incorporated by reference thereto.                                                             
|   
|(6) |  | Filed as an exhibit to the Registrants Form 10-Q filed on April
30, 2002 and incorporated by reference thereto.                                                             
|   
|(7) |  | Filed as an exhibit to the Registrants Form 10-Q filed on July 31,
2002 and incorporated by reference thereto.                                                              

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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 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Wesley E. Carson

Wesley E. Carson         |  | President                                                                                   |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Kevin P. Hemenway

Kevin P. Hemenway       |  | Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Accounting Officer) |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Leonard A. Steinberg

Leonard A. Steinberg |  | Vice President, General Counsel and
Corporate Secretary                                     |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Byron I. Mallott

Byron I. Mallott         |  | Director                                                                                    |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Brian Rogers
Brian Rogers                  |  | Director                                                                                    |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ W. Dexter Paine, III

W. Dexter Paine, III |  | Director                                                                                    |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Saul A. Fox

Saul A. Fox                   |  | Director                                                                                    |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Wray T. Thorn

Wray T. Thorn               |  | Director                                                                                    |  | March 6, 2003
|                                               |  |                                                                                             |  |              
|/s/ Charles P. Sitkin

Charles P. Sitkin       |  | Director                                                                                    |  | March 6, 2003

52



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##### Table of Contents






CERTIFICATIONS

Form of Sarbanes-Oxley Section 302(a) Certification

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



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



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



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



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



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

|                    |  |                                                                                                                                            
|------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Date: March 6, 2003 |  | /s/ Charles E. Robinson

Charles E. Robinson
Chief Executive Officer and
Chairman of the Board
Alaska Communications Systems Holdings, Inc.

53



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##### Table of Contents



Form of Sarbanes-Oxley Section 302(a) Certification

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



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



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



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



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



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

|                    |  |                                                                                                                                               
|------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Date: March 6, 2003 |  | /s/ Kevin P. Hemenway

Kevin P. Hemenway
Senior Vice President, Chief
Financial Officer and Treasurer
Alaska Communications Systems Group, Inc

54



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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, 2002 and 2001                                       |  | F-3 
|                                                                                               |  |     
|Consolidated Statements of Operations  Years Ended December 31, 2002, 2001 and 2000           |  | F-4 
|                                                                                               |  |     
|Consolidated Statements of Stockholders Equity  Years Ended December 31, 2002, 2001 and 2000 |  | F-5 
|                                                                                               |  |     
|Consolidated Statements of Cash Flows  Years Ended December 31, 2002, 2001 and 2000           |  | F-6 
|                                                                                               |  |     
|Notes to Consolidated Financial Statements                                                     |  | F-7 
|                                                                                               |  |     
|Schedule II  Valuation and Qualifying Accounts                                                |  | F-31

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholder
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, 2002
and 2001, 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, 2002. Our audits included the financial statement schedule listed in Item
15(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, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 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.

As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2002 the Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.

/s/ DELOITTE & TOUCHE LLP



Portland, Oregon
February 20, 2003

F-2



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Consolidated Balance Sheets
December 31, 2002 and 2001
(In Thousands Except Share Amounts)

|                                                                |                                                                                       |                                      |                            |          |   |        |           |         |   |         | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------ | -------------------------- | -------- | - | ------ | --------- | ------- | - | ------- | 
|                                                                |                                                                                       | 2002                                 |                            | 2001    
|                                                                |                                                                                       |                                      |                            |         
|                                                                |                                                                                       | Assets                               |                            |          |   |        |           |         |   |        
|Current assets:                                                 |                                                                                       |                                      |                            |          |   |        |           |        
|                                                                | Cash and cash equivalents                                                             |                                      | $                          | 18,565   |   |        | $         | 41,012  |  
|                                                                | Restricted cash                                                                       |                                      |                            | 3,440    |   |        |           | 6,932   |  
|                                                                | Accounts receivable-trade, net of allowance of $6,075 and $4,944                      |                                      |                            | 48,820   |   |        |           | 46,912  |  
|                                                                | Accounts receivable-affiliate                                                         |                                      |                            | 3,761    |   |        |           | 2,475   |  
|                                                                | Materials and supplies                                                                |                                      |                            | 11,203   |   |        |           | 8,723   |  
|                                                                | Prepayments and other current assets                                                  |                                      |                            | 6,172    |   |        |           | 6,032   |  
|                                                                | Assets held for sale                                                                  |                                      |                            | 261      |   |        |           |        |  
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        
|                                                                |                                                                                       |                                      | Total current assets       |          |   | 92,222 |           |         |   | 112,086 | 
|Property, plant and equipment                                   |                                                                                       |                                      | 1,090,365                  |          |   |        | 1,036,829 |        
|Less: Accumulated depreciation and amortization                 |                                                                                       |                                      | 625,276                    |          |   |        | 557,849   |        
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        
|                                                                | Property, plant and equipment, net                                                    |                                      |                            | 465,089  |   |        |           | 478,980 |  
|Goodwill                                                        |                                                                                       |                                      | 77,225                     |          |   |        | 250,495   |        
|Intangible assets, net                                          |                                                                                       |                                      | 23,269                     |          |   |        | 26,785    |        
|Debt issuance costs, net of amortization of $15,883 and $11,692 |                                                                                       |                                      | 21,130                     |          |   |        | 25,321    |        
|Deferred charges and other assets                               |                                                                                       |                                      | 26,047                     |          |   |        | 9,875     |        
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        
|Total assets                                                    |                                                                                       | $                                    | 704,982                    |          |   | $      | 903,542   |        
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        
|                                                                |                                                                                       | Liabilities and Stockholders Equity |                            |          |   |        |           |         |   |        
|Current liabilities:                                            |                                                                                       |                                      |                            |          |   |        |           |        
|                                                                | Current portion of long-term obligations                                              |                                      | $                          | 5,933    |   |        | $         | 5,107   |  
|                                                                | Accounts payable-affiliate                                                            |                                      |                            | 1,319    |   |        |           | 1,303   |  
|                                                                | Accounts payable, accrued and other current liabilities                               |                                      |                            | 49,480   |   |        |           | 62,765  |  
|                                                                | Advance billings and customer deposits                                                |                                      |                            | 9,804    |   |        |           | 9,190   |  
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        
|                                                                |                                                                                       |                                      | Total current liabilities  |          |   | 66,536 |           |         |   | 78,365  | 
|Long-term obligations, net of current portion                   |                                                                                       |                                      | 586,898                    |          |   |        | 591,496   |        
|Other deferred credits and long-term liabilities                |                                                                                       |                                      | 32,930                     |          |   |        | 25,003    |        
|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                                                                   |                                      |                            | (249,738 | ) |        |           | (64,735 | )
|                                                                | Accumulated other comprehensive loss                                                  |                                      |                            | (18,886  | ) |        |           | (13,829 | )
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        
|                                                                |                                                                                       |                                      | Total stockholders equity |          |   | 18,618 |           |         |   | 208,678 | 
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        
|Total liabilities and stockholders equity                      |                                                                                       | $                                    | 704,982                    |          |   | $      | 903,542   |        
|                                                                |                                                                                       |                                      |                            |          |   |        |           |        

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, 2002, 2001 and 2000
(In Thousands)

|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |         |         |  
|--------------------------------------------------------------------------------------------------------- | -------------------------------------- | ---------------------------- | -------- | ------- | ------- | ---- | ------ | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                                                          |                                        |                              |          | 2002    |         | 2001 |        | 2000   
|                                                                                                          |                                        |                              |          |         |         |      |        |        
|Operating revenues:                                                                                       |                                        |                              |          |         |         |      |        |         |         |   |         |        
|                                                                                                          | Local telephone                        |                              | $        | 226,447 |         |      | $      | 221,411 |         |   | $       | 222,268 |        
|                                                                                                          | Wireless                               |                              |          | 43,180  |         |      |        | 41,894  |         |   |         | 41,155  |        
|                                                                                                          | Directory                              |                              |          | 33,604  |         |      |        | 33,870  |         |   |         | 29,156  |        
|                                                                                                          | Internet                               |                              |          | 20,847  |         |      |        | 13,724  |         |   |         | 9,170   |        
|                                                                                                          | Interexchange                          |                              |          | 19,424  |         |      |        | 21,316  |         |   |         | 11,778  |        
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|                                                                                                          |                                        | Total operating revenues     |          |         | 343,502 |      |        |         | 332,215 |   |         |         | 313,527 |  
|Operating expenses:                                                                                       |                                        |                              |          |         |         |      |        |         |         |   |         |        
|                                                                                                          | Local telephone                        |                              |          | 117,277 |         |      |        | 120,465 |         |   |         | 131,542 |        
|                                                                                                          | Wireless                               |                              |          | 27,912  |         |      |        | 25,649  |         |   |         | 26,306  |        
|                                                                                                          | Directory                              |                              |          | 14,170  |         |      |        | 14,684  |         |   |         | 13,334  |        
|                                                                                                          | Internet                               |                              |          | 29,502  |         |      |        | 15,677  |         |   |         | 11,785  |        
|                                                                                                          | Interexchange                          |                              |          | 27,547  |         |      |        | 29,509  |         |   |         | 19,749  |        
|                                                                                                          | Unusual charges                        |                              |          |        |         |      |        |        |         |   |         | 5,288   |        
|                                                                                                          | Depreciation and amortization          |                              |          | 82,940  |         |      |        | 79,108  |         |   |         | 71,755  |        
|                                                                                                          | Loss on disposal of assets, net        |                              |          | 2,163   |         |      |        |        |         |   |         |        |        
|                                                                                                          | Goodwill impairment loss               |                              |          | 64,755  |         |      |        |        |         |   |         |        |        
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|                                                                                                          |                                        | Total operating expenses     |          |         | 366,266 |      |        |         | 285,092 |   |         |         | 279,759 |  
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|Operating income (loss)                                                                                   |                                        |                              | (22,764  | )       |         |      | 47,123 |         |         |   | 33,768  |        
|Other income and expense:                                                                                 |                                        |                              |          |         |         |      |        |         |         |   |         |        
|                                                                                                          | Interest expense                       |                              |          | (49,113 | )       |      |        | (57,565 | )       |   |         | (61,958 | )      
|                                                                                                          | Interest income and other              |                              |          | 2,203   |         |      |        | 3,250   |         |   |         | 3,560   |        
|                                                                                                          | Equity in income (loss) of investments |                              |          |        |         |      |        | 69      |         |   |         | (303    | )      
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|                                                                                                          |                                        | Total other income (expense) |          |         | (46,910 | )    |        |         | (54,246 | ) |         |         | (58,701 | )
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|Loss before income taxes, discontinued operations and cumulative
effect of change in accounting principle |                                        |                              | (69,674  | )       |         |      | (7,123 | )       |         |   | (24,933 | )      
|Income tax benefit                                                                                        |                                        |                              |         |         |         |      | 195    |         |         |   | 197     |        
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|Loss from continuing operations                                                                           |                                        |                              | (69,674  | )       |         |      | (6,928 | )       |         |   | (24,736 | )      
|Loss from discontinued operations                                                                         |                                        |                              | (7,632   | )       |         |      | (1,718 | )       |         |   | (917    | )      
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|Loss before cumulative effect of change in accounting principle                                           |                                        |                              | (77,306  | )       |         |      | (8,646 | )       |         |   | (25,653 | )      
|Cumulative effect of change in accounting principle                                                       |                                        |                              | (105,350 | )       |         |      |       |         |         |   |        |        
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        
|Net loss                                                                                                  |                                        | $                            | (182,656 | )       |         | $    | (8,646 | )       |         | $ | (25,653 | )      
|                                                                                                          |                                        |                              |          |         |         |      |        |         |         |   |         |        

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, 2002, 2001 and 2000
(In Thousands)

|                                  |                                      |   |        |   |             |   |             |   |               |   |               |          |   |   |             |         |   |   |          |          |  
|--------------------------------- | ------------------------------------ | - | ------ | - | ----------- | - | ----------- | - | ------------- | - | ------------- | -------- | - | - | ----------- | ------- | - | - | -------- | -------- | -
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |          |   |   | Accumulated |         |   |   |         
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |          |   |   | Other       |         |   |   |         
|                                  |                                      |   | Common |   | Contributed |   | Accumulated |   | Comprehensive |   | Stockholder's
|                                  |                                      |   | Stock  |   | Capital     |   | Deficit     |   | Loss          |   | Equity       
|                                  |                                      |   |        |   |             |   |             |   |               |   |              
|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  |         
|Dividends                         |                                      |   |       |   |             |   |            |   |               |   | (2,347        | )        |   |   |            |         |   |   | (2,347   | )       
|Components of Comprehensive loss: |                                      |   |        |   |             |   |             |   |               |   |               |          |   |   |             |         |   |   |          |         
|                                  | Net loss                             |   |        |  |             |   |             |  |               |   |               | (182,656 | ) |   |             |        |   |   |          | (182,656 | )
|                                  | Minimum pension liability adjustment |   |        |  |             |   |             |  |               |   |               |         |   |   |             | (2,342  | ) |   |          | (2,342   | )
|                                  | Interest rate swap marked to market  |   |        |  |             |   |             |  |               |   |               |         |   |   |             | (2,715  | ) |   |          | (2,715   | )
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |          |   |   |             |         |   |   |          |         
|Total comprehensive loss          |                                      |   |        |   |             |   |             |   |               |   |               |          |   |   |             |         |   |   | (187,713 | )       
|Balance, December 31, 2002        |                                      | $ |       |   |             | $ | 287,242     |   |               | $ | (249,738      | )        |   | $ | (18,886     | )       |   | $ | 18,618   |         
|                                  |                                      |   |        |   |             |   |             |   |               |   |               |          |   |   |             |         |   |   |          |         

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, 2002, 2001 and 2000
(In Thousands)

|                                                                                |                                                     |   |          |         |      |   |         |        |   |   |         |        |  
|------------------------------------------------------------------------------- | --------------------------------------------------- | - | -------- | ------- | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                |                                                     |   | 2002     |         | 2001 |   | 2000   
|                                                                                |                                                     |   |          |         |      |   |        
|Cash Flows from Operating Activities:                                           |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Net loss                                                                        |                                                     | $ | (182,656 | )       |      | $ | (8,646  | )      |   | $ | (25,653 | )     
|Adjustments to reconcile net loss to net cash provided by operating activities: |                                                     |   |          |         |      |   |         |        |   |   |         |       
|                                                                                | Loss on discontinued operations                     |   |          | 7,632   |      |   |         | 1,718  |   |   |         | 917    |  
|                                                                                | Cumulative effect of change in accounting principle |   |          | 105,350 |      |   |         |       |   |   |         |       |  
|                                                                                | Depreciation and amortization                       |   |          | 82,940  |      |   |         | 79,108 |   |   |         | 71,755 |  
|                                                                                | Loss on disposal of assets, net                     |   |          | 2,163   |      |   |         |       |   |   |         |       |  
|                                                                                | Goodwill impairment loss                            |   |          | 64,755  |      |   |         |       |   |   |         |       |  
|                                                                                | Amortization of debt issuance costs                 |   |          | 4,191   |      |   |         | 4,312  |   |   |         | 4,526  |  
|                                                                                | Investment tax credits                              |   |          |        |      |   |         | (195   | ) |   |         | (197   | )
|                                                                                | Capitalized interest                                |   |          | (1,157  | )    |   |         | (1,416 | ) |   |         | (1,096 | )
|                                                                                | Other deferred credits                              |   |          | 3,073   |      |   |         | 418    |   |   |         | (1,141 | )
|                                                                                | Changes in components of working capital:           |   |          |         |      |   |         |        |   |   |         |        |  
|                                                                                | Accounts receivable and other current assets        |   |          | (4,722  | )    |   |         | 95     |   |   |         | (6,443 | )
|                                                                                | Accounts receivable  affiliate                     |   |          | (1,286  | )    |   |         | (959   | ) |   |         | 96,160 |  
|                                                                                | Accounts payable and other current liabilities      |   |          | (12,460 | )    |   |         | 5,604  |   |   |         | 4,126  |  
|                                                                                | Other                                               |   |          | (1,375  | )    |   |         | (2,386 | ) |   |         | 1,000  |  
|                                                                                | Net cash used in discontinued operations            |   |          | (649    | )    |   |         | (1,015 | ) |   |         | (407   | )
|                                                                                |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Net cash provided by operating activities                                       |                                                     |   | 65,799   |         |      |   | 76,638  |        |   |   | 143,547 |       
|Cash Flows from Investing Activities:                                           |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Construction and capital expenditures, net of capitalized interest              |                                                     |   | (66,977  | )       |      |   | (87,582 | )      |   |   | (69,101 | )     
|Acquisition of PCS licenses                                                     |                                                     |   | (300     | )       |      |   |        |        |   |   |        |       
|Release of funds from escrow                                                    |                                                     |   | 3,706    |         |      |   |        |        |   |   |        |       
|Issuance of note receivable                                                     |                                                     |   | (15,000  | )       |      |   |        |        |   |   |        |       
|Proceeds from liquidation of minority interest investment                       |                                                     |   |         |         |      |   | 1,370   |        |   |   |        |       
|Issuance of note receivable from officer                                        |                                                     |   |         |         |      |   | (339    | )      |   |   |        |       
|Cost of acquisitions, net of cash received                                      |                                                     |   |         |         |      |   | (1,000  | )      |   |   | (5,598  | )     
|Placement of funds in escrow                                                    |                                                     |   |         |         |      |   | (6,932  | )      |   |   |        |       
|                                                                                |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Net cash used by investing activities                                           |                                                     |   | (78,571  | )       |      |   | (94,483 | )      |   |   | (74,699 | )     
|Cash Flows from Financing Activities:                                           |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Payments on long-term debt                                                      |                                                     |   | (7,328   | )       |      |   | (3,039  | )      |   |   | (6,223  | )     
|Dividends                                                                       |                                                     |   | (2,347   | )       |      |   |        |        |   |   | (9,735  | )     
|                                                                                |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Net cash used by financing activities                                           |                                                     |   | (9,675   | )       |      |   | (3,039  | )      |   |   | (15,958 | )     
|Increase (decrease) in cash                                                     |                                                     |   | (22,447  | )       |      |   | (20,884 | )      |   |   | 52,890  |       
|Cash and cash equivalents at beginning of the year                              |                                                     |   | 41,012   |         |      |   | 61,896  |        |   |   | 9,006   |       
|                                                                                |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Cash and cash equivalents at the end of the year                                |                                                     | $ | 18,565   |         |      | $ | 41,012  |        |   | $ | 61,896  |       
|                                                                                |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Supplemental Cash Flow Data:                                                    |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Interest paid                                                                   |                                                     | $ | 45,830   |         |      | $ | 49,456  |        |   | $ | 57,418  |       
|Income taxes paid                                                               |                                                     |   |         |         |      |   |        |        |   |   |        |       
|Supplemental Noncash Transactions:                                              |                                                     |   |          |         |      |   |         |        |   |   |         |       
|Property acquired under capital leases                                          |                                                     | $ | 4,187    |         |      | $ |        |        |   | $ | 3,152   |       
|Note payable in connection with acquisition                                     |                                                     |   |         |         |      |   |        |        |   |   | 2,250   |       
|Minimum pension liability adjustment                                            |                                                     |   | 2,342    |         |      |   | 2,392   |        |   |   |        |       
|Interest rate swap marked to market                                             |                                                     |   | 2,715    |         |      |   | 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, 2002, 2001 and 2000
(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) a Delaware corporation, is engaged principally in
providing local telephone, wireless, directory, 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. 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, 2002 and 2001 and for the years ended December 31, 2002, 2001
and 2000 and represent the consolidated financial position, results of
operations and cash flows principally of the following entities:



| |  | Alaska Communications Systems Holdings, Inc.
|- |  | --------------------------------------------
| 
| |  | ACS of Alaska, Inc. (ACSAK)               
| 
| |  | ACS of the Northland, Inc. (ACSN)         
| 
| |  | ACS of Fairbanks, Inc. (ACSF)             
| 
| |  | ACS of Anchorage, Inc. (ACSA)             
| 
| |  | ACS Wireless, Inc. (ACSW)                 
| 
| |  | ACS Long Distance, Inc. (ACSLD)           
| 
| |  | ACS Television, L.L.C. (ACSTV)            
| 
| |  | ACS Internet, Inc. (ACSI)                 
| 
| |  | ACS InfoSource, Inc. (ACSIS)              

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 2001 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 or settled in
2003. In the event the Company prevails, the restriction will be lifted,
otherwise, the cash will be paid to the claimants. Liabilities associated with
this claim are recorded in the Companys accounts payable, accrued and other
current liabilities.

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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(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.

Property, Plant and Equipment

Telephoneplant is stated substantially at original cost of construction.
Telephone plant retired in the ordinary course of business, together with the
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 7.4%, 7.0%, and 6.6% for 2002,
2001 and 2000, 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 2002, 2001 and 2000.

Debt Issue Costs

Legal, accounting and financing fees, printing costs, and other expenses
associated with the issuance of the Companys senior credit facility, senior
subordinated notes, and discount debentures are being amortized using the
straight-line method over the term of the debt, which approximates the
effective interest method. Amortization expense included in interest expense
for 2002, 2001 and 2000 was $4,191, $4,312, and $4,526, 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 2002 one customer accounted for 11%
of consolidated revenues and no other customer accounted for more than 10% of
consolidated revenue. During 2001 and 2000, 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 $4,940 and $465 of revenue during 2002 and 2001,
respectively, 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 upon final adjudication of rates.

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition (Continued)

Access revenue is recognized when earned. The Company participates in toll
revenue pools with other telephone companies. Such pools are funded by toll
revenue and/or access charges regulated by the Regulatory Commission of Alaska
(RCA) within the intrastate jurisdiction and the Federal Communications
Commission (FCC) within the interstate jurisdiction. Much of the interstate
access revenue is initially recorded based on estimates. These estimates are
derived from interim financial statements, available separations studies and
the most recent information available about achieved rates of return. These
estimates are subject to adjustment in future accounting periods as additional
operational information becomes available. To the extent that disputes arise
over revenue settlements, the Companys policy is to defer revenue collected
until settlement methodologies are resolved and finalized. During the second
quarter of 2002, the Company recognized as revenue $11,066 of previously
deferred interstate access revenue and reversed $1,673 of interest expense
previously accrued thereon as a result of a favorable ruling by the District of
Columbia Court of Appeals related to a dispute on interstate access rates for
the Anchorage market. At December 31, 2002 and 2001, the Company had
liabilities of $20,548 and $31,748, respectively, related to its estimate of
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 and $197 was
amortized against income in 2001 and 2000, 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. Historically, lives approved for regulatory
purposes have approximated economically useful lives. On July 21, 2002, the
Company received an order from the RCA which appears to extend lives approved
for rate-making purposes beyond the economically useful lives of the underlying
assets. Management petitioned for reconsideration, and the RCA has agreed to
take additional testimony. A final order on the matter is not expected until
the second quarter of 2003. As of December 31, 2002 the Company has deferred
as a regulatory asset $894 of costs incurred in connection with regulatory rate
making proceedings, which will be amortized in future periods. If the Company
were not following SFAS No. 71, these costs would have been charged to expense
as incurred. Non-regulated revenues and costs incurred by the local telephone
exchange operations and non-regulated operations of the Company are not
accounted for under SFAS No. 71 principles.

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

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Change in Accounting Estimate

During the third quarter of 2002, the Company changed its estimate of the
useful lives of certain classes of assets, resulting in additional depreciation
expense of $2,206 for the year ended December 31, 2002.

Comprehensive Income (Loss)

Comprehensive income (loss) represents net income (loss) plus the results
of certain Stockholders equity changes not reflected in the consolidated
statements of operations. For 2002 and 2001, the Company has provided an income
tax valuation allowance equal to the income tax benefit resulting from its
other comprehensive loss. The Companys comprehensive loss is equal to its net
loss for 2000.

Stock Incentive Plans

The Companys employees participate in various plans of ACS Group. The
Company applies Accounting Principles Board Opinion No. 25 Accounting for
Stock Issued to Employees, in accounting for its stock incentive plans.
Accordingly, no compensation cost has been recognized for options with exercise
prices equal to or greater than fair value on the date of grant. No
compensation costs were charged to operations in 2002, 2001 or 2000. If
compensation costs had been determined consistent with SFAS No. 123 Accounting
for Stock-Based Compensation, the Companys net loss on a pro forma basis for
2002, 2001 and 2000 would have been as follows:

|          |             |  |      |          |      |  |      |         |   |  |   |         |  
|--------- | ----------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|          |             |  | 2002 |          | 2001 |  | 2000
|          |             |  |      |          |      |  |     
|Net loss: |             |  |      |          |      |  |      |         |   |  |   |        
|          | As reported |  | $    | (182,656 | )    |  | $    | (8,646  | ) |  | $ | (25,653 | )
|          | Pro forma   |  |      | (184,111 | )    |  |      | (10,114 | ) |  |   | (27,315 | )

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:

|                             |  |      |      |      |  |      |      |   |  |  |      |  
|---------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                             |  | 2002 |      | 2001 |  | 2000
|                             |  |      |      |      |  |     
|Risk free rate               |  |      | 2.88 | %    |  |      | 4.45 | % |  |  | 5.50 | %
|Dividend yield               |  |      | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Expected volatility factor   |  |      | 60.8 | %    |  |      | 55.2 | % |  |  | 52.5 | %
|Expected option life (years) |  |      | 6.1  |      |  |      | 5.9  |   |  |  | 6.1  |  

Recent Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002, and have been included in Note
20, Commitments, Contingencies and Guarantees. The recognition and measurement
provisions are effective on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company does not believe the adoption of
this interpretation will have a material impact on its financial position,
results of operations, or cash flows.

On August 15, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143,Accounting for Asset Retirement Obligations, which is
effective for the Companys fiscal year beginning January 1, 2003. This
statement requires, among other things, the accounting and reporting of legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development or normal operation of a
long-lived asset. Certain amounts
included in accumulated depreciation will be redesignated as a regulatory
liability. The Company is evaluating, but has not yet determined the impact of
the adoption of this standard on its 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, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements (Continued)

Effective January 1, 2002, the Company adopted SFAS No. 144,Accounting
for the Impairment or Disposal of Long-Lived Assets.This statement addresses
accounting and reporting of all long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means (see Note 12).

In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 will generally require gains and losses on extinguishments of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. Accordingly, gains or losses from extinguishments of debt for
fiscal years beginning after May 15, 2002 will not be reported as extraordinary
items unless the extinguishment qualifies as an extraordinary item under the
provisions of APB Opinion No. 30. Upon adoption, any gain or loss on
extinguishment of debt previously classified as an extraordinary item in prior
periods presented that does not meet the criteria of APB Opinion No. 30 for
such classification will be reclassified to conform with the provisions of SFAS
No. 145. Earlier application of the provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 is encouraged. SFAS No. 145 does not have any impact
on the Companys results of operations for the current periods reported.

On July 30, 2002, FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities.SFAS No. 146 requires companies
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not believe the adoption
of this statement will have a material impact on its financial position,
results of operations, or cash flows.

On December 31, 2002, FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure.SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company does not currently have plans to change to the fair value
method of accounting for our stock based compensation. The disclosure
requirements are now effective.

2. ACQUISITIONS

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 statements of operations from the date of
acquisition. On March 30, 2002, the Company approved a plan to sell its
wireless cable television service segment. As a result of this decision, the
operating revenue and expense of this segment has been classified as
discontinued operations for all periods presented (See Note 12).

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 statements 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, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

3. ACCOUNTS RECEIVABLE

Accounts receivable  trade consists of the following at December 31, 2002
and 2001:

|                             |                                      |  |        |        |      |  |        |        | 
|---------------------------- | ------------------------------------ |  | ------ | ------ | ---- |  | ------ | ------ | 
|                             |                                      |  | 2002   |        | 2001
|                             |                                      |  |        |        |     
|Accounts receivable  trade: |                                      |  |        |        |      |  |        |       
|                             | Customers                            |  | $      | 37,638 |      |  | $      | 33,613 | 
|                             | Connecting companies                 |  |        | 12,032 |      |  |        | 13,822 | 
|                             | Other                                |  |        | 5,225  |      |  |        | 4,421  | 
|                             |                                      |  |        |        |      |  |        |       
|                             |                                      |  | 54,895 |        |      |  | 51,856 |       
|                             | Less allowance for doubtful accounts |  |        | 6,075  |      |  |        | 4,944  | 
|                             |                                      |  |        |        |      |  |        |       
|                             | Accounts receivable  trade, net     |  | $      | 48,820 |      |  | $      | 46,912 | 
|                             |                                      |  |        |        |      |  |        |       

4.     PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment consists of the following at December 31,
2002 and 2001:

|                                |                                                |  |           |         |      |  |           |         | 
|------------------------------- | ---------------------------------------------- |  | --------- | ------- | ---- |  | --------- | ------- | 
|                                |                                                |  | 2002      |         | 2001
|                                |                                                |  |           |         |     
|Property, plant, and equipment: |                                                |  |           |         |      |  |           |        
|                                | Land, buildings and support assets             |  | $         | 192,832 |      |  | $         | 178,736 | 
|                                | Central office switching and transmission      |  |           | 314,316 |      |  |           | 309,291 | 
|                                | Outside plant cable and wire facilities        |  |           | 499,720 |      |  |           | 486,352 | 
|                                | Wireless switching and transmission systems    |  |           | 51,538  |      |  |           | 40,224  | 
|                                | Other                                          |  |           | 4,393   |      |  |           | 2,359   | 
|                                | Assets held for future use                     |  |           | 3,492   |      |  |           |        | 
|                                | Construction work in progress                  |  |           | 24,074  |      |  |           | 19,867  | 
|                                |                                                |  |           |         |      |  |           |        
|                                |                                                |  | 1,090,365 |         |      |  | 1,036,829 |        
|                                | Less accumulated depreciation and amortization |  |           | 625,276 |      |  |           | 557,849 | 
|                                |                                                |  |           |         |      |  |           |        
|                                | Property, plant and equipment, net             |  | $         | 465,089 |      |  | $         | 478,980 | 
|                                |                                                |  |           |         |      |  |           |        

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

|                                    |                                                |  |        |        |      |  |        |        | 
|----------------------------------- | ---------------------------------------------- |  | ------ | ------ | ---- |  | ------ | ------ | 
|                                    |                                                |  | 2002   |        | 2001
|                                    |                                                |  |        |        |     
|Property held under capital leases: |                                                |  |        |        |      |  |        |       
|                                    | Land, buildings and support assets             |  | $      | 16,930 |      |  | $      | 13,318 | 
|                                    | Outside plant cable and wire facilities        |  |        | 2,710  |      |  |        | 2,710  | 
|                                    |                                                |  |        |        |      |  |        |       
|                                    |                                                |  | 19,640 |        |      |  | 16,028 |       
|                                    | Less accumulated depreciation and amortization |  |        | 6,612  |      |  |        | 4,810  | 
|                                    |                                                |  |        |        |      |  |        |       
|                                    | Property held under capital leases, net        |  | $      | 13,028 |      |  | $      | 11,218 | 
|                                    |                                                |  |        |        |      |  |        |       

Amortization of assets under capital leases included in depreciation
expense in 2002, 2001 and 2000 is $2,333, $1,202, and $1,008, respectively.

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(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 2002, 2001 and 2000 were $3,733, $3,971, and $4,055, respectively.
Future minimum payments under these leases for the next five years and
thereafter are as follows:

|           |      |   |       |       |  |  |  |  | 
|---------- | ---- | - | ----- | ----- |  |  |  |  | 
|           | 2003 |   | $     | 2,474 | 
|           | 2004 |   |       | 1,971 | 
|           | 2005 |   |       | 1,331 | 
|           | 2006 |   |       | 1,014 | 
|           | 2007 |   |       | 794   | 
|Thereafter |      |   | 1,954 |      
|           |      |   |       |      
|           |      | $ | 9,538 |      
|           |      |   |       |      

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets. In accordance with the guidelines of this accounting
principle, goodwill and indefinite-lived intangible assets are no longer
amortized but will be assessed for impairment on at least an annual basis. SFAS
No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment.

Goodwill amortization, which was $7,741 and $7,510 for the years ended
December 31, 2001 and 2000, respectively, ceased effective January 1, 2002. In
the first quarter of 2002, pursuant to SFAS No. 142, the Company completed its
reassessment of previously recognized intangible assets, and ceased
amortization of indefinite-lived intangible assets.

SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level upon adoption and at least annually thereafter, utilizing
a two-step methodology. The initial step requires the Company to determine the
fair value of each reporting unit and compare it to the carrying value,
including goodwill, of such unit. If the fair value exceeds the carrying value,
no impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be
impaired. The amount, if any, of the impairment is then measured in the second
step.

The Company has determined that its business segments constitute reporting
units, with the exception of the Internet segment, which includes two reporting
units. Those reporting units are (1) Internet service and (2) IP based private
network service. The Company completed the initial step of impairment testing
during the second quarter which indicated that goodwill recorded in the local
telephone, Internet, and interexchange segments was impaired as of January 1,
2002. Due to the potential impairment, the Company then completed the second
step of the test to measure the amount of the impairment. The Company
determined the fair value of each reporting unit for purposes of this test
primarily by using a discounted cash flow valuation technique. Significant
estimates used in the valuation include estimates of future cash flows, both
future short-term and long-term growth rates, and estimated cost of capital for
purposes of arriving at a discount factor. Based on that analysis, a
transitional impairment loss of $105,350 was recognized as the cumulative
effect of a change in accounting principle in the consolidated statement of
operations. The income tax benefit of $39,540 was offset by a valuation
allowance.

The Company performed its annual impairment test as of the beginning of
the fourth quarter of 2002. The Company determined the fair value of each
reporting unit for purposes of this test primarily by using a discounted cash
flow valuation technique. Significant estimates used in the valuation include
estimates of future cash flows, both future short-term and long-term growth
rates, and estimated cost of capital for purposes of arriving at a discount
factor. Based on comparing this discounted cash flow model to the carrying
value of the reporting units, an impairment loss of $64,755 in the local
telephone segment was recognized in the consolidated statement of operations
for the year ended December 31, 2002. The Company attributes the impairment
loss in the local telephone segment to competitively biased regulatory policy.
On an ongoing basis, the Company expects to perform its annual impairment test
during the fourth quarter absent any impairment indicators.

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

5. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

In connection with the Companys adoption of a plan to discontinue its
wireless cable television service segment during the first quarter of 2002, the
goodwill of that segment was considered impaired, and an impairment charge of
$3,165 is included with the results of discontinued operations.

The changes in the carrying value of goodwill by segment for the year
ended December 31, 2002 are as follows:

|                                                      |  |                 |         |          |  |           |       |          |  |               |        |           |  |       |        |   |  |   |      |   |  |   |        |   |  |   |          |  
|----------------------------------------------------- |  | --------------- | ------- | -------- |  | --------- | ----- | -------- |  | ------------- | ------ | --------- |  | ----- | ------ | - |  | - | ---- | - |  | - | ------ | - |  | - | -------- | -
|                                                      |  | Local Telephone |         | Wireless |  | Directory |       | Internet |  | Interexchange |        | All Other |  | Total
|                                                      |  |                 |         |          |  |           |       |          |  |               |        |           |  |      
|Balance, December 31, 2001                            |  | $               | 191,351 |          |  | $         | 8,851 |          |  | $             | 38,831 |           |  | $     | 8,146  |   |  | $ | 151  |   |  | $ | 3,165  |   |  | $ | 250,495  |  
|Impairment losses included in
discontinued operations |  |                 |        |          |  |           |      |          |  |               |       |           |  |       |       |   |  |   |     |   |  |   | (3,165 | ) |  |   | (3,165   | )
|Impairment losses  transitional                      |  |                 | (97,053 | )        |  |           |      |          |  |               |       |           |  |       | (8,146 | ) |  |   | (151 | ) |  |   |       |   |  |   | (105,350 | )
|Impairment losses  annual test                       |  |                 | (64,755 | )        |  |           |      |          |  |               |       |           |  |       |       |   |  |   |     |   |  |   |       |   |  |   | (64,755  | )
|                                                      |  |                 |         |          |  |           |       |          |  |               |        |           |  |       |        |   |  |   |      |   |  |   |        |   |  |   |          |  
|Balance, December 31, 2002                            |  | $               | 29,543  |          |  | $         | 8,851 |          |  | $             | 38,831 |           |  | $     |       |   |  | $ |     |   |  | $ |       |   |  | $ | 77,225   |  
|                                                      |  |                 |         |          |  |           |       |          |  |               |        |           |  |       |        |   |  |   |      |   |  |   |        |   |  |   |          |  

Provided below is a reconciliation of previously reported financial
statement information to adjusted amounts that reflect the elimination of
goodwill and indefinite-lived intangible amortization for the comparable years
ended December 31, 2001 and 2000 prior to adoption of SFAS No. 142:

|                  |           |                                          |        |      |       |      |         |   |       | 
|----------------- | --------- | ---------------------------------------- | ------ | ---- | ----- | ---- | ------- | - | ----- | 
|                  |           |                                          |        | 2001 |       | 2000
|                  |           |                                          |        |      |       |     
|Reported net loss |           | $                                        | (8,646 | )    |       | $    | (25,653 | )
|                  | Add back: |                                          |        |      |       |      |         |   |      
|                  |           | Goodwill amortization                    |        |      | 7,741 |      |         |   | 7,510 | 
|                  |           | Indefinite-lived intangible amortization |        |      | 528   |      |         |   | 524   | 
|                  |           |                                          |        |      |       |      |         |  
|Adjusted net loss |           | $                                        | (377   | )    |       | $    | (17,619 | )
|                  |           |                                          |        |      |       |      |         |  

The following table provides the gross carrying value and accumulated
amortization for each major class of intangible asset as of December 31, 2002
based on the Companys reassessment of previously recognized intangible assets
and their remaining amortization lives in accordance with the adoption of SFAS
No. 142:

|                                    |                              |                                          |                                     |        |                |       |              |       |             |       |  |   |  |  | 
|----------------------------------- | ---------------------------- | ---------------------------------------- | ----------------------------------- | ------ | -------------- | ----- | ------------ | ----- | ----------- | ----- |  | - |  |  | 
|                                    |                              |                                          |                                     |        | Gross Carrying |       | Accumulated  |       | Amortizable
|                                    |                              |                                          |                                     |        | Amount         |       | Amortization |       | Life       
|                                    |                              |                                          |                                     |        |                |       |              |       |            
|Amortizable intangible assets:      |                              |                                          |                                     |        |                |       |              |       |             |       |  |  
|                                    | Customer list                |                                          | $                                   | 915    |                |       | $            | 275   |             |       |  | 5 | 
|                                    | Other intangible assets      |                                          |                                     | 2,625  |                |       |              | 1,593 |             |       |  | 5 | 
|                                    |                              |                                          |                                     |        |                |       |              |       |             |       |  |  
|                                    |                              |                                          | Total amortizable intangible assets |        | $              | 3,540 |              |       | $           | 1,868 |  |   |  |  | 
|                                    |                              |                                          |                                     |        |                |       |              |       |             |       |  |  
|Indefinite-lived intangible assets: |                              |                                          |                                     |        |                |       |              |       |             |       |  |  
|                                    | Cellular licenses            |                                          | $                                   | 18,194 |                |       |              |       |             |       |  |   | 
|                                    | PCS licenses                 |                                          |                                     | 3,323  |                |       |              |       |             |       |  |   | 
|                                    | Domain names and trade names |                                          |                                     | 80     |                |       |              |       |             |       |  |   | 
|                                    |                              |                                          |                                     |        |                |       |              |       |             |       |  |  
|                                    |                              | Total indefinite-lived intangible assets |                                     | $      | 21,597         |       |              |       |             |       |  |   |  | 
|                                    |                              |                                          |                                     |        |                |       |              |       |             |       |  |  

For amortizable intangible assets the total intangible amortization
expense for the years ended December 31, 2002, 2001 and 2000 was $708, $616 and
$525, respectively. The estimated amortization expense for each of the next
five years ending December 31 is as follows:

|     |  |   |     |  |  |  |  |  |  |  |  | 
|---- |  | - | --- |  |  |  |  |  |  |  |  | 
|2003 |  | $ | 951 | 
|2004 |  | $ | 446 | 
|2005 |  | $ | 183 | 
|2006 |  | $ | 92  | 
|2007 |  | $ |    | 

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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

6. ACCOUNTS PAYABLE, ACCRUED AND OTHER CURRENT LIABILITIES

Accounts payable, accrued and other current liabilities consist of the
following at December 31, 2002 and 2001:

|                                                        |  |      |        |      |  |   |        | 
|------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                                                        |  | 2002 |        | 2001
|                                                        |  |      |        |     
|Accounts payable  trade                                |  | $    | 11,435 |      |  | $ | 10,138 | 
|Accrued payroll, benefits, and related liabilities      |  |      | 6,413  |      |  |   | 8,379  | 
|Accrued personal time off                               |  |      | 5,200  |      |  |   | 5,207  | 
|Accrued interest                                        |  |      | 6,106  |      |  |   | 6,983  | 
|Refundable access revenue                               |  |      | 9,147  |      |  |   | 22,688 | 
|Other                                                   |  |      | 11,179 |      |  |   | 9,370  | 
|                                                        |  |      |        |      |  |   |        | 
|Accounts payable, accrued and other current liabilities |  | $    | 49,480 |      |  | $ | 62,765 | 
|                                                        |  |      |        |      |  |   |        | 

7. LONG-TERM OBLIGATIONS

Long-term obligations consist of the following at December 31, 2002 and
2001:

|                                               |  |      |         |      |  |   |         | 
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                               |  | 2002 |         | 2001
|                                               |  |      |         |     
|Senior credit facility term loan  tranche A   |  | $    | 148,500 |      |  | $ | 150,000 | 
|Senior credit facility term loan  tranche B   |  |      | 148,500 |      |  |   | 150,000 | 
|Senior credit facility term loan  tranche C   |  |      | 133,650 |      |  |   | 135,000 | 
|9 3/8% senior subordinated notes due 2009      |  |      | 150,000 |      |  |   | 150,000 | 
|Capital leases and other long-term obligations |  |      | 12,181  |      |  |   | 11,603  | 
|                                               |  |      |         |      |  |   |         | 
|                                               |  |      | 592,831 |      |  |   | 596,603 | 
|Less current portion                           |  |      | 5,933   |      |  |   | 5,107   | 
|                                               |  |      |         |      |  |   |         | 
|Long-term obligations, net of current portion  |  | $    | 586,898 |      |  | $ | 591,496 | 
|                                               |  |      |         |      |  |   |         | 

The aggregate maturities of long-term obligations for each of the five
years and thereafter subsequent to December 31, 2002 are as follows:

|           |      |   |         |         |  |  |  |  | 
|---------- | ---- | - | ------- | ------- |  |  |  |  | 
|           | 2003 |   | $       | 5,933   | 
|           | 2004 |   |         | 6,060   | 
|           | 2005 |   |         | 5,260   | 
|           | 2006 |   |         | 147,846 | 
|           | 2007 |   |         | 144,908 | 
|Thereafter |      |   | 282,824 |        
|           |      |   |         |        
|           |      | $ | 592,831 |        
|           |      |   |         |        

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 $435,000 of term loans and a
revolving credit facility with a $75,000 line of credit, of which $430,650 is
outstanding at December 31, 2002. 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. During the second quarter of 2002, the Companys lenders
approved an amendment to its senior credit facility that, among other things,
permits the Company to repurchase up to $15,000 of its outstanding common stock
over the term of the Senior Credit Facility. As of December 31, 2002 and 2001
the Company was in compliance with all of the covenants of the senior
credit facility.

F-15



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

7. LONG-TERM OBLIGATIONS (Continued)

The tranche A term loan of $148,500 is repayable in annual principal
payments of $1,500 which commenced 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, 2002 and
2001 was 4.125% and 4.69%, respectively, and is based on the LIBOR rate option.

The tranche B term loan of $148,500 is repayable in annual principal
payments of $1,500 which commenced 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, 2002 and 2001 was 4.88% and 5.44%, respectively, and is
based on the LIBOR rate option.

The tranche C term loan of $133,650 is repayable in annual principal
payments of $1,350 which commenced 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, 2002 and 2001 was 5.06% and 7.06%, respectively, and is based on
the LIBOR rate option.

The senior credit facility also provides a revolving credit facility in
the amount of $75,000 which is available, in part, for up to $25,000 in letters
of credit and up to $10,000 in the form of swingline loans. This revolving
facility is available through May 15, 2006 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, 2002 and 2001.

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 $217,500,
expiring in June 2004. 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 $150,000 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, 2002 and 2001 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 $12,181 and $11,603 with a weighted average interest rate
of 8.05% and 8.74% at December 31, 2002 and 2001, respectively.

F-16



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

8. OTHER DEFERRED CREDITS AND LONG-TERM LIABILITIES:

Deferred credits and other long-term liabilities consist of the following
at December 31, 2002 and 2001:

|                                                       |  |      |        |      |  |   |        | 
|------------------------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | 
|                                                       |  | 2002 |        | 2001
|                                                       |  |      |        |     
|Refundable access revenue                              |  | $    | 11,401 |      |  | $ | 9,060  | 
|Interest rate swap, marked to market                   |  |      | 14,152 |      |  |   | 11,437 | 
|Additional pension liability                           |  |      | 6,285  |      |  |   | 4,147  | 
|Other deferred credits                                 |  |      | 1,092  |      |  |   | 359    | 
|                                                       |  |      |        |      |  |   |        | 
|Total deferred credits and other long-term liabilities |  | $    | 32,930 |      |  | $ | 25,003 | 
|                                                       |  |      |        |      |  |   |        | 

9. LOCAL TELEPHONE OPERATING REVENUE

Local telephone operating revenues consisted of the following for the
years ended December 31, 2002, 2001 and 2000:

|                              |                                          |   |         |         |      |   |         |         |  |   |         |         | 
|----------------------------- | ---------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                                          |   | 2002    |         | 2001 |   | 2000   
|                              |                                          |   |         |         |      |   |        
|Local network service         |                                          | $ | 99,512  |         |      | $ | 96,270  |         |  | $ | 94,098  |        
|Network access revenue        |                                          |   | 108,335 |         |      |   | 102,977 |         |  |   | 105,172 |        
|Deregulated revenue and other |                                          |   | 18,600  |         |      |   | 22,164  |         |  |   | 22,998  |        
|                              |                                          |   |         |         |      |   |         |         |  |   |         |        
|                              | Total local telephone operating revenues |   | $       | 226,447 |      |   | $       | 221,411 |  |   | $       | 222,268 | 
|                              |                                          |   |         |         |      |   |         |         |  |   |         |        

10. UNUSUAL CHARGES

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

|                                        |  |   |       | 
|--------------------------------------- |  | - | ----- | 
|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 also recorded $3,019
related to severance and restructuring charges under several plans adopted
during 2000. 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, Continued
Years Ended December 31, 2002, 2001 and 2000
(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 0.0%, 1.7%, and 0.8% in 2002, 2001
and 2000, 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:

|                                                        |                                                        |                                               |         |      |        |      |        |      |       |   |        |   |        |  
|------------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------- | ------- | ---- | ------ | ---- | ------ | ---- | ----- | - | ------ | - | ------ | -
|                                                        |                                                        |                                               |         | 2002 |        | 2001 |        | 2000
|                                                        |                                                        |                                               |         |      |        |      |        |     
|Computed federal income taxes at the 34% statutory rate |                                                        | $                                             | (23,689 | )    |        | $    | (2,422 | )    |       | $ | (8,736 | )
|                                                        | Increase (reduction) in tax resulting from:            |                                               |         |      |        |      |        |      |       |   |        |   |       
|                                                        |                                                        | State income taxes (net federal benefit)      |         |      | (4,097 | )    |        |      | (381  | ) |        |   | (1,503 | )
|                                                        |                                                        | Amortization of investment tax credits        |         |      |       |      |        |      | (195  | ) |        |   | (197   | )
|                                                        |                                                        | Prior year adjustment                         |         |      | 269    |      |        |      |      |   |        |   |       |  
|                                                        |                                                        | Other                                         |         |      | 453    |      |        |      | (68   | ) |        |   | 285    |  
|                                                        |                                                        | Valuation allowance  book net operating loss |         |      | 27,064 |      |        |      | 2,871 |   |        |   | 9,954  |  
|                                                        |                                                        |                                               |         |      |        |      |        |      |       |   |        |  
|Total income tax benefit                                |                                                        | $                                             |        |      |        | $    | (195   | )    |       | $ | (197   | )
|                                                        |                                                        |                                               |         |      |        |      |        |      |       |   |        |  
|                                                        | The benefit for income taxes is summarized as follows: |                                               |         |      |        |      |        |      |       |   |        |   |       

|                                       |                    |                |               |   |      |   |      |   |      |   |      |   |   |   | 
|-------------------------------------- | ------------------ | -------------- | ------------- | - | ---- | - | ---- | - | ---- | - | ---- | - | - | - | 
|                                       |                    |                |               |   | 2002 |   | 2001 |   | 2000
|                                       |                    |                |               |   |      |   |      |   |     
|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 | )
|                                       |                    |                |               |   |      |   |      |   |      |   |      |  
|Total income tax benefit               |                    | $              |              |   |      | $ | (195 | ) |      | $ | (197 | )
|                                       |                    |                |               |   |      |   |      |   |      |   |      |  

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

|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |         |         |  
|---------------------------------------- | ----------------------------------- | ------------------------------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                         |                                     |                                                  |         | 2002    |         | 2001 |         | 2000   
|                                         |                                     |                                                  |         |         |         |      |         |        
|Deferred tax liabilities  long-term:    |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|                                         |                                     | Property, plant and equipment                    |         | $       | (20,786 | )    |         | $       | (20,380 | ) |         | $       | (16,338 | )
|                                         |                                     | Intangibles                                      |         |         |        |      |         |         | (13,105 | ) |         |         | (7,235  | )
|                                         |                                     | Other                                            |         |         | (88     | )    |         |         |        |   |         |         |        |  
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|Total long-term deferred tax liabilities |                                     |                                                  | (20,874 | )       |         |      | (33,485 | )       |         |   | (23,573 | )      
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|Deferred tax assets:                     |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|                                         | Current:                            |                                                  |         |         |         |      |         |         |         |   |         |         |        
|                                         |                                     | Accrued compensation                             |         |         | 4,249   |      |         |         | 4,081   |   |         |         | 5,329   |  
|                                         |                                     | Accrued bad debts                                |         |         | 2,827   |      |         |         | 2,172   |   |         |         | 4,825   |  
|                                         |                                     | Interest rate swap mark to market                |         |         | 5,661   |      |         |         | 4,575   |   |         |         |        |  
|                                         |                                     | Minimum pension liability adjustment             |         |         | 1,893   |      |         |         | 957     |   |         |         |        |  
|                                         |                                     | Other                                            |         |         | 987     |      |         |         | 516     |   |         |         | 293     |  
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|                                         | Total current deferred tax assets   |                                                  |         | 15,617  |         |      |         | 12,301  |         |   |         | 10,447  |        
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|                                         | Long-term:                          |                                                  |         |         |         |      |         |         |         |   |         |         |        
|                                         |                                     | Net operating loss carryforwards from operations |         |         | 57,136  |      |         |         | 49,324  |   |         |         | 32,324  |  
|                                         |                                     | Intangibles                                      |         |         | 46,734  |      |         |         |        |   |         |         |        |  
|                                         |                                     | Debt issuance cost                               |         |         | 1,213   |      |         |         |        |   |         |         |        |  
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|                                         | Total long-term deferred tax assets |                                                  |         | 105,083 |         |      |         | 49,324  |         |   |         | 32,324  |        
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|Total deferred tax assets                |                                     |                                                  | 120,700 |         |         |      | 61,625  |         |         |   | 42,771  |        
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|                                         | Valuation allowance                 |                                                  |         | (99,826 | )       |      |         | (28,140 | )       |   |         | (19,048 | )      
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        
|Net deferred tax asset                   |                                     | $                                                |        |         |         | $    |        |         |         | $ | 150     |        
|                                         |                                     |                                                  |         |         |         |      |         |         |         |   |         |        

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS
HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

11. INCOME TAXES (Continued)

The Company has available at December 31, 2002 unused operating loss
carryforwards of $142,839 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 (SRLY)
rules. SRLY NOLs can only be used in years 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 increase retained earnings.

|           |  |          |       |                    |  |                    |         |       |  |   |         | 
|---------- |  | -------- | ----- | ------------------ |  | ------------------ | ------- | ----- |  | - | ------- | 
|           |  | Internet |       |                    |  |                    |         | Total
|Year of    |  | Alaska's |       | Unused Operating   |  | Unused Operating  
|Expiration |  | SRLY     |       | Loss Carryforwards |  | Loss Carryforwards
|           |  |          |       |                    |  |                   
|2017       |  | $        | 27    |                    |  | $                  |        |       |  | $ | 27      | 
|2018       |  |          | 328   |                    |  |                    | 42      |       |  |   | 370     | 
|2019       |  |          | 852   |                    |  |                    | 16,767  |       |  |   | 17,619  | 
|2020       |  |          | 2,631 |                    |  |                    | 55,286  |       |  |   | 57,917  | 
|2021       |  |          |      |                    |  |                    | 46,615  |       |  |   | 46,615  | 
|2022       |  |          |      |                    |  |                    | 20,291  |       |  |   | 20,291  | 
|           |  |          |       |                    |  |                    |         |       |  |   |         | 
|           |  | $        | 3,838 |                    |  | $                  | 139,001 |       |  | $ | 142,839 | 
|           |  |          |       |                    |  |                    |         |       |  |   |         | 

12. DISCONTINUED OPERATIONS

On March 30, 2002, the Company approved a plan to sell its wireless cable
television service segment. As a result of this decision, the operating revenue
and expense of this segment has been classified as discontinued operations
under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets,for all periods presented and the assets and liabilities of the
disposal group have been written down to their fair value, net of expected
selling expense. The income tax benefit in all years was offset by a valuation
allowance. The following discloses the results of the discontinued operations
for years ended December 31, 2002, 2001 and 2000:

|                                             |  |      |        |      |  |      |        |   |  |   |       |  
|-------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                             |  | 2002 |        | 2001 |  | 2000
|                                             |  |      |        |      |  |     
|Operating revenue                            |  | $    | 716    |      |  | $    | 960    |   |  | $ | 1,131 |  
|Operating expense                            |  |      | 1,255  |      |  |      | 2,555  |   |  |   | 1,968 |  
|                                             |  |      |        |      |  |      |        |   |  |   |       |  
|Operating loss                               |  |      | (539   | )    |  |      | (1,595 | ) |  |   | (837  | )
|Interest expense                             |  |      | (33    | )    |  |      | (126   | ) |  |   | (151  | )
|Other                                        |  |      |       |      |  |      | 3      |   |  |   | 71    |  
|                                             |  |      |        |      |  |      |        |   |  |   |       |  
|Loss from operations of discontinued segment |  |      | (572   | )    |  |      | (1,718 | ) |  |   | (917  | )
|Write down of net assets to fair value       |  |      | (7,060 | )    |  |      |       |   |  |   |      |  
|                                             |  |      |        |      |  |      |        |   |  |   |       |  
|Loss from discontinued operations            |  | $    | (7,632 | )    |  | $    | (1,718 | ) |  | $ | (917  | )
|                                             |  |      |        |      |  |      |        |   |  |   |       |  

Assets held for sale December 31, 2002 consist of the following:

|                                             |                      |   |     |     |  |  |  |  |  |  |  |  | 
|-------------------------------------------- | -------------------- | - | --- | --- |  |  |  |  |  |  |  |  | 
|Accounts receivable, net of allowance of $42 |                      | $ | 50  |    
|Other current assets                         |                      |   | 7   |    
|Property, plant and equipment                |                      |   | 201 |    
|Intangible assets                            |                      |   | 85  |    
|Current liabilities                          |                      |   | (82 | )  
|                                             |                      |   |     |    
|                                             | Assets held for sale |   | $   | 261 | 
|                                             |                      |   |     |    

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

13. STOCK INCENTIVE PLANS

The Companys employees participate in various plans of ACS Group. The
Company may grant stock options, stock appreciation rights and other awards to
officers, employees and non-employee directors through the Compensation
Committee of ACS Groups Board of Directors. At December 31, 2002, ACS Group
has reserved a total of 6,060 shares of authorized common stock for issuance
under the plans. In general, options under the plans vest ratably over three,
four or five years and the plans terminate in approximately 10 years. On April
3, 2002, ACS Group merged the ALEC Holdings, Inc. 1999 Stock Incentive Plan
into the Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan.

Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan

ACS Group has reserved 4,910 shares under this plan, which was adopted by
ACS Group in November 1999. At December 31, 2002, 5,712 options have been
granted, 1,897 have been forfeited, 441 have been exercised, and 1,095 shares
are available for grant under the plan.

Information on outstanding options for the years ended December 31, 2002,
2001 and 2000 is summarized as follows:

|                                               |  |           |       |          |  |           |      |          |  |           |       |          |  |   |      |  |  |          |       |   |  |   |       | 
|---------------------------------------------- |  | --------- | ----- | -------- |  | --------- | ---- | -------- |  | --------- | ----- | -------- |  | - | ---- |  |  | -------- | ----- | - |  | - | ----- | 
|                                               |  | 2002      |       |          |  |           |      | 2001     |  | 2000     
|                                               |  |           |       |          |  |           |      |          |  |          
|                                               |  |           |       |          |  | Weighted  |      |          |  |           |       | Weighted |  |   |      |  |  | Weighted
|                                               |  |           |       |          |  | Average   |      |          |  |           |       | Average  |  |   |      |  |  | Average 
|                                               |  | Number of |       | Exercise |  | Number of |      | Exercise |  | Number of |       | Exercise
|                                               |  | Shares    |       | Price    |  | Shares    |      | Price    |  | Shares    |       | Price   
|                                               |  |           |       |          |  |           |      |          |  |           |       |         
|Outstanding, January 1                         |  |           | 3,606 |          |  | $         | 7.47 |          |  |           | 3,998 |          |  | $ | 7.55 |  |  |          | 3,154 |   |  | $ | 6.15  | 
|Granted                                        |  |           | 278   |          |  |           | 7.82 |          |  |           | 260   |          |  |   | 6.81 |  |  |          | 1,752 |   |  |   | 10.03 | 
|Exercised                                      |  |           | (76   | )        |  |           | 6.08 |          |  |           | (128  | )        |  |   | 6.03 |  |  |          | (198  | ) |  |   | 6.96  | 
|Canceled or expired                            |  |           | (434  | )        |  |           | 8.13 |          |  |           | (524  | )        |  |   | 8.43 |  |  |          | (710  | ) |  |   | 7.92  | 
|                                               |  |           |       |          |  |           |      |          |  |           |       |          |  |   |      |  |  |          |       |   |  |   |       | 
|Outstanding, December 31                       |  |           | 3,374 |          |  |           | 7.52 |          |  |           | 3,606 |          |  |   | 7.47 |  |  |          | 3,998 |   |  |   | 7.55  | 
|                                               |  |           |       |          |  |           |      |          |  |           |       |          |  |   |      |  |  |          |       |   |  |   |       | 
|Options exercisable at December 31             |  |           | 2,632 |          |  |           | 7.33 |          |  |           | 2,208 |          |  |   | 7.11 |  |  |          | 1,728 |   |  |   | 6.72  | 
|Weighted average fair value of options granted |  |           |       |          |  |           | 4.57 |          |  |           |       |          |  |   | 3.93 |  |  |          |       |   |  |   | 5.66  | 

The outstanding options at December 31, 2002 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 - $8.00            |  |                     | 2,812 |              |  |          | 6.39 |                     |  | $        | 6.19  |  |  |          | 2,224 |  |  | $ | 6.08  | 
|$8.58 - $12.63           |  |                     | 18    |              |  |          | 7.47 |                     |  |          | 12.63 |  |  |          | 12    |  |  |   | 12.63 | 
|$14.20                   |  |                     | 544   |              |  |          | 7.12 |                     |  |          | 14.20 |  |  |          | 396   |  |  |   | 14.20 | 

F-20



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

13. 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 November 1999. ACS Group has reserved 150 shares under this plan. At
December 31, 2002, 110 shares have been awarded and 40 shares are available for
grant under the plan. For the years ended December 31, 2002, 2001, and 2000,
directors were required to receive not less than 25% of their annual retainer
and meeting fees in the form of ACS Groups stock, and may have elected to
receive up to 100% of directors compensation in the form of stock. Starting
in 2003, directors no longer have the option of receiving stock and will
receive all of their annual retainer and meeting fees in cash.

During the year ended December 31, 2002, 58 shares under the plan were
awarded to directors, of which 34 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 directors, of which 19 were elected to be
deferred until termination of service by the directors. During the year ended
December 31, 2000, 26 shares under the plan were awarded to directors, of which
13 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 by ACS Group in November 1999. ACS Group has
reserved 1,000 shares under this plan. At December 31, 2002, 632 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 December 31, 2002, 97 shares were issued under the plan. On June 30,
2002, 53 shares were issued under the plan. On December 31, 2001, 38 shares
were issued under the plan. On June 29, 2001, 48 shares were issued under the
plan. On December 29, 2000, 67 shares were issued under the plan. On June 30,
2000, 65 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, 2002 approximately 15% of eligible employees elected to
participate in the plan.

14. 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 contribution plan, the accumulated
benefits and plan
assets are not determined for or allocated separately to the individual
employer. The Companys portion of the plans pension cost for 2002, 2001 and
2000 was $13,390, $11,830, and $10,978, respectively.

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 2002, 2001 or
2000.

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

14. RETIREMENT PLANS (Continued)

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 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 2002, 2001 or 2000.

The following table represents the net periodic pension expense (benefit)
for the ACS Retirement Plan for 2002, 2001 and 2000:

|                                         |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                         |  | 2002 |      | 2001 |  | 2000
|                                         |  |      |      |      |  |     
|Interest cost                            |  | $    | 680  |      |  | $    | 627  |   |  | $ | 447  |  
|Expected return on plan assets           |  |      | (723 | )    |  |      | (773 | ) |  |   | (813 | )
|Amortization of gain/loss                |  |      | 260  |      |  |      | 30   |   |  |   |     |  
|Amortization of prior year service costs |  |      | 203  |      |  |      | 203  |   |  |   | 34   |  
|                                         |  |      |      |      |  |      |      |   |  |   |      |  
|Net periodic pension expense (benefit)   |  | $    | 420  |      |  | $    | 87   |   |  | $ | (332 | )
|                                         |  |      |      |      |  |      |      |   |  |   |      |  

The following is a reconciliation of
the beginning and ending balances for
2002 and 2001 for the projected benefit obligation and the plan
assets of the
ACS Retirement Plan:

|                                        |                                                   |  |      |        |      |  |   |       |  
|--------------------------------------- | ------------------------------------------------- |  | ---- | ------ | ---- |  | - | ----- | -
|                                        |                                                   |  | 2002 |        | 2001
|                                        |                                                   |  |      |        |     
|Change in projected benefit obligation: |                                                   |  |      |        |      |  |   |      
|                                        | Projected benefit obligation at beginning of year |  | $    | 9,108  |      |  | $ | 8,600 |  
|                                        | Amortization of prior service cost                |  |      | (203   | )    |  |   | (203  | )
|                                        | Interest cost                                     |  |      | 680    |      |  |   | 627   |  
|                                        | Actuarial loss                                    |  |      | 1,279  |      |  |   | 215   |  
|                                        | Benefits paid                                     |  |      | (249   | )    |  |   | (131  | )
|                                        |                                                   |  |      |        |      |  |   |      
|                                        | Projected benefit obligation at end of year       |  | $    | 10,615 |      |  | $ | 9,108 |  
|                                        |                                                   |  |      |        |      |  |   |      
|Change in plan assets                   |                                                   |  |      |        |      |  |   |      
|                                        | Fair value of plan assets at beginning of year    |  | $    | 8,736  |      |  | $ | 9,257 |  
|                                        | Return on plan assets                             |  |      | (803   | )    |  |   | (390  | )
|                                        | Benefits paid                                     |  |      | (249   | )    |  |   | (131  | )
|                                        |                                                   |  |      |        |      |  |   |      
|                                        | Fair value of plan assets at end of year          |  | $    | 7,684  |      |  | $ | 8,736 |  
|                                        |                                                   |  |      |        |      |  |   |      

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

|                                |  |      |         |      |  |   |        |  
|------------------------------- |  | ---- | ------- | ---- |  | - | ------ | -
|                                |  | 2002 |         | 2001
|                                |  |      |         |     
|Projected benefit obligation    |  | $    | (10,615 | )    |  | $ | (9,108 | )
|Plan assets at fair value       |  |      | 7,684   |      |  |   | 8,736  |  
|                                |  |      |         |      |  |   |        |  
|Funded Status                   |  |      | (2,931  | )    |  |   | (372   | )
|                                |  |      |         |      |  |   |        |  
|Unrecognized prior service cost |  |      | 1,551   |      |  |   | 1,755  |  
|Unrecognized net loss           |  |      | 4,734   |      |  |   | 2,392  |  
|                                |  |      |         |      |  |   |        |  
|Net amount recognized           |  | $    | 3,354   |      |  | $ | 3,775  |  
|                                |  |      |         |      |  |   |        |  

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

14. RETIREMENT PLANS (Continued)

The net amounts recognized in the balance sheet were classified as follows at December 31, 2002 and 2001:

|                                     |  |      |        |      |  |   |       |  
|------------------------------------ |  | ---- | ------ | ---- |  | - | ----- | -
|                                     |  | 2002 |        | 2001
|                                     |  |      |        |     
|Accrued benefit liability            |  | $    | (2,931 | )    |  | $ | (372  | )
|Intangible asset                     |  |      | 1,551  |      |  |   | 1,755 |  
|Accumulated other comprehensive loss |  |      | 4,734  |      |  |   | 2,392 |  
|                                     |  |      |        |      |  |   |       |  
|Net amount recognized                |  | $    | 3,354  |      |  | $ | 3,775 |  
|                                     |  |      |        |      |  |   |       |  

The actuarial assumptions used to account for the plan as of December 31, 2002 and 2001 are as follows:

|                              |  |      |      |      |  |  |      |  
|----------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                              |  | 2002 |      | 2001
|                              |  |      |      |     
|Discount rate                 |  |      | 6.75 | %    |  |  | 7.25 | %
|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 and amended
in October 2002. 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
amendment revised the premium subsidy, added a premium subsidy cap and suspends
retirees benefits from the ACS Health Plan during any period the retiree has
access to employer health benefits. 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 ERISA. 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 2002 and 2001:

|                                            |  |      |     |      |  |   |    | 
|------------------------------------------- |  | ---- | --- | ---- |  | - | -- | 
|                                            |  | 2002 |     | 2001
|                                            |  |      |     |     
|Service cost                                |  | $    | 69  |      |  | $ | 11 | 
|Interest cost                               |  |      | 40  |      |  |   | 6  | 
|Expected return on plan assets              |  |      | (11 | )    |  |   |   | 
|Amortization of prior service cost          |  |      | 24  |      |  |   | 4  | 
|                                            |  |      |     |      |  |   |    | 
|Net periodic postretirement benefit expense |  | $    | 122 |      |  | $ | 21 | 
|                                            |  |      |     |      |  |   |    | 

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

14. RETIREMENT PLANS (Continued)

The following is a reconciliation of the beginning and ending balances for 2002 and 2001 for
the projected benefit obligation and the plan assets for the ACS
Health Plan:

|                                                         |                                                                   |  |      |      |      |  |   |     |  
|-------------------------------------------------------- | ----------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | --- | -
|                                                         |                                                                   |  | 2002 |      | 2001
|                                                         |                                                                   |  |      |      |     
|Change in accumulated postretirement benefit obligation: |                                                                   |  |      |      |      |  |   |    
|                                                         | Accumulated postretirement benefit obligation                     |  | $    | 588  |      |  | $ |    |  
|                                                         | at beginning of the year:                                         |  |      |      |      |  |   |     |  
|                                                         | Plan adoption                                                     |  |      |     |      |  |   | 586 |  
|                                                         | Plan amendment                                                    |  |      | (440 | )    |  |   |    |  
|                                                         | Service cost                                                      |  |      | 69   |      |  |   | 11  |  
|                                                         | Interest cost                                                     |  |      | 40   |      |  |   | 6   |  
|                                                         | Actuarial (gain)/loss                                             |  |      | 11   |      |  |   | (15 | )
|                                                         |                                                                   |  |      |      |      |  |   |    
|                                                         | Accumulated postretirement benefit obligation at end of the year: |  | $    | 268  |      |  | $ | 588 |  
|                                                         |                                                                   |  |      |      |      |  |   |    
|Change in plan assets:                                   |                                                                   |  |      |      |      |  |   |    
|                                                         | Fair value of plan assets at beginning of year                    |  | $    | 128  |      |  | $ |    |  
|                                                         | Employer contributions                                            |  |      |     |      |  |   | 128 |  
|                                                         | Return on plan assets                                             |  |      | (1   | )    |  |   |    |  
|                                                         |                                                                   |  |      |      |      |  |   |    
|                                                         | Fair value of plan assets at end of year                          |  | $    | 127  |      |  | $ | 128 |  
|                                                         |                                                                   |  |      |      |      |  |   |    

The following table represents the funded status of the ACS Health Plan at December 31, 2002
and 2001:

|                                              |  |      |      |      |  |   |      |  
|--------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                              |  | 2002 |      | 2001
|                                              |  |      |      |     
|Accumulated postretirement benefit obligation |  | $    | (268 | )    |  | $ | (588 | )
|Plan assets at fair value                     |  |      | 127  |      |  |   | 128  |  
|                                              |  |      |      |      |  |   |      |  
|Funded status                                 |  |      | (141 | )    |  |   | (460 | )
|                                              |  |      |      |      |  |   |      |  
|Unrecognized prior service cost               |  |      | 118  |      |  |   | 582  |  
|Unrecognized net (gain) or loss               |  |      | 7    |      |  |   | (15  | )
|                                              |  |      |      |      |  |   |      |  
|Prepaid (accrued) benefit costs               |  | $    | (16  | )    |  | $ | 107  |  
|                                              |  |      |      |      |  |   |      |  

The actuarial assumptions used to account for the ACS Health Plan as of
December 31, 2002 and 2001 is an assumed discount rate of 6.75% and 7.25%,
respectively, 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 2002:

|                                                        |  |     |    |     |  |  |     |  
|------------------------------------------------------- |  | --- | -- | --- |  |  | --- | -
|                                                        |  | +1% |    | -1%
|                                                        |  |     |    |    
|Effect on total of service and interest cost components |  |     | 13 |     |  |  | (12 | )
|Effect on accumulated postretirement benefit obligation |  |     | 71 |     |  |  | (64 | )

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

15. BUSINESS SEGMENTS

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

The Company also incurs interest expense, interest income, equity in
earnings of investments, goodwill amortization in 2001 and 2000 on the original
May 14, 1999 purchases, goodwill impairment losses and other operating and non
operating income and expense at the corporate level which are not allocated to
the business segments, nor are they evaluated by the chief operating decision
maker in analyzing the performance of the business segments. These non
operating income and expense items are provided in the accompanying table under
the caption All Other in order to assist the users of these financial
statements in reconciling the operating results and total assets of the
business segments to the consolidated financial statements. Common use assets
are held at the Company and are allocated to the business segments
based on operating revenue. Included in the caption All Other are also the
net assets held for sale of $261 and other net liabilities of the discontinued
operation that would not be sold of $5,941. 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, 2002:

|                                         |  |                 |         |          |  |           |        |          |  |               |         |           |  |              |         |       |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------- |  | --------------- | ------- | -------- |  | --------- | ------ | -------- |  | ------------- | ------- | --------- |  | ------------ | ------- | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                         |  | Local Telephone |         | Wireless |  | Directory |        | Internet |  | Interexchange |         | All Other |  | Eliminations |         | Total
|                                         |  |                 |         |          |  |           |        |          |  |               |         |           |  |              |         |      
|Operating revenues                       |  | $               | 226,447 |          |  | $         | 43,233 |          |  | $             | 33,604  |           |  | $            | 20,848  |       |  | $ | 29,708 |   |  | $ | 24,807  |   |  | $ | (35,145 | ) |  | $ | 343,502 |  
|Depreciation and amortization            |  |                 | 55,498  |          |  |           | 5,541  |          |  |               | 11      |           |  |              | 6,744   |       |  |   | 2,256  |   |  |   | 12,890  |   |  |   |        |   |  |   | 82,940  |  
|Operating income (loss)                  |  |                 | 32,005  |          |  |           | 3,647  |          |  |               | 19,404  |           |  |              | (21,468 | )     |  |   | (1,250 | ) |  |   | (55,026 | ) |  |   | (76     | ) |  |   | (22,764 | )
|Interest expense                         |  |                 | 435     |          |  |           | (5     | )        |  |               |        |           |  |              | (146    | )     |  |   | (330   | ) |  |   | (49,067 | ) |  |   |        |   |  |   | (49,113 | )
|Interest income                          |  |                 | 3       |          |  |           | 3      |          |  |               |        |           |  |              |        |       |  |   | 2      |   |  |   | 2,416   |   |  |   |        |   |  |   | 2,424   |  
|Income tax provision (benefit)           |  |                 | 13,214  |          |  |           | 1,527  |          |  |               | 7,985   |           |  |              |        |       |  |   |       |   |  |   | (22,726 | ) |  |   |        |   |  |   |        |  
|Income (loss) from
continuing operations |  |                 | 19,199  |          |  |           | 2,113  |          |  |               | 11,419  |           |  |              | (21,619 | )     |  |   | (1,583 | ) |  |   | (79,127 | ) |  |   | (76     | ) |  |   | (69,674 | )
|Total assets                             |  |                 | 526,333 |          |  |           | 83,985 |          |  |               | 110,506 |           |  |              | (26,971 | )     |  |   | 7,676  |   |  |   | 3,453   |   |  |   |        |   |  |   | 704,982 |  
|Capital expenditures                     |  |                 | 31,186  |          |  |           | 14,007 |          |  |               |        |           |  |              | 16,604  |       |  |   | 228    |   |  |   | 9,439   |   |  |   |        |   |  |   | 71,464  |  

Operating revenues disclosed above include intersegment operating revenues
of $22,634 for local telephone, $1,786 for wireless, $1,400 for directory and
$13,965 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, 2001:

|                                         |  |                 |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------- |  | --------------- | ------- | -------- |  | --------- | ------- | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                         |  | Local Telephone |         | Wireless |  | Directory |         | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                                         |  |                 |         |          |  |           |         |          |  |               |        |           |  |              |        |      
|Operating revenues                       |  | $               | 221,411 |          |  | $         | 41,923  |          |  | $             | 33,870 |           |  | $            | 13,726 |       |  | $ | 30,795 |   |  | $ | 17,072  |   |  | $ | (26,582 | ) |  | $ | 332,215 |  
|Depreciation and amortization            |  |                 | 53,242  |          |  |           | 5,626   |          |  |               | 1,048  |           |  |              | 2,606  |       |  |   | 2,284  |   |  |   | 14,302  |   |  |   |        |   |  |   | 79,108  |  
|Operating income (loss)                  |  |                 | 34,794  |          |  |           | 5,084   |          |  |               | 18,110 |           |  |              | (9,504 | )     |  |   | (1,752 | ) |  |   | 391     |   |  |   |        |   |  |   | 47,123  |  
|Interest expense                         |  |                 | (1,716  | )        |  |           | (36     | )        |  |               |       |           |  |              | (97    | )     |  |   | (302   | ) |  |   | (55,414 | ) |  |   |        |   |  |   | (57,565 | )
|Interest income                          |  |                 | 13      |          |  |           | 14      |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 1,963   |   |  |   |        |   |  |   | 1,990   |  
|Income tax provision (benefit)           |  |                 | 13,534  |          |  |           | 2,164   |          |  |               | 7,453  |           |  |              |       |       |  |   |       |   |  |   | (23,346 | ) |  |   |        |   |  |   | (195    | )
|Income (loss) from
continuing operations |  |                 | 19,560  |          |  |           | 2,966   |          |  |               | 10,657 |           |  |              | (9,591 | )     |  |   | (2,049 | ) |  |   | (28,471 | ) |  |   |        |   |  |   | (6,928  | )
|Total assets                             |  |                 | 653,412 |          |  |           | 108,475 |          |  |               | 88,079 |           |  |              | 3,679  |       |  |   | 28,887 |   |  |   | 21,010  |   |  |   |        |   |  |   | 903,542 |  
|Capital expenditures                     |  |                 | 45,635  |          |  |           | 5,786   |          |  |               | 21     |           |  |              | 16,319 |       |  |   | 19,787 |   |  |   | 34      |   |  |   |        |   |  |   | 87,582  |  

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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

15. BUSINESS SEGMENTS (Continued)

Operating revenues disclosed above include intersegment operating revenues
of $21,677 for local telephone, $1,603 for wireless, $ 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 |         | Wireless |  | Directory |         | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                                         |  |                 |         |          |  |           |         |          |  |               |        |           |  |              |        |      
|Operating revenues                       |  | $               | 222,268 |          |  | $         | 41,205  |          |  | $             | 29,156 |           |  | $            | 9,172  |       |  | $ | 19,773 |   |  | $ | 16,609  |   |  | $ | (24,656 | ) |  | $ | 313,527 |  
|Depreciation and amortization            |  |                 | 56,912  |          |  |           | 5,029   |          |  |               | 1,046  |           |  |              | 1,495  |       |  |   | 1,345  |   |  |   | 5,928   |   |  |   |        |   |  |   | 71,755  |  
|Operating income (loss)                  |  |                 | 31,751  |          |  |           | 6,414   |          |  |               | 13,958 |           |  |              | (8,760 | )     |  |   | (1,325 | ) |  |   | (8,270  | ) |  |   |        |   |  |   | 33,768  |  
|Interest expense                         |  |                 | (1,046  | )        |  |           | (11     | )        |  |               |       |           |  |              | (109   | )     |  |   | (312   | ) |  |   | (60,480 | ) |  |   |        |   |  |   | (61,958 | )
|Interest income                          |  |                 | 105     |          |  |           | 215     |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 3,449   |   |  |   |        |   |  |   | 3,769   |  
|Income tax provision (benefit)           |  |                 | 7,913   |          |  |           | 2,703   |          |  |               | 5,746  |           |  |              |       |       |  |   |       |   |  |   | (16,559 | ) |  |   |        |   |  |   | (197    | )
|Income (loss) from
continuing operations |  |                 | 22,814  |          |  |           | 3,944   |          |  |               | 8,212  |           |  |              | (8,863 | )     |  |   | (1,631 | ) |  |   | (49,212 | ) |  |   |        |   |  |   | (24,736 | )
|Total assets                             |  |                 | 634,105 |          |  |           | 108,663 |          |  |               | 71,505 |           |  |              | 25,082 |       |  |   | 43,596 |   |  |   | 26,355  |   |  |   |        |   |  |   | 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 wireless, $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.

16. RELATED PARTY TRANSACTIONS

The Company has various intercompany transactions with the Parent and at
December 31, 2002 and 2001, $3,761 and $2,475, 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 Company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 2002, 2001 and 2000 was $1,316, $1,285, and $1,169,
respectively. The management fee payable at 2002 and 2001 was $1,319 and
$1,303, respectively.

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 3.26% as of December 31, 2002, and is due on April 15,
2005. The note is secured by a pledge of 100 shares of ACS Groups stock held
in the officers name. In accordance with an addendum to the officers
employment agreement dated May 3, 2001, the loan will be forgiven ratably over
a three year period on its anniversary date ending on April 16, 2004.
Accordingly, $114 was forgiven on April 16, 2002 and recognized as compensation
expense. The note balance, including accrued interest, was $235 and $339 as of
December 31, 2002 and 2001, respectively.

F-26



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

17. 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.

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 interest
rate swap. The cumulative unrealized gain from the transition adjustment was
recorded as a credit to other comprehensive income within the Consolidated
Statements of Stockholders Equity. As of December 31, 2002 and 2001, the fair
value of the swap has declined to a liability of $14,152 and $11,437,
respectively, which is recorded in other deferred credits and long-term
liabilities on the Companys Consolidated Balance Sheets. 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 present value of expected payments or receipts based on implied forward
rates in the LIBOR yield curve at the end of the year. 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 years ended December 31, 2002 and 2001, realized changes in the fair value
of the cash flow hedge amounted to a charge of $9,046 and $3,653, of which the
ineffective portion was $59 and $247, respectively. 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, 2002, $10,040 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 2003. The
swap agreement currently in place expires on June 24, 2004.

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.

18. 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 Companys interest rate swap
agreement is marked to fair value, therefore its carrying value is equal to its
fair value.

The fair value for the Companys senior subordinated notes was estimated
based on quoted market prices. The fair value of the Companys senior credit
facility term debt approximates carrying values due to the variable interest
rate nature of the debt and its senior position in the capital structure.

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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

18. 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,
2002:

|                                               |  |          |         |       |  |   |         | 
|---------------------------------------------- |  | -------- | ------- | ----- |  | - | ------- | 
|                                               |  | Carrying |         | Fair 
|                                               |  | Value    |         | Value
|                                               |  |          |         |      
|Senior credit facility term debt  tranche A   |  | $        | 148,500 |       |  | $ | 148,500 | 
|Senior credit facility term debt  tranche B   |  |          | 148,500 |       |  |   | 148,500 | 
|Senior credit facility term debt  tranche C   |  |          | 133,650 |       |  |   | 133,650 | 
|9 3/8% senior subordinated notes due 2009      |  |          | 150,000 |       |  |   | 107,250 | 
|Capital leases and other long-term obligations |  |          | 12,181  |       |  |   | 12,181  | 
|                                               |  |          |         |       |  |   |         | 
|                                               |  | $        | 592,831 |       |  | $ | 550,081 | 
|                                               |  |          |         |       |  |   |         | 

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 | 
|Capital leases and other long-term obligations |  |          | 11,603  |       |  |   | 11,603  | 
|                                               |  |          |         |       |  |   |         | 
|                                               |  | $        | 596,603 |       |  | $ | 595,103 | 
|                                               |  |          |         |       |  |   |         | 

19. SEVERANCE AND RESTRUCTURING CHARGES

In June 2002, the Company adopted a restructuring plan and recorded $862
of associated charges, including $523 of severance costs and $339 of lease
termination costs for office space. Employee force reductions expected as a
result of this plan total approximately 30 persons, and the plan is expected to
be completed by June 2003. As of December 31, 2002, 11 employees have been
terminated and are eligible for severance and the Company has paid out $172
accrued under this plan.

20. COMMITMENTS, CONTINGENCIES AND GUARANTEES

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

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, of which approximately $12,400 has been
expended through December 31, 2002. The Company intends to fund this commitment
with cash on hand and cash flows from operations.

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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (Continued)

On July 15, 2002 the Company fulfilled a commitment to Neptune
Communications, L.L.C. (Neptune) to provide a loan in the form of an
unsecured note receivable totaling $15,000 in return for certain consideration.
The note, which is included in deferred charges and other assets on the
Companys Consolidated Balance Sheets, bears interest at the applicable federal
rate, which was 5.61% at the date of issuance, and matures on July 15, 2022.
Interest is payable semiannually, but Neptune may elect to add the interest to
the principal in lieu of cash payments. The commitment was funded with cash on
hand. In connection with this note, Neptune has granted the Company an option
to purchase certain network assets of Neptune, no later than January 2, 2006 at
a price equal to the then outstanding loan balance. The Company has also
entered into a strategic agreement with Neptune for the life of the fiber optic
cable system owned by Neptune. The significant provisions of this agreement
are: i) purchase commitments by the Company for capacity in 2005 and 2007, the
final price and quantity of which are subject to future events, ii) Neptunes
restoration of the Companys traffic carried on another cable system, iii) and
specific interconnection arrangements between the Company and Neptune, should
the Company exercise its option to purchase certain network assets from
Neptune. The Company is currently renegotiating the terms and conditions of
this agreement and it is not possible to determine the ultimate outcome of
these negotiations at this time.

The Company has been
authorized by its Board of Directors to evaluate the possible
disposition of its directory business, ACSIS. This transaction, if
completed, would result in a de-leveraging of the Companys
balance sheet and generate cash for other corporate objectives. The
Company expects to file on or about March 6, 2003, a preliminary
prospectus with Canadian securities regulators relating to a proposed
public offering in Canada of ACSIS through a Canadian income fund. Any
prospective sale of ACSIS is subject to the approval of the Companys
Board of Directors, which is dependent upon terms and pricing. Any
such sale is also contingent upon a number of conditions including
approval by securities regulators, the approval of an amendment of
certain terms and conditions of the
Companys senior credit facility and market conditions. There
can be no assurance that the Company will consummate any transaction
to sell ACSIS.

On May 14, 1999 ACS Group issued senior discount debentures due May 15,
2011 of which $17,313 is outstanding at December 31, 2002. Interest accrues at
13.00% and is payable at ACS Groups option semiannually on May 15 and November
15, commencing May 15, 2000 until May 15, 2004 when ACS Group will be required
to semiannually pay interest. The senior discount debentures which are recorded
at ACS Group are collateralized by substantially all assets of the Company.
The guarantee was entered into primarily to support or enhance the
creditworthiness otherwise attributed to ACS Group on a stand-alone basis.

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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements, Continued
Years Ended December 31, 2002, 2001 and 2000
(In Thousands Except Per Share Amounts)

21. CONSOLIDATED QUARTERLY OPERATING INFORMATION (UNAUDITED)

|                                                                         |  |         |          |         |  |                          |        |         |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------- | -------- | ------- |  | ------------------------ | ------ | ------- |  | - | ------- | - |  | - | ------- | -
|                                                                         |  |         |          |         |  | Quarterly Financial Data |        |         |  |  
|                                                                         |  |        
|                                                                         |  | First   |          | Second  |  | Third                    |        | Fourth 
|                                                                         |  | Quarter |          | Quarter |  | Quarter                  |        | Quarter
|                                                                         |  |         |          |         |  |                          |        |        
|2002                                                                     |  |         |          |         |  |                          |        |         |  |   |         |   |  |   |         |  
|Operating revenues                                                       |  | $       | 82,010   |         |  | $                        | 92,905 |         |  | $ | 84,330  |   |  | $ | 84,257  |  
|Operating income (loss)                                                  |  |         | 12,542   |         |  |                          | 15,173 |         |  |   | 5,909   |   |  |   | (56,388 | )
|Income (loss) from continuing operations                                 |  |         | 299      |         |  |                          | 4,746  |         |  |   | (6,257  | ) |  |   | (68,462 | )
|Loss on discontinued operations                                          |  |         | (6,872   | )       |  |                          | (515   | )       |  |   | (136    | ) |  |   | (109    | )
|Income (loss) before cumulative effect of change in
accounting principle |  |         | (6,573   | )       |  |                          | 4,231  |         |  |   | (6,393  | ) |  |   | (68,571 | )
|Cumulative effect of change in accounting principle                      |  |         | (105,350 | )       |  |                          |       |         |  |   |        |   |  |   |        |  
|Net income (loss)                                                        |  |         | (111,923 | )       |  |                          | 4,231  |         |  |   | (6,393  | ) |  |   | (68,571 | )
|                                                                        
|2001                                                                     |  |         |          |         |  |                          |        |         |  |   |         |   |  |   |         |  
|Operating revenues                                                       |  | $       | 81,301   |         |  | $                        | 81,850 |         |  | $ | 82,981  |   |  | $ | 86,083  |  
|Operating income                                                         |  |         | 10,310   |         |  |                          | 12,096 |         |  |   | 12,708  |   |  |   | 12,009  |  
|Loss from continuing operations                                          |  |         | (3,912   | )       |  |                          | (1,668 | )       |  |   | (225    | ) |  |   | (1,123  | )
|Loss on discontinued operations                                          |  |         | (310     | )       |  |                          | (491   | )       |  |   | (526    | ) |  |   | (391    | )
|Net loss                                                                 |  |         | (4,222   | )       |  |                          | (2,159 | )       |  |   | (751    | ) |  |   | (1,514  | )
|                                                                        
|2000                                                                     |  |         |          |         |  |                          |        |         |  |   |         |   |  |   |         |  
|Operating revenues                                                       |  | $       | 78,235   |         |  | $                        | 80,788 |         |  | $ | 75,008  |   |  | $ | 79,496  |  
|Operating income                                                         |  |         | 11,453   |         |  |                          | 12,084 |         |  |   | 3,524   |   |  |   | 6,707   |  
|Loss from continuing operations                                          |  |         | (3,709   | )       |  |                          | (3,143 | )       |  |   | (10,493 | ) |  |   | (7,391  | )
|Loss on discontinued operations                                          |  |         | (139     | )       |  |                          | (251   | )       |  |   | (223    | ) |  |   | (304    | )
|Net loss                                                                 |  |         | (3,848   | )       |  |                          | (3,394 | )       |  |   | (10,716 | ) |  |   | (7,695  | )

On March 30, 2002, the Company
approved a plan to sell its
wireless cable television service
segment. As a result of this
decision, the operating revenue and
expense of this segment has been
classified as discontinued
operations for all periods
presented. Effective January 1,
2002, the Company adopted SFAS No.
142, Goodwill and Other Intangible
Assetsand a transitional
impairment loss of $105,350 was
recognized as the cumulative effect
of a change in accounting principle
in the consolidated statement of
operations. The Company performed
its annual goodwill impairment test
during the fourth quarter of 2002
and recorded a goodwill impairment
loss of $64,755 in operating
expenses of the consolidated
statement of operations.

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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
|                                     |  |            |       |            |  |              |       |                |  |          
|2002 Allowance for doubtful accounts |  | $          | 4,944 |            |  | $            | 4,884 |                |  | $         | 214   |            |  | $ | 3,967  |  |  | $ | 6,075 | 
|                                     |  |            |       |            |  |              |       |                |  |           |       |            |  |   |        |  |  |   |       | 
|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 | 
|                                     |  |            |       |            |  |              |       |                |  |           |       |            |  |   |        |  |  |   |       | 



---

|(1) |  | Represents the 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.

F-31