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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

|                                             |  |                                                                                         
|-------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(Mark One)                                   |  |                                                                                         
|[X]                                          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|                                            
|For the quarterly period ended June 30, 2002
|OR                                          
|                                            
|[   ]                                        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _____________________ to _____________________

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)




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

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

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

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


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]       No [   ]

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

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

Yes [X]       No [   ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

DOCUMENTS INCORPORATED BY REFERENCE
None



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TABLE OF CONTENTS



|                  |                                                                                               |                                            |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|                  |                                                                                               | Consolidated Balance Sheets               
|                  |                                                                                               | Consolidated Statements of Operations     
|                  |                                                                                               | Consolidated Statements of Cash Flows     
|                  |                                                                                               | Notes to Consolidated Financial Statements
|                  | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II          
|OTHER INFORMATION
|                  | ITEM 1. LEGAL PROCEEDINGS.                                                                   
|                  | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.                                           
|                  | ITEM 3. DEFAULTS UPON SENIOR SECURITIES.                                                     
|                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                 
|                  | ITEM 5. OTHER INFORMATION.                                                                   
|                  | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|EXHIBIT 10.12    



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TABLE OF CONTENTS

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

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

|                                                                |                                                                                       |                            |           |          |         |              |           |         |         | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------- | --------- | -------- | ------- | ------------ | --------- | ------- | ------- | 
|                                                                |                                                                                       |                            |           | June 30, |         | December 31,
|                                                                |                                                                                       |                            |           | 2002     |         | 2001        
|                                                                |                                                                                       |                            |           |          |         |             
|Assets                                                          |                                                                                       |                            |           |          |         |              |           |        
|Current assets:                                                 |                                                                                       |                            |           |          |         |              |           |        
|                                                                | Cash and cash equivalents                                                             |                            | $         | 28,594   |         |              | $         | 41,012  |        
|                                                                | Restricted cash                                                                       |                            |           | 7,104    |         |              |           | 6,932   |        
|                                                                | Accounts receivable-trade, net of allowance of $4,613 and $4,944                      |                            |           | 48,123   |         |              |           | 46,912  |        
|                                                                | Accounts receivable-affiliates                                                        |                            |           | 2,918    |         |              |           | 2,475   |        
|                                                                | Materials and supplies                                                                |                            |           | 9,499    |         |              |           | 8,723   |        
|                                                                | Prepayments and other current assets                                                  |                            |           | 11,139   |         |              |           | 6,032   |        
|                                                                | Assets held for sale                                                                  |                            |           | 277      |         |              |           |        |        
|                                                                |                                                                                       |                            |           |          |         |              |           |        
|                                                                |                                                                                       | Total current assets       |           |          | 107,654 |              |           |         | 112,086 | 
|Property, plant and equipment                                   |                                                                                       |                            | 1,065,161 |          |         |              | 1,036,829 |        
|Less: accumulated depreciation                                  |                                                                                       |                            | 591,807   |          |         |              | 557,849   |        
|                                                                |                                                                                       |                            |           |          |         |              |           |        
|                                                                | Property, plant and equipment, net                                                    |                            |           | 473,354  |         |              |           | 478,980 |        
|Goodwill                                                        |                                                                                       |                            | 141,980   |          |         |              | 250,495   |        
|Intangible assets                                               |                                                                                       |                            | 23,323    |          |         |              | 26,785    |        
|Debt issuance costs, net of amortization of $14,228 and $12,126 |                                                                                       |                            | 23,243    |          |         |              | 25,321    |        
|Deferred charges and other assets                               |                                                                                       |                            | 9,482     |          |         |              | 9,875     |        
|                                                                |                                                                                       |                            |           |          |         |              |           |        
|Total assets                                                    |                                                                                       | $                          | 779,036   |          |         | $            | 903,542   |        
|                                                                |                                                                                       |                            |           |          |         |              |           |        
|                                                               
|Liabilities and Stockholders Equity                            |                                                                                       |                            |           |          |         |              |           |        
|                                                               
|Current liabilities:                                            |                                                                                       |                            |           |          |         |              |           |        
|                                                                | Current portion of long-term obligations                                              |                            | $         | 5,827    |         |              | $         | 5,107   |        
|                                                                | Accounts payable-affiliates                                                           |                            |           | 659      |         |              |           | 1,303   |        
|                                                                | Accounts payable, accrued and other current liabilities                               |                            |           | 53,375   |         |              |           | 62,765  |        
|                                                                | Advance billings and customer deposits                                                |                            |           | 9,278    |         |              |           | 9,190   |        
|                                                                |                                                                                       |                            |           |          |         |              |           |        
|                                                                |                                                                                       | Total current liabilities  |           |          | 69,139  |              |           |         | 78,365  | 
|Long-term obligations, net of current portion                   |                                                                                       |                            | 585,799   |          |         |              | 591,496   |        
|Other deferred credits and long-term liabilities                |                                                                                       |                            | 23,689    |          |         |              | 25,003    |        
|Commitments and contingencies                                   |                                                                                       |                            |          |          |         |              |          |        
|Stockholders equity:                                           |                                                                                       |                            |           |          |         |              |           |        
|                                                                | Common stock, $.01 par value; 1,000 shares authorized,
1 share issued and outstanding |                            |           |         |         |              |           |        |        
|                                                                | Paid in capital in excess of par value                                                |                            |           | 287,242  |         |              |           | 287,242 |        
|                                                                | Accumulated deficit                                                                   |                            |           | (172,427 | )       |              |           | (64,735 | )      
|                                                                | Accumulated other comprehensive loss                                                  |                            |           | (14,406  | )       |              |           | (13,829 | )      
|                                                                |                                                                                       |                            |           |          |         |              |           |        
|                                                                |                                                                                       | Total stockholders equity |           |          | 100,409 |              |           |         | 208,678 | 
|                                                                |                                                                                       |                            |           |          |         |              |           |        
|Total liabilities and stockholders equity                      |                                                                                       | $                          | 779,036   |          |         | $            | 903,542   |        
|                                                                |                                                                                       |                            |           |          |         |              |           |        

See Notes to Consolidated Financial Statements

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

|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |         |         |  
|------------------------------------------------------------------------ | ----------------------------- | ------------------------ | ------ | ------------------ | ------- | ---------------- | ------ | ------- | ------- | ---- | -------- | ------- | ------- | - | ------ | ------- | ------- | -
|                                                                         |                               |                          |        | Three Months Ended |         | Six Months Ended
|                                                                         |                               |                          |        | June 30,           |         | June 30,        
|                                                                         |                               |                          |        |                    |         |                 
|                                                                         |                               |                          |        | 2002               |         | 2001             |        | 2002    |         | 2001
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |     
|Operating revenues:                                                      |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|                                                                         | Local telephone               |                          | $      | 63,991             |         |                  | $      | 54,461  |         |      | $        | 119,313 |         |   | $      | 109,158 |        
|                                                                         | Cellular                      |                          |        | 10,771             |         |                  |        | 10,411  |         |      |          | 19,749  |         |   |        | 19,693  |        
|                                                                         | Directory                     |                          |        | 8,381              |         |                  |        | 8,213   |         |      |          | 17,022  |         |   |        | 16,152  |        
|                                                                         | Internet                      |                          |        | 4,551              |         |                  |        | 3,203   |         |      |          | 8,393   |         |   |        | 6,314   |        
|                                                                         | Interexchange                 |                          |        | 4,820              |         |                  |        | 5,212   |         |      |          | 9,670   |         |   |        | 11,162  |        
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|                                                                         |                               | Total operating revenues |        |                    | 92,514  |                  |        |         | 81,500  |      |          |         | 174,147 |   |        |         | 162,479 |  
|                                                                        
|Operating expenses:                                                      |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|                                                                         | Local telephone               |                          |        | 32,571             |         |                  |        | 30,428  |         |      |          | 61,569  |         |   |        | 59,323  |        
|                                                                         | Cellular                      |                          |        | 6,678              |         |                  |        | 5,972   |         |      |          | 12,343  |         |   |        | 11,550  |        
|                                                                         | Directory                     |                          |        | 3,532              |         |                  |        | 3,363   |         |      |          | 6,958   |         |   |        | 6,862   |        
|                                                                         | Internet                      |                          |        | 7,317              |         |                  |        | 3,266   |         |      |          | 12,445  |         |   |        | 7,009   |        
|                                                                         | Interexchange                 |                          |        | 6,997              |         |                  |        | 6,821   |         |      |          | 13,612  |         |   |        | 16,365  |        
|                                                                         | Depreciation and amortization |                          |        | 19,973             |         |                  |        | 19,554  |         |      |          | 39,232  |         |   |        | 38,964  |        
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|                                                                         |                               | Total operating expenses |        |                    | 77,068  |                  |        |         | 69,404  |      |          |         | 146,159 |   |        |         | 140,073 |  
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|Operating income                                                         |                               |                          | 15,446 |                    |         |                  | 12,096 |         |         |      | 27,988   |         |         |   | 22,406 |        
|                                                                        
|Other income (expense):                                                  |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|                                                                         | Interest expense              |                          |        | (10,975            | )       |                  |        | (14,552 | )       |      |          | (23,718 | )       |   |        | (29,910 | )      
|                                                                         | Interest income and other     |                          |        | 275                |         |                  |        | 739     |         |      |          | 775     |         |   |        | 1,825   |        
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|                                                                         |                               | Total other expense      |        |                    | (10,700 | )                |        |         | (13,813 | )    |          |         | (22,943 | ) |        |         | (28,085 | )
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|Income (loss) before income taxes                                        |                               |                          | 4,746  |                    |         |                  | (1,717 | )       |         |      | 5,045    |         |         |   | (5,679 | )      
|Income tax benefit                                                       |                               |                          |       |                    |         |                  | 49     |         |         |      |         |         |         |   | 99     |        
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|Income (loss) from continuing operations                                 |                               |                          | 4,746  |                    |         |                  | (1,668 | )       |         |      | 5,045    |         |         |   | (5,580 | )      
|Loss from discontinued operations, net of tax                            |                               |                          | (515   | )                  |         |                  | (491   | )       |         |      | (7,387   | )       |         |   | (801   | )      
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|Income (loss) before cumulative effect of change
in accounting principle |                               |                          | 4,231  |                    |         |                  | (2,159 | )       |         |      | (2,342   | )       |         |   | (6,381 | )      
|Cumulative effect of change in accounting
principle, net of tax          |                               |                          |       |                    |         |                  |       |         |         |      | (105,350 | )       |         |   |       |        
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        
|Net income (loss)                                                        |                               | $                        | 4,231  |                    |         | $                | (2,159 | )       |         | $    | (107,692 | )       |         | $ | (6,381 | )      
|                                                                         |                               |                          |        |                    |         |                  |        |         |         |      |          |         |         |   |        |        

See Notes to Consolidated Financial Statements

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

|                                                                                |                                                     |                                                |          |                  |        |      |         |        |        |  
|------------------------------------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------- | -------- | ---------------- | ------ | ---- | ------- | ------ | ------ | -
|                                                                                |                                                     |                                                |          | Six Months Ended
|                                                                                |                                                     |                                                |          | March 31,       
|                                                                                |                                                     |                                                |          |                 
|                                                                                |                                                     |                                                |          | 2002             |        | 2001
|                                                                                |                                                     |                                                |          |                  |        |     
|Cash Flows from Operating Activities:                                           |                                                     |                                                |          |                  |        |      |         |       
|Net loss                                                                        |                                                     | $                                              | (107,692 | )                |        | $    | (6,381  | )     
|Adjustments to reconcile net loss to net cash provided by operating activities: |                                                     |                                                |          |                  |        |      |         |       
|                                                                                | Loss on discontinued operations                     |                                                |          | 7,387            |        |      |         | 801    |       
|                                                                                | Cumulative effect of change in accounting principle |                                                |          | 105,350          |        |      |         |       |       
|                                                                                | Depreciation and amortization                       |                                                |          | 39,232           |        |      |         | 38,964 |       
|                                                                                | Amortization of debt issuance costs                 |                                                |          | 2,078            |        |      |         | 2,199  |       
|                                                                                | Investment tax credits                              |                                                |          |                 |        |      |         | (98    | )     
|                                                                                | Capitalized interest                                |                                                |          | (767             | )      |      |         | (752   | )     
|                                                                                | Other deferred credits                              |                                                |          | (1,891           | )      |      |         | 8,241  |       
|                                                                                | Changes in components of working capital:           |                                                |          |                  |        |      |         |        |       
|                                                                                |                                                     | Accounts receivable and other current assets   |          |                  | (7,664 | )    |         |        | 837    |  
|                                                                                |                                                     | Accounts payable and other current liabilities |          |                  | (9,730 | )    |         |        | (9,613 | )
|                                                                                |                                                     | Other                                          |          |                  | 371    |      |         |        | (62    | )
|                                                                                | Net cash used in discontinued operations            |                                                |          | (477             | )      |      |         | (527   | )     
|                                                                                |                                                     |                                                |          |                  |        |      |         |       
|Net cash provided by operating activities                                       |                                                     |                                                | 26,197   |                  |        |      | 33,609  |       
|Cash Flows from Investing Activities:                                           |                                                     |                                                |          |                  |        |      |         |       
|Construction and capital expenditures, net of capitalized interest              |                                                     |                                                | (31,975  | )                |        |      | (56,167 | )     
|Proceeds from liquidation of minority interest investment                       |                                                     |                                                |         |                  |        |      | 1,370   |       
|Issuance of note receivable from officer                                        |                                                     |                                                |         |                  |        |      | (331    | )     
|                                                                                |                                                     |                                                |          |                  |        |      |         |       
|Net cash used by investing activities                                           |                                                     |                                                | (31,975  | )                |        |      | (55,128 | )     
|Cash Flows from Financing Activities:                                           |                                                     |                                                |          |                  |        |      |         |       
|Payments on long-term debt                                                      |                                                     |                                                | (6,640   | )                |        |      | (2,431  | )     
|                                                                                |                                                     |                                                |          |                  |        |      |         |       
|Net cash used by financing activities                                           |                                                     |                                                | (6,640   | )                |        |      | (2,431  | )     
|Decrease in cash                                                                |                                                     |                                                | (12,418  | )                |        |      | (23,950 | )     
|Cash and cash equivalents at beginning of the period                            |                                                     |                                                | 41,012   |                  |        |      | 61,896  |       
|                                                                                |                                                     |                                                |          |                  |        |      |         |       
|Cash and cash equivalents at the end of the period                              |                                                     | $                                              | 28,594   |                  |        | $    | 37,946  |       
|                                                                                |                                                     |                                                |          |                  |        |      |         |       
|Supplemental Cash Flow Data:                                                    |                                                     |                                                |          |                  |        |      |         |       
|Interest paid                                                                   |                                                     | $                                              | 24,914   |                  |        | $    | 28,189  |       
|Income taxes paid                                                               |                                                     |                                                |         |                  |        |      |        |       
|Supplemental Noncash Transactions:                                              |                                                     |                                                |          |                  |        |      |         |       
|Property acquired under capital lease                                           |                                                     | $                                              | 2,306    |                  |        | $    |        |       
|Interest rate swap marked to market                                             |                                                     | $                                              | 577      |                  |        | $    | 4,616   |       

See Notes to Consolidated Financial Statements

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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, 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 an integrated
communications provider engaged principally in providing local telephone,
directory, cellular, Internet, and interexchange services to its customers in
the state of Alaska through its telecommunications subsidiaries. The Company
was formed in October of 1998 for the purpose of acquiring and operating
telecommunications properties. The principal activities in 1998 and through May
14, 1999 were the preparation of systems and obtaining financing for pending
acquisitions. On May 14, 1999, the Company was acquired and became a wholly
owned subsidiary of Alaska Communications Systems Group, Inc. (the Parent or
ACS Group).

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



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

Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to rules and regulations of the Securities and Exchange
Commission. However, the Company believes the disclosures which are made are
adequate to make the information presented not misleading. The consolidated
financial statements and footnotes included in this Form 10-Q should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended
December 31, 2001. Certain reclassifications have been made to the 2001
financial statements to make them conform to the current presentation.

In the opinion of management, the financial statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the consolidated financial position, results of operations and cash
flows for all periods presented. The results of operations for the three and
six months ended June 30, 2002 and 2001 are not necessarily indicative of the
results of operations which might be expected for the entire year or any other
interim periods.

Revenue Recognition

Access revenues are recognized when earned. The Company participates in
toll revenue pools with other telephone companies. Such pools are funded by
toll revenue and/or access charges regulated by the Regulatory Commission of
Alaska (RCA) within the intrastate jurisdiction and the Federal
Communications Commission (FCC) within the interstate jurisdiction. Much of
the interstate access service revenue is initially recorded based on estimates.
These estimates are derived from interim financial statements, available
separations studies and the most recent information available about achieved
rates of return. These estimates are subject to adjustment in future accounting
periods, as 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.

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

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

Regulatory Accounting and Regulation

The local telephone exchange operations of the Company account for costs
in accordance with the accounting principles for regulated enterprises
prescribed by Statement of Financial Accounting Standards (SFAS) No. 71,
Accounting for the Effects of Certain Types of Regulation.This accounting
recognizes the economic effects of rate regulation by recording cost and a
return on investment as such amounts are recovered through rates authorized by
regulatory authorities. Accordingly, under SFAS No. 71, plant and equipment is
depreciated over lives approved by regulators and certain costs and obligations
are deferred based upon approvals received from regulators to permit recovery
of such amounts in future years. Historically, lives approved for regulatory
purposes have approximated economically useful lives. On July 21, 2002, the
Company received an order from the RCA which appears to extend lives approved
for rate-making purposes beyond the economically useful lives of the underlying
assets. Management is evaluating the effects of this order on the financial
statements of the Company. During the quarter ended June 30, 2002, the Company
revised its estimate of the allowable regulatory asset related to deferred rate
case costs based on a regulatory order and, as a result, recorded expense of
$875. As of June 30, 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 71,
these costs would have been charged to expense as incurred.

Comprehensive loss

Comprehensive loss for the six months ended June 30, 2002 and 2001 was
$108,269 and $10,997, respectively. The difference between net loss and
comprehensive loss resulted from the adoption of SFAS 133, Accounting for
Derivative Instruments and Hedging Activities,as amended.The accumulated
other comprehensive loss of $14,406 at June 30, 2002 consists of $2,392 of
minimum pension liability adjustment and $12,014 of interest rate swap mark to
market. The accumulated other comprehensive loss of $13,829 at December 31,
2001 consists of $2,392 of minimum pension liability adjustment and $11,437 of
interest rate swap mark to market.

2. NEW ACCOUNTING STANDARDS

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

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

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

2. NEW ACCOUNTING STANDARDS (Continued)

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.

3. 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 for the year ended December 31,
2001, 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. On an ongoing basis, the Company expects to perform its annual
impairment test as of September 30, absent any impairment indicators.

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

3. 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 six
months ended June 30, 2002 are as follows:

|                                                      |  |           |         |          |  |           |       |          |  |               |        |           |  |       |        |   |  |   |      |   |  |   |        |   |  |   |          |  
|----------------------------------------------------- |  | --------- | ------- | -------- |  | --------- | ----- | -------- |  | ------------- | ------ | --------- |  | ----- | ------ | - |  | - | ---- | - |  | - | ------ | - |  | - | -------- | -
|                                                      |  | Local     |         |          |  |           |       |          |  |               |        |           |  |       |        |   |  |   |      |   |  |   |        |   |  |  
|                                                      |  | Telephone |         | Cellular |  | 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                                     |  |           | (97,053 | )        |  |           |      |          |  |               |       |           |  |       | (8,146 | ) |  |   | (151 | ) |  |   |       |   |  |   | (105,350 | )
|                                                      |  |           |         |          |  |           |       |          |  |               |        |           |  |       |        |   |  |   |      |   |  |   |        |   |  |   |          |  
|Balance, June 30, 2002                                |  | $         | 94,298  |          |  | $         | 8,851 |          |  | $             | 38,831 |           |  | $     |       |   |  | $ |     |   |  | $ |       |   |  | $ | 141,980  |  
|                                                      |  |           |         |          |  |           |       |          |  |               |        |           |  |       |        |   |  |   |      |   |  |   |        |   |  |   |          |  

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

|                                                    |  |                           |          |      |  |   |        |  
|--------------------------------------------------- |  | ------------------------- | -------- | ---- |  | - | ------ | -
|                                                    |  | Six Months Ended June 30,
|                                                    |  |                          
|                                                    |  | 2002                      |          | 2001
|                                                    |  |                           |          |     
|Reported net loss                                   |  | $                         | (107,692 | )    |  | $ | (6,381 | )
|Add back:                                           |  |                           |          |      |  |   |        |  
|Goodwill amortization                               |  |                           |         |      |  |   | 3,863  |  
|Indefinite-lived intangible amortization            |  |                           |         |      |  |   | 264    |  
|Cumulative effect of change in accounting principle |  |                           | 105,350  |      |  |   |       |  
|                                                    |  |                           |          |      |  |   |        |  
|Adjusted net loss                                   |  | $                         | (2,342   | )    |  | $ | (2,254 | )
|                                                    |  |                           |          |      |  |   |        |  

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

|                                         |  |                |        |              |  |             |        |   |  |  |   | 
|---------------------------------------- |  | -------------- | ------ | ------------ |  | ----------- | ------ | - |  |  | - | 
|                                         |  | Gross Carrying |        | Accumulated  |  | Amortizable
|                                         |  | Amount         |        | Amortization |  | Life       
|                                         |  |                |        |              |  |            
|Amortizable intangible assets:           |  |                |        |              |  |             |        |   |  |  |   | 
|Customer list                            |  | $              | 915    |              |  | $           | (183   | ) |  |  | 5 | 
|Other intangible assets                  |  |                | 2,625  |              |  |             | (1,331 | ) |  |  | 5 | 
|                                         |  |                |        |              |  |             |        |   |  |  |   | 
|Total amortizable intangible assets      |  | $              | 3,540  |              |  | $           | (1,514 | ) |  |  |   | 
|                                         |  |                |        |              |  |             |        |   |  |  |   | 
|Indefinite-lived intangible assets:      |  |                |        |              |  |             |        |   |  |  |   | 
|Cellular licenses                        |  | $              | 18,194 |              |  |             |        |   |  |  |   | 
|PCS licenses                             |  |                | 3,023  |              |  |             |        |   |  |  |   | 
|Domain names and trade names             |  |                | 80     |              |  |             |        |   |  |  |   | 
|                                         |  |                |        |              |  |             |        |   |  |  |   | 
|Total indefinite-lived intangible assets |  | $              | 21,297 |              |  |             |        |   |  |  |   | 
|                                         |  |                |        |              |  |             |        |   |  |  |   | 

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

3. GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

The total intangible amortization expense for the six months ended June
30, 2002 and 2001 was $354 and $566, respectively. The estimated amortization
expense for each of the next five years ending December 31, is as follows:

|     |  |   |     | 
|---- |  | - | --- | 
|2002 |  | $ | 708 | 
|2003 |  | $ | 708 | 
|2004 |  | $ | 690 | 
|2005 |  | $ | 183 | 
|2006 |  | $ | 92  | 

4. 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 both periods presented and the assets and liabilities of the
disposal group have been written down as of March 30, 2002 to their fair value,
net of expected selling expenses. During the second quarter, the Company
revised its initial fair value estimate, writing down the net assets by an
additional $400. The following discloses the results of the discontinued
operations for the six months ended June 30, 2002 and 2001:

|                                             |  |                  |        |      |  |   |       |  
|-------------------------------------------- |  | ---------------- | ------ | ---- |  | - | ----- | -
|                                             |  | Six Months Ended
|                                             |  | June 30,        
|                                             |  |                 
|                                             |  | 2002             |        | 2001
|                                             |  |                  |        |     
|Operating revenue                            |  | $                | 425    |      |  | $ | 498   |  
|Operating expenses                           |  |                  | 720    |      |  |   | 1,233 |  
|                                             |  |                  |        |      |  |   |       |  
|Operating loss                               |  |                  | (295   | )    |  |   | (735  | )
|Interest expense                             |  |                  | (32    | )    |  |   | (66   | )
|                                             |  |                  |        |      |  |   |       |  
|Loss from operations of discontinued segment |  |                  | (327   | )    |  |   | (801  | )
|Write down of net assets to fair value       |  |                  | (7,060 | )    |  |   |      |  
|                                             |  |                  |        |      |  |   |       |  
|Loss from discontinued operations            |  | $                | (7,387 | )    |  | $ | (801  | )
|                                             |  |                  |        |      |  |   |       |  

Assets held for sale at June 30, 2002 consist of the following:

|                                             |  |   |      |  
|-------------------------------------------- |  | - | ---- | -
|Accounts receivable, net of allowance of $34 |  | $ | 86   |  
|Other current assets                         |  |   | 14   |  
|Property, plant and equipment                |  |   | 228  |  
|Intangible assets                            |  |   | 100  |  
|Current liabilities                          |  |   | (151 | )
|                                             |  |   |      |  
|Assets held for sale                         |  | $ | 277  |  
|                                             |  |   |      |  

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

5. STOCK INCENTIVE PLANS

The Companys employees participate in various plans of ACS Group, which
through its Compensation Committee of the Board of Directors, may grant stock
options, stock appreciation rights and other awards to officers, employees and
non-employee directors. At June 30, 2002, ACS Group has reserved a total of
6,060 shares of authorized common stock for issuance under the various plans.
The plans terminate in approximately 10 years from the date of adoption and
allow forfeited options to be reissued. Unless otherwise determined by the
Compensation Committee, options will vest ratably on each of the first four
anniversaries after the grant date and will have an exercise price equal to the
fair market value of the common stock on the date of grant. The term of options
granted under the plan may not exceed 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 in
November 1999 in connection with its initial public offering. At June 30, 2002,
5,712 options have been granted, 1,595 have been forfeited, 441 have been
exercised, and 793 shares are available for grant under the plan.

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

On February 20, 2002, the Parents Board of Directors approved the grant
of options to purchase 80 shares under the plan to employees at an exercise
price equal to the fair market value of the common stock on the date of grant,
vesting over three years ratably.

On March 19, 2002, the Parents Board of Directors approved the grant of
options to purchase 22 shares under the plan to employees at an exercise price
equal to the fair market value of the common stock on the date of grant,
vesting over three years ratably.

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

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

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

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

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

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##### Table of Contents



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

5. STOCK INCENTIVE PLANS (Continued)

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

This plan was also adopted in connection with ACS Groups initial public
offering in November 1999. At June 30, 2002, 270 shares have been issued under
the plan and 730 shares are available for issuance and sale. The plan will
terminate on December 31, 2009. All ACS Group employees and all of the
employees of designated subsidiaries generally will be eligible to participate
in the purchase plan, other than employees whose customary employment is 20
hours or less per week or is for not more than five months in a calendar year,
or who are ineligible to participate due to restrictions under the Internal
Revenue Code.

On June 28, 2002, 53 shares were issued under the plan.

6. BUSINESS SEGMENTS

The Company has five reportable segments: local telephone, cellular,
directory, Internet and interexchange. Local telephone provides landline
telecommunications services, and consists of local telephone service, network
access and deregulated and other revenues; cellular provides wireless
telecommunications service; directory provides yellow page advertising and
other related products; Internet provides Internet service and IP based private
network service; and interexchange provides long distance and private network
services. Each reportable segment is a strategic business under separate
management and offering different services than those offered by the other
segments. The Company also has a wireless cable television service segment that
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 on the original May 14,
1999 purchases, and other operating and non operating income and expense at the
corporate level which are not allocated to the business segments, nor are they
evaluated by the chief operating decision maker in analyzing the performance of
the business segments. These non operating income and expense items are
provided in the accompanying table under the caption All Other in order to
assist the users of these financial statements in reconciling the operating
results and total assets of the business segments to the consolidated financial
statements. Common use assets are held at the Company and are allocated to the
business segments based on operating revenues. Included in the caption All
Other are also the net assets held for sale of $277 and other net liabilities
of the discontinued operation that would not be sold of $5,709. 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 six months ended June 30, 2002:

|                                         |  |           |         |          |  |           |        |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------- |  | --------- | ------- | -------- |  | --------- | ------ | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                         |  | Local     |         |          |  |           |        |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |  
|                                         |  | Telephone |         | Cellular |  | Directory |        | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                                         |  |           |         |          |  |           |        |          |  |               |        |           |  |              |        |      
|Operating revenues                       |  | $         | 119,313 |          |  | $         | 19,768 |          |  | $             | 17,022 |           |  | $            | 8,393  |       |  | $ | 14,638 |   |  | $ | 9,896   |   |  | $ | (14,883 | ) |  | $ | 174,147 |  
|Depreciation and amortization            |  |           | 27,475  |          |  |           | 2,755  |          |  |               | 2      |           |  |              | 2,974  |       |  |   | 1,138  |   |  |   | 4,888   |   |  |   |        |   |  |   | 39,232  |  
|Operating income (loss)                  |  |           | 22,945  |          |  |           | 2,030  |          |  |               | 10,056 |           |  |              | (9,908 | )     |  |   | (566   | ) |  |   | 3,468   |   |  |   | (37     | ) |  |   | 27,988  |  
|Interest expense                         |  |           | 809     |          |  |           | (2     | )        |  |               |       |           |  |              | (55    | )     |  |   | (151   | ) |  |   | (24,319 | ) |  |   |        |   |  |   | (23,718 | )
|Interest income                          |  |           | 1       |          |  |           | 1      |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 1,169   |   |  |   |        |   |  |   | 1,171   |  
|Income tax provision (benefit)           |  |           | 9,571   |          |  |           | 796    |          |  |               | 4,134  |           |  |              |       |       |  |   |       |   |  |   | (14,501 | ) |  |   |        |   |  |   |        |  
|Income (loss) from
continuing operations |  |           | 14,184  |          |  |           | 1,133  |          |  |               | 5,922  |           |  |              | (9,987 | )     |  |   | (717   | ) |  |   | (5,453  | ) |  |   | (37     | ) |  |   | 5,045   |  
|Total assets                             |  |           | 615,055 |          |  |           | 99,149 |          |  |               | 44,066 |           |  |              | (8,466 | )     |  |   | 19,747 |   |  |   | 9,485   |   |  |   |        |   |  |   | 779,036 |  
|Capital expenditures                     |  |           | 13,295  |          |  |           | 5,111  |          |  |               | 436    |           |  |              | 10,099 |       |  |   |       |   |  |   | 5,340   |   |  |   |        |   |  |   | 34,281  |  

12



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

6. BUSINESS SEGMENTS (Continued)

Operating revenues disclosed above include intersegment operating revenues
of $11,323 for local telephone, $882 for cellular, $702 for directory and
$6,809 for interexchange. In accordance with SFAS No. 71, intercompany revenues
between local telephone and all other segments are not eliminated above.

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

|                                         |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------- |  | --------- | ------- | -------- |  | --------- | ------- | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                         |  | Local     |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |         |   |  |  
|                                         |  | Telephone |         | Cellular |  | Directory |         | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                                         |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |      
|Operating revenues                       |  | $         | 109,158 |          |  | $         | 19,706  |          |  | $             | 16,152 |           |  | $            | 6,314  |       |  | $ | 15,656 |   |  | $ | 8,238   |   |  | $ | (12,745 | ) |  | $ | 162,479 |  
|Depreciation and amortization            |  |           | 26,229  |          |  |           | 2,843   |          |  |               |       |           |  |              | 1,246  |       |  |   | 1,144  |   |  |   | 7,502   |   |  |   |        |   |  |   | 38,964  |  
|Operating income (loss)                  |  |           | 17,246  |          |  |           | 2,678   |          |  |               | 9,262  |           |  |              | (4,364 | )     |  |   | (2,203 | ) |  |   | (213    | ) |  |   |        |   |  |   | 22,406  |  
|Interest expense                         |  |           | (885    | )        |  |           | (3      | )        |  |               |       |           |  |              | (76    | )     |  |   | (152   | ) |  |   | (28,794 | ) |  |   |        |   |  |   | (29,910 | )
|Interest income                          |  |           | 3       |          |  |           | 12      |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 1,745   |   |  |   |        |   |  |   | 1,760   |  
|Income tax provision (benefit)           |  |           | 6,649   |          |  |           | 1,154   |          |  |               | 3,632  |           |  |              |       |       |  |   |       |   |  |   | (11,534 | ) |  |   |        |   |  |   | (99     | )
|Income (loss) from
continuing operations |  |           | 9,693   |          |  |           | 1,618   |          |  |               | 5,630  |           |  |              | (4,426 | )     |  |   | (2,356 | ) |  |   | (15,739 | ) |  |   |        |   |  |   | (5,580  | )
|Total assets                             |  |           | 625,920 |          |  |           | 102,928 |          |  |               | 37,716 |           |  |              | 37,963 |       |  |   | 70,720 |   |  |   | 23,777  |   |  |   |        |   |  |   | 899,024 |  
|Capital expenditures                     |  |           | 21,545  |          |  |           | 446     |          |  |               |       |           |  |              | 13,524 |       |  |   | 19,504 |   |  |   | 1,148   |   |  |   |        |   |  |   | 56,167  |  

Operating revenues disclosed above include intersegment operating revenues
of $9,949 for local telephone, $603 for cellular, $500 for directory and
$13,097 for interexchange. In accordance with SFAS No. 71, intercompany
revenues between local telephone and all other segments are not eliminated
above.

The following table illustrates selected financial data for each segment
as of and for the three months ended June 30, 2002:

|                                         |  |           |         |          |  |           |        |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|---------------------------------------- |  | --------- | ------- | -------- |  | --------- | ------ | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                         |  | Local     |         |          |  |           |        |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |        |   |  |  
|                                         |  | Telephone |         | Cellular |  | Directory |        | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                                         |  |           |         |          |  |           |        |          |  |               |        |           |  |              |        |      
|Operating revenues                       |  | $         | 63,991  |          |  | $         | 10,781 |          |  | $             | 8,381  |           |  | $            | 4,551  |       |  | $ | 7,504  |   |  | $ | 5,055   |   |  | $ | (7,749 | ) |  | $ | 92,514  |  
|Depreciation and amortization            |  |           | 13,794  |          |  |           | 1,390  |          |  |               | 1      |           |  |              | 1,721  |       |  |   | 564    |   |  |   | 2,503   |   |  |   |       |   |  |   | 19,973  |  
|Operating income (loss)                  |  |           | 14,356  |          |  |           | 1,273  |          |  |               | 4,845  |           |  |              | (6,044 | )     |  |   | (287   | ) |  |   | 1,318   |   |  |   | (15    | ) |  |   | 15,446  |  
|Interest expense                         |  |           | 1,242   |          |  |           | (1     | )        |  |               |       |           |  |              | (48    | )     |  |   | (76    | ) |  |   | (12,092 | ) |  |   |       |   |  |   | (10,975 | )
|Interest income                          |  |           |        |          |  |           | 1      |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 606     |   |  |   |       |   |  |   | 607     |  
|Income tax provision (benefit)           |  |           | 6,882   |          |  |           | 502    |          |  |               | 1,992  |           |  |              |       |       |  |   |       |   |  |   | (9,376  | ) |  |   |       |   |  |   |        |  
|Income (loss) from
continuing operations |  |           | 8,716   |          |  |           | 668    |          |  |               | 2,853  |           |  |              | (6,116 | )     |  |   | (363   | ) |  |   | (997    | ) |  |   | (15    | ) |  |   | 4,746   |  
|Total assets                             |  |           | 617,008 |          |  |           | 99,967 |          |  |               | 42,275 |           |  |              | (8,192 | )     |  |   | 19,027 |   |  |   | 8,951   |   |  |   |       |   |  |   | 779,036 |  
|Capital expenditures                     |  |           | 7,325   |          |  |           | 4,156  |          |  |               | 238    |           |  |              | 6,973  |       |  |   |       |   |  |   | 2,343   |   |  |   |       |   |  |   | 21,035  |  

Operating revenues disclosed above include intersegment operating revenues
of $5,947 for local telephone, $477 for cellular, $351 for directory and $3,611
for interexchange. In accordance with SFAS No. 71, intercompany revenues
between local telephone and all other segments are not eliminated above.

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

|                                         |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|---------------------------------------- |  | --------- | ------- | -------- |  | --------- | ------- | -------- |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                         |  | Local     |         |          |  |           |         |          |  |               |        |           |  |              |        |       |  |   |        |   |  |   |         |   |  |   |        |   |  |  
|                                         |  | Telephone |         | Cellular |  | Directory |         | Internet |  | Interexchange |        | All Other |  | Eliminations |        | Total
|                                         |  |           |         |          |  |           |         |          |  |               |        |           |  |              |        |      
|Operating revenues                       |  | $         | 54,461  |          |  | $         | 10,417  |          |  | $             | 8,213  |           |  | $            | 3,203  |       |  | $ | 7,584  |   |  | $ | 4,110   |   |  | $ | (6,488 | ) |  | $ | 81,500  |  
|Depreciation and amortization            |  |           | 13,182  |          |  |           | 1,444   |          |  |               |       |           |  |              | 626    |       |  |   | 560    |   |  |   | 3,742   |   |  |   |       |   |  |   | 19,554  |  
|Operating income (loss)                  |  |           | 7,737   |          |  |           | 1,633   |          |  |               | 4,839  |           |  |              | (1,998 | )     |  |   | 16     |   |  |   | (131    | ) |  |   |       |   |  |   | 12,096  |  
|Interest expense                         |  |           | (402    | )        |  |           |        |          |  |               |       |           |  |              | (42    | )     |  |   | (77    | ) |  |   | (14,031 | ) |  |   |       |   |  |   | (14,552 | )
|Interest income                          |  |           |        |          |  |           |        |          |  |               |       |           |  |              |       |       |  |   |       |   |  |   | 708     |   |  |   |       |   |  |   | 708     |  
|Income tax provision (benefit)           |  |           | 2,974   |          |  |           | 715     |          |  |               | 1,814  |           |  |              |       |       |  |   |       |   |  |   | (5,552  | ) |  |   |       |   |  |   | (49     | )
|Income (loss) from
continuing operations |  |           | 4,370   |          |  |           | 999     |          |  |               | 3,025  |           |  |              | (2,030 | )     |  |   | (61    | ) |  |   | (7,971  | ) |  |   |       |   |  |   | (1,668  | )
|Total assets                             |  |           | 624,617 |          |  |           | 104,857 |          |  |               | 38,094 |           |  |              | 38,083 |       |  |   | 69,694 |   |  |   | 23,679  |   |  |   |       |   |  |   | 899,024 |  
|Capital expenditures                     |  |           | 9,796   |          |  |           | 59      |          |  |               |       |           |  |              | 2,397  |       |  |   |       |   |  |   |        |   |  |   |       |   |  |   | 12,252  |  

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

6. BUSINESS SEGMENTS (Continued)

Operating revenues disclosed above include intersegment operating revenues
of $5,578 for local telephone, $375 for cellular, $250 for directory and $6,617
for interexchange. In accordance with SFAS No. 71, intercompany revenues
between local telephone and all other segments are not eliminated above.

7. RELATED PARTY TRANSACTIONS

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 4.64% as of June 30, 2002, and is due on April 15,
2005. The note is secured by a pledge of 100 shares of the Companys stock held
in the officers name. In accordance with an addendum to the officers
employment agreement dated May 3, 2001, the loan will be forgiven ratably over
a three year period ending April 16, 2004. Accordingly, $114 was forgiven on
April 16, 2002 and recognized as compensation expense. The note balance,
including accrued interest, was $231 as of June 30, 2002.

Fox Paine & Company, the majority stockholder of the Parent, receives an
annual management fee in the amount of one percent of the Companys net income
before interest expense, income taxes and depreciation and amortization,
calculated without regard to the fee. The management fee expense for the six
months ended June 30, 2002 and 2001 was $656 and $603, respectively.

8. SEVERANCE AND RESTRUCTURING CHARGES

The Company recorded $3,019 related to severance and restructuring charges
under several plans adopted during 2000. The Company completed these plans as
of June 30, 2002 and approximately 180 employees have been terminated. The
Company recorded additional expense of $138 during the quarter to complete
these plans.

In connection with the completion of the above restructuring plans, the
Company adopted another restructuring plan in June 2002. Employee force
reductions resulting from this restructuring plan are expected to total
approximately 30, which the Company expects to complete by December 31, 2002.
The Company recorded $523 related to severance charges under this plan. The
Company also recorded $339 in lease termination costs of office space in
Anchorage, Alaska. As of June 30, 2002, the Company has not paid out any
amounts accrued under this plan.

9. COMMITMENTS AND CONTINGENCIES

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

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.

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

9. COMMITMENTS AND CONTINGENCIES (Continued)

In December 2001, the Company entered into a material contract with the
State of Alaska to provide it with comprehensive telecommunications services
for a period of five years. This contract obligates the Company to, among other
things, provide on the states behalf customer premise equipment and other
capital assets which the Company believes will range between $25,000 and
$30,000 over the term of the agreement, including $20,000 to $25,000 during
2002, of which approximately $5,500 has been expended through June 30, 2002.
The Company intends to fund this commitment with cash on hand and cash flows
from operations.

10. SUBSEQUENT EVENT

On July 15, 2002 the Company fulfilled a commitment to a third party to provide
to that party a loan in the form of an unsecured note receivable totaling
$15,000 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.

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

FORWARD LOOKING STATEMENTS AND ANALYSTS REPORTS

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

Actual future performance, outcomes and results may differ materially from
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 SFAS No. 71 to the Companys wireline subsidiaries; and
possible changes in the demand for the Companys products and services. In
addition to these factors, actual future performance, outcomes and results may
differ materially because of other, more general, factors including (without
limitation) changes in general industry and market conditions and growth rates;
changes in interest rates or other general national, regional or local economic
conditions; governmental and public policy changes; changes in accounting
policies or practices adopted voluntarily or as required by accounting
principles generally accepted in the United States of America; and the
continued availability of financing in the amounts, at the terms and on the
conditions necessary to support the Companys future business.

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

INTRODUCTION

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

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

| |   |  |                                               |  |                                                                                                                                          
| | - |  | --------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
| |  |  | local telephone services, including:         
|
| |   |  |                                              |  | basic local service to retail customers within the Companys service areas,                                                              
|
| |   |  |                                              |  | wholesale service to competitive local exchange carriers (CLECs),                                                                      
|
| |   |  |                                              |  | network access services to interexchange
carriers for origination and termination of interstate and
intrastate long distance phone calls,
|
| |   |  |                                              |  | enhanced services,                                                                                                                       
|
| |   |  |                                              |  | ancillary services, such as billing & collections (B&C), and                                                                            
|
| |   |  |                                              |  | universal service payments;                                                                                                              
|
| |  |  | cellular services;                           
|
| |  |  | directory advertising;                       
|
| |  |  | Internet services; and                       
|
| |  |  | interexchange network long-distance services.

Local Telephone Within the telecommunications industry, local exchange
carriers (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. Revenue is also
generated from ancillary 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 pricing and settlement methodologies,                                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | authorized rates of return for regulated services,                                                                       
|
| |  |  | whether an access line is used by a business or residential subscriber,                                                  
|
| |  |  | whether an access line is used by a retail or wholesale subscriber,                                                      
|
| |  |  | intrastate and interstate calling patterns,                                                                              
|
| |  |  | customers selection of various local rate plan options,                                                                 
|
| |  |  | selection of enhanced calling services, such as voice
mail, or other packaged products, such as cellular and Internet
and
|
| |  |  | other subscriber usage characteristics.                                                                                  

LECs have three basic tiers of customers:



| |  |  | business and residential customers located in their
local service areas that pay for local phone service,                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | interexchange carriers that pay for access to long
distance calling customers located within its local service
areas and                                                                                      
|
| |  |  | CLECs that pay for wholesale access to the Companys
network in order to provide competitive local service on either
a wholesale or unbundled network element (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.

The Companys local service rates for end users are authorized by the
Regulatory Commission of Alaska (RCA). Authorized rates are set by the
Federal Communications Commission (FCC) and the RCA for interstate and
intrastate access charges, respectively, and may change from time to time.

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Cellular- The Company is the largest and only statewide provider of
cellular services in Alaska, currently serving approximately 80,000
subscribers. Its cellular network covers over 470,000 residents, including all
major population centers and highway corridors. The Company operates a TDMA
digital network in substantially all of its service areas, and is in the
process of upgrading this network to a new generation of digital network known
as CDMA.

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

Internet- The Company is the second largest provider of Internet access
services in Alaska with over 47,000 customers. The Company offers dial-up and
dedicated digital subscriber line, (DSL) Internet access to its customers.

Interexchange- The Company provides long distance and other interexchange
services to approximately 65,000 customers in Alaska. The traffic from these
customers are carried over the Companys own or leased facilities.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30,
2001

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

Operating Revenues

Operating revenues increased $11.0 million, or 13.5%, for the three months
ended June 30, 2002 compared to the three months ended June 30, 2001. Local
telephone, cellular, directory advertising and Internet all increased compared
to the corresponding period of 2001, while interexchange revenues decreased
compared to the corresponding period of 2001.

Local Telephone

Local telephone revenues, which consist of local network service, network
access revenue and deregulated and other revenue, increased $9.5 million, or
17.5%, for the three months ended June 30, 2002 compared to the same period in
2001. The following table summarizes the Companys consolidated local telephone
revenues by category.

|                              |                               |   |                    |        |      |   |        |        | 
|----------------------------- | ----------------------------- | - | ------------------ | ------ | ---- | - | ------ | ------ | 
|                              |                               |   | Three Months Ended
|                              |                               |   | June 30,          
|                              |                               |   |                   
|                              |                               |   | 2002               |        | 2001
|                              |                               |   |                    |        |     
|                              |                               |   | (In Thousands)    
|Local telephone revenue:      |                               |   |                    |        |      |   |        |       
|                              | Local network service         |   | $                  | 25,040 |      |   | $      | 22,879 | 
|                              | Network access revenue        |   |                    | 34,929 |      |   |        | 25,029 | 
|                              | Deregulated and other revenue |   |                    | 4,022  |      |   |        | 6,553  | 
|                              |                               |   |                    |        |      |   |        |       
|Total local telephone revenue |                               | $ | 63,991             |        |      | $ | 54,461 |       
|                              |                               |   |                    |        |      |   |        |       

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

|                                   |  |                |         |      |  |  |         | 
|---------------------------------- |  | -------------- | ------- | ---- |  |  | ------- | 
|                                   |  | As of June 30,
|                                   |  |               
|                                   |  | 2002           |         | 2001
|                                   |  |                |         |     
|Retail access lines                |  |                | 246,310 |      |  |  | 268,419 | 
|Wholesale access lines             |  |                | 24,970  |      |  |  | 17,964  | 
|Unbundled network elements         |  |                | 57,633  |      |  |  | 43,672  | 
|                                   |  |                |         |      |  |  |         | 
|Total local telephone access lines |  |                | 328,913 |      |  |  | 330,055 | 
|                                   |  |                |         |      |  |  |         | 

The local network service component of local telephone revenues was $25.0
million for the three months ended June 30, 2002 compared with $22.9 million
for the three months ended June 30, 2001. Revenue increased $2.1 million or
9.4% from the prior year. Approximately $1.0 million of this increase was due
to rate increases for both retail and UNE local service rates implemented
during the fourth quarter of 2001 at ACSA, as discussed below. The Company also
experienced increased cellular local access revenue and service order revenue
compared to the prior year, which together accounted for approximately $0.4
million of the increase. Additionally, the Company has improved its collection
practices over those in place during the second quarter of 2001, thereby
reducing its recorded bad debt expense by $0.9 million.

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 is expected to generate approximately $4.0 to $5.0 million
in annual revenue. The Company expects the RCA to hold hearings during 2002 and
adjudicate final local service rates during 2003.

The Company continued to experience loss of retail market share for local
network service in its Anchorage, Fairbanks and Juneau service areas during the
quarter. 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 for UNEs currently
in place. 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 is expected
to generate approximately $0.6 million to $0.7 million in annual revenue. The
Company expects the RCA to hold hearings during 2002 and adjudicate final
Anchorage UNE rates during 2003.

Network access revenues increased by $9.9 million, or 39.6%, from $25.0
million in 2001 to $34.9 million in 2002. During the quarter, the Company
recognized as revenue $11.1 million of previously deferred interstate access
revenues 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. Network access revenues are based on a regulated return on rate base
and recovery of allowable expenses associated with the origination and
termination of toll calls for the Companys retail and resale customers. After
consideration of the revenue recognized as a result of the favorable ruling by
the court, the decrease in network access revenues compared to the
corresponding period in 2001 is due primarily to a shift from retail and resale
lines to UNEs. Management expects that network access revenues will decline as
a component of local telephone revenues for the foreseeable future.

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Deregulated and other revenues, which declined $2.5 million, or 38.6% 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 decline in customer premise equipment (CPE)
sales of approximately $1.6 million. CPE sales tend to fluctuate significantly
from quarter to quarter and appear to be impacted by recent economic concerns
in the marketplace. In addition, B&C, paystation, and late fee revenue have
all declined compared to the prior year as a result of changes in the
marketplace.

Cellular

Cellular revenues increased $0.4 million, or 3.5%, to $10.8 million for
the three months ended June 30, 2002 compared to $10.4 million for the three
months ended June 30, 2001. This increase was due to a growth in average
subscribers of 3.4% from 77,689 in 2001 to 80,354 in 2002. The average revenue
per unit, or ARPU, was stable at $44.68 in 2002 compared to $44.67 during 2001.

Directory

Directory revenues increased by $0.2 million, or 2.0%, from $8.2 million
in 2001 to $8.4 million in 2002. This growth reflects improved penetration and
revenue per advertiser for the current directory phone book cycles compared
with 2001. Management expects the growth in directory revenues to slow as other
advertising vehicles, such as the Internet, television and radio, compete for
this business and the market matures. Additionally, management believes that
directory revenues will grow at a slower rate in the near term due to the
recent economic uncertainty and its impacts on the advertising and publishing
marketplace.

Internet

Internet revenues increased from $3.2 million in 2001 to $4.6 million in
2002  an increase of $1.4 million, or 42.1%. This increase is primarily due
to a growth in DSL subscribers of 98.8% from 4,958 in 2001 to 9,856 in 2002,
the revenues of MosquitoNet, an Internet Service Provider which was acquired on
July 6, 2001, and revenues associated with the Companys contract with the
State of Alaska.

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. Services under this contract began to be
implemented during the second quarter of 2002. Accordingly, the Company
anticipates revenues for this segment will increase in future periods. The
Company anticipates substantial capital investments will be made over the life
of the contract to support the telecommunications needs of this customer.

Interexchange

Interexchange revenues decreased from $5.2 million in 2001 to $4.8 million
in 2002  a decrease of $0.4 million, or 7.5%. The decrease was due to a
decline in long distance minutes of use from 60.8 million in 2001 to 38.9
million in 2002, and a decline in long distance subscribers 66,341 in 2001 to
64,958 in 2002. The decline in minutes of use was due to the Companys decision
to terminate an unlimited $20 per month interstate calling plan, which was
marketed as Infinite Minutes, in May of 2001 and increased competition in the
marketplace.

Operating Expenses

Operating expenses increased $7.7 million, or 11.0%, from $69.4 million
for the three months ended June 30, 2001 to $77.1 million for the three months
ended June 30, 2002. Operating expenses decreased as a percentage of operating
revenues from 85.2% in 2001 to 83.3% in 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 increased from
$30.4 million for the three months ended June 30, 2001 to $32.6 million for the
three months ended June 30, 2002. The increase is due
substantially to $2.2 million in additional costs incurred during the quarter related primarily to
severance and restructuring charges and rate case expenses.

Cellular

Cellular expense increased $0.7 million, or 11.8%, for the three months
ended June 30, 2002 compared to the three months ended June 30, 2001. This
increase is due to an increase in minutes of use from 42.6 million minutes in
2001 to 50.4 million minutes in 2002.

Directory

Directory expenses increased $0.1 million from $3.4 million in 2001 to
$3.5 million in 2002. This increase is due to an increase in costs of good sold
associated with the growth in revenue.

Internet

Internet expenses increased by $4.0 million, or 124.0%, from $3.3 million
in 2001 to $7.3 million in 2002. The increase in Internet expenses was due
principally to start-up expenses associated with commencing services under the
State of Alaska telecommunications contract. The acquisition in July 2001 of
MosquitoNet 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 $0.2 million, or 2.6%.

Depreciation and Amortization

Depreciation and amortization expense increased $0.4 million, or 2.1%, due
principally to increases in plant in service for the three months ended June
30, 2002 over the corresponding period of 2001 offset by ceasing goodwill
amortization with the adoption of SFAS No. 142, Goodwill and Intangible Assets
on January 1, 2002. Depreciation and amortization expense in 2001 included $1.9
million of goodwill amortization. Under SFAS No. 142, goodwill is no longer
amortized but is instead subjected to an annual impairment test.

Interest Expense and Interest Income and Other

Interest expense decreased $3.6 million, or 24.6%, for the three months
ended June 30, 2002 compared to the three months ended June 30, 2001 as a
result of market interest rate effects on the Companys variable interest rate
debt combined with the reversal of previously accrued interest expense of $1.7
million as a result of a favorable ruling by the District of Columbia Court of
Appeals related to a dispute on interstate access rates for the Anchorage
market. Interest income and other also declined by $0.5 million, or 62.8%, as a
result of a lower average invested cash balance and lower market interest rates
during 2002 compared to 2001.

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Income Taxes

The Company has fully reserved the income tax benefit of $62.4 million
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 both periods presented and the assets and
liabilities of the disposal group have been written down as of March 30, 2002
to their fair value, net of expected selling expenses. During the second
quarter, the Company revised its initial estimate of fair value down by $0.4
million. The write down and results of operations of this discontinued segment
resulted in a charge to discontinued operations of $0.5 million and $0.5
million for the three months ended June 30, 2002 and 2001, respectively. The
Company has fully reserved in the form of a valuation allowance $3.0 million of
income tax benefit resulting from this discontinuance incurred during 2002.

Net income (loss)

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

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

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

Operating Revenues

Operating revenues increased $11.7 million, or 7.2%, for the six months
ended June 30, 2002 compared to the six months ended June 30, 2001. Local
telephone, cellular, directory advertising and Internet all increased compared
to the corresponding period of 2001, while interexchange revenues decreased
compared to the corresponding period of 2001.

Local Telephone

Local telephone revenues, which consist of local network service, network
access revenue and deregulated and other revenue, increased $10.2 million, or
9.3%, for the six months ended June 30, 2002 compared to the same period in
2001. The following table summarizes the Companys consolidated local telephone
revenues by category.

|                              |                               |   |                  |        |      |   |         |        | 
|----------------------------- | ----------------------------- | - | ---------------- | ------ | ---- | - | ------- | ------ | 
|                              |                               |   | Six Months Ended
|                              |                               |   | June 30,        
|                              |                               |   |                 
|                              |                               |   | 2002             |        | 2001
|                              |                               |   |                  |        |     
|                              |                               |   | (In Thousands)  
|Local telephone revenue:      |                               |   |                  |        |      |   |         |       
|                              | Local network service         |   | $                | 50,684 |      |   | $       | 46,142 | 
|                              | Network access revenue        |   |                  | 59,965 |      |   |         | 51,265 | 
|                              | Deregulated and other revenue |   |                  | 8,664  |      |   |         | 11,751 | 
|                              |                               |   |                  |        |      |   |         |       
|Total local telephone revenue |                               | $ | 119,313          |        |      | $ | 109,158 |       
|                              |                               |   |                  |        |      |   |         |       

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

|                                   |  |                |         |      |  |  |         | 
|---------------------------------- |  | -------------- | ------- | ---- |  |  | ------- | 
|                                   |  | As of June 30,
|                                   |  |               
|                                   |  | 2002           |         | 2001
|                                   |  |                |         |     
|Retail access lines                |  |                | 246,310 |      |  |  | 268,419 | 
|Wholesale access lines             |  |                | 24,970  |      |  |  | 17,964  | 
|Unbundled network elements         |  |                | 57,633  |      |  |  | 43,672  | 
|                                   |  |                |         |      |  |  |         | 
|Total local telephone access lines |  |                | 328,913 |      |  |  | 330,055 | 
|                                   |  |                |         |      |  |  |         | 

The local network service component of local telephone revenues was $50.7
million for the six months ended June 30, 2002 compared with $46.1 million for
the six months ended June 30, 2001. Revenue increased $4.6 million or 9.8% from
the prior year. Approximately $2.2 million of this increase was due to rate
increases for both retail and UNE local service rates implemented during the
fourth quarter of 2001 at ACSA, as discussed below. The Company also
experienced increased cellular local access revenue and service order revenue
compared to the prior year, which together accounted for approximately $1.0
million of the increase. Additionally, the Company has improved its collection
practices over those in place during the first quarter of 2001, thereby
reducing its recorded bad debt expense by $1.4 million.

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 is expected to generate approximately $4.0 to $5.0 million
in annual revenue. The Company expects the RCA to hold hearings during 2002 and
adjudicate final local service rates during 2003.

The Company continued to experience loss of retail market share for local
network service in its Anchorage, Fairbanks and Juneau service areas during the
quarter. 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 for UNEs currently
in place. 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 is expected
to generate approximately $0.6 million to $0.7 million in annual revenue The
Company expects the RCA to hold hearings during 2002 and adjudicate final
Anchorage UNE rates during 2003.

Network access revenues increased by $8.7 million, or 17.0%, from $51.3
million in 2001 to $60.0 million in 2002. During the second quarter of 2002,
the Company recognized as revenue $11.1 million of previously deferred
interstate access revenues related to a dispute on interstate access rates for
the Anchorage market based on a favorable ruling by the District of Columbia
Court of Appeals. Network access revenues are based on a regulated return on
rate base and recovery of allowable expenses associated with the origination
and termination of toll calls for the Companys retail and resale customers.
After consideration of the revenue recognized as a result of the favorable
ruling by the court, the decrease in network access revenues compared to the
corresponding period in 2001 is due primarily to a shift from retail and resale
lines to UNEs. 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 $3.1 million, or 26.3% 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 decline in CPE sales of approximately $2.2
million. CPE sales tend to fluctuate significantly from quarter to quarter and
appear to be impacted by recent economic

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concerns in the marketplace. In addition, B&C, paystation, and late fee
revenue have all declined compared to the prior year as a result of changes in
the marketplace.

Cellular

Cellular revenues increased $0.1 million, or 0.3%, to $19.8 million for
the six months ended June 30, 2002 compared to $19.7 million for the six months
ended June 30, 2001. This increase is due to growth in average subscribers of
4.4% from 77,254 in 2001 to 80,615 in 2002. Average revenue per unit, or ARPU,
decreased from $42.49 in 2001 to $40.83 in 2002. The decrease in ARPU is the
result of pricing programs implemented during 2001 that offer more minutes for
a lower price than was offered in the previous year.

Directory

Directory revenues increased by $0.9 million, or 5.4%, from $16.1 million
in 2001 to $17.0 million in 2002. This growth reflects improved penetration and
revenue per advertiser for the current directory phone book cycles compared
with 2001. Management expects the growth in directory revenues to slow as other
advertising vehicles, such as the Internet, television and radio, compete for
this business and the market matures. Additionally, management believes that
directory revenues will grow at a slower rate in the near term due to the
recent economic uncertainty and its impacts on the advertising and publishing
marketplace.

Internet

Internet revenues increased from $6.3 million in 2001 to $8.4 million in
2002  an increase of $2.1 million, or 32.9%. This increase is primarily due
to a growth in DSL subscribers of 98.8% from 4,958 in 2001 to 9,856 in 2002,
the revenues of MosquitoNet, an Internet Service Provider which was acquired on
July 6, 2001, and revenues associated with the Companys contract with the
State of Alaska.

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. Services under this contract began to be
implemented during the second quarter of 2002. Accordingly, the Company
anticipates revenues for this segment will increase in future periods. The
Company anticipates substantial capital investments will be made over the life
of the contract to support the telecommunications needs of this customer.

Interexchange

Interexchange revenues decreased from $11.2 million in 2001 to $9.7
million in 2002  a decrease of $1.5 million, or 13.4%. The decrease was due
to a decline in long distance minutes of use from 129.6 million in 2001 to 76.8
million in 2002, and a 2.1% decline in long distance subscribers from 66,341 in
2001 to 64,958 in 2002. The decline in minutes of use was due to the Companys
decision to terminate an unlimited $20 per month interstate calling plan, which
was marketed as Infinite Minutes, in May of 2001 and increased competition in
the marketplace.

Operating Expenses

Operating expenses increased $6.1 million, or 4.3%, from $140.1 million
for the six months ended June 30, 2001 to $146.2 million for the six months
ended June 30, 2002.

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 increased from
$59.3 million for the six months ended June 30, 2001 to $61.6 million for the
six months ended June 30, 2002. The increase is due

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substantially to $2.2 million in additional costs incurred during the quarter
related primarily to severance and restructuring charges and rate case
expenses.

Cellular

Cellular expense increased $0.8 million, or 6.9%, for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001. This increase is
due to an increase in minutes of use from 75.0 million minutes in 2001 to 91.6
million minutes in 2002.

Directory

Directory expenses increased $0.1 million from $6.9 million in 2001 to
$7.0 million in 2002. As a percent of directory revenue, expenses were 42.5%
for 2001 compared to 40.9% for 2002. This margin improvement is due to stable
fixed costs combined with increasing directory revenue.

Internet

Internet expenses increased by $5.4 million, or 77.6% from $7.0 million in
2001 to $12.4 million in 2002. The increase in Internet expenses was due
principally to start-up expenses associated with commencing services under the
State of Alaska telecommunications contract. The acquisition in July 2001 of
MosquitoNet 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 decreased by $2.8 million, or 16.8%, and decreased
as a percentage of revenue from 146.6% in 2001 to 140.8% in 2002. The majority
of this decrease was the result of the decline in long distance minutes of use
as discussed under interexchange service revenues.

Depreciation and Amortization

Depreciation and amortization expense increased $0.3 million, or 0.7%, due
principally to increases in plant in service for the six months ended June 30,
2002 over the corresponding period of 2001 offset by ceasing goodwill
amortization with the adoption of SFAS No. 142, Goodwill and Intangible Assets
on January 1, 2002. Depreciation and amortization expense in 2001 included $3.9
million of goodwill amortization. Under SFAS No. 142, goodwill is no longer
amortized but is instead subjected to an annual impairment test.

Interest Expense and Interest Income and Other

Interest expense decreased $6.2 million, or 20.7%, for the six months
ended June 30, 2002 compared to the six months ended June 30, 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 had a reversal of
previously accrued interest expense of $1.7 million as a result of a favorable
ruling by the District of Columbia Court of Appeals related to a dispute on
interstate access rates for the Anchorage market. Interest income and other
also declined by $1.1 million, or 57.5%, as a result of a lower average
invested cash balance and lower market interest rates during 2002 compared to
2001.

Income Taxes

The Company has fully reserved the income tax benefit of $62.4 million
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 both periods presented and the assets and
liabilities of the disposal group have been written down as of March 30, 2002
to their fair value, net of expected selling expenses. During the second
quarter, the Company revised its initial estimate of fair value down by $0.4
million. The write down and results of operations of this discontinued segment
resulted charge to discontinued operations of $7.4 million and $0.8 million for
the periods ended June 30, 2002 and 2001, respectively. The Company has fully
reserved in the form of a valuation allowance the $3.0 million 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. 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 3
of the Notes to Consolidated Financial Statements of this quarterly report
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.

LIQUIDITY AND CAPITAL RESOURCES

The Company has satisfied its operational and capital cash requirements
primarily through internally generated funds, the sale of stock and debt
financing. For the six months ended June 30, 2002 the Companys cash flows from
operating activities were $26.2 million. At June 30, 2002, the Company had
approximately $35.6 million in net working capital. Of that $35.6 million in
net working capital, unrestricted cash and cash equivalents represent $28.6
million and restricted cash represents $7.1 million. As of June 30, 2002 the
Company had $75.0 million of remaining capacity under its revolving credit
facility, representing 100% of available capacity.

The Company has outstanding a $431.0 million bank credit agreement
(Senior Credit Facility) and $150.0 million in 9.375% senior subordinated
notes due 2009, representing substantially all of the Companys long-term debt
of $591.6 million as of June 30, 2002. In addition, $17.3 million in senior
discount debentures are recorded at ACS Group and are collateralized by
substantially all assets of the Company. Interest on ACS Groups senior
discount debentures and ACS Holdings senior subordinated notes are payable
semiannually. Interest on borrowings under the Senior Credit Facility is
payable monthly, quarterly or semi-annually at the Companys option. The Senior
Credit Facility requires 1% annual principal payments that commenced on May 14,
2002, with balloon payments in each of 2006, 2007, and 2008. The Senior Credit
Facility contains a number of restrictive covenants and events of default,
including covenants limiting capital expenditures, incurrence of debt, and the
payment of dividends, and requires the Company to achieve certain financial
ratios. The Company is in compliance with all of its debt covenants. During
the quarter, the Companys lenders approved an amendment to its Senior Credit
Facility that, among other things, permits the Company to repurchase up to $15
million of its outstanding common stock over the term of the Senior Credit
Facility.

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

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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
cellular network has required significant capital. The implementation of the
Companys interexchange network and data services strategy is also capital
intensive. In 1999, the Company purchased fiber capacity for $19.5 million,
which was funded with monies borrowed to finance the 1999 acquisitions. Capital
expenditures for 2000 were $72.3 million, including $3.2 million in capital
leases. Capital expenditures for 2001 were $87.6 million, including $19.5
million for additional fiber capacity and $15 million for an IP based network
and service center. The Company anticipates capital spending for 2002 of
approximately $85 million, including approximately $20 to $25 million necessary
to meet its obligations under a material contract with the State of Alaska and
approximately $7 million for the first phase of its buildout of PCS licenses.
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s capital requirements may change, however, due to, among
other things: the Companys decision to pursue specific acquisition
opportunities, changes in technology, the effects of competition or changes in
the Companys business strategy. The Companys ability to satisfy its capital
requirements will be dependent upon its future financial performance, which is,
in turn, subject to future economic conditions and to financial, business and
other factors, many of which are beyond the Companys control.

On July 15, 2002 the Company fulfilled a commitment to a third party to
provide to that party a loan in the form of an unsecured note receivable
totaling $15,000 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.

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

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

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

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

Access revenues are recognized when earned. The Company participates in
toll revenue pools with other telephone companies. Such pools are funded by
toll revenue and/or access charges regulated by the RCA within the intrastate
jurisdiction and the FCC within the interstate jurisdiction. Much of the
interstate access service revenue is initially recorded based on estimates.
These estimates are derived from interim

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financial statements, available separations studies and the most recent
information available about achieved rates of return. These estimates are
subject to adjustment in future accounting periods as refined operational
information becomes available. To the extent that disputes arise over revenue
settlements, the Companys policy is to defer revenue collected until
settlement methodologies are resolved and finalized. During the second quarter
of 2002, the Company recognized as revenue $11.1 million of previously deferred
interstate access revenue and reversed $1.7 million of interest expense
previously accrued thereon as a result of a favorable ruling by the District of
Columbia Court of Appeals related to a dispute on interstate access rates for
the Anchorage market. At June 30, 2002, the Company had recorded liabilities of
$20.7 million related to potentially refundable access revenue.

The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes reflect the temporary differences
between the financial and tax bases of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance to the extent
that it is more likely than not that such deferred tax assets will not be
realized. The cumulative valuation allowance against deferred tax assets was
$62.4 million as of June 30, 2002.

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 Regulatory Commission of Alaska which
appears to extend lives approved for rate-making purposes beyond the
economically useful lives of the underlying assets. Management is evaluating
the effects of this order on the financial statements of the Company. During
the quarter ended June 30, 2002, the Company revised its estimate of the
allowable regulatory asset related to deferred rate case costs based on a
regulatory order and, as a result, recorded expense of $0.9 million. As of June
30, 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 71, these
costs would have been charged to expense as incurred.

OUTLOOK

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



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

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

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services. In addition, as a result of the RCAs recent affirmation of the
APUCs termination of the Companys rural exemptions, the Company may be
required to provide interconnection elements and/or wholesale discounted
services to competitors in all or some of its rural service areas. Moreover,
while cellular telephone services have historically complemented traditional
LEC services, the Company anticipates that existing and emerging wireless
technologies may increasingly compete with LEC services. In cellular services,
the Company currently competes with at least one other cellular provider in
each of its cellular service areas. In the interexchange market, the Company
currently has less than 10% of total revenues in Alaska and faces competition
from the two major interexchange providers in Alaska. 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.

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

On December 10, 2001, the Company entered into a material contract with
the State of Alaska to provide it with comprehensive telecommunications
services. The Company expects that this contract will generate approximately
$92 million in revenues over its term, including an estimated $10 million in
2002. The contract also obligates the Company to provide customer premise and
other capital assets to the state estimated to require an investment of $25 to
$30 million over the term of the agreement, including $20 to $25 million during
2002, of which it has expended approximately $5.5 million through June 30,
2002.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has issued senior subordinated notes and has entered into a
bank credit facility. These on-balance sheet financial instruments, to the
extent they provide for variable rates of interest, expose the Company to
interest rate risk, with the primary interest rate risk exposure resulting from
changes in LIBOR or the prime rate, which are used to determine the interest
rates that are applicable to borrowings under the Companys bank credit
facilities. The Company uses derivative financial instruments, in particular an
interest rate swap agreement, to partially hedge variable interest
transactions. The Companys derivative financial instrument transaction has
been entered into for hedging purposes. The terms and characteristics of the
derivative financial instruments are matched with the underlying on-balance
sheet instrument or anticipated transactions and do not constitute speculative
or leveraged positions independent of these exposures. There have been no
material changes to the Companys outstanding debt instruments since December
31, 2001.

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PART II




OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.

As previously reported, the Company filed a formal appeal of the RCAs
order terminating the rural exemption for Fairbanks, Juneau and the rural
communities in the Glacier State study area on November 10, 1999. This matter
is currently pending in the Alaska Supreme Court. The Company intends to
vigorously pursue the matter.

General Communication, Inc. (GCI), requested a new interconnection
agreement for the rural communities in ACSNs Glacier State study area on
November 29, 2001. GCI sought RCA mediation of the matter on March 1, 2002,
and, by letter dated March 21, 2002, the Company responded that it already had
an interconnection agreement with GCI for this area and, therefore, had
satisfied its obligations for the term of its existing agreement. GCI filed a
motion for declaratory and injunctive relief with the RCA on April 3, 2002
seeking to force the Company to arbitrate the matter, and subsequently filed a
petition for arbitration with the RCA on April 19, 2002. On April 5, 2002, the
Company filed a complaint seeking a declaratory ruling from the federal
district court in Alaska that it had satisfied its statutory obligation to
arbitrate an interconnection agreement for this area for the remainder of the
term of the existing agreement. The Company intends to pursue its legal rights
but cannot, at this time, predict the outcome of this dispute.

The Company completed the hearing for Phase I (revenue requirements) of
its rate cases for all its local exchange companies in March 2002. The RCA
issued a decision regarding depreciation on June 6, 2002 that arguably extended
the Companys asset lives beyond the time period for which they are
economically useful. The Company sought clarification and reconsideration of
the June 6, 2002 order. On July 21, 2002, the RCA clarified that in fact it
intended to extend lives for certain assets beyond the period for which they
are economically useful and establish very low depreciation rates. The Company
is evaluating the impact of this decision and its next course of action. Once
the LEC revenue requirements are adjudicated, Phase II (cost of service and
rate design) proceedings will commence. The Company intends to vigorously
pursue these matters in the coming months but does not expect a final decision
this year.

The Company also previously reported that on February 7, 2001, it filed an
appeal in the United States Court of Appeals for the District of Columbia
Circuit of a January 24, 2001 FCC Order to pay $2.7 million plus interest to
GCI for excess interstate access charges. On April 4, 2001, the FCC released
an order granting the Companys request for a stay of the payment and allowed
the Company to place the funds in question, already fully reserved, in escrow
pending the outcome of the appeal. On March 4, 2002, the District of Columbia
Circuit 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.

On May 14, 2001, the Company was served with a class action lawsuit
concerning its interstate Infinite Minutes long distance plan. The court
certified the class on March 19, 2002 and denied reconsideration of that
decision on April 22, 2002. It is impossible to determine at this time the
actual number of plaintiffs or the claims that will actually continue to be in
dispute. The Company believes this suit is without merit and intends to
vigorously defend its position.

The Company is involved in various other 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.

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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.




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

None.




ITEM 5. OTHER INFORMATION.

None.




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

(a) Exhibits:

|      |  |                                                                                                   
|----- |  | --------------------------------------------------------------------------------------------------
|10.12 |  | Amendment and waiver, dated as of June 27, 2002 to the Credit
Agreement listed as Exhibit No. 10.3

(b) Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter ended June 30, 2002.

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SIGNATURES

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

|                    |                                             |                                                                                                   
|------------------- | ------------------------------------------- | --------------------------------------------------------------------------------------------------
|Date: July 31, 2002 | ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC
|                   
|                    |                                             | /s/ Charles E. Robinson                                                                           
|                    |                                             |                                                                                                   
|                    |                                             | Charles E. Robinson
Chief Executive Officer and
Chairman of the Board                             
|                   
|                    |                                             | /s/ Wesley E. Carson                                                                              
|                    |                                             |                                                                                                   
|                    |                                             | Wesley E. Carson
President and
Chief Administrative Officer                                       
|                   
|                    |                                             | /s/ Kevin P. Hemenway                                                                             
|                    |                                             |                                                                                                   
|                    |                                             | Kevin P. Hemenway
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)

32