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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 September 30, 2003

OR

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

For the transition period from_______________________to

Commission file number 333-82363

ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(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)

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

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

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 þ         No o

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

Yes o         No þ

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

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

Yes o         No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

DOCUMENTS INCORPORATED BY REFERENCE
None



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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                           
|                          | ITEM 4. CONTROLS AND PROCEDURES                                                              
|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                                                     
|SIGNATURES               
|EXHIBIT 31.1             
|EXHIBIT 31.2             
|EXHIBIT 32.1             
|EXHIBIT 32.2             



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##### Table of Contents



TABLE OF CONTENTS

|           |  |                                                                                       |  |                                                                                                                   |    |        |   | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- | -- | ------ | - | 
|           |  |                                                                                       |  |                                                                                                                   |    | Page  
|           |  |                                                                                       |  |                                                                                                                   |    | Number
|           |  |                                                                                       |  |                                                                                                                   |    |       
|PART I.    |  | Financial Information                                                                 |  |                                                                                                                   |    |       
|Item 1.    |  | Financial Statements:                                                                 |  |                                                                                                                   |    |       
|           |  |                                                                                       |  | Consolidated Balance Sheets (unaudited)
As of September 30, 2003 and December 31, 2002                            |    |        | 3 | 
|           |  |                                                                                       |  | Consolidated Statements of Operations (unaudited)
For the Three and Nine Months Ended September 30, 2003 and 2002 |    |        | 4 | 
|           |  |                                                                                       |  | Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 2003 and 2002           |    |        | 5 | 
|           |  |                                                                                       |  | Notes to Consolidated Financial Statements (unaudited)                                                            |    |        | 6 | 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |                                                                                                                   | 28 |       
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                   | 45 |       
|Item 4.    |  | Controls and Procedures                                                               |  |                                                                                                                   | 45 |       
|PART II.   |  | Other Information                                                                     |  |                                                                                                                   |    |       
|Item 1.    |  | Legal Proceedings                                                                     |  |                                                                                                                   | 46 |       
|Item 2.    |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                                   | 47 |       
|Item 3.    |  | Defaults upon Senior Securities                                                       |  |                                                                                                                   | 47 |       
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                   | 47 |       
|Item 5.    |  | Other Information                                                                     |  |                                                                                                                   | 47 |       
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                   | 47 |       
|Signatures |  |                                                                                       |  |                                                                                                                   | 49 |       

2



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

|                                                               |                                                                                       |                            |           |               |         |              |           |          |        | 
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------- | ------- | ------------ | --------- | -------- | ------ | 
|                                                               |                                                                                       |                            |           | September 30, |         | December 31,
|                                                               |                                                                                       |                            |           | 2003          |         | 2002        
|                                                               |                                                                                       |                            |           |               |         |             
|Assets                                                         |                                                                                       |                            |           |               |         |              |           |         
|Current assets:                                                |                                                                                       |                            |           |               |         |              |           |         
|                                                               | Cash and cash equivalents                                                             |                            | $         | 121,160       |         |              | $         | 18,565   |       
|                                                               | Restricted cash                                                                       |                            |           | 555           |         |              |           | 3,440    |       
|                                                               | Accounts receivable-trade, net of allowance of $6,255 and $6,075                      |                            |           | 39,470        |         |              |           | 48,820   |       
|                                                               | Accounts receivable-affiliate                                                         |                            |           | 4,729         |         |              |           | 3,761    |       
|                                                               | Materials and supplies                                                                |                            |           | 10,327        |         |              |           | 11,203   |       
|                                                               | Prepayments and other current assets                                                  |                            |           | 6,266         |         |              |           | 6,172    |       
|                                                               | Assets held for sale                                                                  |                            |           |              |         |              |           | 261      |       
|                                                               |                                                                                       |                            |           |               |         |              |           |         
|                                                               |                                                                                       | Total current assets       |           |               | 182,507 |              |           |          | 92,222 | 
|Property, plant and equipment                                  |                                                                                       |                            | 1,055,802 |               |         |              | 1,090,365 |         
|Less: accumulated depreciation                                 |                                                                                       |                            | 671,447   |               |         |              | 625,276   |         
|                                                               |                                                                                       |                            |           |               |         |              |           |         
|                                                               | Property, plant and equipment, net                                                    |                            |           | 384,355       |         |              |           | 465,089  |       
|Goodwill                                                       |                                                                                       |                            | 38,403    |               |         |              | 77,225    |         
|Intangible assets                                              |                                                                                       |                            | 22,561    |               |         |              | 23,269    |         
|Debt issuance costs, net of amortization of $5,119 and $15,883 |                                                                                       |                            | 19,312    |               |         |              | 21,130    |         
|Deferred charges and other assets                              |                                                                                       |                            | 8,473     |               |         |              | 26,047    |         
|                                                               |                                                                                       |                            |           |               |         |              |           |         
|Total assets                                                   |                                                                                       | $                          | 655,611   |               |         | $            | 704,982   |         
|                                                               |                                                                                       |                            |           |               |         |              |           |         
|Liabilities and Stockholders Equity                           |                                                                                       |                            |           |               |         |              |           |         
|Current liabilities:                                           |                                                                                       |                            |           |               |         |              |           |         
|                                                               | Current portion of long-term obligations                                              |                            | $         | 2,304         |         |              | $         | 5,933    |       
|                                                               | Accounts payable-affiliates                                                           |                            |           | 898           |         |              |           | 1,319    |       
|                                                               | Accounts payable, accrued and other current liabilities                               |                            |           | 48,435        |         |              |           | 49,480   |       
|                                                               | Advance billings and customer deposits                                                |                            |           | 8,871         |         |              |           | 9,804    |       
|                                                               |                                                                                       |                            |           |               |         |              |           |         
|                                                               |                                                                                       | Total current liabilities  |           |               | 60,508  |              |           |          | 66,536 | 
|Long-term obligations, net of current portion                  |                                                                                       |                            | 533,611   |               |         |              | 586,898   |         
|Other deferred credits and long-term liabilities               |                                                                                       |                            | 28,312    |               |         |              | 32,930    |         
|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                                                                   |                            |           | (241,537      | )       |              |           | (249,738 | )     
|                                                               | Accumulated other comprehensive loss                                                  |                            |           | (12,525       | )       |              |           | (18,886  | )     
|                                                               |                                                                                       |                            |           |               |         |              |           |         
|                                                               |                                                                                       | Total stockholders equity |           |               | 33,180  |              |           |          | 18,618 | 
|                                                               |                                                                                       |                            |           |               |         |              |           |         
|Total liabilities and stockholders equity                     |                                                                                       | $                          | 655,611   |               |         | $            | 704,982   |         
|                                                               |                                                                                       |                            |           |               |         |              |           |         

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 |         | Nine Months Ended
|                                                                                                                   |                                                              |                         |         | September 30,      |         | September 30,    
|                                                                                                                   |                                                              |                         |         |                    |         |                  
|                                                                                                                   |                                                              |                         |         | 2003               |         | 2002              |        | 2003    |         | 2002
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |     
|Operating revenue:                                                                                                 |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|                                                                                                                   | Local telephone                                              |                         | $       | 53,261             |         |                   | $      | 52,815  |         |      | $      | 162,472  |         |   | $        | 172,128 |        
|                                                                                                                   | Wireless                                                     |                         |         | 12,591             |         |                   |        | 11,903  |         |      |        | 34,868   |         |   |          | 32,420  |        
|                                                                                                                   | Directory                                                    |                         |         |                   |         |                   |        | 8,360   |         |      |        | 11,631   |         |   |          | 25,382  |        
|                                                                                                                   | Internet                                                     |                         |         | 8,223              |         |                   |        | 6,422   |         |      |        | 24,416   |         |   |          | 14,815  |        
|                                                                                                                   | Interexchange                                                |                         |         | 4,147              |         |                   |        | 3,998   |         |      |        | 12,623   |         |   |          | 11,991  |        
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|                                                                                                                   |                                                              | Total operating revenue |         |                    | 78,222  |                   |        |         | 83,498  |      |        |          | 246,010 |   |          |         | 256,736 |  
|Operating expense:                                                                                                 |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|                                                                                                                   | Local telephone (exclusive of depreciation and amortization) |                         |         | 30,160             |         |                   |        | 27,968  |         |      |        | 84,267   |         |   |          | 88,221  |        
|                                                                                                                   | Wireless (exclusive of depreciation and amortization)        |                         |         | 7,545              |         |                   |        | 7,441   |         |      |        | 21,796   |         |   |          | 21,329  |        
|                                                                                                                   | Directory (exclusive of depreciation and amortization)       |                         |         |                   |         |                   |        | 3,408   |         |      |        | 5,249    |         |   |          | 10,366  |        
|                                                                                                                   | Internet (exclusive of depreciation and amortization)        |                         |         | 11,730             |         |                   |        | 8,756   |         |      |        | 35,829   |         |   |          | 21,904  |        
|                                                                                                                   | Interexchange (exclusive of depreciation and amortization)   |                         |         | 6,056              |         |                   |        | 5,723   |         |      |        | 17,886   |         |   |          | 17,494  |        
|                                                                                                                   | Contract termination and asset impairment charges            |                         |         | 54,539             |         |                   |        |        |         |      |        | 54,539   |         |   |          |        |        
|                                                                                                                   | Depreciation and amortization                                |                         |         | 22,044             |         |                   |        | 22,458  |         |      |        | 66,735   |         |   |          | 61,690  |        
|                                                                                                                   | Loss (gain) on disposal of assets, net                       |                         |         | (15,968            | )       |                   |        | 1,835   |         |      |        | (112,507 | )       |   |          | 2,108   |        
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|                                                                                                                   |                                                              | Total operating expense |         |                    | 116,106 |                   |        |         | 77,589  |      |        |          | 173,794 |   |          |         | 223,112 |  
|Operating income (loss)                                                                                            |                                                              |                         | (37,884 | )                  |         |                   | 5,909  |         |         |      | 72,216 |          |         |   | 33,624   |        
|Other income (expense):                                                                                            |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|                                                                                                                   | Interest expense                                             |                         |         | (21,939            | )       |                   |        | (12,744 | )       |      |        | (49,546  | )       |   |          | (36,462 | )      
|                                                                                                                   | Interest income and other                                    |                         |         | (15,100            | )       |                   |        | 578     |         |      |        | (10,121  | )       |   |          | 1,626   |        
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|                                                                                                                   |                                                              | Total other expense     |         |                    | (37,039 | )                 |        |         | (12,166 | )    |        |          | (59,667 | ) |          |         | (34,836 | )
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|Income (loss) before income taxes, discontinued operations
and cumulative effect of change in accounting principle |                                                              |                         | (74,923 | )                  |         |                   | (6,257 | )       |         |      | 12,549 |          |         |   | (1,212   | )      
|Income tax benefit                                                                                                 |                                                              |                         |        |                    |         |                   |       |         |         |      |       |          |         |   |         |        
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|Income (loss) from continuing operations                                                                           |                                                              |                         | (74,923 | )                  |         |                   | (6,257 | )       |         |      | 12,549 |          |         |   | (1,212   | )      
|Loss from discontinued operations, net of tax                                                                      |                                                              |                         |        |                    |         |                   | (136   | )       |         |      | (52    | )        |         |   | (7,523   | )      
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|Income (loss) before cumulative effect of change
in accounting principle                                           |                                                              |                         | (74,923 | )                  |         |                   | (6,393 | )       |         |      | 12,497 |          |         |   | (8,735   | )      
|Cumulative effect of change in accounting principle                                                                |                                                              |                         |        |                    |         |                   |       |         |         |      |       |          |         |   | (105,350 | )      
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        
|Net income (loss)                                                                                                  |                                                              | $                       | (74,923 | )                  |         | $                 | (6,393 | )       |         | $    | 12,497 |          |         | $ | (114,085 | )      
|                                                                                                                   |                                                              |                         |         |                    |         |                   |        |         |         |      |        |          |         |   |          |        

See Notes to Consolidated Financial Statements

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

|                                                                                         |                                                                     |   |                   |         |      |   |          |         |  
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | - | ----------------- | ------- | ---- | - | -------- | ------- | -
|                                                                                         |                                                                     |   | Nine Months Ended
|                                                                                         |                                                                     |   | September 30,    
|                                                                                         |                                                                     |   |                  
|                                                                                         |                                                                     |   | 2003              |         | 2002
|                                                                                         |                                                                     |   |                   |         |     
|Cash Flows from Operating Activities:                                                    |                                                                     |   |                   |         |      |   |          |        
|Net income (loss)                                                                        |                                                                     | $ | 12,497            |         |      | $ | (114,085 | )      
|Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |                                                                     |   |                   |         |      |   |          |        
|                                                                                         | Loss on discontinued operations                                     |   |                   | 52      |      |   |          | 7,523   |  
|                                                                                         | Cumulative effect of change in accounting principle                 |   |                   |        |      |   |          | 105,350 |  
|                                                                                         | Depreciation and amortization                                       |   |                   | 66,735  |      |   |          | 61,690  |  
|                                                                                         | Loss (gain) on disposal of assets and asset impairment charges, net |   |                   | (48,748 | )    |   |          | 2,108   |  
|                                                                                         | Amortization of debt issuance costs and original issue discount     |   |                   | 15,866  |      |   |          | 3,134   |  
|                                                                                         | Capitalized interest                                                |   |                   | (88     | )    |   |          | (1,078  | )
|                                                                                         | Other deferred credits                                              |   |                   | 1,743   |      |   |          | (914    | )
|                                                                                         | Changes in components of working capital:                           |   |                   |         |      |   |          |         |  
|                                                                                         | Accounts receivable and other current assets                        |   |                   | 8,087   |      |   |          | (4,774  | )
|                                                                                         | Accounts payable and other current liabilities                      |   |                   | (5,028  | )    |   |          | (8,899  | )
|                                                                                         | Other                                                               |   |                   | (557    | )    |   |          | (280    | )
|                                                                                         | Net cash used by discontinued operations                            |   |                   | (40     | )    |   |          | (596    | )
|                                                                                         |                                                                     |   |                   |         |      |   |          |        
|Net cash provided by operating activities                                                |                                                                     |   | 50,519            |         |      |   | 49,179   |        
|Cash Flows from Investing Activities:                                                    |                                                                     |   |                   |         |      |   |          |        
|Construction and capital expenditures, net of capitalized interest                       |                                                                     |   | (29,787           | )       |      |   | (50,253  | )      
|Net proceeds from sale of business                                                       |                                                                     |   | 155,268           |         |      |   |         |        
|Issuance of note receivable                                                              |                                                                     |   |                  |         |      |   | (15,000  | )      
|Release of funds from escrow                                                             |                                                                     |   | 3,539             |         |      |   | 3,706    |        
|Placement of funds in restricted account                                                 |                                                                     |   | (645              | )       |      |   |         |        
|                                                                                         |                                                                     |   |                   |         |      |   |          |        
|Net cash provided (used) by investing activities                                         |                                                                     |   | 128,375           |         |      |   | (61,547  | )      
|Cash Flows from Financing Activities:                                                    |                                                                     |   |                   |         |      |   |          |        
|Payments on long-term debt                                                               |                                                                     |   | (433,973          | )       |      |   | (6,774   | )      
|Proceeds from issuance of long-term debt                                                 |                                                                     |   | 375,970           |         |      |   |         |        
|Debt issuance costs                                                                      |                                                                     |   | (14,000           | )       |      |   |         |        
|Dividends                                                                                |                                                                     |   | (4,296            | )       |      |   | (830     | )      
|                                                                                         |                                                                     |   |                   |         |      |   |          |        
|Net cash used by financing activities                                                    |                                                                     |   | (76,299           | )       |      |   | (7,604   | )      
|Increase (decrease) in cash and cash equivalents                                         |                                                                     |   | 102,595           |         |      |   | (19,972  | )      
|Cash and cash equivalents at beginning of the period                                     |                                                                     |   | 18,565            |         |      |   | 41,012   |        
|                                                                                         |                                                                     |   |                   |         |      |   |          |        
|Cash and cash equivalents at the end of the period                                       |                                                                     | $ | 121,160           |         |      | $ | 21,040   |        
|                                                                                         |                                                                     |   |                   |         |      |   |          |        
|Supplemental Cash Flow Data:                                                             |                                                                     |   |                   |         |      |   |          |        
|Interest paid                                                                            |                                                                     | $ | 31,670            |         |      | $ | 30,796   |        
|Income taxes paid                                                                        |                                                                     |   |                  |         |      |   |         |        
|Supplemental Noncash Transactions:                                                       |                                                                     |   |                   |         |      |   |          |        
|Property acquired under capital leases and mortgages                                     |                                                                     | $ | 2,340             |         |      | $ | 2,306    |        
|Interest rate swap marked to market                                                      |                                                                     | $ | (6,361            | )       |      | $ | 3,786    |        

See Notes to Consolidated Financial Statements

5



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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, Amounts 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,
wireless, Internet, and interexchange services to its customers in the state of
Alaska through its telecommunications subsidiaries. The Company is 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)                 

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, 2002. Certain reclassifications have been made to the 2002
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 and contract
termination and asset impairment charges) 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 nine months
ended September 30, 2003 and 2002 are not necessarily indicative of the results
of operations which might be expected for the entire year or any other interim
periods.

Revenue Recognition

Access revenue is recognized when earned. The Company participates in toll
revenue pools with other telephone companies. Such pools are funded by toll
revenue and/or access charges regulated by the Regulatory Commission of Alaska
(RCA) within the intrastate jurisdiction and the Federal Communications
Commission (FCC) within the interstate jurisdiction. Much of the interstate
access revenue is initially recorded based on estimates. These estimates are
derived from interim financial statements, available separations studies and
the most recent information available about achieved rates of return. These
estimates are subject to adjustment in future accounting periods as additional
operational information becomes available. To the extent that disputes arise
over revenue settlements, the Companys policy is to defer revenue collected
until settlement methodologies are resolved and finalized. During the second
quarter of 2002, the Company recognized as revenue $11,066 of previously
deferred interstate access revenue and reversed $1,673 of interest expense
previously accrued thereon as a result of a favorable ruling by the District of
Columbia Court of Appeals related to a dispute on interstate access rates for
the Anchorage market. At September 30, 2003 and 2002, the Company had
liabilities of $16,433 and $20,748, respectively, related to its estimate of
refundable access revenue.

6



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##### Table of Contents



ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited, Amounts 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 22, 2002, the
Company received an order from the RCA which extended lives approved for
ratemaking purposes beyond the economically useful lives of the underlying
assets. Management petitioned for reconsideration on the ACSA order and the RCA
has accepted additional testimony and held a hearing in May of 2003. The RCA
subsequently reconsidered its order and adopted service lives that more closely
approximate the actual economic lives of the assets. The Company implemented,
effective January 1, 2003, higher depreciation rates for its regulated
telephone plant for the interstate jurisdiction. As a result, the Company has
recorded a regulatory asset under SFAS No. 71 of $8,289 as of September 30,
2003 related to depreciation of the regulated telephone plant allocable to its
intrastate and local jurisdictions. The Company has also deferred as a
regulatory asset $894 of costs incurred in connection with regulatory rate
making proceedings, which is being amortized over three years starting in 2003.
The balance of this regulatory asset was $670 at September 30, 2003. If the
Company were not following SFAS No. 71, it would have recorded additional
depreciation expense of $8,289 for the intrastate and local jurisdictions and
the deferred costs incurred in connection with regulatory rate making
proceedings would have been charged to expense as incurred. Non-regulated
revenues and costs incurred by the local telephone exchange operations and
non-regulated operations of the Company are not accounted for under SFAS No. 71
principles.

Stock Incentive Plans

The Companys employees participate in various plans of ACS Group. The
Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for its stock incentive plans.
Accordingly, no compensation cost has been recognized for options with exercise
prices equal to or greater than fair value on the date of grant. No
compensation costs were charged to operations for the nine months ended
September 30, 2003 or 2002. If compensation costs had been determined
consistent with SFAS No. 123, Accounting for Stock-Based Compensation,the
Companys net income (loss) on a pro forma basis for the nine months ended
September 30, 2003 and 2002 would have been as follows:

|                   |             |  |                                         |        |      |  |   |          |  
|------------------ | ----------- |  | --------------------------------------- | ------ | ---- |  | - | -------- | -
|                   |             |  | For the nine months ended September 30,
|                   |             |  | 2003                                    |        | 2002
|                   |             |  |                                         |        |     
|Net income (loss): |             |  |                                         |        |      |  |   |         
|                   | As reported |  | $                                       | 10,565 |      |  | $ | (116,025 | )
|                   | Pro forma   |  |                                         | 10,620 |      |  |   | (117,415 | )

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

|                             |  |      |      |      |  |  |      |  
|---------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                             |  | 2003 |      | 2002
|                             |  |      |      |     
|Risk free rate               |  |      | 2.95 | %    |  |  | 2.69 | %
|Dividend yield               |  |      | 0.0  | %    |  |  | 0.0  | %
|Expected volatility factor   |  |      | 57.0 | %    |  |  | 57.8 | %
|Expected option life (years) |  |      | 6.1  |      |  |  | 6.1  |  

7



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



|2. |  | NEW ACCOUNTING STANDARDS
|-- |  | ------------------------

On August 15, 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143,Accounting for Asset Retirement Obligations. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This standard generally
applies to legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction, development and/or the
normal operation of a long-lived asset. Under the new accounting method, asset
retirement obligations are recognized in the period in which they are incurred
if a reasonable estimate of fair value can be made. When the liability is
initially recorded, the cost is capitalized and increases the carrying value of
the related long-lived asset. The liability is then accreted to its present
value each period and the capitalized cost is depreciated over the estimated
useful life of the related asset. At the settlement date, the obligation is
settled for its recorded amount or a gain or loss is recognized upon
settlement.

In accordance with federal and state regulations, depreciation expense for
the Companys local exchange carriers regulated operations have historically
included an additional provision for cost of removal. Under SFAS No. 143, the
additional cost of removal provision would no longer be included in
depreciation expense, because it does not meet the recognition and measurement
principles of an asset retirement obligation. On December 20, 2002, the FCC
notified local exchange carriers that they should not adopt the provisions of
SFAS No. 143 unless specifically required by the FCC in the future. As a result
of the FCC ruling, the Company will continue to record a regulatory liability
for cost of removal for its local exchange carrier subsidiaries that follow
SFAS No. 71 accounting.

The Company applied the provisions of SFAS No. 143 to its nonregulated
subsidiaries effective January 1, 2003. The Companys wireless segment has
entered into cell site operating leases, which are subject to the provisions of
this statement. Cell site lease agreements may contain clauses requiring
restoration of the leased site at the end of the lease term, creating an asset
retirement obligation. Landlords may choose not to exercise these rights as
cell sites are considered useful improvements. The Companys initial adoption
of this statement did not have a material impact on its results of operations,
financial position or cash flows.

In June 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities.SFAS No. 146 requires that 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s adoption of this statement did
not have a material impact on its financial position, results of operations, or
cash flows.

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

On April 30, 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. This Statement is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The Companys adoption of this statement did not have a material impact
on its financial position, results of operations, or cash flows.

8



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



|2. |  | NEW ACCOUNTING STANDARDS (continued)
|-- |  | ------------------------------------

On May 15, 2003, FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. The
new Statement requires that certain financial instruments that, under previous
guidance, issuers could account for as equity, be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 had no effect on
the Companys financial position, results of operations or cash flows.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions are effective on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 had no effect on the
Companys financial position, results of operations or cash flows.

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



|3. |  | LONG-TERM OBLIGATIONS
|-- |  | ---------------------

During the first quarter of 2003, the Companys lenders approved an
amendment and waiver to its senior credit facility that, among other things,
permitted the Company to sell its directory business and required that in the
event the sale was completed, 75% of proceeds would be used to repay
outstanding senior credit facility term loans. This amendment and waiver became
effective on May 8, 2003, and on May 13, 2003, the Company paid down $106,650
of its outstanding term loans under its old senior credit facility.

On August 26, 2003, the Company completed the refinancing of its old
senior credit facility term loans. The Company entered into a $250,000 new
senior credit facility consisting of a term loan facility in an aggregate
principal amount of $200,000 and an undrawn revolving credit facility of
$50,000. The Company simultaneously issued $182,000 aggregate principal amount
of 9 7/8% senior notes due 2011 at an issue price of approximately 96.7% for
net proceeds of $175,970. From these proceeds, the Company paid off the
remaining $320,727 of its old senior credit facility, thereby extinguishing it.
As a result of this early extinguishment of debt, the Company charged $9,696 of
unamortized debt issue costs to interest expense in August 2003.

9



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



|3. |  | LONG-TERM OBLIGATIONS (Continued)
|-- |  | ---------------------------------

Long-term obligations consists of the following at September 30, 2003 and
December 31, 2002:

|                                                                    |  |      |         |      |  |   |         | 
|------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                    |  | 2003 |         | 2002
|                                                                    |  |      |         |     
|Old senior credit facility term loan - tranche A                    |  | $    |        |      |  | $ | 148,500 | 
|Old senior credit facility term loan - tranche B                    |  |      |        |      |  |   | 148,500 | 
|Old senior credit facility term loan - tranche C                    |  |      |        |      |  |   | 133,650 | 
|New senior credit facility term loan                                |  |      | 200,000 |      |  |   |        | 
|9 3/8% senior subordinated notes due 2009                           |  |      | 150,000 |      |  |   | 150,000 | 
|9 7/8% senior subordinated notes due 2011                           |  |      | 182,000 |      |  |   |        | 
|Original issue discount - 9 7/8% senior
subordinated notes due 2011 |  |      | (5,982  | )    |  |   |        | 
|Capital leases and other long-term obligations                      |  |      | 9,897   |      |  |   | 12,181  | 
|                                                                    |  |      |         |      |  |   |         | 
|                                                                    |  |      | 535,915 |      |  |   | 592,831 | 
|Less current portion                                                |  |      | 2,304   |      |  |   | 5,933   | 
|                                                                    |  |      |         |      |  |   |         | 
|Long-term obligations, net of current portion                       |  | $    | 533,611 |      |  | $ | 586,898 | 
|                                                                    |  |      |         |      |  |   |         | 

The aggregate maturities of long-term obligations for each of the five
years and thereafter subsequent to September 30, 2003 are as follows:

|                               |  |   |         | 
|------------------------------ |  | - | ------- | 
|2003 (October 1 -
December 31) |  | $ | 23      | 
|2004 (January 1 -
December 31) |  |   | 2,288   | 
|2005 (January 1 -
December 31) |  |   | 2,315   | 
|2006 (January 1 -
December 31) |  |   | 2,337   | 
|2007 (January 1 -
December 31) |  |   | 2,327   | 
|2008 (January 1 -
December 31) |  |   | 2,151   | 
|Thereafter                     |  |   | 524,474 | 
|                               |  |   |         | 
|                               |  | $ | 535,915 | 
|                               |  |   |         | 

The Companys obligations under the new senior credit facility are
unconditionally and irrevocably guaranteed, joint and severally, by the Company
and its subsidiaries, and secured by collateral that includes substantially all
of the Company and its subsidiaries assets. The new 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 the covenants.

10



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



|4. |  | CONTRACT TERMINATION AND ASSET IMPAIRMENT CHARGES
|-- |  | -------------------------------------------------

During the quarter ended September 30, 2003, the Company recorded $54,539
in contract termination and asset impairment charges. These charges resulted
from (1) the termination of a 5 year comprehensive Telecommunications
Partnering Agreement (TPA) with the State of Alaska and (2) an impairment of
fiber optic indefeasible rights of use and IP network and service center assets
resulting from the termination of the TPA as well as changes in the
communications industry and the economy. The following table itemizes the
components of the contract termination and asset impairment charges.

|                                   |                                                         |  |        |        | 
|---------------------------------- | ------------------------------------------------------- |  | ------ | ------ | 
|Contract termination charges:      |                                                         |  |        |       
|                                   | Contract termination payment                            |  | $      | 3,448  | 
|                                   | Loss on disposal of assets                              |  |        | 5,648  | 
|                                   | Accounts receivable and working capital write-downs     |  |        | 3,256  | 
|                                   |                                                         |  |        |        | 
|Total contract termination charges |                                                         |  | 12,352 |       
|Asset impairment charges           |                                                         |  | 42,187 |       
|                                   |                                                         |  |        |        | 
|                                   | Total contract termination and asset impairment charges |  | $      | 54,539 | 
|                                   |                                                         |  |        |        | 

Contract Termination Charges

On September 15, 2003, the Company received notification from the State of
Alaska that it intended to terminate the TPA with the Company and disentangle.
Subsequently, the Company and the State negotiated and agreed to a definitive
Settlement Agreement and Mutual Release (the Settlement Agreement) effective
October 14, 2003, outlining the terms of disentanglement between the parties.
Under the terms of the Settlement Agreement, the Company agreed to pay to the
State of Alaska $3,448 in cash, one half of which was due upon signing the
agreement and one half of which will be due upon completion of disentanglement.
The Company also agreed to transfer to the State title to certain assets used
in providing services under the TPA which resulted in a net loss on disposal of
those assets of $5,648. Based on terms of the Settlement Agreement, the Company
determined that certain accounts receivable and working capital associated with
the TPA will not be fully recoverable and has written them down to their
estimated net realizable value, resulting in a charge of $3,256 during the
quarter. The estimated net realizable value of the working capital and which
assets are ultimately transferred to the State could change as the Company
completes disentanglement.

Asset Impairment Charges

The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. The Company was prompted to conduct an asset
impairment review of its fiber optic Indefeasible Rights of Use (IRUs) that
were acquired in 1999 and 2001 and certain IP network and certain service
center assets due to the termination of the TPA as discussed above (which was a
significant customer using these assets), indications that market pricing of
similar assets were significantly below the Companys carrying value, and
significant industry and economic trends affecting the Companys ability to
generate positive cash flow from these assets in its interexchange and Internet
segments. This review was conducted under the guidelines of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. As a result of
its review, the Company determined that its carrying value of IRUs exceeded
their fair value by $27,128 and its carrying value of the IP network and
service center assets exceeded their fair value by $15,059. Accordingly, the
Company recorded a $42,187 impairment charge and wrote the assets down to their
fair value during the third quarter of 2003.

11



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



|5. |  | GAIN ON DISPOSAL OF ASSETS
|-- |  | --------------------------

On April 28, 2003, the Company entered into an underwriting agreement with
a syndicate of Canadian investment banks to complete the sale of a majority
interest in the newly formed ACS Media, LLC (the Directories Business). The
Company subsequently filed on April 29, 2003, a final prospectus with Canadian
securities regulators to sell a majority interest in its Directories Business
in a public offering in Canada to the ACS Media Income Fund (the Fund), which
is a Canadian income fund. The offering was sponsored by the Company. The
transaction closed on May 8, 2003, with the Company selling an 87.42% interest
and retaining a 12.58% interest in the Directories Business. The Companys
retained 12.58% minority interest was recorded at an initial book value of
$1,077 representing the pro-rata retained ownership at historical book value,
and accounted for under the equity method.

The Company also entered into an arrangement with the Metropolitan Life
Insurance Company (MetLife) to provide a credit facility to its Directories
Business on May 8, 2003 immediately prior to the sale of its Directories
Business to the Fund. The Directories Business then drew $35,000 of term loans
against the facility, using $1,468 to pay fees and expenses related to the debt
issuance and $87 to prepay an annual agency fee to MetLife. Of the $33,445 in
net cash proceeds, $413 was deposited into the Directories Business as cash
working capital and $33,032 was distributed to the Company as a dividend. The
credit facility is non-recourse to the Company.

The Fund then sold 17,500 units on May 8, 2003 for net proceeds of
$110,435, after deducting its underwriters fees and transaction expenses of
$10,246. The Funds net proceeds were used to acquire from the Company an
87.42% interest in the Directories Business. The Company received net proceeds
of $105,059 after deducting its fees and expenses associated with the
Transaction of $5,376. The Company recognized a gain on disposition of $97,578
on a pre-tax basis.

The following table indicates the Companys basis in assets sold to and
liabilities assumed by the Fund and its retained interest in ACS Media LLC.

|                                     |                                    |   |         |         |  
|------------------------------------ | ---------------------------------- | - | ------- | ------- | -
|Net proceeds of the Transaction      |                                    | $ | 105,059 |        
|                                     |                                    |   |         |        
|Basis in directories business sold:  |                                    |   |         |        
|                                     | Current assets                     |   |         | 4,214   |  
|                                     | Property, plant and equipment, net |   |         | 90      |  
|                                     | Goodwill                           |   |         | 38,821  |  
|                                     | Debt issue costs                   |   |         | 1,468   |  
|                                     | Current liabilities                |   |         | (1,035  | )
|                                     | Long-term debt                     |   |         | (35,000 | )
|                                     |                                    |   |         |        
|Basis of Directories Business        |                                    |   | 8,558   |        
|Equity in minority interest retained |                                    |   | 1,077   |        
|                                     |                                    |   |         |        
|Basis in net assets sold to the Fund |                                    |   | 7,481   |        
|                                     |                                    |   |         |        
|Gain on sale of Directories Business |                                    | $ | 97,578  |        
|                                     |                                    |   |         |        

On August 27, 2003, the Company was released from a lockup agreement
relating to the remaining interest in the Directories Business and the Company
disposed of substantially all of its remaining interest in the Directories
Business through the exercise of its right to convert 99.23% of its then
remaining 12.58% interest in the Directories Business to 2,500 units of the ACS
Media Income Fund, which were then sold in an underwritten offering. The
transaction settled on September 4, 2003, generating $17,177 in net proceeds
after deducting transaction expenses of $100, and resulting in a gain on
disposition of $15,940 after deducting the basis of $1,237. As a result of this
transaction, the Company now owns less than 0.1% of the Directories Business.

12



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



|5. |  | GAIN ON DISPOSAL OF ASSETS (Continued)
|-- |  | --------------------------------------

Related to the initial sale, the Company realized a gain on foreign
exchange of $4,104 as a result of currency fluctuation from April 28, 2003, the
date the underwriting and investment agreements were executed, to May 8, 2003,
the date the offering closed and the transaction was consummated. From the
subsequent sale the Company realized an additional gain on foreign exchange of
$157 as a result of currency fluctuation from August 27, 2003, the date the
purchase agreement for substantially all of its remaining interest in the
Directories Business was executed, to September 4 2003, the date the
transaction closed. The foreign exchange gains are included in Interest income
and other in the Consolidated Statements of Operations.

In contemplation of the sale of the Directories Business, the Company
formalized a number of agreements with ACS InfoSource, Inc. in May 2003
effective as of January 1, 2001, the day ACS InfoSource, Inc. was formed. ACS
InfoSource, Inc. subsequently assigned certain contracts, including a 50-year
directory publishing and distribution agreement and a 50-year license
agreement, to ACS Media, LLC as a part of the sale transaction. The Company
also entered into a 45-year non-competition agreement and a 10-year billing and
collection agreement directly with ACS Media, LLC. The Company has a right to
minority representation of one manager of the permitted nine managers of ACS
Media LLC so long as its long-term contracts with ACS Media LLC are in effect.
Currently, a director of the Company and employee of Fox Paine, the Companys
majority shareholder, is a manager of ACS Media, LLC.



|6. |  | NON-OPERATING IMPAIRMENT CHARGES
|-- |  | --------------------------------

The Company periodically evaluates the fair value of its investments and
other non-operating assets against their carrying value. Any impairments to
non-operating assets are charged to non-operating expense under the caption
Interest income and other in the Consolidated Statement of Operations. During
the third quarter of 2003, impairment charges were taken as a result of changes
in market and economic conditions, a notice of termination of the TPA, and the
Companys reassessment of the net realizable value of its note receivable and
the associated option to purchase certain network assets from Neptune
Communications, L.L.C. As a result of this analysis, the Company recorded in
Interest income and other in the Consolidated Statement of Operations an
impairment charge of $15,924. The Company still has purchase commitment
obligations associated with this note as described in Note 13.



|7. |  | DISCONTINUED OPERATIONS
|-- |  | -----------------------

On March 30, 2002, the Company approved a plan to sell its wireless cable
television service segment. As a result of this decision, the operating revenue
and expense of this segment has been classified as discontinued operations
under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets,for all periods presented and the assets and liabilities of the
disposal group have been written down to their fair value, net of expected
selling expenses. The income tax benefit in all periods was offset by a
valuation allowance. The Company completed its disposal of its wireless cable
television segment as of March 31, 2003.

The following discloses the results of the discontinued operations of the
wireless cable television service segment for the three and nine months ended
September 30, 2003 and 2002:

|                                                                       |  |                    |   |                   |  |      |      |      |  |   |     |   |  |   |        |  
|---------------------------------------------------------------------- |  | ------------------ | - | ----------------- |  | ---- | ---- | ---- |  | - | --- | - |  | - | ------ | -
|                                                                       |  | Three Months Ended |   | Nine Months Ended
|                                                                       |  | September 30,      |   | September 30,    
|                                                                       |  | 2003               |   | 2002              |  | 2003 |      | 2002
|                                                                       |  |                    |   |                   |  |      |      |     
|Operating revenue                                                      |  | $                  |  |                   |  | $    | 169  |      |  | $ | 110 |   |  | $ | 594    |  
|Operating expense                                                      |  |                    |  |                   |  |      | 305  |      |  |   | 162 |   |  |   | 1,025  |  
|                                                                       |  |                    |   |                   |  |      |      |      |  |   |     |   |  |   |        |  
|Operating loss                                                         |  |                    |  |                   |  |      | (136 | )    |  |   | (52 | ) |  |   | (431   | )
|Interest expense                                                       |  |                    |  |                   |  |      |     |      |  |   |    |   |  |   | (32    | )
|                                                                       |  |                    |   |                   |  |      |      |      |  |   |     |   |  |   |        |  
|Loss from operations of discontinued segment                           |  |                    |  |                   |  |      | (136 | )    |  |   | (52 | ) |  |   | (463   | )
|Write down of net assets to fair value                                 |  |                    |  |                   |  |      |     |      |  |   |    |   |  |   | (7,060 | )
|                                                                       |  |                    |   |                   |  |      |      |      |  |   |     |   |  |   |        |  
|Loss from discontinued operations
of wireless cable television segment |  | $                  |  |                   |  | $    | (136 | )    |  | $ | (52 | ) |  | $ | (7,523 | )
|                                                                       |  |                    |   |                   |  |      |      |      |  |   |     |   |  |   |        |  

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



|8. |  | CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|-- |  | ---------------------------------------------------

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other 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 second step of the goodwill impairment test
compares the implied fair value goodwill of the reporting unit with the
carrying amount of that goodwill. The implied fair value of a reporting units
goodwill is the excess of the fair value of a reporting unit over the amounts
assigned to assets and liabilities. If the carrying value of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess.

The Company has determined that its business segments constitute reporting
units, with the exception of the Internet segment, which included two reporting
units at the time the Company adopted SFAS 142. Those reporting units were (1)
Internet service and (2) IP based private network service. The Company
completed the initial step of impairment testing 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 the
Companys estimated cost of capital for purposes of arriving at a discount
factor. Based on that analysis, a transitional impairment loss of $105,350 was
recognized as the cumulative effect of a change in accounting principle in the
consolidated statement of operations. The income tax benefit of $39,540 was
offset by a valuation allowance.



|9. |  | 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 September 30, 2003, ACS Group has reserved a total
of 6,060 shares of authorized common stock for issuance under the plans. The
plans terminate in approximately 10 years from the date of adoption and allow
forfeited options to be reissued. In general, options under the plans vest
ratably over three, four or five years and will have an exercise price
Equal to the fair market value of the common stock on the date of grant. The
term of options granted under the plan may not exceed 10 years.

Alaska Communications Systems Group, Inc. 1999 Stock Incentive Plan

ACS Group has reserved 4,910 shares under this plan, which was adopted by
the Company in November 1999. At September 30, 2003, 5,712 options have been
granted, 2,537 have been forfeited, 441 have been exercised, and 1,735 shares
are available for grant under the plan.

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

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

14



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



|9. |  | STOCK INCENTIVE PLANS (Continued)
|-- |  | ---------------------------------

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

This plan was also adopted by ACS Group in November 1999. ACS Group has
reserved 1,000 shares under this plan. At September 30, 2003, 547 shares are
available for issuance and sale. On June 30, 2003, 87 shares were issued under
the plan. 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.



|10. |  | BUSINESS SEGMENTS
|--- |  | -----------------

The Company has four reportable segments: local telephone, wireless,
Internet and interexchange. Local telephone provides landline
telecommunications services, and consists of local telephone service, network
access and deregulated and other revenue; wireless provides wireless
telecommunications service; Internet provides Internet service and advanced IP
based private networks; and interexchange provides switched and dedicated long
distance services. Each reportable segment is a strategic business under
separate management and offering different services than those offered by the
other segments. The Company evaluates the performance of its segments based on
operating income (loss).

Previously, the Company reported its Directories Business as a separate
segment. As discussed in Note 5, the Company sold an 87.42% interest in its
Directories Business during the second quarter of 2003 and is no longer
directly engaged in day-to-day management of that business. Therefore, the
Directories Business no longer constitutes a reportable segment. Accordingly,
the historical operating results for the Directories Business are included in
All Other in the accompanying tables.

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

The following table illustrates selected financial data for each segment
as of and for the nine months ended September 30, 2003:

|                                                                    |  |                 |         |          |  |          |        |               |  |           |         |              |  |       |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------- |  | --------------- | ------- | -------- |  | -------- | ------ | ------------- |  | --------- | ------- | ------------ |  | ----- | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                    |  | Local Telephone |         | Wireless |  | Internet |        | Interexchange |  | All Other |         | Eliminations |  | Total
|                                                                    |  |                 |         |          |  |          |        |               |  |           |         |              |  |      
|Operating revenue                                                   |  | $               | 162,472 |          |  | $        | 34,929 |               |  | $         | 24,416  |              |  | $     | 15,380  |   |  | $ | 30,913  |   |  | $ | (22,100 | ) |  | $ | 246,010 |  
|Depreciation and amortization                                       |  |                 | 43,115  |          |  |          | 4,568  |               |  |           | 7,232   |              |  |       | 892     |   |  |   | 10,928  |   |  |   |        |   |  |   | 66,735  |  
|Loss (gain) on disposal of assets
and asset impairment charges, net |  |                 | 826     |          |  |          | 1,947  |               |  |           | 31,019  |              |  |       | 12,661  |   |  |   | (95,201 | ) |  |   |         |   |  |   | (48,748 | )
|Operating income (loss)                                             |  |                 | 18,748  |          |  |          | 3,614  |               |  |           | (57,032 | )            |  |       | (18,253 | ) |  |   | 125,148 |   |  |   | (9      | ) |  |   | 72,216  |  
|Interest expense                                                    |  |                 | 355     |          |  |          | 3      |               |  |           | 93      |              |  |       | 192     |   |  |   | 48,903  |   |  |   |        |   |  |   | 49,546  |  
|Interest income                                                     |  |                 | 30      |          |  |          |       |               |  |           |        |              |  |       |        |   |  |   | 1,055   |   |  |   |        |   |  |   | 1,085   |  
|Equity in earnings of minority
investments                          |  |                 |        |          |  |          |       |               |  |           |        |              |  |       |        |   |  |   | 628     |   |  |   |        |   |  |   | 628     |  
|Income tax provision (benefit)                                      |  |                 | 6,712   |          |  |          | 1,485  |               |  |           |        |              |  |       |        |   |  |   | (8,197  | ) |  |   |        |   |  |   |        |  
|Income (loss) from
continuing operations                            |  |                 | 11,712  |          |  |          | 2,126  |               |  |           | (57,125 | )            |  |       | (18,445 | ) |  |   | 74,290  |   |  |   | (9      | ) |  |   | 12,549  |  
|Total assets                                                        |  |                 | 497,546 |          |  |          | 81,824 |               |  |           | (85,431 | )            |  |       | (18,066 | ) |  |   | 179,738 |   |  |   |        |   |  |   | 655,611 |  
|Capital expenditures                                                |  |                 | 14,994  |          |  |          | 6,533  |               |  |           | 4,226   |              |  |       | 52      |   |  |   | 6,322   |   |  |   |        |   |  |   | 32,127  |  

15



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



|10. |  | BUSINESS SEGMENTS (Continued)
|--- |  | -----------------------------

Operating revenue disclosed above includes intersegment operating revenue
of $21,228 for local telephone, $1,351 for wireless, $1,826 for interexchange
and $19,775 for all other. In accordance with SFAS No. 71, intercompany revenue
between local telephone and all other segments is not eliminated above.

The following table illustrates selected financial data for each segment
as of and for the nine

|                                         |  |                 |         |          |  |          |         |               |  |           |         |              |  |       |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------- |  | --------------- | ------- | -------- |  | -------- | ------- | ------------- |  | --------- | ------- | ------------ |  | ----- | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                         |  | Local Telephone |         | Wireless |  | Internet |         | Interexchange |  | All Other |         | Eliminations |  | Total
|                                         |  |                 |         |          |  |          |         |               |  |           |         |              |  |      
|Operating revenue                        |  | $               | 172,128 |          |  | $        | 32,455  |               |  | $         | 14,815  |              |  | $     | 13,490 |   |  | $ | 44,096  |   |  | $ | (20,248 | ) |  | $ | 256,736 |  
|Depreciation and amortization            |  |                 | 41,401  |          |  |          | 4,134   |               |  |           | 4,773   |              |  |       | 1,700  |   |  |   | 9,682   |   |  |   |        |   |  |   | 61,690  |  
|Operating income (loss)                  |  |                 | 24,071  |          |  |          | 3,553   |               |  |           | (15,286 | )            |  |       | (599   | ) |  |   | 21,944  |   |  |   | (59     | ) |  |   | 33,624  |  
|Interest expense                         |  |                 | (627    | )        |  |          | 3       |               |  |           | 95      |              |  |       | 226    |   |  |   | 36,765  |   |  |   |        |   |  |   | 36,462  |  
|Interest income                          |  |                 | 2       |          |  |          | 3       |               |  |           |        |              |  |       | 2      |   |  |   | 1,734   |   |  |   |        |   |  |   | 1,741   |  
|Income tax provision (benefit)           |  |                 | 10,010  |          |  |          | 1,452   |               |  |           |        |              |  |       |       |   |  |   | (11,462 | ) |  |   |        |   |  |   |        |  
|Income (loss) from
continuing operations |  |                 | 14,690  |          |  |          | 2,100   |               |  |           | (15,381 | )            |  |       | (823   | ) |  |   | (1,739  | ) |  |   | (59     | ) |  |   | (1,212  | )
|Total assets                             |  |                 | 612,582 |          |  |          | 103,955 |               |  |           | (14,064 | )            |  |       | 11,250 |   |  |   | 59,733  |   |  |   |        |   |  |   | 773,456 |  
|Capital expenditures                     |  |                 | 20,937  |          |  |          | 8,554   |               |  |           | 15,583  |              |  |       |       |   |  |   | 7,485   |   |  |   |        |   |  |   | 52,559  |  

Operating revenue disclosed above include intersegment operating revenue
of $17,849 for local telephone, $1,350 for wireless, $1,729 for interexchange
and $19,803 for all other. In accordance with SFAS No. 71, intercompany revenue
between local telephone and all other segments is not eliminated above.

The following table illustrates selected financial data for each segment
as of and for the three months ended September 30, 2003:

|                                                                    |  |                 |         |          |  |          |        |               |  |           |         |              |  |       |         |   |  |   |         |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------- |  | --------------- | ------- | -------- |  | -------- | ------ | ------------- |  | --------- | ------- | ------------ |  | ----- | ------- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                    |  | Local Telephone |         | Wireless |  | Internet |        | Interexchange |  | All Other |         | Eliminations |  | Total
|                                                                    |  |                 |         |          |  |          |        |               |  |           |         |              |  |      
|Operating revenue                                                   |  | $               | 53,261  |          |  | $        | 12,611 |               |  | $         | 8,223   |              |  | $     | 5,153   |   |  | $ | 6,674   |   |  | $ | (7,700 | ) |  | $ | 78,222  |  
|Depreciation and amortization                                       |  |                 | 14,377  |          |  |          | 1,639  |               |  |           | 2,400   |              |  |       | (225    | ) |  |   | 3,853   |   |  |   |       |   |  |   | 22,044  |  
|Loss (gain) on disposal of assets
and asset impairment charges, net |  |                 | 529     |          |  |          | 1,205  |               |  |           | 31,019  |              |  |       | 12,661  |   |  |   | 2,377   |   |  |   |        |   |  |   | 47,791  |  
|Operating income (loss)                                             |  |                 | 2,777   |          |  |          | 961    |               |  |           | (42,852 | )            |  |       | (14,969 | ) |  |   | 16,199  |   |  |   |       |   |  |   | (37,884 | )
|Interest expense                                                    |  |                 | 76      |          |  |          | 1      |               |  |           | 26      |              |  |       | 44      |   |  |   | 21,792  |   |  |   |       |   |  |   | 21,939  |  
|Interest income                                                     |  |                 | 29      |          |  |          |       |               |  |           |        |              |  |       |        |   |  |   | 367     |   |  |   |       |   |  |   | 396     |  
|Equity in earnings of minority
investments                          |  |                 |        |          |  |          |       |               |  |           |        |              |  |       |        |   |  |   | 325     |   |  |   |       |   |  |   | 325     |  
|Income tax provision (benefit)                                      |  |                 | 831     |          |  |          | 761    |               |  |           |        |              |  |       |        |   |  |   | (1,592  | ) |  |   |       |   |  |   |        |  
|Income (loss) from
continuing operations                            |  |                 | 1,900   |          |  |          | 199    |               |  |           | (42,878 | )            |  |       | (15,013 | ) |  |   | (19,131 | ) |  |   |       |   |  |   | (74,923 | )
|Total assets                                                        |  |                 | 497,546 |          |  |          | 81,824 |               |  |           | (85,431 | )            |  |       | (18,066 | ) |  |   | 179,738 |   |  |   |       |   |  |   | 655,611 |  
|Capital expenditures                                                |  |                 | 6,266   |          |  |          | 5,991  |               |  |           | 976     |              |  |       | 42      |   |  |   | 1,301   |   |  |   |       |   |  |   | 14,576  |  

Operating revenue disclosed above includes intersegment operating revenue
of $6,991 for local telephone, $469 for wireless, $697 for interexchange and
$6,674 for all other. In accordance with SFAS No. 71, intercompany revenue
between local telephone and all other segments is not eliminated above.

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

10. BUSINESS SEGMENTS (Continued)

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

|                                         |  |           |         |          |  |          |         |               |  |           |        |              |  |       |        |   |  |   |        |   |  |   |        |   |  |   |         |  
|---------------------------------------- |  | --------- | ------- | -------- |  | -------- | ------- | ------------- |  | --------- | ------ | ------------ |  | ----- | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                         |  | Local     |         |          |  |          |         |               |  |           |        |              |  |       |        |   |  |   |        |   |  |   |        |   |  |  
|                                         |  | Telephone |         | Wireless |  | Internet |         | Interexchange |  | All Other |        | Eliminations |  | Total
|                                         |  |           |         |          |  |          |         |               |  |           |        |              |  |      
|Operating revenue                        |  | $         | 52,815  |          |  | $        | 11,919  |               |  | $         | 6,422  |              |  | $     | 4,586  |   |  | $ | 17,178 |   |  | $ | (9,422 | ) |  | $ | 83,498  |  
|Depreciation and amortization            |  |           | 13,926  |          |  |          | 1,379   |               |  |           | 1,799  |              |  |       | 562    |   |  |   | 4,792  |   |  |   |       |   |  |   | 22,458  |  
|Operating income (loss)                  |  |           | 1,126   |          |  |          | 1,627   |               |  |           | (5,354 | )            |  |       | (33    | ) |  |   | 8,565  |   |  |   | (22    | ) |  |   | 5,909   |  
|Interest expense                         |  |           | 182     |          |  |          | 1       |               |  |           | 40     |              |  |       | 75     |   |  |   | 12,446 |   |  |   |       |   |  |   | 12,744  |  
|Interest income                          |  |           | 1       |          |  |          | 2       |               |  |           |       |              |  |       | 2      |   |  |   | 565    |   |  |   |       |   |  |   | 570     |  
|Income tax provision (benefit)           |  |           | 439     |          |  |          | 656     |               |  |           |       |              |  |       |       |   |  |   | (1,095 | ) |  |   |       |   |  |   |        |  
|Income (loss) from
continuing operations |  |           | 506     |          |  |          | 967     |               |  |           | (5,394 | )            |  |       | (106   | ) |  |   | (2,208 | ) |  |   | (22    | ) |  |   | (6,257  | )
|Total assets                             |  |           | 598,021 |          |  |          | 107,001 |               |  |           | (9,774 | )            |  |       | 11,429 |   |  |   | 66,779 |   |  |   |       |   |  |   | 773,456 |  
|Capital expenditures                     |  |           | 7,642   |          |  |          | 3,443   |               |  |           | 5,484  |              |  |       |       |   |  |   | 1,436  |   |  |   |       |   |  |   | 18,005  |  

Operating revenue disclosed above include intersegment operating revenue
of $5,515 for local telephone, $468 for wireless, $711 for interexchange and
$9,207 for all other. In accordance with SFAS No. 71, intercompany revenue
between local telephone and all other segments is not eliminated above.

11. RELATED PARTY TRANSACTIONS

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

Fox Paine & Company, the majority stockholder, receives an annual
management fee in the amount of one percent of the Companys net income before
interest expense, income taxes and depreciation and amortization, calculated
without regard to the fee. The management fee expense for the nine months ended
September 30, 2003 and 2002 was $878 and $986, respectively.

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

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

In August 2003, the board of directors also approved the payment of a fee
equal to 1% of the gross proceeds generated from the refinancing of the
Companys debt. The Company paid Fox Paine & Company $3,760 on August 28, 2003.

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

11. RELATED PARTY TRANSACTIONS (Continued)

On September 14, 2003, the Company entered into an agreement with a
retiring officer to reacquire 267 shares of the ACS Groups stock owned by the
officer in January 2004 at a purchase price per share equal to the highest
average closing price of a share of the Companys stock during any
5-consecutive day trading period in January 2004. The officer will deliver the
shares to the Company on January 2, 2004, and the Company will make the
repurchase payments to the officer in four equal quarterly installments
commencing on March 31, 2004.

On September 19, 2003, Fox Paine entered into a consulting agreement with
an officer of the Company. The consulting term will begin on January 1, 2004
and continue for one year, after which either party may terminate the
arrangement. During the consulting term, the officer will advise Fox Paine on
and evaluate potential opportunities in the telecommunications industry, and
Fox Paine will pay the officer a monthly fee of $20 for these services.

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

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

Condensed Consolidated Balance Sheet
September 30, 2003

|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |   |          |         | 
|------------------------------------------------ |  | ------------------------------------------------------- | -------------------------- | - | ------------ | ------- | ------------ | - | ------------ | ------- | ------------ | - | ------------ | -------- | --------- | - | -------- | ------- | 
|                                                 |  |                                                         |                            |   | Combined     |         | ACS Holdings |   |              |         |              |   | ACS Holdings
|                                                 |  |                                                         |                            |   | Subsidiaries |         | Parent Only  |   | Eliminations |         | Consolidated
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |             
|Assets                                           |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|Current assets:                                  |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|                                                 |  | Cash and cash equivalents                               |                            | $ | 190          |         |              | $ | 120,970      |         |              | $ |             |          |           | $ | 121,160  |        
|                                                 |  | Restricted cash                                         |                            |   |             |         |              |   | 555          |         |              |   |             |          |           |   | 555      |        
|                                                 |  | Accounts receivable-trade, net                          |                            |   | 15,172       |         |              |   | 24,298       |         |              |   |             |          |           |   | 39,470   |        
|                                                 |  | Accounts receivable-affiliates                          |                            |   | 202,873      |         |              |   | (198,144     | )       |              |   |             |          |           |   | 4,729    |        
|                                                 |  | Materials and supplies                                  |                            |   | 10,247       |         |              |   | 80           |         |              |   |             |          |           |   | 10,327   |        
|                                                 |  | Prepayments and other current assets                    |                            |   | 3,486        |         |              |   | 2,780        |         |              |   |             |          |           |   | 6,266    |        
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|                                                 |  |                                                         | Total current assets       |   |              | 231,968 |              |   |              | (49,461 | )            |   |              |         |           |   |          | 182,507 | 
|Investments                                      |  |                                                         |                           |   |              |         | 565,755      |   |              |         | (565,755     | ) |              |          |          |  
|Property, plant and equipment                    |  |                                                         | 947,139                    |   |              |         | 108,663      |   |              |         |             |   |              |          | 1,055,802 |  
|Less: accumulated depreciation                   |  |                                                         | 624,688                    |   |              |         | 46,759       |   |              |         |             |   |              |          | 671,447   |  
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|                                                 |  | Property, plant and equipment, net                      |                            |   | 322,451      |         |              |   | 61,904       |         |              |   |             |          |           |   | 384,355  |        
|Goodwill                                         |  |                                                         |                           |   |              |         |             |   |              |         | 38,403       |   |              |          | 38,403    |  
|Intangible assets                                |  |                                                         | 22,100                     |   |              |         | 461          |   |              |         |             |   |              |          | 22,561    |  
|Debt issuance costs, net                         |  |                                                         |                           |   |              |         | 19,312       |   |              |         |             |   |              |          | 19,312    |  
|Deferred charges and other assets                |  |                                                         | 1,765                      |   |              |         | 6,708        |   |              |         |             |   |              |          | 8,473     |  
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|Total assets                                     |  | $                                                       | 578,284                    |   |              | $       | 604,679      |   |              | $       | (527,352     | ) |              | $        | 655,611   |  
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |   |          |        
|                                                 |  | Liabilities and Stockholders Equity                    |                            |   |              |         |              |   |              |         |              |   |              |          |           |   |          |        
|Current liabilities:                             |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|                                                 |  | Current portion of long-term obligations                |                            | $ | 510          |         |              | $ | 1,794        |         |              | $ |             |          |           | $ | 2,304    |        
|                                                 |  | Accounts payable-affiliates                             |                            |   |             |         |              |   | 898          |         |              |   |             |          |           |   | 898      |        
|                                                 |  | Accounts payable, accrued and other current liabilities |                            |   | 17,394       |         |              |   | 31,041       |         |              |   |             |          |           |   | 48,435   |        
|                                                 |  | Advance billings and customer deposits                  |                            |   | 8,871        |         |              |   |             |         |              |   |             |          |           |   | 8,871    |        
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|                                                 |  |                                                         | Total current liabilities  |   |              | 26,775  |              |   |              | 33,733  |              |   |              |         |           |   |          | 60,508  | 
|Long-term obligations, net of current portion    |  |                                                         | 5,617                      |   |              |         | 527,994      |   |              |         |             |   |              |          | 533,611   |  
|Deferred income taxes                            |  |                                                         | 4,304                      |   |              |         | (4,304       | ) |              |         |             |   |              |          |          |  
|Other deferred credits and long-term liabilities |  |                                                         | 14,236                     |   |              |         | 14,076       |   |              |         |             |   |              |          | 28,312    |  
|Commitments and contingencies                    |  |                                                         |                           |   |              |         |             |   |              |         |             |   |              |          |          |  
|Stockholders equity:                            |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|                                                 |  | Common stock                                            |                            |   | 25           |         |              |   |             |         |              |   | (25          | )        |           |   |         |        
|                                                 |  | Paid in capital in excess of par value                  |                            |   | 361,124      |         |              |   | 287,242      |         |              |   | (361,124     | )        |           |   | 287,242  |        
|                                                 |  | Retained earnings (accumulated deficit)                 |                            |   | 166,203      |         |              |   | (241,537     | )       |              |   | (166,203     | )        |           |   | (241,537 | )      
|                                                 |  | Accumulated other comprehensive loss                    |                            |   |             |         |              |   | (12,525      | )       |              |   |             |          |           |   | (12,525  | )      
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |   |          |        
|                                                 |  |                                                         | Total stockholders equity |   |              | 527,352 |              |   |              | 33,180  |              |   |              | (527,352 | )         |   |          | 33,180  | 
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |  
|Total liabilities and stockholders equity       |  | $                                                       | 578,284                    |   |              | $       | 604,679      |   |              | $       | (527,352     | ) |              | $        | 655,611   |  
|                                                 |  |                                                         |                            |   |              |         |              |   |              |         |              |   |              |          |           |   |          |        

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



|12. |  | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)
|--- |  | --------------------------------------------------------

Condensed Consolidated Balance Sheet
December 31, 2002

|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |   |        | 
|------------------------------------------------ | ------------------------------------------------------- | ------------------------------------ | -------------------------- | ------- | ------------ | ------- | ------------ | -------- | ------------ | ------ | ------------ | -------- | ------------ | -------- | --------- | -------- | - | ------ | 
|                                                 |                                                         |                                      |                            |         | Combined     |         | ACS Holdings |          |              |        |              |          | ACS Holdings
|                                                 |                                                         |                                      |                            |         | Subsidiaries |         | Parent Only  |          | Eliminations |        | Consolidated
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |             
|Assets                                           |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |         
|Current assets:                                  |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |         
|                                                 | Cash and cash equivalents                               |                                      | $                          | (73     | )            |         | $            | 18,638   |              |        | $            |         |              |          | $         | 18,565   |  
|                                                 | Restricted cash                                         |                                      |                            |        |              |         |              | 3,440    |              |        |              |         |              |          |           | 3,440    |  
|                                                 | Accounts receivable-trade, net                          |                                      |                            | 28,713  |              |         |              | 20,107   |              |        |              |         |              |          |           | 48,820   |  
|                                                 | Accounts receivable-affiliates                          |                                      |                            | 34,625  |              |         |              | (30,864  | )            |        |              |         |              |          |           | 3,761    |  
|                                                 | Materials and supplies                                  |                                      |                            | 11,176  |              |         |              | 27       |              |        |              |         |              |          |           | 11,203   |  
|                                                 | Prepayments and other current assets                    |                                      |                            | 2,941   |              |         |              | 3,231    |              |        |              |         |              |          |           | 6,172    |  
|                                                 | Assets held for sale                                    |                                      |                            | 261     |              |         |              |         |              |        |              |         |              |          |           | 261      |  
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  
|                                                 |                                                         |                                      | Total current assets       |         |              | 77,643  |              |          |              | 14,579 |              |          |              |         |           |          |   | 92,222 | 
|Investments                                      |                                                         |                                      |                           |         |              |         | 550,964      |          |              |        | (550,964     | )        |              |          |          |         
|Property, plant and equipment                    |                                                         |                                      | 987,132                    |         |              |         | 103,233      |          |              |        |             |          |              |          | 1,090,365 |         
|Less: accumulated depreciation                   |                                                         |                                      | 588,536                    |         |              |         | 36,740       |          |              |        |             |          |              |          | 625,276   |         
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  
|                                                 | Property, plant and equipment, net                      |                                      |                            | 398,596 |              |         |              | 66,493   |              |        |              |         |              |          |           | 465,089  |  
|Goodwill                                         |                                                         |                                      | 38,821                     |         |              |         |             |          |              |        | 38,404       |          |              |          | 77,225    |         
|Intangible assets                                |                                                         |                                      | 22,237                     |         |              |         | 1,032        |          |              |        |             |          |              |          | 23,269    |         
|Debt issuance costs, net                         |                                                         |                                      |                           |         |              |         | 21,130       |          |              |        |             |          |              |          | 21,130    |         
|Deferred charges and other assets                |                                                         |                                      | 32,278                     |         |              |         | (6,231       | )        |              |        |             |          |              |          | 26,047    |         
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  
|Total assets                                     |                                                         | $                                    | 569,575                    |         |              | $       | 647,967      |          |              | $      | (512,560     | )        |              | $        | 704,982   |         
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  
|                                                 |                                                         | Liabilities and Stockholders Equity |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |   |       
|Current liabilities:                             |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |         
|                                                 | Current portion of long-term obligations                |                                      | $                          | 1,312   |              |         | $            | 4,621    |              |        | $            |         |              |          | $         | 5,933    |  
|                                                 | Accounts payable-affiliates                             |                                      |                            |        |              |         |              | 1,319    |              |        |              |         |              |          |           | 1,319    |  
|                                                 | Accounts payable, accrued and other current liabilities |                                      |                            | 18,834  |              |         |              | 30,646   |              |        |              |         |              |          |           | 49,480   |  
|                                                 | Advance billings and customer deposits                  |                                      |                            | 9,804   |              |         |              |         |              |        |              |         |              |          |           | 9,804    |  
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  
|                                                 |                                                         |                                      | Total current liabilities  |         |              | 29,950  |              |          |              | 36,586 |              |          |              |         |           |          |   | 66,536 | 
|Long-term obligations, net of current portion    |                                                         |                                      | 6,899                      |         |              |         | 579,999      |          |              |        |             |          |              |          | 586,898   |         
|Deferred income taxes                            |                                                         |                                      | 7,673                      |         |              |         | (7,673       | )        |              |        |             |          |              |          |          |         
|Other deferred credits and long-term liabilities |                                                         |                                      | 12,493                     |         |              |         | 20,437       |          |              |        |             |          |              |          | 32,930    |         
|Stockholders equity:                            |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |         
|                                                 | Common stock                                            |                                      |                            | 25      |              |         |              |          |              |        |              | (25      | )            |          |           |         |  
|                                                 | Paid in capital in excess of par value                  |                                      |                            | 355,574 |              |         |              | 287,242  |              |        |              | (355,574 | )            |          |           | 287,242  |  
|                                                 | Retained earnings (accumulated deficit)                 |                                      |                            | 156,961 |              |         |              | (249,738 | )            |        |              | (156,961 | )            |          |           | (249,738 | )
|                                                 | Accumulated other comprehensive loss                    |                                      |                            |        |              |         |              | (18,886  | )            |        |              |         |              |          |           | (18,886  | )
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  
|                                                 |                                                         |                                      | Total stockholders equity |         |              | 512,560 |              |          |              | 18,618 |              |          |              | (512,560 | )         |          |   | 18,618 | 
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  
|Total liabilities and stockholders equity       |                                                         | $                                    | 569,575                    |         |              | $       | 647,967      |          |              | $      | (512,560     | )        |              | $        | 704,982   |         
|                                                 |                                                         |                                      |                            |         |              |         |              |          |              |        |              |          |              |          |           |          |  

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##### Table of Contents



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

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

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

|                                  |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |         |         |  
|--------------------------------- | ------------------------------------------------- | ---------------------------- | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | ------------ | ------ | - | ------- | ------- | ------- | -
|                                  |                                                   |                              |         | Combined     |         | ACS Holdings |         |              |         |              |        | ACS Holdings
|                                  |                                                   |                              |         | Subsidiaries |         | Parent Only  |         | Eliminations |         | Consolidated
|                                  |                                                   |                              |         |              |         |              |         |              |         |             
|Operating revenue:                |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |        
|                                  | Local telephone                                   |                              | $       | 53,261       |         |              | $       |             |         |              | $      |             |        |   | $       | 53,261  |        
|                                  | Wireless                                          |                              |         | 12,611       |         |              |         |             |         |              |        | (20          | )      |   |         | 12,591  |        
|                                  | Internet                                          |                              |         | 8,223        |         |              |         |             |         |              |        |             |        |   |         | 8,223   |        
|                                  | Interexchange                                     |                              |         | 5,153        |         |              |         |             |         |              |        | (1,006       | )      |   |         | 4,147   |        
|                                  | Other                                             |                              |         |             |         |              |         | 6,674        |         |              |        | (6,674       | )      |   |         |        |        
|                                  |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |         |        
|                                  |                                                   | Total operating revenue      |         |              | 79,248  |              |         |              | 6,674   |              |        |              | (7,700 | ) |         |         | 78,222  |  
|Operating expense:                |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |        
|                                  | Local telephone                                   |                              |         | 35,578       |         |              |         | 169          |         |              |        | (5,587       | )      |   |         | 30,160  |        
|                                  | Wireless                                          |                              |         | 8,617        |         |              |         |             |         |              |        | (1,072       | )      |   |         | 7,545   |        
|                                  | Internet                                          |                              |         | 11,435       |         |              |         |             |         |              |        | 295          |        |   |         | 11,730  |        
|                                  | Interexchange                                     |                              |         | 7,392        |         |              |         |             |         |              |        | (1,336       | )      |   |         | 6,056   |        
|                                  | Contract termination and asset impairment charges |                              |         | 52,152       |         |              |         | 2,387        |         |              |        |             |        |   |         | 54,539  |        
|                                  | Depreciation and amortization                     |                              |         | 18,191       |         |              |         | 3,853        |         |              |        |             |        |   |         | 22,044  |        
|                                  | Loss (gain) on disposal of assets                 |                              |         | (15,974      | )       |              |         | 6            |         |              |        |             |        |   |         | (15,968 | )      
|                                  |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |         |        
|                                  |                                                   | Total operating expense      |         |              | 117,391 |              |         |              | 6,415   |              |        |              | (7,700 | ) |         |         | 116,106 |  
|Operating income (loss)           |                                                   |                              | (38,143 | )            |         |              | 259     |              |         |              |       |              |        |   | (37,884 | )      
|Other income (expense):           |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |        
|                                  | Interest expense                                  |                              |         | (147         | )       |              |         | (21,792      | )       |              |        |             |        |   |         | (21,939 | )      
|                                  | Interest income and other                         |                              |         | 512          |         |              |         | (64,131      | )       |              |        | 48,519       |        |   |         | (15,100 | )      
|                                  |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |         |        
|                                  |                                                   | Total other income (expense) |         |              | 365     |              |         |              | (85,923 | )            |        |              | 48,519 |   |         |         | (37,039 | )
|                                  |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |         |        
|Income (loss) before income taxes |                                                   |                              | (37,778 | )            |         |              | (85,664 | )            |         |              | 48,519 |              |        |   | (74,923 | )      
|Income tax expense (benefit)      |                                                   |                              | 8,354   |              |         |              | (8,354  | )            |         |              |       |              |        |   |        |        
|                                  |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |         |        
|Net income (loss)                 |                                                   | $                            | (46,132 | )            |         | $            | (77,310 | )            |         | $            | 48,519 |              |        | $ | (74,923 | )      
|                                  |                                                   |                              |         |              |         |              |         |              |         |              |        |              |        |   |         |         |        

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##### Table of Contents



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

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

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

|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |         |  
|----------------------------------------------------------------- | --------------------------------- | ----------------------- | ------ | ------------ | ------ | ------------ | ------ | ------------ | ------- | ------------ | ----- | ------------ | ------ | - | ------ | ------- | ------- | -
|                                                                  |                                   |                         |        | Combined     |        | ACS Holdings |        |              |         |              |       | ACS Holdings
|                                                                  |                                   |                         |        | Subsidiaries |        | Parent Only  |        | Eliminations |         | Consolidated
|                                                                  |                                   |                         |        |              |        |              |        |              |         |             
|Operating revenue:                                                |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |        
|                                                                  | Local telephone                   |                         | $      | 52,815       |        |              | $      |             |         |              | $     |             |        |   | $      | 52,815  |        
|                                                                  | Wireless                          |                         |        | 11,919       |        |              |        |             |         |              |       | (16          | )      |   |        | 11,903  |        
|                                                                  | Directory                         |                         |        | 8,360        |        |              |        |             |         |              |       |             |        |   |        | 8,360   |        
|                                                                  | Internet                          |                         |        | 6,422        |        |              |        |             |         |              |       |             |        |   |        | 6,422   |        
|                                                                  | Interexchange                     |                         |        | 4,586        |        |              |        |             |         |              |       | (588         | )      |   |        | 3,998   |        
|                                                                  | Other                             |                         |        |             |        |              |        | 8,818        |         |              |       | (8,818       | )      |   |        |        |        
|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |        
|                                                                  |                                   | Total operating revenue |        |              | 84,102 |              |        |              | 8,818   |              |       |              | (9,422 | ) |        |         | 83,498  |  
|Operating expense:                                                |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |        
|                                                                  | Local telephone                   |                         |        | 36,938       |        |              |        | 551          |         |              |       | (9,521       | )      |   |        | 27,968  |        
|                                                                  | Wireless                          |                         |        | 8,537        |        |              |        |             |         |              |       | (1,096       | )      |   |        | 7,441   |        
|                                                                  | Directory                         |                         |        | 3,415        |        |              |        |             |         |              |       | (7           | )      |   |        | 3,408   |        
|                                                                  | Internet                          |                         |        | 9,118        |        |              |        |             |         |              |       | (362         | )      |   |        | 8,756   |        
|                                                                  | Interexchange                     |                         |        | 6,120        |        |              |        |             |         |              |       | (397         | )      |   |        | 5,723   |        
|                                                                  | Other                             |                         |        | 29           |        |              |        |             |         |              |       | (29          | )      |   |        |        |        
|                                                                  | Depreciation and amortization     |                         |        | 17,692       |        |              |        | 4,766        |         |              |       |             |        |   |        | 22,458  |        
|                                                                  | Loss (gain) on disposal of assets |                         |        | (3           | )      |              |        | (145         | )       |              |       | 1,983        |        |   |        | 1,835   |        
|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |        
|                                                                  |                                   | Total operating expense |        |              | 81,846 |              |        |              | 5,172   |              |       |              | (9,429 | ) |        |         | 77,589  |  
|Operating income                                                  |                                   |                         | 2,256  |              |        |              | 3,646  |              |         |              | 7     |              |        |   | 5,909  |        
|Other income (expense):                                           |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |        
|                                                                  | Interest expense                  |                         |        | (298         | )      |              |        | (12,446      | )       |              |       |             |        |   |        | (12,744 | )      
|                                                                  | Interest income and other         |                         |        |             |        |              |        | (699         | )       |              |       | 1,277        |        |   |        | 578     |        
|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |        
|                                                                  |                                   | Total other expense     |        |              | (298   | )            |        |              | (13,145 | )            |       |              | 1,277  |   |        |         | (12,166 | )
|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |        
|Income (loss) before income taxes and
and discontinued operations |                                   |                         | 1,958  |              |        |              | (9,499 | )            |         |              | 1,284 |              |        |   | (6,257 | )      
|Income tax expense (benefit)                                      |                                   |                         | 3,106  |              |        |              | (3,106 | )            |         |              |      |              |        |   |       |        
|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |        
|Income (loss) from continuing operations                          |                                   |                         | (1,148 | )            |        |              | (6,393 | )            |         |              | 1,284 |              |        |   | (6,257 | )      
|Loss from discontinued operations, net                            |                                   |                         | (136   | )            |        |              |       |              |         |              |      |              |        |   | (136   | )      
|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |        
|Net income (loss)                                                 |                                   | $                       | (1,284 | )            |        | $            | (6,393 | )            |         | $            | 1,284 |              |        | $ | (6,393 | )      
|                                                                  |                                   |                         |        |              |        |              |        |              |         |              |       |              |        |   |        |         |        

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

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2003

|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |         |  
|------------------------------------------------------------- | ------------------------------------------------- | ---------------------------- | ------ | ------------ | ------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | ------------ | ------- | - | ------ | -------- | ------- | -
|                                                              |                                                   |                              |        | Combined     |         | ACS Holdings |         |              |         |              |        | ACS Holdings
|                                                              |                                                   |                              |        | Subsidiaries |         | Parent Only  |         | Eliminations |         | Consolidated
|                                                              |                                                   |                              |        |              |         |              |         |              |         |             
|Operating revenue:                                            |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |         
|                                                              | Local telephone                                   |                              | $      | 162,472      |         |              | $       |             |         |              | $      |             |         |   | $      | 162,472  |        
|                                                              | Wireless                                          |                              |        | 34,929       |         |              |         |             |         |              |        | (61          | )       |   |        | 34,868   |        
|                                                              | Directory                                         |                              |        | 11,631       |         |              |         |             |         |              |        |             |         |   |        | 11,631   |        
|                                                              | Internet                                          |                              |        | 24,416       |         |              |         |             |         |              |        |             |         |   |        | 24,416   |        
|                                                              | Interexchange                                     |                              |        | 15,380       |         |              |         |             |         |              |        | (2,757       | )       |   |        | 12,623   |        
|                                                              | Other                                             |                              |        |             |         |              |         | 19,282       |         |              |        | (19,282      | )       |   |        |         |        
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        
|                                                              |                                                   | Total operating revenue      |        |              | 248,828 |              |         |              | 19,282  |              |        |              | (22,100 | ) |        |          | 246,010 |  
|Operating expense:                                            |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |         
|                                                              | Local telephone                                   |                              |        | 99,783       |         |              |         | 603          |         |              |        | (16,119      | )       |   |        | 84,267   |        
|                                                              | Wireless                                          |                              |        | 24,611       |         |              |         |             |         |              |        | (2,815       | )       |   |        | 21,796   |        
|                                                              | Directory                                         |                              |        | 5,359        |         |              |         |             |         |              |        | (110         | )       |   |        | 5,249    |        
|                                                              | Internet                                          |                              |        | 36,976       |         |              |         |             |         |              |        | (1,147       | )       |   |        | 35,829   |        
|                                                              | Interexchange                                     |                              |        | 19,786       |         |              |         |             |         |              |        | (1,900       | )       |   |        | 17,886   |        
|                                                              | Other                                             |                              |        | 9            |         |              |         |             |         |              |        | (9           | )       |   |        |         |        
|                                                              | Contract termination and asset impairment charges |                              |        | 52,152       |         |              |         | 2,387        |         |              |        |             |         |   |        | 54,539   |        
|                                                              | Depreciation and amortization                     |                              |        | 55,809       |         |              |         | 10,926       |         |              |        |             |         |   |        | 66,735   |        
|                                                              | Loss (gain) on disposal of assets                 |                              |        | (112,513     | )       |              |         | 6            |         |              |        |             |         |   |        | (112,507 | )      
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        
|                                                              |                                                   | Total operating expense      |        |              | 181,972 |              |         |              | 13,922  |              |        |              | (22,100 | ) |        |          | 173,794 |  
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        
|Operating income                                              |                                                   |                              | 66,856 |              |         |              | 5,360   |              |         |              |       |              |         |   | 72,216 |         
|Other income (expense):                                       |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |         
|                                                              | Interest expense                                  |                              |        | (643         | )       |              |         | (48,903      | )       |              |        |             |         |   |        | (49,546  | )      
|                                                              | Interest income and other                         |                              |        | 4,920        |         |              |         | (5,799       | )       |              |        | (9,242       | )       |   |        | (10,121  | )      
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        
|                                                              |                                                   | Total other income (expense) |        |              | 4,277   |              |         |              | (54,702 | )            |        |              | (9,242  | ) |        |          | (59,667 | )
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        
|Income (loss) before income taxes
and discontinued operations |                                                   |                              | 71,133 |              |         |              | (49,342 | )            |         |              | (9,242 | )            |         |   | 12,549 |         
|Income tax expense (benefit)                                  |                                                   |                              | 59,452 |              |         |              | (59,452 | )            |         |              |       |              |         |   |       |         
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        
|Income (loss) from continuing operations                      |                                                   |                              | 11,681 |              |         |              | 10,110  |              |         |              | (9,242 | )            |         |   | 12,549 |         
|Loss from discontinued operations                             |                                                   |                              | (52    | )            |         |              |        |              |         |              |       |              |         |   | (52    | )       
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        
|Net income (loss)                                             |                                                   | $                            | 11,629 |              |         | $            | 10,110  |              |         | $            | (9,242 | )            |         | $ | 12,497 |         
|                                                              |                                                   |                              |        |              |         |              |         |              |         |              |        |              |         |   |        |          |        

23



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

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Operations
Nine Months Ended September 30, 2002

|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |         |  
|------------------------------------------------------------------------------------------------------------------ | ----------------------------- | ---------------------------- | ------ | ------------ | ------- | ------------ | -------- | ------------ | ------- | ------------ | ----- | ------------ | ------- | - | -------- | ------- | ------- | -
|                                                                                                                   |                               |                              |        | Combined     |         | ACS Holdings |          |              |         |              |       | ACS Holdings
|                                                                                                                   |                               |                              |        | Subsidiaries |         | Parent Only  |          | Eliminations |         | Consolidated
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |             
|Operating revenue:                                                                                                 |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |        
|                                                                                                                   | Local telephone               |                              | $      | 172,128      |         |              | $        |             |         |              | $     |             |         |   | $        | 172,128 |        
|                                                                                                                   | Wireless                      |                              |        | 32,455       |         |              |          |             |         |              |       | (35          | )       |   |          | 32,420  |        
|                                                                                                                   | Directory                     |                              |        | 25,382       |         |              |          |             |         |              |       |             |         |   |          | 25,382  |        
|                                                                                                                   | Internet                      |                              |        | 14,815       |         |              |          |             |         |              |       |             |         |   |          | 14,815  |        
|                                                                                                                   | Interexchange                 |                              |        | 13,490       |         |              |          |             |         |              |       | (1,499       | )       |   |          | 11,991  |        
|                                                                                                                   | Other                         |                              |        |             |         |              |          | 18,714       |         |              |       | (18,714      | )       |   |          |        |        
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        
|                                                                                                                   |                               | Total operating revenue      |        |              | 258,270 |              |          |              | 18,714  |              |       |              | (20,248 | ) |          |         | 256,736 |  
|Operating expense:                                                                                                 |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |        
|                                                                                                                   | Local telephone               |                              |        | 104,223      |         |              |          | 2,091        |         |              |       | (18,093      | )       |   |          | 88,221  |        
|                                                                                                                   | Wireless                      |                              |        | 23,780       |         |              |          |             |         |              |       | (2,451       | )       |   |          | 21,329  |        
|                                                                                                                   | Directory                     |                              |        | 10,379       |         |              |          |             |         |              |       | (13          | )       |   |          | 10,366  |        
|                                                                                                                   | Internet                      |                              |        | 22,668       |         |              |          |             |         |              |       | (764         | )       |   |          | 21,904  |        
|                                                                                                                   | Interexchange                 |                              |        | 18,345       |         |              |          |             |         |              |       | (851         | )       |   |          | 17,494  |        
|                                                                                                                   | Other                         |                              |        | 72           |         |              |          |             |         |              |       | (72          | )       |   |          |        |        
|                                                                                                                   | Depreciation and amortization |                              |        | 52,036       |         |              |          | 9,654        |         |              |       |             |         |   |          | 61,690  |        
|                                                                                                                   | Loss on disposal of assets    |                              |        | 125          |         |              |          |             |         |              |       | 1,983        |         |   |          | 2,108   |        
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        
|                                                                                                                   |                               | Total operating expense      |        |              | 231,628 |              |          |              | 11,745  |              |       |              | (20,261 | ) |          |         | 223,112 |  
|Operating income                                                                                                   |                               |                              | 26,642 |              |         |              | 6,969    |              |         |              | 13    |              |         |   | 33,624   |        
|Other income (expense):                                                                                            |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |        
|                                                                                                                   | Interest expense              |                              |        | 303          |         |              |          | (36,765      | )       |              |       |             |         |   |          | (36,462 | )      
|                                                                                                                   | Interest income and other     |                              |        | 6            |         |              |          | (4,593       | )       |              |       | 6,213        |         |   |          | 1,626   |        
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        
|                                                                                                                   |                               | Total other income (expense) |        |              | 309     |              |          |              | (41,358 | )            |       |              | 6,213   |   |          |         | (34,836 | )
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        
|Income (loss) before income taxes, discontinued
operations and cumulative effect of
change in accounting principle |                               |                              | 26,951 |              |         |              | (34,389  | )            |         |              | 6,226 |              |         |   | (1,212   | )      
|Income tax expense (benefit)                                                                                       |                               |                              | 17,607 |              |         |              | (17,607  | )            |         |              |      |              |         |   |         |        
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        
|Income (loss) from continuing operations                                                                           |                               |                              | 9,344  |              |         |              | (16,782  | )            |         |              | 6,226 |              |         |   | (1,212   | )      
|Loss from discontinued operations                                                                                  |                               |                              | (7,273 | )            |         |              | (250     | )            |         |              |      |              |         |   | (7,523   | )      
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        
|Income (loss) before cumulative effect
of change in accounting principle                                           |                               |                              | 2,071  |              |         |              | (17,032  | )            |         |              | 6,226 |              |         |   | (8,735   | )      
|Cumulative effect of change
in accounting principle                                                                |                               |                              | (8,297 | )            |         |              | (97,053  | )            |         |              |      |              |         |   | (105,350 | )      
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        
|Net income (loss)                                                                                                  |                               | $                            | (6,226 | )            |         | $            | (114,085 | )            |         | $            | 6,226 |              |         | $ | (114,085 | )      
|                                                                                                                   |                               |                              |        |              |         |              |          |              |         |              |       |              |         |   |          |         |        

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ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

Notes to Consolidated Financial Statements, Continued
(Unaudited, Amounts In Thousands Except Per Share Amounts)


12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2003

|                                                     |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|---------------------------------------------------- |  | ------------ | -------- | ------------ |  | ------------ | -------- | ------------ |  | ------------ | - |  |  | - | -------- | -
|                                                     |  | Combined     |          | ACS Holdings |  |              |          |              |  | ACS Holdings
|                                                     |  | Subsidiaries |          | Parent Only  |  | Eliminations |          | Consolidated
|                                                     |  |              |          |              |  |              |          |             
|Net cash provided (used) by operating activities     |  | $            | (128,362 | )            |  | $            | 178,881  |              |  | $            |  |  |  | $ | 50,519   |  
|Cash Flows from Investing Activities:                |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Construction and capital expenditures                |  |              | (23,520  | )            |  |              | (6,267   | )            |  |              |  |  |  |   | (29,787  | )
|Net proceeds from sale of business                   |  |              | 155,268  |              |  |              |         |              |  |              |  |  |  |   | 155,268  |  
|Other investing activities                           |  |              |         |              |  |              | 2,894    |              |  |              |  |  |  |   | 2,894    |  
|                                                     |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Net cash provided (used) by investing activities     |  |              | 131,748  |              |  |              | (3,373   | )            |  |              |  |  |  |   | 128,375  |  
|Cash Flows from Financing Activities:                |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Payments on long-term debt                           |  |              | (3,123   | )            |  |              | (430,850 | )            |  |              |  |  |  |   | (433,973 | )
|Proceeds from issuance of long-term debt             |  |              |         |              |  |              | 375,970  |              |  |              |  |  |  |   | 375,970  |  
|Debt issuance costs                                  |  |              |         |              |  |              | (14,000  | )            |  |              |  |  |  |   | (14,000  | )
|Dividends                                            |  |              |         |              |  |              | (4,296   | )            |  |              |  |  |  |   | (4,296   | )
|                                                     |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Net cash provided (used) by financing activities     |  |              | (3,123   | )            |  |              | (73,176  | )            |  |              |  |  |  |   | (76,299  | )
|Increase in cash and cash equivalents                |  |              | 263      |              |  |              | 102,332  |              |  |              |  |  |  |   | 102,595  |  
|Cash and cash equivalents, beginning of the period   |  |              | (73      | )            |  |              | 18,638   |              |  |              |  |  |  |   | 18,565   |  
|                                                     |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Cash and cash equivalents, end of the period         |  | $            | 190      |              |  | $            | 120,970  |              |  | $            |  |  |  | $ | 121,160  |  
|                                                     |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Supplemental Cash Flow Data:                         |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Interest paid                                        |  | $            | 639      |              |  | $            | 31,031   |              |  | $            |  |  |  | $ | 31,670   |  
|Income taxes paid                                    |  | $            |         |              |  | $            |         |              |  | $            |  |  |  | $ |         |  
|Supplemental Noncash Transactions:                   |  |              |          |              |  |              |          |              |  |              |   |  |  |   |          |  
|Property acquired under capital leases and
mortgages |  | $            | 2,340    |              |  | $            |         |              |  | $            |  |  |  | $ | 2,340    |  
|Interest rate swap marked to market                  |  | $            |         |              |  | $            | (6,361   | )            |  | $            |  |  |  | $ | (6,361   | )

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##### Table of Contents



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

12. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2002

|                                                     |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|---------------------------------------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | - |  |  | - | ------- | -
|                                                     |  | Combined     |         | ACS Holdings |  |              |         |              |  | ACS Holdings
|                                                     |  | Subsidiaries |         | Parent Only  |  | Eliminations |         | Consolidated
|                                                     |  |              |         |              |  |              |         |             
|Net cash provided (used) by operating activities     |  | $            | 46,694  |              |  | $            | 2,485   |              |  | $            |  |  |  | $ | 49,179  |  
|Cash Flows from Investing Activities:                |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Construction and capital expenditures                |  |              | (43,280 | )            |  |              | (6,973  | )            |  |              |  |  |  |   | (50,253 | )
|Issuance of note receivable                          |  |              |        |              |  |              | (15,000 | )            |  |              |  |  |  |   | (15,000 | )
|Release of funds from escrow                         |  |              |        |              |  |              | 3,706   |              |  |              |  |  |  |   | 3,706   |  
|                                                     |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Net cash used by investing activities                |  |              | (43,280 | )            |  |              | (18,267 | )            |  |              |  |  |  |   | (61,547 | )
|Cash Flows from Financing Activities:                |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Payments on long-term debt                           |  |              | (2,245  | )            |  |              | (4,529  | )            |  |              |  |  |  |   | (6,774  | )
|Dividends                                            |  |              |        |              |  |              | (830    | )            |  |              |  |  |  |   | (830    | )
|                                                     |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Net cash provided (used) by financing activities     |  |              | (2,245  | )            |  |              | (5,359  | )            |  |              |  |  |  |   | (7,604  | )
|Increase (decrease) in cash and cash equivalents     |  |              | 1,169   |              |  |              | (21,141 | )            |  |              |  |  |  |   | (19,972 | )
|Cash and cash equivalents, beginning of the period   |  |              | 1,239   |              |  |              | 39,773  |              |  |              |  |  |  |   | 41,012  |  
|                                                     |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Cash and cash equivalents, end of the period         |  | $            | 2,408   |              |  | $            | 18,632  |              |  | $            |  |  |  | $ | 21,040  |  
|                                                     |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Supplemental Cash Flow Data:                         |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Interest paid                                        |  | $            | (284    | )            |  | $            | 31,080  |              |  | $            |  |  |  | $ | 30,796  |  
|Income taxes paid                                    |  | $            |        |              |  | $            |        |              |  | $            |  |  |  | $ |        |  
|Supplemental Noncash Transactions:                   |  |              |         |              |  |              |         |              |  |              |   |  |  |   |         |  
|Property acquired under capital leases and
mortgages |  | $            | 2,306   |              |  | $            |        |              |  | $            |  |  |  | $ | 2,306   |  
|Interest rate swap marked to market                  |  | $            |        |              |  | $            | 3,786   |              |  | $            |  |  |  | $ | 3,786   |  

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

13. 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. The
Company believes this suit is without merit and intends to vigorously defend
its position. The actual number of plaintiffs remain undetermined nor are the
claims that will actually be in dispute been resolved.

On July 15, 2002 the Company fulfilled a commitment to Neptune Communications,
L.L.C. (Neptune) to provide a loan for the aggregate principal amount of
$15,000 in return for certain consideration. The Company has an agreement that
enables it to purchase additional fiber optic capacity in future years from
Neptune, the expenditures for which are expected to be significant and may
exceed $25,000 over the next four years. While the Company has an agreement
with Neptune, certain material terms of the agreement remain subject to
continued renegotiation. The significant provisions of this agreement are: i)
purchase commitments by the Company for capacity in 2005 and 2007, the final
price and quantity of which are subject to future events, ii) Neptunes
restoration of the Companys traffic carried on another cable system, iii) and
specific interconnection arrangements between the Company and Neptune, should
the Company exercise its option to purchase certain network assets from
Neptune. The Company is currently negotiating open elements of its agreement
with Neptune and renegotiating other terms and conditions of the agreement. It
is impossible to determine the ultimate outcome of these negotiations at this
time. The loan was written down to its estimated net realizable value during
the quarter ended September 30, 2003 as described in Note 6.

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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 the Companys historical experience and its 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, Accounting for the Effects of Certain Types of
Regulation,to the Companys local telephone 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 13th 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 wireless 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 ACS Holdings service areas,                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | wholesale service to competitive local exchange carriers (CLECs),                                                                      
|
| |  |  | network access services to interexchange
carriers for origination and termination of interstate and
intrastate long distance phone calls,
|
| |  |  | enhanced services,                                                                                                                       
|
| |  |  | ancillary services, such as billing and collection (B&C), and                                                                          
|
| |  |  | universal service payments;                                                                                                              



| |  | wireless services;                                    
| | - | ------------------------------------------------------
|
| |  | Internet services; and                                
|
| |  | interexchange network long-distance and data services.

On May 8, 2003, the Company completed the sale of a majority interest
(87.42%) in its Directories Business. Subsequently, on August 27, 2003, the
Company was released from a lockup agreement relating to the remaining interest
in the Directories Business and the Company disposed of substantially all of
its remaining interest in the Directories Business through the exercise of its
right to convert 99.23% of its then remaining 12.58% interest in the
Directories Business to 2,500 units of the ACS Media Income Fund, which were
then sold in an underwritten offering. As a result of this transaction, the
Company now owns less than 0.1% of the Directories Business. See Note 5, Gain
on Disposal of Assets, in the footnotes to the financial statements for
additional information on this transaction.

Local
Telephone -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 in part by billing
interexchange carriers for access to the LECs local network and its customers
and in part by billing the local customers themselves. Universal service
revenues are a subsidy paid to rural LECs to support the high cost of providing
service in rural markets. Other service revenue is generated from ancillary
services and enhanced services.

Changes in revenue are largely attributable to changes in the number of
access lines, local service rates and minutes of use. Other factors can also
impact revenue, including:



| |  | intrastate and interstate revenue settlement methodologies,            
| | - | -----------------------------------------------------------------------
|
| |  | authorized rates of return for regulated services,                     
|
| |  | whether an access line is used by a business or residential subscriber,
|
| |  | intrastate and interstate calling patterns,                            
|
| |  | customers selection of various local rate plan options,               
|
| |  | selection of enhanced calling services, such as voice mail, 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 and a
portion of network access,                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | interexchange carriers that pay for access to long
distance calling customers located within its local service
areas and                                                                                     
|
| |  | CLECs that pay for wholesale access to the Companys
network in order to provide competitive local service on either
a wholesale or 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.

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

Wireless- The Company is one of the largest statewide providers of
wireless services in Alaska, currently serving approximately 84,000
subscribers. Its wireless network covers over 478,000 residents, including all
major population centers and highway corridors. The Company operates a TDMA
digital network in substantially all of its service areas, and intends to
upgrade this network to a new generation of digital network known as CDMA.

Internet- The Company is the second largest provider of Internet access
services in Alaska with approximately 45,000 customers. The Company offers
dial-up and dedicated digital subscriber line (DSL) Internet access to its
customers. The Company is a single source provider of advanced IP based private
networks in Alaska.

Interexchange-The Company provides switched and dedicated long distance
services to approximately 43,500 customers in Alaska. The traffic from these
customers is carried over the Companys owned or leased facilities.

RECENT DEVELOPMENTS

On September 15, 2003, the Company announced the appointment of Liane
Pelletier as CEO and President and the retirement of Charles E. Robinson as CEO
effective October 6, 2003. Ms. Pelletier, who also joined our Board of
Directors, joined ACS after spending 17 years at Sprint Corporation, most
recently as a member of the Executive Management Committee and as Chief
Integration Officer. Ms. Pelletiers position consolidates Mr. Robinsons
day-to-day responsibilities and those of Wesley E. Carson, who left in May 2003
to be CEO of the Directories Business. Mr. Robinson, a 45-year telecom industry
veteran who founded ACS in 1999, will remain as Chairman until the end of the
year but is retiring from day-to-day management of the Company. The Company
also announced on November 6, 2003 the appointment of David C. Eisenberg to its
management team. Mr. Eisenberg, also a former Sprint Corporation executive,
joined ACS effective November 3, 2003 in the position of Sr. Vice President,
Corporate Strategy and Development.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002

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

Operating Revenue

Operating revenue decreased $5.3 million, or 6.3%, for the three months
ended September 30, 2003 compared to the three months ended September 30, 2002.
Local telephone, wireless, Internet and interexchange revenue all increased
compared to the corresponding period of 2002.

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Local Telephone

Local telephone revenue, which consists of local network service, network
access revenue and deregulated and other revenue, increased $0.4 million, or
0.8%, for the three months ended September 30, 2003 compared to the same period
in 2002. The following table summarizes the Companys consolidated local
telephone revenue by category.

|                                                                           |                       |   |                                  |        |      |   |         |        | 
|-------------------------------------------------------------------------- | --------------------- | - | -------------------------------- | ------ | ---- | - | ------- | ------ | 
|                                                                           |                       |   | Three Months Ended September 30,
|                                                                           |                       |   |                                 
|                                                                           |                       |   | 2003                             |        | 2002
|                                                                           |                       |   |                                  |        |     
|                                                                           |                       |   | (In Thousands)                  
|Local telephone revenue:                                                   |                       |   |                                  |        |      |   |         |       
|                                                                           | Local network         |   | $                                | 24,022 |      |   | $       | 24,186 | 
|                                                                           | Network access        |   |                                  | 23,750 |      |   |         | 23,862 | 
|                                                                           | Deregulated and other |   |                                  | 5,489  |      |   |         | 4,767  | 
|                                                                           |                       |   |                                  |        |      |   |         |       
|Total local telephone revenue                                              |                       | $ | 53,261                           |        |      | $ | 52,815  |       
|                                                                           |                       |   |                                  |        |      |   |         |       
|                                                                          
|The following table summarizes the Companys local telephone access lines.
|                                                                          
|                                                                           |                       |   | As of September 30,             
|                                                                           |                       |   |                                 
|                                                                           |                       |   | 2003                             |        | 2002
|                                                                           |                       |   |                                  |        |     
|Retail                                                                     |                       |   | 224,744                          |        |      |   | 241,583 |       
|Wholesale                                                                  |                       |   | 18,795                           |        |      |   | 25,074  |       
|Unbundled
network elements - loop (UNE - L)                                |                       |   | 67,542                           |        |      |   | 60,504  |       
|Unbundled network elements - platform (UNE
- P)                            |                       |   | 4,907                            |        |      |   |        |       
|                                                                           |                       |   |                                  |        |      |   |         |        | 
|Total local telephone access lines                                         |                       |   | 315,988                          |        |      |   | 327,161 |       
|                                                                           |                       |   |                                  |        |      |   |         |        | 

The local network service component of local telephone revenue was $24.0
million for the three months ended September 30, 2003 compared with $24.2
million for the three months ended September 30, 2002.Revenue decreased $0.2
million or 0.7% from the prior year. This decrease reflects the net effect of
retail market share losses offset by increases in unbundled network element
revenue and local private line revenue and decreased uncollectible revenue.

The Company continued to experience loss of retail market share for local
network service in its Anchorage, Fairbanks and Juneau service areas during the
year. Generally, when the Company loses a retail local network service line to
a competitor, it continues to provide the line to the competitor on a wholesale
basis at reduced revenue per line. Management believes that the continuing loss
of market share it has experienced in certain of its markets is partially
attributable to below cost interconnection rates mandated by the RCA for UNEs.
During the first quarter of 2000, the Company reopened interconnection
proceedings for its Anchorage market and in the second quarter of 2001, filed
for an interim and refundable UNE rate increase of approximately $10 per month
per loop. On October 25, 2001, the RCA granted ACSA an interim and refundable
UNE rate increase of $1.07, increasing the UNE rates from $13.85 to $14.92. The
interim and refundable rate increase was implemented in November 2001 and
generated approximately $0.7 million in additional revenue during the calendar
year 2002. The Company expects the RCA to hold hearings during November 2003
and adjudicate final Anchorage UNE rates during 2004.

The Company believes it is earning less than its authorized rate of return
for local network service in several of its markets and in compliance with the
Alaska Public Utilities Commission (APUC) orders related to the approval of
the acquisition of the four LECs in 1999, filed local service rate cases for
all of its
LEC businesses with the RCA on July 2, 2001 aimed at making up this
deficiency. The RCAs decisions on revenue requirements will have a direct
impact on the retail rates and intrastate access rates that the Company is
allowed to charge. A RCA finding of over earnings generally leads to rate
reductions while a RCA finding of under earnings generally results in rate
increases.

In October 2001, the Company filed for increased interim and refundable
local service rates in its Anchorage market in order to expedite a partial
recovery of the total revenue deficiency. On November 15, 2001, the RCA
approved an interim and refundable rate increase for ACSA of 24% for certain
services.This interim and refundable rate increase was implemented in November
2001 and generated

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approximately $4.2 million in additional revenue in calendar
year 2002. On December 16, 2002, the RCA reopened the revenue requirement phase
of the hearing for ACSA to take additional testimony regarding ACSAs service
lives. The RCA corrected the length of the service lives at issue, increasing
the amount by which ACSA is under earning. The Company expects the RCA to
continue to hold hearings during 2003 and to adjudicate final local service
rates during 2004.

On March 25, 2003, the RCA issued an order approving new revenue
requirements for ACSF, ACSAK, and ACSN. The RCA found over earnings by ACSF and
ACSN and under earnings by ACSAK. In compliance with RCA orders, ACSF, ACSAK,
ACSN have filed cost of service and rate design studies, and supporting
testimony, consistent with the RCA revenue requirements orders. Final rates are
expected in 2004.

Network access revenue decreased from $23.9 million for the three months
ended September 30, 2002 to $23.8 million for the same period in 2003.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. The decrease in network
access revenues of $0.1 million compared to the corresponding period in 2002 is
due primarily to updated access studies. Management expects that network access
revenues will generally be on a declining trend for the foreseeable future.

Deregulated and other revenue, which increased to $5.5 million compared to
$4.8 million in the prior year, consists principally of B&C services, space and
power rents, deregulated equipment sales, paystation revenue, regulated
directory listing revenue, and other miscellaneous telephone revenue. The
increase of $0.7 million is due to an increase in B&C and rent revenue offset
by a decrease in deregulated equipment sales and paystation revenue.

Wireless

Wireless revenue increased $0.7 million, or 5.8%, to $12.6 million for the
three months ended September 30, 2003 compared to $11.9 million for the three
months ended September 30, 2002. This increase was due to a growth in average
subscribers of 2.6% from 81,334 in 2002 to 83,444 in 2003. Subscriber average
minutes of use also increased from 227 minutes in 2002 to 256 minutes in 2003.
Primarily as a result of increased minutes of use, the monthly average revenue
per unit, or ARPU, increased to $50.30 in 2003 compared to $48.78 during 2002.

Internet

Internet revenue increased from $6.4 million in 2002 to $8.2 million in
2003, an increase of $1.8 million, or 28.0%. This increase is primarily due to
revenue associated with the Companys contract with the State of Alaska.
Internet also experienced growth in DSL subscribers of 47.5% from 11,045 in
2002 to 16,294 in 2003.

On September 15, 2003, the Company received notification from the State of
Alaska that it intended to terminate a five year Telecommunications Services
Partnering Agreement with the Company and disentangle. Subsequently, the
Company and the State negotiated and agreed to a definitive Settlement
Agreement and Mutual Release effective October 14, 2003, outlining the terms of
disentanglement between the parties. The Company anticipates that revenue for
this segment will decrease in future periods as disentanglement occurs under
the agreement.

Interexchange

Interexchange revenue increased from $4.0 million in 2002 to $4.1 million
in 2003. Long distance subscribers decreased from 67,230 in 2002 to 43,499 in
2003. The decrease in subscribers was substantially due to database grooming to
remove approximately 20,000 non-revenue generating inactive subscribers from
the subscriber list in connection with the conversion of long distance billing
from an outside service bureau to an in-house system during the first and
second quarters of 2003. The average revenue per unit, or ARPU, increased to
$31.49 in 2003 compared to $20.16 during 2002 and total minutes of use
increased from 38.7 million in 2002 to 39.0 million in 2003.

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Operating Expense

Operating expense increased $38.5 million from $77.6 million for the three
months ended September 30, 2002 to $116.1 million for the three months ended
September 30, 2003. Operating expenses for 2003 includes $54.5 million of
contract termination and asset impairment charges and a gain on disposal of
assets of $16.0 million. Not including these items, operating expenses was
relatively flat with the prior year. Depreciation and amortization associated
with the operation of each of the Companys segments has been included in total
depreciation and amortization.

Local Telephone

The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and
property and other operating tax expense.Local telephone expense increased to
$30.2 million for the three months ended September 30, 2003 from $28.0 million
for the three months ended September 30, 2002.The increase in local telephone
expense was substantially attributable to executive recruiting and retirement
costs and prior years federal universal service charges recorded during the
third quarter of 2003.

Wireless

Wireless expense increased $0.1 million from $7.4 million for the three
months ended September 30, 2002 to $7.5 million for the three months ended
September 30, 2003.

Internet

Internet expense increased by $3.0 million, or 34.0%, from $8.8 million in
2002 to $11.7 million in 2003. The increase in Internet expense was due
principally to operating costs associated with providing services under the
State of Alaska telecommunications contract. On September 15, 2003, the Company
received notification from the State of Alaska that it intended to terminate a
five year Telecommunications Services Partnering Agreement with the Company and
disentangle. Subsequently, the Company and the State negotiated and agreed to a
definitive Settlement Agreement and Mutual Release effective October 14, 2003,
outlining the terms of disentanglement between the parties. The Company
anticipates expense for this segment to decline as it completes the
disentanglement of these services under the contract.

Interexchange

Interexchange expense increased by $0.4 million, or 5.8%, to $6.1 million
for the quarter ended September 30, 2003 from $5.7 million for the quarter
ended September 30, 2002.

Contract termination and asset impairment charges

During the quarter ended September 30, 2003, the Company recorded $54.5
million in contract termination and asset impairment charges. These charges
resulted from (1) the termination of the TPA with the State of Alaska and (2)
an impairment of fiber optic indefeasible rights of use and IP network and
service center assets resulting from the termination of the TPA as well as
changes in the communications industry and the economy. The following table
itemizes the components of the contract termination and asset impairment
charges (in thousands).

|                                   |                                                         |  |        |        | 
|---------------------------------- | ------------------------------------------------------- |  | ------ | ------ | 
|Contract termination charges:      |                                                         |  |        |       
|                                   | Contract termination payment                            |  | $      | 3,448  | 
|                                   | Loss on disposal of assets                              |  |        | 5,648  | 
|                                   | Accounts receivable and working capital write-downs     |  |        | 3,256  | 
|                                   |                                                         |  |        |       
|Total contract termination charges |                                                         |  | 12,352 |       
|Asset impairment charges           |                                                         |  | 42,187 |       
|                                   |                                                         |  |        |       
|                                   | Total contract termination and asset impairment charges |  | $      | 54,539 | 
|                                   |                                                         |  |        |       

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See Note 4 to the financial statements for a description of each element
of the contract termination and asset impairment charges.

Depreciation and Amortization

Depreciation and amortization expense decreased $0.4 million, or 1.8% from
$22.5 million in 2002 to $22.0 million in 2003.

Loss (gain) on disposal of assets

On August 27, 2003, the Company was released from a lockup agreement
relating to the remaining interest in the Directories Business and the Company
disposed of substantially all of its remaining interest in the Directories
Business through the exercise of its right to convert 99.23% of its then
remaining 12.58% interest in the Directories Business to 2.5 million units of
the ACS Media Income Fund, which were then sold in an underwritten offering.
The transaction settled on September 4, 2003, generating $17.2 million in net
proceeds and a gain on disposition of $15.9 million. As a result of this
transaction, the Company now owns less than 0.1% of the Directories Business.

The Company also recorded a non-cash loss on the disposal of assets of
$1.8 million during the quarter ended September 30, 2002 as a result of
retiring certain assets no longer in use.

Interest Expense and Interest Income and Other

Interest expense increased to $21.9 million for the three months ended
September 30, 2003 compared to $12.7 million for the three months ended
September 30, 2002. As a result of the early extinguishments of outstanding
debt of $320.7 million during the quarter ended September 30, 2003, $9.7
million of debt issuance cost was charged to interest expense. After
consideration of this item, the decrease in interest expense is the result of
market interest rate effects on the Companys variable interest rate debt.
Interest income and other decreased by $15.7 million to an expense of $15.1
million for the three months ended September 30, 2003 compared to income of
$0.6 million for the three months ended September 30, 2002, substantially due
to a $15.9 million non-operating impairment loss on a note receivable as
described in Note 6 to the financial statements attached hereto.

Income Taxes

The Company has provided a valuation allowance for the full income tax
benefit resulting from the consolidated losses it has incurred since May 14,
1999, the date of the acquisition of substantially all of its operations.

Discontinued Operations

On March 30, 2002, the Companys management approved a plan to offer for
sale its wireless cable television service segment. As a result of this
decision, the operating revenue and expense of this segment have been
classified as discontinued operations under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,for all periods presented and the
assets and liabilities of the disposal group have been written down to their
fair value, net of expected selling expense. The results of operations of this
discontinued segment resulted in a charge to discontinued operations of $0.1
million for
the three months ended September 30, 2002. The Company has fully reserved
in the form of a valuation allowance the income tax benefit resulting from this
discontinuance. The Company completed its disposal of its wireless cable
television segment as of March 31, 2003.

Net Income (Loss)

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

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Nine Months Ended September 30, 2003 Compared to Nine Months Ended September
30, 2002

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

Operating Revenue

Operating revenue decreased $10.7 million, or 4.2%, for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002.
Wireless, Internet and interexchange revenue increased compared to the
corresponding period of 2002, while local telephone revenue decreased compared
to the corresponding period of 2002.

Local Telephone

Local telephone revenue, which consists of local network service, network
access revenue and deregulated and other revenue, decreased $9.7 million, or
5.6%, for the nine months ended September 30, 2003 compared to the same period
in 2002. The following table summarizes the Companys consolidated local
telephone revenue by category.

|                                                                           |                       |   |                     |        |      |   |         |        | 
|-------------------------------------------------------------------------- | --------------------- | - | ------------------- | ------ | ---- | - | ------- | ------ | 
|                                                                           |                       |   | Nine Months Ended  
|                                                                           |                       |   | September 30,      
|                                                                           |                       |   |                    
|                                                                           |                       |   | 2003                |        | 2002
|                                                                           |                       |   |                     |        |     
|                                                                           |                       |   | (In Thousands)     
|Local telephone revenue:                                                   |                       |   |                     |        |      |   |         |       
|                                                                           | Local network         |   | $                   | 73,370 |      |   | $       | 74,870 | 
|                                                                           | Network access        |   |                     | 73,951 |      |   |         | 83,827 | 
|                                                                           | Deregulated and other |   |                     | 15,151 |      |   |         | 13,431 | 
|                                                                           |                       |   |                     |        |      |   |         |       
|Total local telephone revenue                                              |                       | $ | 162,472             |        |      | $ | 172,128 |       
|                                                                           |                       |   |                     |        |      |   |         |       
|                                                                          
|The following table summarizes the Companys local telephone access lines.
|                                                                          
|                                                                           |                       |   | As of September 30,
|                                                                           |                       |   |                    
|                                                                           |                       |   | 2003                |        | 2002
|                                                                           |                       |   |                     |        |     
|Retail                                                                     |                       |   | 224,744             |        |      |   | 241,583 |       
|Wholesale                                                                  |                       |   | 18,795              |        |      |   | 25,074  |       
|Unbundled
network elements - loop (UNE - L)                                |                       |   | 67,542              |        |      |   | 60,504  |       
|Unbundled
network elements - platform (UNE - P)                            |                       |   | 4,907               |        |      |   |        |       
|                                                                           |                       |   |                     |        |      |   |         |        | 
|Total local telephone access lines                                         |                       |   | 315,988             |        |      |   | 327,161 |       
|                                                                           |                       |   |                     |        |      |   |         |        | 

The local network service component of local telephone revenue was $73.4
million for the nine months ended September 30, 2003 compared with $74.9
million for the nine months ended September 30, 2002.Revenue decreased $1.5
million or 2.0% from the prior year. This decrease reflects the net effect of
retail market share losses offset by increases in unbundled network element
revenue and local private line revenue and decreased uncollectible revenue

The Company continued to experience loss of retail market share for local
network service in its Anchorage, Fairbanks and Juneau service areas during the
year. Generally, when the Company loses a retail local network service line to
a competitor, it continues to provide the line to the competitor on a wholesale
basis at reduced revenue per line. Management believes that the continuing loss
of market share it has experienced in certain of its markets is partially
attributable to below cost interconnection rates mandated by the RCA for UNEs.
During the first quarter of 2000, the Company reopened interconnection
proceedings for its Anchorage market and in the second quarter of 2001, filed
for an interim and refundable UNE rate increase of approximately $10 per month
per loop. On October 25, 2001, the RCA granted ACSA an interim and refundable
UNE rate increase of $1.07, increasing the UNE rates from $13.85 to $14.92. The
interim and refundable rate increase was implemented in November 2001 and
generated

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approximately $0.7 million in additional revenue for the calendar
year 2002. The Company expects the RCA to hold hearings during November 2003
and adjudicate final Anchorage UNE rates during 2004.

The Company believes it is earning less than its authorized rate of return
for local network service in several of its markets and in compliance with APUC
orders related to the approval of the acquisition of the four LECs in 1999,
filed local service rate cases for all of its LEC businesses with the RCA on
July 2, 2001 aimed at making up this deficiency. The RCAs decisions on revenue
requirements will have a direct impact on the retail rates and intrastate
access rates that the Company is allowed to charge. A RCA finding of over
earnings generally leads to rate reductions while a RCA finding of under
earnings generally results in rate increases.

In October 2001, the Company filed for increased interim and refundable
local service rates in its Anchorage market in order to expedite a partial
recovery of the total revenue deficiency. On November 15, 2001, the RCA
approved an interim and refundable rate increase for ACSA of 24% for certain
services.This interim and refundable rate increase was implemented in November
2001 and generated approximately $4.2 million in additional revenue for the
calendar year 2002. On December 16, 2002, the RCA reopened the revenue
requirement phase of the hearing for ACSA to take additional testimony
regarding ACSAs service lives. The RCA corrected the length of the service
lives at issue, increasing the amount by which ACSA is under earning. The
Company expects the RCA to continue to hold hearings during 2003 and to
adjudicate final local service rates during 2004.

On March 25, 2003, the RCA issued an order approving new revenue
requirements for ACSF, ACSAK, and ACSN. The RCA found over earnings by ACSF and
ACSN and under earnings by ACSAK. In compliance with RCA orders, ACSF, ACSAK,
ACSN have filed cost of service and rate design studies, and supporting
testimony, consistent with the RCA revenue requirements orders. Final rates are
expected in 2004.

Network access revenue decreased from $83.8 million in 2002 to $74.0
million for 2003.During the second quarter of 2002, the Company recognized as
revenue $11.1 million of previously deferred interstate access revenues related
to a dispute on interstate access rates for the Anchorage market based on a
favorable ruling by the District of Columbia Court of Appeals. Network access
revenues are based on a regulated return on rate base and recovery of allowable
expenses associated with the origination and termination of toll calls for the
Companys retail and resale customers. After consideration of the revenue
recognized as a result of the favorable ruling by the court, the increase in
network access revenues of $1.3 million compared to the corresponding period in
2002 is due primarily to updated access studies. Management expects that
network access revenues will generally be on a declining trend for the
foreseeable future.

Deregulated and other revenue, which increased to $15.2 million compared
to $13.4 million in the prior year, consists principally of B&C services, space
and power rents, deregulated equipment sales, paystation revenue, regulated
directory listing revenue, and other miscellaneous telephone revenue. The
increase in deregulated and other revenue of $1.8 million is primarily due to
an increase in B&C and rent revenue offset by a decrease in deregulated
equipment sales and paystation revenue.

Wireless

Wireless revenue increased $2.4 million, or 7.6%, to $34.9 million for the
nine months ended September 30, 2003 compared to $32.4 million for the nine
months ended September 30, 2002. This
increase was due to a growth in average subscribers of 2.8% from 80,840 in 2002
to 83,107 in 2003. Subscriber average minutes of use also increased from 202
minutes in 2002 to 229 minutes in 2003. Primarily as a result of increased
minutes of use, the monthly average revenue per unit, or ARPU, increased to
$46.62 in 2003 compared to $44.56 during 2002.

Internet

Internet revenue increased from $14.8 million in 2002 to $24.4 million in
2003  an increase of $9.6 million, or 64.8%.This increase is primarily due
to revenue associated with the Companys contract with the State of Alaska and
approximately $1.2 million of this increase was earned in the prior year but

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could not be estimated and therefore was not recorded until the current year.
Internet also experienced growth in DSL subscribers of 47.5% from 11,045 in
2002 to 16,294 in 2003.

On September 15, 2003, the Company received notification from the State of
Alaska that it intended to terminate a five year Telecommunications Services
Partnering Agreement with the Company and disentangle. Subsequently, the
Company and the State negotiated and agreed to a definitive Settlement
Agreement and Mutual Release effective October 14, 2003, outlining the terms of
disentanglement between the parties. The Company anticipates that revenue for
this segment will decrease in future periods as disentanglement occurs under
the agreement.

Interexchange

Interexchange revenue increased $0.6 million from $12.0 million in 2002 to
$12.6 million in 2003. Long distance subscribers decreased from 67,230 in 2002
to 43,499 in 2003. The decrease in subscribers was substantially due to
database grooming to remove approximately 20,000 non-revenue generating
inactive subscribers from the subscriber list in connection with the conversion
of long distance billing from an outside service bureau to an in-house system
during the first and second quarters of 2003. The average revenue per unit, or
ARPU, increased to $24.71 in 2003 compared to $20.04 during 2002 and total
minutes of use decreased from 115.5 million in 2002 to 113.5 million in 2003.

Operating Expense

Operating expense decreased $49.3 million, or 22.1%, from $223.1 million
for the nine months ended September 30, 2002 to $173.8 million for the nine
months ended September 30, 2003. Operating expenses for 2003 includes $54.5
million of contract termination and asset impairment charges and a gain on
disposal of assets of $112.5 million. Depreciation and amortization associated
with the operation of each of the Companys segments has been included in total
depreciation and amortization.

Local Telephone

The components of local telephone expense are plant specific operations,
plant non-specific operations, customer operations, corporate operations and
property and other operating tax expense.Local telephone expense decreased to
$84.3 million for the nine months ended September 30, 2003 from $88.2 million
for the nine months ended September 30, 2002.The decrease in local telephone
expense was substantially attributable to cost reductions achieved as a result
of the Companys restructuring plan adopted in June of 2002. In the second
quarter of 2002, there were $2.2 million in costs related primarily to
severance and restructuring charges and rate case expenses.

Wireless

Wireless expense increased $0.5 million, or 2.2%, for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002.
This increase is due substantially to an increase in roaming minutes of use
over the prior year. As a percentage of revenue, wireless expense decreased
from 65.8% in 2002 to 62.5% in 2003.

Internet

Internet expense increased by $13.9 million, or 63.6%, from $21.9 million
in 2002 to $35.8 million in 2003. The increase in Internet expense was due
principally to transition expenses and operating costs associated with
providing services under the State of Alaska telecommunications contract. State
of Alaska contract related expense totaling $1.5 million was incurred in the
previous year but was recorded in the current year as it was the first point in
which the expense could be matched to the associated revenue, as discussed
above in Internet revenue. As a percentage of revenue, Internet expense
decreased from 147.9% in 2002 to 146.7% in 2003. On September 15, 2003, the
Company received notification from the State of Alaska that it intended to
terminate a five year Telecommunications Services Partnering Agreement with the
Company and disentangle. Subsequently, the Company and the State negotiated and
agreed to a definitive Settlement Agreement and Mutual Release effective
October 14, 2003, outlining the terms of

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disentanglement between the parties.
The Company anticipates expense for this segment to level decline as it
completes the disentanglement of these services under the contract.

Interexchange

Interexchange expense increased $0.4 million from $17.5 million in 2002 to
$17.9 million in 2003. As a percentage of revenue, interexchange expense
decreased from 145.9% in 2002 to 141.7% in 2003. The Company converted its long
distance billing from an outside service bureau to an in-house system during
the first quarter of 2003. This billing conversion is expected to result in
annual cost savings of approximately $0.6 million and improved customer
service.

Contract termination and asset impairment charges

During the quarter ended September 30, 2003, the Company recorded $54.5
million in contract termination and asset impairment charges. These charges
resulted from (1) the termination of the TPA with the State of Alaska and (2)
an impairment of fiber optic indefeasible rights of use and IP network and
service center assets resulting from the termination of the TPA as well as
changes in the communications industry and the economy. The following table
itemizes the components of the contract termination and asset impairment
charges (in thousands).

|                                   |                                                         |  |        |        | 
|---------------------------------- | ------------------------------------------------------- |  | ------ | ------ | 
|Contract termination charges:      |                                                         |  |        |       
|                                   | Contract termination payment                            |  | $      | 3,448  | 
|                                   | Loss on disposal of assets                              |  |        | 5,648  | 
|                                   | Accounts receivable and working capital write-downs     |  |        | 3,256  | 
|                                   |                                                         |  |        |       
|Total contract termination charges |                                                         |  | 12,352 |       
|Asset impairment charges           |                                                         |  | 42,187 |       
|                                   |                                                         |  |        |       
|                                   | Total contract termination and asset impairment charges |  | $      | 54,539 | 
|                                   |                                                         |  |        |       

See Note 4 to the financial statements for a description of each element
of the contract termination and asset impairment charges.

Depreciation and Amortization

Depreciation and amortization expense increased $5.0 million, or 8.2%, due
principally to increases in plant in service and to the adoption of shorter
depreciable lives for certain classes of assets compared to the corresponding
period of 2002. Management adopted the higher depreciation rates on these
classes of assets as a result of an evaluation of the expected useful lives of
its underlying assets, primarily in its regulated local telephone segment.

Loss (gain) on disposal of assets

On April 28, 2003, the Company signed an underwriting agreement to sell a
majority interest in its directory business and on April 29, 2003 filed a final
prospectus to offer this majority interest to investors through a Canadian
income fund. The transaction closed on May 8, 2003, with the Company selling an
87.42% interest and retaining a 12.58% interest in its Directories
Business. The Company recognized a gain on disposition of this majority
interest of its directory business of $97.6 million on a pre-tax basis.

Subsequently on August 27, 2003, the Company was released from a lockup
agreement relating to the remaining interest in the Directories Business and
the Company disposed of substantially all of its remaining interest in the
Directories Business through the exercise of its right to convert 99.23% of its
then remaining 12.58% interest in the Directories Business to 2.5 million units
of the ACS Media Income Fund, which were then sold in an underwritten offering.
The transaction settled on September 4, 2003, generating $17.2 million in net
proceeds and a gain on disposition of $15.9 million. As a result of this
transaction, the Company now owns less than 0.1% of the Directories Business.

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The Company recorded a non-cash loss on the disposal of certain fixed
assets of $1.0 million during 2003, the majority of which were wireless assets.
The Company recorded a non-cash loss on the disposal of $2.1 million during
2002 as a result of retiring certain assets no longer in use.

Interest Expense and Interest Income and Other

Interest expense increased to $49.5 million for the nine months ended
September 30, 2003 compared to $36.5 million for the nine months ended
September 30, 2002. As a result of the early extinguishments of outstanding
debt of $106.7 million during second quarter of 2003 and the refinancing of
$320.7 million during the third quarter of 2003, $13.1 million of debt issuance
cost was charged to interest expense. During the second quarter of 2002, the
Company reversed $1.7 million of previously accrued interest expense 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. After
consideration of these items, the decrease in interest expense is the result of
market interest rate effects on the Companys variable interest rate debt.
Interest income and other decreased to $10.1 million of expense for the nine
months ended September 30, 2003 compared to $1.6 million of income for the nine
months ended September 30, 2002, substantially due to a $15.9 million
non-operating impairment loss on a note receivable offset by the $4.3 million
gain on foreign exchange on the directory transactions.

Income Taxes

The Company has provided a valuation allowance for the full income tax
benefit resulting from the consolidated losses it has incurred since May 14,
1999, the date of the acquisition of substantially all of its operations.

Discontinued Operations

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

Cumulative Effect of Change in Accounting Principle

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other 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 transitional review for
goodwill impairment required under SFAS No. 142 indicated that goodwill
recorded in the local telephone, Internet and interexchange segments was
impaired as of January 1, 2002. Accordingly, the Company measured and
recognized in the first quarter of 2002 a transitional impairment loss of
$105.4 million as the cumulative effect of a change in accounting principle in
the consolidated statement of operations. The income tax benefit of $39.5
million was offset by a valuation allowance. See Note 8 Cumulative Effect of
Change in Accounting Principle in the Notes to Consolidated Financial
Statements included elsewhere in this 10-Q for additional discussion of the
this statement.

Net Income (Loss)

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

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LIQUIDITY AND CAPITAL RESOURCES

The Company has satisfied its operational and capital cash requirements
primarily through internally generated funds, the sale of its Parents stock,
the sale of its directory business, and debt financing. For the nine months
ended September 30, 2003, the Companys cash flows from operating activities
were $50.5 million. At September 30, 2003, the Company had approximately $122.0
million in net working capital, including $121.2 million in unrestricted cash.
As of September 30, 2003, the Company had $50.0 million of remaining capacity
under its revolving credit facility, representing 100% of available capacity.

The Company has outstanding a $200.0 million bank credit agreement
(Senior Credit Facility), $150.0 million in 9.375% senior subordinated notes
due 2009 and $182.0 million in 9.875% senior notes due 2011 representing
substantially all of the Companys long-term debt of $535.9 million as of
September 30, 2003. 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 the Companys senior subordinated notes, senior notes
and ACS Groups senior discount debentures is payable semiannually.Interest on
borrowings under the Senior Credit Facility is payable monthly, bi-monthly,
quarterly or semi-annually at the Companys option. The Senior Credit Facility
requires $500,000 quarterly principal payments that commence on March 31, 2004,
with the balance due in 2010. 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.

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

On July 15, 2002 the Company fulfilled a commitment to Neptune to provide
a loan for the aggregate principal amount of $15 million in return for certain
consideration. The Company has an agreement that enables it to purchase
additional fiber optic capacity in future years from Neptune, the expenditures
for which are expected to be significant and may exceed $25 million over the
next four years. While the Company has an agreement with Neptune, certain
material terms of the agreement remain subject to continued renegotiation. The
significant provisions of this agreement are: i) purchase commitments by the
Company for capacity in 2005 and 2007, the final price and quantity of which
are subject to future events, ii) Neptunes restoration of the Companys
traffic carried on another cable system, iii) and specific interconnection
arrangements between the Company and Neptune, should the Company exercise its
option to purchase certain network assets from Neptune. The Company is
currently negotiating open elements of its agreement with Neptune and
renegotiating other terms and conditions of the agreement. It is impossible to
determine the ultimate outcome of these negotiations at this time. The loan was
written down to its estimated fair value during the quarter ended September 30,
2003 as described in Note 6 of the financial statements attached hereto.

The local telephone network requires the timely maintenance of plant and
infrastructure. The Companys historical capital expenditures have been
significant. The construction and geographic expansion of the Companys
wireless network has required significant capital. The implementation of the
Companys interexchange network and data services strategy is also capital
intensive. The Company anticipates capital spending of between $45 million and
$50 million for 2003, and has spent $32.1 million in the nine months ended
September 30, 2003, including property acquired under a mortgage of $2.3
million. The Company intends to fund its future capital expenditures with cash
on hand, through internally generated cash flows, and if necessary, through
borrowings under the revolving credit facility.

On May 8, 2003 the Company completed the sale of a majority interest in
the newly formed ACS Media, LLC (the Directories Business) to the ACS Media
Income Fund (the Fund). The Fund sold 17.5 million units on May 8, 2003 for
net proceeds of $110.4 million, after deducting its underwriters fees and
transaction expenses of $10.2 million. The Funds net proceeds were used to
acquire from the Company an 87.42% interest in the Directories Business. The
Company received net proceeds of $105.1 million after deducting its fees and
expenses associated with the transaction of $5.3 million.

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

Subsequently, on August 27, 2003, the Company was released from a lockup
agreement relating to the remaining interest in the Directories Business and
the Company disposed of substantially all of its remaining interest in the
Directories Business through the exercise of its right to convert 99.23% of its
then remaining 12.58% interest in the Directories Business to 2.5 million units
of the ACS Media Income Fund, which were then sold in an underwritten offering.
The transaction settled on September 4, 2003, generating $17.1 in net proceeds.

During the first quarter of 2003, the Companys lenders approved an
amendment and waiver to its Senior Credit Facility that, among other things,
permitted the Company to sell its directory business and required that in the
event the sale was completed, 75% of proceeds would be used to repay
outstanding Senior Credit Facility term loans. This amendment and waiver became
effective on May 8, 2003, and on May 13, 2003, the Company paid down $106.7
million of the outstanding Senior Credit Facility term loans.

On August 26, 2003, the Company completed the refinancing of its Senior
Credit Facility term loans. The Company entered into a new $250.0 million
Senior Credit Facility consisting of a term loan facility in an aggregate
principal amount of $200.0 million and an undrawn revolving credit facility in
an aggregate principal amount of $50.0 million. The Company simultaneously
issued $182.0 million aggregate principal amount of 9 7/8% senior unsecured
notes due 2011 at an issue price of approximately 96.7% for net proceeds of
$176.0 million. From these proceeds, the Company paid off $320.7 million of its
then existing credit facility.

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

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

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

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

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of commitments and contingencies at
the date of the financial statements and the reported amounts of revenue and
expense during the reporting

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

Access revenue is recognized when earned. The Company participates in toll
revenue pools with other telephone companies. Such pools are funded by toll
revenue and/or access charges regulated by the RCA within the intrastate
jurisdiction and the FCC within the interstate jurisdiction. Much of the
interstate access revenue is initially recorded based on estimates. These
estimates are derived from interim financial statements, available separations
studies and the most recent information available about achieved rates of
return. These estimates are subject to adjustment in future accounting periods
as additional operational information becomes available. To the extent that
disputes arise over revenue settlements, the Companys policy is to defer
revenue collected until settlement methodologies are resolved and finalized. At
September 30, 2003, the Company had recorded liabilities of $16.4 million
related to its estimate of refundable access revenue. Actual results could vary
from this estimate.

The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred taxes reflect the temporary differences
between the financial and tax basis of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse.Deferred tax assets are reduced by a valuation allowance to the extent
that it is more likely than not that such deferred tax assets will not be
realized. The cumulative valuation allowance against deferred tax assets is
$87.6 million as of September 30, 2003.

The local telephone exchange operations of the Company account for costs
in accordance with the accounting principles for regulated enterprises
prescribed by SFAS No. 71, Accounting for the Effects of Certain Types of
Regulation.This accounting recognizes the economic effects of rate regulation
by recording cost and a return on investment as such amounts are recovered
through rates authorized by regulatory authorities. Accordingly, under SFAS No.
71, plant and equipment is depreciated over lives approved by regulators and
certain costs and obligations are deferred based upon approvals received from
regulators to permit recovery of such amounts in future years. Historically,
lives approved for regulatory purposes have approximated economically useful
lives. On July 22, 2002, the Company received an order from the RCA which
extended lives approved for ratemaking purposes beyond the economically useful
lives of the underlying assets. Management petitioned for reconsideration on
the ACSA order and the RCA has accepted additional testimony and held a hearing
in May of 2003. The RCA subsequently reconsidered its order and adopted service
lives that more closely approximate the actual economic lives of the assets.
The Company implemented, effective January 1, 2003, higher depreciation rates
for its regulated telephone plant for the interstate jurisdiction. As a result,
the Company has recorded a regulatory asset under SFAS No. 71 of $8.3 million
as of September 30, 2003. The Company has also deferred as a regulatory asset
$0.9 million of costs incurred in connection with regulatory rate making
proceedings, which is being amortized over three years starting in 2003. The
balance of this regulatory asset was $0.7 million at September 30, 2003. If the
Company were not following SFAS No. 71, it would have recorded additional
depreciation expense of $8.3 million for the intrastate and local jurisdictions
and the deferred costs incurred in connection with regulatory rate making
proceedings would have been charged to expense as incurred.

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

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consolidated statement of operations. At September 30, 2003, the Company
had recorded goodwill of $38.4 million.

On September 15, 2003, the Company received notification from the State of
Alaska that it intended to terminate the TPA with the Company and disentangle.
Subsequently, the Company and the State negotiated and agreed to a definitive
Settlement Agreement and Mutual Release (the Settlement Agreement) effective
October 14, 2003, outlining the terms of disentanglement between the parties.
Under the terms of the Settlement Agreement, the Company agreed to pay to the
State of Alaska $3.4 million in cash, one half of which was due upon
effectiveness and one half of which will be due upon completion of
disentanglement. The Company also agreed to transfer to the State title to
certain assets used in providing services under the TPA which resulted in a net
loss on disposal of those assets of $5.6 million. Based on terms of the
Settlement Agreement, the Company determined that certain accounts receivable
and working capital associated with the TPA will not be fully recoverable and
has written them down to their estimated net realizable value, resulting in a
charge of $3.3 million during the quarter. The estimated net realizable value
of the working capital and which assets are ultimately transferred to the State
could change as the Company completes disentanglement.

The Company reviews its property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount of these
assets may not be recoverable. The Company was prompted to conduct an asset
impairment review of its fiber optic IRUs that were acquired in 1999 and 2001
and certain IP network and certain service center assets due to the termination
of the TPA as discussed above (which was a significant customer using these
assets), indications that market pricing of similar assets were significantly
below the Companys carrying value, and significant industry and economic
trends affecting the Companys ability to generate positive cash flow from
these assets in its interexchange and Internet segments. This review was
conducted under the guidelines of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. As a result of its review, the Company
determined that its carrying value of IRUs exceeded their fair value by $27.1
million and its carrying value of the IP network and service center assets
exceeded their fair value by $15.1 million. Accordingly, the Company recorded a
$42.2 million impairment charge and wrote the assets down to their fair value
during the third quarter of 2003.

The Company also periodically evaluates the fair value of its investments
and other non-operating assets against their carrying value. During the third
quarter of 2003, impairment charges were taken as a result of changes in market
and economic conditions, a notice of termination of the TPA, and the Companys
reassessment of the net realizable value of its note receivable from Neptune
Communications, L.L.C. As a result of this analysis, the Company recorded in
Interest income and other in the Consolidated Statement of Operations an
impairment charge of $15.9 million.

OUTLOOK

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



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

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.

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

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has issued senior subordinated notes, senior 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.
During the quarter ended June 30, 2003, the Company prepaid $106.7 million of
its bank credit facility. During the quarter ended September 30, 2003, the
Company entered into a new $250.0 million Senior Credit Facility consisting of
a term loan facility in an aggregate principal amount of $200.0 million and an
undrawn revolving credit facility of $50.0 million. The Company simultaneously
issued $182.0 million aggregate principal amount of 9 7/8% senior unsecured
notes due 2011 at an issue price of approximately 96.7% for net proceeds of
$176.0 million. From these proceeds, the Company paid off $320.7 million of its
then existing credit facility. See Note 3 of the financial statements attached
hereto for more information on these transactions.




ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

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

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

Changes in internal controls

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

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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 exemptions for Fairbanks, Juneau and the rural
communities in the Glacier State study area on November 10, 1999. This matter
has been fully briefed and argued and is currently pending before the Alaska
Supreme Court.

The Companys LECs (ACSN, ACSF, ACSAK and ACSA) are currently negotiating
and seeking arbitration of new interconnections agreements with General
Communication, Inc. (GCI). A hearing is scheduled in the ACSA matter for
November 2003. The Companys petition to consolidate the arbitration of new
interconnection agreements for the rural companies (ACSN, ACSF, and ACSAK) with
the Anchorage arbitration was denied and they were assigned to an arbitrator
with direction to complete these proceedings by February 2004. The Company and
GCI have discussed delaying the proceedings until the Anchorage arbitration is
completed. In light of the pending arbitrations for new interconnection
agreements for Fairbanks and Juneau, the Company dismissed its district court
actions concerning the existing Fairbanks and Juneau interconnection agreements
on October 14, 2003.

Following the RCAs March 25, 2003 order approving new revenue
requirements for ACSF, ACSAK, and ACSN, these entities filed cost of service
and rate design studies on May 23, 2003. A hearing in this proceeding is now
scheduled for February 9, 2004, and new rates are not expected to go into
effect until the second or third quarter of 2004. In May 2003, the RCA held a
limited rehearing in the revenue requirement phase for ACSA. The RCA
subsequently reconsidered its order and adopted service lives that more closely
approximate the actual economic lives of the assets, increasing ACSAs
depreciation expense, thereby increasing ACSAs revenue requirement. The RCA
will issue its final revenue requirement order before the end of the fourth
quarter of 2003, ACSA will then have 60 days to file its cost of service and
rate design study consistent with that order. A hearing on the ACSA rate design
is expected in second quarter of 2004 and new rates should be expected by the
second or third quarter of 2004.

The Company has been involved with a number of service-oriented disputes
with GCI. The RCA has ordered the Company to, amongst other things, construct
new facilities for GCI to serve GCI customers and to provide GCI with query
access to the Companys LEC provisioning system. The Company is currently
seeking review of that portion of the RCAs decision that orders ACS LECs to
construct new facilities for GCI to serve GCI customers. In May 2003, however,
GCI filed a complaint against the Company with the FCC concerning service
issues. The Company is vigorously defending its actions before the FCC. While
the potential for some liability exists from GCIs complaint before the FCC,
the Company cannot predict the final outcome of this proceeding.

On May 14, 2001, the Company was served with a class action lawsuit
concerning its interstate Infinite Minutes long distance plan. A trial is
scheduled for September 2004. 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.

On September 15, 2003, the Company received notification that the State of
Alaska was terminating the TPA, a contract under which the Company was obliged
to provide comprehensive telecommunications services to the State of Alaska for
a period of five years. On October 1, 2003, the Company announced that it had
entered into a voluntary settlement agreement with the State of Alaska under
which the Company makes a cash payment to the State of Alaska of approximately
$3.4 million and transfers to the State of Alaska title to certain capital
equipment. The parties have agreed to cooperate to complete disentanglement by
December 31, 2003.

On October 28, 2003, ACSW was served with a complaint filed by the Alaska
Attorney General for violations of the Alaska Consumer Protection Act. The
complaint alleges the opt out campaign for the Voice Connect product
violates the law. ACSW disagrees with the allegations and intends to vigorously
defend its actions. The Company, however, cannot predict the final outcome of
this proceeding.

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ACSW has petitioned the RCA for Eligible Telecommunications Carrier
(ETC) status in two high cost areas of Alaska. The RCA has yet to take action
on this petition. Meanwhile, Dobson Communications has also petitioned the RCA
for ETC status in various parts of Alaska and has further sought to have the
RCA redefine ILEC study areas, including those served by ACS LECs, based on
wire centers for the purpose of targeting subsets of the existing study areas
for CETC status and receipt of universal service funding.

The Company has also been named as a defendant in an action brought by
Fireweed Communications regarding its use of the Companys Eagles Nest
communications tower. The Company denies any liability and is defending its
actions.

The Company is involved in various other claims, legal actions and
regulatory proceedings arising in the ordinary course of business. See Note 13,
Commitments and Contingencies, in the footnotes to the financial statements for
additional information. The Company believes that the disposition of these
matters will not have a material adverse effect on the Companys consolidated
financial position, results of operations or cash flows.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.




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

None.




ITEM 5. OTHER INFORMATION.

None.




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

(a) Exhibits:

|     |  |                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Liane Pelletier, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                        
|     |  |                                                                                                                                                              
|31.2 |  | Certification of Kevin P. Hemenway, Chief Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                      
|     |  |                                                                                                                                                              
|32.1 |  | Certification of Liane Pelletier, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The
Sarbanes-Oxley Act of 2002.  
|     |  |                                                                                                                                                              
|32.2 |  | Certification of Kevin P. Hemenway, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of The
Sarbanes-Oxley Act of 2002.

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(b)  Reports on Form 8-K:



| |  | The following item was reported on Form 8-K, filed May 13, 2003 and
amended on July 7, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Item 2. Acquisition or
Disposition of Assets - On April 28, 2003, the
Company entered into an underwriting agreement with a syndicate of
Canadian investment banks to complete the sale of a majority interest in
the newly formed ACS Media, LLC, the Companys directory business. The
Company subsequently filed on April 29, 2003, a final prospectus with
Canadian securities regulators to sell a majority interest in ACS Media,
LLC in a public offering in Canada to the ACS Media Income Fund, which is
a Canadian income fund. The offering was sponsored by the Company. The
transaction closed on May 8, 2003, with the Company selling an 87.42%
interest and retaining a 12.58% interest in ACS Media, LLC.
|
| |  | The following item was reported on Form 8-K, filed August 8, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Item 5. Other Events- On August 7, 2003, Alaska Communications Systems
Holdings, Inc. a announced that it was proposing to offer $175 million of
senior notes due 2011 through a private placement to qualified
institutional buyers under Rule 144A of the Securities Act of 1933, as
amended.                                                                                                                                                                                                                                                                                                                                                                                                                           

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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: November 13, 2003 |  | ALASKA COMMUNICATIONS SYSTEMS HOLDINGS, INC.

| |  |                               
| |  | ------------------------------
| |  | /s/ Liane Pelletier           
| |  |                               
| |  | Liane Pelletier               
| |  | Chief Executive Officer and   
| |  | President                     
| |  |                               
| |  | /s/ Kevin P. Hemenway         
| |  |                               
| |  | Kevin P. Hemenway             
| |  | Senior Vice President and     
| |  | Chief Financial Officer       
| |  | (Principal Accounting Officer)

49