Forward Looking Statements and Analysts' Reports This Form 10-Q and future filings by Alaska Communications Systems Group, Inc. and its consolidated subsidiaries ("we", "our", "us", the "Company", and "ACS Group") on Forms 10-K, 10-Q and 8-K and the documents incorporated therein by reference include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these provisions. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, pricing plans, acquisition and divestiture 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 and statements of assumptions underlying any of the foregoing. Words such as "aims", "anticipates", "believes", "could", "estimates", "expects", "hopes", "intends", "may", "plans", "projects", "seeks", "should" and variations of these words and similar expressions are intended to identify these forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Forward-looking statements by us are based on estimates, projections, beliefs and assumptions of management and are not guarantees of future performance. Such forward-looking statements may be contained in this Form 10-Q under "Management's discussion and analysis of financial condition and results of operations" and elsewhere. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by us as a result of a number of important factors. Examples of these factors include (without limitation):
• our strongly competitive environment, which comprises national and local wireless and wireline facilities-based competitors;

• our ability to complete, manage, integrate, market, maintain and attract sufficient customers to our AKORN fiber facility and our ability to develop attractive integrated products and services making use of the facility;

• our ability to fully integrate the Crest Northstar fiber facility with AKORN and the ACS network generally such that we realize the synergies available;

• our ability to generate sufficient earnings and cash flows to continue to make dividend payments to our stockholders and comply with the restrictive covenants of our debt obligations;

• changes in revenue from Universal Service Funds ("USF");

• rapid technological developments and changes in the telecommunications industries;

• changes in revenue resulting from regulatory actions affecting intercarrier compensation;

• regulatory limitations on our ability to change our pricing for communications services;

• occurrence of widespread or lengthy failures of our system or network cables, particularly our non-redundant systems, including our existing primary capacity on the Northstar cable, the failure of which would cause significant delays or interruptions of service and/or loss of customers and may adversely affect our investment in Crest;

• other unanticipated damage to one or more of our high capacity cables resulting from construction or digging mishaps or natural disasters;

• the possible future unavailability of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, to our wireline subsidiaries;

• our ability to bundle our products and services;

• changes in the demand for our products and services and new competitive entrants;

• changes in interest rates or other general national, regional or local economic conditions;

• governmental and public policy changes;

• continuing uncertainty arising out of our assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2007;

• changes in accounting policies or practices adopted voluntarily or as required by accounting principles generally accepted in the United States; and

• the matters described under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and subsequent Quarterly Reports on Form 10-Q.

In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not currently known to us could also cause

the forward-looking events discussed in this Form 10-Q or our other reports not to occur as described. Except as otherwise required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Form 10-Q.
Investors should also be aware that while we do, at various times, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree 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 our responsibility.
Unless the context indicates otherwise, all references in this Form 10-Q to "we", "our", "ours", "us", "the Company", or "ACS" refer to Alaska Communications Systems Group, Inc. and its consolidated subsidiaries. Overview
We believe we are the leading provider of integrated communications services in Alaska. Our wireline business comprises one of the most expansive end-to-end Internet Protocol ("IP") networks in Alaska and the largest local exchange carrier network in the state. We believe our wireless business comprises the most extensive, reliable wireless network in Alaska and the only Alaska wireless network with "third-generation" data transmission capabilities.
The sections that follow provide information about important aspects of our operations and investments and include discussions of our results of operations, financial condition and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information we use in evaluating performance and allocating resources. We also monitor the state of the economy in general. In doing so, we compare Alaskan economic activity with broader economic conditions. In general, we believe that the Alaskan telecommunications market as well as general economic activity in Alaska, differs in important ways from the broader U.S. economy. These differences include, among others, the cost of long-haul telecommunications bandwidth, military activity, local customer preferences, median personal income, average usage of Internet technology, unemployment levels, housing activity, activity in the oil and gas markets, tourism, and local political activity.
Our results of operations, financial position and sources and uses of cash in the current and future periods continue to reflect our focus on the following strategic imperatives:
• Emphasis on Top-Line Growth: We emphasize revenue growth as well as growth in net cash provided by operating activities. We devote more resources to higher growth markets such as wireless, including wireless data, wireline broadband connections, including our long-haul fiber investment connecting our network to the lower 48, as well as expanded strategic services to business markets, rather than to the traditional wireline voice market.

• Investment with Discipline: We focus on gaining market share in those markets that contain high revenue producing customers. In our wireline business, we focus on deploying and selling broadband connections in each market covered by our network. We have targeted investment in deploying high-speed fiber connectivity in and between Alaska's urban centers. We have increasingly targeted carrier and enterprise customers. Revenues for the three months ended September 30, 2008 from these customers grew 36.8% compared to the prior year, primarily driven by sales of advanced IP services and increases in revenues from agreements with carriers to terminate their Alaskan long-distance traffic. We have directed resources towards offering wireless plans that encourage customer adoption of large monthly-minute postpaid plans and unlimited postpaid plans. We also promote an unlimited data and text message package. These investments have been made, in part, to maintain a competitive position against a new national wireless provider market entrant.

• Profitability Improvement: We seek to increase operating income and margins. Supporting this goal, our capital spending continues to be directed toward growth markets. High-speed EV-DO and cutting-edge data services, deployment of our AKORN fiber facility coupled with the complimentary purchase of Crest, as well as expanded services to enterprise customers, including Metro Ethernet, are examples of initiatives designed to tap high growth markets. As a result of our investment in AKORN, we expect 2008 capital expenditures to be higher than 2007 levels. In addition, we expect additional capital expenditures to support the growth of our wireless network and enhance its reliability and data transmission speeds though an upgrade to EV-DO, Rev A technology. We expect to target these capital expenditures based on feedback from large customers seeking high-speed wireless data coverage, particularly in Alaska's North Slope oil fields.

• Process Improvement: While focusing resources on revenue growth and market share gains, we continually challenge our management team and employees at all levels to lower expenses through process improvements. We expect to invest in technology-assisted process improvement, including self-service initiatives. We expect these efforts, such as call center routing improvements, deploying self-pay kiosks, and customer service tools, to improve our cost structure and maintain or improve operating income margins. As a result of past successes, we have been able to serve more customers while maintaining our workforce at or below prior levels.

• Pay for Performance: We embrace a culture of urgency and accountability. We establish goals for all of our employees that are tied to the imperatives described above and tie compensation to performance whenever practicable.

Revenue Sources by Segment
Wireline
We provide advanced IP network services, voice, data, broadband, network access and long distance services to consumers, carriers, businesses and government customers throughout Alaska and to and from Alaska. We provide telephone and high speed Internet services to consumers in our wireline footprint. Our high-speed data network relies on advanced packet-based MPLS technology. Our MPLS network combined with our Metro Ethernet service, which we market to medium and large businesses, government customers and carriers, offers our customers scalable, high-speed data and customized information technology products and services, as well as Internet connectivity. To complete our robust wireline fiber network, we expect to fully integrate Crest's Alaska Northstar fiber facility into our network and commercially deploy in early 2009 our new state-of-the-art AKORN undersea fiber optic cable connecting Alaska with the lower 48 states. Our wireline revenues for the three and nine months ended September 30, 2008 were $62.1 million and $184.3 million, respectively, representing approximately 61.3% and 63.0%, respectively, of our aggregate revenues.
Wireless
Our wireless segment provides facilities-based voice and data services statewide. We operate the only "third-generation" wireless network in Alaska.
We provide wireless voice and data services across an extensive statewide 1xRTT CDMA and EV-DO wireless network. In addition, through roaming agreements with major U.S. and Canadian carriers, we provide our customers a range of services and coverage throughout the lower 48 states, Hawaii and Canada. Our wireless revenues for the three and nine months ended September 30, 2008 were $39.2 million and $108.2 million, respectively, representing approximately 38.7% and 37.0%, respectively, of our aggregate revenues.

RESULTS OF OPERATIONS
     All amounts are discussed at the consolidated level after the elimination
of affiliate revenue and expense.
Three Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007
   Operating Revenues
    Wireline
     The following table summarizes wireline revenue by source for the three
months ended September 30, 2008 and 2007.

                                           Three Months ended September 30,
                                                    (in thousands)
                                          2008             Change         2007
         Wireline Revenue by Source:

         Retail                        $    23,617             -4.9 %   $ 24,835
         Wholesale                           5,244            -12.5 %      5,994
         Access                             23,676             -7.4 %     25,578
         Enterprise                          9,563             36.8 %      6,988

                                       $    62,100             -2.0 %   $ 63,395

Retail: Retail revenue decreased by $1.2 million, or 4.9%, in the three months ended September 30, 2008 over September 30, 2007. The decrease was driven by a $0.8 million decline in local exchange revenue primarily associated with residential line losses, a $0.5 million decrease in customer premise equipment sales to businesses, $0.2 million decline in long distance sales, and a $0.1 million decline in dial up ISP revenue. These losses were offset, in part, by and $0.4 million increase in revenue from our DSL subscriber base.
Wholesale: Wholesale revenues decreased by $0.8 million, or 12.5%, in 2008 due to declines in unbundled network elements ("UNE") and wholesale local revenue where lines in service declined by 30.1% annually to 30,120 as a result of the ongoing migration of lines over to cable telephony. As a result of ongoing declines in UNE and wholesale local lines, we expect that wholesale revenue will decline as a component of wireline revenue for the foreseeable future.
Access: Access revenues decreased by $1.9 million, or 7.4%, in 2008, with the prior year performance benefiting from $3.3 million in out of period network access, arising from settlements with the National Exchange Carrier's Association ("NECA"), compared to $1.4 million in 2008. We expect that network access revenue will decline as a component of local telephone revenue for the foreseeable future due to the reduction in allocable expenses and the continued shift of voice traffic to wireless networks.
Enterprise: Enterprise revenue increased by $2.6 million, or 36.8%, in 2008 due to $1.4 million in revenue from the provision of virtual network facilities to lower 48 carriers for long distance voice termination, $0.5 million from higher sales of advanced network services to large business and government customers, and an increase of $0.6 million in point to point private line services.
Wireless
Wireless revenue increased $2.1 million, or 5.6%, to $39.2 million for the three months ended September 30, 2008 compared to $37.1 million for the three months ended September 30, 2007. This increase is primarily due to the following:
• growth in average subscribers of 4.7% to 149,606 from 142,866 for the three months ended September 30, 2008 and 2007, respectively;

• higher phone and accessory sales in the quarter ended September 30, 2008 resulting in $3.7 million of handset revenue compared to $2.5 million for the quarter ended September 30, 2007; and

• higher revenue from non-ACS customers roaming on our network resulting in third-party roaming revenue increasing to $7.3 million from $6.3 million for the quarter ended September 30, 2008 and 2007, respectively.

These gains were offset, in part, by a 5.6% decline in average revenue per unit ("ARPU") to $60.79 from $64.43 following proactive measures taken to match national price points for voice plans.
Operating Expense
Operating expense increased $6.5 million, or 7.9%, to $89.2 million for the three months ended September 30, 2008 from $82.7 million for the three months ended September 30, 2007. Depreciation and amortization associated with the operation of each of our segments has been included in total depreciation and amortization.
Wireline: Wireline expenses, which include local telephone, Internet, interexchange and cable systems operating costs, increased $2.3 million, or 5.1%, for the three months ended September 30, 2008 compared to the comparable period in 2007. The increase is primarily attributable to a $1.4 million in start up costs for our strategic long haul fiber investments, a $1.0 million increase in long distance interstate COGS and a $1.0 million in net non-recurring expense benefits in the prior year, including a $1.8 million favorable settlement on a long term property tax dispute and a $0.8 million contingent liability charge on a vendor contract. These increases were offset in part by a $0.5 million decrease related to an amended affiliate billing and collection ("B&C") agreement and a $0.7 million decrease in labor costs.
Wireless: Wireless expense increased $3.0 million, or 15.3%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The increase is primarily attributable to an additional $1.5 million in handset, accessory and data content expense, $0.9 million in expense associated with backhaul costs for our expanded wireless footprint, and $0.6 million in employee sales and service costs to support our growing customer base.
Depreciation and Amortization: Depreciation and amortization expense increased $1.3 million, or 7.4%, for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. The change is due to accelerated depreciation of asset additions in asset classes that had previously reached their maximum depreciable lives and are now depreciating again.
Other Income and Expense: Other income and expense was a net expense of $8.3 million in the three months ended September 30, 2008, an increase of 12.6% from the $7.4 million in the three months ended September 30, 2007. The increase is primarily attributable to an increase in interest expense of $2.0 million associated with our new convertible debt instrument offset, in part, by a $0.4 million decrease in interest expense related to our 2011 notes paid which were paid in full in August of 2007, and an increase of $0.8 million in capitalized interest on our long-term construction projects. In addition, we recorded an impairment charge on our auction rate securities of $0.3 million.
Income Taxes: In the quarter ended September 30, 2008, we recorded a tax expense of $1.7 million. There was no corresponding expense in 2007, other than $0.2 million of alternative minimum tax ("AMT"), as prior to December 2007 we had fully reserved for the unused income tax benefit resulting from the consolidated loss we had incurred since our inception. Our estimated effective tax rate is 45.85%. At September 30, 2008, we had tax net operating loss carry forwards of $127.3 million. Income tax expense will not involve a cash outflow, other than for AMT, until these net operating losses ("NOLs") are used.
Net Income: The decrease in net income is primarily a result of the factors discussed above.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Operating Revenues
Wireline
The following table summarizes wireline revenue by source for the nine months ended September 30, 2008 and 2007.

                                            Nine Months ended September 30,
                                                     (in thousands)
                                            2008           Change        2007
          Wireline Revenue by Source:

          Retail                        $     71,163          -3.7 %   $  73,908
          Wholesale                           15,660         -13.0 %      17,999
          Access                              71,581          -3.7 %      74,331
          Enterprise                          25,873          43.7 %      17,999

                                        $    184,277           0.0 %   $ 184,237

Retail: Retail revenue decreased by $2.7 million, or 3.7%, in the nine months ended September 30, 2008. The decrease was driven by a $2.2 million decline in local exchange revenue primarily associated with residential line losses, $0.7 million in lower CPE sales to businesses, a $0.6 million decline in long distance sales and a $0.4 million decrease in dial up ISP revenue. These losses were offset, in part, by a $1.1 million increase in revenue from our DSL subscriber base.
Wholesale: Wholesale revenues decreased by $2.3 million, or 13.0%, in the nine months ended September 30, 2008 due to declines in UNE and wholesale local revenue which is primarily attributable to the ongoing migration of lines leased to our key competitor to cable telephony, offset in part by a negotiated increase in rates.
Access: Access revenues decreased by $2.8 million, or 3.7%, in the nine months ended September 30, 2008. In 2008 and 2007, we benefited from a $6.1 million and $5.5 million, respectively, in net out-of-period settlements and net reserve releases. The 2008 out-of-period revenue included a $5.5 million reserve release primarily related to refundable USF support while the 2007 settlement included $5.4 million in settlements with NECA and Universal Service Administrative Company ("USAC") for our cost studies. In addition, for the nine months ended September 30, 2008, high cost loop support decreasing by $2.0 million, intrastate revenue decreasing by $1.4 million due to lower demand driven by the continued shift of voice traffic to wireless networks, and interstate revenue decreased $0.4 million. We expect network access revenue to decline as a component of revenue for the foreseeable future.
Enterprise: Enterprise revenue increased by $7.9 million, or 43.7%, in the nine months ended September 30, 2008 due to $5.3 million in revenue from the provision of virtual network facilities to lower 48 carriers for long distance voice termination, $1.3 million from higher sales of advanced network services to large business and government customers, an increase $0.3 million in point-to-point private line services and $1.0 million from a capacity exchange agreement with another carrier.
Wireless
Wireless revenue increased $5.7 million, or 5.6%, to $108.2 million for the nine months ended September 30, 2008 compared to $102.5 million for the nine months ended September 30, 2007. This increase is primarily due to the following:
• growth in average subscribers of 5.7% to 147,428 from 139,444 for the nine months ended September 30, 2008 and 2007, respectively;

• higher phone and accessory sales for the nine months ended September 30, 2008 resulting in $8.3 million of handset revenue compared to $6.8 million for the nine months ended September 30, 2007; and

• higher revenue from non-ACS customers roaming on our network resulting in third-party roaming revenue increasing to $16.6 million from $14.0 million for the nine months ended September 30, 2008 and 2007, respectively.

These gains were offset, in part, by a 1.9% decline in ARPU to $60.99 from $62.14 following proactive measures taken to match national price points for voice plans.
Operating Expense
Operating expense increased $12.4 million, or 5.2%, to $253.7 million for the nine months ended September 30, 2008 from $241.3 million for the nine months ended September 30, 2007. Depreciation and amortization associated with the operation of each of our segments has been included in total depreciation and amortization.
Wireline: Wireline expenses, which include local telephone, Internet, interexchange and cable systems operating cost increased $0.9 million, or 0.7%, for the nine months ended September 30, 2008 compared to the comparable period in 2007. The decrease is primarily attributable declines of $7.1 million in labor and $1.1 million in an affiliate B&C charges and $0.6 million in lower advertising costs associated with our DSL service. This decrease was offset, in part, by a $3.7 million increase in LD interstate COGS, a $1.3 million increase in ISP access and circuit expenses and $2.2 million in start up costs for our strategic long haul fiber investments, a net $1.0 million in net non-recurring expense benefits in the prior year, including a $1.8 million favorable settlement on a long term property tax dispute and a $0.8 million contingent liability charge on a vendor contract.
Wireless: Wireless expense increased $10.1 million, or 18.9%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The increase is primarily attributable to $3.8 million in costs associated with backhaul costs for our expanded wireless footprint, an increase of $3.3 million in handset, accessory and data content expense, a $2.0 million increase in employee sales and service costs to support our growing customer base and a $0.3 million increase in regulatory surcharges.
Depreciation and Amortization: Depreciation and amortization expense increased $0.8 million, or 1.5%, for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The change is primarily due to an increase in the number of asset classes reaching their maximum depreciable lives.
Loss on disposal of assets: In the nine months ended September 30, 2008, we recorded a loss on disposal of assets of $0.8 million related to the termination of our satellite TV distribution agreement.
Other Income and Expense: Other income and expense was a net expense of $23.4 million in the nine months ended September 30, 2008, an increase of 9.6% from the $21.3 million in the nine months ended September 30, 2007. The increase is primarily attributable to an increase in interest expense of $3.9 million associated with our new convertible debt instrument offset by a $0.6 million decrease in interest expense related to our 2011 notes which were paid in full . . .