• military activity;

• the cost of long-haul telecommunications bandwidth;

• local customer preferences;

• average usage of Internet technology;

• unemployment levels; and

• housing activity.

We have observed variances in economic effect on Alaska when compared to the U.S. as a whole. Some factors, particularly, the price of oil and gas, may have the opposite effect on the Alaskan economy than they may have on the U.S. economy as a whole. In forecasting the local economic conditions that affect us, we take particular note of these factors.
Our results of operations, financial position and sources and uses of cash in the current and future periods 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 optic cables 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 conductivity in and between Alaska's urban centers. During 2008, we invested heavily in interstate capacity through our purchase of Crest Communications and construction of AKORN. We have increasingly targeted carrier and enterprise customers. Revenues from these customers grew 42.9% compared with last 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. By directing resources carefully, we seek to distinguish ourselves from our competitors in a cost effective way.

• 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 and improve the customer experience through process improvements. We expect to invest in technology-assisted process improvement, including self-service initiatives. We expect 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. We seek to provide our non-represented employees cash incentives and equity compensation that are tied to these goals. We design executive compensation programs carefully to align executives' and shareholders' long-term interests.

We aim to create value for our shareholders by carefully investing cash flows generated by the business in specific opportunities and transactions that support these imperatives. In addition, we use our cash flows to maintain and grow our dividend payout to shareholders. In light of continued uncertainty in the U.S. credit markets, our Board of Directors has continued to maintain our current $0.86 per share annual dividend policy. Under this policy, the company returned approximately $37.3 million in cash dividends to our stockholders during 2008.
Recent Acquisition
On October 30, 2008, we closed on the purchase of 100% of the outstanding stock of Crest Communications Corporation. The results of Crest's operations have been included in our Wireline segment in the Consolidated Financial Statements since that date. Crest's operations include an undersea fiber system of approximately 1,900 miles with cable landing facilities in Whittier, Juneau, and Valdez, Alaska and Nedonna Beach, Oregon. The system also includes terrestrial transport components linking Nedonna Beach, Oregon to the Network Operations Control Center in Hillsboro, Oregon and collocation facilities in Portland, Oregon and Seattle, Washington. We believe that the acquisition will complement our AKORN fiber build, by providing meaningful operating efficiencies and cost synergies, by offering enterprise customers the only diverse and redundant routing of traffic between Alaska and the lower 48, by allowing management the use of Network Operations Control Centers in Alaska and the lower 48, and by connecting our network to Southeast Alaska. Furthermore, we believes that the acquisition will drive incremental utilization of our differentiated Alaskan terrestrial assets from Crest's customer base and allow us to participate in the fast-growing bandwidth market ahead of AKORN's commercial launch.
A valuation of the business enterprise and acquired assets and liabilities was performed resulting in a determination that the fair value of the business enterprise was greater than the total acquisition price. The major asset acquired was the Northstar fiber network connecting Alaska with the lower 48, which was valued at replacement cost. These costs were derived from our current build out of the AKORN fiber. In accordance with SFAS No. 141- Business

Combinations ("SFAS 141"), the total cost of the acquisition has been allocated to the assets acquired and the liabilities assumed based on a pro-rata reduction of their estimated fair value at the date of acquisition. Certain purchase price adjustments are still under review and therefore the purchase price allocation is still subject to refinement.
The aggregate purchase price was $65.0 million, net of $1.1 million in cash acquired and inclusive of $4.2 million of cash consideration that has been placed in an escrow account for the settlement of any potential claims of misrepresentations, breach of warranties or covenants or for other indemnifications during the first eighteen months following the closing. The Company and Crest have made customary representations and warranties and covenants in the Agreement. Additionally, $4.0 million has been deferred from the purchase price and placed in an escrow account, until a specific claim for an unapproved asset sale has been resolved. Revenue Sources by Segment
Wireline
Revenue from our wireline business services is generated from retail, wholesale and enterprise customer segments as well as from the provision of network access services to interexchange and wireless carriers.
Our Retail Business:
We generate revenue from retail residential and business customers primarily from:
• basic local telephone service including features to customers within our service areas;

• ISP services including DSL and dial up;

• long distance services;

• space and power services to business customers; and

• CPE sales to business customers.

The number of local telephone customers we serve continues to steadily decline. We expect this trend to continue.
The table below sets forth subscriber numbers as of December 31, 2008, 2007

and 2006:

                                                As of December 31
                                        2008          2007          2006
                Local telephone        174,524       185,658       194,815
                Annual growth rate        -6.0 %        -4.7 %        -2.3 %
                DSL                     47,648        47,501        44,066
                Annual growth rate         0.3 %         7.8 %        22.9 %
                Dial up                  6,741         9,125        12,591
                Annual growth rate       -26.1 %       -27.5 %       -27.6 %
                Long distance           64,252        65,256        63,995
                Annual growth rate        -1.5 %         2.0 %        13.6 %

Our Wholesale Business:
We generate revenue from wholesale customers primarily from:
• providing competitive local service to CLECs on either a wholesale or UNE basis as prescribed under the Telecommunications Act;

• carrier billing and collection services; and

• providing carriers with access to space and power at our central office locations.

The number of telephone lines we serve on a wholesale basis has continued to decline. The rate of wholesale line loss has outpaced the rate of retail line loss generally and has accelerated since 2005. This accelerated decline is primarily a result of a specific CLEC customer migrating its customers onto its own cable telephony plant. The table below sets forth subscriber numbers as of December 31, 2008, 2007 and 2006:

                                                As of December 31
                                          2008         2007         2006
                UNE and resale local     26,844       40,696       57,852
                Annual growth rate        -34.0 %      -29.7 %      -19.1 %

Our Enterprise Business:
We generate enterprise revenue from large business customers, state and federal governments, and other carriers primarily from local and long distance private line services;
• provision of virtual network facilities to nationwide carriers for long distance voice termination;

• advanced network services; and

• capacity sales on our in-state terrestrial fiber facility.

Our Network Access Business:
Our 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 on long distance calling patterns and the relative market share of each long distance carrier. The major sources of network access revenue are:
• interstate access charges;

• intrastate access charges;

• federal USF support; and

• wireless carrier access charges.

Wireless
Our business provides wireless voice and data services, other value-added services across our owned and operated network in Alaska and across the lower 48 states, Hawaii and Canada with our roaming partners. We generate wireless revenue primarily from:
• sale of pre-paid and post-paid wireless voice plans to our Alaskan subscribers;

• sale of value-added feature services, including data, to our Alaskan subscribers;

• equipment sales;

• providing lower 48 and Canadian carriers with roaming access to our network for their subscribers; and

• CETC subsidies.

Our wireless business has been a principal driver of revenue growth since 2005. However, as competition increases and markets become increasingly penetrated, we expect that the pace of growth in the future will not reflect our past experience. The table below sets forth subscriber numbers as of December 31, 2008, 2007 and 2006:

                                                As of December 31
                                        2008          2007          2006
                Retail wireless        149,466       144,449       130,971
                Annual growth rate         3.5 %        10.3 %        16.1 %
                Wholesale wireless         346         1,999         3,017
                Annual growth rate       -82.7 %       -33.7 %       -35.6 %

Results of Operations
The following table summarizes our company's operations for the years ended December 31, 2008, 2007, and 2006. Net income for the year ended December 31, 2008 was affected by a one-time impairment charge on goodwill and intangible assets of $29.6 million. Net income for the year ended December 31, 2007 was affected substantially by a one-time, non-cash income tax benefit resulting in a net benefit of $111.2 million arising out of the full release of a reserve previously held against our deferred tax asset.

($ in thousands, except per share data)                      2008             2007             2006

Operating revenues:
Wireline                                                   $ 246,028        $ 248,265        $ 233,351
Wireless                                                     143,569          137,520          115,370

Total operating revenues                                     389,597          385,785          348,721

Operating expenses:
Wireline (exclusive of depreciation and amortization)        185,321          179,456          172,421
Wireless (exclusive of depreciation and amortization)         84,751           74,305           62,478
Depreciation and amortization                                 74,002           71,337           69,096
Loss on disposal of assets, net                                  750              248            1,105
Loss on impairment of goodwill and intangible assets          29,641                -                -

Total operating expenses                                     374,465          325,346          305,100


Operating income                                              15,132           60,439           43,621

Other income and expense:
Interest expense and loss on extinguishment of debt          (32,921 )        (28,741 )        (40,095 )
Interest income and other                                      1,148            1,244           10,195

Total other income (expense)                                 (31,773 )        (27,497 )        (29,900 )


Income (loss) before income taxes                            (16,641 )         32,942           13,721

Income tax benefit (expense)                                   6,502          111,194             (443 )


Net income (loss)                                          $ (10,139 )      $ 144,136        $  13,278


Net Income (loss) per share:
Basic                                                      $   (0.23 )      $    3.38        $    0.32

Diluted                                                    $   (0.23 )      $    3.26        $    0.31


Weighted average shares outstanding:
Basic                                                         43,391           42,701           42,045

Diluted                                                       43,391           44,185           43,387

Year ended December 31, 2008 Compared to the Year ended December 31, 2007
   Wireline
     The following table summarizes wireline revenue by source for the years
ended December 31, 2008, 2007 and 2006.

                                                    Year Ended December 31,
                                           2008                     2007              2006
                                   Amount       Change       Amount      Change      Amount
     Wireline Revenue by Source:

     Retail                        $  94.7          -3.3 %   $  97.9         2.4 %   $  95.6
     Wholesale                        20.4         -13.6 %      23.6        -7.1 %      25.4
     Access                           93.9          -6.9 %     100.9         6.8 %      94.5
     Enterprise                       37.0          42.9 %      25.9        44.7 %      17.9

                                   $ 246.0          -0.9 %   $ 248.3         6.4 %   $ 233.4

Operating Revenues
Retail: Retail revenue decreased by $3.2 million, or 3.3% in 2008. The decrease was driven by a $2.9 million decline in local exchange revenue primarily associated with residential line losses, a $0.9 million decline in long distance sales, $0.3 million in lower CPE sales to businesses, and a $0.6 million decrease in dial up ISP revenue. These losses were offset, in part, by a $1.7 million increase in revenue from our DSL subscriber base.
Declines in retail switched access lines in service of 6.0% in 2008 were concentrated in the residential market and were driven by wireless substitution and competition.
Wholesale: Wholesale revenues decreased by $3.2 million, or 13.6%, in 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. These losses were partially offset by higher revenues from billing and collection, and space and power services.
Total UNE and wholesale lines declined by 34.0% in 2008, to 26,844, 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.
Network Access: Network access revenues decreased by $7.0 million, or 6.9% in 2008. In 2008 and 2007, we benefited from a $6.3 million and $10.1 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, high-cost loop support decreased by $2.7 million and intrastate revenue decreased by $1.7 million due to lower demand driven, in part, by the continued shift of voice traffic to wireless networks. We expect network access revenue to decline as a component of revenue for the foreseeable future.
Enterprise: Enterprise revenue increased by $11.1 million, or 42.9%, in 2008 due to $7.5 million in revenue from the provision of virtual network facilities to lower 48 carriers for long distance voice termination, $1.5 million from higher sales of advanced network services to large business and government customers, $0.9 million from a capacity exchange agreement with another carrier and an increase of $0.8 million in point-to-point private line services.
Wireless
Wireless revenue increased $6.1 million, or 4.4%, to $143.6 million for the year ended December 31, 2008 compared to $137.5 million for the year ended December 31, 2007. This increase is due primarily to the following:
• growth in average subscribers of 5.1% to 148,114 from 140,863 for the year ended December 31, 2008 and 2007, respectively;

• higher phone and accessory sales in the year ended December 31, 2008 resulting in $11.1 million of handset revenue compared to $9.3 million for the year ended December 31, 2007; and

• higher revenue from non-ACS customers roaming on our network resulting in third party roaming revenue increasing to $20.5 million from $18.1 million for the year ended December 31, 2008 and 2007, respectively.

Offsetting these gains was a decrease in average revenue per unit ("ARPU") of 2.5% to $61.01 from $62.58 for the year ended December 31, 2008 and 2007, respectively, following proactive measures taken to match national pricing points for voice plans.
Operating Expense
Operating expense increased $49.1 million, or 15.1%, to $374.5 million for the year ended December 31, 2008, from $325.3 million for the year ended December 31, 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 and interexchange operating costs increased $5.9 million, or 3.3%, for the year ended December 31, 2008. The increase is primarily attributable to a $4.8 million increase in LD interstate COGS, $3.5 million in start up costs for our strategic long haul fiber investments, a $1.1 million increase in outside services and consulting costs, a $0.9 million increase in ISP access and circuit expenses, a $0.5 increase in utility costs, and a $1.8 million non-recurring expense benefit in the prior year due to a favorable settlement on a long-term property tax dispute. Offsetting these increases were declines of $3.4 million in labor, $1.3 million in an affiliate B&C charges, $1.6 million in DSL COGS and $0.6 million in lower advertising costs associated with our DSL service.
Wireless: Wireless expense increased $10.4 million, or 14.1%, for the year ended December 31, 2008 compared to the year ended December 31, 2007. The increase is primarily attributable to an increase of $3.7 million in handset, accessory and data content expense, $3.4 million in costs associated with backhaul for our expanded wireless footprint, a $2.4 million increase in employee sales and service costs and a $0.4 million increase in regulatory surcharges.
Depreciation and Amortization: Depreciation and amortization expense increased $2.7 million, or 3.7%, for the year ended December 31, 2008 compared to the year ended December 31, 2007. The change is due to an increase in depreciable asset base partially offset by a number of asset classes reaching their maximum depreciable lives.
Loss on Impairment of Goodwill and Intangible Assets: In the fourth quarter of 2008 we determined that $29.6 million of goodwill and intangibles were impaired on our wireline segment. The goodwill impairment charge is primarily driven by adverse equity market conditions, the industry transition from wireline to wireless products and services, decreases in current market multiples and the decline in our stock price throughout 2008. This non-cash charge reduces goodwill, but does not impact our overall business operations or cash flows. The tax benefit derived from recording the impairment charge was recorded as a deferred income tax benefit and is included in the deferred tax assets as part of our net operating loss carry forwards.
Other Income and Expense: Other income and expense was a net expense of $31.8 million in the year ended December 31, 2008, an increase of 15.6% from the $27.5 million in the year ended December 31, 2007. The increase is primarily attributable to the increase in interest expense in 2008 associated with our new 5.75% convertible debt instrument.
Income Taxes: In the year ended December 31, 2008, we recorded a tax benefit of $6.5 million related to the build up of deferred tax assets from our $16.6 million book loss. In the year ended December 31, 2007, we recorded a net benefit of $111.2 million when we reversed 100% of our valuation allowance. We released the reserve as we believed it was more likely than not, that all of the deferred tax assets would be realized based on the weight of all available evidence, including two years of positive net income and our projected earnings. In 2008, if it were not for the bonus depreciation taken for tax purposes allowed under the "Economic Stimulus Act of 2008", we would have recorded income for tax purposes.
Net Income (loss): Net income decreased to a loss of $10.1 million in 2008, from income of $144.1 million in 2007. The change is primarily the result of incurring a goodwill impairment charge of $29.6 million assessed against our wireline segment in 2008, while 2007 benefited from the one-time reversal of the $122.5 million valuation allowance for our deferred tax asset.

Year ended December 31, 2007 Compared to the Year ended December 31, 2006
   Wireline
     The following table summarizes wireline revenue by source for the years
ended December 31, 2007, 2006 and 2005.

                                                    Year Ended December 31,
                                           2007                    2006              2005
                                    Amount      Change      Amount      Change      Amount
      Wireline Revenue by Source:

      Retail                        $  97.9         2.4 %   $  95.6        -2.6 %   $  98.2
      Wholesale                        23.6        -7.1 %      25.4       -19.4 %      31.5
      Access                          100.9         6.8 %      94.5        -0.9 %      95.4
      Enterprise                       25.9        44.7 %      17.9        15.5 %      15.5

                                    $ 248.3         6.4 %   $ 233.4        -3.0 %   $ 240.6

Operating Revenues
Retail: Retail revenue increased by $2.3 million, or 2.4% in 2007. The increase was primarily driven by growth in revenue from our DSL subscriber base of $1.6 million and a $1.2 million increase in long distance sales. These gains were offset in part by a $0.6 million decline in local exchange revenue primarily associated with residential line losses; and a $0.7 million decline in dial up ISP revenue.
Declines in retail switched access lines in service of 4.7% in 2007 were concentrated in the residential market and were driven by wireless substitution and competition. During 2007 we added 3,400 DSL connections and exited the year with 47,500 DSL subscribers.
Wholesale: Wholesale revenues decreased by $1.8 million, or 7.1%, in 2007 due to declines in UNE and wholesale local revenue of $2.9 million 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. These losses were partially offset by higher revenues from billing and collection, and space and power services. . . .