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", "ACS Group" and "ACS") 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 Northstar and Alaska-Oregon Network ("AKORN") long-haul fiber facilities and our ability to develop attractive integrated products and services making use of the facility;

• the continued availability of financing in the amounts, at the terms, and subject to the conditions necessary, to support our future business;

• our ability to generate sufficient earnings and cash flows to continue to make dividend payments to our stockholders;

• rapid technological developments and changes in the telecommunications industries;

• changes in revenue resulting from regulatory actions affecting inter-carrier compensation;

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

• possible widespread or lengthy failures of our system or network cables, particularly our non-redundant systems, including our primary fiber-link connecting Alaska and the lower 48 states, which would cause significant delays or interruptions of service and/or loss of customers;

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

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

• changes in the demand for our products and services;

• 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;

• the success of any future acquisitions; and

• the matters described under "Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 and this Quarterly Report 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 IP networks in Alaska and we are the largest local exchange carrier network in the state. We believe our wireless business comprises the most extensive, reliable wireless network in Alaska with third-generation ("3G") 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, is affected by certain economic factors, which include:
• activity in the oil and gas markets;

• 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 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 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 conductivity in and between Alaska's urban centers. During 2008, we invested heavily in interstate capacity through our purchase of Crest and construction of AKORN. We have increasingly targeted carrier and enterprise customers. Revenues from these customers grew 51.1% compared with the quarter ended March 31, 2008, 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.

• Profitability Improvement: We seek to increase operating income and margins. In support of this goal, our capital spending continues to be directed toward growth markets. High-speed evolution data optimized ("EVDO") 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 2009 capital expenditures to be lower than 2008 levels. 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 EVDO Rev A technology.

• 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 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. We seek to provide our non-represented employees cash incentives and equity compensation that are tied to these goals. We carefully design executive compensation programs to align executives' and shareholders' long-term interests.

Revenue Sources by Segment
We have two reportable business segments, wireline and wireless, which conduct the following principal activities:
• Wireline: We provide communications services including voice, data, broadband, multi-protocol label switching ("MPLS") services, network access, long distance and other services to consumers, carriers, businesses and government customers throughout Alaska and to and from Alaska.

• Wireless: We provide wireless voice and data services, products, other value-added services and equipment sales across Alaska.

RESULTS OF OPERATIONS
     All amounts are discussed at the consolidated level after the elimination
of certain affiliate revenue and expense.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
     The following table summarizes results of operations for the three months
ended March 31, 2009 and 2008:

                                                                  Three Months ended March 31,
                                                   2009              2008             Change           % Change
Operating revenues:
Wireline
Retail                                          $ 22,951          $ 23,646          $   (695 )            -2.9 %
Wholesale                                          4,498             5,335              (837 )           -15.7 %
Access                                            21,181            26,304            (5,123 )           -19.5 %
Enterprise                                        11,821             7,821             4,000              51.1 %
Wireless                                          35,558            33,670             1,888               5.6 %

Total operating revenues                          96,009            96,776              (767 )            -0.8 %


Operating expenses:
Wireline (exclusive of depreciation and
amortization)                                     46,337            43,270             3,067               7.1 %
Wireless (exclusive of depreciation and
amortization)                                     18,473            20,121            (1,648 )            -8.2 %
Depreciation and amortization                     20,885            16,463             4,422              26.9 %
Loss on disposal of assets, net                      450                14               436            3114.3 %

Total operating expenses                          86,145            79,868             6,277               7.9 %


Operating income                                   9,864            16,908            (7,044 )           -41.7 %
Operating margin                                    10.3 %            17.5 %

Other income and expense:
Interest expense                                  (8,340 )          (7,229 )          (1,111 )            15.4 %
Interest income                                       34               303              (269 )           -88.8 %
Other                                                (45 )             (76 )              31             -40.8 %

Total other income and expense                    (8,351 )          (7,002 )          (1,349 )            19.3 %


Income before income tax expense                   1,513             9,906            (8,393 )           -84.7 %

Income tax expense                                  (669 )          (4,130 )           3,461             -83.8 %


Net income                                      $    844          $  5,776          $ (4,932 )           -85.4 %


Net income per share:
Basic                                           $   0.02          $   0.13          $  (0.11 )

Diluted                                         $   0.02          $   0.13          $  (0.11 )

Operating Revenues
Wireline
Retail: Retail revenue decreased in the three months ended March 31, 2009 over March 31, 2008 primarily due to a $0.9 million decline in local exchange revenue associated with residential line losses and lower CPE sales to businesses; and a $0.2 million decline in long distance sales. These losses were offset in part by a $0.4 million increase in revenue from our Internet Service Provider ("ISP") subscriber base.

Declines in retail switched access lines in service in the first quarter were concentrated in the residential market which is impacted by wireless substitution.
Wholesale: Wholesale revenues decreased due to declines in unbundled network elements ("UNEs") and wholesale local revenue which is primarily attributable to the ongoing migration of lines leased to our key competitor as they continue to move 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 in 2009 primarily due to a net reserve release of $5.1 million in 2008 which was attributable to refundable USF support following the issuance of a notice of proposed rule-making by the FCC in January 2008 and an FCC order in May 2008.
Enterprise: Enterprise revenue increased in 2009 primarily due to $2.3 million in carrier data, $0.8 million in LD wholesale carrier voice, and $0.8 million in sales of advanced network services to large business and government customers.
Wireless
In the quarter ended March 31, 2009, wireless revenue increased 5.6% over the period ended March 31, 2008. The increase is due primarily to $2.5 million in Competitive Eligible Telecommunications Carrier ("CETC") revenue and a $1.1 million increase in data rich custom calling feature revenues. These increases were partially offset by lower priced voice plans initiated in the prior year to match national price points for voice plans. Operating Expense
Operating expense increased year over year for the three months ended March 31, 2009, with increases in wireline expenses and depreciation offset by decreases in wireless expenses.
Wireline: Wireline expenses, which include local telephone, Internet, interexchange and cable systems operating costs, increased for the quarter ended March 31, 2009 over March 31, 2008, primarily due to a $1.6 million increase in labor expense related to our new cable operations, a $1.0 million increase in land and building facilities related charges, a $0.5 million increase in LD interstate COGS and a $0.3 million increase in DSL COGS.
Wireless: Wireless expense decreased by $1.5 million driven primarily by reductions in handset, accessory and data content expenses.
Depreciation and Amortization: Depreciation and amortization expense increased primarily due to additional depreciation on the assets purchased from Crest combined with accelerated depreciation of asset additions in asset classes that had previously reached their maximum depreciable lives.
Other Income and Expense: Other income and expense was a net expense of $8.4 million due to higher interest expense on the $125.0 million, 5.75% Convertible Notes issued April 8, 2008. In addition, interest income decreased due to a reduced amount of excess investible cash.
Income Taxes: Income taxes are currently being calculated using our estimated effective tax rate for 2009 of 44.2%. At March 31, 2009 we had tax net operating loss ("NOL") carry forwards of approximately $147.2 million. Income tax expense will not involve a cash outflow until these NOL's are utilized.
Net Income: The decrease in net income is primarily a result of the factors discussed above.
Liquidity and Capital Resources
Sources
We have satisfied our cash requirements in the first quarter of 2009 for operations, capital expenditures and debt service primarily through internally generated funds. For the three months ended March 31, 2009, our net cash flows provided by operating activities were $28.0 million. At March 31, 2009, we had approximately $17.8 million in net working capital, of which approximately $2.8 million was cash and cash equivalents and $12.0 million was restricted cash. As of March 31, 2009, we had full access to our $45.0 million revolving credit facility.

Our 2005 Senior Credit Facility contains a number of restrictive covenants and events of default, including covenants limiting capital expenditures, incurrence of debt, and payment of dividends. The 2005 Senior Credit Facility also requires that we achieve certain financial ratios quarterly and we are currently operating comfortably within their restrictions. We have entered into a series of interest swap agreements that have effectively hedged London Inter-Bank Offered Rate ("LIBOR") on our entire term loan.
On April 8, 2008, we sold $125.0 million aggregate principal amount of our 5.75% Convertible Notes due March 1, 2013. These notes are unsecured obligations, subordinate to our obligations under the 2005 Senior Credit Facility, will pay interest semi-annually and will be convertible upon satisfaction of certain conditions.
Uses
Our networks require the timely maintenance of plant and infrastructure. Our historical capital expenditures have been, and continue to be, significant. Cash outflows for capital expenditures for the three months ended March 31, 2009 were $19.1 million, inclusive of $12.3 million in net settlements of capital expenditure payables since December 31, 2008. New capital acquisition for 2009 totaled $6.8 million of which $1.8 million was expended on the build out of our AKORN facility. We intend to fund future capital expenditures with cash on hand and net cash generated from operations.
Since October 28, 2004, we have paid quarterly dividends on our common stock. Based on current shares outstanding at April 22, 2009 of approximately 44.2 million shares and our current annual dividend policy of $0.86 per share, maintenance of our current annual dividend policy would result in $38.0 million cash being paid to common stockholders. Dividends on our common stock are not cumulative.
We believe that we will have sufficient cash on hand, cash provided by operations, and available borrowing capacity under our revolving credit facility to service our debt, pay our quarterly dividends, and fund our operations, capital expenditures and other obligations over the next 12 months. Our ability to meet such obligations will be dependent upon our 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 our control. See "Item 1A-Risk Factors" in our Annual Report on Form 10-K for further information regarding these risks. Legal
We are involved in various claims, legal actions, personnel matters and regulatory proceedings arising in the ordinary course of business, and have recorded litigation reserves of $0.6 million against certain claims and legal actions as of March 31, 2009. We believe that the disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows beyond the amounts already recorded. Estimates involved in developing these litigation reserves could change as these claims, legal actions and regulatory proceedings progress. Employees
As of March 31, 2009, we employed approximately 940 regular full-time employees, 11 regular part-time employees and one full-time temporary employee. Of these employees, approximately 76% are represented by the International Brotherhood of Electrical Workers, Local 1547 ("IBEW"). Management considers employee relations to be satisfactory.
Recent Developments
None
Critical Accounting Policies and Accounting Estimates We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present results of operations. For additional discussion on the application of these and other significant accounting policies, see "Note 1-Summary of Significant Accounting Policies" to our Annual Report on Form 10-K for the

fiscal year ended December 31, 2008. These policies and estimates are considered critical because they had a material impact, or have the potential to have a material impact, on our financial statements and because they require significant judgments, assumptions or estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the significant estimates affecting the financial statements are those related to the realizable value of accounts receivable, materials and supplies, long-lived assets, goodwill and intangible assets, income taxes and network access revenue reserves. Actual results may differ from those estimates.
Recently Adopted Accounting Pronouncements In May 2008, FASB FSP APB No. 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-1") was issued. FAS APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instruments in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This opinion is effective as of the beginning of an entity's first fiscal year beginning after December 15, 2008, which corresponds to our fiscal year beginning January 1, 2009, and must be applied retrospectively to all periods presented. Early adoption was prohibited. We determined this pronouncement applied to our 5.75% Convertible Notes issued April 8, 2008. We were required to bifurcate the note into the liability portion and the portion attributable to the conversion feature of the notes. In doing so, we used the discounted cash flow approach to value the debt portion of the notes. The cash flow stream from the coupon interest payments and the final principal payment were discounted at 11% to arrive at the valuations. We chose 11% as the appropriate discount rate after examining the interest rates for similar instruments issued in the same time frame for similar companies without the conversion option.