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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

OR

Commission file number: 0-23253

ITC^DELTACOM, INC.

(Exact name of registrant as specified in its charter)

(706) 385-8000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  ¨    No  x

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2003, based upon the last reported sale price of the registrant’s common stock on the OTC Bulletin Board on that date, was approximately $63.1 million.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x     No  ¨

The number of shares of the registrant’s common stock outstanding on March 1, 2004 was 51,832,586.

DOCUMENT INCORPORATED BY REFERENCE

Certain information in the proxy statement for the 2004 annual meeting of stockholders of the registrant is incorporated by reference into Part III hereof.

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TABLE OF CONTENTS

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “may,” “will,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “continue” and similar expressions as they relate to us or our management are intended to identify these forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flow and other operating results, cost savings and other expected benefits of our acquisition of BTI Telecom Corp., business strategy, financing plans, forecasted trends related to the markets in which we operate, legal proceedings and similar matters are forward-looking statements. Our expectations expressed or implied in these forward-looking statements may not turn out to be correct. Our results could be materially different from our expectations because of various risks, including the risks discussed in this report under “Business–Risk Factors.”

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PART I

Some of the information contained in this report concerning the markets and industry in which we operate is derived from publicly available information and from industry sources. Although we believe that this publicly available information and the information provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.

Unless we indicate otherwise, references in this report to “we,” “us,” “our” and “ITC^DeltaCom” mean ITC^DeltaCom, Inc. and its subsidiaries and predecessors and references in this report to “BTI” mean BTI Telecom Corp. and its subsidiaries. Unless we indicate otherwise, we have rounded dollar amounts over $1 million to the nearest hundred thousand and dollar amounts less than $1 million to the nearest thousand.

Item 1.    Business.

Overview

We are one of the largest providers of integrated communications services in the southeastern United States. We deliver a comprehensive suite of high-quality voice and data communications services, including local exchange, long distance, enhanced data, Internet, colocation and managed services, and sell customer premise equipment to our end-user customers. We offer these services primarily over our owned network facilities and also use leased network facilities to extend our market coverage. In addition, we own, operate and manage an extensive fiber optic network with significant transmission capacity that we use for our own voice and data traffic and selectively sell to other communications providers on a wholesale basis. We believe that we are the largest facilities-based competitive provider of integrated communications services in our primary eight-state market, which encompasses Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.

On October 6, 2003, we completed our acquisition of BTI Telecom Corp., a facilities-based integrated communications provider serving markets in the southeastern United States. Before we acquired BTI, it was one of the country’s largest privately held integrated communications providers. BTI’s services include local exchange services, long distance services, data services, Internet access and other enhanced services. Before the acquisition, BTI focused its service offerings on small and medium-sized business customers from Washington, D.C. to Miami, Florida, the majority of which were located in Florida, Georgia, North Carolina, South Carolina, Tennessee and Virginia. BTI operated a 4,500 route-mile fiber optic network across the eastern United States, three network operations centers with Alcatel USA 600E digital long distance switches and 14 network operations centers with Lucent 5E2000 local switches. BTI also colocated approximately 90 digital loop carriers in the central offices of incumbent local telephone companies, had approximately 174,500 local access lines in service and provided local service over its own facilities for approximately 42% of those lines.

Our acquisition of BTI has provided us with the opportunity to further our strategic initiative to increase monthly recurring revenues from end-user customers within our existing markets and has created one of the largest providers of integrated communications services in the southeastern United States. ITC^DeltaCom and BTI had similar retail growth strategies and targeted customers, complementary regional fiber optic networks and overlapping operations in 14 markets. By combining our business with that of a former competitor, the acquisition has enabled us to achieve a size and scale that we believe provides us with a competitive advantage in our primary markets and significant opportunities for cost savings and improved cash flow. As a result of the acquisition, we have achieved, and expect to continue to generate, significant operational efficiencies by increasing utilization of our switches and network assets, eliminating duplicative network costs and transitioning each company’s voice and data traffic from previously leased long-haul facilities to our combined fiber optic network. The inclusion of BTI’s assets and operations in our business since October 6, 2003 has contributed to a significant increase in the size of our business between September 30, 2003 and December 31, 2003. Between those dates, we have:

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As of December 31, 2003, we marketed and sold our integrated communications services through 40 branch offices. As of the same date, our 10,900 route-mile fiber optic network extended from New York to Florida and principally covered portions of our primary eight-state market.

Our Business Strategy

Our primary objective is to be the leading provider of high-quality integrated communications services in each of our major service areas in the southeastern United States, principally by using our network facilities to offer local, long distance, Internet access and data services to small, medium-sized, and large business enterprises, governmental agencies and other carriers. We deliver high value bundled and individual services tailored to the needs of our customers and conveniently billed on a single invoice.

The key elements of our business strategy include:

Services

We deliver integrated voice and data communications services to end-user customers and other communications providers in the southeastern United States.

Bundled Services Approach. We offer our integrated communications services in a high-quality bundle to small, medium-sized and large businesses at attractive prices. When economically advantageous for us to do so, we seek to bundle our integrated communications services together with sales of customer premise equipment and related installation and maintenance services. Our targeted customers often will have multiple vendors for voice and data communications services, each of which may be billed separately. Unlike many of these vendors, we are able to provide a single digital T-1 transmission line over which we offer a comprehensive package of local telephone, long distance, Internet access and other integrated communications services. We believe that our bundle of services provides an especially attractive means of delivering communications solutions when combined with our ability to provide, install and maintain the customer premise equipment which our customers require to operate their businesses efficiently.

Our customer-focused software and network permit us to present a single point of contact to handle customer service requests and to present our customers with one fully-integrated monthly billing statement for the entire package of integrated communications services they purchase from us.

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Integrated Communications Services. We offer integrated voice and data communications services to end users on a retail basis. We refer to these services, which we describe in more detail below, as our “integrated communications” services. Revenues from these services represented approximately 78% of our total operating revenues for the three months ended December 31, 2003 and were generated from sales to over 50,000 customers, a significant portion of which purchased multiple services.

Local Services. We offer a wide range of local services, including local voice services, voicemail, universal messaging, directory assistance, call forwarding, return call, hunting, call pick-up, repeat dialing and speed dialing services. We provide our local services primarily over digital T-1 transmission lines, which have approximately 24 available channels, and primary rate interface, or PRI, lines, which have approximately 23 available channels.

Access Trunks. We offer access trunks to customers that own and operate switching equipment on their own premises. The trunks enable the switching equipment of our customers to be connected to our network over a digital T-1 transmission line. These connections provide customers with local and long distance calling capacity on any of the T-1’s 24 available channels.

Long Distance Services. We offer both domestic and international switched and dedicated long distance services, including “1+” outbound dialing, inbound toll-free and calling card services. Many of our small and medium-sized business customers prefer to purchase our long distance services as part of a bundle that includes some of our other integrated communications services offerings.

Enhanced Services. We offer conference calling services, including toll-free and operator-assisted access, sub-conferencing and transcription services, and enhanced calling card services, which provide features such as voicemail and faxmail, voice-activated speed dialing, conference calling and network voice messaging. We also provide customized solutions tailored to the customer’s needs through a network system, referred to as an “intelligent peripheral,” that enables flexible interactions between the user and a network.

Frame Relay Services. We offer frame relay services on the Lucent STDX-9000 switching platform. These services offer customers an efficient method of data transport at speeds equivalent to those available over a digital T-1 transmission line. Our frame relay services allow customers to meet more efficiently their data transfer needs for applications that include Internet access, local area network interconnection and complex systems network architectures.

Private Line Services. We offer private line services that provide dedicated communications connections between multiple locations of our end-user customers to transmit voice, video or data in a variety of bandwidths.

Digital Subscriber Line. We offer xDSL technologies using Alcatel and Copper Mountain digital subscriber line, or DSL, products in select markets. DSL technology provides continuous high-speed local connections to the Internet and to private and local area networks.

Internet Access. We offer dedicated Internet access via private line and frame relay connectivity that provides high-performance, cost-efficient interconnection of multiple local area networks or legacy systems.

Colocation Services. Our colocation services allow businesses to have a secure data center presence without incurring significant capital expenditures, increasing traffic on their corporate network or burdening their information technology staff. We offer hosting, security, data storage, monitoring, networking and hardware solutions. Our colocation services include Internet connectivity with varying speeds of bandwidth, primary and secondary domain name services support, timely reporting of system performance, and continuous monitoring by our network operations staff.

Managed Services. Our managed services encompass system monitoring, managed messaging, managed system and e-mail security services, storage management services and hardware management services. Our system monitoring services include the monitoring of critical system thresholds, problem resolution and detailed

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reporting. Our managed security services include managed firewalls, virtual private networks, intrusion detection, vulnerability assessments, content and virus scanning, and authentication systems. Our storage management services include the assessment and implementation of storage solutions, which offer customers multiple technology and hardware choices. Through our hardware management services, we offer customers hardware maintenance for servers from numerous vendors.

ATM Services. We offer high-bandwidth, low-delay, connection-oriented switching and multiplexing techniques for data transfer, which are known as “ATM” services. ATM allows for the simultaneous high-speed transfer of voice, data and video in a manner that is more efficient than traditional methods. We typically sell these services to larger businesses.

Wholesale Services. We offer wholesale communications services to other communications businesses. We refer to these services, which are described in more detail below, as our “wholesale services.” Revenues from these services represented approximately 17% of our total operating revenues for the three months ended December 31, 2003 and are generated from sales to a limited number of other communications companies.

Broadband Transport Services. Our broadband transport services allow other communications companies to transport the traffic of their customers between local access and transport areas, which are geographic areas composed of contiguous local exchanges. Some of the communications companies that purchase our broadband transport services own transmission facilities, such as fiber optic cables, while others do not own transmission facilities. Through our broadband transport services, we route the voice and data communications of the customers of our communications company-customers over a long-haul circuit, through a switch and into a receiving terminal on our network. We then transmit the voice or data communication over a long-haul circuit on our network to a terminal, where it exits our network. Our communications company-customers then route the communication through another switch and onto the facilities of a local carrier, which terminates the communication to the intended recipient.

We offer our broadband transport services in varying degrees of speed and size. Some of our services are used by our customers for very high capacity, inter-city connectivity and specialized high-speed data networking. We connect our network to the facilities of our customers either by local carrier or by a direct connection. We typically bill our broadband transport services customers a fixed monthly rate that generally is based upon the capacity and length of the circuit we provide, regardless of the amount of capacity that the customer actually uses.

As a result of general market conditions and continued reductions in the rates we charge for our broadband transport services, we have decreased the amount of capital we invest in our broadband transport services business.

Local Interconnection Services. We provide local communications services to Internet service providers on a wholesale basis. These services include primary rate interface connectivity between our network and the network of the Internet service provider, as well as equipment colocation services that permit the Internet service provider to colocate its modems, routers or network servers with our network equipment.

Operator and Directory Assistance Services. We provide nationwide operator and directory assistance services to a number of other communications companies through redundant call centers in Anniston and Alexander City, Alabama. In addition to traditional directory assistance, we provide enhanced assistance services, such as movie listings, stock quotes, weather information, horoscopes and yellow pages. We also provide these enhanced services on a nationwide basis.

Other. Our wholesale services also include a limited amount of switched termination services that we provide to other communications companies. These services primarily include wholesale sales of domestic and international long distance services to other communications companies.

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Equipment Sales and Related Services. We sell, install and perform on-site maintenance of equipment, such as telephones, office switchboard systems and, to a lesser extent, private branch exchanges. We offer these services, which we refer to as our “equipment sales and related services,” in the following markets:

Revenues from these services represented approximately 5% of our total operating revenues for the three months ended December 31, 2003 and are primarily generated from sales to our integrated communications services customers.

We intend to offer our equipment sales and related services in additional markets in the future, with the goals of augmenting and supporting our sale of our integrated communications services and enhancing retention of our customers for those services.

Facilities

Our switching facilities and related electronics, our fiber optic network and our data center enable us to offer our integrated communications services and our wholesale services at competitive prices tailored to the customer’s specific needs.

Switching Facilities. Our networking design, together with our interconnection agreements with the incumbent local telephone companies, such as BellSouth, has enabled us to be a facilities-based provider of local and long distance telephone services in all of our markets.

Our switches are the primary electronic components that connect customers to our network and transmit voice communications over our network. Our primary switching facilities for voice communications consist of 12 Nortel DMS-500 switches and 14 Lucent 5E switches. Our Nortel DMS-500 switches, which are capable of handling both local and long distance voice and data traffic, are installed in the following locations:

Our Lucent 5E switches, which are capable of handling local voice and data traffic, are installed in the following locations:

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As a part of our integration activities with respect to our acquisition of BTI, we have removed a substantial amount of service from a Lucent 5E switch in Knoxville, Tennessee and plan to physically remove the switch. We also have scheduled the removal of an additional Lucent 5E switch in each of Jacksonville, Florida and Nashville, Tennessee during 2004. To improve operating efficiencies, we also plan to move BTI’s Lucent 5E switches in Tampa and Orlando, Florida into our points of presence within those two cities, where we will continue to operate those switches. Our points of presence are the locations along our network where we are able to deliver communications traffic to, and receive communications traffic from, other carriers for further transmission or ultimate delivery to end-users. Our integration plan also provides for the removal from our network of a total of three Alcatel USA 600E digital long distance switches that are located in Atlanta, Georgia, Orlando, Florida and Raleigh, North Carolina. We expect to continue to evaluate the operational efficiency of our network and to assess our network’s need for additional switching capacity.

In addition to our switching platform, we also have colocated communications equipment in various markets in the southern United States. Colocation enables us to provide remote facilities-based local and long distance services in markets where we do not have switches by using our switches in other locations as hosts. To provide these remote services, we use our fiber optic network to connect our remote equipment to our switches when it is economically and operationally advantageous for us to do so.

Fiber Optic Network. As of December 31, 2003, we owned over 10,900 route miles of a fiber optic network which extended from New York to Florida and principally covered portions of our primary eight-state market. We have built or acquired our network through long-term dark fiber leases or indefeasible rights-of-use agreements. We extend the geographic reach of our network and seek to reduce our dependence on incumbent local telephone companies in some markets through strategic relationships with regional public utilities pursuant to which we market, sell and use transmission capacity on networks that are owned and operated by the utilities. As of December 31, 2003, our network extended to over 200 points of presence. These points of presence are located in most major population centers in the areas covered by our fiber optic network and in a significant number of smaller towns and communities. As a result of our investment in the build-out of our fiber optic network since 1997, our network is substantially completed and able to accommodate a significant increase in voice and data traffic without material additional capital investment by us. We intend to focus most of our future capital expenditures on success-based investments that we believe will enable us to acquire additional customers and generate increased operating revenues.

We have implemented electronic redundancy, which enables traffic to be rerouted to another fiber in the same fiber sheath in the event of a partial fiber cut or electronic failure, over a portion of our network. In addition, as of December 31, 2003, over 60% of our network traffic was protected by geographical diverse routing, a network design also called a “self healing ring,” which enables traffic to be rerouted in the event of a total cable cut to an entirely different fiber optic cable, assuming capacity is available.

In integrating the ITC^DeltaCom and BTI networks, we will be able to transition a substantial portion of each company’s voice and data traffic from previously leased long-haul facilities to our combined owned fiber optic network, to redeploy or eliminate redundant switches and other network facilities, to eliminate related duplicative back office and other administrative functions, and to experience related operational efficiencies.

Data Center. Our data center in Suwanee, Georgia became fully operational in 2001. The data center is a centralized facility through which we provide to business customers advanced hosting services, colocation services, managed services, professional services, hardware and software sales, and related services. The data center floor space contains open racks, enclosed cabinets, caged areas and suites. The center is connected through multiple and diverse connections to our fiber optic network. Site access is controlled by security officers, video

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surveillance and enhanced security procedures, and the center is protected by advanced fire protection devices. Temperature, humidity and air quality are carefully maintained to promote uninterrupted server operation. The data center also has redundant power supply systems to provide a constant source of power in the event of a component failure. The data center has a significant amount of available capacity as of December 31, 2003. Use of this capacity by customers would result in increased revenues without the need for us to expend significant additional capital.

Sales and Marketing

Integrated Communications Services and Equipment Sales and Related Services. We provide our integrated communications services and our equipment sales and related services through our direct sales force and our network of independent dealers and sales agents.

Direct Sales. We focus our sales efforts for our integrated communications services and our equipment sales and related services on businesses in the southeastern United States. We conducted our direct sales efforts through 40 branch offices as of December 31, 2003.

We market our integrated communications services and our equipment sales and related services through a direct sales force composed of sales personnel, technical consultants and technicians. We derive the vast majority of our revenues for our integrated communications services and our equipment sales and related services from our direct sales efforts. We believe that high-quality employee training is necessary for superior customer service and, as a result, require each member of our sales force for these services to complete our intensive training program. We base our marketing strategy upon the conviction that customers prefer to have one company accountable for all of their communications services. Each branch office provides technical assistance for the products and services it sells. Our customers are assured that they will have a single point of contact, 24 hours a day, seven days a week, to support all of the services they receive from us.

Our sales personnel make direct calls to prospective and existing business customers, conduct analyses of business customers’ usage histories and service needs, and demonstrate at in-person consultations how the service package we tailor will improve a customer’s communications capabilities and costs. Sales personnel locate potential business customers by several methods, including customer referrals, market research, telemarketing, and networking alliances, such as endorsement agreements with trade associations and local chambers of commerce. Our sales personnel work closely with our network engineers and information systems consultants to design new service products and applications. Our branch offices also are primarily responsible for coordinating service and customer premise equipment installation activities. Technicians survey customers’ premises to assess power and space requirements, and coordinate delivery, installation and testing of equipment.

Our integrated communications services contracts generally provide for payment in arrears based on minutes of use for long distance services or for payment of a flat fee in advance for local telephone, data and Internet services. The agreements also generally provide that the customer may terminate the affected service without a charge for early termination in the event of a substantial and prolonged outage arising from causes within our control, and for other specified causes. The agreements for long distance services generally provide that the customer must utilize at least a minimum amount, measured by dollars or minutes of use, of switched long distance services per month for the term of the agreement. We also have begun to offer our switched long distance services bundled together with some of our other integrated communications services under agreements providing for a recurring fixed monthly fee and a specified maximum number of long distance minutes of use. For example, our Simplici-T offering, which we re-launched in connection with our BTI integration efforts, provides local, long distance, Internet and data services over one digital T-1 transmission line for a fixed monthly fee that is invoiced on a single bill.

We also market our integrated communications services and equipment sales and related services through public relations, advertisements, event sponsorships, trade journals, direct mail and trade forums. Because we seek to distinguish our services largely based on the convenience of our integrated bundle of these services and

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the benefits of our comprehensive and individualized customer support, we believe that advertising and public relations will continue to play a significant role in our marketing strategy for these services.

We offer our business customers colocation services, managed services, professional services and hardware and software sales from our data center in Suwanee, Georgia. The sales personnel for these services and products make direct calls to prospective and existing business customers, work closely with our engineering staff to design specific solutions for each customer and seek to market these services as part of our bundle of integrated communications services offerings.

We supplement our sales to businesses with sales to residential customers of our GrapeVine product, which does not have its own dedicated sales force.

Independent Dealer and Agent Sales. We have an established network of independent dealers and agents to market our integrated communications services and equipment sales and related services. As of December 31, 2003, we had 16 employees located in our direct sales offices to manage our independent dealer and agent sales forces, including our “Corporate Partner Program” managers who recruit and support dealers and agents. These dealer-managers are responsible for recruiting new dealers for our services and supporting new sales made by the dealers. As with our direct sales force, our independent dealers and agents have access to our technical consultants and technicians for sales support. This access enables these dealers and agents to be more effective in their sales efforts and ultimately to present a better solution for the customer. We also support dealers and agents through our order management and support infrastructure. Our authorized dealers and agents receive commissions based on services sold, usage volume and customer retention. We may expand our independent dealer and agent sales program into additional markets during 2004.

Wholesale Services. We market and sell our broadband transport and other wholesale services through a small direct sales force of fewer than ten employees. We generally enter into a master lease agreement with our broadband transport services customers that have terms ranging from one year to five years. Our broadband transport customers then purchase the amount of capacity they require from time to time under the terms specified in the master agreements.

Competition

The communications industry is highly competitive. We compete primarily on the basis of the price, availability, reliability, variety and quality of our offerings and on the quality of our customer service. Our ability to compete effectively depends on our ability to maintain high-quality services at prices generally equal to or below those charged by our competitors. In particular, price competition in the integrated communications services and broadband transport services markets generally has been intense and is expected to increase. Our competitors include, among others, various “competitive carriers” like us, as well as larger providers such as AT&T Corp., Sprint, MCI and BellSouth Corporation. These larger providers have substantially greater infrastructure, financial, personnel, technical, marketing and other resources, larger numbers of established customers and more prominent name recognition than ITC^DeltaCom. These companies also operate more extensive transmission networks than we do. In addition, companies such as Level 3 Communications, Inc., Broadwing Communications, WilTel Communications, LLC and Qwest Communications International Inc. have constructed nationwide fiber optic systems, including routes through portions of the southern United States in which we operate our fiber optic network. We increasingly face competition in the local and long distance market from local carriers, resellers, cable companies, wireless carriers and satellite carriers, and may compete with electric utilities. We also may increasingly face competition from businesses offering long distance data and voice services over the Internet. These businesses could enjoy a significant cost advantage because currently they generally do not pay carrier access charges or universal service fees.

We face significant competition from “competitive carriers” that are similar to us, principally in terms of size, structure, and market share. Some of these carriers already have established local operations in some of our current and target markets. Others are not as well-situated as ITC^DeltaCom in the markets in which we offer

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service. Many competitive carriers are struggling financially. We cannot predict which of these carriers will be able to continue to compete effectively against us over time.

We also compete in the provision of local services against the incumbent local telephone company in each particular market, which is BellSouth in a large majority of our market areas. Incumbent carriers enjoy substantial competitive advantages arising from their historical monopoly position in the local telephone market, including pre-existing customer relationships with all or virtually all end-users. Further, we are highly dependent on incumbent carriers for local network facilities and wholesale services required in order for us to assemble our own local services. In addition, incumbent carriers are expected to compete in each other’s markets in some cases, which will increase the competition we face. Wireless communications providers are competing with wireline local telephone service providers, which further increases competition.

Local and long distance marketing is converging, as other carriers offer integrated communications services. For example, many competitive carriers also offer long distance services to their customers and large long distance carriers, such as AT&T, Sprint and MCI, have begun to offer local services in some markets. We also compete with numerous direct marketers, telemarketers and equipment vendors and installers with respect to portions of our business.

Regional Bell operating companies, such as BellSouth, are currently allowed to provide, both inside and outside their home regions, “interLATA” long distance and mobile services, which are long distance services that originate and terminate in different local access and transport areas. These companies already have extensive fiber optic cable, switching and other network facilities in their respective regions that they can use to provide long distance services throughout the country. By offering in-region long distance services in our markets, BellSouth is able to offer substantially the same integrated local and long distance services as ITC^DeltaCom, and will have a significant competitive advantage over us in marketing those services to its existing local customers.

A continuing trend toward consolidation, mergers, acquisitions and strategic alliances in the communications industry also could increase the level of competition we face.

A recent trend toward deregulation, particularly in connection with incumbent carriers and service providers that use Voice Over Internet Protocol applications, could increase the level of competition we face in our markets and, in turn, adversely affect our operating results. Incumbent carriers and, in particular, the regional Bell operating companies, continue to seek deregulation for many of their services at both the federal and state levels. If their efforts are successful, these companies will gain additional pricing flexibility, which could affect our ability to compete with them. The recent emergence of service providers that use Voice Over Internet Protocol applications also could present a competitive threat. Because the regulatory status of Voice Over Internet Protocol applications is largely unsettled, providers of such applications may be able to avoid costly regulatory requirements, including the payment of intercarrier compensation. This could impede our ability to compete with these providers on the basis of price. More generally, the emergence of new service providers will increase competition, which could adversely affect our ability to succeed in the marketplace for communications and other services.

Regulation

Overview. Our services are subject to federal, state and local regulation. Through our wholly-owned subsidiaries, we hold numerous federal and state regulatory authorizations. The FCC exercises jurisdiction over telecommunications common carriers to the extent they provide, originate or terminate interstate or international communications. The FCC also establishes rules and has other authority over some issues related to local telephone competition. State regulatory commissions retain jurisdiction over telecommunications carriers to the extent they provide, originate or terminate intrastate communications. Local governments may require us to obtain licenses, permits or franchises to use the public rights-of-way necessary to install and operate our networks.

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Federal Regulation. We are classified as a non-dominant carrier by the FCC and, as a result, are subject to relatively limited regulation of our interstate and international services. Some general policies and rules of the FCC apply to us, and we are subject to some FCC reporting requirements, but the FCC does not review our billing rates. We possess the operating authority required by the FCC to conduct our long distance business as it is currently conducted. As a non-dominant carrier, we may install and operate additional facilities for the transmission of domestic interstate communications without prior FCC authorization, except to the extent that radio licenses are required.

The FCC required non-dominant long distance companies, including us, to detariff interstate long distance domestic and international services in 2001. In 2001, the FCC also permitted competitive local carriers, including us, to choose either to detariff the interstate access services that competitive carriers sell to long distance companies that originate or terminate traffic from or to their local customers, or to maintain tariffs but comply with rate caps. Tariffs set forth the rates, terms and conditions for service and must be updated or amended when rates are adjusted or products are added or removed. Before detariffing, we filed tariffs with the FCC to govern our relationship with most of our long distance customers and with long distance companies that originated or terminated traffic from or to our local customers. The detariffing process has required us, among other things, to post these rates, terms and conditions on our web site instead of filing them as tariffs with the FCC. Because detariffing precludes us from filing our tariffs with the FCC, some may argue that we are no longer subject to the “filed rate doctrine,” under which the filed tariff controls all contractual disputes between a carrier and its customers. The detariffing process has effectively required us to enter into individual contracts with each of our customers and to notify our customers when rates are adjusted or products are added or removed. This process increases our costs of doing business. Detariffing may expose us to legal liabilities and costs if we can no longer rely on the filed rate doctrine to settle contract disputes with our customers.

In the future, an important element of providing competitive local services may be the ability to offer customers high-speed broadband local connections. The FCC recently adopted significant restrictions on the unbundled network elements that incumbent carriers must make available to competitors to enable them to provide broadband services to customers using incumbent carrier networks. Although these restrictions were largely upheld by a federal court of appeals in March 2004, the court’s decision may be appealed and we cannot predict the outcome of any such appeal. The FCC also is considering what regulatory treatment, if any, should be accorded to digital subscriber line services provided by communications companies and to cable modem services, which are used by cable companies to deploy high-speed Internet access services. The FCC found in 2002 that cable modem service is an “information service” that is exempt from regulation. A federal court of appeals recently overturned that decision, as being inconsistent with an earlier ruling by the court that cable modem service has both “information service” and “telecommunication service” components, which would make that service subject to regulation. The FCC has sought comment on a number of other regulatory proposals that could affect the speed and manner in which high-speed broadband local services are deployed by our competitors. In addition, the FCC is considering clarifications and changes to the prospective regulatory status of services and applications using the Internet Protocol, including Voice Over Internet Protocol offerings. In this regard, the FCC recently ruled that the Internet-based service provided by one company is an unregulated “information service,” although that determination may not apply more broadly to all providers of Voice Over Internet Protocol offerings. Congress also has considered in the past and may consider in the future legislation that would deregulate some aspects of the incumbent local carriers’ broadband services and would reduce the extent to which those carriers must provide access to their networks to competitive local carriers for the provision of broadband services. Several cable companies already are offering broadband Internet access over their network facilities, and incumbent carriers and competitive carriers also offer these services through digital subscriber line technology. If we are unable to meet the future demands of our customers for broadband local access on a timely basis at competitive rates, we may be at a significant competitive disadvantage.

The FCC regulates the interstate access rates charged by local carriers for the origination and termination of interstate long distance traffic. These access rates make up a significant portion of the cost of providing long distance service. The FCC has adopted policy changes that over time are reducing incumbent carriers’ access rates, which have the impact of lowering the cost of providing long distance service, especially to business customers. In addition, the FCC has adopted rules that require competitive carriers to reduce gradually the levels

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of their tariffed access charges until those charges are no greater than those of the incumbent carriers with which they compete. We expect further FCC action to reduce and possibly eliminate most access charges in the future. We will not know the full impact of the FCC’s decisions until its decisions are implemented over the next several years.

In April 2001, the FCC issued a ruling changing the compensation mechanism for traffic exchanged between telecommunications carriers that is destined for Internet service providers. In doing so, the FCC prescribed a new rate structure for this traffic and prescribed gradually reduced caps for its compensation. We may, in the course of our business, exchange the traffic of Internet service providers with other carriers. The FCC’s ruling in connection with such traffic affected a large number of carriers, including us, and further developments in this area could have a significant impact on the industry and on us. Although a federal court remanded that FCC decision for further consideration, the court did not reverse the decision, so it remains in effect. The FCC is likely to re-adopt the same substantive requirements but with a revised rationale in response to the court’s remand decision. In addition, the FCC has sought comment on broad policy changes that could harmonize the rate structure and levels of all forms of inter-carrier compensation, and ultimately could eliminate most forms of carrier-to-carrier payments for interconnected traffic.

The FCC’s role with respect to local telephone competition arises principally from the Telecommunications Act of 1996. The Telecommunications Act preempts state and local laws to the extent that they prevent competition in the provision of any telecommunications service. Subject to this limitation, state and local governments retain telecommunications regulatory authority over intrastate telecommunications. The Telecommunications Act imposes a variety of duties on local carriers, including competitive carriers such as ITC^DeltaCom, to promote competition in the provision of local telephone services. These duties include requirements for local carriers to:

Incumbent carriers also are subject to additional duties. These duties include obligations of incumbent carriers to:

Collectively, these requirements recognize that local telephone service competition is dependent upon cost-based and non-discriminatory interconnection with, and use of, some elements of incumbent carrier networks and facilities under specified circumstances. Failure to achieve and maintain such arrangements could have a material adverse impact on our ability to provide competitive local telephone services. Under the Telecommunications Act, incumbent carriers are required to negotiate in good faith with carriers requesting any or all of the foregoing arrangements.

Among other interconnection agreements, we entered into interconnection agreements with BellSouth in 1999 that enabled us to provide local service in all nine BellSouth states on either a resale basis or by purchasing all unbundled network elements required to provide local service without using facilities we own. These interconnection agreements also allow us to purchase unbundled network elements, including UNE-Transport

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and UNE-Loops, that we use to provide services over our own facilities. These interconnection agreements expired in June 2003. We are currently engaged in an arbitration process concerning the rates and terms of new agreements with BellSouth in Alabama, Georgia, Florida, North Carolina, Louisiana and Tennessee. We expect to continue to operate under the terms of the existing agreements until we enter into new agreements. We have adopted the agreements between AT&T and BellSouth for South Carolina, Mississippi and Kentucky. By adopting these agreements, we will assume the terms and conditions of such agreements that are applicable to AT&T. We are unable to determine the impact, if any, that these arbitration proceedings will have on our results of operations and financial condition. We expect, but cannot assure you, that each new BellSouth interconnection agreement to which we are a party will provide us with the ability to provide local service in the nine BellSouth states on a reasonable commercial basis.

In August 2003, the FCC adopted changes to the rules defining the circumstances under which incumbent carriers must make network elements available to competitors at cost-based rates. First, the FCC adopted rules permitting state regulators, under specified circumstances, to impose significant limitations on the ability of competitive carriers like us to purchase the “unbundled network element platform,” or UNE-P, from incumbent local exchange carriers at regulated prices based on the FCC’s “Total Element Long Run Incremental Cost,” or TELRIC, methodology. Under the FCC’s revised rules, the state commissions could impose geographic limitations or time limitations on the availability of UNE-P at TELRIC rates, and could impose time limitations or phase out the availability of this offering over a specified period. Second, the FCC adopted restrictions on the availability of some broadband loops and network elements at TELRIC rates and limited the services that competitors could provide over those elements. The FCC decided that switching in connection with service provided to enterprise or large customers should no longer be required at cost-based rates on an unbundled basis, unless a state regulatory commission could demonstrate that carriers providing service at DS1 capacity and above should be entitled to unbundled access to local circuit switches in a particular market. In addition, the FCC eliminated, following a transition period, the requirement that incumbent carriers provide “line sharing” arrangements, which some competitive carriers use to provide broadband telecommunications and Internet services. Both incumbent carriers and competitive carriers appealed aspects of the FCC’s August 2003 order to a federal court of appeals, which in March 2004 vacated and remanded to the FCC several portions of that order. The court vacated certain portions of the order that were beneficial to us, including those requiring incumbent carriers to continue to make available mass market switching and dedicated transport facilities at cost-based rates, and delegating certain responsibilities to the states to determine which of these elements should continue to be made available. The court also upheld several portions of the order that could result in increased costs for us, including limiting the local loops and enterprise switching elements that must be made available to competitors like us at cost-based rates. If the FCC or any other party appeals the court’s ruling, we cannot predict whether any such appeal would be successful. We also cannot predict how the FCC will act in its remand proceedings resulting from the ruling, or whether its resulting decisions will be favorable or unfavorable to our business.

The FCC has initiated a re-examination of its TELRIC pricing methodology for network elements. The FCC has proposed a number of changes to these pricing rules that would be unfavorable to us. Legislation has been proposed in Congress in the past and may be proposed in the future that would further restrict the access of competitive carriers to incumbent carriers’ network elements. Any restriction on, or reduction of, the network elements available to us could have a material adverse effect on our business.

The FCC has granted incumbent carriers some flexibility in pricing their interstate special and switched access services. Under this pricing scheme, local carriers may establish pricing zones based on access traffic density and charge different prices for access provided in each zone. The FCC recently has been granting incumbent carriers additional pricing flexibility on a market-by-market basis as local competition develops in their markets. This pricing flexibility could place us at a competitive disadvantage, either as a purchaser of access for our long distance operations or as a vendor of access to other carriers or end-user customers.

In a related proceeding, the FCC has changed the methodology used to subsidize universal telephone service and other public policy goals. Beginning in April 2003, to support these goals, telecommunications providers like us pay a fee calculated as a percentage of projected revenues for the quarter of contribution. Before April 2003,

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the calculation was based on historical revenues. The FCC is considering additional changes, including possibly changing from a revenues-based system of assessing universal service support to a system based on the number of telephone numbers or end-user connections provided by a carrier. Some states are also implementing universal service funds. The effects of these decisions are uncertain and subject to change. In particular, the fees we pay to subsidize universal service may increase or decrease substantially in the future as a result of these federal and state proceedings.

The FCC continues to consider related questions regarding the applicability of access charges and universal service fees to providers of Internet access service and other services and applications using Internet protocol, including Voice Over Internet Protocol. Currently, Internet access providers are not subject to these expenses, and a federal court of appeals has upheld the FCC’s decision not to impose such fees. However, there are open questions about how the existing rules apply to providers of data, voice or other services using the Internet or Internet protocol-based technology. The FCC is in the process of re-examining this issue. We are not in a position to determine how these issues regarding access charges and universal service fees will be resolved or whether the resolution of these issues will be harmful to our competitive position or our results of operations.

In July 2001, the FCC adopted revised rules affecting its equipment colocation requirements. In a number of ways, the FCC’s revised rules are favorable to competitive carriers such as ITC^DeltaCom. In other ways, however, these rules may prevent competing carriers from colocating their equipment in a manner that best suits their business needs. We expect that the interconnection agreements we enter into with BellSouth and with other carriers will be subject to the FCC’s revised colocation rules, but these rules may change or otherwise operate to the advantage of incumbent carriers.

The FCC imposes prior approval requirements on transfers of control and assignments of radio licenses and operating authorizations. The FCC has the authority generally to condition, modify, cancel, terminate, revoke or decline to renew licenses and operating authority for failure to comply with federal laws and the rules, regulations and policies of the FCC. Fines or other penalties also may be imposed for such violations. The FCC or third parties may raise issues with regard to our compliance with applicable laws and regulations.

State Regulation. We are subject to various state laws and regulations. Most state public utility commissions require providers such as ITC^DeltaCom to obtain authority from the commission before initiating service in the state. In most states, including Alabama, Georgia and Florida, we also are required to file tariffs or price lists setting forth the terms, conditions and prices for services that are classified as intrastate and to update or amend our tariffs when we adjust our rates or add new products. We also are subject to various reporting and record-keeping requirements. In addition, some states are ordering the detariffing of services, which may impede our reliance on the filed rate doctrine and increase our costs of doing business.

We have authority to offer intrastate long distance services in all 50 U.S. states, other than Alaska, and the District of Columbia. We also have an application for authority pending in Alaska. We have obtained authority to provide long distance service in states outside of our current and target markets to enhance our ability to attract business customers that maintain offices, or have employees who travel, outside of our markets.

We provide local services in our region by reselling the retail local services of the incumbent carrier in a given territory and, in some established markets, using incumbent network elements and our own local switching facilities. We possess authority to provide local telephone services in Alabama, Delaware, Arkansas, Florida, Georgia, Kansas, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, New York, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia and the District of Columbia.

Many issues remain open regarding how new local telephone carriers will be regulated at the state level. For example, although the Telecommunications Act preempts the ability of states to forbid local service competition, the Telecommunications Act preserves the ability of states to impose reasonable terms and conditions of service and other regulatory requirements. The scope of state regulation will be refined through rules and policy decisions made by public utility commissions as they address local service competition issues.

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State public utility commissions have responsibility under the Telecommunications Act to oversee relationships between incumbent carriers and their new competitors with respect to such competitors’ use of the incumbent carriers’ network elements and wholesale local services. Public utility commissions arbitrate interconnection agreements between the incumbent carriers and competitive carriers such as ITC^DeltaCom when necessary. Important issues regarding the scope of the authority of public utility commissions in this area and the extent to which the commissions will adopt policies that promote local telephone service competition remain unresolved. For example, a federal court of appeals recently vacated the FCC’s decision that state commissions should play the main role in determining whether the elements included in the UNE-P would continue to be made available at cost-based rates in particular geographic areas and for purposes of serving particular classes of customers. This decision may be subject to further appeals, and we expect that the FCC eventually will commence a proceeding on remand to refine further its network element rules. It is difficult to predict how these matters will be resolved or their impact on our ability to pursue our business plan.

States also regulate the intrastate carrier access services of the incumbent carriers. We are required to pay access charges to the incumbent carriers when they originate or terminate our intrastate long distance traffic. Our business could be harmed by high access charges, particularly to the extent that the incumbent carriers do not incur the same level of costs with respect to their own intrastate long distance services or to the extent that the incumbent carriers are able to offer their long distance affiliates better access pricing. Some states also regulate the intrastate access charges of competitive carriers. States also will be developing intrastate universal service charges parallel to the interstate charges created by the FCC. For example, incumbent carriers such as BellSouth advocate the formation of state-level funds that would be supported by potentially large payments by businesses such as ITC^DeltaCom based on their total intrastate revenues. Another issue is the use by some incumbent carriers, with the approval of the applicable public utility commissions, of extended local area calling that converts otherwise competitive intrastate toll service to local service. States also are or may be addressing various intraLATA dialing parity issues that may affect competition. Our business could be harmed by these developments.

We also will be affected by how states regulate the retail prices of the incumbent carriers with which we compete. We believe that, as the degree of intrastate competition increases, the states will offer the incumbent carriers increasing pricing flexibility and deregulation of particular services deemed to be competitive. This flexibility and deregulation may present the incumbent carriers with an opportunity to subsidize services that compete with our services with revenues generated from their non-competitive services, thereby allowing incumbent carriers to offer competitive services at prices lower than most or all of their competitors. BellSouth has obtained authority to create affiliates that would operate on a much less regulated basis and, therefore, could provide significant competition even if the traditional BellSouth local business does not receive more pricing flexibility. We cannot predict the extent to which these developments may affect our business.

Many states also require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignment of carrier assets, carrier stock offerings and incurrence by carriers of significant debt obligations. Certificates of authority generally can be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law or the rules, regulations and policies of state regulatory authorities. Fines or other penalties also may be imposed for such violations. Public utility commissions or third parties may raise issues with regard to our compliance with applicable laws or regulations.

Local Government Authorizations and Related Rights-of-Way. We are required to obtain street use and construction permits and licenses or franchises to install and expand our fiber optic network using municipal rights-of-way. In some municipalities where we have installed network equipment, we are required to pay license or franchise fees based on a percentage of gross revenues or a per linear foot basis. Following the expiration of existing franchises, these fees may not remain at their current levels. In many markets, the incumbent carriers do not pay these franchise fees or they pay fees that are substantially less than those required to be paid by us, although the Telecommunications Act requires that, in the future, such fees be applied in a competitively neutral manner. To the extent that competitors do not pay the same level of fees that we do, we could be at a competitive

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disadvantage. Termination of the existing franchise or license agreements before their expiration dates, or a failure to renew the franchise or license agreements, and a requirement that we remove the corresponding portion of our facilities or abandon the corresponding portion of our network could harm our business. In addition, we would be adversely affected if we are unable to obtain additional authorizations for any new network construction on reasonable terms. Unresolved issues also exist regarding the ability of new local service providers to gain access to commercial office buildings to serve tenants.

Employees

As of December 31, 2003, we had approximately 2,360 employees, of whom approximately 2,180 were full-time employees. None of our employees is represented by a union or covered by a collective bargaining agreement. We believe that our relationship with our employees is good. In connection with the construction and maintenance of our fiber optic network and the conduct of our other business operations, we use third-party contractors, some of whose employees may be represented by unions or covered by collective bargaining agreements.

Web Sites and Additional Information

The SEC maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding ITC^DeltaCom. In addition, we maintain a corporate web site at www.itcdeltacom.com. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. The contents of our web site are not a part of this report.

We have adopted a code of ethics applicable to our chief executive officer and our senior financial officers, who include our principal financial officer, principal accounting officer or controller, and persons performing similar functions. We will provide a copy of this code in print without charge to any stockholder who requests a copy. Requests for copies may be directed to Corporate Secretary, ITC^DeltaCom, Inc., 4092 South Memorial Parkway, Huntsville, Alabama 35802. We intend to disclose any amendments to this code, and any waiver of a provision of the code for the benefit of the company’s directors, principal executive officer and senior financial officers, on our web site referred to above within five business days following such amendment or waiver, or within any other period that may be required under SEC rules from time to time.

Risk Factors

Our business and operations are subject to a number of risks and uncertainties, including the following:

We may experience difficulty integrating BTI and may fail to realize the anticipated benefits of our acquisition of BTI.

Our success will depend on our ability to realize the cost savings, operating efficiencies and new revenue opportunities we expect to result from our integration of the ITC^DeltaCom and BTI businesses. Our operating results and financial condition will be adversely affected if we are unable to integrate successfully the operations of ITC^DeltaCom and BTI, fail to achieve or achieve on a timely basis such cost savings, operating efficiencies and new revenue opportunities, or incur unforeseen costs and expenses or experience unexpected operating difficulties that offset anticipated cost savings. In particular, the integration of BTI may involve, among other items, integration of sales, marketing, billing, accounting, quality control, management, personnel, payroll, regulatory compliance, network infrastructure and other systems and operating hardware and software, some of which may be incompatible with our existing systems and therefore may need to be replaced. The integration of BTI may place significant strain on our management, financial and other resources.

We expect that the BTI acquisition will generate annualized cost savings of up to $60 million by the end of 2005. The foregoing cost savings estimate does not include non-recurring adjustments that we will record in

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connection with the acquisition. In addition, the estimate is based upon our assumptions concerning a number of factors, including operating efficiencies, the consolidation of functions, and the integration of operations, systems, marketing methods and procedures. These assumptions are uncertain and are subject to significant business, economic and competitive conditions that are difficult to predict and often beyond our management’s control.

Recent FCC actions may restrict our ability to provide local exchange services and may increase the costs we incur to provide these services.

In August 2003, the FCC released an order allowing the incumbent local telephone companies to petition state public utility commissions for authority to stop providing some unbundled network elements to us and other competitive communications companies. The elements subject to the order included dedicated transport services between central offices, broadband local loops, local switching services for residential and small business customers that are used as part of the unbundled network element platform, or UNE-P, and other elements. In addition, to the extent our customers are deemed enterprise or large business customers, as defined by the FCC, the FCC ruled that the incumbent local telephone companies may no longer be required to provide local switching services with respect to those customers. Our UNE-P local services offering is composed of a bundle of these elements, and we use these unbundled network elements to provide local exchange services. In March 2004, a federal court of appeals vacated and remanded portions of the FCC’s August 2003 order that were beneficial to us and upheld other portions that would increase our costs of doing business. We cannot predict whether the ruling will be appealed, the results of any such appeal or the FCC remand proceedings, or more generally the ultimate implications of the ruling on our business. If the March 2004 ruling or any FCC decisions on remand do not facilitate an orderly transition of our customers from the UNE-P platform, or if BellSouth and the other incumbent carriers in our markets do not otherwise facilitate an orderly transition, our business could be adversely affected. In addition, if prices of the network elements that we use to provide our services increase as a result of the implementation of the March 2004 ruling or any future consideration of this issue by the FCC, our cost of providing local exchange service could increase and have a significant adverse impact on our earnings and cash flows.

The FCC also has proposed new rules that would change the existing cost-based method of pricing the services that we obtain from the incumbent local telephone companies. If adopted, the proposed rules would enable the incumbent local telephone companies to initiate proceedings before state public utility commissions to seek increased rates for unbundled network elements. If some elements in particular markets or on particular transport routes in those markets cease to be available to us at the existing cost-based rates, we could experience an increase in our cost of providing local exchange services.

We are subject to a significant number of legal proceedings that could result in our payment of substantial monetary damages and could adversely affect our ability to provide services.

To maintain our fiber optic network, we have obtained easements, rights-of-way, franchises and licenses from various third parties, including actual and potential competitors, local governments, private landowners and others. We may not be able to continue to use or have access to all of our existing easements, rights-of-way, franchises and licenses or to renew or replace them after they expire. Third parties have initiated legal proceedings in a number of states challenging some of our significant licenses to use the rights-of-way of others, including our licenses to use the rights-of-way of Mississippi Power Company, Gulf Power Company, Georgia Power Company and Kansas City Southern Railroad and Illinois Central Railroad. The pending proceedings affect approximately 1,750 route miles of our network as of December 31, 2003. We cannot predict whether additional portions of our network will become subject to similar legal proceedings in the future. If some of these or similar future challenges are successful, or if we are otherwise unsuccessful in maintaining or renewing our rights to use our network easements, rights-of-way, franchises and licenses, we may be compelled to abandon significant portions of our network, which would require us to incur additional expenditures, and we could also be required to pay substantial monetary damages.

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Our integrated communications services business is subject to significant competitive pressures that could restrict our ability to achieve or sustain operating profitability.

Our industry is highly competitive, and the level of competition, particularly with respect to pricing, is increasing. As a result of competitive pressures, we may not be able to achieve or sustain operating profitability, adequate market share or significant revenue growth in any of our markets. The prices we charge for our retail local, long distance and data services have declined significantly in recent years. BellSouth and the other incumbent local telephone companies in our markets offer substantially the same services we offer, in some cases at lower prices. These companies have substantially greater infrastructure, financial, personnel, technical, marketing and other resources, larger numbers of established customers and more prominent name recognition than we do. We expect to continue to face significant pricing and product competition from BellSouth and the other large, established telephone companies that currently are the dominant providers of telecommunications services in our markets. We also will continue to face significant competitive product and pricing pressures from other types of communications businesses, including cable companies providing broadband Internet access and other integrated services providers, and from other companies like us that attempt to compete in the local services market.

We may be required to reduce further some or all of the prices we charge for our retail local, long distance and data services for the following reasons, which could adversely affect our ability to generate positive cash flows from operations:

Our wholesale services, including our broadband transport services, continue to be adversely affected by pricing pressure, network overcapacity, service cancellations and other factors.

We have continued to experience adverse trends relating to our wholesale service offerings, including our broadband transport services, that have resulted primarily from a reduction in rates charged to our customers due to overcapacity in the broadband services business and from service cancellations by some customers, including customers of our local interconnection business. We expect that these factors will result in continued declines in revenues and cash flows from our wholesale services. As a result, we have decreased the amount of capital we are investing in our wholesale business, which could lead to further declines.

Our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services.

We depend on other communications companies to originate and terminate a significant portion of the long distance traffic initiated by our customers. Our operating performance will suffer if we are not offered these access services at rates that are substantially equivalent to the costs of, and rates charged to, our competitors and permit profitable pricing of our long distance services. The charges for access services historically have made up a significant percentage of our overall cost of providing long distance service. Some of our Internet-based competitors generally have been exempt from these and other regulatory charges, which could give them a significant cost advantage in this area. The FCC presently is considering what charges, if any, should be assessed on long distance services provided over the Internet.

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Our inability to maintain our network infrastructure, portions of which we do not own, could adversely affect our operating results.

We have effectively extended our network with minimal capital expenditures by entering into marketing and management agreements with public utility companies to sell long-haul private line services on the fiber optic networks owned by these companies. Under these agreements, we generally earn a commission based upon a percentage of the gross revenues generated by the sale of capacity on the utility’s networks. Any cancellation or non-renewal of any of these agreements, any adverse legal ruling with respect to our rights under any of these agreements, or any future failure by us to acquire and maintain similar network agreements in these or other markets as necessary, could materially adversely affect our operations. In addition, some of our agreements with the public utility companies are nonexclusive, and our business would suffer from any reduction in the amount of capacity that is made available to us.

Our ability to provide service also could be materially adversely affected by a cable cut, switch failure or other equipment failure along our fiber optic network or along any other fiber optic network on which we lease transmission capacity. A significant portion of our fiber optic network is not protected by electronic redundancy or geographical diverse routing. Lack of these safeguards could result in our inability to reroute traffic to another fiber in the same fiber sheath in the event of a partial fiber cut or electronics failure or to an entirely different fiber optic route, assuming capacity is available, in the event of a total cable cut or if we fail to maintain our rights-of-way on some routes.

If we are unable to interconnect with BellSouth and other incumbent carriers on acceptable terms, our ability to offer competitively priced local telephone services will be adversely affected.

In order to provide local telephone services, we must interconnect with and resell the services of the incumbent carriers to supplement our own network facilities. Our interconnection agreements with BellSouth expired in June 2003. Although we have adopted the agreements between BellSouth and another provider in three states, we are arbitrating the rates and terms of new agreements with BellSouth in six of the nine BellSouth states. We may not be able to enter into new interconnection agreements with BellSouth or other carriers on favorable terms, in a timely manner, or at all. Further, federal regulators have adopted substantial modifications to the requirements that obligate BellSouth and other former monopoly local telephone companies to provide to us at cost-based rates the elements of their telephone networks that enable us to offer many of our services at competitive rates. If we are unable to enter into or maintain favorable interconnection agreements in our markets, our ability to provide local services on a competitive and profitable basis may be materially adversely affected. Any successful effort by the incumbent carriers to deny or substantially limit our access to their network elements or wholesale services also would harm our ability to provide local telephone services.

We may not be able to retain the few large customers on which we depend for a significant percentage of our revenues.

We may not be able to retain our large customers or we may be required to lower significantly our prices to retain these customers. The table below sets forth the approximate percentages of our total revenues generated in 2001, 2002 and 2003 by our five largest integrated communications services customers and our three largest wholesale services customers:

If we were to lose any of these customers or were forced to lower our prices to retain these customers, our operating revenues and business could be adversely affected.

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We will be unable to service our indebtedness and comply with our financial and operating covenants if we do not generate substantial operating cash flow and realize cost savings from the BTI acquisition.

Our ability to make scheduled payments under our credit facilities and our other indebtedness and to comply with our financial and operating covenants will depend primarily on our success in generating substantial operating cash flow and realizing the cost savings we anticipate will result from our acquisition of BTI. Our cash flow may be insufficient to meet required payments of principal and interest under our other indebtedness. We will be required through June 30, 2006 to repay an increasing amount of our $184 million of outstanding borrowings under our senior credit facility and thereafter through June 30, 2008 to repay an increasing amount of our $55.7 million of outstanding borrowings under our junior credit facility. We may not be able to refinance our existing indebtedness and, even if we are able to do so, the terms of a refinancing might not be as favorable as the terms of existing indebtedness. If principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, including new equity capital, our cash flow may not be sufficient to repay all maturing indebtedness at the relevant times. Failure to pay or extend the maturity of such indebtedness could result in our default under or acceleration of our other indebtedness. If the maturity of our indebtedness were accelerated, we may not have sufficient funds to pay such indebtedness. Prevailing interest rates, our operating results and financial condition, our debt ratings or other factors at the time of refinancing, including the possible reluctance of lenders to make loans, may result in higher interest rates and increased interest expense.

Our indebtedness could adversely affect our financial health and ability to compete.

We have a significant amount of indebtedness. As of December 31, 2003, we had $301.8 million of total long-term indebtedness, including current portion, and capital leases. Our indebtedness could have important consequences. For example, it may:

Financial and operating covenants in our credit facilities may restrict our business activities.

Our credit facilities contain operating covenants that significantly restrict our ability to engage in specified activities. These covenants include limitations on, among other things, our ability to incur secured and unsecured indebtedness, pay dividends, sell assets, make investments and engage in mergers and consolidations, which could restrict our ability to pursue business initiatives or acquisition transactions. In addition, our credit facilities require us to meet specified financial tests and maintain specified financial ratios. Failure to meet any of the covenants could cause an event of default under, and accelerate payment of, some or all of our indebtedness, which would have a material adverse effect on us.

We may not benefit from our acquisition strategy.

As part of our growth strategy, we will continue to seek to supplement internal expansion with acquisitions. We may not be successful in identifying, consummating and integrating any newly acquired businesses into our operations. The integration of acquired businesses poses a number of significant risks, including the following:

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Even if acquired companies eventually contribute to an increase in our profitability, the acquisitions may adversely affect our operating results in the short term. Our operating results may decrease as a result of transaction-related expenses we record for these acquisitions. Our operating results may be further reduced by the higher operating and administrative expenses we may incur in the periods immediately following an acquisition as we seek to integrate the acquired business into our own operations. Impairment charges resulting from acquisitions also may contribute to reduced earnings.

Acquisitions may place significant strain on our management, financial and other resources. We could expend a substantial amount of time and capital integrating businesses that we acquire or pursuing acquisitions that we do not consummate, which could harm our business.

We may complete a significant business combination that could increase our leverage, result in a change of control, or both.

We regularly evaluate potential acquisitions of other businesses that we believe would enable us to add customers, increase penetration in our current markets and achieve additional network efficiencies. If we enter into a definitive agreement with respect to any acquisition, we may require additional financing that could result in an increase in our leverage. Such financing may not be available on commercially reasonable terms, or at all. Further, we may issue voting securities in an amount that could result in a change of control of our company. We do not know whether we will enter into any such an acquisition or transaction or, if we do, on what terms.

The local and long distance industries are subject to significant government regulation, which may change in a manner that is harmful to our business.

We are required to comply with telecommunications regulations implemented by federal, state and local governments. We are required to obtain authorizations from the FCC and state public utility commissions to offer some of our communications services, to file tariffs for many of our services and to comply with local license, franchise or permit requirements relating to installation and operation of our network. Many of these regulations continue to change. Any of the following events related to the manner in which our business is regulated could limit the types of services we provide or the terms on which we provide these services:

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Our failure to maintain adequate billing, customer service and information systems will limit our ability to increase our services.

Our inability to identify adequately all of our information and processing needs, to process the information adequately or accurately, to upgrade our systems as necessary, or to integrate our systems with the systems of businesses we acquire could have a material adverse effect on our operating results. We depend on sophisticated information and processing systems to grow, monitor costs, bill customers, provision customer orders and achieve operating efficiencies. As we increase our provision of dial tone and other services, our need for enhanced billing and information systems also will increase.

In addition, we have experienced problems with respect to the operations support systems used by us and other new carriers to order and receive network elements and wholesale services from the incumbent carriers. These systems are necessary for new carriers like us to provide local service to customers on a timely and competitive basis. FCC rules, together with rules adopted by state public utility commissions, may not be implemented in a manner that will permit us effectively to order, receive and provision network elements and other facilities necessary for us to provide many of our services.

We are subject to risks associated with rapid changes in technology.

Our business could suffer from unexpected developments in technology, or from our failure to adapt to these changes. The communications industry is subject to rapid and significant changes in technology, and we may be required to select one emerging technology over another. We will be unable to predict with any certainty, at the time we are required to make our investments, whether the technology we have chosen will prove to be the most economic, efficient or capable of attracting customer usage. If we choose the wrong technology, we could lose our existing customers and be unable to attract new customers, which would harm our business and operations.

Our success depends on our ability to attract and retain key personnel.

The loss of the services of our key personnel, or our inability to attract, recruit and retain sufficient or additional qualified personnel, could hurt our business. Our business is currently managed by a small number of key management and operating personnel, including our executive officers. Most of our senior management team has extensive experience in the telecommunications industry. We do not maintain “key man” insurance on these employees. Because of current market conditions for our industry, our stock incentive program may not provide an adequate incentive to current or potential key employees to become or remain employed by us.

Our network or other ground facilities could be damaged by natural catastrophes or terrorism.

A major earthquake, tornado, fire, terrorist attack on the United States, or other catastrophic event could damage our network, network operations center, central offices or corporate headquarters. Such an event could interrupt our service and harm our business in the affected areas. We do not have replacement or redundant facilities that can be used to provide alternative means of service to all customers or under every circumstance in the event of a catastrophic event. Any damage to our network could result in degradation of our service for some customers and could result in complete loss of service in affected areas.

Affiliates of Welsh, Carson, Anderson & Stowe own securities representing a majority of our voting power, which gives them the ability to exercise significant or controlling influence over major corporate actions by us.

Affiliates of Welsh, Carson, Anderson & Stowe, a private equity firm, have reported in SEC filings that as a group they beneficially own common stock and Series B preferred stock representing a majority of the voting power of our outstanding capital stock. Based on their existing stock ownership and their rights under a governance agreement with us, the members of this group and the other Welsh Carson securityholders currently have the right:

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After January 6, 2005, the Welsh Carson securityholders will cease to be bound by contractual provisions limiting to four directors the number of directors they may nominate for election, appoint or elect to our board of directors and, based on their stock ownership, may have the ability after that date to elect a majority of our board of directors.

The Welsh Carson securityholders may have interests with respect to our company that differ from those of our other stockholders as a result of significant investments by the Welsh Carson securityholders in other communications companies.

We own our corporate headquarters in West Point, Georgia and our data center in Suwanee, Georgia.

We own switch sites in Anniston, Birmingham and Montgomery, Alabama and in Nashville, Tennessee. We also lease space for a network operations center in Arab, Alabama and for our voice switch sites in the following locations:

The leases for these switch sites expire on various dates from 2004 to 2015. As part of our integration activities related to the BTI acquisition, we have subleased or are seeking to sublease approximately three of these leased switch sites.

We have constructed and own a multi-service facility in Anniston, Alabama, which functions as a centralized switching control center for our network and as an operator services center. We also lease a second operator services center in Alexander City, Alabama. In addition, we lease space in Atlanta, Georgia to operate a network operations center related to a portion of our integrated communications business.

We operate branch offices through which we conduct our sales and marketing efforts in the following locations:

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The leases for these branch offices expire on various dates from 2003 through 2007. As part of our integration activities related to the BTI acquisition, we have either subleased or eliminated our remaining lease obligations through a discounted termination payment program in three redundant sales offices and expect that we will make additional discounted termination payments to terminate our leases of several additional locations over the next several months. In addition, 12 additional redundant sales offices will be subleased or the existing leases for those sales offices will expire without being renewed during 2004.

We also lease office space for various administrative functions, including accounting, legal, sales and human resources, in Huntsville, Alabama and in Raleigh, North Carolina, and own an administrative office in Arab, Alabama.

As part of our fiber optic network, we own or lease rights-of-way, land, office space and towers throughout the southern United States.

Item 3.    Legal Proceedings.

General. We are a party to legal proceedings in the ordinary course of our business, including disputes with contractors or vendors, which we believe are not material to our business.

Regulatory Proceedings. We are a party to numerous regulatory proceedings affecting the segments of the communications industry in which we operate, including regulatory proceedings before various state public utility commissions and the FCC, particularly in connection with actions by the regional Bell operating companies. We anticipate these companies will continue to pursue arbitration, litigation, regulations and legislation in states within our primary eight-state market to reduce regulatory oversight and state regulation over their rates and operations. These companies are also actively pursuing major changes in the Telecommunications Act through litigation and legislation which we believe would adversely affect competitive communications service providers, including ITC^DeltaCom. If adopted, these initiatives could make it more difficult for us to compete with these companies and other incumbent carriers. We may not succeed in our challenges to these or other similar actions that would prevent or deter us from successfully competing with the incumbent carriers.

Proceedings Affecting Rights-of-Way. To maintain our fiber optic network, we have obtained easements, rights-of-way, franchises and licenses from various third parties, including actual and potential competitors, local governments, private landowners and others. We may not be able to continue to use or have access to all of our existing easements, rights-of-way, franchises and licenses or to renew or replace them after they expire. Third parties have initiated legal proceedings in a number of states challenging some of our significant licenses to use the rights-of-way of others, including our licenses to use the rights-of-way of Mississippi Power Company, Gulf Power Company, Georgia Power Company, Kansas City Southern Railroad and Illinois Central Railroad. The pending proceedings affect approximately 1,750 route miles of our network as of December 31, 2003. If some of these or similar future challenges are successful, or if we otherwise are unsuccessful in maintaining or renewing our rights to use our network easements, rights-of-way, franchises and licenses, we may be compelled to abandon significant portions of our network, which would require us to incur additional expenditures, and we could also be required to pay substantial monetary damages. As indicated below or in note 11 to our audited consolidated financial statements included elsewhere in this report, the results of these challenges are uncertain and, individually or in the aggregate, could have a material adverse effect on our results of operations or financial position. These challenges include, but are not limited to, the following:

Mississippi Power Company Rights-of-Way. A portion of our network runs through fiber optic cables owned by the Mississippi Power Company over its rights-of-way located in Jasper County, Mississippi. A proceeding involving Mississippi Power Company and several landowners who have granted Mississippi Power Company rights-of-way in Jasper County resulted in a January 1999 order of the Mississippi Supreme Court holding that Mississippi Power Company could not permit third parties to use its rights-of-way at issue for any purpose other than in connection with providing electricity to customers of Mississippi Power Company. We became a party to the proceeding after the January 1999 order. The Circuit Court of the First Judicial District of Jasper County,

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Mississippi has directed us not to use that portion of our fiber optic network located on Mississippi Power Company’s rights-of-way in Jasper County, except in an emergency, pending the outcome of the trial. We have rerouted all of the circuits on the affected portion of our network so that we may continue to provide services to our customers along the affected route. If the courts ultimately agree with the landowners that the existing easements do not permit our use, we believe our potential liability for damages may be limited to the value of a permanent easement for that use. We cannot assure you in this respect, however, since the landowners are seeking damages equal to the profits or gross revenues received by us from our use of Mississippi Power Company’s rights-of-way in Jasper County and punitive damages for our use of the route.

We initiated civil suits in August 2001 and May 2002 in the United States District Court for the Southern District of Mississippi in which we seek a declaratory judgment confirming our continued use of cables in Mississippi Power Company’s rights-of-way on 37 parcels of land and 63 parcels of land, respectively, or, alternatively, condemnation of the right to use the cables upon payment of just compensation to the landowners. Some of the defendants in the August 2001 proceeding have filed counterclaims against Mississippi Power Company, and we are seeking a constructive trust upon the revenues earned on those rights-of-way, together with compensatory and punitive damages. Although we have resolved the issue of our use of the rights-of-way with some of the defendants, we cannot provide assurance that we will be successful in either of these proceedings. The August 2001 proceeding was consolidated with another pending civil suit in the United States District Court for the Southern District of Mississippi, in which we were made a defendant, which was initiated by landowners claiming to represent a class of landowners and seeking compensatory and punitive damages against Mississippi Power Company arising from Mississippi Power Company’s grant of permission to third parties to use its rights-of-way for telecommunications purposes. Recently, both civil suits were dismissed by the district court. The order of dismissal in the civil action involving the 37 parcels of land has been appealed to the United States Court of Appeals for the Fifth Circuit and oral arguments were held during March 2004. We have sought reconsideration of the order of dismissal in the civil action involving the 63 parcels of land.

Since 2002, over 220 lawsuits have been filed by a single counsel in the Circuit Court for Harrison County, Mississippi, against Mississippi Power Company, ITC^DeltaCom and WorldCom, Inc. d/b/a MCI Group. Each plaintiff claims to be the owner of property over which Mississippi Power Company has an easement and that WorldCom and/or we have benefited by using the easement to provide telecommunications services. As a result of these allegations, each of the plaintiffs claims trespass, unjust enrichment, fraud and deceit, and civil conspiracy against each of the defendants. Each of the plaintiffs also seeks $5 million in compensatory damages, $50 million in punitive damages, disgorgement of the gross revenues derived from the use by WorldCom and us of the cable over the easements, a percentage of gross profits obtained from the use of the cable, and the plaintiffs’ costs to prosecute the action. Mississippi Power Company, WorldCom and we have denied all of the plaintiffs’ allegations. These actions are substantially similar to the other actions that we are defending in state and federal courts in Mississippi. Of the over 220 lawsuits, we believe that we use for the provision of telecommunications services only a small number of parcels of land across which the optical fiber of Mississippi Power Company extends. On August 5, 2002, Mississippi Power Company removed all actions involving WorldCom’s use of Mississippi Power Company’s rights-of-way to the United States District Court for the Southern District of Mississippi and requested the actions to be transferred to the United States Bankruptcy Court for the Southern District of New York, where WorldCom’s bankruptcy proceeding is pending. The lawsuits involving only those lines being used by us remain pending in state court and are proceeding toward trial.

In August 2002, we were served with a complaint filed in the Circuit Court of Hinds County, Mississippi, in which four owners of property located in Hancock County, Mississippi allege Mississippi Power Company and we have violated the plaintiffs’ rights with regard to the use of Mississippi Power Company’s easement across the plaintiffs’ properties. The plaintiffs allege trespass, unjust enrichment, negligence, breach of contract and tortious breach of contract, fraudulent concealment, fraudulent misrepresentation and conspiracy, and seek an accounting and an unspecified amount of damages. Although WorldCom is not a party to this action, Mississippi Power Company has removed this action to the United States District Court for the Southern District of Mississippi and requested the action to be transferred to the United States Bankruptcy Court for the Southern District of New York, where WorldCom’s bankruptcy proceeding is pending.

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In September 2002, Mississippi Power Company and we were served with a summons and complaint filed in a civil action in the Circuit Court of Jasper County, Mississippi. The landowners of 75 parcels of property located in various Mississippi counties allege Mississippi Power Company and we have violated the landowners’ rights with regard to the use of Mississippi Power Company’s easements across the landowners’ property similar to other rights-of-way suits in Mississippi. The plaintiffs allege trespass, unjust enrichment, fraud and deceit, and civil conspiracy and seek from each plaintiff $5 million in compensatory damages, $50 million in punitive damages, disgorgement of gross revenues, a percentage of gross revenues derived from use of the rights-of-way and court costs. Although WorldCom is not a party to this action, Mississippi Power Company has removed this action to the United States District Court for the Southern District of Mississippi and requested the action to be transferred to the United States Bankruptcy Court for the Southern District of New York, where WorldCom’s bankruptcy proceeding is pending.

In October 2001, a civil action was filed in the Chancery Court of Lamar County, Mississippi, against Mississippi Power Company and us by two plaintiffs seeking to quiet and confirm title to real property, for ejectment and for an accounting. The plaintiffs are joint owners of a single parcel of property located in Lamar County, Mississippi. Both plaintiffs also were defendants in our action involving 37 parcels of land described above. The plaintiffs have not specified the particular dollar amount of damages they are seeking.

In December 2002, two civil actions were filed against Mississippi Power Company and us in the Circuit Court of Smith County, Mississippi, by a single attorney. The plaintiffs allege trespass on the basis that the documents granting Mississippi Power Company the rights to cross the plaintiffs’ property do not grant the right to Mississippi Power Company to allow third parties to use the rights-of-way for the transmission of telecommunications services of such third parties and that such use by third parties is prohibited under state law. The plaintiffs allege that we are using such rights-of-way across the plaintiffs’ property, but we do not have sufficient information from the complaint or otherwise to determine where the plaintiffs’ properties are located. We do not utilize rights-of-way in Smith County, Mississippi, where these civil actions were filed. However, one of the actions involves multiple plaintiffs and has been removed by Mississippi Power Company to the United States District Court for the Southern District of Mississippi, because some parcels of land are crossed by a transmission line used by WorldCom.

Mississippi Power Company and Southern Company Rights-of-Way. In April 2002, a civil action was filed by an individual property owner in the Chancery Court of Harrison County, Mississippi, against Mississippi Power Company, Southern Company and us. The plaintiff seeks permanently to enjoin Mississippi Power Company and Southern Company from continuing to permit their rights-of-way across the plaintiff’s property to be used by third parties in any manner that is not related to the transmission of electric power. The plaintiff also seeks proof of cancellation of all leases and contracts between third parties and Mississippi Power Company or Southern Company regarding the use of the fiber optic cable on the rights-of-way across the plaintiff’s property, proof that the use of the rights-of-way is for purposes associated with providing electricity, an accounting of revenues of third parties from the use of the rights-of-way, punitive damages of $1 million, and costs and expenses.

In July 2002, nine lawsuits on behalf of 101 property owners were filed against Mississippi Power Company, Southern Company and us in the Chancery Court of Jones County, Mississippi. All nine complaints are identical in seeking relief for trespass, nuisance, conversion, unjust enrichment, fraud, fraudulent misrepresentation and fraudulent concealment. The plaintiffs seek rescission and equitable reformation arising from the alleged unauthorized use of the subject rights of way in violation of the terms of the easements held by Mississippi Power Company. The plaintiffs also seek an accounting, unspecified monetary damages and equitable relief. Although WorldCom is not a party to these actions, Mississippi Power Company has removed these actions involving WorldCom’s use of Mississippi Power Company’s rights-of-way to the United States District Court for the Southern District of Mississippi and requested the actions to be transferred to the United States Bankruptcy Court for the Southern District of New York, where WorldCom’s bankruptcy proceeding is pending.

On October 15, 2003, a complaint was filed against Mississippi Power Company, The Southern Company, Southern Telecom, Inc., Southern Company Services, Inc., Southern Management Development, Inc. and us in

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the Circuit Court of Harrison County, Mississippi, by a landowner that has alleged that Mississippi Power Company, in collusion with The Southern Company, Southern Telecom, Southern Company Services, Southern Management Development and us, caused or participated in the covert installation of fiber optic lines on, over or under the property owned by the plaintiff for the purpose of selling, leasing or sharing, for profit, conduit or dark fibers or wavelength service. The plaintiff contends that such actions constitute improper and illegal use of the plaintiff’s land by the defendants. The plaintiff also alleges trespass, unjust enrichment, fraud and deceit, and civil conspiracy. The plaintiff seeks damages in the amount of $5 million, punitive damages, disgorgement of gross revenues derived from the alleged wrongful conduct, a percentage of the gross profits obtained from the use of a fiber telecommunications network and costs.

Gulf Power Company Rights-of-Way. We use the rights-of-way of Gulf Power Company in Florida for a portion of our network. In the fourth quarter of 2000, Gulf Power was sued in the Circuit Court of Gadsden County, Florida, by two landowners that claim to represent a class of all landowners over whose property Gulf Power has facilities that are used by third parties. The landowners have alleged that Gulf Power does not have the authority to permit us or other carriers to transmit telecommunications services over the rights-of-way. We were made a party to this litigation in August 2001. In March 2002, the court dismissed this matter without prejudice on the basis that, among other things, there was no additional burden on the property as a result of third-party use of the rights-of-way for telecommunications purposes and that the easements were broad enough in scope to permit such third-party use. However, the court also has permitted the plaintiffs to amend their complaint to allege additional facts to support their contention that there is an additional burden on the property because of the maintenance requirements of the fiber routes and the placement of buildings and other physical telecommunications equipment on the rights-of-way. In November 2003, the trial court granted the plaintiffs’ motion for partial summary judgment, holding that Gulf Power’s authority to operate and condemn the property was restricted to uses “relating to electric power,” Gulf Power never had authority to operate or condemn property for general telecommunications use, Gulf Power’s use of its condemnation powers to support telecommunications use would have violated applicable Florida statutes, since Gulf Power could not lawfully engage in general telecommunications business, the plaintiffs could not have reasonably intended to convey rights to Gulf Power to use the easements in such business, and the defendants cannot contend that general telecommunications fiber optics lines for international use are “necessary or convenient in connection with” Gulf Power’s transmission of electricity.

Georgia Power Company Rights-of-Way. We use rights-of-way of Georgia Power Company in Georgia for a portion of our network. In July 2001, a suit was filed in the Superior Court of Decatur County, Georgia, by a group seeking compensatory and punitive damages and claiming to represent a class of landowners. The plaintiffs have alleged that Georgia Power and other entities do not have the right to grant third parties the use of the rights-of-way for the transmission of telecommunications services of such third parties. We were made a party to the suit in January 2002.

In November 2002, a civil action was filed in the Superior Court of Walton County, Georgia, against Georgia Power Company and us. The plaintiff, claiming to be representative of a class of all landowners over which Georgia Power Company has facilities, alleges that the documents granting Georgia Power Company the rights to cross the plaintiff’s property do not grant the right to Georgia Power Company to allow third parties to use the rights-of-way for the transmission of telecommunications services of such third parties. The civil action claims trespass and unjust enrichment. There are no specified dollar amounts demanded in the complaint, but the relief sought includes compensatory damages, punitive damages, attorney fees and injunctive relief requiring the removal of the fiber optic facilities from the plaintiff’s land. This matter has been stayed by agreement of the parties pending the outcome of the Decatur County action, as that case may encompass the same claims.

Kansas City Southern Railroad and Illinois Central Railroad Rights-of-Way. On March 11, 2003, a complaint was filed against us in the United States District Court for the Southern District of Mississippi. The plaintiffs, claiming to be representatives of a class of plaintiffs, claim to be owners of the land across which certain rights-of-way of Kansas City Southern Railroad and Illinois Central Railroad are located. Under agreements with Kansas City Southern Railroad and Illinois Central Railroad, we use certain fiber optic cable

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within the rights-of-way of Kansas City Southern Railroad and Illinois Central Railroad across Mississippi. The plaintiffs claim that the documents granting the rights-of-way Kansas City Southern Railroad and Illinois Central Railroad do not permit the installation and operation of telecommunication facilities of third parties within the rights-of-way. The plaintiffs allege trespass, unjust enrichment and conversion and seek unspecified amounts of compensatory and punitive damages, restitution, disgorgement, attorney fees, an accounting of amounts paid to Kansas City Southern Railroad and Illinois Central Railroad and declaratory relief regarding the parties’ rights. We have denied the allegations, but have counter-claimed for the certification of a class of counter-defendants. We seek a declaration that we have the right to use the rights-of-way or, alternatively, to condemn such rights.

On July 10, 2003, a complaint was filed against us in the Fifth Judicial District Court for the Parish of Richland, State of Louisiana. The plaintiffs, claiming to be representatives of a class of plaintiffs, allege that they are owners of the land which underlies or abuts the Kansas City Southern Railroad corridor in Louisiana. Under agreements with Kansas City Southern Railroad and Illinois Central Railroad, we use certain fiber optic cable within the rights-of-way of Kansas City Southern Railroad and Illinois Central Railroad in Louisiana. The plaintiffs claim that the documents granting the rights-of-way to Kansas City Southern Railroad and Illinois Central Railroad do not permit the installation and operation of telecommunication facilities of third parties within the rights-of-way. The plaintiffs allege trespass, unjust enrichment, conversion, civil conspiracy, negligence, infringement and misappropriation, and seek the imposition of a constructive trust, an accounting of all compensation paid or received for use of the real property involved in the litigation, restitution, disgorgement, actual, compensatory and consequential damages, and attorney’s fees.

ITC^DeltaCom’s Suit for Rights-of-Way Indemnification. In August 2001, we filed suit in the Superior Court of Troup County, Georgia, against Southern Telecom, Inc., Alabama Power Company, Georgia Power Company, Mississippi Power Company, Gulf Power Company and related entities from which we have obtained use of rights-of-way for their fiber optic telecommunications networks. We seek a declaratory judgment that the defendants are legally required to use their best efforts to defend against any claims that we do not have the right to use the rights-of-way granted to these entities and to defend, indemnify and hold ITC^DeltaCom harmless against all such claims. We filed for summary judgment in December 2001 and the defendants subsequently also filed a motion for summary judgment. The court has not ruled on these motions, but indicated from the bench that the claim may not yet be ripe for adjudication. The defendants also have filed a counterclaim requesting, among other relief, that we reimburse them for the cost of perfecting the applicable rights-of-way.

Item 4.    Submission of Matters to a Vote of Security Holders.

(a) We held our 2003 annual meeting of stockholders on December 18, 2003.

(c) All holders of record of our common stock, Series A preferred stock and Series B preferred stock at the close of business on November 3, 2003 were eligible to vote at the annual meeting. Each holder of common stock was entitled to one vote at the annual meeting for each share held by such stockholder as of the record date for the meeting. As of November 3, 2003, there were 51,827,620 shares of common stock outstanding, which represented a total of 51,827,620 votes entitled to vote at the annual meeting.

Under our restated certificate of incorporation, holders of the Series A preferred stock and the Series B preferred stock are currently entitled to vote on an “as converted” basis together with the holders of the common stock as a single class on all matters presented for a vote to the holders of the common stock, other than the election of directors. Accordingly, the holders of the Series A preferred stock and the Series B preferred stock were entitled to vote on such an as-converted basis at the annual meeting on each proposal other than the election of directors. Holders of the Series A preferred stock and the Series B preferred stock were entitled to cast a number of votes equal to the number of shares of common stock into which each such series of preferred stock was convertible as of the record date for the annual meeting. In accordance with our restated certificate of incorporation, each holder of any of the 322,828 shares of Series A preferred stock outstanding as of the record date for the annual meeting was entitled to cast 17.6304 votes at the annual meeting for each such share held by the stockholder as of the record date, and each holder of any of the 350,000 shares of Series B preferred stock

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outstanding as of the record date for the annual meeting was entitled to cast 33.5452 votes at the annual meeting for each such share held by the stockholder as of the record date. As of November 3, 2003, holders of the Series A preferred stock and the Series B preferred were entitled to cast a total of approximately 5,691,587 votes and 11,740,820 votes, respectively, at the annual meeting.

The following sets forth information regarding each matter voted upon at the 2003 annual meeting of stockholders.

The stockholders approved a proposal to elect each of the seven nominees to the board of directors. The tabulation of votes on this proposal is as follows:

The stockholders approved a proposal to approve an amended form of ITC^DeltaCom’s restated certificate of incorporation. The amendments to the restated certificate of incorporation approved by the stockholders:

The tabulation of votes on this proposal is as follows:

The stockholders approved a proposal to approve the ITC^DeltaCom, Inc. Amended and Restated Stock Incentive Plan. The tabulation of votes on this proposal is as follows:

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PART II

Market for the Common Stock. We consummated our plan of reorganization on October 29, 2002 under Chapter 11 of the United States bankruptcy code. Under our plan of reorganization, our old common stock was canceled and former holders of our old common stock and other securities received in exchange for cancellation of such common stock and other securities a total of approximately 44,750,000 shares of a new issue of our common stock.

Our old common stock was listed on the Nasdaq National Market through August 27, 2002 and quoted on the OTC Bulletin Board thereafter through October 29, 2002, which was the effective date of our plan of reorganization. Our new common stock was quoted on the OTC Bulletin Board from October 30, 2002 through December 23, 2003, when the common stock was listed and began trading on the Nasdaq SmallCap Market.

The following table sets forth the high and low sale prices of our old common stock during 2002 through our reorganization plan effective date of October 29, 2002 and the high and low sale prices of our current common stock during the remainder of 2002 and during 2003.

Effective on March 5, 2004, our common stock was listed and began trading on the Nasdaq National Market under the symbol “ITCD.”

On March 1, 2004, there were approximately 540 record holders of our common stock.

Dividend Policy. We did not declare or pay any cash dividends on our common stock that was outstanding before we consummated our plan of reorganization on October 29, 2002 and do not anticipate that we will pay cash dividends on our common stock in the foreseeable future. Future declaration and payment of dividends, if any, on our common stock, Series A preferred stock or Series B preferred stock will be determined in light of factors deemed relevant by our board of directors, including our earnings, operations, capital requirements and financial condition and restrictions in our financing agreements. Our credit facilities and our principal capital lease facilities limit our ability to pay cash dividends on our capital stock by prohibiting our operating subsidiaries from distributing funds to ITC^DeltaCom, Inc. for this purpose.

Under our certificate of incorporation, we have the option, instead of paying cash dividends on our preferred stock, to pay dividends on each series in additional shares of Series A preferred stock or Series B preferred stock, as applicable. As of the date of this report, since our initial issuance of the Series A preferred stock on October 29, 2002 and our initial issuance of the Series B preferred stock on October 6, 2003, we have paid all dividends on our preferred stock in the form of payment-in-kind dividends of the same series of preferred stock.

Recent Sales of Unregistered Securities. On October 6, 2003, we consummated our acquisition of BTI and the other transactions contemplated by our merger agreement with BTI and Welsh, Carson,

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Anderson & Stowe VIII, L.P., WCAS Capital Partners III, L.P., WCAS Information Partners, L.P. and other named parties, which we sometimes refer to collectively as the “Welsh Carson securityholders.”

As of the merger effective time on October 6, 2003, pursuant to the BTI merger agreement, the common stock and preferred stock of BTI was convertible into the right to receive a total of 50,000 shares of our common stock.

On October 6, 2003, pursuant to the merger agreement, we issued to the Welsh Carson securityholders 6,950,000 shares of our common stock and 3,000,000 warrants to purchase shares of our common stock in exchange for the surrender for cancellation of promissory notes representing $95 million principal amount of BTI indebtedness owing to the Welsh Carson securityholders. As of October 6, 2003, these warrants, which we refer to as our “Series B warrants,” were exercisable for a total of 3,000,000 shares of our common stock at a purchase price of $8.50 per share of common stock.

On October 6, 2003, pursuant to the merger agreement and immediately prior to the effective time of the merger, some of the Welsh Carson securityholders purchased a total of 350,000 shares of a new issue of our Series B preferred stock for a total purchase price of $35 million. In accordance with the merger agreement, approximately $27.5 million of the purchase price was paid in cash and approximately $7.5 million was paid by the surrender for cancellation of approximately $7.5 million principal amount of BTI promissory notes owing to the Welsh Carson securityholders. As of October 6, 2003, these 350,000 shares of Series B preferred stock were convertible into a total of approximately 11,666,667 shares of our common stock at a conversion price of $3.00 per share of common stock.

In connection with our non-public offering of common stock, Series B preferred stock and Series B warrants in connection with the foregoing transactions, we relied on the exemption from registration under the Securities Act of 1933 afforded by Section 4(2) of the Securities Act and Regulation D thereunder.

Conversion Rights of Series B Preferred Stock. Each share of Series B preferred stock is convertible at the holder’s option, in whole or in part, at any time after such share is issued, into a number of shares of our common stock which is obtained by dividing the $100 liquidation preference per share plus the amount of any accrued and unpaid dividends by the conversion price applicable to such share. The initial conversion price of the Series B preferred stock is $3.00 per share of common stock. Subject to exceptions, the conversion price will be subject to reduction from time to time for dilutive issuances of ITC^DeltaCom common stock that occur through October 6, 2005. A reduction in the conversion price will result in an increase in the number of shares of common stock issuable upon conversion of the Series B preferred stock.

The Series B preferred stock is convertible into common stock at any time shares of such series of preferred stock are outstanding. We are not required to redeem any Series B preferred stock until October 29, 2012 and, except in limited circumstances, do not have the right to redeem any Series B preferred stock until October 6, 2006.

Exercise Right of Series B Warrants. Each series B warrant entitles the holder thereof to purchase for cash one share of our common stock at an exercise price of $8.50 per share of common stock. The exercise price and the number of shares of common stock issuable upon exercise of the Series B warrants are subject to substantially the same antidilution adjustments as the conversion price of the Series B preferred stock. A reduction in the exercise price of the Series B warrants will result in an increase in the number of shares of common stock issuable upon exercise. Each Series B warrant is exercisable at any time during the seven-year period commencing on the original issue date of October 6, 2003 and ending on October 6, 2010. Each Series B warrant not exercised before such expiration date will become void and all rights of the holder in respect of such warrant will cease as of such date.

Holders of Series B warrants will be able to exercise their warrants only if (1) a registration statement relating to the exercise of the warrants and issuance of the shares underlying the warrants is then effective under the Securities Act and is available, or (2) the exercise of the warrants and issuance of shares upon such exercise

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is exempt from the registration requirements of the Securities Act and such shares are qualified for sale or exempt from registration or qualification under the applicable securities laws of the states or other jurisdictions in which the various holders of the warrants, or other persons to whom it is proposed that such shares be issued upon the exercise of such warrants, reside.

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Item 6.    Selected Financial Data.

The following table sets forth ITC^DeltaCom’s selected consolidated financial data. The selected historical income statement data for the years ended December 31, 1999, 2000 and 2001 and the selected historical balance sheet data as of the end of such periods have been derived from the consolidated financial statements that have been audited by Arthur Andersen LLP, independent public accountants. The selected historical income statement data for the periods from January 1, 2002 to October 29, 2002 and October 30, 2002 to December 31, 2002 and the year ended December 31, 2003, and the selected historical balance sheet data as of October 29, 2002, December 31, 2002 and December 31, 2003, have been derived from the consolidated financial statements that have been audited by BDO Seidman, LLP, independent public accountants. The 2002 historical income statement and balance sheet data have been separated into these two periods as a result of ITC^DeltaCom’s adoption, under AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” of fresh start reporting on October 30, 2002, following its emergence from Chapter 11 bankruptcy reorganization proceedings on October 29, 2002. The financial results as of and for the periods ended October 29, 2002 and December 31, 2002 are not comparable in certain respects to the financial results for prior periods.

You should read the selected financial data below together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements, including the notes thereto, included elsewhere in this report.

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In 2001, ITC^DeltaCom recorded special charges consisting of a write-down of impaired property and equipment of $23.0 million and a write-down of goodwill and other intangible assets of $51.4 million, resulting in negative EBITDA for 2001. In 2002, ITC^DeltaCom recorded a net gain of $60.8 million related to gain from the cancellation of indebtedness and reorganization costs associated with the voluntary petition for reorganization under Chapter 11. See note 14 to ITC^DeltaCom’s audited consolidated financial statements included elsewhere in this report. In 2003, ITC^DeltaCom recorded merger-related expenses of $2.1 million in connection with the acquisition of BTI.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

General. We are one of the largest providers of integrated communications services in the southeastern United States. We deliver a comprehensive suite of high-quality voice and data communications services, including local exchange, long distance, enhanced data, Internet, colocation and managed services, and sell customer premise equipment to our end-user customers. We offer these services primarily over our owned network facilities and also use leased network facilities to extend our market coverage. In addition, we own, operate and manage an extensive fiber optic network with significant transmission capacity that we use for our own voice and data traffic and selectively sell to other communications providers on a wholesale basis. We believe that we are the largest facilities-based competitive provider of integrated communications services in our primary eight-state market, which encompasses Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.

On October 6, 2003, we completed our acquisition of BTI Telecom Corp., a facilities-based integrated communications provider serving markets in the southeastern United States. Before the acquisition, BTI was generating annualized operating revenues for 2003 in excess of $220 million, based on operating revenues of $56 million in the third quarter of 2003. Our acquisition of BTI has provided us with the opportunity to further our strategic initiative to increase monthly recurring revenues from end-user customers within our existing markets and has created one of the largest providers of integrated communications services in the southeastern United States. ITC^DeltaCom and BTI had similar retail growth strategies and targeted customers, complementary regional fiber optic networks and overlapping operations in 14 markets. By combining our business with that of a former competitor, the acquisition has enabled us to achieve a size and scale that we believe provides us with a competitive advantage in our primary markets and significant opportunities for cost savings and improved cash flow. As a result of the acquisition, we have achieved, and expect to continue to generate, significant operational efficiencies by increasing utilization of our switches and network assets, eliminating duplicative network costs and transitioning each company’s voice and data traffic from previously leased long-haul facilities to our combined fiber optic network. The inclusion of BTI’s assets and operations in our business since October 6, 2003 has contributed to a significant increase in the size of our business between September 30, 2003 and December 31, 2003. Between those dates, we have:

As of December 31, 2003, we marketed and sold our integrated communications services through 40 branch offices. As of the same date, our 10,900 route-mile fiber optic network extended from New York to Florida and principally covered portions of our primary eight-state market.

Based on the results of the combined company in the fourth quarter of 2003, our annualized operating revenues were approximately $600 million. Because we anticipate that we will realize at least $30 million of net cost savings from the acquisition in 2004, we expect that our 2004 EBITDA will significantly exceed the $55 million we achieved in 2003. Of our operating revenues in the fourth quarter of 2003, approximately 80% were generated by our integrated communications services, approximately 3% were generated by sales of customer premise equipment and related services, and approximately 17% were generated by our wholesale services.

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We acquired BTI in an all-stock merger transaction valued at approximately $132 million, including approximately $111.3 million of assumed BTI indebtedness. In connection with the acquisition, Welsh, Carson, Anderson & Stowe, a private equity firm, invested an additional $35 million in us to enhance our liquidity primarily to support costs associated with our merger integration activities. We also amended and restated our senior credit facility and entered into a new credit facility with the BTI lenders. Under these facilities, we assumed total BTI indebtedness of $111.3 million, including secured indebtedness in the principal amount of approximately $85.7 million outstanding under BTI’s senior credit facility.

Integration of BTI. We are integrating the operations of BTI into our existing operations to achieve significant economies of scale from the consolidation of sales and marketing, customer service, provisioning and installation, and information technology, purchasing, financial and administrative functions. We have identified, for the three categories of costs shown in the table below, net cost savings of $30 million we expect that the acquisition will generate in 2004 and an additional $10 million we expect to realize in 2005 as a result of the full year impact of these prior-year savings. Of the annualized cost savings of $40 million we expect to achieve by the end of 2004 and of the annualized cost savings of up to $60 million we expect to achieve by the end of 2005, the following table shows the amounts we have achieved on an annualized basis as of January 31, 2004.

We expect to realize savings in compensation and benefits costs by reducing the total number of employees of ITC^DeltaCom and BTI as of July 1, 2003 by approximately 360 employees. The employee headcount of the combined company was reduced by a total of approximately 190 positions, or 53% of our total planned employee reductions, as of January 31, 2004. Of these positions, approximately 50 were eliminated before the acquisition closing date, approximately 85 were eliminated between the acquisition closing date and December 31, 2003 and approximately 55 were eliminated in January 2004. These measures have resulted in approximately $9.3 million of annualized compensation and benefits costs savings as of January 31, 2004.

We expect to realize savings in cost of services by increasing utilization of our switches and network assets, eliminating duplicative network costs and transitioning each company’s voice and data traffic from previously leased long-haul facilities to our combined fiber optic network. We have achieved annualized cost of services savings of approximately $3.3 million as of January 31, 2004.

We expect to realize savings in other selling, operations and administration costs by eliminating duplicative facilities, consolidating back office systems and eliminating redundant professional services and other corporate overhead costs. We have realized annualized other selling, operations and administration cost savings of $4.5 million as of January 31, 2004, primarily as a result of the renegotiation of insurance premiums, facilities integration, and efficiencies related to back office operations, billing and collections, and public relations.

As of January 31, 2004, we have completed integration activities to realize monthly recurring cost savings of approximately $1.4 million, or $17.1 million on an annualized basis, which represent 43% of the monthly recurring cost savings of approximately $3.3 million, or $40 million on an annualized basis, we expect to achieve by December 31, 2004. These cost savings represent approximately twice the monthly recurring cost savings we had achieved through December 31, 2003. The foregoing annualized cost savings amounts as of January 31, 2004 are based on the approximate combined monthly costs of ITC^DeltaCom and BTI as of July 2, 2003, which is the date on which we agreed to acquire BTI, and represent the total annual cost savings we expect to realize as a

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result of our cost savings initiatives from that date, even if we do not implement any of the costs savings initiatives we have planned for periods following January 31, 2004.

The foregoing cost savings estimates are based upon assumptions that are uncertain and are subject to significant business, economic and competitive uncertainties which are difficult to predict and often beyond the control of management. These assumptions are based upon management’s judgment concerning a number of factors, including operating efficiencies, the consolidation of functions, and the integration of operations, systems, marketing methods and procedures. We may not be able to accomplish these actions successfully, and these cost savings and efficiencies may not be achieved to the extent we estimate.

Reorganization and Asset Revaluations. We filed a voluntary petition for relief under Chapter 11 of the United States bankruptcy code on June 25, 2002. On October 17, 2002, the United States Bankruptcy Court entered an order confirming our plan of reorganization. We consummated our reorganization under the plan on October 29, 2002. As a result of our reorganization, we canceled $515 million principal amount of indebtedness, plus related accrued and unpaid interest.

We adopted the provisions of AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” upon commencement of the bankruptcy proceedings. On October 29, 2002, we implemented fresh start reporting under the provisions of SOP 90-7. Under SOP 90-7, the reorganization value of ITC^DeltaCom was allocated to our assets and liabilities, our accumulated deficit was eliminated and our new equity was issued in accordance with our plan of reorganization as if we were a new reporting entity. As a consequence of our reorganization and in accordance with SOP 90-7, we have separately presented our financial results for 2002 in the accompanying audited consolidated financial statements of ITC^DeltaCom and in other portions of this report as follows: results for the period from January 1, 2002 to October 29, 2002 are reported under “Predecessor”; and the results for the period from October 30, 2002 to December 31, 2002 are reported under “Successor.” To compare our 2002 financial results, after giving effect to our reorganization, to our 2001 and 2003 historical financial results for purposes of this management’s discussion, we have combined the periods from January 1, 2002 to October 29, 2002 and from October 30, 2002 to December 31, 2002. We have also combined the results for these periods for purposes of comparing our 2002 pro forma results to our 2003 pro forma results for purposes of this management’s discussion.

Before the acquisition, BTI recorded an asset impairment charge in 2003 of $94.4 million to property, plant and equipment and other assets, which consisted principally of BTI’s fiber optic network, switching infrastructure and other intangible assets. This impairment charge was based upon trends in BTI’s cash flow and operating performance and the availability of capital to support future growth. In accordance with SFAS No. 144, BTI expected future cash flows to be less than the carrying value of the assets. Based on this evaluation, BTI determined that long-lived assets with a carrying amount of $224.6 million were no longer recoverable and were in fact impaired, and wrote them down to their estimated fair value of $130.2 million as of June 30, 2003. The effect of the BTI asset revaluation on ITC^DeltaCom 2003 results was approximately $5.0 million in reduced depreciation and amortization expense on an actual basis and approximately $20.0 million in reduced depreciation and amortization expense on a pro forma basis.

Operating Revenues. We currently derive operating revenues from our offering of integrated communications services, wholesale services and equipment sales and related services.

Integrated Communications Services. We deliver integrated voice and data communications services to end users on a retail basis. We refer to these services, which are described in more detail in this report under “Business–Services–Integrated Communications Services,” as our “integrated communications” services. Revenues from these services represented approximately 78% of our total operating revenues for the three months ended December 31, 2003 and were generated from sales to over 50,000 customers, a significant portion of which purchase multiple services. We derive most of our operating revenues from recurring monthly charges that are generated by our integrated communications services.

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Since 2001, we have derived an increasing percentage of our operating revenues from local services, primarily local services provided under our interconnection agreements with other local telephone companies, and from data and Internet services. We expect that gross margin as a percentage of operating revenues associated with our facilities-based local, data and Internet retail services will be slightly higher than the gross margin as a percentage of operating revenues associated with our long distance retail services.

As we continue to use portions of the networks of other local telephone companies to provide services over our network and facilities instead of reselling services using the entire network of those companies, we expect our gross margin on local services to improve. We believe that this improvement will result from reduced access charges and from efficiencies realized through increased reliance on our network. Competitive market pressures to reduce prices for our integrated communications services, however, could offset these expected margin improvements.

During 2001, we began selling our integrated communications services to smaller business customers through a dedicated sales force. While sales to these customers generally generate lower gross margins compared to our sales of integrated communications services to larger businesses, we believe that these customers provide an important additional source of revenue for our business.

During the first quarter of 2003, we initiated our “GrapeVine” offering of local services to residential customers and had installed 21,000 access lines related to this service by December 31, 2003. GrapeVine customers receive our local telephone services bundled with one of our long distance service plans. We expect that the incremental revenues generated by GrapeVine will augment our existing customer base and revenue streams, although sales of these services may adversely affect our gross margins, since we provide these services primarily using the networks of other telephone companies. We currently do not expect that our offering of residential services will capture a significant share of the residential market for local telephone service.

Rates for long distance services continued to decline in 2003, although the rate of decline has begun to decrease. Although this decline had a negative impact on our operating revenues and gross margins, our operating revenues from long distance services increased during 2003 as a result of an increase in the minutes used by our customers. We believe that rates for long distance services have begun to stabilize and that the minutes used by our customers will continue to increase, which would have a positive impact on our operating revenues and gross margins.

We expect that a significant portion of our revenue growth will continue to come from our integrated communications services business. Although we have experienced success in obtaining increased market share in the markets where we provide our integrated communications services, we generally do not expect that our integrated communications services will command a significant share of the market for communications services in the southeastern United States.

The customer contracts for our integrated communications services provide for payment in arrears based on minutes of use for switched services and payment in advance for local exchange, data and Internet services, or payment for all services in advance based on a fixed fee agreement. The contracts generally provide that the customer may terminate the affected services without penalty for specified outages in service and for other defined causes. The contracts also typically provide that the customer must use at least a minimum dollar amount of switched long distance services per month for the term of the contract. We also have begun to offer our switched long distance services bundled together with some of our other integrated communications services under agreements providing for a recurring fixed monthly fee and a specified maximum number of long distance minutes of use. During the past several years, market prices for many communications services have been declining. To maintain and develop our customer base in response to these and other competitive pressures, we have modified some of our integrated communications services contracts to extend lower rates over longer terms, generally in excess of one year, to selected customers. We may decide in the future to modify further other integrated communications services contracts in a similar manner to emphasize lower pricing and longer commitment periods.

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Wholesale Services. We deliver wholesale communications services to other communications businesses. We refer to these services as our “wholesale services.” Our wholesale services include regional communications transmission capacity over our fiber optic network, which we refer to as our “broadband transport” services, local interconnection services to Internet service providers, operator and directory assistance services, and limited amounts of switched termination services for other communications companies. Revenues from these services represented approximately 17% of our total operating revenues for the three months ended December 31, 2003 and are generated from sales to a limited number of other communications companies.

We provide our broadband transport services to other communications companies on a “take or pay” basis, on an individual circuit basis, or on a month-to-month basis after the initial term of the “take or pay” or individual circuit contract has expired. We generally provide our broadband transport services under master lease agreements that have terms ranging from one year to five years. Our broadband transport customers then purchase the amount of capacity they require from time to time under the terms specified in the master agreements.

Broadband transport services also include commission revenues from the marketing, sale and management of capacity on the portions of our network that are owned by utilities but managed and marketed by us. Negligible incremental costs are associated with these commissions, because we use the same marketing and sales force to service the utility-owned portions of the network as we use to service the owned portions of the network. Our commission revenues from these arrangements amounted to approximately $11.3 million for 2001, $9.2 million for 2002 and $7.1 million for 2003. See note 2 to our audited consolidated financial statements appearing elsewhere in this report for additional information regarding these commissions.

The average rates we charge to other communication companies for our broadband transport services continued to decline in 2003, although the rate of decline has begun to decrease. The decreases in average rates resulted principally from price reductions for our broadband transport services due to industry overcapacity and from action by other carriers to transfer traffic from our network to unused portions of their network. As a result of general market conditions, including pricing pressures, especially in smaller markets, removal of traffic from our network, and known or forecasted service disconnections, we expect that our broadband transport services will continue to experience less favorable market conditions and a continued decline in annual revenues for 2004, even though this portion of our business has experienced less severe price reductions and fewer disconnections in recent months.

We provide local interconnection services throughout our primary eight-state market to Internet service providers that enable the customers of the Internet service providers to connect to their providers by dialing a local number. To acquire these services, our customers interconnect to our network either by colocating their communications equipment within one of our facilities or by purchasing our broadband transport services to connect their remote equipment with our equipment. To provide the local dial tone to their customers, our Internet service provider customers generally purchase primary rate interface, or PRI, circuits from us that are the functional equivalent of approximately 23 local telephone lines. In connection with our provision of the local dial tone, we generate revenues from sales of PRIs to the Internet service providers and from reciprocal compensation we receive from BellSouth and other carriers that provide the local services to the customers of the Internet service providers. Of the $15.0 million in local interconnection revenues we generated in 2003, approximately $3.4 million represented reciprocal compensation revenues. The balance of these local interconnection revenues were generated by PRI circuits sold to the Internet service providers. We currently anticipate that our quarterly local interconnection revenues during 2004 will remain generally consistent with the local interconnection revenues generated during the fourth quarter of 2003. We expect limited pricing pressures for these services to be offset by an increase in the amount of PRI circuits we sell to Internet service providers.

We sell nationwide directory assistance services to other communications providers. These communications providers route directory assistance requests of their own customers to one or both of our operator services centers that are located on our regional fiber optic network. These communications providers typically purchase our broadband transport services to interconnect with our operator services centers. We have recently begun to

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provide enhanced assistance services such as movie listings, stock quotes, weather information, horoscopes and yellow pages. We also provide these enhanced services on a nationwide basis. We have experienced continued growth in revenues from our operator and directory assistance services over the last several years. We expect this trend to continue during 2004.

We do not expect our other wholesale revenues, which we derive from the sale of limited amounts of switched termination services for other communications companies, to increase significantly or to provide a significant portion of our total revenues during 2004. We have continued to rationalize this portion of our business by raising prices, limiting the amount of capital we invest in this business, and removing commission incentives related to sales of these services.

We have entered into various fiber swap and other asset swap agreements, which we treat as like-kind exchanges. As a result, these transactions have had no impact on our consolidated balance sheets or consolidated statement of operations.

Equipment Sales and Related Services. We derive non-recurring revenues from selling, installing and providing maintenance services for customer premise equipment. We refer to these services as our “equipment sales and related services.” Revenues from these services represented approximately 9% of our total operating revenues for the year ended December 31, 2003 and are primarily generated from sales to our integrated communications services customers.

No single customer represented over 10% of our total operating revenues for 2003, 2002 or 2001.

Operating Expenses. Our principal operating expenses consist of cost of services, selling, operations and administration expense, and depreciation and amortization. As we expand our revenue base and offer new services, we expect our cost of services to increase. We have been successful reducing our selling, operations and administration expense through our various restructurings, which have had a favorable impact on our operating results. As a result of the revaluation of our property, plant and equipment and intangible assets, and the cancellation of our public notes as part of our reorganization consummated in October 2002, our depreciation and amortization expense decreased significantly in 2003. We expect to experience more favorable operating results as we benefit from our restructurings, our reorganization and operating efficiencies we expect will result from our acquisition of BTI.

Cost of Services. We currently provide our integrated communications services by using our network and facilities and by reselling the services of other telephone companies. Cost of services related to our integrated communications services consists primarily of access charges and local facility charges that we are required to pay to other telephone companies when we use a portion of their network or facilities in providing services to our customers, as well as charges that we are required to pay to other telephone companies when they originate, terminate or transport messages sent by our customers. Cost of services related to our integrated communications services also include costs of third-party contract personnel, direct labor costs and manufacturers’ service contracts.

The provision of local services over our network generally reduces the amounts we would otherwise be required to pay to other telephone companies to use their networks and facilities in order to provide local services. As a result, our cost of providing local services as a percentage of our operating revenues decreased from 1997 through 2001 as we increased the percentage of local services we provided over our network. However, during 2002, as some of our Internet service provider customers canceled our provision of local interconnection services, the percentage of access lines that we provide over our network decreased and our cost of providing local services as a percentage of our operating revenues increased slightly. This trend continued in 2003 as a result of increased off-network sales to small business and residential customers. As of December 31, 2003, approximately 60% of the end-user and local interconnection access lines we had in service were provided over our own network and facilities, compared to approximately 69% at December 31, 2002 and 81% at December 31, 2001.

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As a result of the decrease in the percentage of access lines that we provide, our cost of providing local services as a percentage of our operating revenues has continued to increase slightly. We believe that we will not experience significant increases in the future because we expect that our acquisition of BTI will enable us to increase the percentage of access lines we provide over our network by transitioning the previously-provided off-network lines of each company onto our combined owned network. We also believe that we will not experience significant increases in the future because our off-network sales to the smaller business and residential customers we target generally generate higher gross margins than the off-network services we have historically provided, primarily as a result of favorable wholesale pricing we have obtained for these off-network services from other telephone companies. The term and volume discounts we negotiated in early 2002 regarding the purchase from the local telephone companies of network elements that we do not own, but use to provide local services, contributed to decreases in our cost of providing these off-network services.

Although we continue to expect that our cost of providing these off-network services generally will remain higher than our costs of providing local services over our network, we have been able to achieve additional reductions in cost in 2002 and 2003 through additional colocations with other network providers. These additional colocations have provided us with the advantage of unbundled network element pricing compared to special access tariff costs in eight markets. Our acquisition of BTI has significantly increased the capacity and geographic reach of our network and enhanced our colocation and switching capacity. We have identified and are seeking to eliminate a significant amount of redundant fixed network costs during 2004. We expect that the elimination of these costs also will have a positive impact on our consolidated gross margins. In March 2004, a federal court of appeals vacated and remanded portions of the FCC’s August 2003 order that were beneficial to us and upheld other portions that would increase our costs of doing business, including our costs of providing services to customers using the UNE-P platform. We cannot predict whether the ruling will be appealed, the results of any such appeal or the FCC remand proceedings, or more generally the ultimate implications of the ruling on our business. If prices of the network elements that we use to provide our services increase as a result of the implemenation of the March 2004 ruling or any future consideration of this issue by the FCC, our cost of providing local exchange service could increase significantly.

We expect that, as we provide local service to more customers using our network, our cost of providing local service as a percentage of our operating revenues will decrease. We expect that the percentage of access lines that we provide over our network will continue to increase. Any resulting improvement in our cost of providing local service as a percentage of our operating revenues may be offset by any increase in the number of lines we sell to smaller businesses or residential customers using the networks of other providers.

Our cost of services also includes charges for labor and inventory sold related to our sale, installation and repair of telephone systems and related equipment.

Cost of services related to our broadband transport services includes substantially all fixed costs attributable to the following:

The cost of services related to local interconnection services is represented by the network requirements of these services that we cannot provide over our owned network. The cost of services related to our directory assistance revenues is primarily represented by the cost of the listing and enhanced data, which we purchase from a third party primarily at variable rates. Because our wholesale services generally have significantly lower costs of services compared to our integrated communications and other services, our consolidated gross margin, as a percentage of our operating revenues, will be adversely affected if the percentage of our operating revenues provided by our wholesale services continues to decline.

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Selling, Operations and Administration Expense. Selling, operations and administration expense consists of expenses of selling and marketing, field personnel engaged in direct network maintenance and monitoring, customer service and corporate administration. Although some components of our selling, operations and administration expense increased in 2003, including expenses related to our acquisition of BTI, the initiation of our GrapeVine services offering, increased resources to support the growth of our operator services and directory assistance businesses, and increased infrastructure for our internal audit and compliance functions, our overall selling, operations and administration expense decreased in 2003 compared to 2002 as a result of our 2001 and 2002 restructuring efforts. We believe that our integration efforts related to the acquisition of BTI will produce cost savings that will offset selected infrastructure investments and will result in a decrease in selling, operations and administration expense as a percentage of our operating revenues in 2004.

Depreciation and Amortization. Depreciation and amortization expense includes depreciation of our communications network and equipment and, through December 31, 2001, amortization of goodwill and other intangible assets related to acquisitions. In September 2001, we wrote off all of the goodwill we recorded as a result of acquisitions we completed in 1999 and 2000. As part of our reorganization and the adoption of fresh start reporting, we reduced the value of our property, plant and equipment and intangible assets by approximately $228.2 million. As a result, we incurred a significant decrease in our depreciation and amortization expense in 2003 compared to 2002. We expect that our depreciation and amortization expense will increase significantly in 2004 as a result of our acquisition of BTI. For more information about the effects of our reorganization efforts on our depreciation and amortization expense, see notes 4, 5, 10 and 14 to our audited consolidated financial statements included elsewhere in this report.

EBITDA Presentation. EBITDA represents net income (loss) before interest, taxes, depreciation and amortization. We have included data with respect to EBITDA because our management evaluates and projects the performance of our business using several measures, including EBITDA. Our management considers this measure to be an important supplemental indicator of our performance, particularly as compared to the performance of our competitors, because it eliminates many differences among companies in financial, capitalization and tax structures, as well as some recurring non-cash and non-operating charges to net income or loss. For these reasons, our management believes that EBITDA provides important supplemental information to investors regarding the operating performance of ITC^DeltaCom and facilitates comparisons by investors between the operating performance of ITC^DeltaCom and the operating performance of its competitors. Our management believes that consideration of EBITDA should be supplemental, because EBITDA is not a measurement of financial performance under generally accepted accounting principles and may not be comparable to similarly titled measures reported by other companies. As a result, EBITDA should not be considered an alternative to net income (loss), as calculated in accordance with generally accepted accounting principles, as a measure of performance.

Historical Information About Our Business

The following table presents historical information about our operating revenues, and the telephone access lines we installed for and sold to our customers who purchase our integrated communications services and our wholesale services.

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