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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from                      to                     

Commission file number: 0-23253

ITC^DELTACOM, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(706) 385-8000

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 $0.01 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  x    No  ¨

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2004, based upon the last reported sale price of the registrant’s common stock on the National Market System of The Nasdaq Stock Market, Inc. on that date, was approximately $120 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 February 28, 2005 was 55,084,955.

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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, liquidity, revenues, cash flows and other operating results, 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 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.

As of December 31, 2004, we marketed and sold our integrated communications services through 40 branch offices, had installed for our customers approximately 444,500 access lines and had approximately 300 colocations of our network equipment in over 240 central offices of incumbent local telephone companies in the markets we serve. 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.

We are incorporated in Delaware. Our principal executive offices are located at 1791 O.G. Skinner Drive, West Point, Georgia 31833, and our telephone number at that address is (706) 385-8000. 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. The SEC also maintains a web site at www.sec.gov that contains reports, proxy statements and other information regarding ITC^DeltaCom.

Recent Developments

Asset Impairment Loss. Because of underperformance of our assets relative to expected historical and projected future operating results, significant negative industry trends, a significant decline in our common stock price for a sustained period and our market capitalization relative to net book value, we conducted an impairment review of our long-lived assets. Based on that review, we determined we had incurred asset impairment losses totaling $203.9 million during 2004. The charges were primarily attributable to our write-down of impaired property, plant and equipment assets and amortizable intangible customer base assets. The book value of our net intangible assets, long-lived assets and goodwill decreased to $362.9 million at December 31, 2004 from $603.8 million at December 31, 2003.

Restructuring of Existing Indebtedness; New Loan. On March 29, 2005, we completed a restructuring of our existing $259.7 million of secured indebtedness and obtained a new $20 million subordinated secured term

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loan. The purpose of the restructuring was to enhance our liquidity position by obtaining an infusion of new funds and by obtaining a deferral of principal payments on most of our secured indebtedness until June 2006. Because negative operating trends have adversely affected our liquidity, we determined it was necessary to undertake a restructuring in order for us to meet our short-term debt service requirements and other cash needs. The completion of the restructuring also enabled us to cure covenant defaults under our credit facilities and principal capital leases we incurred during the first quarter of 2005. Our lenders waived these defaults through and as of the restructuring date.

In our restructuring, we amended our senior and junior credit agreements, replaced all $22.0 million of obligations outstanding under our principal capital leases with loans in the same amount under the senior credit agreement, and entered into a subordinated secured loan agreement for $20 million of new borrowings. We drew down the full amount of the subordinated secured loan on the restructuring date. Our existing lenders required the new loan as a condition of the restructuring.

Under the terms of our secured indebtedness following the restructuring:

The $20 million subordinated secured loan was made to us by investment funds and other persons affiliated with Welsh, Carson, Anderson & Stowe, a private equity firm, who include members of the stockholder group that owns capital stock representing a majority of our voting power. In connection with this loan, we issued such lenders ten-year warrants to purchase 20 million shares of our common stock. The warrant exercise price of $0.60 per share is equal to the volume-weighted average trading price of our common stock as quoted on the Nasdaq National Market for the ten consecutive trading days before the restructuring date. The warrants will first be exercisable on the 21st calendar day following our distribution of an information statement to our stockholders under SEC rules.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Other Information” for more information about the foregoing recent developments.

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:

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Our business strategy for 2005 will focus on performance of our existing operations. As part of this effort, we are seeking to increase our penetration of existing markets in which we have, or believe we may achieve, significant operating efficiencies and to improve customer service by reducing installation, repair and customer dispute resolution times.

Acquisition of BTI

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.

Our acquisition of BTI has contributed to a significant increase in the size of our business, has furthered 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, we have achieved a size and scale that we believe provides us with a competitive advantage in our primary markets.

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 80% of our total operating revenues for 2004.

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. Beginning in 2005, in response to regulatory developments, we have de-emphasized our single-line local services in markets in which we do not have a facilities-based presence and do not plan to expand.

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 Lucent STDX-9000 and CBX-500 switching platforms. 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 selected 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.

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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 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 as our “wholesale services.” Revenues from these services represented approximately 17% of our total operating revenues for 2004 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 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.

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 3% of our total operating revenues for 2004 and are primarily generated from sales to our integrated communications services customers.

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 13 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 BTI integration efforts during 2004, we removed a Lucent 5E switch from service in Knoxville, Tennessee and from service in Nashville, Tennessee, as well as an Alcatel USA 600E digital long distance switch from service in Orlando, Florida. We re-deployed one of the Lucent 5E switches in Birmingham, Alabama. We also removed a Lucent 5E switch from service in Jacksonville, Florida in early 2005. Our integration plan also provides for the removal from service during 2005 of two additional Alcatel USA 600E digital long distance switches that are located in Atlanta, Georgia 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, 2004, 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, 2004, 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 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, 2004, approximately 70% 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.

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 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

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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, 2004. 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, 2004.

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 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.

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We have supplemented our sales to businesses with sales of our GrapeVine product to residential customers. Beginning during the fourth quarter of 2004, we have ceased to apply sales and marketing resources to support GrapeVine and to solicit new customers. As a result, we expect that revenues generated by GrapeVine will continue to decline as an increasing number of existing GrapeVine customers discontinue service in favor of residential service from other providers.

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, 2004, 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.

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 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 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

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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 Corp., 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 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. On January 31, 2005, SBC Communications, Inc., and AT&T Corp. announced their intention to enter into a business combination. In February 2005, Verizon Communications, Inc., and MCI announced an agreement to enter into a business combination, and Qwest Communications International Inc. announced a bid to compete with Verizon’s purchase offer. Such transactions, if consummated, would result in substantial consolidation of U.S. wireline telecommunications resources and revenue. In addition, as reflected in the acquisitions of Cable and Wireless USA, Inc., by Savvis Communications, Inc., Focal Communications, Inc., by Broadwing Corporation, and KMC Telecom Corp. by CenturyTel, Inc., substantial consolidation also has taken place among competitive carriers. Assuming that each of the announced transactions involving AT&T Corp. and MCI occur as planned, market power for U.S. telecommunications services will be further consolidated among the incumbent carriers, and both business and residential customer choice will be significantly reduced. Although it is not certain what the effects of this industry consolidation will be, we believe that one possible result could be that prices for telecommunications services would stabilize due to reduced competition. The incumbent carriers are significantly larger than we are in terms of annual revenues, total assets, and financial resources, and have increased their marketing efforts toward our target market of small- and medium-size businesses.

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 Federal Communications Commission, or FCC, exercises jurisdiction over telecommunications common carriers to the extent they

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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.

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 following discussion summarizes some specific areas of federal regulation that directly or indirectly affect our business.

Local Competition. 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, or UNEs, including UNE-Transport 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

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terms of new agreements with BellSouth in Alabama, Florida, North Carolina, Louisiana and Tennessee. We executed a new interconnection agreement with BellSouth in Georgia. We expect to continue to operate under the terms of the existing agreements in Alabama, Florida, North Carolina, Louisiana and Tennessee until we enter into new agreements. We adopted the agreements between AT&T Corp. and BellSouth for South Carolina, Mississippi and Kentucky. These agreements have expired, and the parties have begun negotiations for new agreements. By adopting these agreements, we assumed the terms and conditions of such agreements that are applicable to AT&T Corp. 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 competitive carriers at cost-based rates. These rule changes were appealed by both incumbent carriers and competitive carriers to a federal court of appeals, which in March 2004 vacated and remanded to the FCC several aspects of those changes. In February 2005, the FCC issued a decision in response to the court’s March 2004 ruling. That decision, which is known as the Triennial Review Remand Order, or TRRO, became effective on March 11, 2005, and revised the rules for when incumbent carriers must unbundle and make available to competitive carriers various types of UNEs, including high-capacity loops and interoffice transport. The following sets forth information about the application of the new rules.

UNE Loops

DS0 Loops. A DS0 loop is a single, voice-grade channel. Typically, individual business lines are DS0 loops. Incumbent carriers must make DS0 loops available at UNE rates on an unlimited basis.

DS1 Loops. A DS1 loop is a digital loop with a total speed of 1.544 megabytes per second, which is the equivalent of 24 DS0s. Multiple voice lines and Internet access can be provided to a customer over a single DS1 loop. We understand the FCC’s new rules to require that incumbent carriers make available to competitive carriers DS1 loops at UNE rates in the majority of incumbent carrier central offices.

DS3 Loops. A DS3 loop is a digital loop with a total speed of 44.736 megabytes per second. We understand the FCC’s new rules to require that incumbent carriers make available to competitive carriers DS3 loops at UNE rates in the majority of incumbent carrier central offices.

OCn Loops and Dark Fiber. Under the FCC’s new rules, incumbent carriers are not required to provide optical capacity loops or dark fiber loops as UNEs. Optical capacity loops, referred to as OCn loops, are very high-capacity digital loops ranging in capacity from OC3 loops, which are the equivalent of three DS3s, to OC192.

Incumbent carriers are not required to provide some mass market broadband loop facilities and functionality to competitive carriers as UNEs. Specifically, incumbent carriers are not required to make newly-deployed fiber-to-the-home, or FTTH, loops available as UNEs and are only required to provide the equivalent of DS0 capacity on any FTTH loop built over an existing copper loop. It is possible that incumbent carriers will seek additional regulatory relief from any remaining obligation to make FTTH loops available to competitive carriers. The FCC already has held that incumbent carriers are not required to unbundle and make available to competitive carriers fiber-to-the-curb, or FTTC, loops.

UNE Transport

DS1 Transport. Whether transport is available as a UNE is determined on a route-by-route basis. Incumbent carriers must make transport at UNE rates available at DS1 capacity levels between any two incumbent carrier central offices unless both central offices either serve more than 38,000 business lines or have four or more fiber-based colocators.

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DS3 Transport. Access to DS3 capacity-level transport is more limited than access to DS1 transport. Incumbent carriers must make transport at UNE rates available at DS3 capacity levels between any two incumbent carrier central offices unless both central offices either serve more than 24,000 business lines or have three or more fiber-based colocators.

Dark Fiber Transport. Dark fiber transport is available under the same conditions as DS3 transport.

Incumbent carriers are not required to provide access to transport at greater-than DS3 capacity levels. Incumbent carriers also are not required to provide transport at any capacity level to connect an incumbent carrier central office with a competitive carrier’s facilities.

In addition to addressing high-capacity loops and transport, the TRRO confirmed the eventual elimination of mass market local switching as a UNE, thereby phasing out the availability of UNE-P at cost-based rates to competitive carriers such as us. Although ITC^DeltaCom has an embedded base of UNE-P customers, we have begun to migrate our existing UNE-P customers to other provisioning arrangements where we have facilities and it is advantageous for us to do so.

The FCC also confirmed in the TRRO that the availability of special access services for competitive carriers does not excuse incumbent carriers from the requirement to make available prescribed UNEs at rates based on the FCC’s “Total Element Long Run Incremental Cost,” or TELRIC, pricing methodology.

To the extent incumbent carriers no longer need to provide to competitive carriers the above-described switching, loop and transport elements as UNEs, the FCC established a transitional period during which incumbent carriers must continue to make these elements available at prescribed rates for a defined period of time. We anticipate that some incumbent and competitive carriers will use this transition period to enter into commercial agreements for these elements, but these agreements are likely to contain rates, terms and conditions that are less favorable to competitive carriers than they have been in the past.

Although the rules adopted by the FCC in the TRRO became effective on March 11, 2005, the FCC required incumbent and competitive carriers to implement the new unbundling ruling by negotiating changes to the interconnection agreements. BellSouth, however, has argued otherwise, and this issue is now pending before regulatory and judicial tribunals in a number of jurisdictions. We believe the FCC made clear that all carriers must follow the “change of law” procedures set forth in their interconnection agreements to implement any new requirements and that carriers must follow the procedures set forth in section 252(b) of the Telecommunications Act to modify those interconnection agreements that are silent as to the implementation of changes in law. We cannot predict at this time whether our view will be affirmed by the relevant federal and state agencies and tribunals that are considering this issue. In the meantime, we have entered into negotiations with incumbent carriers to amend our existing interconnection agreements to accommodate the recent changes to the FCC’s rules and also have entered into negotiations with some incumbent carriers with respect to new commercial agreements.

The TRRO continued the recent trend of reducing the number and types of UNEs that incumbent carriers must make available to competitive carriers. Although the TRRO has been appealed, we cannot predict the outcome of this appeal or whether the result of any such appeal will be favorable or unfavorable to our business.

TELRIC Pricing. 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. Future restrictions on, or reductions in, the network elements available to us, or any increase in the cost to us of such network elements, could have a material adverse effect on our business.

Broadband. In the future, an important element of providing competitive local service may be the ability to offer customers high-speed broadband local connections. The FCC recently reduced the number and types of

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unbundled network elements, such as FTTC and FTTH, that incumbent carriers must make available to competitive carriers to enable them to provide broadband services to customers using incumbent carrier networks. These restrictions were largely upheld by a federal court of appeals. Although the court’s decision regarding so-called “naked DSL” may be appealed, we cannot predict the outcome of any such appeal. The FCC also recently held that incumbent carriers such as BellSouth cannot be required by state commissions to make digital subscriber line services available to end users when a competitive carrier provides the end user with voice service. This is known in the industry as “naked DSL.” Although this decision also may be appealed, we cannot predict the outcome of any such appeal.

In other proceedings affecting broadband policy, the FCC is considering what regulatory treatment, if any, should be accorded to digital subscriber line services provided by communications companies and has already considered what regulatory treatment should be accorded 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 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, but the court’s decision has been appealed to the United States Supreme Court, where the matter is pending.

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. We cannot predict the outcome of these proposals at the FCC or in the courts or the effect they will have on our business and the industry.

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.

Internet Protocol-Enabled Services. 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. Voice Over Internet Protocol is an application that manages the delivery of voice information across data networks, including the Internet, using Internet protocol. Rather than send voice information across traditional circuits, Voice Over Internet Protocol sends voice information in digital form using discrete packets that are routed in the same manner as data packets. Voice Over Internet Protocol is widely viewed as a more cost-effective alternative to traditional circuit-switched telephone service. Because Voice Over Internet Protocol can be deployed by carriers in various capacities, and because it is widely considered a next-generation communications service, its regulatory classification has not yet been determined.

The FCC thus far has issued three declaratory rulings in connection with the regulatory treatment of Voice Over Internet Protocol, but those rulings have been narrowly tailored. In one case, the FCC held that a computer-to-computer Voice Over Internet Protocol application provided by Pulver.com is an unregulated information service, in part because it does not include a transmission component, offers computing capabilities, and is free to its users. In another case, the FCC reached a different conclusion, holding that AT&T’s use of Voice Over Internet Protocol to transmit the long-haul portion of certain calls constitutes a telecommunications service, thus subjecting it to regulation, because the calls use ordinary customer premises equipment with no enhanced functionality, originate and terminate on the public switched telephone network, and undergo no net protocol conversion and provide no enhanced functionality to end users. In a third case, which involved the Voice Over Internet Protocol application of Vonage, the FCC preempted the authority of the State of Minnesota (and presumably all other states) and ruled that Vonage’s Voice Over Internet Protocol application, and others like it,

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is an interstate service subject only to federal regulation, thus preempting the authority of the Minnesota commission to require Vonage to obtain state certification. The FCC, however, refused to rule in the Vonage case whether Vonage’s Voice Over Internet Protocol application is a telecommunications service or an information service, thus leaving open the question of the extent to which the service will be regulated. A number of other petitions addressing the application of existing regulations to Voice Over Internet Protocol and other Internet Protocol services have been filed at the FCC and are pending. We cannot at this time predict the outcome of those petitions on our business or the industry.

The FCC has initiated a more generic proceeding to address the many regulatory issues raised by the development and growth of Voice Over Internet Protocol services, including the extent to which Voice Over Internet Protocol will be regulated at the federal level, and has expressly reserved the right to reconsider its declaratory rulings in the generic proceeding. The FCC also is examining what requirements, if any, should be applied to Voice Over Internet Protocol service to enable law enforcement agencies, when necessary and appropriate, to access information transmitted through Voice Over Internet Protocol applications; the extent to which Voice Over Internet Protocol providers should contribute to the Universal Service Fund; and whether and to what extent E-911 requirements should apply to Voice Over Internet Protocol providers. Federal and state rulings in connection with Voice Over Internet Protocol will likely have a significant impact on us, our competitors and the communications industry.

Congress also has considered in the past, and may consider in the future, legislation addressing Voice Over Internet Protocol. We cannot at this time predict if or when such legislation will be enacted, or its effect on our business and the industry.

Intercarrier Compensation. 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 of their tariffed access charges until those charges are no greater than those of the incumbent carriers with which they compete. In March 2005, the FCC initiated a proceeding designed to examine and reform comprehensively intercarrier compensation, including access charges, in the telecommunications market. Intercarrier compensation typically is the largest single expense incurred by companies that provide telecommunications services, including us. Further FCC action in this area may reduce most access charges in the future or shift all forms of intercarrier compensation to flat-rate pricing. We cannot predict at this time the result of this proceeding, the full impact of the FCC’s decisions in this area, or the effect these decisions will have on our business and the industry.

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 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. In the course of our business, we may 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. In March 2005, in the context of its generic proceeding on intercarrier compensation, the FCC sought comment on broad

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policy changes that could harmonize the rate structure and levels of all forms of intercarrier compensation, and ultimately could eliminate most forms of carrier-to-carrier payments for interconnected traffic, including traffic destined for Internet service providers.

Universal Service. Access charges historically have been used to subsidize universal telephone service. Together with access and other intercarrier compensation reform, the FCC in recent years has changed the methodology used to subsidize universal telephone service and achieve other related public policy goals. Any reform in connection with intercarrier compensation will, by necessity, require revisions to the FCC’s policies governing universal service. Because the effects of these revisions are uncertain, the fees we pay to subsidize universal service may increase or decrease substantially in the future.

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 these issues in the context of its generic proceeding on IP-enabled services. 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.

Detariffing. 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.

Other Federal Regulations. 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.

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We have authority to offer intrastate long distance services in all 50 U.S. states. 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.

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. Pursuant to the Communications Act, the decisions of state public utility commissions with regard to interconnection disputes may be appealed to federal courts. In one recent appeal, BellSouth successfully challenged Georgia’s state-ordered UNE rates. As a result, BellSouth is expected to seek a retroactive true-up regarding these rates that could result in a negative financial impact on us. The appellate court held that the state utility commission in Georgia may consider interconnection agreement language between BellSouth and competitive carriers such as us in determining whether BellSouth is entitled to a true-up.

There also remain unresolved important issues regarding the scope of the authority of public utility commissions and the extent to which the commissions will adopt policies that promote local telephone service competition. For example, although the FCC recently preempted the ability of states to regulate some aspects of Voice Over Internet Protocol services, the FCC’s decision has been appealed, and it is difficult to predict how this and other matters will affect 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

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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 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, 2004, we had approximately 2,050 employees, of whom approximately 1,840 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 satisfactory. 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.

Chapter 11 Reorganization in 2002

Beginning in the third quarter of 2001, we initiated a strategic and operational restructuring intended to accelerate positive cash flow from operations by emphasizing our core retail services and reducing operating costs. In addition to de-emphasizing some non-core services, the key elements of this strategy include reduction of our employee base, consolidation of facilities and operations, and reduction of capital expenditures. We also sought to eliminate a substantial portion of our existing indebtedness and reduce our fixed interest costs so that we are able to achieve and maintain positive cash flow from operations through the current period of uncertainty affecting the telecommunications industry and competitive telecommunications companies.

In order to complete our reorganization expeditiously, 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 bankruptcy court entered an order confirming our plan of reorganization. We completed our reorganization under the plan on October 29, 2002.

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As of October 29, 2002, under our plan of reorganization:

The foregoing ownership percentages assume the conversion of our new Series A preferred stock into common stock as of October 29, 2002. In connection with our plan of reorganization, we also amended our senior credit facility and our principal capital lease facilities.

On October 29, 2002, we implemented fresh start reporting under the provisions of AICPA Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” 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. Under fresh start reporting, we recorded reorganization charges of $228.2 million to adjust the historical carrying value of our assets and liabilities to fair market value, and a $312.0 million gain on the October 29, 2002 cancellation of debt under our plan of reorganization. We also recorded expenses of $14.1 million for professional services and $8.9 million for the write-off of deferred financing fees and debt discounts in connection with our reorganization.

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Risk Factors

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

We will be unable to comply with our credit facility financial covenants and to refinance our existing indebtedness if we do not generate substantial operating cash flow.

Our ability to comply with the financial covenants under our credit facilities will depend primarily on our success in generating substantial operating cash flow. Under our credit agreements, we are subject to a maximum capital expenditures covenant, a senior debt ratio covenant, a total leverage ratio covenant, an interest coverage ratio covenant, a minimum unrestricted cash covenant, and a minimum consolidated EBITDA covenant. Industry conditions and financial, business and other factors, including those we identify as risk factors in this report, will affect our ability to generate the cash flows we need to meet those financial tests and ratios.

We will be required on June 30, 2006 to repay $204 million of outstanding borrowings under our senior credit facility and from September 30, 2007 through June 30, 2009 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. In such event, our lenders would be entitled to proceed against the collateral securing the indebtedness, which includes substantially all of our assets. Prevailing interest rates, our operating results and financial condition, 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 current financial condition could result in additional cash requirements that would weaken our liquidity position.

We depend on a carrier for the provision of wholesale telecommunications services under our interconnection agreements with the carrier and pursuant to various access tariffs which the carrier has filed with federal and state regulatory agencies. Under specified circumstances based on our financial condition, the carrier may have the right to demand that we accelerate our payment terms to it, which could result in an acceleration of payments ordinarily due under terms of up to 30 days in connection with the carrier’s provision of services to us. Our use of cash to fund the accelerated demand would reduce our liquidity available for working capital, capital expenditures and other general corporate purposes.

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

We have a significant amount of indebtedness. As of March 29, 2005, following our restructuring on that date, we had $305.6 million of total long-term indebtedness, including current portion. Our indebtedness could have important consequences. For example, it may:

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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. Our credit facilities also require us to meet specified financial tests and maintain specified financial ratios. Our failure to meet these tests or ratios could result in an event of default under our credit facilities.

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.

The controlling affiliates of the investment funds that constitute Welsh, Carson, Anderson & Stowe, a private equity firm, have reported in SEC filings that such affiliates and the funds, as a group, 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 capital stock ownership, the members of this group currently have the right to increase the size of our eight-member board of directors and appoint or elect a majority of our board of directors and to block actions involving our company or its assets that require stockholder approval. As of the date of this report, four of our eight directors are members of this group.

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

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

In February 2005, the FCC released an order limiting the number and types of unbundled network elements that incumbent local exchange carriers must make available to us and other competitive communications companies. The FCC’s order also eliminated the requirement that incumbent carriers make available to us and other competitive carriers local switching services for residential and small business customers. Because of this order, incumbent local telephone companies no longer are required to provide local switching services, which means that we can no longer rely on the Unbundled Network Element-Platform, or UNE-P, to provide local services to customers. The FCC’s order also limits the availability to us of some incumbent carrier dedicated transport services between central offices and broadband local loops. Although the FCC’s order permits carriers to enter into commercial agreements for network elements and provides for a transition period to the new rules, it is unlikely that BellSouth and the other incumbent carriers in our markets will make network elements available to us at the same rates they have in the past. In addition, if these incumbent carriers do not cooperate in facilitating an orderly transition to the new rules, our business could be adversely affected. If prices of the network elements that we use to provide our services increase or are eliminated as a result of the implementation of the February 2005 order 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.

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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 1,600 route miles of our network as of December 31, 2004 and, if resolved in a manner adverse to us, could affect additional portions of our network. 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.

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. These advantages may increase as a result of pending and contemplated consolidations in our industry. 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:

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The foregoing competitive pressure have contributed to a significant increase in our customer attrition over the past year. Customer turnover rates may remain high, or may even increase, if our current financial condition materially limits our ability to respond to competition.

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. Pending or contemplated consolidations in our industry also may adversely affect our wholesale services by improving the resources of the consolidating companies and reducing their demand for our services as those companies upgrade their own networks and consolidate their voice and data traffic on those networks. We expect that these factors will result in continued declines in revenues and cash flows from our wholesale service offerings. Such declines will have a disproportionately adverse impact on our operating results, because of the higher gross margins associated with our wholesale services.

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.

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.

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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 five 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 our prices significantly to retain them. Our ability to retain these customers may be adversely affected by our current financial condition and pending or contemplated consolidations in our industry. The table below sets forth the approximate percentages of our total revenues generated in 2002, 2003 and 2004 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.

We may not benefit from our acquisition strategy.

We may seek to supplement our internal growth by pursuing acquisitions of other businesses. 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 fail to continue to realize anticipated benefits of our acquisition of BTI.

Our success will depend on our ability to continue to realize the cost savings, operating efficiencies and revenue opportunities we expect to result from our acquisition of BTI. Our operating results and financial condition will be adversely affected if we fail to continue to experience such cost savings, operating efficiencies and revenue opportunities.

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:

Our failure to maintain adequate billing, customer service and information systems could 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 are dependent upon operations support systems 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.

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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. Many members of our senior management team have 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.

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 lease space for our voice switch sites in the following locations:

The leases for these switch sites expire on various dates from 2006 to 2015. As part of our integration activities related to the BTI acquisition, we are seeking to sublease six additional vacated leased switch sites.

We have constructed and own a multi-service facility in Anniston, Alabama, which functions as a centralized maintenance center for our network and as an operator services center. We also lease a second operator services center in Alexander City, Alabama.

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

The leases for these branch offices expire on various dates from 2005 through 2010. As part of our integration activities related to the BTI acquisition, we have four sales offices that have been subleased and one sales office that has been vacated and not subleased. We will not renew the leases for any of these five offices when they expire in 2005.

We also lease office space for various administrative functions, including accounting, legal, information technology, engineering, sales and human resources, in Huntsville and Anniston, 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, and point-of-presence space throughout the southern United States.

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 that 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 also are actively pursuing major changes in the federal communications laws through litigation and legislation that would adversely affect competitive communications service providers, including us. If successful, 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. These pending proceedings affected approximately 1,600 route miles of our network as of December 31, 2004. 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

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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 12 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, 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 be certain in this respect, however, because the landowners are seeking compensatory 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 fiber optic 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 fiber optic 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 be certain 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. Both suits have been dismissed by the district court and are on appeal to the United States Court of Appeals for the Fifth Circuit. Several of the defendants in the civil action involving the 37 parcels of land have sued Mississippi Power Company and us in states courts in Lamar, Forrest and Jones County Chancery Court alleging 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.

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 MCI. Each plaintiff claims to be the owner of property over which Mississippi Power Company has an easement and that MCI 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 MCI 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. In December 2004, a settlement agreement was entered and each of the cases has been or is expected to be dismissed, because the plaintiffs have granted Mississippi Power Company an easement that allows for our use for telecommunications purposes of Mississippi Power Company’s fiber optic cables installed over the plaintiffs’ properties.

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In 2002, a lawsuit on behalf of five property owners was filed against Mississippi Power Company and Southern Company in the Circuit Court of Forrest County, Mississippi, seeking relief for trespass, nuisance, conversion, unjust enrichment, fraud, fraudulent misrepresentation and fraudulent concealment. In May 2004, we were added as a defendant in the lawsuit, upon the court’s order. 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. In September 2004, the court granted Mississippi Power Company’s motion for partial summary judgment and issued a final order that the plaintiff is not entitled to any compensation for trespass damages. The plaintiff has appealed the order to the Mississippi Supreme Court. Our motion for summary judgment on all claims is pending.

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 that 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. We were dismissed from this proceeding in October 2004.

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 that Mississippi Power Company and we have violated the landowners’ rights with regard to the use of Mississippi Power Company’s easements across the landowners’ properties. The allegations are similar to those made in 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 the gross revenues derived from use of the rights-of-way, and court costs. Although MCI is not a party to this proceeding, during the pendency of MCI’s bankruptcy proceedings, Mississippi Power Company had removed this action to the United States District Court for the Southern District of Mississippi and requested that the action be transferred to the United States Bankruptcy Court for the Southern District of New York, which administered MCI’s bankruptcy proceedings. There have been no further material developments in this matter.

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 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 use 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 MCI. There have been no further material developments in the proceeding that was removed. The other proceeding has been dismissed.

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

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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 November 2003, the plaintiff voluntarily dismissed his claims with prejudice.

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. During the pendency of MCI’s bankruptcy proceedings, Mississippi Power Company sought to change the venue of these proceedings, but the proceedings have been returned to the original venue.

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 on various grounds. In January 2005, the court allowed the plaintiffs to file an amended complaint, to which we subsequently filed an answer.

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 January 2005, the court granted the plaintiffs’ motion for partial summary judgment, holding that Georgia Power Company had the right to use the easements for communications directly related to the transmission and distribution of electricity, but that the easements do not afford Georgia Power Company the right to allow any other party, including us, the right to use the rights-of-way for the transmission of communications services. The order has been appealed to the Georgia Supreme Court.

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

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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 described above, as that case may encompass the same claims.

Kansas City Southern Railroad and Illinois Central Railroad Rights-of-Way. In March 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, allege that they are the 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 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 telecommunications 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 denied the allegations, but counter-claimed for the certification of a class of counter-defendants. We sought a declaration that we have the right to use the rights-of-way or, alternatively, to condemn such rights. In September 2004, the district court found that neither the class requested by the plaintiffs, nor the class of counter-defendants, should be certified. Our appeal of the district court’s refusal to certify a class of counter-defendants was denied by the United States Court of Appeals for the Fifth Circuit. In February 2005, the district court dismissed the claims of the remaining plaintiffs. The plaintiffs have appealed this decision to the Fifth Circuit. We have filed a cross-appeal.

A lawsuit was filed against us in Richland Parish, Louisiana, in July 2003 and removed to the United States District Court, Western District of Louisiana, Monroe Division, in August 2003. 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 some 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 or operation of telecommunications 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. In July 2004, the court found that the class should not be certified. One plaintiff voluntarily dismissed his claim when discovery revealed that he had no rights in the property identified in the complaint. The only remaining named plaintiff asserts a claim based on ownership of less than one mile of property over which we use fiber optic cable within the rights-of-way of Kansas City Southern Railroad or Illinois Central Railroad. The trial of this claim is scheduled for October 2005.

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 us harmless against all such claims. We filed for summary judgment in December 2001, and the defendants subsequently filed a motion for summary judgment. 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. In September 2004, the court issued an order denying our motion and the defendant’s motion for summary judgment and staying the litigation until a final determination of the landowner litigation which underlies our claims in this matter. We have appealed this order to the Georgia Supreme Court.

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Claim Relating to Sale of Account Receivable. In the first quarter of 2003, we sold for approximately $1.0 million approximately $2.2 million of accounts receivable owed to us by MCI before MCI filed for bankruptcy under chapter 11 of the bankruptcy code in 2002. In November 2004, we received a notice from the assignee of the accounts receivable demanding that we repurchase for $830,000 approximately $1.5 million of such accounts receivable. We expect that, if we make payment on the claim to the assignee, we would seek recovery on the claim from MCI’s bankruptcy estate. We are unable to predict the amount of such claim, if any, that we would be able to recover in such event, but we are negotiating with the bankruptcy estate to attempt to resolve any objections.

There were no matters submitted to a vote of our security holders in the fourth quarter of 2004.

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PART II

Market for the Common Stock. Our common stock is listed on the Nasdaq National Market of The Nasdaq Stock Market, Inc. and has been trading on the Nasdaq National Market since March 5, 2004 under the symbol “ITCD.” From December 23, 2003 through March 4, 2004, the common stock was listed and traded on the Nasdaq SmallCap Market, and from January 1, 2003 through December 22, 2003, was quoted on the OTC Bulletin Board.

The following table sets forth the high and low sale prices of the common stock for each quarter of 2003 and 2004.

On February 28, 2005, there were approximately 1,200 record holders of the common stock.

Dividend Policy. We have not declared or paid any cash dividends on our common stock and do not anticipate that we will declare or pay cash dividends on the common stock in the foreseeable future. Future declaration and payment of dividends, if any, on the 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 prohibit us from paying cash dividends on our capital stock.

Under our certificate of incorporation, we have the option, instead of paying quarterly cash dividends on our preferred stock, to pay quarterly dividends on each series in additional shares of such series. 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.

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The following table sets forth ITC^DeltaCom’s selected consolidated financial data. The selected historical income statement data for the years ended December 31, 2000 and 2001 and the selected historical balance sheet data as of the end of such periods have been derived from ITC^DeltaCom’s audited consolidated financial statements. 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 years ended December 31, 2003 and 2004, and the selected historical balance sheet data at October 29, 2002, December 31, 2002, December 31, 2003 and December 31, 2004, have been derived from the consolidated financial statements that have been audited by BDO Seidman, LLP, independent registered public accounting firm. 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 at 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 asset impairment loss 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 2004, ITC^DeltaCom recorded asset impairment loss consisting of a write-down of impaired property and equipment of $199.9 million and a write-down of $4.0 million to its amortizable intangible customer base asset, resulting in negative EBITDA for 2004. See note 4 to ITC^DeltaCom’s audited consolidated financial statements included elsewhere in this report. 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 15 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. In 2004, ITC^DeltaCom recorded merger-related expenses of $1.5 million in connection with the acquisition of BTI and $3.3 million in connection with the terminated mergers with Florida Digital Network, Inc. and NT Corporation. See note 3 to ITC^DeltaCom’s audited consolidated financial statements included elsewhere in this report.

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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 one of 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.

At December 31, 2004, we marketed and sold our integrated communications services through 40 branch offices. At 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.

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. 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. 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. In addition, we have achieved cost savings 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 continue to integrate 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 achieved the net cost savings of $30 million we expected the acquisition would generate in 2004 and the annualized cost savings of at least $40 million we expected the acquisition would generate by the end of 2004. Our annualized cost savings as of December 31, 2004, which totaled $42.4 million, 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 have realized as a result of our cost savings initiatives from that date through December 31, 2004.

In the third quarter of 2004, we entered into definitive agreements to acquire by merger Florida Digital Network, Inc. (“FDN”) and NT Corporation (“NTC”), each of which is privately held communications company headquartered in Florida. In December 2004, we and FDN mutually terminated our merger agreement. Because the completion of our proposed merger with FDN was a condition to the completion of our proposed merger with NTC, we determined not to proceed with the NTC transaction. In February 2005, we and NTC mutually terminated our merger agreement. In connection with these terminated mergers, we incurred expenses totaling $3.3 million, consisting primarily of financial advisory, legal and accounting fees.

Although we have achieved the cost savings we expected in connection with our integration of BTI through the end of 2004, our total operating revenues and resulting gross margins have continued to decline. We

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anticipate a continuation of adverse revenue trends in 2005 in our long distance, enhanced data and wholesale business operations, which we expect will exert negative pressure on our gross margins. To address these revenue trends, we are pursuing additional cost reductions and opportunities to achieve additional operating efficiencies.

Asset Revaluations and Reorganization. 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’s 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.

Beginning in December 2004, we considered the following factors as evidencing the necessity of an impairment review: underperformance of our assets relative to expected historical and projected future operating results; significant negative industry trends; a significant decline in our common stock price for a sustained period; and our market capitalization relative to net book value. For purposes of our impairment review, we identified, as two separate asset groups with identifiable cash flows, (1) our “retail group,” which consists of those assets and liabilities associated with servicing our retail customer base, and (2) our “wholesale group,” which consists of those assets and liabilities associated with servicing our wholesale customer base. We determined that the sum of the expected future cash flows was less than the carrying amount of the retail long-lived asset group, including intangibles, and recognized in the quarter ended December 31, 2004 an impairment loss of $199.9 million to our property, plant and equipment and an impairment loss of $4.0 million to our amortizable intangible customer base asset, equal to the excess of the carrying amount of the assets over their fair value in accordance with SFAS No.144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” The audit committee of our board of directors concluded on March 25, 2005 that such a charge was required. The asset impairment had no significant impact on our 2004 depreciation and amortization expense and is expected to reduce depreciation and amortization expense in 2005 by approximately $27.0 million on an annual basis. The book value of our net intangible assets, long-lived assets and goodwill decreased to $362.9 million at December 31, 2004 from $603.8 million at December 31, 2003.

In evaluating the underperformance of our assets and negative industry trends in our impairment review, we took account of the following factors, among others:

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.

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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 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.

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 80% of our total operating revenues in 2004. We derive most of our operating revenues from recurring monthly charges that are generated by our integrated communications services.

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. In response to FCC action that eliminated local switching services from the list of required unbundled network elements that must be made available to competitive carriers like us, we expect to convert a significant number of our UNE-P lines to UNE-L lines utilizing our existing DS0 colocations.

Beginning in January 2005, we temporarily have suspended our direct sales effort to small business customers that utilizes UNE-P as a provisioning method, except in limited circumstances, as we attempt to negotiate a commercial UNE-P agreement with incumbent local exchange carriers and to implement our UNE-L strategy. Depending upon the outcome of both of these strategic efforts, we may reinitiate our direct sales efforts to smaller business customers.

During the first quarter of 2003, we initiated our “GrapeVine” offering of local services to residential customers and had installed 16,900 and 21,000 access lines related to this service by December 31, 2004 and December 31, 2003, respectively. GrapeVine customers receive our local telephone services bundled with one of our long distance service plans. Effective in October 2004, we terminated efforts to obtain new customers for our Grapevine product because of customer attrition, recent FCC action significantly limiting UNE-P as a provisioning alternative, and the negative implications of these factors for the product’s prospects.

Our long distance services were negatively affected in 2004 by a continued decline in rates and competitive pressures to bundle long distance minutes of use within local service product offerings. Our existing base of

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business long distance minutes is also subject to increasing competition from both Voice Over Internet Protocol and wireless competitive offerings. The negative impact of these factors on our 2004 long distance revenues was exacerbated by the substantial long distance revenue base we acquired in the BTI merger. We expect that these trends will continue in 2005 to have a negative impact on our long distance revenues, which accounted for approximately $90 million, or 16%, of our total annualized operating revenues as of the fourth quarter of 2004.

We expect that we can continue to expand portions of 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. We are currently conducting a strategic review of the profitability of all our service offerings and, as a result of this review, may increase our sales efforts in certain areas, while decreasing our sales efforts in others.

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.

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 16.5% of our total operating revenues for 2004 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 $9.2 million for 2002, $7.1 million for 2003 and $5.7 million for 2004. 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 2004. 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

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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 2005.

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 $13.6 million and $15.0 million in local interconnection revenues we generated in 2004 and 2003, respectively, approximately $2.7 million in 2004 and $3.4 million in 2003 represented reciprocal compensation revenues. The balance of these local interconnection revenues were generated by PRI circuits sold to the Internet service providers. We anticipate that our local interconnection revenues for 2005 will decline from the 2004 level due both to lower PRI circuit and reciprocal compensation revenues, as dial-up Internet service provider services continue to be replaced with broadband applications.

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 also provide, on a nationwide basis, enhanced assistance services such as movie listings, stock quotes, weather information, horoscopes and yellow pages. We have experienced continued growth in revenues from our operator and directory assistance services over the last several years. We derive a significant portion of our directory assistance and operator services revenues, although not a significant portion of our total operating revenues, from one customer under an agreement that expires in October 2005. If we do not renew this customer contract or continue providing services at current levels, our directory assistance and operator service revenues could decline in 2005.

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 operating revenues during 2005. 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.

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 3.3% of our total operating revenues for 2004 and are primarily generated from sales to our integrated communications services customers.

No single customer represented over 10% of our total operating revenues for 2004, 2003 or 2002.

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, in October 2002, our depreciation and amortization expense decreased significantly in 2003. As a result of the write-down of $199.9 million to our property, plant and equipment and a write-down of $4.0 million to our amortizable intangible customer base asset due to impairment in 2004, our depreciation and amortization expense will decrease significantly in 2005.

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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, but was reversed slightly during 2004. At December 31, 2004, approximately 62% of the end-user and local interconnection access lines we had in service were provided over our own network and facilities, compared to approximately 60% at December 31, 2003 and 69% at December 31, 2002. During 2005, we intend to focus our sales efforts on services that are provisioned on our own network and facilities, and accordingly expect that our cost of providing local services as a percentage of our operating revenues will decrease from the 2004 level.

We are pursuing a number of initiatives in 2005 targeted at reducing our overall cost of services. We continue to assess the implications for our existing and future cost of services of recent FCC action that significantly limits UNE-P as a provisioning alternative. We currently estimate that our cost of services will increase by over $200,000 per month for the first year after the implementation date of the FCC’s Triennial Review Remand Order. Our estimate reflects the approximately 135,000 UNE-P business lines in our existing base of lines as of February 28, 2005 and the expected impact of a 15% cost increase on loops and transport that we have determined are no longer impaired under the TRRO. Because of uncertainties relating to our future customer base, we are unable to estimate with certainty the impact of the TRRO on our cost of services after March 2006. We believe, however, that, as of March 2006, our cost per UNE-P line could be $7 to $10 higher than our current cost for every UNE-P line that remains in our customer base.

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. 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, however, decreased in 2003 as a percentage of revenues compared to 2002, as a result of our 2001 and 2002 restructuring efforts, and further in 2004, as we sought to mitigate continued pressure on our gross margins through targeted reductions in selling, operations and administrative expense. As a result of past efforts, we do not expect that we will be able to achieve future reductions in our overall selling, operations and administration expense at the level of the reductions we achieved in 2004.

Depreciation and Amortization. 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. Our depreciation and amortization expense increased $23.7 million to $87.1 million in 2004 from $63.4 million primarily as a result of the BTI acquisition. In December 2004, we recognized an impairment loss of $199.9 million to our property, plant and equipment and an impairment loss of $4.0 million to our amortizable intangible customer base asset. The asset impairment had no impact on our 2004 depreciation and amortization expense and is expected to reduce depreciation and amortization in 2005 approximately $27.0 million on an annual basis. For more information about the effects of the foregoing actions on our depreciation and amortization expense, see notes 4, 5, 6, 11 and 15 to our audited consolidated financial statements included elsewhere in this report.

EBITDA Presentation. EBITDA represents net income (loss) before interest, taxes, depreciation and amortization. EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States (“GAAP”). We have included data with respect to EBITDA because our management evaluates and projects the performance of our business using several measures, including EBITDA. Management considers EBITDA to be an important supplemental indicator of our operating performance, particularly as compared to the operating performance of our competitors, because this measure eliminates many differences among companies in financial, capitalization and tax structures, capital investment cycles and ages of related assets, as well as some recurring non-cash and non-operating supplemental information to investors regarding our operating performance and facilitates comparisons by investors between the operating performance of our company and the operating performance of our competitors. Our management believes that consideration of EBITDA should be supplemental, because EBITDA has limitations as an analytical financial measure. These limitations include the following:

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Our management compensates for these limitations by relying primarily on its GAAP results to evaluate its operating performance and by considering independently the economic effects of the foregoing items that are not reflected in EBITDA. As a result of these limitations, EBITDA should not be considered as an alternative to net income (loss), as calculated in accordance with generally accepted accounting principles, as a measure of operating performance, nor should it be considered as an alternative to cash flows as a measure of liquidity.

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.

Historical Results of Operations of ITC^DeltaCom

The following comparison of our operating results is materially affected by our acquisition in October 2003 of BTI, whose results are included in our 2003 operating results from October 1, 2003, and our October 2002 reorganization under Chapter 11 of the United States bankruptcy code. Because of the significance of the BTI acquisition and our reorganization, our operating results for these periods are not directly comparable.

2004 Compared to 2003

Operating Revenues. Total operating revenues increased $122 million, or 26.4%, from $461.6 million for 2003 to $583.6 million for 2004.

Operating revenues from our integrated communications services for 2004 increased $146.9 million, or 45.8%, to $467.6 million from $320.7 million for 2003. The revenue increase was primarily attributable to the effects of our acquisition of BTI, whose operating results were included in our 2004 results for the full year, but in our 2003 results only for the fourth quarter. The overall revenue increase from our integrated communications services reflected increases in the following components of this business:

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Our local services revenues accounted for a larger portion of our overall revenues from integrated communications services, as we expanded our sales of bundled servicing offerings in 2004. When we sell a bundled product that includes long distance minutes and data services together with local services, we attribute all of the revenues from this product to local services. We expect to continue experiencing downward pricing pressure on our local services revenues, particularly as we seek to renew contracts with existing customers who entered into those contracts in the preceding two or three years.

Although we experienced an overall increase in long distance revenues as a result of the inclusion of BTI’s operating results, both total minutes of use (including minutes of use that we included in local service “bundled minutes”) and billable minutes of use (excluding bundled minutes) continued to decline in 2004. Customer attrition and increasing competition from wireless communications products contributed to the decline. We expect that these negative trends will persist into 2005.

Operating revenues from our wholesale services for 2004 decreased $3.5 million, or 3.5%, to $96.4 million from $99.9 million for 2003. The decrease was primarily attributable to a decline in broadband transport services revenues resulting from customer cancellations, downward pricing pressure and the limited capital investment we have allocated to support these services. The wholesale revenues generated by our local interconnection services in 2004 decreased $1.4 million, or 9.3%, to $13.6 million from $15 million. The decrease in this component of our wholesale revenues was primarily attributable to a decline in installed local interconnection lines to 61,801 at December 31, 2004 from 68,770 at December 31, 2003. We experienced modest growth in our wholesale operator and director assistance revenues in 2004.

Operating revenues from equipment sales and related services for 2004 decreased $21.5 million, or 52.4%, to $19.5 million from $41.0 million for 2003. The decrease was attributable to the discontinuation of our integrated technology solutions business effective October 2003, through which we resold computer servers, routers and other related equipment and provided professional services related to the installation and maintenance of that equipment. This business had revenues of approximately $22.7 million in 2003.

Our actual total operating revenues of $583.6 million for 2004 were $51.4 million less than our pro forma total operating revenues of $635.0 million for 2003. In addition to the factors discussed above, increased customer attrition and the renewal of customer contracts at competitive rates limited our actual revenue performance. Compared to our 2003 pro forma revenues, we derived $6.3 million less from our integrated communications services, $23.6 million less from our wholesale services and $21.5 million less from equipment sales and related services. The factors discussed above affecting each of these operations negatively affected our gross margins as well as our revenues, and offset a substantial portion of the cost savings we have achieved in integrating BTI’s operations since October 2003.

Cost of Services. Total cost of services of $290.9 million, or 49.8% of total operating revenues, for 2004 represented an increase of $60.1 million over total cost of services of $230.8 million, or 50.0% of total operating revenues, for 2003. This increase was primarily attributable to our inclusion of BTI’s operating results for a full fiscal year. The increase in cost of services due to the BTI acquisition was partially offset by our realization through December 31, 2004 of $7.6 million in line cost savings related to the integration of BTI. The line cost savings we achieved since the closing of the BTI acquisition represented a $10.6 million annualized reduction in our annualized line costs as of December 31, 2004. We continued to experience growth in our facilities-based T-1 products, the majority of which have been purchased and provisioned under our interconnection agreements. Costs associated with both our single line resale and UNE-L products declined from 2003, as customer attrition continued to decrease our installed base of these products. Because new customer additions effectively offset customer attrition, our installed base of UNE-P lines remained relatively consistent during 2004. The increase in our cost of services also was limited by declines in our variable cost of services associated with our long distance

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products, which continue to experience a decrease in total minutes of use, and declines in our cost of services related to the discontinuation of our integrated technology solutions business effective in October 2003.

Our actual cost of services of $290.9 million for 2004 was $37.0 million lower than our pro forma consolidated cost of services of $327.9 millions for 2003. This difference was primarily attributable to the $51.4 million revenue shortfall described above and to $7.6 million of cost savings associated with our integration of BTI. Our actual gross margin for 2004 was 50.2% compared to 48.4% as reflected in the 2003 pro forma cost of services. The improvement in our gross margin was primarily attributable to line cost savings related to the integration of BTI and the discontinuation of our integrated technology solutions business effective in October 2003.

Selling, Operations and Administration Expense. Total selling, operations and administration expense increased $47.9 million from $174.0 million, or 37.7% of total operating revenues, for 2003 to $221.9 million, or 38% of total operating revenues, for 2004. The increase was primarily attributable to our inclusion of BTI’s operating results for a full fiscal year. The effects of the acquisition were offset in part by cost savings resulting from reductions in compensation, employee benefits and facilities costs associated with our integration of BTI. We realized $24.0 million of such cost savings through December 31, 2004. As of the same date, our annualized savings in selling, operations and administration expense attributable to the integration of BTI totaled $31.5 million. During December 2004, we initiated an additional reduction in personnel to better align our costs structure with our existing revenue performance. We estimate that this reduction, which will result in a decrease of approximately 260 employees in our employee headcount, will generate annualized cost savings of approximately $16.0 million when fully implemented by March 31, 2005. We recorded a restructuring charge of $1.6 million during the fourth quarter of 2004 in connection with this reduction in force. As we review our revenue and cost performance measures in 2005, we plan to consider possible increased investment to expand our sales force in targeted markets. Any such expansion would offset in part the reduction in force implemented as part of the December 2004 restructuring.

Depreciation and Amortization. Total depreciation and amortization expense of $87.1 million for 2004 represented an increase of $23.7 million from total depreciation and amortization expense of $63.4 million for 2003. The increase resulted primarily from the depreciation of acquired BTI assets.

Asset Impairment Loss. We incurred asset impairment losses totaling $203.9 during 2004. The charges for 2004 were primarily attributable to our write-down of impaired property, plant and equipment assets and amortizable intangible customer base assets, as described under “Overview.”

Interest Expense. Total interest expense of $21.3 million for 2004 increased by $5.4 million from total interest expense of $15.9 million for 2003. The increase was primarily attributable to higher average balances of outstanding borrowings since October 6, 2003 resulting from our assumption on that date of $111.3 million of additional indebtedness in connection with our acquisition of BTI.

Interest Income. Total interest income from the temporary investment of available cash balances increased $86,000 from $344,000 for 2003 to $430,000 for 2004.

EBITDA. EBITDA represents net income (loss) before interest, taxes, depreciation and amortization. The following table presents EBITDA amounts for the years ended December 31, 2003 and 2004. The table also sets forth for these periods a quantitative reconciliation of the differences between EBITDA and net loss, as net loss is calculated in accordance with generally accepted accounting principles.