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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

OR

Commission file number: 0-23253

ITC^DELTACOM, INC.

(Exact name of registrant as specified in its charter)

(706) 385-8000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Not Applicable

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

Common Stock, par value $.01 per share

(Title of Class)

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

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

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

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

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

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

DOCUMENT INCORPORATED BY REFERENCE

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

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TABLE OF CONTENTS

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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PART I

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

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

Item 1.    Business.

Overview

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

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

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

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

Our Business Strategy

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

The key elements of our business strategy include:

Services

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Facilities

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

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

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

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

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

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

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

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

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

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

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

Sales and Marketing

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

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

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

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

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

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

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

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

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

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

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

Competition

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

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

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

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

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

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

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

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

Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

States also regulate the intrastate carrier access services of the incumbent carriers. We are required to pay access charges to the incumbent carriers when they originate or terminate our intrastate long distance traffic. Our business could be harmed by high access charges, particularly to the extent that the incumbent carriers do not incur the same level of costs with respect to their own intrastate long distance services or to the extent that the incumbent carriers are able to offer their long distance affiliates better access pricing. Some states also regulate the intrastate access charges of competitive carriers. States also will be developing intrastate universal service charges parallel to the interstate charges created by the FCC. For example, incumbent carriers such as BellSouth advocate the formation of state-lev