ITC DELTACOM INC - FORM 10-Q - November 15, 2010

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EX-32 - EXHIBIT 32 - ITC DELTACOM INC	dex32.htm
EX-31.1 - EXHIBIT 31.1 - ITC DELTACOM INC	dex311.htm
EX-31.2 - EXHIBIT 31.2 - ITC DELTACOM INC	dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

For the transition period from to

Commission file number: 0-23253

ITC^DeltaCom, Inc.

(Exact name of registrant as specified in its charter)


Delaware		58-2301135
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

7037 Old Madison Pike, Huntsville, Alabama		35806
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (256) 382-5900

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Outstanding at November 10, 2010
Common Stock, $.01 par value		83,673,150 shares

ITC^DeltaCom, Inc.

Index


		Page No.
Part I. Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets of ITC^DeltaCom, Inc. and Subsidiaries as of September 30, 2010 and December 31, 2009		1

	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) of ITC^DeltaCom, Inc. and Subsidiaries for the three and nine months ended September 30, 2010 and 2009		3

	Condensed Consolidated Statements of Stockholders’ Deficit of ITC^DeltaCom, Inc. and Subsidiaries for the nine months ended September 30, 2010		4

	Condensed Consolidated Statements of Cash Flows of ITC^DeltaCom, Inc. and Subsidiaries for the nine months ended September 30, 2010 and 2009		5

	Notes to Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22

Item 4.	Controls and Procedures		22

Part II. Other Information

Item 1A.	Risk Factors		23

Item 6.	Exhibits		24

Signatures			25

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	September 30, 2010		December 31, 2009
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	81,798	$	67,786
Short-term investments (Note 4)		—		1,706
Restricted cash		782		957
Accounts receivable, less allowance for doubtful accounts of $2,499 and $3,631 in 2010 and 2009, respectively		42,281		42,835
Inventory		4,047		2,995
Prepaid expenses and other		6,032		5,563

Total current assets		134,940		121,842

PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $389,245 and $350,881 in 2010 and 2009, respectively		205,536		201,549

OTHER LONG-TERM ASSETS:
Goodwill		35,109		35,109
Other intangible assets, net of accumulated amortization of $20,109 and $18,204 in 2010 and 2009, respectively		364		2,268
Other long-term assets		9,983		7,726

Total other long-term assets		45,456		45,103

Total assets	$	385,932	$	368,494

The accompanying notes are an integral part of these condensed consolidated balance sheets.

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	September 30, 2010			December 31, 2009
	(Unaudited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts payable:
Trade	$	26,290		$	23,067
Construction		2,934			2,857
Accrued interest		17,124			580
Accrued compensation		4,432			9,310
Unearned revenue		20,056			20,578
Other current liabilities		20,998			20,465
Current portion of long-term debt (Note 5)		—			4,614

Total current liabilities		91,834			81,471

LONG-TERM LIABILITIES:
Other long-term liabilities		1,655			1,688
Long-term debt (Note 5)		318,616			302,059

Total long-term liabilities		320,271			303,747

COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS’ DEFICIT:
Common stock, par value $0.01; 350,000,000 shares authorized; 83,673,150, and 81,674,270 shares issued and outstanding in 2010 and 2009, respectively		836			816
Additional paid-in capital		728,056			728,700
Accumulated deficit		(755,065	)		(746,240	)

Total stockholders’ deficit		(26,173	)		(16,724	)

Total liabilities and stockholders’ deficit	$	385,932		$	368,494

The accompanying notes are an integral part of these condensed consolidated balance sheets.

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
OPERATING REVENUES:
Integrated communications services	$	90,118		$	97,668		$	274,523		$	299,797
Wholesale services		16,330			14,564			45,900			44,807
Equipment sales and related services		4,472			4,167			12,537			12,373

TOTAL OPERATING REVENUES		110,920			116,399			332,960			356,977

COSTS AND EXPENSES:
Cost of services and equipment, excluding depreciation and amortization		51,391			52,627			148,170			163,731
Selling, operations and administration expense		38,670			41,378			118,744			126,865
Depreciation and amortization		13,810			17,110			42,280			51,245

Total operating expenses		103,871			111,115			309,194			341,841

OPERATING INCOME		7,049			5,284			23,766			15,136

OTHER (EXPENSE) INCOME:
Interest expense		(9,644	)		(7,453	)		(22,869	)		(22,544	)
Interest income		11			9			22			38
Write-off of debt discount and issuance cost (Note 5)		—			—			(7,948	)		—
Other income (loss)		(50	)		43			268			(89	)
Merger cost (Note 10)		(2,064	)		—			(2,064	)		—

Total other expense, net		(11,747	)		(7,401	)		(32,591	)		(22,595	)

LOSS BEFORE INCOME TAXES		(4,698	)		(2,117	)		(8,825	)		(7,459	)

INCOME TAX EXPENSE		—			—			—			—

NET LOSS	$	(4,698	)	$	(2,117	)	$	(8,825	)	$	(7,459	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE	$	(0.06	)	$	(0.03	)	$	(0.11	)	$	(0.09	)

BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		83,660,985			81,136,456			83,031,819			80,987,101

COMPREHENSIVE INCOME (LOSS)
NET LOSS	$	(4,698	)	$	(2,117	)	$	(8,825	)	$	(7,459	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in unrealized gains on derivative instrument designated as cash flow hedging instrument, net of tax		—			2,275			—			5,610

COMPREHENSIVE INCOME (LOSS)	$	(4,698	)	$	158		$	(8,825	)	$	(1,849	)

The accompanying notes are an integral part of these condensed consolidated statements.

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(UNAUDITED)

(In thousands, except share data)


	Common Stock				Additional Paid-in						Total Stockholders’ Equity
	Shares		Amount		Capital			Deficit			(Deficit)
BALANCE, December 31, 2009		81,674,270	$	816	$	728,700		$	(746,240	)	$	(16,724	)
Deferred compensation						1,504						1,504
Common stock units exercised		1,998,880		20		(20	)					—
Common stock withheld for payment of taxes (Note 7)						(2,128	)					(2,128	)
Net loss									(8,825	)		(8,825	)

BALANCE, September 30, 2010		83,673,150	$	836	$	728,056		$	(755,065	)	$	(26,173	)

The accompanying notes are an integral part of these condensed consolidated statements.

ITC^DELTACOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(8,825	)	$	(7,459	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		42,280			51,245
Provision for doubtful accounts		2,670			3,955
Stock-based compensation		2,014			1,767
Amortization of debt issuance costs and debt discount		2,015			1,816
Net (gain) loss on fixed asset sales and short-term investments		(187	)		31
Loss on write-off of unamortized debt discount and issuance cost		7,948			—
Changes in current operating assets and liabilities:
Accounts receivable, net		(2,003	)		3,392
Inventory		(1,053	)		324
Prepaid expenses and other		(469	)		87
Accounts payable		3,312			265
Accrued interest		16,544			199
Unearned revenue		(522	)		(1,054	)
Accrued compensation and other current liabilities		(4,553	)		(1,245	)

Total adjustments		67,996			60,782

Net cash provided by operating activities		59,171			53,323

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(44,651	)		(33,023	)
Change in accounts payable—construction		77			914
Proceeds from sale of fixed assets		650			360
Proceeds from sale of short-term investments		1,706			2,826
Change in restricted cash		(1	)		(1	)
Payment for accrued restructuring and merger costs		(539	)		(862	)
Other		(434	)		(186	)

Cash used in investing activities		(43,192	)		(29,972	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt, capital lease and other long-term obligations, net of issuance costs		318,035			—
Taxes paid on vested restricted shares		(2,112	)		—
Prepaid debt issuance cost		(9,815	)		—
Repayments of long-term debt, capital lease and other long-term obligations		(308,075	)		(2,571	)

Cash used by financing activities		(1,967	)		(2,571	)

CHANGE IN CASH AND CASH EQUIVALENTS		14,012			20,780

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		67,786			56,683

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	81,798		$	77,463

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest	$	5,065		$	20,529

The accompanying notes are an integral part of these condensed consolidated statements.

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Basis of Presentation

Nature of Business

ITC^DeltaCom, Inc. (“ITC^DeltaCom” and, together with its wholly-owned subsidiaries, the “Company”) provides integrated communications services in the southeastern United States. The Company delivers a comprehensive suite of high-quality data and voice communications services, including high-speed or broadband data communications (which consist of Ethernet and Internet access connectivity), local exchange, long-distance and conference calling, and mobile data and voice services. The Company also sells customer premises equipment to the Company’s business customers. The Company offers these services primarily over its advanced fiber optic network. Its fiber optic network provides it with significant transmission capacity that it uses for its own data and voice traffic and selectively sells to other communications providers on a wholesale basis.

Regulation

The Company is subject to certain regulations and requirements of the Federal Communications Commission (the “FCC”) and state public service commissions in its service areas.

Segment Disclosure

The Company operates in one segment in which it provides integrated communications services to businesses.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company’s management in accordance with generally accepted accounting principles in the United States for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. The Company’s accounting policies are consistent, in all material respects, with those applied in preparing the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2009 (the “2009 Form 10-K”), as filed with the SEC. In the opinion of management, these interim financial statements reflect all adjustments, including normal recurring adjustments management considers necessary for the fair presentation of the Company’s financial position, operating results and cash flows for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2009 has been derived from the audited consolidated balance sheet as of that date. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the 2009 Form 10-K.

The accompanying condensed consolidated financial statements present results for the three and nine months ended September 30, 2010. These results are not necessarily indicative of the results that may be achieved for the year ending December 31, 2010 or any other period.

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of ITC^DeltaCom and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

2. Recent Accounting Pronouncements

Fair Value Measurements and Disclosures

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, to require some new disclosures and clarify some existing disclosure requirements. Included are requirements to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs. In addition, ASU 2010-06 clarifies that, with respect to the existing disclosures, a reporting entity should:

•

use judgment in determining the appropriate classes of assets and liabilities for purposes of reporting fair value measurement for each class of assets and liabilities; and

•

provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ASU 2010-06 is effective for the Company beginning on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for the Company for fiscal periods beginning on and after January 1, 2011.

Subsequent Events Disclosures

The FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, effective upon issuance on February 24, 2010 (except for certain provisions not applicable to the Company). The amendments in ASU 2010-09 remove the requirement for a reporting entity to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. These amendments are intended to remove potential conflicts with the SEC’s disclosure requirements.

Disclosure about Financing Receivables and Allowance for Credit Losses

The FASB issued ASU 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, in July 2010 to require companies to provide extensive new disaggregated disclosures about the credit quality of their financing receivables and the allowance for credit losses. The objective of the expanded disclosure is to provide greater transparency about: (1) the nature of credit risk inherent in an entity’s financing receivables; (2) how the entity analyzes that risk in estimating its allowance for credit losses; and (3) the changes in the allowance for credit losses as well as the reasons for those changes. The following instruments are exempt from the disclosure requirements of the ASU: (a) short-term trade accounts receivables other than credit card receivables; (b) receivables measured at fair value or lower of cost or fair value; (c) unconditional promises to give; and (d) debt securities. For public companies, the disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010 and disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company’s financing receivables are short-term trade accounts receivable other than credit card receivables and therefore are exempt from the ASU disclosure requirements.

A description of other recent accounting pronouncements applicable to the Company is set forth in Note 2 to the consolidated financial statements included in the 2009 Form 10-K.

3. Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier value hierarchy is used to prioritize the inputs in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exist, therefore requiring an entity to develop its own assumptions. Observable market data should be used when available.

Assets and liabilities measured at fair value are based on one or more of three valuation techniques which are: market approach, defined as prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities; cost approach, defined as the amount that would be required to replace the service capacity of an asset (replacement cost); and income approach, defined as techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

The following tables show the assets and liabilities measured at fair value that are included in the accompanying consolidated balance sheets as of September 30, 2010 and December 31, 2009 and the fair value hierarchy level (in thousands):

Assets and Liabilities Measured at Fair Value on a Recurring Basis:


	December 31, 2009
	Carrying Value		Level 1		Level 2		Level 3
Assets
Short-term investments⁽¹⁾	$	1,706	$	—	$	—	$	1,706

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) (in thousands):


	Short-term investments^( 1)						Investments held for sale⁽¹⁾
	September 30, 2010			September 30, 2009			September 30, 2010		September 30, 2009
Balance at beginning of period	$	1,706		$	3,278		$	—	$	1,345
Transfers to Level 3		—			—			—		—
Change in fair value included in earnings (losses)		—			—			—		—
Redemptions		(1,706	)		(2,826	)		—		—

Balance at end of period	$	—		$	452		$	—	$	1,345

(1)

The Company classified its investment in shares of the Primary Fund of The Reserve Fund (Note 4) as Level 3 of the fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Primary Fund and its underlying securities. The Company assessed the fair value of the underlying collateral for the Primary Fund through evaluation of the liquidation value of assets held by the Primary Fund.

Fair Value of Debt (in thousands):


	September 30, 2010		December 31, 2009
Carrying amount	$	318,616	$	306,673
Fair value		332,000		290,062

There is no quoted market value for the Company’s 10.5% senior secured notes outstanding at September 30, 2010 and there was no quoted market value for loans outstanding under the Company’s first lien senior secured credit facility or second lien senior secured credit facility outstanding at December 31, 2009 and repaid on April 9, 2010. Based on market conditions, management estimated the fair value of the Company’s loans outstanding under the notes to be approximately 102% of face value at September 30, 2010 and under the credit facilities to be approximately 94% of face value at December 31, 2009.

4. Investments

The Company’s short-term investments at December 31, 2009 consisted of an investment in the Primary Fund of The Reserve Fund, a registered money market fund that was substantially liquidated as of December 31, 2009. On September 16, 2008, which was the date on which withdrawals from the Primary Fund were suspended, the Company had invested $25.4 million at cost in the Primary Fund. As a result of its receipt of a cash payment of $1.7 million on January 29, 2010, the Company recovered the book value of its investment at that date.

5. Long-Term Debt and Derivative Financial Instruments

Long-Term Debt

Long-term obligations, net of discount, at September 30, 2010 and December 31, 2009 consisted of the following (in thousands):


	September 30, 2010		December 31, 2009
10.5% senior secured notes due April 1, 2016, net of unamortized discount of $6,384	$	318,616	$	—
First lien term loan facility due July 31, 2013, net of unamortized discount of $1,709		—		223,173
Second lien credit facility due July 31, 2014		—		75,000
Revolving credit facility due July 31, 2012		—		8,500

Total		318,616		306,673
Less current maturities		—		(4,614	)

Total	$	318,616	$	302,059

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On April 9, 2010, ITC^DeltaCom and its wholly-owned subsidiaries closed an offering of $325 million aggregate principal amount of 10.5% senior secured notes due in 2016 (the “notes”) and a $30 million five-year senior secured revolving credit facility. The Company sold the notes in transactions not subject to the registration requirements of the Securities Act of 1933 (the “Securities Act”). The Company sold the notes at an offering price of 97.857% of the principal amount of the notes. The Company applied the gross proceeds of approximately $318 million it received from the sale of the notes to repay $305.5 million aggregate amount of indebtedness, including all principal plus accrued and unpaid interest, outstanding under its first lien and second lien senior secured credit facilities and its former revolving credit facility, which were terminated. Through September 30, 2010, the Company had used approximately $9.8 million of the offering proceeds to pay offering fees and expenses, including fees incurred in its exchange offer completed on July 29, 2010 and described below under “Exchange Offer.” The Company used the remainder of the offering proceeds for general corporate purposes.

Senior Secured Notes

The notes accrue interest at a rate of 10.5% per year from April 9, 2010. Interest on the notes is payable semi-annually in cash in arrears on April 1 and October 1 of each year, commencing on October 1, 2010. The notes will mature on April 1, 2016.

The Company may redeem some or all of the notes, at any time before April 1, 2013, at a redemption price equal to 100% of their principal amount plus a “make-whole” premium. The Company may redeem some or all of the notes at any time on or after April 1, 2013, at specified redemption prices declining from 105.250% to 100% of their principal amount. In addition, before April 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price equal to 110.5% of their principal amount with the net proceeds of certain equity offerings. During any 12-month period before April 1, 2013, the Company may redeem up to 10% of the aggregate principal amount of the notes at a redemption price equal to 103% of their principal amount. If (1) the Company sells certain of its assets and does not either (a) apply the net sale proceeds to repay indebtedness under the Company’s senior secured revolving credit facility, the notes, or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business, or (2) ITC^DeltaCom experiences a change of control, the Company may be required to offer to purchase notes from holders at 100% of their principal amount, in the case of a sale of assets, or 101% of their principal amount, in the case of a change of control. The Company would be required to pay accrued and unpaid interest, if any, on the notes redeemed or purchased in each of the foregoing events of redemption or purchase.

The notes are ITC^DeltaCom’s general senior obligations and rank equally in right of payment with all of ITC^DeltaCom’s existing and future senior indebtedness. The notes are secured on a first-priority basis, along with ITC^DeltaCom’s obligations under its senior secured revolving credit facility and any future pari passu secured obligations, subject to specified exceptions and permitted liens, by substantially all of the assets of ITC^DeltaCom and its subsidiaries that are deemed to be restricted subsidiaries under the indenture governing the notes. Currently all of ITC^DeltaCom subsidiaries are deemed to be restricted subsidiaries under the indenture. The notes are guaranteed on a senior secured basis by each of ITC^DeltaCom’s restricted subsidiaries on the initial issue date of the notes and will be guaranteed on a senior secured basis by each future domestic restricted subsidiary, other than certain excluded subsidiaries, and by any foreign restricted subsidiary that guarantees any indebtedness of ITC^DeltaCom or any domestic restricted subsidiary. The guarantees are the subsidiary guarantors’ general senior obligations and rank equally in right of payment with all of the subsidiary guarantors’ existing and future senior indebtedness.

The subsidiary guarantors are wholly owned, directly or indirectly, by ITC^DeltaCom, Inc. and have, jointly and severally, fully and unconditionally guaranteed, to each holder of the notes, the full and prompt performance of ITC^DeltaCom’s obligations under the notes and the indenture governing the notes, including the payment of principal (or premium, if any) and interest on the notes, on an equal and ratable basis. Further, ITC^DeltaCom has no independent assets or operations, and there are no significant restrictions on the ability of its consolidated subsidiaries to transfer funds to ITC^DeltaCom in the form of cash dividends, loans or advances. ITC^DeltaCom’s assets consist solely of cash representing less than 1% of consolidated assets and investments it has made in its consolidated subsidiaries, and its operations consist solely of changes in its investment in subsidiaries and interest associated with the senior indebtedness. Based on these facts, and in accordance with SEC Regulation S-X Rule 3-10, “Financial statements of guarantors and issuers of guaranteed securities registered or being registered,” ITC^DeltaCom will not be required to provide condensed consolidating financial information for the subsidiary guarantors.

The indenture governing the notes contains covenants that, among other things, limit ITC^DeltaCom’s ability, and the ability of ITC^DeltaCom’s restricted subsidiaries, to incur additional indebtedness, create liens, pay dividends on, redeem or repurchase ITC^DeltaCom’s capital stock, make investments or repay subordinated indebtedness, engage in sale-leaseback transactions, enter into transactions with affiliates, sell assets, create restrictions on dividends and other payments to ITC^DeltaCom from its subsidiaries, issue or sell stock of subsidiaries, and engage in mergers and consolidations. All of the covenants are subject to a number of important qualifications and exceptions under the indenture.

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Exchange Offer

In connection with the sale of the notes, ITC^DeltaCom entered into a registration rights agreement among ITC^DeltaCom, the subsidiary guarantors of the notes and the initial purchaser of the notes, pursuant to which the Company agreed to use commercially reasonable efforts to file, and cause to be declared effective, a registration statement with the SEC to exchange the notes for a new issue of substantially identical notes in an exchange registered under the Securities Act or, if required, to file, and cause to be declared effective, a shelf registration statement to cover resales of the notes under specified circumstances.

On July 29, 2010, the Company consummated its offer to exchange its 10.5% senior secured notes due 2016 issued on April 9, 2010 for an equal aggregate principal amount of its newly issued 10.5% senior secured notes due 2016 which were registered under the Securities Act. All of the outstanding unregistered notes, representing an aggregate principal amount of $325 million, were exchanged. The Company received no cash proceeds from the issuance of the notes in the exchange offer. The new notes have terms substantially identical to the terms of the notes issued on April 9, 2010, except that the offering of the new notes was registered under the Securities Act, and the transfer restrictions, registration rights and related additional interest terms applicable to the original notes do not apply to the notes issued in the exchange offer.

Revolving Credit Facility

Under the revolving credit facility, up to $30 million principal amount of borrowings may be outstanding at any time. The facility loans may be borrowed, repaid and reborrowed from time to time during the term of the facility and will mature and be payable in full on April 9, 2015. The Company will be required to prepay amounts outstanding under the revolving credit facility with the net cash proceeds from certain sales and other dispositions of its assets. The Company may use the proceeds of borrowings under the revolving credit facility for its general corporate purposes.

Amounts drawn under the revolving credit facility will bear interest at an annual rate calculated, at the Company’s option, on the basis of either (1) a base rate plus a margin of 3.5% or (2) an adjusted London interbank offered rate (“LIBOR”) plus a margin of 4.5%. The interest rate on the revolving credit loans that are base-rate loans will fluctuate as the base rate fluctuates and, in the case of the adjusted LIBOR loans, the interest rate will be adjusted at the end of each applicable interest period. Interest on base-rate loans will be payable quarterly in arrears, while interest on adjusted LIBOR loans will be payable at the end of each applicable interest period, which may be one, two, three or six months, except that in the case of a six-month interest period, interest will be payable at the end of every three-month period.

ITC^DeltaCom is the borrower under the revolving credit facility. All of ITC^DeltaCom’s obligations under the facility are or will be guaranteed by all its existing and future domestic subsidiaries and, subject to conditions, foreign subsidiaries. The obligations of the loan parties under the facilities are secured by first-priority liens on, and first-priority security interests in, substantially all of their assets, including a first-priority pledge of the capital stock of each direct or indirect subsidiary of the Company. In the event of enforcement of the liens securing the 10.5% senior secured notes due 2016 and the related guarantees or a distribution in bankruptcy, the proceeds thereof will first be applied to repay obligations under the revolving credit facility.

The revolving credit facility contains negative covenants, including, among others, covenants limiting the ability of ITC^DeltaCom and its subsidiaries to incur indebtedness, create liens, pay dividends and make distributions or other restricted payments, make investments, change their business, engage in transactions with affiliates, sell assets, and engage in mergers and acquisitions. In addition, the revolving credit facility contains affirmative covenants, including, among others, covenants requiring compliance with laws, maintenance of corporate existence, licenses, property and insurance, payment of taxes and performance of other material obligations, and the delivery of financial and other information.

The Company will be required to comply with specified financial tests and to maintain certain financial ratios on a consolidated basis based on measures that include levels of indebtedness and earnings before interest, taxes, depreciation, amortization and other specified items. The Company generally is not required to be in compliance with these ratios if no loans are outstanding under the revolving credit facility and if its obligations relating to letters of credit issued under the facility do not exceed $2 million.

At September 30, 2010, there were no loans outstanding under the revolving credit facility and the Company’s obligations relating to letters of credit issued under the facility totaled approximately $910,000.

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Credit Facilities Repaid on April 9, 2010

Borrowings under the first lien credit facility repaid on April 9, 2010 accrued interest, at the Company’s option, at an annual rate equal to either (1) a specified base rate plus 3.00% or (2) the specified LIBOR plus 4.00%. As of March 31, 2010, the annual interest rate on borrowings outstanding under the first lien credit facility was 4.2%. Borrowings under the second lien credit facility repaid on April 9, 2010 accrued interest, at the Company’s option, at an annual rate equal to either (1) a specified base rate plus 6.50% or (2) LIBOR plus 7.50%. As of March 31, 2010, the annual interest rate on borrowings outstanding under the second lien credit facility was 7.7%.

The first lien credit facility repaid on April 9, 2010 required a prepayment of principal equal to 50% of the excess cash flow, as defined in the facility, within 100 days after the end of each fiscal year. The prepayment required from excess cash flow for the year ended December 31, 2009 was approximately $2.3 million, which amount is included in the accompanying condensed consolidated balance sheets in current maturities of long-term debt as of December 31, 2009.

In the three months ended June 30, 2010, the Company recognized the write-off, in its condensed consolidated statements of operations and comprehensive loss, of deferred financing costs and unamortized debt discount totaling approximately $7.9 million in connection with the credit facilities repaid on April 9, 2010.

As of September 30, 2010, the Company had $325 million of total long-term indebtedness, net of approximately $6.4 million of unamortized discount, or approximately $318.6 million net total long term debt, which had an overall weighted average annual interest rate of 10.7%, including debt discount and excluding deferred financing costs.

As of March 31, 2010 and December 31, 2009, the Company was in compliance with all of the financial covenants as required under its credit facilities.

Interest cost included amortized debt discount of $290,000 and $682,000, for the three and nine months ended September 30, 2010, respectively, and $102,000 and $308,000 for the three and nine months ended September 30, 2009, respectively.

Derivative Financial Instrument

For a period of two years which terminated September 30, 2009, under the terms of the first lien and second lien credit facilities that were repaid on April 9, 2010, the Company agreed to hedge at least 50% of the aggregate principal amount of borrowings outstanding under the facilities, so that such borrowings would be effectively subject to a fixed or maximum interest rate. The Company’s objective was to hedge the variability in the cash flows of the interest payments on $210 million principal amount, or approximately 70%, of its variable-rate debt, which accrued interest based on a variable three-month LIBOR rate. On August 24, 2007, the Company entered into a receive-floating, pay-fixed interest rate swap agreement that fixed the LIBOR portion of the interest rate at an annual rate of 4.955% on $210 million principal amount of debt. The swap agreement was designated as a cash flow hedge of the variability in the cash flow resulting from interest rate risk under the variable three-month LIBOR rates designated in the credit facility agreements.

The Company accounted for its interest rate swap agreement that was designated as a cash flow hedge of the variability in the cash flow resulting from interest rate risk in accordance with ASC Topic 815, Derivatives and Hedging. ASC Topic 815 requires that the derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company was required by ASC Topic 815 to document, designate and assess the effectiveness of transactions that receive hedge accounting treatment. The Company’s interest rate swap agreement qualified as a cash flow hedge under ASC Topic 815. The critical terms of the hedging instrument matched the terms of the hedged transactions, so that the notional amount, payment dates, benchmark rate and repricing dates of the interest rate swap instrument matched the same terms of the interest-bearing liability. The Company assessed the effectiveness of the swap prospectively and retrospectively each quarter using the cumulative dollar offset method. The Company used the change in variable cash flows method to measure hedge effectiveness. The hedge was determined to be highly effective until its termination at September 30, 2009. The Company recognized (1) the swap at its fair value as an asset or liability in its balance sheet and marked the swap to fair value through other comprehensive income (loss), (2) floating-rate interest expense in earnings, (3) the offsetting effect of the interest swap in earnings and (4) hedge ineffectiveness immediately in earnings. Changes in unrealized gains (losses) of $2.3 million and $5.6 million for the three and nine months ended September 30, 2009, respectively, are included in “other comprehensive income (loss)” in the accompanying consolidated statements of operations and comprehensive loss.

6. Income Taxes

Income tax expense for the three and nine months ended September 30, 2010 and 2009 is based on the Company’s estimate of the effective tax rate expected to be applicable for the respective full year. A loss is anticipated for the year, resulting in a zero effective tax rate for the year, and tax benefits from the loss for the year are not expected to be recognizable as a deferred tax asset.

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7. Stock-Based Compensation

The Company maintains two stock-based employee compensation plans, consisting of the ITC^DeltaCom, Inc. Amended and Restated Stock Incentive Plan (the “Stock Incentive Plan”) and the ITC^DeltaCom, Inc. Amended and Restated Executive Stock Incentive Plan. Option vesting schedules generally range from 25% of the shares subject to the option over a four-year vesting period to one-third of the shares subject to the option over a three-year vesting period. A limited number of shares are subject to vesting over a two-year period. The option price for any option may not be less than 100% of the fair market value of the stock covered by the option on the date of grant.

The only participants in the Amended and Restated Executive Stock Incentive Plan, which is administered by ITC^DeltaCom’s Board of Directors, are three senior officers of the Company who have received awards under the plan. A description of the awards is set forth in Note 9 to the consolidated financial statements included in the 2009 Form 10-K.

As more fully set forth in Note 9 to the consolidated financial statements included in the 2009 Form 10-K, the Company awarded to certain officers of the Company equity instruments, including restricted stock units and stock options, under the Stock Incentive Plan that it classified as a liability in the three months ended December 31, 2009. Included in the grants of restricted stock units set forth below for the three months ended March 31, 2010, December 31, 2009 and March 31, 2009 were restricted stock units for approximately 1,038,000, 73,000 and 459,000 shares of common stock, respectively, with a fair value of approximately $2,003,000, $108,000 and $289,000, respectively, on the grant date. Recognition of share-based compensation cost for those shares is based on liability accounting treatment. Also as more fully set forth in Note 9 to the consolidated financial statements included in the 2009 Form 10-K, in 2009 the Company granted nonqualified stock options to purchase 1,600,000 shares of common stock to a senior officer that are subject to performance-based vesting over four years. If the officer continues in employment with the Company, any of these options that have not previously vested will vest on the six-year anniversary of the grant date. The Company also granted to the senior officer nonqualified stock options to purchase 400,000 shares of common stock that vest ratably over four years. All of the foregoing options granted to such senior officer are included in the options determined by the Company to require liability classification. As of September 30, 2010 and December 31, 2009, the total fair value of the liability recorded in the accompanying condensed consolidated balance sheets for option share-based compensation awards was approximately $634,000 and $596,000, respectively, and the total liability recorded for restricted stock unit compensation awards was approximately $1.7 million and $1.2 million, respectively.

On March 31, 2010, in connection with the deferred delivery of approximately 2,900,000 shares of common stock subject to restricted stock units granted in 2005, the Company delivered approximately 1,800,000 shares of common stock to three senior officers and withheld approximately 1,100,000 shares of common stock to satisfy the employer’s statutory tax withholding requirements. The Company valued the shares at $1.95 per share based on the closing sale price of the Company’s common stock on March 30, 2010 as reported on the OTC Bulletin Board and paid approximately $2.1 million of withholding tax, which was charged to additional paid-in-capital in the accompanying condensed consolidated balance sheet.

The Company granted restricted stock units for shares of common stock as follows:


Three Months Ended	Approximate Number of Shares		Approximate Fair Value of the Awards
September 30, 2010		115,000	$	167,000
June 30, 2010		20,000	$	38,000
March 31, 2010		2,725,000	$	5,260,000
December 31, 2009		230,000	$	342,000
September 30, 2009		120,000	$	150,000
June 30, 2009		45,000	$	41,000
March 31, 2009		1,491,000	$	939,000

The Company will recognize the fair value of the awards in expense over the service periods of the grants. The fair value of the awards was determined based on the closing price of ITC^DeltaCom’s common stock on the grant date as reported on the OTC Bulletin Board.

The Company recognized stock-based compensation in the total amount of $896,000 and $2.0 million in the three and nine months ended September 30, 2010, respectively, and $700,000 and $1.8 million in the three and nine months ended September 30, 2009, respectively, including compensation related to stock option awards and restricted stock units granted in the current and prior years. As of September 30, 2010, the total compensation cost related to nonvested restricted stock units not yet recognized was $5.7 million.

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed as net income available to common stockholders divided by the weighted average basic shares outstanding. The outstanding shares used to calculate the weighted average basic shares for the three and nine months ended September 30, 2010 excludes 2,600,000 and 3,400,000, respectively, and for the three and nine months ended September 30, 2009 excludes 3,600,000 and 3,300,000, respectively, of common shares issuable under share-based compensation awards for restricted stock units and stock options, as these awards were issued but were not vested and, therefore, not considered outstanding for purposes of computing basic earnings per share at the balance sheet dates. Diluted earnings (loss) per share is determined as the lowest earnings or highest loss per incremental share in the sequence of potential common shares from the most dilutive to the least dilutive. When a loss is reported, diluted earnings per share cannot be adjusted for the dilutive impact of potential common shares from share-based compensation awards because the effect would be anti-dilutive.

9. Commitments and Contingencies

Purchase Commitments

At September 30, 2010, the Company had entered into agreements with vendors to purchase approximately $8.1 million of equipment and services during the year ending December 31, 2010 related to the improvement and installation of switches, other network equipment and certain services.

Legal Proceedings

In the normal course of its business, the Company is a party or otherwise subject to litigation and various other legal proceedings, including proceedings in which third parties have challenged some of the Company’s significant licenses to use the rights-of-way of others and other proceedings described in Note 10 to the Company’s audited consolidated financial statements included in the 2009 Form 10-K. Other than such proceedings, there are no legal proceedings pending against the Company that, if resolved adversely to the Company, management believes would have a material adverse effect on the Company’s financial position, results of operations or liquidity.

Regulatory Proceedings and Customer-Based Taxation

The Company is a party or is subject to numerous state and federal regulatory proceedings affecting the segments of the communications industry in which it operates, including regulatory proceedings in connection with actions by the former regional Bell operating companies, their successors and affiliates. The Company anticipates that these companies will continue to pursue changes to communications law and policy through arbitration, litigation, regulations and legislation within the Company’s primary eight-state market in order to reduce regulatory oversight and state regulation over their rates and operations and in other ways that could adversely affect competitive carriers, like the Company. Moreover, the decisions made by the agencies interpreting and implementing various federal and state regulations and other administrative decisions are frequently challenged through both the regulatory process and the courts. These challenges often are not resolved for a period of years and occasionally have retroactive impacts that could be either beneficial or adverse to the Company’s operations.

Throughout its service territory, the Company is required to bill and to remit taxes, fees and other charges (collectively referred to as “taxes”) on behalf of government entities at the city, county, state and federal levels (“taxing authorities”). Each taxing authority may have unique rules concerning the services that are subject to each tax and how those services should be taxed, the application of which involves judgment. Taxing authorities periodically perform audits to verify compliance with their rules and may include all periods remaining open under applicable statutes or codes, which can span as many as five years. If the Company is unable to substantiate its position or is otherwise found to be non-compliant, non-compliance could potentially have a significant financial impact on the Company.

In view of the regulatory environment in which it operates, the Company is at risk of non-compliance with various laws and regulations, which could result in the loss of its operating authority, fines and assessments. The Company routinely evaluates the potential impact of matters undergoing challenges and matters involving compliance with laws and regulations to assess the reasonableness of its actions and to determine whether sufficient information exists to warrant disclosure and/or accrual. However, estimating the range of possible outcomes and the probabilities of the possible outcomes in a dynamic regulatory environment is subject to significant uncertainties.

ITC^DELTACOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. Subsequent Event

As previously reported, on October 1, 2010, ITC^DeltaCom entered into a definitive merger agreement with EarthLink, Inc. and a wholly-owned subsidiary of EarthLink, pursuant to which EarthLink agreed to acquire ITC^DeltaCom in an all-cash transaction for $3.00 per share. The transaction is valued at approximately $516 million, including the assumption of the Company’s outstanding indebtedness.

The merger agreement provides for EarthLink’s acquisition of ITC^DeltaCom by means of a merger of EarthLink’s subsidiary with and into ITC^DeltaCom, with ITC^DeltaCom surviving as a wholly-owned subsidiary of EarthLink.

As described in Note 5, ITC^DeltaCom has outstanding $325 million aggregate principal amount of 10.5% senior secured notes due 2016. Under the related indenture, following the consummation of the merger, ITC^DeltaCom will be required to offer to repurchase any or all of the Notes at 101% of their principal amount. To the extent the notes are not repurchased or repaid, the notes would remain outstanding as obligations of ITC^DeltaCom and its subsidiaries following the merger.

The merger, which the boards of directors of both companies have unanimously approved, will be completed upon the satisfaction of several closing conditions, including receipt of required regulatory approvals from the Federal Communications Commission and certain public utilities commissions, several of which we have received. The parties have been granted early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 which satisfies a closing condition. Each party’s obligation to consummate the merger is subject to certain other conditions, including, among others, the accuracy of the other party’s representations and warranties and the other party’s compliance, in all material respects, with its covenants and agreements contained in the merger agreement. In addition, EarthLink’s obligation to consummate the merger is also conditioned on the absence of a material adverse effect related to ITC^DeltaCom. Subject to the fulfillment of these closing conditions, the transaction is expected to close in the fourth quarter of 2010 or the first quarter of 2011. The merger is not subject to any financing condition. ITC^DeltaCom incurred approximately $2.1 million of costs in connection with the merger during the three months ended September 30, 2010, and expects to incur up to $6 million of additional costs to complete the merger.

The merger agreement contains certain termination rights for EarthLink. Upon termination of the merger agreement, under specified circumstances, ITC^DeltaCom may be required to pay EarthLink a termination fee equal to $8.25 million and reimbursement of EarthLink’s expenses up to $2.5 million.

EarthLink also entered into a Written Consent and Voting Agreement, dated October 1, 2010, with certain affiliates of Welsh, Carson, Anderson & Stowe and Tennenbaum Capital Partners, LLC, who in the aggregate own approximately 62% of ITC^DeltaCom’s outstanding shares of common stock. Pursuant to the agreement, such stockholders executed and delivered an irrevocable written consent (subject to certain conditions) adopting the merger agreement shortly after the merger agreement was executed. As a result, no further stockholder action will be required to adopt the merger agreement or approve the merger. ITC^DeltaCom has mailed to its stockholders an information statement describing the merger agreement and the merger.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis 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. When used in this management’s discussion and analysis, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to ITC^DeltaCom or our management are intended to identify our forward-looking statements. All statements by us regarding our expected financial position, revenues, cash flow and other operating results, cost savings, 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 actual results could be materially different from our expectations because of various risks. Some of these risks are discussed below and under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our 2009 fiscal year and in our subsequent SEC filings. Except as required by applicable law, we disclaim any obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise.

This management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for our 2009 fiscal year and the financial statements and related notes included in that report.

Unless we indicate otherwise or the context otherwise indicates, references below to “we,” “us,” “our” and “ITC^DeltaCom” mean ITC^DeltaCom, Inc. and its subsidiaries.

Agreement for Acquisition by EarthLink

As previously reported, on October 1, 2010, ITC^DeltaCom, Inc. entered into a definitive merger agreement with EarthLink, Inc. and a wholly-owned subsidiary of EarthLink, pursuant to which EarthLink agreed to acquire ITC^DeltaCom, Inc. in an all-cash transaction for $3.00 per share. The transaction is valued at approximately $516 million, including the assumption of the Company’s outstanding indebtedness.

The merger agreement provides for EarthLink’s acquisition of ITC^DeltaCom, Inc. by means of a merger of EarthLink’s subsidiary with and into ITC^DeltaCom, Inc. with ITC^DeltaCom, Inc. surviving as a wholly-owned subsidiary of EarthLink.

As described below, ITC^DeltaCom, Inc. has outstanding $325 million aggregate principal amount of 10.5% senior secured notes due 2016. Under the related indenture, following the consummation of the merger, ITC^DeltaCom, Inc. will be required to offer to repurchase any or all of the Notes at 101% of their principal amount. To the extent the notes are not repurchased or repaid, the notes would remain outstanding as obligations of ITC^DeltaCom, Inc. and its subsidiaries following the merger.

The merger, which the boards of directors of both companies have unanimously approved, will be completed upon the satisfaction of several closing conditions, including receipt of required regulatory approvals from the Federal Communications Commission and certain public utilities commissions several of which we have received. The parties have been granted early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 which satisfies a closing condition. Each party’s obligation to consummate the merger is subject to certain other conditions, including, among others, the accuracy of the other party’s representations and warranties and the other party’s compliance, in all material respects, with its covenants and agreements contained in the merger agreement. In addition, EarthLink’s obligation to consummate the merger is also conditioned on the absence of a material adverse effect related to ITC^DeltaCom, Inc.. Subject to the fulfillment of these closing conditions, the transaction is expected to close in the fourth quarter of 2010 or the first quarter of 2011. The merger is not subject to any financing condition.

The merger agreement contains certain termination rights for EarthLink. Upon termination of the merger agreement, under specified circumstances, ITC^DeltaCom, Inc. may be required to pay EarthLink a termination fee equal to $8.25 million and reimbursement of EarthLink’s expenses up to $2.5 million.

EarthLink also entered into a Written Consent and Voting Agreement, dated October 1, 2010, with certain affiliates of Welsh, Carson, Anderson & Stowe and Tennenbaum Capital Partners, LLC, who in the aggregate own approximately 62% of ITC^DeltaCom, Inc.’s outstanding shares of common stock. Pursuant to the agreement, such stockholders executed and delivered an irrevocable written consent (subject to certain conditions) adopting the merger agreement shortly after the merger agreement was executed. As a result, no further stockholder action will be required to adopt the merger agreement or approve the merger. ITC^DeltaCom, Inc. has mailed to its stockholders an information statement describing the merger agreement and the merger.

Overview

We are one of the largest facilities-based competitive providers of integrated communications services, principally to businesses, in our primary eight-state market, which encompasses Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. We deliver a comprehensive suite of high-quality data and voice communications services, including high-speed or broadband data communications (which consist of Ethernet and Internet access connectivity), local exchange, long-distance and conference calling, and mobile data and voice services. We often offer these services as bundled solutions, including our Simpli-Business ^SM complete office communications solution that conveniently packages our managed network services and communications devices for business customers. We also sell customer premises equipment to our business customers.

We offer our services primarily over our advanced fiber optic network, which as of September 30, 2010 consisted of 12,483 route miles deployed from New York to Florida and from Georgia to Texas, and principally covered portions of our primary eight-state market. We also use additional network facilities obtained from other providers to extend our market coverage and to meet the needs of our customers. Our fiber optic network provides us with significant transmission capacity that we use for our own data and voice traffic and selectively sell to other communications providers on a wholesale basis.

For the third quarter of 2010, we:

•

recorded operating income of $7.0 million compared to operating income of $5.3 million for the third quarter of 2009, and a net loss of $4.7 million compared to a net loss of $2.1 million for the third quarter of 2009;

•

recorded adjusted EBITDA, as defined by us below, of $21.8 million, a 5.6% decrease from $23.1 million for the third quarter of 2009;

•

ended the quarter with approximately 414,400 retail business voice lines in service, of which 89.3% were provided on our own network, which represented an increase from 87.4% provided on our own network at the end of the third quarter of 2009;

•

experienced an increase of 0.02% in total operating revenues over the second quarter of 2010, which was a decrease in total operating revenues of $5.5 million, or 4.7%, compared to the third quarter of 2009;

•

continued to benefit from investments in process redesign and other efficiency gains, resulting in selling, operations and administration expense of $38.7 million compared to $41.4 million for the third quarter of 2009; and

•

generated $20.2 million in net cash provided by operating activities compared to $14.6 million generated for the third quarter of 2009.

The following table presents information about our business as of the dates indicated.


	September 30, 2010		June 30, 2010		March 31, 2010		December 31, 2009		September 30, 2009
Colocations⁽¹⁾		294		294		281		279		272
Voice and data switches, Nortel Call Server 2000 IP, Nortel DMS500 and Lucent 5E		20		20		20		20		21
Number of employees⁽²⁾		1,360		1,357		1,365		1,398		1,437

(1)	Two colocations in the same physical facility are reflected as one location.

(2)	Includes full-time and part-time employees.

The following table presents, for the quarterly periods or as of the dates indicated, additional information about our operations and business. All data, except lines in service and percentages, are shown in thousands of dollars.


	Three Months Ended
	September 30, 2010		June 30, 2010		March 31, 2010		December 31, 2009		September 30, 2009
Integrated communications services revenues	$	90,118	$	91,287	$	93,118	$	94,359	$	97,668

Wholesale services revenues:
Broadband transport		14,265		13,046		11,917		12,327		12,284
Local interconnection		70		93		120		127		181
Directory assistance and operator services		1,000		964		919		925		986
Other		995		1,178		1,333		1,215		1,113

Total wholesale services revenues		16,330		15,281		14,289		14,594		14,564

Equipment sales and related services revenues		4,472		4,332		3,733		3,394		4,167

Total operating revenues	$	110,920	$	110,900	$	111,140	$	112,347	$	116,399


	Three Months Ended
	September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009			September 30, 2009
Increase (decrease) in total operating revenues (from previous quarter)		0.02	%		(0.2	)%		(1.1	)%		(3.4	)%		(1.9	)%
At period end:
Retail business voice lines in service⁽¹⁾
UNE-T and UNE lines⁽²⁾		369,998			368,739			366,734			367,403			369,752
Resale and commercial agreement lines ⁽³⁾		44,425			46,975			49,754			51,602			53,456

Total retail business voice lines in service		414,423			415,714			416,488			419,005			423,208

Wholesale voice lines in service⁽⁴⁾		6,923			6,900			8,694			8,004			6,969

Total business voice lines in service ⁽⁵⁾		421,346			422,614			425,182			427,009			430,177

(1)	Lines in service include only voice lines in service. Conversion of data services provided to customers to a voice line equivalent is excluded.

(2)	Facilities-based service offering in which we provide local service through our owned and operated switching facilities.

(3)	Voice lines for local and mobile services served via commercial agreements and reselling incumbent local exchange carrier tariff offerings.

(4)	Represents primary rate interface circuits provided as part of our local interconnection services for Internet service providers.

(5)	Reported net of lines disconnected or canceled.

Three and Nine Months Ended September 30, 2010 Compared to Three and Nine Months Ended September 30, 2009

Operating Revenues. Total operating revenues decreased $5.5 million, or 4.7%, to $110.9 million for the three months ended September 30, 2010, or the “2010 quarter,” from $116.4 million for the three months ended September 30, 2009, or the “2009 quarter.” Total operating revenues decreased $24 million, or 6.7%, to $333 million for the nine months ended September 30, 2010, or the “2010 nine-month period,” from $357 million for the nine months ended September 30, 2009, or the “2009 nine-month period.”

Operating revenues from our integrated communications services decreased $7.6 million, or 7.7%, to $90.1 million for the 2010 quarter from $97.7 million for the 2009 quarter. Integrated communications services revenues for the 2010 nine-month period decreased $25.3 million, or 8.4%, to $274.5 million from $299.8 million for the 2009 nine-month period. The decreases for the 2010 quarter and 2010 nine-month periods were primarily attributable to decreases in local and data service revenues of $6.4 million for the 2010 quarter and $20.8 million for the 2010 nine-month period resulting from customer disconnects and pricing pressure related to adverse economic conditions. Carrier access and long distance revenues also decreased $1.1 million for the 2010 quarter and $4.5 million for the 2010 nine-month period. Long distance and carrier access revenues represented approximately 13% of our total operating revenues for the 2010 and 2009 quarters.

During the 2010 quarter, we experienced an increase of approximately 1,300 facilities-based local lines, and a decrease of approximately 2,600 resale and UNE-P lines that were disconnected or converted to facilities-based lines, resulting in a net decrease in billable retail local lines of approximately 1,300 lines. We experienced an increase of approximately 250 retail facilities-based local lines and a decrease of approximately 9,000 in resale and UNE-P lines from the end of the 2009 quarter to the end of the 2010 quarter, for a net decrease in total lines of 2.1%, or 8,750 total retail lines.

Operating revenues generated by sales of wholesale services for the 2010 quarter increased by $1.7 million, or 11.6%, to $16.3 million from $14.6 million for the 2009 quarter and increased $1.1 million, or 2.5%, to $45.9 million for the 2010 nine-month period from $44.8 million for the 2009 nine-month period. Local interconnection revenues declined $141,000 for the 2010 quarter and $1 million for the 2010 nine-month period as a result of the continued contraction of the dial-up Internet business. Directory assistance and operator services revenues increased $14,000 for the 2010 quarter and decreased $151,000 for the 2010 nine-month period from the prior corresponding periods. The decreases were offset by increases in broadband transport services of $2 million for the 2010 quarter and $2 million for the 2010 nine-month period. The increases in broadband transport service revenues resulted from actions on our part to secure our customer relationships, in which we entered into new contracts with utilities to acquire facilities for use in serving our customers and canceled contracts with the utilities to market their facilities to our customers. As a result, our broadband transport revenues and our cost of services increased for the 2010 quarter and nine-month period approximately $1.8 million and $2.8 million over the 2009 quarter and the 2009 nine-month period, respectively. These increases in the 2010 nine-month period were offset in part by disconnects and price reductions.

Operating revenues from equipment sales and related services increased $305,000, or 7.3%, to $4.5 million for the 2010 quarter from $4.2 million for the 2009 quarter. Revenues from equipment sales and related services increased $164,000, or 1.3%, from $12.4 million for the 2009 nine-month period to $12.5 million for the 2010 nine-month period. Revenues from equipment sales increased as a result of our expanded product offerings for telephone systems.

Core and Non-Core Services Revenue. Our management differentiates between “core revenue,” which is derived from sales of services that we consider to be key to our business strategy, and “non-core revenue.”

We consider our core revenue to include the following:

•

Core retail revenue. We define our core retail revenue as revenue we generate from sales of our integrated digital T-1 transmission line-based services, including local, data, broadband Internet, long distance and mobile services which are bundled according to customer service requirements. Our core retail revenue decreased $4.8 million, or 7.3%, to $61.2 million for the 2010 quarter from $66.0 million for the 2009 quarter and decreased $15.1 million, or 7.5%, to $187.0 million for the 2010 nine-month period from $202.1 million for the 2009 nine-month period.

•

Enterprise revenue. We define enterprise revenue to include revenue generated by customers which we believe have the potential to spend over $75,000 per month on our products and services. Services provided to our enterprise customers typically include in-bound and out-bound voice services as well as data and local services. Our enterprise revenue increased $1.2 million, or 13.2%, to $10.3 million for the 2010 quarter from $9.1 million for the 2009 quarter and increased $3.4 million, or 13%, to $29.6 million for the 2010 nine-month period from $26.2 million for the 2009 nine-month period.

•

Core wholesale fiber revenue. Our core wholesale fiber revenue consists of revenue from sales of our broadband capacity services, which we provide to other communications companies. Our core wholesale fiber revenue increased $2.0 million, or 16.3%, to $14.3 million for the 2010 quarter from $12.3 million for the 2009 quarter and increased $2.0 million, or 5.4%, to $39.2 million for the 2010 nine-month period from $37.2 million for the 2009 nine-month period.

•

Equipment sales and services revenue. We derive non-recurring revenue from selling, installing and providing maintenance services for customer premises equipment. Revenue from equipment sales and services increased $305,000, or 7.3%, to $4.5 million for the 2010 quarter from $4.2 million for the 2009 quarter and increased $164,000, or 1.3%, to $12.5 million for the 2010 nine-month period from $12.4 million for the 2009 nine-month period.

Within both our retail and wholesale customer bases, we have defined revenue from certain traditional telecommunications products to be “non-core revenue” because technological changes have led to the development of competing solutions for the types of customers that typically purchase such products. We consider our non-core revenue to include the following:

•

Non-core retail revenue. We define our non-core retail revenue as revenue generated from sales of our basic telephone services supplying standard single line telephones, telephone lines and access to the public switched network, or “POTS,” as well as resale local service. Our non-core retail revenue also includes outbound long distance usage-based revenue and revenue from access usage related to products which we do not consider to be key to our business. Non-core retail revenue decreased $3.9 million, or 17.3%, to $18.6 million for the 2010 quarter from $22.5 million for the 2009 quarter and decreased $13.6 million, or 19.0%, to $57.8 million for the 2010 nine-month period from $71.4 million for the 2009 nine-month period.

•

Non-core wholesale revenue. Non-core wholesale revenue includes revenue from our sales of dial-up Internet services, wholesale long distance services and operator and directory-assisted traffic. We consider revenue generated by dial-up Internet access services to be non-core revenue because of the expansion of substitute broadband Internet services. The decline in demand for usage-based services at the retail level has contributed to the same decline in wholesale long distance services, as well as to declines in operator and directory-assisted traffic. Revenues from our non-core wholesale services decreased $216,000, or 9.5%, to $2.1 million for the 2010 quarter from $2.3 million for the 2009 quarter and decreased $951,000, or 12.5%, to $6.7 million for the 2010 nine-month period from $7.6 million for the 2009 nine-month period.

The following table sets forth, for the 2010 and 2009 periods, the portions of our total operating revenues represented by our (1) core and non-core retail revenue, (2) core and non-core wholesale revenue, (3) enterprise revenue and (4) equipment sales and services revenue (in thousands):


	Three Months Ended September 30				Nine Months Ended September 30
	2010		2009		2010		2009
Retail revenue:
Core retail revenue	$	61,157	$	66,042	$	187,045	$	202,135
Non-core retail revenue		18,634		22,510		57,851		71,425

Total retail revenue		79,791		88,552		244,896		273,560
Wholesale revenue:
Core wholesale fiber revenue		14,265		12,284		39,229		37,184
Non-core wholesale revenue		2,065		2,280		6,671		7,623

Total wholesale revenue		16,330		14,564		45,900		44,807
Enterprise revenue		10,327		9,116		29,627		26,237
Equipment sales and services revenue		4,472		4,167		12,537		12,373

Total operating revenue:	$	110,920	$	116,399	$	332,960	$	356,977

Cost of Services and Equipment. Total cost of services and equipment of $51.4 million, or 46.3% of total operating revenues, for the 2010 quarter decreased $1.2 million from total cost of services of $52.6 million or 45.2% of total operating revenues, for the 2009 quarter. Total cost of services and equipment of $148.2 million, or 44.5% of total operating revenues, for the 2010 nine-month period represented a decrease of $15.5 million from total cost of services and equipment of $163.7 million, or 45.9% of total operating revenues, for the 2009 nine-month period. The decrease in cost of services and equipment for the 2010 periods was the result of a reduction in revenue, the increase in disputed billings to the company which we successfully resolved and the continued benefits from our ongoing cost-saving initiatives. The effects of these factors were partially offset by the increased cost of new facilities required to support services to existing and new customers for our integrated communications services.

Our cost-saving initiatives includes initiatives to reduce the amount we pay other telephone companies to use their networks and facilities through renegotiation of our contracts, implementation of new DS1 and DS0 central office colocations with AT&T, audits of invoices, use of alternative local providers, market profitability analysis and least-cost routing of interexchange carrier calls. We also continue to reduce our network cost structure by continuing to decrease the number of high-cost commercial agreement and resale lines in both absolute numbers and as a percentage of total lines and by continuing to pursue initiatives to reduce our cost of services.

Selling, Operations and Administration Expense. Selling, operations and administration expense of $38.7 million, or 34.9% of total operating revenues, for the 2010 quarter decreased $2.7 million from $41.4 million, or 35.6% of total operating revenues, for the 2009 quarter. Selling, operations and administration expense of $118.7 million, or 35.7% of total operating revenues, for the 2010 nine-month period decreased $8.2 million from $126.9 million, or 35.5% of total operating revenues, for the 2009 nine-month period. The decrease in selling, operations and administration expense for the 2010 quarter and for the 2010 nine-month period was primarily attributable to a $3.8 million decrease for the 2010 quarter and a $9.0 million decrease for the 2010 nine-month period in compensation-related cost and reduced commissions paid to independent sales agents, and maintenance, data processing/billing, insurance and professional fees, which was offset in part for the 2010 periods by increased non-recurring facilities and promotional costs, legal fees, and corporate overhead. The total number of our employees decreased to 1,360 at September 30, 2010 from 1,398 at December 31, 2009. Our continuing investment in automating provisioning, other support and administrative functions has allowed us to take advantage of attrition in those functions, obviating the need to replace some personnel. When necessary, we supplement our work force by partnering with specialized vendors to provide some functions in the fulfillment of customer orders. As a result of the decline in business demand for our services, we experienced attrition in sales positions in some markets in 2009. We have focused in 2010 on recruiting and retaining sales employees to sell our products and provide services to new and existing customers.

Depreciation and Amortization. Depreciation and amortization expense decreased $3.3 million from $17.1 million for the 2009 quarter to $13.8 million for the 2010 quarter and decreased $8.9 million from $51.2 million for the 2009 nine-month period to $42.3 million for the 2010 nine-month period. The decrease in depreciation and amortization expense was primarily attributable to decreased capital investments we placed in service after 2002 compared to prior years, as we continue to maximize the use of our existing network investments.

Interest Expense. Interest expense increased $2.1 million from $7.5 million for the 2009 quarter to $9.6 million for the 2010 quarter and increased $325,000 from $22.5 million for the 2009 nine-month period to $22.9 million for the 2010 nine-month period. The increase in the 2010 quarter was attributable to the increase in the weighted average interest rate on our outstanding borrowings and an increase in our outstanding debt balances, resulting from our issuance of $325 million principal amount of 10.5% senior secured notes on April 9, 2010. Our outstanding debt balance (not including discount) ranged from $307.6 million at the beginning of the third quarter of 2009 to $307.1 million at the end of the third quarter of 2009, compared to $325 million throughout the third quarter of 2010. The increase in interest expense for the 2010 nine-month period was attributable to the increase in the weighted average interest rate on our outstanding borrowings during the 2010 nine-month period from the weighted average interest rate during the 2009 nine-month period. Our weighted average interest rate was approximately 8.4% throughout the 2009 nine-month period. During the 2010 nine-month period, our weighted average interest rate ranged from 5.1% at the beginning of the period to approximately 10.7% from April 9, 2010 until the end of the period. Interest expense resulting from amortization of debt discount and debt issuance costs was approximately $700,000 for the 2010 quarter compared to $600,000 for the 2009 quarter, and approximately $2.0 million for the 2010 nine-month period compared to $1.8 million for the 2009 nine-month period.

Write-off of Unamortized Debt Discount and Issuance Cost. We recognized the write-off of $7.9 million of unamortized debt discount and issuance cost in the 2010 nine-month period in connection with the repayment of $305.2 million principal amount of indebtedness outstanding under our first lien and second lien senior secured credit facilities and our former revolving credit facility from the proceeds of our sale on April 9, 2010 of our 10.5% senior secured notes due April 1, 2016.

Merger Cost. In the 2010 quarter, we incurred approximately $2.1 million of costs in connection with the definitive merger agreement with EarthLink, Inc. pursuant to which EarthLink agreed to acquire ITC^DeltaCom. We expect to incur up to $6 million of additional costs to complete the merger.

Adjusted EBITDA. Adjusted EBITDA, as defined by us, represents net income (loss) before interest income and expense, net, provision for income taxes, depreciation and amortization, stock-based compensation, non-cash loss on extinguishment of debt, write-off of debt discount and issuance cost, prepayment penalties on debt, equity commitment fees, restructuring expenses, asset impairment loss, other income or loss, and merger cost. Not all of these adjustments are applicable in every period. Adjusted EBITDA is not a financial measurement under accounting principles generally accepted in the United States, or “GAAP.” Our management uses adjusted EBITDA, together with financial measures prepared in accordance with GAAP, such as revenue and net loss, to assess our historical and prospective operating performance. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Adjusted EBITDA” in our Annual Report on Form 10-K for our 2009 fiscal year for a discussion of our reasons for including adjusted EBITDA data in this report and for material limitations with respect to the usefulness of this measurement.

The following table sets forth, for the 2010 and 2009 periods, a quantitative reconciliation of adjusted EBITDA to net loss, as net loss is calculated in accordance with GAAP (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net loss	$	(4,698	)	$	(2,117	)	$	(8,825	)	$	(7,459	)
Add: non-EBITDA items included in net loss:
Interest income and expense, net		9,633			7,444			22,847			22,507
Depreciation and amortization		13,810			17,110			42,280			51,245
Stock-based compensation		896			700			2,014			1,767
Write-off of debt discount and issuance cost		—			—			7,948			—
Other (income) loss		50			(43	)		(268	)		89
Merger cost		2,064			—			2,064			—

Adjusted EBITDA	$	21,755		$	23,094		$	68,060		$	68,149

Adjusted EBITDA decreased $1.3 million, or 5.6%, to $21.8 million for the 2010 quarter from $23.1 million for the 2009 quarter. A decrease of $5.5 million in total operating revenues for the 2010 quarter was offset in part by reductions of $1.2 million in cost of services and equipment and a reduction of $2.9 million in selling, operations and administration expense, not including stock-based compensation. Adjusted EBITDA decreased $89,000, or 0.1%, to $68.1 million for the 2010 nine-month period from $68.2 million for the 2009 nine-month period. A decrease of $24.0 million in total operating revenues was offset in part by the positive impact of a reduction of $15.5 million in cost of services and equipment and a reduction of $8.4 million in selling, operations and administration expense, not including stock-based compensation.

Liquidity and Capital Resources

Sources and Uses of Cash. During the 2010 and 2009 nine-month periods, we funded our operating and capital requirements and other cash needs through cash from operations. Cash provided by operating activities was $59.2 million in the 2010 nine-month period and $53.3 million in the 2009 nine-month period. Changes in current operating assets and liabilities were $11.3 million in the 2010 nine-month period and $2.0 million in the 2009 nine-month period. The increase in current operating assets and liabilities in the 2010 nine-month period resulted primarily from an increase of $16.5 million in accrued interest and an increase of $3.3 million in trade accounts payable. The effects of these increases were offset in part by a decrease of $4.6 million in accrued compensation and other accrued liabilities, an increase of $1.1 million in inventory, an increase of $469,000 in prepaid expenses, a decrease of $522,000 in unearned revenue and an increase of $2.0 million in accounts receivable. The increase in current operating assets and liabilities in the 2009 nine-month period resulted primarily from a reduction of $3.4 million in accounts receivable, an increase of $265,000 in trade accounts payable, a reduction of $324,000 in inventory, and an increase of $199,000 in accrued interest. The effects of these increases were offset in part by a decrease of $1.2 million in accrued compensation and other accrued liabilities, a decrease of $1.1 million in unearned revenue, and an increase of $87,000 in prepaid expenses.

Cash used in investing activities was $43.2 million in the 2010 nine-month period and $30.0 million in the 2009 nine-month period. In the 2010 nine-month period, we used $44.6 million to fund capital expenditures and $539,000 to pay accrued restructuring costs related to prior years and $434,000 for other expenditures. In the 2010 nine-month period, we obtained proceeds of $1.7 million from the sale of short-term investments and $650,000 from the sale of fixed assets. In the 2009 nine-month period, we used $32.1 million to fund capital expenditures and $862,000 to pay accrued restructuring costs related to prior years and $186,000 for other expenditures. In the 2009 nine-month period, we obtained proceeds of $2.8 million from the sale of short-term investments and $360,000 from the sale of fixed assets.

Cash used in financing activities in the 2010 nine-month period totaled $2.0 million and included $318 million of proceeds from long-term debt, which was partially offset by $9.8 million used to pay debt issuance cost, $2.1 million for taxes paid on vested restricted shares, and $308.1 million for repayment of long-term debt and capital lease obligations. In the 2009 nine-month period, $2.6 million was applied to the repayment of long-term debt.

Indebtedness. On April 9, 2010, ITC^DeltaCom, Inc. and its wholly-owned subsidiaries closed an offering of $325 million aggregate principal amount of 10.5% senior secured notes due in 2016, which we refer to as the “notes,” and a $30 million five-year senior secured revolving credit facility.

Senior Secured Notes. We sold the notes on April 9, 2010 in transactions not subject to the registration requirements of the Securities Act of 1933. We sold the notes at an offering price of 97.857% of the principal amount of the notes. We applied the gross proceeds of approximately $318 million we received from the sale of the notes to repay $305.5 million aggregate amount of indebtedness, including all principal and accrued and unpaid interest, outstanding under our first lien and second lien senior secured credit facilities and our former revolving credit facility, which were terminated. Through September 30, 2010, we had used approximately $9.8 million of the offering proceeds to pay offering fees and expenses, including fees incurred in our exchange offer completed on July 29, 2010 and described below. We used the remainder of the offering proceeds for general corporate purposes. For a description of the terms of the notes, see Note 5 to the condensed consolidated financial statements appearing elsewhere in this report.

On July 29, 2010, we consummated our offer to exchange the notes we issued on April 9, 2010 for an equal aggregate principal amount of our newly issued 10.5% senior secured notes due 2016 which were registered under the Securities Act. All of the outstanding unregistered notes, representing an aggregate principal amount of $325 million, were exchanged. We received no cash proceeds from the issuance of the notes in the exchange offer. The new notes have terms substantially identical to the terms of the original notes, except that the offering of the new notes was registered under the Securities Act, and the transfer restrictions, registration rights and related additional interest terms applicable to the original notes do not apply to the notes issued in the exchange offer.

Revolving Credit Facility. For a description of the terms of our $30 million senior secured revolving credit facility, see Note 5 to the condensed consolidated financial statements appearing elsewhere in this report.

Total Long-Term Indebtedness. At September 30, 2010, we had $325 million of total long-term indebtedness, net of approximately $6.4 million of unamortized discount, or approximately $318.6 million net total long-term debt, which had an overall weighted average annual interest rate of 10.7%, including debt discount and excluding deferred financing costs.

Compliance with Financial Covenants. Under our revolving credit facility, we will be required to comply with specified financial tests and to maintain certain financial ratios on a consolidated basis based on measures that include levels of indebtedness and earnings before interest, taxes, depreciation, amortization and other specified items. We generally are not required to be in compliance with these ratios if no loans are outstanding under the revolving credit facility and if our obligations relating to letters of credit issued under the facility do not exceed $2 million. At September 30, 2010, there were no loans outstanding under the revolving credit facility and our obligations relating to letters of credit issued under the facility totaled approximately $910,000.

Cash Requirements. As of September 30, 2010, there have been no material changes in our contractual obligations as set forth in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010.

At September 30, 2010, we had entered into agreements with vendors to purchase approximately $8.1 million of services and property, plant and equipment during 2010 related primarily to the maintenance and improvement of communications facilities and technology services.

Subject to our proposed acquisition by EarthLink discussed above, we expect that we will not experience significant changes over the next year in the aggregate amount of our total capital expenditures, in the amount of capital expenditures that we will apply for network and facilities maintenance, or in the type of capital expenditures that we believe will enable us to acquire additional customers within the markets covered by our existing network to generate increased operating revenues. We currently estimate that our aggregate capital requirements for 2010 will total approximately $60 million to $70 million, including $4.2 million of commitments at September 30, 2010. Through September 30, 2010, we made $44.6 million of capital expenditures in 2010. The actual amount and timing of our capital requirements may differ materially from our expectations as a result of constraints on our liquidity and regulatory, technological, economic and competitive developments, including market developments and new opportunities.

We believe that our cash on hand, the cash flows we expect to generate from operations under our current business plan and borrowings expected to be available under our revolving credit facility will provide us with sufficient funds to enable us to fund our planned capital expenditures, satisfy our debt service requirements, and meet our other cash needs under our current business plan for at least the next 12 months. Our ability to meet all of our cash needs during the next 12 months and thereafter could be adversely affected by various circumstances, including an increase in customer attrition, employee turnover, service disruptions and associated customer credits, acceleration of critical operating payables, lower than expected collections of accounts receivable, and other circumstances outside of our immediate and direct control. We may determine that it is necessary or appropriate to obtain additional funding through new debt financing or the issuance of equity securities to address such contingencies or changes to our business plan or to complete acquisitions of other businesses. We cannot provide any assurance as to whether, or as to the terms on which, or if at all, we would be able to obtain such debt or equity financing, which would be subject to limitations imposed by covenants contained in our senior secured notes indenture and senior secured revolving credit facility agreement and would be negatively affected by the continuation of adverse conditions in the credit and capital markets.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We seek to minimize our exposure to market risks. We maintain investments consisting primarily of short-term, interest-bearing securities. We enter into long-term debt obligations with appropriate pricing and terms. We do not hold or issue derivative, derivative commodity or other financial instruments for trading purposes. We do not have any material foreign currency exposure.

Our major market risk exposure has been changing interest rates on borrowings we used to fund our business. We applied the proceeds of our sale and issuance on April 9, 2010 of our fixed-rate 10.5% senior secured notes due 2016 to repay all $306.2 million principal amount of our variable-rate debt outstanding as of March 31, 2010.

Item 4.

Controls and Procedures

Our management, with the participation of our Chief Executive Officer, who is our principal executive officer, and our Executive Vice President and Chief Financial Officer, who is our principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2010. Based upon that evaluation, our Chief Executive Officer and our Executive Vice President and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the fiscal period covered by this report.

During the fiscal period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1A.

Risk Factors

In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009 could materially affect our business, financial condition or operating results. Set forth below are material updates to such risk factors. The risks described in our Annual Report on Form 10-K and in our subsequent SEC filings are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

The pending acquisition of ITC^DeltaCom may not be completed which could result in operating difficulties, losses and other adverse consequences.

In October 2010, we entered into a merger agreement under which EarthLink, Inc. will acquire ITC^DeltaCom, Inc. for $3.00 per share in cash with ITC^DeltaCom surviving as a wholly-owned subsidiary of EarthLink. Completion of the merger is conditioned upon, among other things, the receipt of approvals, including from the Federal Communications Commission and certain state public utilities commissions. There is no assurance that we will receive the necessary approvals or satisfy the other conditions to the merger. Failure to complete the pending merger would prevent our shareholders from receiving the merger consideration and us from realizing the other anticipated benefits of the merger. We will also remain liable for significant transaction costs, including legal and accounting fees, whether or not the merger is completed. In addition, the current market price of our common stock may reflect a market assumption as to whether the merger will occur. Consequently, the completion of, or a failure to complete, the merger could result in a significant change in the market price of our common stock.

The merger involves the integration of two companies that have previously operated independently. The integration may require significant management attention and resources that would otherwise be available for current operation of our business. Delays in this process could adversely affect our business, financial results, financial condition and stock price. In addition, we may not be able to retain key personnel who leave during the integration process.

Item 6.

Exhibits

The following exhibits are either filed with this Quarterly Report on Form 10-Q or are incorporated herein by reference. Our Securities Exchange Act file number is 0-23253.


Exhibit No.		Description

2.1		Agreement and Plan of Merger, dated as of October 1, 2010, by and among EarthLink, Inc., Egypt Merger Corp. and ITC^DeltaCom, Inc. Filed as Exhibit 2.1 to the Current Report on Form 8-K of ITC^DeltaCom, Inc. filed on October 1, 2010 and incorporated herein by reference.

10.1		Written Consent and Voting Agreement, dated as of October 1, 2010. Filed as Exhibit 10.1 to the Current Report on Form 8-K of ITC^DeltaCom, Inc. filed on October 1, 2010 and incorporated herein by reference.

*31.1		Certification of Chief Executive Officer of ITC^DeltaCom, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.

*31.2		Certification of Executive Vice President and Chief Financial Officer of ITC^DeltaCom, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.

*32		Certifications pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350.

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ITC^DeltaCom, Inc. (Registrant)

Dated: November 15, 2010	By:	/s/ RICHARD E. FISH, JR.
		Richard E. Fish, Jr.
		Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer and Principal Financial Officer)

Exhibit Index


Exhibit No.		Description

2.1		Agreement and Plan of Merger, dated as of October 1, 2010, by and among EarthLink, Inc., Egypt Merger Corp. and ITC^DeltaCom, Inc. Filed as Exhibit 2.1 to the Current Report on Form 8-K of ITC^DeltaCom, Inc. filed on October 1, 2010 and incorporated herein by reference.

10.1		Written Consent and Voting Agreement, dated as of October 1, 2010. Filed as Exhibit 10.1 to the Current Report on Form 8-K of ITC^DeltaCom, Inc. filed on October 1, 2010 and incorporated herein by reference.

*31.1		Certification of Chief Executive Officer of ITC^DeltaCom, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.

*31.2		Certification of Executive Vice President and Chief Financial Officer of ITC^DeltaCom, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934.

*32		Certifications pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350.

*	Filed herewith.

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