UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, ~~2010~~2011

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

For the transition period from to

Commission File Number: 001-15605

ITC^DELTACOM, INC.

(Exact name of registrant as specified in its charter)

Delaware		58-2301135
(State of incorporation)		(I.R.S. Employer Identification No.)

1375 Peachtree Street, Atlanta, Georgia 30309

(Address of principal executive offices, including zip code)

(404) 815-0770

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 o

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o x No o

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

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the of the Exchange Act (Check One):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller Reporting Company o

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

~~The~~As ~~aggregate~~of ~~market~~January 31, ~~value~~2012, of250 ~~the~~shares ~~registrant’s~~of ~~outstanding~~ common stock ~~held~~were byoutstanding ~~non-affiliates~~(all ofshares ~~the~~are ~~registrant~~issued onto ~~June 30~~EarthLink, ~~2010 was $41~~ Inc.~~3 million.~~)

As of January 31, 2011, 150 shares of common stock were outstanding (all shares are issued to EarthLink, Inc.)

ITC^DELTACOM, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS REPORT WITH THE REDUCED DISCLOSURE FORMAT.

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ITC^DELTACOM, INC.

Annual Report on Form 10-K

For the Year Ended December 31, ~~2010~~2011

TABLE OF CONTENTS

PART I
Item 1.	Business	1	1
Item 1A.	Risk Factors	13	14
Item 1B.	Unresolved Staff Comments	23	23
Item 2.	Properties	23	23
Item 3.	Legal Proceedings	23	23
Item 4.	~~Removed~~Mine ~~and~~Safety ~~Reserved~~Disclosures	23	23
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24	24
Item 6.	Selected Financial Data*	24	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	24	24
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	39	40
Item 8.	Financial Statements and Supplementary Data	39	41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68	72
Item 9A.	Controls and Procedures	69	72
Item 9B.	Other Information	69	72
PART III
Item 10.	Directors, Executive Officers and Corporate Governance*	70	73
Item 11.	Executive Compensation*	70	73
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*	70	73
Item 13.	Certain Relationships and Related Transactions, and Director Independence*	70	73
Item 14.	Principal Accounting Fees and Services	70	73
PART IV
Item 15.	Exhibits, Financial Statement Schedules	71	74
SIGNATURES		75	78

* Omitted pursuant to General Instructions (I)(~~2of~~2) of Form 10-K

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FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report. ITC^DeltaCom, Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although ITC^DeltaCom, Inc. believes that its expectations are based on reasonable assumptions, it can give no assurance that its targets and goals will be achieved. Important factors that could cause actual results to differ from estimates or projections contained in the forward-looking statements are described under “Risk Factors” in Item 1A of Part I and under “Safe Harbor Statement” in Item 7 of Part II.

PART I

Item 1. Business.

Overview

ITC^DeltaCom, Inc., together with its consolidated subsidiaries, provides integrated communications services in the southeastern United States. We ~~deliver~~provide a ~~comprehensive~~broad ~~suite~~range of ~~high-quality~~ data and voice communications services to businesses and enterprise organizations, 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 and equipment services. We also sell ~~customer~~transmission ~~premises~~capacity ~~equipment~~ to ~~our~~other ~~business~~communications ~~customers~~providers on a wholesale basis. We offer these services primarily over our ~~14-state~~regional fiber optic network. ~~We also sell transmission capacity to other communications providers on a wholesale basis.~~

In December 2010, we were acquired by EarthLink, Inc. (“EarthLink”) for $3.00 per share, with ITC^DeltaCom, Inc. surviving as a wholly-owned subsidiary of EarthLink. Subsequent to the acquisition, our integrated communication services were rebranded as EarthLink BusinessTM and our wholesale services were rebranded as ~~Interstate~~EarthLink ~~FiberNet~~Carrier, an EarthLink Business company.

Services

~~Our~~We ~~service~~provide ~~offerings~~a ~~include~~broad range of data, voice and equipment services to businesses, ~~including~~enterprise ~~broadband~~organizations ~~Internet~~and ~~access~~communications ~~services;~~carriers. We ~~voice~~present ~~services,~~our ~~including~~revenue ~~local~~in ~~exchange,~~the ~~long-distance~~following ~~and~~three ~~conference~~categories: ~~calling;~~(1) retail ~~mobile~~services, which includes data and voice services; ~~and~~provided ~~equipment~~to ~~sales~~businesses and ~~related~~enterprise organizations; (2) wholesale services., Wewhich ~~provide~~includes ~~our~~the ~~services~~sale of transmission capacity to ~~end~~other ~~user~~telecommunications ~~business~~carriers; and (3) other services, which includes the sale of customer premises equipment. Our retail customers range from large enterprises with many locations, to small and medium-sized multi-site businesses, to ~~wholesale/resale~~business customers with one site. Our wholesale customers consist primarily of telecommunications carriers and network resellers. Revenues generally consist of monthly recurring fees; usage fees; installation fees; equipment fees and termination fees.

~~Bundled~~Retail Services ~~Approach~~

~~When~~Data ~~financially advantageous for us to do so, we seek to bundle our integrated communications~~ services. ~~together~~We ~~with~~offer ~~communications~~a ~~devices,~~broad ~~related~~range ~~installation~~of ~~and~~data ~~maintenance services~~ and ~~managed~~Internet ~~network~~ services. ~~Our~~to ~~targeted~~businesses ~~customers often will have multiple vendors for voice~~ and ~~data~~enterprise ~~communications services~~organizations, asincluding ~~well~~high-speed asInternet ~~additional vendors for communication devices~~access, ~~each~~dedicated ofInternet ~~which~~access ~~may~~and ~~bill~~Multiprotocol ~~the~~Label ~~customer~~Switching ~~separately~~(“MPLS”) services. We offer a ~~comprehensive~~full ~~package~~range of ~~local~~access ~~telephone~~types, ~~long~~including ~~distance~~DSL, ~~Internet~~ ~~access~~T-1 and ~~other~~DS3 ~~integrated~~lines, ~~communications~~Ethernet ~~services.~~and Wewireless ~~are~~broadband, ~~able~~at tospeeds ~~leverage~~ranging ~~our~~from ~~experience~~1.5Mbps into ~~providing~~over ~~and~~100Mbps. ~~maintaining~~All ~~customer~~connectivity ~~premises~~is ~~equipment~~provided asover ~~well~~our asfacilities-based ~~relationships~~network ~~with~~and ~~leading~~is ~~manufacturers~~monitored 24/7 to ~~provide~~keep ~~our~~customer ~~customers~~information ~~with~~secure. ~~access~~Our tohigh-speed aservices ~~range~~also ofincludes ~~remotely~~enhanced ~~managed~~features ~~office~~such ~~communication~~as ~~devices.~~online Wefaxing, ~~believe~~email, ~~that~~POP ~~our~~services, ~~bundle~~web ofhosting, ~~services~~firewall ~~provides~~and anVirtual ~~attractive~~Private ~~means~~Networks of(VPN), ~~delivering~~among ~~communications solutions~~others.

Voice services. We offer a broad range of voice services to businesses and enterprise organizations, including local, domestic and international switched access, dedicated long distance services,

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~~Integrated~~hosted ~~Communications~~IP ~~Services~~private branch exchange (“PBX”) solutions and access trunks for customers that own and operate switching equipment on their own premises. We offer a full range of access types, from traditional voice lines to T1 to Ethernet. We also provide enhanced services to our customers by offering a number of calling features.

We ~~offer~~also ~~integrated~~provide mobile data, and voice ~~and~~services ~~equipment~~using the network of nationwide wireless services provides. Our mobile services provide nationwide mobile access to ~~end~~voice, e-~~users~~mail, ~~targeting~~text ~~retail~~ and ~~enterprise~~Internet ~~business customers~~connectivity. WeOur ~~refer~~customers tocan ~~these~~select ~~services,~~cell ~~which~~phones weand ~~describe~~personal indigital ~~more~~assistants, ~~detail~~or ~~below~~PDAs, asfrom ~~our~~leading ~~“integrated~~manufacturers ~~communications”~~and ~~services.~~use ~~Revenues~~our ~~from~~hosted ~~these~~e-mail exchange services ~~represented~~to ~~approximately~~integrate ~~82%~~office-based ofe-mail, ~~our~~calendar ~~total~~and ~~operating~~contacts ~~revenues~~programs ~~for~~with ~~2010~~the mobile devices.

Secure IP-based networks. We offer Multi Protocol Label Switching, or MPLS, based IP-VPN services by equipping our core Internet Protocol, or IP, network with the ability to provide IP-VPN standard services. A VPN, or virtual private network, is a secure, outsourced network that links multiple customer locations by using computer software to create virtual circuits over the Internet solely for the customer’s use, instead of building a physical circuit to the customer. This service offering enables us to provide prioritized traffic based on customer-specific requirements with multi-tiered service levels, such as for voice, Internet and data. Revenues consist of fees charged for secure IP-based networks, installation fees, termination fees and fees for equipment.

Internet Access. We offer dedicated Internet access via private line and Ethernet connectivity at speeds ranging from DS-1, or 1.544 million bits per second, to 1Gbps, or 1 billion bits per second, that provides cost-efficient interconnection to a combination of multiple tier-one national Internet service providers. We also provide Internet access via frame relay connectivity to some of our customers. Revenues primarily consist of monthly recurring fees, installation fees and usage fees.

Local Telephone Services. We offer basic local dial tone service, as well as a wide range of local services, including premium local voice services, such as voicemail, universal messaging and directory assistance. We also offer all local CLASS (Custom Local Area Signaling Services) features, such as call forwarding, return call, hunting, call pick-up, repeat dialing and speed dialing services. We provide our local services primarily over digital T-1 transmission lines, which have 24 available channels. We also provide various protocol options, including primary rate interface, or PRI, lines, which have 24 channels, of which 23 are voice channels. Revenues primarily consist of monthly recurring fees and usage fees.

Long Distance Services. We offer both domestic and international switched and dedicated long distance services, including “1+” outbound dialing, inbound toll-free and calling card services. We generally sell our long distance services as part of a bundle that includes one or more of our local services offerings, our other network service offerings and/or our integrated solutions offerings. Revenues primarily consist of monthly recurring fees and usage fees.

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

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

Private Line Services. We offer private line services that provide dedicated communications connections between two of our end-user customer’s locations to transmit voice, video or data in a variety of bandwidths. Revenues primarily consist of monthly recurring fees.

ATM/Frame Relay Services. We provide high-bandwidth, low-delay, connection-oriented switching and multiplexing techniques for data transfer, which are known as asynchronous transfer mode, or ATM, services to some of our customers. ATM allows for the efficient, simultaneous high-speed transfer

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of voice, data and video, meeting a variety of “Quality of Service” objectives. We provide frame relay services to some of our customers on various network elements and switching platforms. These services provide an efficient method of data transport at speeds equivalent to those available over a digital T-1 transmission line. Revenues primarily consist of monthly recurring fees.

Mobile Data and Voice. We provide mobile data and voice services as a mobile virtual network operator, or MVNO, using the network of a nationwide wireless services provider that employs code division multiple-access, or CDMA, technology. Our mobile services provide nationwide mobile access to voice, e-mail, text and Internet connectivity. Our customers can select cell phones and personal digital assistants, or PDAs, from leading manufacturers and use our hosted e-mail exchange services to integrate office-based e-mail, calendar and contacts programs with the mobile devices. We offer the service only to customers who also purchase one of our other integrated communications services, providing a convenient single point of contact for our customer’s communications needs with a single monthly statement. Revenues primarily consist of monthly recurring fees and usage fees.

Wholesale Services

~~Through~~We ~~our wholly-owned subsidiary, Interstate FiberNet, we~~ provide voice and data services to other communications carriers and to larger-scale providers of network capacity. Revenues from these services ~~represented approximately 14% of our total operating revenues for 2010, and~~ are generated from sales to ~~a limited number of~~ other communications companies, including incumbent local exchange carriers (“ILECs”), competitive local exchange carriers (“CLECs”), wireless service providers, cable companies, Internet ~~service~~Service ~~providers~~Providers (“ISPs”) and others. We offer broadband transport services, including private line services, Ethernet private line services and wavelength services, that allow other ~~carriers.~~communications ~~Revenues~~providers ~~consist~~to transport the traffic of ~~fees~~their ~~charged~~end-user ~~for~~or wholesale customers across our local and intercity network; local communications services, ~~termination~~to ~~fees,~~ISPs ~~fees~~and ~~for~~local ~~equipment~~dial tone communications services to service providers; nationwide live and ~~usage~~automated ~~fees~~operator and directory assistance services; and dedicated Internet access services through our IP network and our direct connectivity to the IP networks of other ISPs.

WeOther ~~offer the following services to some or all of our wholesale customers:~~Services

~~· Broadband~~We ~~transport services~~sell, ~~including~~install ~~private~~and ~~line~~perform ~~services,~~on-site ~~Ethernet~~maintenance ~~private~~of ~~line services and wavelength services~~equipment, ~~that~~such ~~allow~~as ~~other~~telephones ~~communications~~and ~~providers~~PBX’s, toin ~~transport~~all ~~the traffic~~ of ~~their~~the ~~end-user~~markets orin ~~wholesale~~which ~~customers~~we ~~across~~offer ~~our~~integrated ~~local~~communications ~~and intercity network;~~services.

· Local communications services to Internet service providers and local dial tone communications services to other competitive exchange carriers;

· Nationwide live and automated operator and directory assistance services; and

· Dedicated Internet access services through our IP network and our direct connectivity to the IP networks of other Internet service providers.

Equipment Sales and Related Services

We sell, install and perform on-site maintenance of equipment, such as telephones and private branch exchanges, or PBX. We offer these services, which we refer to as our “equipment sales and related services,” in all of the markets in which we offer integrated communications services. Revenues from these services represented approximately 4% of our total operating revenues for 2010 and are primarily generated from sales to our integrated communications services customers.

Sales and Distribution

We provide our ~~integrated communications~~ services through ~~two~~three primary sales channels,: direct sales, ~~and~~indirect ~~independent~~sales ~~dealers~~ and ~~sales~~wholesale ~~agents. Our direct~~ sales ~~force is composed of sales personnel, technical consultants and technicians~~channels. We believe that customers prefer to have one company accountable for all of their communications services. Our customers are assured they will have a point of contact, 24 hours a day and seven days a week, to support all of the services they receive from us.

WeDirect ~~have~~sales anchannel. ~~established~~Our ~~network~~direct ofsales ~~independent~~force ~~dealers~~is ~~and~~composed ~~agents~~of tosales ~~market~~personnel, ~~our~~technical ~~integrated~~consultants and technicians.

3Indirect sales channel. We supplement our direct sales force with our channel partners, who leverage their pre-existing business relationships with the customer and act as sales agents for us. The channel partners include value-added resellers, local area network consultants and other telecommunications and IT consultants to businesses. Our authorized dealers and agents receive commissions based on services sold, usage volume and customer retention.

Wholesale sales channel. We market our wholesale services through a dedicated direct sales force. We generally enter into master service agreements with our wholesale services customers that have terms ranging from one to five years.

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communications services and equipment sales and related services. We employ dealer sales management strategically located in our direct sales offices to manage our independent dealer and agent sales forces. Our dealer sales management is responsible for recruiting new dealers to market our services and supporting new sales made by the dealers. As with our direct sales force, our independent dealers and agents have access to our technical consultants and technicians for sales support, as well as to our dedicated dealer support team, which provides order management and issue resolution services to our dealers. This access enables our dealers and agents to be more effective in their sales efforts and ultimately to present a more attractive bundle of services for the customer. Our authorized dealers and agents receive commissions based on services sold, usage volume and customer retention.

We market our wholesale services through a dedicated direct sales force. We generally enter into master service agreements with our wholesale services customers that have terms ranging from one to five years. Our broadband transport customers purchase the capacity they require under the terms specified in the master agreements.

Customer Service and Retention

We seek to differentiate ourselves from our competitors by building long-term customer relationships based on customized service offerings and personalized customer service. Our collaborative sales approach allows our sales force to offer product bundles that meet the particular needs of each prospective and current customer. We believe that offering a bundled package of value-added communications services to our customers is an attractive means of delivering communications solutions, thereby increasing retention rates and limiting customer churn. We ~~are also seeking to improve customer response times through internal training programs and integrated billing, support and sales systems. We~~ reinforce our strategy through compensation programs that reward our sales and account management staff based on customer retention and revenue growth.

Network Infrastructure

We provide our integrated communications services primarily through a ~~14-state~~regional fiber optic network and switching and colocation facilities.

Fiber Optic Network. As of December 31, ~~2010~~2011, our advanced fiber optic network consisted of 16,~~504~~551 route miles (12,~~559~~606 miles owned or obtained through indefeasible rights to use and 3,945 miles marketed and managed) that extended from New York to Florida and from Georgia to Texas, and principally covered portions of our primary eight-state market. The network was built or acquired through direct construction and long-term dark fiber leases or indefeasible rights-of-use agreements. As of December 31, 2010, our network extended to over 200 points of presence. These points of presence are located in most major population centers in the areas covered by the fiber optic network and in a significant number of smaller towns and communities. The network included 44 completed metro fiber rings.

WeSwitching ~~have~~and ~~implemented~~Colocation ~~electronic~~Facilities. ~~redundancy~~Our ~~over~~network adesign, ~~portion~~together ofwith our ~~network,~~interconnection ~~which~~agreements ~~enables~~with ~~traffic~~the toincumbent belocal ~~rerouted~~telephone tocompanies, ~~another~~such ~~fiber~~as inAT&T, ~~the~~has ~~same~~enabled ~~fiber~~us ~~sheath~~to inbe ~~the~~a ~~event~~provider of alocal ~~partial~~and ~~fiber~~long ~~cut~~distance ortelephone ~~electronic~~services ~~failure~~in all of our markets. InSwitches ~~addition,~~are asthe ofprimary ~~December 31,~~electronic ~~2010,~~components ~~approximately~~that ~~74%~~connect ofcustomers to our network ~~traffic~~and ~~was~~transmit ~~protected~~data byand ~~geographical~~voice ~~diverse~~communications ~~routing,~~over aour network. ~~design~~As ~~also~~of ~~called~~December a31, ~~“self healing ring~~2011,” ~~which~~we ~~enables~~had ~~traffic~~21 tovoice beswitches. ~~rerouted~~Our inswitches ~~the~~are ~~event~~capable of ahandling ~~total~~both ~~cable~~local ~~cut~~and tolong andistance ~~entirely~~voice ~~different fiber optic cable~~traffic.

~~Switching~~We ~~and~~have ~~Colocation~~colocated ~~Facilities.~~communications ~~Our~~equipment ~~networking~~within ~~design,~~the ~~together~~central ~~with~~offices ~~our~~of ~~interconnection~~ILECs ~~agreements~~in ~~with~~various ~~the~~markets ~~incumbent~~in ~~local~~the ~~telephone~~southeastern ~~companies,~~United ~~such~~States. asColocation ~~AT&T,~~enables ~~has enabled~~ us to beprovide aremote facilities-based ~~provider of~~ local and long distance ~~telephone~~ services in ~~all of our~~ markets. ~~Switches~~where ~~are~~we ~~the~~do ~~primary~~not ~~electronic~~have ~~components~~switches, ~~that~~by ~~connect~~using ~~customers to~~ our ~~network~~switches ~~and~~in ~~transmit~~other ~~data~~locations ~~and~~as ~~voice communications over our network~~hosts. AsTo ofprovide ~~December 31,~~these ~~2010,~~remote ~~our switching facilities for voice communications consisted of eleven Nortel DMS-500 switch sites~~services, ~~two~~we ~~Nortel~~use ~~Call~~our ~~Server~~fiber ~~2000~~optic IPnetwork ~~switch sites~~ and ~~seven~~leased ~~Alcatel-Lucent~~facilities 5Eto ~~switch~~connect ~~sites.~~our ~~All~~remote ofequipment ~~the~~to our switches ~~are~~when ~~capable~~it ofis ~~handling~~economically ~~both data~~ and ~~local~~operationally ~~and~~advantageous ~~long~~for ~~distance~~us ~~voice~~to do so.

4Network backbone Our network backbone enables us to offer high-quality wavelength, Ethernet, SONET, Internet access and virtual private networking services. The packet-switching portion of our network backbone is based upon Internet Protocol, which is a broadly deployed standards-based protocol that allows for the exchange of data between computer networks. The network infrastructure is built on our Wavelength Division Multiplexing, or WDM, platform and core routers.

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traffic.

We have colocated communications equipment within the central offices of incumbent local telephone companies in various markets in the southeastern United States. Colocation enables us to provide remote facilities-based local and long distance services in markets where we do not have switches, by using our switches in other locations as hosts. To provide these remote services, we use our fiber optic network and leased facilities to connect our remote equipment to our switches when it is economically and operationally advantageous for us to do so.

Our network backbone enables us to offer high-quality wavelength, Ethernet, synchronous optical network, or SONET, Internet access and virtual private networking services. The packet-switching portion of our network backbone is based upon Internet Protocol, which is a broadly deployed standards-based protocol that allows for the exchange of data between computer networks. The network infrastructure is built on our high speed Infinera-based wavelength division multiplexing, or WDM, platform and Cisco core routers.

Competition

The communications industry is highly competitive, and we expect this competition to intensify. These markets are rapidly changing due to industry consolidation, an evolving regulatory environment and the emergence of new technologies. We compete directly or indirectly with ILECs, such as AT&T, ~~Qwest Communications (“Qwest”)~~CenturyLink, Inc. ~~Windstream Corporation (“Windstream”)~~ and Verizon Communications ~~(“Verizon”)~~Inc.; ~~other competitive telecommunications companies~~CLECs, such as ~~Covad Communications,~~ Level 3 Communications Inc., ~~PAETEC~~MegaPath, Inc., Windstream Corporation and XO Holdings Inc.; interexchange carriers, such as ~~Global Crossing and~~ Sprint Nextel Corporation; wireless and satellite service providers; cable service providers/multiple system operators (MSOs), such as Charter Communications, Inc., Comcast Corporation, Cox Communications, Inc. and Time Warner Cable; and stand-alone ~~voice-over-Internet Protocol (“~~VoIP”) providers. ~~Competition~~We ~~could~~experience ~~adversely~~significant ~~impact~~pricing usand inproduct ~~several~~competition ~~ways,~~from ~~including~~AT&T ~~(i) the~~and ~~loss~~other ofincumbents ~~customers~~that ~~and~~are ~~resulting revenue, (ii)~~ the ~~possibility~~dominant ofproviders ~~customers reducing their usage~~ of ~~our~~telecommunications services orin ~~shifting~~our tomarkets. ~~less~~We ~~profitable~~have ~~services~~reduced, ~~(iii) reduced~~and ~~traffic~~may onbe ~~our~~required ~~networks, (iv) our need~~ to ~~expend~~further ~~substantial~~reduce, ~~time~~some or ~~money~~all onof ~~new~~the ~~capital improvement projects, (v) our need to lower~~ prices orwe ~~increase~~charge ~~marketing~~for ~~expenses~~our toretail ~~remain competitive~~local, ~~and~~long ~~(vi) our~~distance ~~inability~~and todata ~~diversify by successfully offering new products or~~ services.

WeCompetition ~~believe~~could ~~the~~adversely ~~primary~~impact ~~competitive~~us ~~factors~~ in ~~the~~several ~~communications industry include price~~ways, ~~availability,~~including ~~reliability~~(i) the loss of ~~service,~~customers ~~network~~and ~~security,~~resulting ~~variety of service offerings~~revenue, ~~quality~~(ii) the ofpossibility ~~service and reputation~~ of ~~the~~customers ~~service~~reducing ~~provider.~~their ~~While~~usage weof ~~believe~~ our ~~integrated communications~~ services ~~compete favorably based on some of these factors, we are at a competitive disadvantage relative to some~~ or ~~all~~shifting ~~of these factors with respect~~ to ~~some~~less ofprofitable ~~our~~services, ~~competitors.~~(iii) reduced ~~Many~~traffic ofon our ~~current and potential competitors have greater market presence~~networks, ~~engineering,~~(iv) our ~~technical~~need ~~and marketing capabilities and financial, personnel and other resources substantially greater than ours; own larger and more diverse networks; are subject~~ to ~~less~~expend ~~regulation;~~substantial time or ~~have~~money ~~substantially~~on ~~stronger~~new ~~brand~~capital ~~names.~~improvement ~~In addition~~projects, ~~industry~~(v) our ~~consolidation~~need ~~has resulted in larger competitors that have greater economies of scale. Consequently, these competitors may be better equipped~~ to ~~charge~~ lower prices ~~for~~or ~~their~~increase ~~products~~marketing ~~and~~expenses ~~services,~~ to ~~provide~~remain ~~more attractive offerings~~competitive, ~~to develop~~ and ~~expand~~(vi) our ~~their~~inability ~~communications and network infrastructures more quickly,~~ to ~~adapt~~diversify ~~more~~by ~~swiftly~~successfully tooffering new ~~or emerging technologies and changes in customer requirements and to devote greater resources to the marketing and sale of their~~ products ~~and~~or services.

We ~~expect~~believe tothe ~~continue~~primary tocompetitive ~~face~~factors ~~significant~~in ~~pricing~~the ~~and~~communications ~~product~~industry ~~competition~~include ~~from~~price, ~~AT&T~~availability, ~~and~~reliability ~~other~~of ~~ILECs~~service, ~~that~~network ~~currently~~security, ~~are~~variety ~~the~~of ~~dominant~~service ~~providers~~offerings, quality of ~~telecommunications~~service ~~services~~and inreputation ~~our~~of ~~markets~~the service provider. WeWhile ~~may~~we bebelieve ~~required~~our tobusiness ~~reduce~~services ~~further~~compete ~~some~~favorably orbased ~~all~~on some of ~~the~~these ~~prices~~factors, we ~~charge~~are ~~for~~at ~~our~~a ~~retail~~competitive ~~local,~~disadvantage ~~long~~with ~~distance~~respect ~~and~~to ~~data~~certain ~~services~~of asour acompetitors. ~~result~~Many of ~~the~~our ~~mergers~~current ofand ~~BellSouth,~~potential ~~SBC~~competitors ~~and~~have ~~AT&T~~greater market presence, engineering, technical and ofmarketing ~~MCI~~capabilities and ~~Verizon~~financial, ~~which~~personnel ~~have~~and ~~increased~~other resources substantially ~~their~~greater ~~respective~~than ~~market power~~ours; ~~the~~own ~~increase~~larger ofand ~~cable~~more ~~companies,~~diverse ~~wireless~~networks; ~~carriers~~are ~~and~~subject ~~providers~~to ofless ~~alternative~~regulation; ~~forms~~or ofhave ~~communication~~substantially ~~that~~stronger ~~rely~~brand onnames. ~~VoIP~~In oraddition, ~~similar~~industry ~~applications;~~consolidation ~~recent~~has ~~regulatory~~resulted ~~decisions~~in larger competitors that have ~~decreased~~greater ~~regulatory~~economies ~~oversight~~ of ~~incumbent~~scale. ~~local~~Consequently, ~~telephone~~these ~~companies;~~competitors ~~and~~may ~~new~~be ~~broadband~~better ~~providers~~equipped ~~with~~to ~~cost~~charge ~~structures~~ lower ~~than~~prices ~~ours~~for astheir aproducts ~~result~~and ofservices, ~~governmental~~to ~~subsidies.~~provide Asmore aattractive ~~result~~offerings, weto ~~may~~develop beand ~~required~~expand their communications and network infrastructures more quickly, to ~~reduce~~adapt ~~further~~more ~~some~~swiftly to new or ~~all~~emerging oftechnologies ~~the~~and changes in customer requirements, to increase prices that we ~~charge~~pay for ~~our~~wholesale ~~retail~~inputs ~~local,~~to ~~long~~our ~~distance~~services and ~~data~~to ~~services~~devote ~~which~~greater ~~could~~resources ~~adversely~~to ~~affect~~the ~~our~~marketing ~~revenues,~~and ~~cash~~sale ~~flows~~of ~~and~~their ~~results~~products ofand ~~operations~~services.

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Regulatory Environment

Our services are subject to varying degrees of federal, state and local regulation. Federal, state and local regulations governing our services are the subject of ongoing judicial proceedings, rulemakings and legislative initiatives that could change the manner in which our industry operates and affect our business.

Overview

~~Our services are subject to varying degrees of federal, state and local regulation.~~ Through our wholly-owned subsidiaries, we hold numerous federal and state regulatory authorizations. The Federal Communications Commission (“FCC”) exercises jurisdiction over telecommunications common carriers to the extent that they provide, originate or terminate interstate or international communications or as otherwise required by federal law. The FCC also establishes rules and has other authority over some issues related to local telephone competition. State regulatory commissions, commonly referred to as public utility commissions (“PUCs”), generally retain jurisdiction over telecommunications carriers to the extent that they provide, originate or terminate intrastate communications. ~~State~~PUCs ~~commissions~~ also have authority to review and approve interconnection agreements between incumbent telephone carriers and competitive carriers such as us, and to conduct arbitration of disputes arising in the negotiation of such agreements. Local governments may require us to obtain licenses, permits or franchises to use the public rights-of-way necessary to install and operate our network. Our operations are also subject to various consumer, environmental, building, safety, health and other governmental laws and regulations.

Our regulatory environment continues to evolve, and existing federal and state regulations are subject to amendment by federal and state administrative agencies, judicial proceedings, and legislative action that could affect, in varying degrees, the manner in which we operate. Bills intended to amend the Act of 1934, as amended by the Telecommunications Act of 1996 (“Communications Act”) are introduced in Congress from time to time and their effect on us and the communications industry cannot always be predicted. Proposed legislation, if enacted, could have a significant effect on our business, particularly if the legislation impairs our ability to interconnect with incumbent carrier networks, lease portions of other carriers’ networks or resell their services at reasonable prices, or lease elements of networks of the incumbent local exchange carriers under acceptable rates, terms and conditions. We cannot predict the outcome of any ongoing legislative initiatives or administrative or judicial proceedings or their potential impact upon the communications and information technology industries generally or upon us specifically. We are also subject to a variety of local regulations in each of the geographic markets in which we operate.4

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The regulatory environment continues to evolve. Bills intended to amend the Communications Act of 1934, as amended by the Telecommunications Act of 1996 (“Communications Act”) are introduced in Congress from time to time and their effect on us and the communications industry cannot always be predicted. Proposed legislation, if enacted, could have a significant effect on our business, particularly if the legislation impairs our ability to interconnect with incumbent carrier networks, lease portions of other carriers’ networks or resell their services at reasonable prices, or lease elements of networks of the ILECs under acceptable rates, terms and conditions. We cannot predict the outcome of any ongoing legislative initiatives or administrative or judicial proceedings or their potential impact upon the communications and information technology industries generally or upon us specifically. We are also subject to a variety of local regulations in each of the geographic markets in which we operate.

Federal Regulation

WeSeveral of our operating subsidiaries are classified as a non-dominant ~~carrier~~carriers by the FCC and, as a result, the prices, terms and conditions of our interstate and international services are subject to relatively limited FCC regulation. Like all common carriers, we are subject to the general requirement that our charges, practices and classifications for communications services must be “just and reasonable,” and that we refrain from engaging in any “unjust or unreasonable discrimination” with respect to our charges, practices or classifications. The FCC must grant its approval before any change in control of any carrier providing interstate or international services, or of any entity controlling such a carrier, and before the assignment of any authorizations held by such a carrier. We have the operating authority required by the FCC to conduct our long distance business as it is currently conducted. As a non-dominant carrier, we may install and operate additional facilities for the transmission of domestic interstate communications without prior FCC authorization, except to the extent that radio licenses are required. The following discussion summarizes some specific areas of federal regulation that directly or indirectly affect our business.

Local Competition. The Communications Act preempts state and local laws to the extent that they prevent competition in the provisioning of any telecommunications service. The Communications Act imposes a variety of duties on local carriers, including competitive carriers such as us, to promote competition in the provisioning of local telephone services. These duties include requirements for local carriers to:

· interconnect with other telecommunications carriers;

· establish compensation arrangements for the completion of telecommunications service calls originated by customers of other carriers on a reciprocal basis;

· permit the resale of their services;

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· permit users to retain their telephone numbers when changing carriers; and

· provide competing carriers access to poles, ducts, conduits and rights-of-way at regulated prices.

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

· offer interconnection at any feasible point in their networks on a non-discriminatory basis;

· offer colocation of competitors’ equipment at their premises on a non-discriminatory basis;

· make available some of their network facilities, features and capabilities, referred to as Unbundled Network Elements, or UNEs, on non-discriminatory, cost-based terms; and

· offer wholesale versions of their retail services for resale at discounted rates.

Collectively, these requirements recognize that local telephone service competition is dependent upon cost-based and non-discriminatory interconnection with, and use of, some elements of incumbent carrier networks and facilities under specified circumstances. Failure to achieve and maintain such arrangements could have a material adverse effect on our ability to provide competitive local telephone services.

Over the past decade, decisions of federal courts and the FCC have narrowed significantly the scope of the facilities that incumbent telephone companies must make available UNEs to competitive carriers such as us at rates based on the Total Element Long Run Incremental Cost, or TELRIC, standard. Incumbent carriers must offer access to their copper loops and subloops, but must offer access to certain higher-capacity DS1 and DS3 transmission facilities only in wire center serving areas with relatively few business lines and colocated competitive carriers, as defined by detailed FCC regulations. In general, incumbent companies are not required to offer UNEs at TELRIC-based rates for fiber loops, DS1 and DS3 transmission facilities in relatively large wire centers or wire centers deemed to already be “competitive” based on FCC standards, optical speed transmission facilities or dark fiber. Further, incumbent companies no longer are required to provide local switching as a UNE, which means that we can no longer rely on the Unbundled Network Element-Platform, or UNE-P, to provide local services to customers at TELRIC-based rates. In some circumstances, AT&T and other incumbent carriers are making available some of these facilities and services, either as lightly regulated special access services or under unregulated “commercial agreements,” at significantly higher rates.

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scope of the facilities that incumbent telephone companies must make available as UNEs to competitive carriers such as us at rates based on the Total Element Long Run Incremental Cost, or TELRIC, standard. Incumbent carriers must offer access to their copper loops and subloops, but must offer access to certain higher-capacity DS1 and DS3 transmission facilities only in wire center serving areas with relatively few business lines and colocated competitive carriers, as defined by detailed FCC regulations. In general, incumbent companies are not required to offer UNEs at TELRIC-based rates for fiber loops, DS1 and DS3 transmission facilities in relatively large wire centers or wire centers deemed to already be “competitive” based on FCC standards, optical speed transmission facilities or dark fiber. Further, incumbent companies no longer are required to provide local switching as a UNE, which means that we cannot rely on the Unbundled Network Element-Platform, or UNE-P, to provide local services to customers at TELRIC-based rates. In some circumstances, AT&T, Verizon and other incumbent carriers are making available some of these facilities and services, either as lightly regulated special access services or under unregulated “commercial agreements,” at significantly higher rates.

Interconnection Agreements. Under the Communications Act, incumbent carriers are required to negotiate in good faith with competitive carriers such as us interconnection, colocation, reciprocal compensation for local traffic and access to UNEs. If the negotiating carriers cannot reach agreement within a prescribed time, either carrier may request binding arbitration of the disputed issues by a state regulatory commission. In addition, carriers are permitted to “adopt” in their entirety agreements reached between the incumbent carrier and another carrier during the initial term of that agreement.

An interconnection agreement typically has a term of three years, although the parties may mutually agree to extend or amend such agreements. We operate under interconnection agreements with AT&T, ~~Verizon,~~and ~~Qwest~~CenturyLink, ~~Frontier~~Fairpoint Communications, ~~CenturyLink,~~Frontier ~~Fairpoint~~ Communications and Windstream. Our retail operating companies each maintain interconnection agreements with the incumbent in each state and for each service territory within which we purchase UNEs. We expect, but cannot assure, that each new interconnection agreement to which we are or will be a party will provide us with the ability to provide service in each respective state on a reasonable commercial basis. InMany ~~addition,~~of ~~new~~our interconnection agreements ~~could~~provide ~~result~~either inthat ~~less~~a ~~favorable~~party ~~rates,~~is ~~terms~~entitled ~~and~~to ~~conditions~~demand ~~than~~renegotiation ~~our~~of ~~prior~~the ~~agreements.~~entire Ifagreement weor ~~cannot~~particular ~~negotiate~~provisions ~~new~~thereof ~~interconnection~~based ~~agreements~~on orintervening ~~renew~~changes ~~our~~in ~~existing~~law ~~interconnection~~resulting ~~agreements~~from inongoing ~~each~~legal ~~state~~and onregulatory ~~acceptable terms~~activity, weor ~~may~~as ~~invoke~~a ~~our~~result ~~ability~~of toan ~~seek~~immediately ~~binding~~effective ~~arbitration~~change ~~before~~in ~~state~~law, ~~regulatory~~in ~~agencies.~~which ~~The~~case ~~arbitration~~the ~~process,~~agreement ~~which~~will isbe ~~conducted~~resolved onpursuant to a ~~state-by-state~~dispute ~~basis,~~resolution ~~can~~process beif ~~costly~~the ~~and~~parties ~~time-consuming,~~do ~~and~~not agree upon the ~~results~~impact of ~~arbitration~~a ~~may~~change bein ~~unfavorable to us~~law. The Ifinitial weterms ~~are~~of ~~not~~many ~~able~~of toour ~~renegotiate or enter into~~ interconnection agreements onhave ~~acceptable~~expired; ~~terms~~however, oreach ifof ~~we are subject to unfavorable arbitration decisions,~~ our ~~cost~~expired ofagreements ~~doing~~contains ~~business~~an ~~could~~“evergreen” ~~increase~~provision ~~and~~that ~~our~~allows ~~ability~~the agreement to ~~compete~~continue ~~could~~in beeffect ~~impeded~~until terminated. In ~~Moreover~~addition, ~~our~~new ~~interconnection~~ agreements ~~with~~could ~~companies~~result ~~other~~in ~~than~~less ~~incumbent~~favorable ~~local~~rates, ~~exchange~~terms ~~carriers~~and ~~(such~~conditions asthan ~~wireless~~our prior agreements.

If we cannot negotiate new interconnection agreements or renew our existing interconnection agreements in each state on acceptable terms, we may invoke our ability to seek binding arbitration before state regulatory agencies. The arbitration process, which is conducted on a state-by-state basis, can be costly and time-consuming, and the results of arbitration may be unfavorable to us. If we are not able to renegotiate or enter into interconnection agreements on acceptable terms, or if we are subject to unfavorable arbitration decisions, our cost of doing business could increase and our ability to compete could be impeded. Moreover, our interconnection agreements and traffic exchange with companies other than ILECs (such as wireless and VoIP providers and other competitive carriers) are not subject to the statutory arbitration mechanism, making it potentially more difficult to reach any agreement on terms that we view as acceptable.

The mergers of BellSouth, SBC and AT&T and of MCI and Verizon have significantly affected the availability of acceptable interconnection agreements that competitive carriers such as us can adopt without incurring the expense of lengthy negotiation and arbitration with an incumbent carrier in each state. Before their respective mergers, AT&T and MCI dedicated significant internal and external resources to negotiate and arbitrate interconnection agreements that many competitive carriers adopted or used as model agreements. These resources and the resulting model agreements are no longer available as a result of consolidation among carriers, and it is likely that competitive carriers such as us will be required to invest more resources than in the past to secure acceptable interconnection agreements.

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Internet Protocol-Enabled Services. The current regulatory environment for VoIP services remains unclear, as the decision whether VoIP is an “information service” or “telecommunications service” is still pending. The FCC is considering clarifications and changes to the regulatory status of services and applications using IP, including VoIP offerings. The FCC has issued a series of rulings in connection with the regulatory treatment of interconnected VoIP service, but many of the rulings have been narrowly tailored and others have addressed only discrete issues. In March 2004, the FCC issued a notice of proposed rulemaking seeking comment on how it might categorize various types of IP-based services, for example, by distinguishing IP services that interconnect to the public switched telephone network, or PSTN, or classifying those that are used as a true substitute for traditional telephone service. Although the FCC has yet to reach a conclusion on many of the key issues presented in this proceeding, it has issued a series of orders holding that VoIP services that interconnect with the PSTN are to be subject to a number of regulatory requirements, including rules relating to Universal Service Fund (“USF”) contributions, Customer Proprietary Network Information rules, the provisioning of network access to authorized law enforcement personnel, local number portability, E-911 and others. The FCC also held that state utility regulatory commissions may not impose pricing and entry regulations on “nomadic” interconnected VoIP services such as that offered by Vonage, concluding that Vonage’s VoIP application, and others like it, are interstate services subject only to federal regulation. Reviewing courts have affirmed these FCC decisions. Broader questions on the regulatory status of VoIP remain to be resolved. We cannot predict how these matters will be resolved or the impact of these matters on companies with which we compete or interconnect.

In November 2011, the FCC adopted intercarrier compensation rules under which all traffic, including VoIP-PSTN traffic, ultimately will be subject to a bill-and-keep framework. Effective as of December 29, 2011, default rates for toll VoIP-PSTN traffic will be equal to interstate access rates applicable to non-VoIP traffic both in terms of rate level and rate structure; default rates for other VoIP-PSTN traffic will be reciprocal compensation rates. In addition, VoIP-PSTN traffic will be subject to the same phase-down of access rates as will be applied to traditional voice traffic, discussed further below. It is unclear at this point whether the new rules will increase or decrease our costs or revenues relating to access charges we would pay or receive for this traffic. In addition, because the new rules regarding payment obligations for VoIP traffic are prospective only and do not address any intercarrier compensation payment obligations for VoIP traffic for any prior periods, we cannot predict how existing disputes regarding treatment of this traffic for prior periods will be resolved. The FCC also issued a Further Notice of Proposed Rulemaking which asks for further input on many of the issues involved, including IP to IP interconnection. While the FCC states an “expectation that parties will negotiate in good faith” toward IP to IP interconnection agreements, questions are asked regarding under what legal framework these interconnection arrangements should proceed, which creates some potential uncertainty regarding whether these arrangements will be economic.

Intercarrier Compensation. The FCC regulates the access rates charged by local carriers to interexchange carriers for the origination and termination of long distance traffic. These access rates make up a significant portion of the cost of providing long distance service. The FCC has adopted policy changes that over time are reducing carriers’ access rates. Under the FCC’s November 2011 order, a uniform bill-and-keep framework for both intrastate and interstate access traffic will be the ultimate end state for all telecommunications traffic exchanged with a local exchange carrier. The reforms required by the FCC’s new rules will be phased in over a multi-year transition. Specifically, effective December 29, 2011, the following rates were capped: (1) all interstate access rate elements and reciprocal compensation rates; (2) for price cap carriers and CLECs operating in their areas, all intrastate access rates; and (3) for rate-of-return carriers and CLECs operating in their areas, terminating access rates only. In addition, competitive carriers must reduce their intrastate tariffed access charges by July 2013 to those no greater than the incumbent carriers with which they compete, as is currently required with CLEC’s interstate access charges. From 2013 through 2018, further reductions in both intrastate and interstate access charges and reciprocal compensation rates are required, with an ultimate end state of bill-and-keep for all charges. These new rules significantly alter the manner in which all carriers, including carriers such as us that use different service platforms such as wireless and VoIP, are compensated for the origination and termination of telecommunications traffic and the rates that we pay for these services. We expect these new rules to result in a loss of revenues and could potentially increase our volume of carrier disputes. Also, it is possible

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~~and~~that ~~VoIP~~the ~~providers~~new ~~and~~rules will ~~other~~be ~~competitive carriers) are not~~ subject to ~~the~~appeals ~~statutory~~and ~~arbitration~~requests ~~mechanism,~~for ~~making~~stay itby ~~potentially~~numerous ~~more~~parties, ~~difficult~~further todelaying ~~reach any agreement on terms that we view as acceptable~~implementation.

The mergers between BellSouth, SBC and AT&T and between MCI and Verizon have significantly affected the availability of acceptable interconnection agreements that competitive carriers such as us can adopt without incurring the expense of lengthy negotiation and arbitration with an incumbent carrier in each state. Before their respective mergers, AT&T and MCI dedicated significant internal and external resources to negotiate and arbitrate interconnection agreements that many competitive carriers adopted or used as model agreements. These resources and the resulting model agreements are no longer available as a result of consolidation among carriers, and it is likely that competitive carriers such as us will be required to invest more resources than in the past to secure acceptable interconnection agreements.

Internet Protocol-Enabled Services. The FCC has held that cable modem services offered by cable television companies and broadband Internet services offered by incumbent local exchange carriers should be classified as “information services” and not telecommunications services subject to regulation under Title II of the Communications Act. The FCC is considering clarifications and changes to the regulatory status of services and applications using IP, including VoIP offerings. The FCC has issued a series of rulings in connection with the regulatory treatment of interconnected VoIP service, but many of the rulings have been narrowly tailored and others have addressed only discrete issues. In March 2004, the FCC issued a notice of proposed rulemaking seeking comment on how it might categorize various types of IP-based services, for example, by distinguishing IP services that interconnect to the public switched telephone network, or PSTN, or classifying those that are used as a true substitute for traditional telephone service. Although the FCC has yet to reach a conclusion on many of the key issues presented in this proceeding, it has issued a series of orders holding that VoIP services that interconnect with the PSTN are to be subject to a number of regulatory requirements, including rules relating to Universal Service Fund contributions, Customer Proprietary Network Information rules, the provisioning of network access to authorized law enforcement personnel, local number portability, E-911 and others. The FCC also held that state utility regulatory commissions may not impose pricing and entry regulations on “nomadic” interconnected VoIP services such as that offered by Vonage, concluding that Vonage’s VoIP application, and others like it, are interstate services subject only to federal regulation. Reviewing courts have affirmed these FCC decisions. The FCC has not yet clarified definitively whether, and to what extent, providers of interconnected VoIP service are required to pay access charges to local exchange carriers, and broader questions on the regulatory status of VoIP remain to be resolved. We cannot predict how these matters will be resolved or the impact of these matters on companies with which we compete or interconnect.

Intercarrier Compensation. The FCC regulates the interstate access rates charged by local carriers to interexchange carriers for the origination and termination of interstate long distance traffic. These access rates make up a significant portion of the cost of providing long distance service. The FCC has adopted policy changes that over time are reducing incumbent carriers’ access rates, which has the effect of lowering the cost of providing long distance service, especially to business customers. In addition, the FCC adopted rules that require competitive carriers to reduce their tariffed access charges to those no greater than the incumbent carriers with which they compete. Facilities-based carriers operating in a local market area must pay one another “reciprocal compensation” for terminating traffic over one another’s local networks. Reciprocal compensation rates are generally much lower than access charges. The FCC also has adopted rules changing the compensation mechanism for traffic exchanged between telecommunications carriers that are destined for dial-up Internet service providers and requiring rates equal to or below the relatively low reciprocal compensation rates. In March 2005, the FCC initiated a proceeding designed to comprehensively examine and reform all of these types of intercarrier compensation, including access charges and reciprocal compensation. There has been no definitive result from this proceeding.

In February 2011, the FCC initiated a further review of the compensation arrangements between all carriers for the use of their respective networks. The pending proceeding could significantly alter the manner in which carriers, including carriers that use different service platforms such as wireless, cable and VoIP, are compensated for the origination and termination of communications traffic and the rates local

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exchange carriers charge for these access services. The proceeding could also significantly alter the manner in which facilities-based local carriers charge other carriers, such as VoIP providers and wireless providers, for the origination and termination of local communications traffic. The FCC’s review of these matters will not only re-examine the rules governing the way carriers charge one another, but also the potential effect that changes to the intercarrier compensation regime could have on various federal subsidy programs such as the Universal Service Fund, on the nation’s legacy carrier network infrastructure and on consumers’ retail rates.

Multiple proposals to reform the entire intercarrier compensation regime have been submitted to the FCC by various industry groups since the proceeding. The most recent rulemaking puts forward a mix of proposals, alternatives and analysis, asking for more input on the framework and potential overhauling of intercarrier compensation and universal service. However, the FCC has not yet enacted a prospective reform of intercarrier compensation. In addition, the FCC has repeatedly declined requests to declare whether under existing law interstate interexchange traffic that originates in IP format and terminates in circuit-switched or time-division multiplexing format is subject to higher switched access charges or lower reciprocal compensation rates. As a result, individual courts and state regulatory commissions have been addressing the issue in the context of individual collection disputes, with inconsistent results.

Special Access. Special access is a service offered by incumbent local telephone companies that consists of dedicated transmission facilities or private lines used by wireline and wireless telecommunications carriers, Internet-based service providers and large enterprise end-users. We rely on the purchase of special access services for “last mile” access to many of our customers’ locations. As a result, the price of special access services must be available at rates that allow us to price our retail offerings to meet our gross margin expectations while remaining competitively priced in the retail market. Incremental increases in the prices of special access services will exert pressure on our gross margins. Since special access services are not subject to the unbundling requirements of the Communications Act, the prices for special access services have not been directly affected by the FCC’s modification of network unbundling rules. To the extent, however, that the availability of UNE digital T1 lines may have served as a restraint on the prices charged for special access services, we could face increased prices for special access services given the limited alternative means of last mile access in some larger central offices resulting from application of the current unbundling rules.

In 1999, the FCC adopted rules that enable incumbent carriers to obtain pricing flexibility for their interstate special access services in various metropolitan areas depending on the level of competition present in an area. We purchase interstate special access services from incumbent carriers in many metropolitan areas where pricing flexibility has been granted. Depending on the degree of pricing flexibility for which the incumbent carrier qualifies in particular areas, the incumbent carrier may be entitled to impose contracts with minimum revenue commitments and bundles of purportedly discounted and non-discounted services that, in effect, enable the carrier to charge substantially greater prices for special access services in those areas, while making it more difficult for competitive carriers to offer substitute services. In some cases, the FCC has granted petitions by the incumbent carriers for forbearance from any regulation of some special access services.

As a result of the mergers of BellSouth, SBC and AT&T and ~~SBC and~~ of MCI and Verizon, the number of providers of competitive access services has diminished. The FCC and the Department of Justice placed conditions on the AT&T and Verizon mergers to constrain the ability of AT&T and Verizon to raise prices on their wholesale special access and equivalent retail services. These regulatory pricing constraints have now expired. AT&T and Verizon are free to realign charges for special access services with current commercial rates. Because a substantial portion of our services are generated through the use of special access lines purchased from AT&T and Verizon, a significant increase in the price for special access could substantially increase our cost of services.

The FCC currently is considering whether and how to reform its special access rules. We rely to a considerable extent on interstate special access services purchased from the incumbent carriers in order to connect to our customers. We cannot predict when the FCC will issue a decision regarding special access prices or how any such decision will affect our business. A significant increase in the price for special access could materially increase our cost of services. Additional pricing flexibility for special access services offered by the incumbent carriers could place us at a competitive disadvantage, both as a purchaser of access and as a vendor of access to other carriers or end-user customers.

9Universal Service. The Communications Act and the FCC’s rules provide for a federal USF, which is intended to subsidize communications services in rural and high-cost areas, services for low-income consumers, and services for schools, libraries and rural health care providers. Currently, the FCC assesses all telecommunications providers, including us, a percentage of interstate revenues received from retail customers. Providers are permitted to pass through a specified percentage of their USF contribution assessment to their customers in a manner consistent with FCC billing regulations.

In November 2008, the FCC proposed to base USF assessments on the number of telephone numbers that a telecommunications carrier actively provides to residential customers and a “connections-based” contribution methodology for business customers, rather than on a percentage of collected interstate

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~~prices~~revenues. orThe ~~how~~objective ~~any~~behind ~~such~~the ~~decision~~proposal ~~will~~is ~~affect~~to ~~our~~capture ~~business.~~USF Arevenues ~~significant~~from ~~increase~~the inexpanding ~~the~~number ~~price~~of ~~for~~new ~~special~~service ~~access~~providers ~~could~~using ~~materially~~different ~~increase~~technologies ~~our~~to ~~cost~~offer ofcommunications services. ~~Additional~~In ~~pricing~~February 2011, ~~flexibility~~the ~~for~~FCC ~~special~~issued ~~access~~another ~~services~~notice ~~offered~~of byproposed rulemaking to consider whether to limit the ~~incumbent~~number ~~carriers~~of ~~could~~recipients ~~place~~of usUSF atproceeds in a ~~competitive~~specified ~~disadvantage,~~geographic ~~both~~region asand whether to select these recipients through a ~~purchaser~~“reverse auction” process, in which the company willing to serve the region using the least amount of ~~access~~USF ~~and~~proceeds would be selected as athe ~~vendor~~proceeds recipient. Separately, various states maintain, or are in the process of ~~access~~implementing, their own universal service programs, and the rules governing these state programs are also subject to ~~other~~changes. ~~carriers~~It oris ~~end-user~~difficult ~~customers~~to predict how those changes might affect the telecommunications industry or us.

~~Universal~~In ~~Service.~~addition, ~~The~~in ~~Communications~~November 2011, ~~Act and~~ the FCC’s ~~rules~~expanded ~~provide~~the ~~for~~USF ato ~~federal~~include ~~Universal~~broadband ~~Service~~services ~~Fund,~~as ~~which~~part isof ~~intended~~a to“Connect ~~subsidize~~America ~~communications~~Fund.” The ~~services~~new infund ~~rural~~also ~~and~~includes ~~high-cost~~a ~~areas,~~Mobility ~~services for low-income consumers~~Fund, ~~and~~making ~~services~~mobile ~~for~~broadband ~~schools,~~an ~~libraries~~independent ~~and~~universal ~~rural~~service ~~health care providers~~objective. ~~Currently~~ Further, ~~the~~ FCC ~~assesses~~reform ~~all~~of ~~telecommunications~~the ~~providers,~~USF ~~including~~contribution ~~us,~~methodology ais ~~percentage~~expected ofto ~~interstate~~be ~~revenues~~addressed ~~received~~in ~~from retail customers~~2012. ~~Providers~~The ~~are~~application ~~permitted~~and toeffect ~~pass~~of ~~through~~these achanges, ~~specified~~and ~~percentage~~similar ofstate ~~their~~requirements, ~~Universal~~on ~~Service~~the ~~Fund~~telecommunications ~~contribution~~industry ~~assessment~~generally toand ~~their~~on ~~customers~~certain inof aour ~~manner~~business ~~consistent~~activities ~~with~~cannot ~~FCC~~be ~~billing regulations~~predicted.

InNational ~~November~~Broadband ~~2008,~~Plan. ~~the~~As ~~FCC~~part ~~proposed~~of ~~to base Universal Service Fund assessments on~~ the ~~number~~American ofRecovery ~~telephone numbers that a telecommunications carrier actively provides to residential customers~~ and aReinvestment ~~“connections-based”~~Act ~~contribution~~of ~~methodology for business customers~~2009, ~~rather~~Congress ~~than~~directed ~~on a percentage of collected interstate revenues. The objective behind~~ the ~~proposal is to capture Universal Service Fund revenues from the expanding number of new service providers using different technologies to offer communications services. In February 2011~~FCC, ~~the~~in ~~FCC~~coordination ~~issued~~with ~~another notice of proposed rulemaking to consider whether to limit~~ the ~~number~~National ofTelecommunications ~~recipients of Universal Service Fund proceeds in a specified geographic region~~ and ~~whether~~Information ~~to select these recipients through a “reverse auction” process~~Administration, ~~in which the company willing~~ to ~~serve~~develop ~~the~~a ~~region~~national ~~using the least amount of Universal Service Fund proceeds would be selected as the proceeds recipient. The FCC also is considering expanding the use of the Universal Service Fund to fund deployment of~~ broadband ~~services~~plan to ~~areas~~ensure that ~~currently~~Americans ~~do not~~ have ~~or have limited~~ access to ~~high speed~~ broadband ~~services~~capability ~~through the creation of a “Connect America Fund.” These~~ and ~~other proposals pending before the FCC related~~ to ~~Universal~~establish ~~Service~~benchmarks ~~Fund~~in ~~reform~~service ~~are~~of ~~expected to generate considerable debate and their outcome is not predictable. Historically, competitive carriers like us have been net contributors to these funds, and~~ that ~~trend is expected to continue~~goal. ~~Any~~The ~~changes~~FCC indelivered ~~the~~its ~~rules~~plan ~~may affect our revenues and our competitive position in relation~~ to ~~other~~Congress ~~service~~on ~~providers~~March 16, ~~but~~2010. itThe isplan ~~not~~outlines ~~possible~~ at ~~this~~a ~~time~~high tolevel ~~predict~~ the ~~extent~~FCC’s wepolicies ~~would~~concerning bemiddle-mile ~~affected~~transport, byintercarrier ~~any such rule changes~~compensation, ifthe ~~at all. Separately~~USF, ~~various~~pole ~~states maintain~~attachments, ~~or are in the process~~ rights-of ~~implementing~~-way, ~~their~~spectrum ~~own~~allocation ~~universal service programs,~~ and ~~the~~broadband ~~rules governing these state programs are also subject to changes~~adoption. The FCC and state regulatory commissions are continuing to make changes to their universal service rules and policies, and it is difficult to predict how those changes might affect the telecommunications industry or us.

National Broadband Plan. As part of the American Recovery and Reinvestment Act of 2009, Congress directed the FCC, in coordination with the National Telecommunications and Information Administration, to develop a national broadband plan to ensure that Americans have access to broadband capability and to establish benchmarks in service of that goal. The FCC delivered its plan to Congress on March 16, 2010. The plan outlines at a high level the FCC’s policies concerning middle mile transport, intercarrier compensation, the Universal Service Fund, pole attachments, rights-of-way, spectrum allocation and broadband adoption.

The plan contains numerous recommendations for future actions by the FCC and Congress to further the goal of nationwide broadband access. We anticipate that the FCC will propose rule changes consistent with the plan and will seek additional comments before any final rules are adopted. The development of the FCC’s plan may lead to changes in the legal and regulatory environment in which we operate. We cannot predict the nature and extent of the impact which the outcome of these proceedings will have on us or our operations.

Customer Proprietary Network Information and Privacy. The Communications Act and the FCC’s rules require carriers to implement measures to prevent the unauthorized disclosure of Customer Proprietary Network Information, or CPNI. CPNI includes information related to the quantity, technological configuration, type, destination and the amount of use of a communications service. In ~~April 2007, the FCC revised its~~ CPNI rules include ~~to impose new~~ restrictions on telecommunications carriers and providers of interconnected VoIP service. We must file a verified certification of compliance by March 1 of each year that affirms the existence of training and other sales and marketing processes designed to prevent improper use and unauthorized release of CPNI. An inadvertent violation of these and related CPNI requirements by us could subject our company to significant fines or other regulatory penalties.

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each year that affirms the existence of training and other sales and marketing processes designed to prevent improper use and unauthorized release of CPNI. An inadvertent violation of these and related CPNI requirements by us could subject our company to significant fines or other regulatory penalties.

Additional measures to protect CPNI and consumer privacy are proposed from time to time, and both Congress and the FCC currently are considering such additional measures. These developments appear to be part of a broader trend to protect consumer information as it continues increasingly to be transmitted in electronic formats. We cannot predict whether additional requirements governing CPNI or other consumer data will be enacted, or whether such additional requirements will affect our ability to market or provide our services to current and future customers.

Network Management and Internet Neutrality. In August 2005, the FCC adopted a policy statement that outlined four principles intended to preserve and promote the open and interconnected nature of the public Internet. The FCC, the Administration and Congress have expressed interest in imposing these so-called “net neutrality” requirements on broadband Internet access providers, which address whether, and the extent to which, owners of network infrastructure should be permitted to engage in network management practices that prioritize data packets on their networks through commercial arrangements or based on other preferences. The FCC in 2005 adopted a policy statement expressing its view that consumers are entitled to access lawful Internet content and to run applications and use services of their choice, subject to the needs of law enforcement and reasonable network management. In an August 2008 decision, the FCC characterized these net neutrality principles as binding and enforceable and stated that network operators have the burden to prove that their network management techniques are reasonable. In that order, which was overturned by a court decision in April 2010, the FCC imposed sanctions on a broadband Internet access provider for managing its network by blocking or degrading some Internet transmissions and applications in a way that the FCC found to be unreasonably discriminatory. In December 2010, the FCC issued new rules to govern network management practices and prohibit unreasonable discrimination in the transmission of Internet traffic. These rules have not taken effect and are currently being challenged in court. It is not possible to determine what specific broadband network management techniques or related business arrangements may be deemed reasonable or unreasonable in the future. We cannot predict how any future legislative, regulatory or judicial decisions relating to net neutrality might affect our ability to manage our broadband network or develop new products or services.

Forbearance. The Communications Act provides the FCC with the authority to not enforce, or “forbear” from enforcing, statutory requirements and regulations if certain public interest factors are satisfied. In December 2005, the FCC granted, in part, a petition for forbearance filed by Qwest seeking relief from specified dominant carrier regulations, including some unbundling obligations related to high capacity loops and transport, in those portions of the Omaha metropolitan statistical area where facilities-based competition had allegedly increased significantly. The FCC’s dominant carrier regulations require Qwest, in part, to offer UNEs and also serve as a check on dominant carrier pricing for other wholesale services, such as special access lines, that we seek to purchase at commercially acceptable prices. Upon being granted relief by the FCC, Qwest has substantially increased the prices for the network elements that we use to provide services in eight central offices in the Omaha metropolitan statistical area, or MSA.9

In January 2007, Qwest filed additional petitions for relief from dominant carrier regulation in the metropolitan statistical areas of Denver, Minneapolis-St. Paul, Phoenix and Seattle. In February 2008, Verizon re-filed petitions, which had previously been denied, for relief from dominant carrier regulation for the State of Rhode Island and Virginia Beach. In July 2008, the FCC denied the Qwest petitions. Qwest subsequently re-filed a petition for forbearance for the Phoenix MSA only in March 2009. The FCC issued an order in June 2010 denying Qwest petition for Phoenix and setting forth specific thresholds and analytical frameworks that must be met for grant of such petitions. Qwest has since appealed the FCC decision and order and that appeal remains in the courts. If a court or the FCC upholds or grants any forbearance or similar petitions filed by incumbent carriers in the future affecting markets in which we operate, our ability to purchase wholesale network services from these carriers at cost-based prices that would allow us to achieve our target profit margins in those markets could be materially adversely affected. The grant of these petitions also would enable incumbent carriers to compete with their competitors, including us, more aggressively on price in the affected markets.

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~~Other~~consumers ~~Federal~~are ~~Regulation.~~entitled Into ~~addition~~access lawful Internet content and to ~~the~~run ~~specific~~applications ~~matters~~and ~~listed~~use ~~above,~~services weof ~~are~~their choice, subject to athe ~~variety~~needs of ~~other~~law ~~FCC~~enforcement ~~filing,~~and ~~reporting~~reasonable network management. In an August 2008 decision, ~~record-keeping~~the FCC characterized these net neutrality principles as binding and ~~fee~~enforceable ~~payment~~and ~~requirements.~~stated ~~The~~that ~~FCC~~network ~~has~~operators have the ~~authority~~burden ~~generally~~ to ~~condition,~~prove ~~modify,~~that ~~cancel~~their network management techniques are reasonable. In that order, ~~terminate~~which was overturned by a court decision in April 2010, ~~revoke~~the FCC imposed sanctions on a broadband Internet access provider for managing its network by blocking or ~~decline~~degrading tosome ~~renew~~Internet ~~licenses~~transmissions and ~~operating~~applications ~~authority~~in ~~for~~a ~~failure~~way that the FCC found to ~~comply~~be ~~with~~unreasonably ~~federal~~discriminatory. ~~laws~~In ~~and~~December 2010, the FCC’s issued new rules, to ~~regulations~~govern network management practices and ~~policies~~prohibit unreasonable discrimination in the transmission of Internet traffic. These ~~Fines~~rules have ornot ~~other~~taken ~~penalties~~effect ~~also~~and ~~may~~are becurrently ~~imposed~~being ~~for~~challenged ~~such~~in ~~violations~~court. It ~~The~~is ~~FCC~~not orpossible ~~third~~to ~~parties~~determine ~~may~~what ~~raise~~specific ~~issues~~broadband ~~with~~network ~~regard~~management totechniques ~~our~~or ~~compliance~~related ~~with~~business ~~applicable~~arrangements ~~laws~~may ~~and~~be ~~regulations.~~deemed ~~Moreover,~~reasonable weor ~~are~~unreasonable ~~subject~~in tothe ~~additional~~future. ~~federal~~We ~~regulation~~cannot ~~and~~predict ~~compliance~~how ~~requirements~~any ~~from~~future ~~other~~legislative, ~~governmental~~regulatory ~~agencies~~or ~~such~~judicial asdecisions ~~the~~relating ~~Federal~~to ~~trade~~net ~~Commission,~~neutrality ~~the~~might ~~Internal~~affect ~~Revenue~~our ~~Service~~ability ~~and~~to ~~the~~manage ~~Securities~~our ~~and~~broadband ~~Exchange~~network ~~Commission~~or develop new products or services.

Forbearance. The Communications Act provides the FCC with the authority to not enforce, or “forbear” from enforcing, statutory requirements and regulations if certain public interest factors are satisfied. If the FCC were to forbear from enforcing regulations that have been established to enable competing broadband Internet access and VoIP, our business could be adversely affected. In December 2005, the FCC granted, in part, a petition for forbearance filed by Qwest seeking relief from specified dominant carrier regulations, including some unbundling obligations related to high capacity loops and transport, in those portions of the Omaha metropolitan statistical area where facilities-based competition had allegedly increased significantly. The FCC’s dominant carrier regulations require Qwest, in part, to offer UNEs and also serve as a check on dominant carrier pricing for other wholesale services, such as special access lines, that we seek to purchase at commercially acceptable prices. Upon being granted relief by the FCC, Qwest has substantially increased the prices for the network elements that we use to provide services in eight central offices in the Omaha metropolitan statistical area.

In January 2007, Qwest filed additional petitions for relief from dominant carrier regulation in the metropolitan statistical areas of Denver, Minneapolis-St. Paul, Phoenix and Seattle. In February 2008, Verizon re-filed petitions, which had previously been denied, for relief from dominant carrier regulation for the State of Rhode Island and Virginia Beach. In July 2008, the FCC denied the Qwest petitions. Qwest subsequently refiled a petition for forbearance for the Phoenix metropolitan service area only in March 2009. The FCC issued an order in June 2010 denying Qwest petition for Phoenix and setting forth specific thresholds and analytical frameworks that must be met for grant of such petitions. Qwest has since appealed the FCC decision and order and that appeal remains in the courts. If a court or the FCC upholds or grants any forbearance or similar petitions filed by incumbent carriers in the future affecting markets in which we operate, our ability to purchase wholesale network services from these carriers at cost-based prices that would allow us to achieve our target profit margins in those markets could be materially adversely affected. The grant of these petitions also would enable incumbent carriers to compete with their competitors, including us, more aggressively on price in the affected markets.

Other Federal Regulation. In addition to the specific matters listed above, we are subject to a variety of other FCC filing, reporting, record-keeping and fee payment requirements. The FCC has the authority generally to condition, modify, cancel, terminate, revoke or decline to renew licenses and operating authority for failure to comply with federal laws and the FCC’s rules, regulations and policies. Fines or other penalties also may be imposed for such violations. The FCC or third parties may raise issues with regard to our compliance with applicable laws and regulations. Moreover, we are subject to additional federal regulation and compliance requirements from other government agencies such as the Federal Trade Commission, the Internal Revenue Service and the Securities and Exchange Commission.

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State Regulation

We are subject to various state laws and regulations. Generally, the state ~~public~~PUCs ~~utility commissions~~ require providers such as us to obtain certificates of authority from the commission before initiating service within the state. In most states, we also are required to file tariffs or price lists setting forth the terms, conditions and prices for specified services that are classified as intrastate and to update or amend our tariffs when we adjust our rates or add new products. We also are subject to various reporting and record-keeping requirements and contribute to state USF, E911 and other funds, and pay other taxes, fees and surcharges where applicable. Certificates of authority can be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for a carrier’s failure to comply with state laws or rules, regulations and policies of state regulatory authorities. State utility commissions generally have authority to supervise telecommunications service providers in their states and to enforce state utility laws and regulations. Fines or other penalties also may be imposed for violations. ~~Public~~PUCs ~~utility commissions~~ or third parties may raise issues with regard to our compliance with applicable laws or regulations.

We have authority to offer intrastate long distance services in all 50 U.S. states and the District of Columbia. We provide local services, where authorized, by reselling the retail local services of the incumbent carrier in a given territory and, in some established markets, using incumbent carriers’ network elements and our own local switching facilities.

State public ~~utility~~PUCs ~~commissions~~ have responsibility under the Communications Act to oversee relationships between incumbent carriers and their competitors with respect to such competitors’ use of the incumbent carriers’ network elements and wholesale local services. ~~Public~~PUCs ~~utility commissions~~ arbitrate interconnection agreements between the incumbent carriers and competitive carriers such as us when one of the parties elects to have it do so. Under the Telecommunications Act, the decisions of ~~state~~PUCs ~~public utility commissions~~ with regard to interconnection disputes may be appealed to federal courts. There remain important unresolved issues regarding the scope of the authority of ~~public~~PUCs ~~utility commissions~~ and the extent to which the commissions will adopt policies that promote local telephone service competition.

States also regulate in part the intrastate carrier access services of ~~incumbent~~ carriers such as us. WeAs an interexchange carrier (“IXC”), we are required to pay intrastate access charges to ~~incumbent~~local exchange carriers when they originate or terminate our intrastate long distance traffic. As Wea ~~could~~CLEC, bewe ~~harmed~~charge byIXCs ~~high~~intrastate access charges orfor ~~increases to access charges, particularly to~~ the ~~extent~~origination ~~that~~and ~~incumbent~~termination ~~carriers~~services dowe ~~not~~provide ~~incur~~to them. Under the ~~same~~FCC’s ~~level~~November 2011 oforder, ~~costs~~state ~~with~~commissions ~~respect~~will tohave ~~their~~oversight ~~own~~of the intrastate ~~long~~access ~~distance~~charge ~~services~~transition orprocess to ~~the~~ensure ~~extent~~ that ~~they~~carriers ~~are~~comply ~~able~~with tothe ~~offer~~FCC’s ~~their~~timing ~~long~~and ~~distance~~required ~~affiliates better access pricing~~reductions. States ~~also~~will ~~regulate~~continue orto ~~legislate~~review ~~changes~~intrastate toswitched ~~the~~access ~~level~~tariffs, ofas ~~intrastate~~well ~~access~~as ~~charges~~interconnection ~~assessed~~agreements byand ~~competitive~~associated ~~local~~reciprocal ~~exchange~~compensation ~~carriers~~rates ~~such~~to asensure ~~us.~~compliance ~~Some~~with ~~states~~the ~~have~~FCC’s ~~ordered~~intercarrier ~~maximum~~compensation ~~rate~~framework ~~caps~~and ~~for~~transition. In ~~intrastate~~addition, ~~access~~a ~~charges~~number of ~~competitive~~states ~~carriers~~have ~~that~~ordered ~~could~~their ~~result~~own ingradual, amulti-year ~~decrease~~intrastate in access charge ~~revenues~~reductions and the ~~inability~~extent ofto ~~competitive~~which ~~carriers~~these tostate ~~recover~~actions ~~fully~~are ~~the~~preempted ~~costs~~by ofthe ~~providing~~FCC’s ~~these~~order ~~services~~is unclear. InStates ~~one~~will ~~such~~also ~~action,~~have ~~which~~responsibility ~~was~~for ~~effective~~determining inthe ~~March 2008,~~network ~~Virginia~~“edge” ~~capped~~for ~~the~~purposes ~~intrastate~~of ~~access~~bill-and-keep. What ~~charges~~these ofproceedings ~~competitive~~may ~~carriers~~entail ator ~~the~~to ~~rates~~what ~~charged~~extent byrequirements ~~the~~arising ~~incumbent~~from insuch ~~whose~~proceedings ~~territory~~will ~~the~~affect ~~competitive~~our ~~carrier~~operations ~~provides~~is ~~service~~unclear.

~~Several states have also initiated intrastate universal service charges that parallel the interstate charges created by the FCC. The impact of these changes is not yet known.~~ In addition, state legislatures are considering, and in some cases enacting, new laws that limit the authority of the state ~~public~~PUCs ~~utility commissions~~ to regulate and oversee the business dealings of ~~the incumbent~~ carriers. We could be harmed by these actions.

12We will be affected by how states regulate the retail prices of the incumbent carriers with which we compete. As the degree of intrastate competition is perceived to increase, states are offering incumbent carriers increased pricing flexibility and deregulation of particular services deemed to be competitive. This flexibility and deregulation may present the incumbent carriers with an opportunity to subsidize services that compete with our services with revenues generated from their non-competitive services, thereby allowing them to offer competitive services at prices lower than most or all of their competitors. For example, AT&T has obtained authority to create affiliates that would operate on a much less regulated basis and, therefore, could provide significant competition in addition to the local services historically

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We will be affected by how states regulate the retail prices of the incumbent carriers with which we compete. As the degree of intrastate competition is perceived to increase, states are offering incumbent carriers increased pricing flexibility and deregulation of particular services deemed to be competitive. This flexibility and deregulation may present the incumbent carriers with an opportunity to subsidize services that compete with our services with revenues generated from their non-competitive services, thereby allowing them to offer competitive services at prices lower than most or all of their competitors. For example, AT&T has obtained authority to create affiliates that would operate on a much less regulated basis and, therefore, could provide significant competition in addition to the local services historically offered by a much more regulated AT&T. We cannot predict the extent to which these developments may affect our business.

Many states require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignment of carrier assets, carrier stock offerings and incurrence by carriers of significant debt obligations. These requirements can delay and increase the cost we incur to complete various financing transactions, including future stock or debt offerings, the sale of part or all of our regulated business or the acquisition of assets and other entities to be used in our regulated business.

Local Government Authorizations and Related Rights-of-Way

We are subject to numerous local regulations such as building codes, municipal franchise requirements and licensing. Such regulations vary on a city-by-city and county-by-county basis and can affect our provision of both network services and carrier services. We are required to obtain street use and construction permits and licenses or franchises to install and expand our fiber optic network using municipal rights-of-way. In some municipalities where we have installed network equipment, we are required to pay license or franchise fees based on a percentage of gross revenues or a per linear foot basis. Following the expiration of existing franchises, these fees are at risk of increasing. In many markets, incumbent carriers do not pay these franchise fees or pay fees that are substantially lower than those required to be paid by us, although the Telecommunications Act requires that, in the future, such fees be applied in a competitively neutral manner. To the extent that our competitors do not pay the same level of fees that we do, we could be at a competitive disadvantage. Termination of the existing franchise or license agreements before their expiration dates, or a failure to renew the franchise or license agreements, and a requirement that we remove the corresponding portion of our facilities or abandon the corresponding portion of our network, could harm our business. In addition, we would be adversely affected if we are unable to obtain additional authorizations for any new network construction on reasonable terms.

A number of states are considering reforming their laws and regulations governing the issuance of franchises and permits by local governmental authorities, and some states already have enacted laws authorizing some types of entities to secure a state-wide franchise. Congress also has considered from time to time, and may consider in the future, various proposals intended to reform the relationship between federal, state and local governments in connection with the franchising process. We cannot predict how these issues will be resolved, or the extent to which these developments will affect our ability to compete. Unresolved issues also exist regarding the ability of new local service providers to gain access to commercial office buildings to serve tenants. The outcome of these challenges cannot be predicted.

~~Proprietary~~Other ~~Rights~~Regulation

~~Our~~Internet ~~EarthLink~~Taxation. ~~Business~~The ~~trademark~~Internet isTax ~~expected~~Non-Discrimination toAct, bewhich ais ~~valuable~~in ~~asset~~effect tothrough ~~our business. In particular~~November 2014, weplaces ~~believe~~a ~~the~~moratorium ~~strength~~on oftaxes ~~our~~on ~~brand~~Internet ~~among~~access ~~existing~~ and ~~potential~~multiple, ~~customers~~discriminatory ~~will~~taxes beon ~~important~~electronic tocommerce. ~~the~~Certain ~~success~~states ofhave ~~our~~enacted ~~business.~~various ~~Additionally,~~taxes ~~our~~on ~~service~~Internet ~~marks,~~access ~~proprietary~~and ~~technologies~~electronic commerce, ~~domain names~~ and ~~similar~~selected ~~intellectual~~states’ ~~property~~taxes are ~~also~~being ~~important~~contested toon ~~the~~a ~~success~~variety of ~~our business~~bases. We ~~principally~~If ~~rely~~these ~~upon~~state ~~trademark~~tax ~~law~~laws asare ~~well~~not assuccessfully ~~contractual~~contested, ~~restrictions~~or toif ~~establish~~future state and ~~protect~~federal ~~our~~laws ~~technology~~imposing ~~and~~taxes ~~proprietary~~or ~~rights~~other ~~and~~regulations ~~information.~~on WeInternet ~~require~~access ~~employees~~ and ~~consultants~~electronic ~~and,~~commerce ~~when~~are ~~possible~~adopted, ~~suppliers~~our ~~and~~cost ~~distributors~~of toproviding ~~sign~~Internet ~~confidentiality~~access ~~agreements,~~services could be increased and weour ~~generally~~business ~~control~~could be adversely affected.

13Consumer Protection. Federal and state governments have adopted consumer protection laws and undertaken enforcement actions to address advertising and user privacy. As part of these efforts, the Federal Trade Commission (“FTC”) and some state Attorney General offices have conducted investigations into the privacy practices of companies that collect information about individuals on the Internet. The FTC and various state agencies as well as individuals have investigated and asserted claims against, or instituted inquiries into, ISPs in connection with marketing, billing, customer retention, cancellation and disclosure practices.

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~~access~~Proprietary to, and distribution of, our technologies, documentation and other proprietary information. We will continue to assess appropriate occasions for seeking trademark and other intellectual property protections for those aspects of our business and technology that we believe constitute innovations providing us with a competitive advantage. From time to time, third parties have alleged that certain of our technologies infringe on their intellectual property rights. To date, none of these claims has had an adverse effect on our ability to market and sell our services.Rights

Our trademarks are valuable assets to our business, and are registered trademarks in the United States. In particular, we believe the strength of these brands among existing and potential customers is important to the success of our business. Additionally, our service marks, proprietary technologies, domain names and similar intellectual property are also important to the success of our business. Although we do have several patents, we do not consider these patents important to our business. We principally rely upon trademark law as well as contractual restrictions to establish and protect our technology and proprietary rights and information. We require employees and consultants and, when possible, suppliers and distributors to sign confidentiality agreements, and we generally control access to, and distribution of, our technologies, documentation and other proprietary information. We will continue to assess appropriate occasions for seeking trademark and other intellectual property protections for those aspects of our business and technology that we believe constitute innovations providing us with a competitive advantage. From time to time, third parties have alleged that certain of our technologies infringe on their intellectual property rights. To date, none of these claims has had an adverse effect on our ability to market and sell our services.

Employees

As of December 31, ~~2010~~2011, we had ~~approximately~~ 1,~~326~~222 employees~~, of whom approximately 1,267 were full-time employees~~. None of our employees isare represented by a labor union, orand ~~covered~~we byhave ano collective bargaining ~~agreement~~agreements. We ~~believe~~consider ~~that~~ our relationship with our employees isto be good. ~~In connection with the construction~~ and ~~maintenance~~have ofnot ~~our~~experienced ~~fiber~~interruptions ~~optic network and the conduct~~ of ~~our other business~~ operations, wedue ~~use~~to ~~third-party~~labor ~~contractors, some of whose employees may be represented by unions or covered by collective bargaining agreements~~disagreements.

Item 1A. Risk Factors.

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may adversely impact our business operations. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.

Risks Related to Our Business and Industry

WeIf ~~may~~we ~~not~~are beunable ~~able~~to adapt to ~~execute~~changes ~~our~~in ~~business~~technology ~~strategy~~and customer demands, ~~which~~we ~~could~~may ~~adversely~~not ~~impact~~remain ~~our~~competitive, ~~results~~and ofour ~~operations~~revenues and ~~cash~~operating ~~flows~~results could suffer.

~~During~~The ~~2010,~~communications weindustry ~~were~~is ~~acquired~~characterized by ~~EarthLink.~~changing ~~As a result~~technology, wechanges ~~will~~in becustomer ~~offering~~needs ~~additional~~and ~~services~~frequent wenew doservice ~~not currently provide~~ and ~~offering~~product ~~our~~introductions, ~~existing~~particularly ~~services~~ in ~~new~~the ~~markets.~~areas Inof ~~addition~~voice-over-Internet-Protocol (“VoIP”), ~~our~~broadband services ~~will~~and beadvanced ~~re-branded~~wireless ~~as EarthLink Business~~offerings. ~~There~~Our ~~can~~future besuccess ~~no assurance that these efforts~~ will bedepend, ~~successful.~~in Wepart, ~~may~~on ~~have~~our ~~difficulty~~ability ~~managing~~to ~~the~~use ~~new~~leading ~~products~~technologies ~~and services~~effectively, ~~entering~~to ~~into~~continue ~~new~~to ~~markets~~develop orour ~~combining~~technical ~~service offerings and sales forces~~expertise, ~~especially~~to ~~where~~enhance weour ~~have~~existing noservices orand ~~limited direct prior experience or where competitors may have stronger market positions. There is no assurance that we will be able~~ to ~~achieve~~develop ~~name recognition or status under our~~ new ~~brand~~services that ismeet ~~comparable~~changing tocustomer ~~the~~needs ~~recognition~~on ~~and~~a ~~status~~timely ~~under~~and ~~our~~cost-effective ~~previous brand~~basis. ~~Our~~We ~~revenues~~may ~~have~~not ~~been~~be ~~declining~~able ~~and we expect the revenues from certain aspects of our business~~ to ~~continue~~adapt toquickly ~~decline.~~enough ~~Therefore, the inability~~ to ~~successfully~~changing ~~implement our new business strategy to counteract these declining revenues could have an adverse impact on our business~~technology, ~~financial~~customer ~~condition,~~requirements ~~results of operations~~ and ~~cash~~industry ~~flows~~standards.

~~The~~Specifically, ~~continuing~~new ~~effects~~technologies such as 4G, Ethernet or other alternatives to network access, could result in the development of ~~adverse~~additional ~~economic~~products ~~conditions~~or services that compete with or displace ours, or that enable current customers to bypass use of our networks. In addition, communications customers are increasingly using wireless forms of communication, such as handheld Internet-access devices and mobile phones, which has resulted in a decline in the volume of voice traffic carried by traditional wireline communications networks. Any of these factors could ~~harm~~adversely affect our ~~business~~revenues and profitability.

~~Unfavorable~~The ~~general~~development ~~economic conditions, including recession~~ and ~~disruptions~~offering toof ~~the~~new ~~credit~~services ~~and~~in ~~financial~~response ~~markets,~~to ~~could~~new ~~negatively~~technologies ~~affect~~or ~~our~~consumer ~~business.~~demands ~~Our~~may ~~customers~~require ~~are~~us ~~particularly~~to ~~exposed~~increase toour acapital ~~weak~~expenditures ~~economy~~significantly. ~~These~~We ~~conditions~~may ~~could~~be ~~adversely~~required ~~affect~~to ~~the~~invest ~~affordability~~or ~~of,~~to ~~and~~convert ~~customer demand for, some of~~ our ~~products~~existing ~~and~~network ~~services and could cause customers~~ to ~~delay~~a ornetwork ~~forgo~~using ~~purchases~~more ofadvanced ~~our~~technology. ~~products~~If ~~and~~we ~~services.~~are ~~Also,~~unable ~~our~~successfully ~~business~~to ~~customers~~install ~~may~~or ~~not~~operate benew ~~able~~network toequipment ~~obtain~~or ~~adequate~~convert ~~access~~our ~~to credit~~network, ~~which~~or ~~could~~if ~~affect~~the ~~their~~technology ~~ability~~choices towe make ~~timely~~prove ~~payments~~ to ~~us.~~be ~~One~~incorrect, ineffective or ~~more~~unacceptably ofcostly, ~~these~~we ~~circumstances~~may ~~could~~not ~~cause~~be ~~our~~able ~~revenues~~ to ~~decline,~~compete ~~churn~~effectively. toIn ~~increase~~addition, ~~allowance~~new ~~for~~technologies ~~doubtful~~may ~~accounts~~be ~~and~~protected ~~write-offs~~by ofpatents ~~accounts receivable to increase~~ or ~~otherwise~~other ~~have~~intellectual aproperty ~~material~~laws, ~~adverse effect on our business~~and, ~~financial position~~therefore, ~~results~~may ofbe ~~operations~~available ~~and~~only ~~cash~~to ~~flows~~our competitors.

~~Additionally, our business is dependent on third-party vendors for services and network equipment~~ 13

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Unfavorable general economic conditions could harm our business.

Unfavorable general economic conditions, including recession and disruptions to the credit and financial markets, could negatively affect our business. These conditions could adversely affect the affordability of, and customer demand for, some of our products and services and could cause customers to delay or forego purchases of our products and services. Unfavorable general economic conditions could cause customers to reduce technology spending. In addition, our customers may not be able to obtain adequate access to credit, which could affect their ability to make timely payments to us. One or more of these circumstances could cause our revenues to decline, churn to increase, allowance for doubtful accounts and write-offs of accounts receivable to increase or otherwise have a material adverse effect on our business, financial position, results of operations and cash flows.

Unfavorable general economic conditions could also negatively impact third-party vendors we rely on for services and network equipment integral to our business. If these vendors encounter financial difficulties, their ability to supply services and network equipment to us may be curtailed. If such vendors were to fail, we may not be able to replace them without disruption to, or deterioration of, our service and we may incur higher costs associated with new vendors. If we were required to purchase another manufacturer’s equipment, we could incur significant initial costs to integrate the equipment into our network and to train personnel to use the new equipment. Any interruption in the services provided by our third-party vendors could adversely affect our business, financial position, results of operations and cash flows.

We face significant competition in the communications industry that could reduce our profitability.

Competition could adversely impact us in several ways, including (i) the loss of customers and resulting revenue, (ii) the possibility of customers reducing their usage of our services or shifting to less profitable services, (iii) reduced traffic on our networks, (iv) our need to expend substantial time or money on new capital improvement projects, (v) our need to lower prices or increase marketing expenses to remain competitive and (vi) our inability to diversify by successfully offering new products or services.

We believe the primary competitive factors in the communications industry include price, availability, reliability of service, network security, variety of service offerings, quality of service and reputation of the service provider. While we believe our business services compete favorably based on some of these factors, we are at a competitive disadvantage with respect to certain of our competitors. Many of our current and potential competitors have greater market presence, engineering, technical and marketing capabilities and financial, personnel and other resources substantially greater than ours; own larger and more diverse networks; are subject to less regulation; or have substantially stronger brand names. In addition, industry consolidation has resulted in larger competitors that have greater economies of scale. Consequently, these competitors may be better equipped to charge lower prices for their products and services, to provide more attractive offerings, to develop and expand their communications and network infrastructures more quickly, to adapt more swiftly to new or emerging technologies and changes in customer requirements, to increase prices that we pay for wholesale inputs to our services and to devote

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~~integral~~greater toresources ~~our business, some of which may be experiencing financial distress. If these vendors encounter or continue~~ to encounter financial difficulties, their ability to supply services and network equipment to us may be curtailed. If such vendors were to fail, we may not be able to replace them without disruption to, or deterioration of, our service and we may incur higher costs. Acquirers of distressed suppliers may not continue to upgrade technology associated with the ~~type~~marketing ~~of equipment we use in our network. If we were required to purchase another manufacturer’s equipment, we could incur significant initial costs to integrate the equipment into our network~~ and tosale ~~train personnel to use the new equipment, which could have an adverse effect on our financial condition and results~~ of ~~operations. Any~~their ~~interruption~~products ~~in the services provided by our third-party vendors could adversely affect our business, financial position, results of operations~~ and ~~cash flows~~services.

IfDecisions weby dothe ~~not~~Federal ~~continue~~Communications toCommission ~~innovate~~relieving ~~and~~incumbent ~~provide~~carriers ~~products~~of certain regulatory requirements, and ~~services~~possible ~~that~~further ~~are~~deregulation ~~useful~~in tothe ~~customers~~future, we may ~~not~~restrict ~~remain~~our ~~competitive,~~ability ~~and~~to ~~our~~provide ~~revenues~~services and ~~operating~~may ~~results~~increase ~~could~~the ~~suffer~~costs we incur to provide these services.

~~The~~We ~~market~~rely ~~for~~in ~~telecommunications~~significant ~~services~~part ison ~~characterized~~purchasing bywholesale ~~changing~~services ~~technology,~~and ~~changes~~leasing innetwork ~~customer~~facilities ~~needs~~from AT&T and ~~frequent~~other ~~new~~incumbent ~~service~~carriers. ~~and~~Over ~~product~~the ~~introductions,~~past ~~and~~several weyears, ~~may~~the beFCC ~~required~~has toreduced ~~select~~or ~~one~~eliminated ~~emerging~~a ~~technology~~number ~~over~~of ~~another.~~regulations ~~Our~~governing ~~future~~the ~~success~~incumbent ~~will~~carriers’ ~~depend~~offerings, inincluding ~~part,~~removal onof ~~our~~local ~~ability~~switching toand ~~use~~other ~~leading~~network ~~technologies~~elements ~~effectively,~~from tothe ~~continue~~list toof ~~develop~~elements ~~our~~that ~~technical~~the ~~expertise,~~incumbent tocarriers ~~enhance~~must ~~our~~provide ~~existing~~on ~~services~~an ~~and~~unbundled tobasis ~~develop~~at ~~new~~TELRIC ~~services~~cost-based ~~that~~rates, ~~meet~~as ~~changing~~well ~~customer~~as ~~needs~~the ongrant aof ~~timely~~broad ~~and~~pricing ~~cost-effective~~flexibility ~~basis.~~to Weincumbents ~~may~~for ~~not~~their bespecial ~~able~~access toservices ~~adapt~~in ~~quickly~~many ~~enough~~areas. toIf ~~changing~~the ~~technology,~~incumbent ~~customer~~carriers ~~requirements~~do ~~and~~not ~~industry~~continue ~~standards.~~to ~~Such~~permit ~~changes~~us ~~could~~to ~~include~~purchase ~~the~~these ~~increasing~~services ~~use~~from ofthem ~~wireless~~under ~~forms~~commercial ofarrangements ~~communication~~at reasonable rates, ~~such~~our asbusiness ~~handheld~~could ~~Internet-access~~be ~~devices~~adversely affected and ~~mobile~~our ~~phones,~~cost ~~new~~of ~~competitors~~providing ~~such~~local asservice ~~VoIP~~could ~~providers~~increase. InThis ~~addition,~~can ~~the~~have ~~development~~a ~~and~~significant ~~offering~~adverse ofimpact ~~new~~on ~~services~~our inoperating ~~response~~results toand ~~new~~cash ~~technologies~~flows. orIf ~~customer~~the ~~demands~~FCC, ~~may~~Congress, ~~require~~state uslegislatures toor ~~increase~~state ~~our~~regulatory ~~capital~~agencies ~~expenditures~~were ~~significantly.~~to ~~Moreover,~~adopt ~~new~~measures ~~technologies~~further ~~may~~reducing bethe ~~protected~~local bycompetition-related ~~patents~~obligations orof ~~other~~the ~~intellectual~~incumbents ~~property~~or ~~laws~~allowing ~~and~~those ~~therefore~~carriers ~~may~~to beincrease ~~available~~further ~~only~~the torates ~~our~~we ~~competitors~~must ~~and~~pay, ~~not~~we tocould ~~us.~~experience ~~Any~~additional ofincreases ~~these~~in ~~factors~~operating ~~could~~costs ~~adversely~~that would negatively affect our ~~revenues~~operating results and ~~profitability~~cash flows.

WeIf ~~face~~we ~~significant~~are ~~competition~~unable ~~that~~to ~~could~~interconnect ~~reduce~~with AT&T and other incumbent carriers on acceptable terms, our ~~profitability~~ability to offer competitively priced local telephone services will be adversely affected.

~~The~~To ~~communications~~provide ~~industry~~local istelephone ~~highly competitive~~services, ~~and~~ we ~~expect~~must ~~this~~interconnect ~~competition~~with toand ~~intensify.~~resell ~~These~~the ~~markets~~services ~~are~~of ~~rapidly~~the ~~changing~~incumbent ~~due~~carriers to ~~industry~~supplement ~~consolidation~~our own network facilities, anpursuant ~~evolving~~to ~~regulatory~~interconnection ~~environment~~agreements between us and the ~~emergence~~incumbent ~~of new technologies~~carriers. We ~~compete~~operate ~~directly~~under orinterconnection ~~indirectly~~agreements with ~~ILECs~~AT&T, ~~such~~CenturyLink, asFrontier ~~AT&T~~Communications, ~~Qwest~~Fairpoint Communications and ~~Verizon~~Windstream. ~~Communications;~~An ~~other~~interconnection ~~competitive~~agreement ~~telecommunications~~typically ~~companies,~~has ~~such~~a asterm ~~Covad~~of ~~Communications~~three years, ~~Level~~although 3the ~~Communications,~~parties ~~PAETEC,~~may ~~Windstream~~mutually ~~Corporation~~agree ~~and~~to XOextend ~~Holdings;~~or ~~interexchange~~amend ~~carriers,~~ such asagreements. ~~Global~~If ~~Crossing~~we ~~and~~are ~~Sprint~~not ~~Nextel;~~able ~~wireless~~to ~~and~~renegotiate ~~satellite~~or ~~service~~enter ~~providers;~~into ~~cable~~interconnection ~~service~~agreements ~~providers~~on acceptable terms, ~~such~~or asif ~~Charter~~we ~~Communications,~~are ~~Inc.,~~subject ~~Comcast,~~to ~~Cox~~unfavorable ~~Communications~~arbitration decisions, ~~Inc.~~our ~~and~~cost ~~Time~~of ~~Warner~~doing ~~Cable;~~business could increase and ~~stand-alone~~our ~~voice-over-Internet-Protocol~~ability ~~(“VoIP”)~~to ~~providers~~compete could be impeded. ~~Competition~~Moreover, ~~could~~our ~~adversely~~interconnection ~~impact~~agreements usand intraffic ~~several~~exchange ~~ways,~~with ~~including~~companies other than incumbent local exchange carriers (i)such ~~the~~as ~~loss~~wireless ofand ~~customers~~VoIP providers and ~~resulting~~other ~~revenue,~~competitive ~~(ii~~carriers) are not subject to the ~~possibility~~statutory ofarbitration ~~customers~~mechanism, ~~reducing~~making ~~their~~it ~~usage~~potentially ofmore ~~our~~difficult ~~services~~to orreach ~~shifting~~any agreement on terms that we view as acceptable. If we are unable to ~~less~~enter ~~profitable~~into ~~services,~~or ~~(iii)~~maintain ~~reduced~~favorable ~~traffic~~interconnection onagreements in our ~~networks~~markets, ~~(iv)~~ our ~~need~~ability to ~~expend~~provide ~~substantial~~local ~~time~~services oron ~~money~~a oncompetitive ~~new~~and ~~capital~~profitable ~~improvement~~basis ~~projects,~~may ~~(v)~~be ~~our~~adversely ~~need~~affected. toAny ~~lower~~successful ~~prices~~effort orby ~~increase~~the ~~marketing~~incumbent ~~expenses~~carriers to ~~remain~~deny ~~competitive~~or ~~and~~substantially ~~(vi)~~limit our ~~inability~~access to ~~diversify~~their bynetwork ~~successfully~~elements ~~offering~~or ~~new~~wholesale ~~products~~services oralso would harm our ability to provide local telephone services.

WeOur ~~believe~~operating ~~the~~performance ~~primary~~will ~~competitive~~suffer ~~factors~~if ~~in the communications industry include price, availability, reliability of service, network security, variety of service offerings, quality of service and reputation of the service provider. While~~ we ~~believe our business services compete favorably based on some of these factors, we~~ are atnot aoffered competitive ~~disadvantage~~rates relative to some or all of these factors with respect to some of our competitors. Many of our current and potential competitors have greater market presence, engineering, technical and marketing capabilities and financial, personnel and other resources substantially greater than ours; own larger and more diverse networks; are subject to less regulation; or have substantially stronger brand names. In addition, industry consolidation has resulted in larger competitors that have greater economies of scale. Consequently, these competitors may be better equipped to charge lower prices for ~~their~~the ~~products~~access ~~and~~ services, towe ~~provide~~need ~~more attractive offerings,~~ to ~~develop~~provide ~~and~~our ~~expand~~long ~~their~~distance communications and network infrastructures more quickly, to adapt more swiftly to new or emerging technologies and changes in customer requirements, and to devote greater resources to the marketing and sale of their products and services.

We depend on other communications companies to originate and terminate a significant portion of the long distance traffic initiated by our customers. The FCC regulates the access rates charged by local carriers to interexchange carriers for the origination and termination of long distance traffic. These access rates make up a significant portion of the cost of providing long distance service. The FCC has recently adopted policy changes that over time are reducing carriers’ access rates. These new rules significantly alter the manner in which all carriers, including carriers that use different service platforms such as wireless and VoIP, are compensated for the origination and termination of telecommunications traffic. These new rules also may alter the rates that we pay for our access services. We expect these new rules to result in a loss of revenues and could potentially increase our volume of carrier disputes. Our operating performance will suffer if we are not offered these access services at rates that are substantially equivalent to the costs of, and rates charged to, our competitors and that permit profitable pricing of our long distance services.

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We ~~expect~~may toexperience ~~continue~~reductions ~~to face significant pricing and product competition from AT&T and other ILECs that currently are the dominant providers of telecommunications services~~ in ~~our~~switched ~~markets.~~access ~~We may be required to reduce further some or all of the prices we charge for our retail local, long distance~~ and ~~data~~reciprocal ~~services~~compensation as a result of the mergers of BellSouth, SBC and AT&T and of MCI and Verizon which have increased substantially their respective market power; the increase of cable companies, wireless carriers and providers of alternative forms of communication that rely on VoIP or similar applications; recent regulatory decisions that have decreased regulatory oversight of incumbent local telephone companies; and new broadband providers with cost structures lower than ours as a result of governmental subsidiesrevenue. As a result, we may be required to reduce further some or all of the prices we charge for our retail local, long distance and data services which could adversely affect our revenues, cash flows and results of operations.

We may ~~not~~experience bedeclines ~~able~~in torevenues ~~compete~~for ~~effectively~~switched ifaccess weand reciprocal compensation as a result of lower volume of traditional long distance voice minutes and FCC and state regulations compelling a reduction of switched access and reciprocal compensation rates. The FCC recently adopted policy changes that over time are ~~unable~~reducing carriers’ access rates. We expect these new rules to ~~install~~result ~~additional~~in ~~network~~a ~~equipment~~loss orof ~~convert~~revenues and could potentially increase our ~~network~~volume of carrier disputes. In addition, the FCC currently is considering whether and how to ~~more~~reform ~~advanced~~its ~~technology~~special access rules. We rely to a considerable extent on interstate special access services purchased from the incumbent carriers in order to connect to our customers. Switched access and reciprocal compensation together have been declining over time. There can be no assurance that we will be able to compensate for the reduction in intercarrier compensation revenue with other revenue sources or increased volume.

We may find it necessary to convert our existing network to a network using more advanced technology. We may not have or be able to raise the significant capital that a conversion may require, or be able to complete the installation of additional network equipment and the conversion to more advanced technology in a timely manner, at a commercially reasonable cost or at all. We also may face technological problems that cannot be resolved. If we are unable to successfully install or operate new network equipment or to convert our network to a network using more advanced technology, we may not be able to compete effectively, and our results of operations could be adversely affected.

Failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations.

To obtain and maintain rights-of-way and similar franchises and licenses needed to install, operate and maintain fiber optic cable and our other network elements, we must negotiate and manage agreements with state highway authorities, local governments, transit authorities, local telephone companies and other utilities, railroads, long distance carriers and other parties. If weany ~~lose access to a right-~~of~~-way~~ ~~and~~these ~~had~~authorizations toterminate ~~remove~~or ~~and relocate our facilities~~lapse, our ~~cash~~operations ~~flows~~ could be adversely affected.

~~Our~~We ~~business~~have ~~may~~substantial ~~suffer~~business ifrelationships ~~third~~with ~~parties~~several ~~used~~large ~~for~~telecommunications ~~customer~~carriers, ~~service~~ and ~~technical~~some ~~support~~of ~~and~~our ~~certain~~customer ~~billing~~agreements ~~services~~may ~~are~~not ~~unable~~continue due to ~~provide~~financial ~~these~~difficulty, ~~services~~acquisitions, non-renewal or ~~terminate~~other ~~their~~factors, ~~relationships~~which ~~with~~could usadversely affect our wholesale revenue and results of operations.

~~Our~~We generate wholesale revenue from the sale of transmission capacity to other telecommunications carriers and have substantial business relationships with several large telecommunications carriers for whom we provide services. The highly competitive environment and ~~financial~~the ~~results~~industry ~~depend,~~consolidation in ~~part,~~the oncommunications markets has challenged the ~~availability~~financial condition and ~~quality~~growth prospects of some of our ~~customer~~carrier ~~service~~customers, and ~~technical~~has ~~support~~caused ~~and~~such ~~certain~~carrier ~~billing~~customers to optimize the telecommunications capacity that they use among competing telecommunications services providers’ networks, including ~~collection services~~ours. IfReplacing ~~one~~this orwholesale ~~more~~revenue ofmay ~~our~~be ~~service~~difficult ~~providers~~because ~~does~~individual ~~not~~enterprise ~~provide~~and ussmall ~~with~~to ~~quality~~medium ~~services,~~business orcustomers iftend ~~our~~to ~~relationship~~place ~~with~~smaller ~~any~~service oforders than our ~~third~~larger ~~party~~carrier ~~vendors~~customers. ~~terminates~~In ~~and~~addition, pricing pressure on services that we ~~are~~sell ~~unable~~to our carrier customers may challenge our ability to ~~provide~~grow ~~those~~revenue ~~services~~from ~~internally~~carrier orcustomers. ~~identify~~As a ~~replacement~~result, ~~vendor~~if inour anlarger ~~orderly,~~carrier ~~cost-effective~~customers ~~and~~terminate ~~timely~~the ~~manner~~services they receive from us, our ~~business,~~wholesale ~~financial~~revenues ~~position,~~and results of operations ~~and~~could ~~cash~~be ~~flows~~materially ~~could~~and ~~suffer~~adversely affected.

General Risks

We may be unable to hire and retain sufficient qualified personnel, and the loss of any of our key executive officers could adversely affect us.

Our business depends on our ability to hire and retain senior management, sales and other key personnel, many of whom have significant experience in our industry. In the communications and technology industry, there is substantial and continuous competition for highly skilled sales and IT personnel in particular. Acquisitions and workforce reductions may affect our ability to retain or replace key personnel, harm employee morale and productivity or disrupt our business. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following a merger transaction. Effective succession planning is important to our long-term success. Failure to ensure effective transfer of knowledge and transitions involving key employees could hinder execution of our business strategies.

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~~Risks~~Privacy ~~Related~~concerns relating to ~~Our~~our ~~Industry~~business could damage our reputation and deter current and potential users from using our services.

~~Decisions~~Concerns byabout ~~the~~our ~~Federal~~practices ~~Communications~~with ~~Commission~~regard ~~relieving~~to ~~incumbent~~the ~~telephone~~collection, ~~companies~~use, disclosure or security of ~~certain~~personal ~~regulatory~~information ~~requirements~~or other privacy-related matters, even if unfounded, could damage our reputation and ~~possible~~operating ~~further~~results. ~~deregulation~~We instrive ~~the~~to ~~future~~comply with all applicable data protection laws and regulations, ~~may~~as ~~restrict~~well as our ~~ability~~own posted privacy policies. However, any failure or perceived failure to ~~provide~~comply ~~services~~with ~~and~~these laws, regulations or policies may ~~increase~~result ~~the~~in ~~costs~~proceedings weor ~~incur~~actions toagainst ~~provide~~us ~~these~~by ~~services~~government entities or others, which could potentially have an adverse effect on our business.

WeFederal ~~rely~~and instate ~~significant~~governments ~~part~~have onadopted ~~purchasing~~consumer ~~wholesale~~protection ~~services~~laws and ~~leasing~~undertaken ~~network~~enforcement ~~facilities~~actions ~~from~~to ~~AT&T~~address advertising and ~~other~~user ~~incumbent local exchange carriers~~privacy. ~~Over~~Our ~~the~~services ~~past~~and ~~several~~business ~~years~~practices, ~~the FCC has reduced~~ or ~~eliminated~~changes ato ~~number~~our ofservices ~~regulations~~and ~~governing~~business ~~the~~practices ~~incumbent~~could ~~carriers’~~subject ~~offerings,~~us ~~including~~to ~~removal~~investigation ofor ~~local~~enforcement ~~switching~~actions ~~and~~if ~~other~~we ~~network~~fail ~~elements~~to ~~from~~adequately ~~the~~comply ~~list~~with ofapplicable ~~elements~~consumer ~~that~~protection ~~the~~laws. ~~incumbent~~Existing ~~carriers~~and ~~must~~future ~~provide~~federal onand anstate ~~unbundled~~laws ~~basis~~and atregulations ~~TELRIC~~also ~~cost-based~~may ~~rates,~~affect ~~as well as~~ the ~~grant~~manner ~~of broad pricing flexibility to incumbents for their special access services~~ in ~~many~~which ~~areas.~~we Ifare ~~the~~required ~~incumbent carriers do not continue~~ to ~~cooperate~~protect byconfidential ~~permitting~~customer usdata toand ~~purchase~~other ~~these services from them under commercial arrangements at reasonable rates~~information, ~~our~~which ~~business~~ could beincrease ~~adversely~~the ~~affected and our~~ cost of ~~providing local exchange service could increase. This can have a significant adverse impact on~~ our ~~operating~~operations ~~results~~ and ~~cash~~our ~~flows.~~potential Ifliability ~~the~~if ~~FCC, Congress, state legislatures or state regulatory agencies were to adopt measures further reducing~~ the ~~local~~security ~~competition-related obligations~~ of ~~incumbent local exchange carriers or allowing those carriers to increase further the rates we must pay, we could experience additional increases in operating costs that would negatively affect~~ our ~~operating~~confidential ~~results~~customer ~~and~~data ~~cash~~is ~~flows~~breached.

~~Our~~Security ~~wholesale~~breaches ~~services,~~could ~~including~~damage our ~~broadband~~reputation ~~transport~~and ~~services,~~harm ~~continue~~our tooperating ~~be adversely affected by pricing pressure, network overcapacity, service cancellations and other factors~~results.

We ~~have~~are ~~continued~~subject to ~~experience~~cyber ~~adverse~~security ~~trends~~risks ~~related~~and tomay ~~our~~incur ~~wholesale~~increasing ~~service~~costs ~~offerings,~~in ~~including~~an ~~our~~effort ~~broadband~~to ~~transport~~minimize those risks. The services ~~and~~we ~~local~~offer ~~interconnection~~involve ~~business,~~the ~~which~~storage ~~have~~and ~~resulted~~transmission ~~primarily~~of ~~from~~customers’ aproprietary ~~reduction~~information. inSecurity ~~rates~~breaches, ~~charged~~such toas ~~our~~unauthorized ~~customers~~access, ~~due~~accidents, toemployee ~~overcapacity~~error inor ~~the~~malfeasance, ~~broadband~~computer ~~services~~viruses, ~~business~~computer ~~and~~hackings ~~from~~or ~~service~~other ~~cancellations~~disruptions, bycan ~~some~~occur ~~customers.~~that ~~Pending~~could orcompromise ~~contemplated~~the ~~consolidations~~security inof our ~~industry~~infrastructure, ~~also~~thereby ~~may~~exposing ~~continue~~such information to ~~affect~~unauthorized ~~adversely~~access ~~our~~by ~~wholesale~~third ~~services~~parties. ~~business~~Techniques byused ~~improving~~to ~~the~~obtain ~~resources~~unauthorized ofaccess ~~the~~to, ~~consolidating~~or ~~companies~~to sabotage systems, change frequently and ~~reducing~~generally ~~their~~are ~~demand~~not ~~for~~recognized ~~our~~until ~~services~~launched asagainst ~~those~~a ~~companies~~target. ~~upgrade~~We ~~their~~may ~~own~~be ~~networks~~required ~~and~~to ~~consolidate~~expend ~~their~~significant ~~voice~~capital and ~~data~~other ~~traffic~~resources onto ~~those~~remedy, ~~networks.~~protect Weagainst ~~expect~~or ~~that~~alleviate these ~~factors~~and ~~will~~related ~~result~~problems, inand ~~continued~~we ~~declines~~may innot ~~revenues~~be ~~and~~able ~~cash~~to ~~flows~~remedy ~~from~~these ~~our~~problems ~~wholesale~~in ~~service~~a ~~offerings~~timely manner, or at all. ~~Such~~Any ~~declines~~security ~~will~~breaches ~~have~~that aoccur ~~disproportionately~~could ~~adverse~~damage ~~effect~~our onreputation, increase our ~~operating~~security ~~results~~costs, ~~because~~expose ofus to litigation and lead to the ~~higher~~loss ~~gross~~of ~~margins~~existing ~~associated~~or ~~with~~potential ~~our~~customers. ~~wholesale~~If our services are perceived as not being secure, our business may be adversely impacted.

~~Our~~Interruption ~~operating~~or ~~performance~~failure ~~will~~of ~~suffer~~our ifnetwork weand ~~are~~information ~~not~~systems ~~offered~~and ~~competitive~~other ~~rates~~technologies ~~for~~could ~~the~~impair ~~access~~our ~~services~~ability ~~we need~~ to provide our ~~long~~services, ~~distance~~which ~~services~~could damage our reputation and harm our operating results.

WeOur ~~depend~~success depends on ~~other~~our ~~communications~~ability ~~companies~~ to ~~originate~~provide ~~and~~reliable ~~terminate~~service. aOur ~~significant~~network, ~~portion~~network ofoperations ~~the~~centers, ~~long~~central ~~distance~~offices, ~~traffic~~corporate ~~initiated~~headquarters byand those of our ~~customers.~~third ~~Our~~party ~~operating~~service ~~performance~~providers ~~will~~are ~~suffer~~vulnerable ifto wedamage ~~are~~or ~~not~~interruption ~~offered~~from ~~these~~fires, ~~access~~earthquakes, ~~services~~hurricanes, attornados, ~~rates~~floods ~~that~~and ~~are~~other ~~substantially~~natural ~~equivalent~~disasters, toterrorist ~~the~~attacks, ~~costs~~power ofloss, capacity limitations, telecommunications failures, software and ~~rates~~hardware ~~charged~~defects toor malfunctions, ~~our~~break ~~competitors~~ins, sabotage and vandalism, human error and other disruptions that ~~permit~~are ~~profitable~~beyond ~~pricing~~our control. Some of our ~~long~~systems ~~distance~~are ~~services.~~not ~~The~~fully ~~charges~~redundant, ~~for~~and ~~access~~our ~~services~~disaster ~~historically~~recovery planning may not be adequate. We have ~~made~~experienced upinterruptions ain ~~significant~~service ~~percentage~~in the past due to factors such as cable damage, theft of our ~~overall~~equipment, ~~cost~~power ofoutages, ~~providing~~inclement ~~long~~weather ~~distance~~and service. ~~Some~~failures of our ~~Internet~~third-~~based~~party ~~competitors~~service ~~generally~~providers. We ~~have~~may ~~been~~experience ~~exempt~~service ~~from~~interruptions ~~these~~or ~~and~~system ~~other~~failures ~~regulatory~~in ~~charges~~the future. In addition, ~~which~~in ~~could~~connection ~~give~~with ~~them~~enhancement, aexpansion or consolidation of our existing network, we may experience service interruptions despite our efforts to minimize the impact to customers. We may make significant ~~cost~~capital ~~advantage~~expenditures ~~over~~to usincrease inthe ~~this~~reliability ~~area~~of our systems, but these capital expenditures may not achieve the results we expect. The ~~FCC~~occurrence ~~currently~~of isany ~~considering~~disruption ~~what~~or ~~charges~~system failure may result in a loss of business, ifincrease ~~any~~expenses, ~~should~~damage beour ~~assessed~~reputation onfor ~~long~~providing ~~distance~~reliable service, subject us to additional regulatory scrutiny or expose us to litigation and ~~other~~possible ~~interconnected~~financial ~~voice~~losses, ~~services~~any ~~provided~~of ~~over~~which ~~the~~could ~~Internet~~have a material adverse effect on our business, financial position, results of operations and cash flows.

We have experienced and may continue to experience reductions in switched access and reciprocal compensation revenue.

Over the past several years, we have experienced a decline in our revenues for switched access and reciprocal compensation. These revenues may continue to decline as a result of lower volume of traditional long distance voice minutes and FCC and state regulations compelling a reduction of switched access and reciprocal compensation rates. The FCC has been considering proposals for an integrated intercarrier compensation regime under which all traffic exchanged between carriers would be subject to a

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~~unified~~Our ~~rate.~~business ~~Such~~depends ~~changes~~on ~~could~~effective ~~materially~~business ~~reduce~~support ~~our~~systems ~~switched access revenue from other carriers. We cannot predict the outcome of pending FCC rule makings related to intercarrier compensation. In addition, some states have adopted,~~ and ~~other states are considering, rules that lower or cap the switched access rates of competitive carriers~~processes. Switched access and reciprocal compensation together have been declining over time. There can be no assurance that we will be able to compensate for the reduction in intercarrier compensation revenue with other revenue sources or increased volume.

Our ~~inability~~business relies on our data, billing and other operational and financial reporting and control systems. To effectively manage our information technology infrastructure, we will need to continue to maintain our ~~network~~data, ~~infrastructure~~billing and other operational and financial systems, ~~portions~~procedures ofand controls, which wecan dobe ~~not~~costly. ~~own~~We have experienced system failures from time to time, and any interruption in the availability of our business support systems, in particular our billing systems, could ~~adversely~~result ~~affect~~in an immediate, and possibly substantial, loss of revenues. Our ability to maintain, expand and update our ~~operating~~information ~~results~~technology infrastructure in response to acquisitions, growth and changing needs is important to the continued implementation of our new service offering initiatives. Our inability to maintain, expand or upgrade our technology infrastructure could have adverse consequences, which could include the delayed implementation of new service offerings, increased acquisition integration costs, service or billing interruptions and the diversion of development resources.

We have effectively extended our network by entering into agreements with public utility companies to sell long-haul private line services on the fiber optic networks owned by these companies. Any cancellation or non-renewal of any of these agreements, any adverse legal ruling with respect to our rights under any of these agreements, or any future failure by us to acquire and maintain similar network agreements in these or other markets as necessary could materially adversely affect our operations. In addition, some of our agreements with the public utility companies are non-exclusive, and our business would suffer from any reduction in the amount of capacity they make available to us.

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

To provide local telephone and some data services, we must interconnect with and resell the services of the incumbent carriers to supplement our own network facilities, pursuant to interconnection agreements between us and the incumbent carriers. As the original term of each of our interconnection agreements expires, it typically will be renewed on a month-to-month basis until it is replaced by a successor agreement. Further, federal regulators have adopted substantial modifications to the requirements that obligate AT&T and other former monopoly local telephone companies to provide to us at cost-based rates the elements of their telephone networks that enable us to offer many of our services at competitive rates. Moreover, in areas outside of the territories of former Regional Bell Operating Companies in which we do business, such as the territories of CenturyLink, Frontier Communications, Windstream, and Fairpoint Communications, those incumbents carriers are subject to less wholesale regulation than are the Regional Bell Operating Companies and tend to have less favorable interconnection options available to competitive carriers. If we are unable to enter into or maintain favorable interconnection agreements in our markets, our ability to provide local services on a competitive and profitable basis may be adversely affected. Any successful effort by the incumbent carriers to deny or substantially limit our access to their network elements or wholesale services also would harm our ability to provide local telephone services.

Government regulations could adversely affect our business or force us to change our business practices.

~~The~~Our ~~regulatory~~services ~~environment~~are ~~relating~~subject to ~~our~~varying ~~business~~degrees ~~continues~~of tofederal, ~~evolve~~state and local regulation. A ~~number~~Federal, state and local regulations governing our services are the subject of ongoing judicial proceedings, rulemakings and legislative initiatives that could change the manner in which our industry operates and ~~regulatory~~affect ~~proposals~~our ~~under~~business. The ~~consideration~~Federal byCommunications ~~federal~~Commission (FCC) exercises jurisdiction over telecommunications common carriers to the extent that they provide, ~~state~~originate or terminate interstate or international communications. The FCC also establishes rules and has other authority over some issues related to local ~~governmental~~telephone ~~entities~~competition. ~~may~~State ~~lead~~regulatory commissions retain jurisdiction over telecommunications carriers to the ~~repeal~~extent that they provide, ~~modification~~originate or ~~introduction~~terminate ofintrastate ~~laws~~communications. orState ~~regulations~~commissions ~~which~~also ~~do,~~have orauthority ~~could~~to review and approve interconnection agreements between incumbent telephone carriers and competitive carriers such as us, ~~affect~~and ~~our~~to ~~business. Our~~conduct ~~results~~arbitration of ~~operations~~disputes ~~could~~arising bein ~~materially~~the ~~adversely~~negotiation ~~affected~~of bysuch ~~future~~agreements. ~~changes~~Local ofgovernments ~~legal~~may ~~and~~require ~~regulatory~~us ~~rights~~to obtain licenses, permits or ~~obligations~~franchises to use the public rights-of-way necessary to install and operate our network.

~~Local~~Bills ~~and~~intended ~~long~~to ~~distance.~~amend Wethe ~~are~~Communications ~~required~~Act toof ~~comply~~1934, ~~with~~as ~~telecommunications~~amended ~~regulations implemented~~ by ~~federal,~~the ~~state~~Telecommunications ~~and~~Act ~~local~~of ~~governments.~~1996 (“Communications WeAct”) are ~~required~~introduced toin ~~obtain~~Congress ~~authorizations~~ from ~~the~~time ~~FCC~~to time and ~~state~~their ~~public~~effect ~~utility~~on ~~commissions~~us toand ~~offer~~the ~~some~~communications ofindustry ~~our~~cannot ~~communications~~always ~~services,~~be topredicted. ~~file~~Proposed ~~tariffs~~legislation, ~~for~~if ~~many~~enacted, ofcould ~~our~~have ~~services~~a ~~and~~significant toeffect ~~comply~~on ~~with~~our ~~local license~~business, ~~franchise~~particularly orif ~~permit~~the ~~requirements~~legislation ~~relating~~impairs our ability to ~~installation~~interconnect ~~and~~with ~~operation~~incumbent ofcarrier ~~our~~networks, ~~network.~~lease ~~Many~~portions of ~~these~~other ~~regulations~~carriers’ ~~continue~~networks toor ~~change.~~resell ~~Failure~~their toservices ~~make~~at ~~proper~~reasonable ~~payments~~prices, ~~for~~or ~~federal~~lease ~~Universal~~elements ~~Service~~of ~~Fund~~networks ~~assessments,~~of ~~FCC~~the ~~regulatory~~ILECs ~~fees~~under oracceptable ~~other~~rates, ~~amounts~~terms ~~mandated by federal~~ and ~~state~~conditions. ~~regulations;~~We ~~failure~~cannot topredict ~~maintain~~the ~~proper~~outcome ~~state~~of ~~tariffs~~any ~~and~~ongoing ~~certifications;~~legislative ~~failure~~initiatives toor ~~comply~~administrative ~~with~~or ~~federal,~~judicial ~~state~~proceedings or ~~local~~their ~~laws~~potential ~~and~~impact ~~regulations;~~upon ~~failure~~the tocommunications ~~obtain~~ and ~~maintain~~information ~~required~~technology ~~licenses,~~industries ~~franchises~~generally ~~and permits; imposition of burdensome license, franchise~~ or ~~permit~~upon ~~requirements for~~ us to specifically.

Failure to make proper payments for federal Universal Service Fund assessments, FCC regulatory fees or other amounts mandated by federal and state regulations; failure to maintain proper state tariffs and certifications; failure to comply with federal, state or local laws and regulations; failure to obtain and maintain required licenses, franchises and permits; imposition of burdensome license, franchise or permit requirements for us to operate in public rights-of-way; and imposition of new burdensome or adverse regulatory requirements could limit the types of services we provide or the terms on which we provide these services.

We are subject to regulatory audits in the ordinary course of business with respect to certain of these regulatory matters, including audits by the Universal Service Administrative Company on Universal Service Fund assessments and payments. These audits can cover periods for several years prior to the date the audit is undertaken and could result in the imposition of liabilities, interest and penalties if our positions are not accepted by the auditing entity. Our financial statements contain reserves for certain of such potential liabilities which we consider reasonable. However, calculation of payments due with respect to these matters can be complex and subject to uncertainty. As a result, these audits could result in liabilities in excess of such reserves which could adversely impact our results of operations.

Our business also is subject to a variety of other U.S. laws and regulations from various entities, including the Federal Trade Commission, the Environmental Protection Agency and the Occupational Safety and Health Administration, as well as by state and local regulatory agencies, that could subject us to liabilities, claims or other remedies. Compliance with these laws and regulations is complex and may require significant costs. In addition, the regulatory framework relating to Internet and communications services is evolving and both the federal government and states from time to time pass legislation that impacts our business. It is likely that additional laws and regulations will be adopted that would affect our

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~~operate~~business. inWe ~~public~~cannot ~~rights-~~predict the impact future laws, regulatory changes or developments may have on our business, financial condition, results of~~-way;~~ ~~and~~operations ~~imposition~~or cash flows. The enactment of ~~new~~any ~~burdensome~~additional laws or ~~adverse~~regulations, ~~regulatory~~increased ~~requirements~~enforcement ~~could~~activity ~~limit~~of ~~the~~existing ~~types~~laws ofand ~~services~~regulations, weor ~~provide~~claims by individuals could significantly impact our costs or the ~~terms~~manner onin which we ~~provide~~conduct ~~these~~business, ~~services~~all of which could adversely impact our results of operations and cause our business to suffer.

~~Consumer protection. Federal and state governments have adopted consumer protection laws and undertaken enforcement actions to address advertising and user privacy.~~ Our ~~services and~~ business ~~practices,~~may orsuffer ~~changes to our services and business practices could subject us to investigation or enforcement actions~~ if wethird ~~fail~~parties ~~to adequately comply with applicable consumer protection laws. Existing and future federal and state laws and regulations also may affect the manner in which we~~ are ~~required~~unable to ~~protect~~provide ~~confidential~~services ~~customer~~or ~~data~~terminate ~~and~~their ~~other~~relationships ~~information,~~with ~~which could increase the cost of our operations and our potential liability if the security of our confidential customer data is breached~~us.

~~Internet~~Our ~~Protocol-enabled~~business ~~services.~~and ~~The~~financial ~~FCC~~results ~~has~~depend, ~~held~~in ~~that~~part, ~~cable~~on ~~modem~~the ~~services~~availability ~~offered~~and byquality ~~cable~~of ~~television~~certain ~~companies~~third-party service providers, including certain billing and ~~broadband~~collection ~~Internet~~services. In addition, our VoIP services, ~~offered~~including byour ~~incumbent~~E911 ~~local~~service, ~~exchange~~depend ~~carriers~~on ~~should~~the beproper ~~classified~~functioning asof ~~“information~~facilities ~~services”~~and equipment owned and ~~not~~operated ~~telecommunications~~by ~~services~~third ~~subject~~parties toand ~~regulation~~is, ~~under~~therefore, ~~Title~~beyond IIour control. If one or more of ~~the~~our ~~Communications~~service ~~Act.~~providers ~~The~~does ~~FCC~~not isprovide ~~considering~~us ~~clarifications~~with ~~and~~quality ~~changes~~services, toor ~~the~~if ~~regulatory~~our ~~status~~relationship with any of ~~services~~our ~~and~~third ~~applications~~party ~~using~~vendors ~~IP,~~terminates ~~including~~and ~~VoIP~~we ~~offerings.~~are ~~Changes~~unable to ~~the~~provide ~~rules Internet~~those ~~protocol~~services internally or identify a replacement vendor in an orderly, cost-~~enables~~effective ~~services~~and ~~could~~timely ~~impact~~manner, our ~~cost~~business, financial position, results of ~~providing~~operations ~~these~~and ~~services~~cash flows could suffer.

~~Forbearance.~~We ~~The~~may ~~Communications Act of 1934, as amended, provides the FCC with the authority to~~ not ~~enforce,~~be orable ~~“forbear” from enforcing, statutory requirements and regulations if certain public interest factors are satisfied. We expect reform~~ to ~~the~~protect FCC’s forbearance review process in the near future. The FCC has initiated a proceeding to establish strict evidentiary and filing procedures for review of forbearance petitions. If the FCC were to forbear from enforcing regulations that have been established to enable competing broadband Internet access and VoIP, our ~~consumer~~intellectual ~~services business could be adversely affected~~property. In addition, with respect to our business services, regulatory authorities generally have decreased their oversight of incumbent carriers and from time to time are asked to forbear from applying a range of regulations to incumbent carriers, which may increase the competitive benefits these companies experience from their longstanding customer relationships and greater financial and technical resources, and may increase their ability to reduce prices for local and other network services by offsetting those reductions with revenue or profits generated by unrelated businesses, products or services

~~Other~~We ~~laws~~regard ~~and~~our ~~regulations. Our~~trademarks as valuable assets to our business. ~~also~~In isparticular, ~~subject~~we tobelieve athe ~~variety~~strength of ~~other~~these ~~U.S.~~brands ~~laws~~among existing and ~~regulations~~potential ~~from~~customers ~~various~~is ~~entities,~~important ~~including~~to the ~~Federal~~success ~~Trade~~of ~~Commission,~~our ~~the~~business. ~~Environmental~~Additionally, ~~Protection~~our ~~Agency~~service marks, ~~and~~proprietary ~~the~~technologies, ~~Occupational~~domain ~~Safety~~names and ~~Health~~similar ~~Administration,~~intellectual asproperty ~~well~~are asalso byimportant ~~state~~to ~~and~~the ~~local~~success ~~regulatory~~of ~~agencies,~~our ~~that~~business. ~~could~~We ~~subject~~principally usrely toupon ~~liabilities,~~trademark ~~claims~~law oras ~~other~~well ~~remedies.~~as ~~Compliance~~contractual ~~with~~restrictions ~~these~~to ~~laws~~establish and ~~regulations~~protect isour ~~complex~~technology and ~~may~~proprietary ~~require~~rights ~~significant~~and ~~costs~~information. We Inrequire ~~addition,~~employees ~~the~~and ~~regulatory~~consultants ~~framework~~and, ~~relating~~when topossible, ~~Internet~~suppliers and ~~communications~~distributors ~~services~~to issign ~~evolving~~confidentiality agreements, and ~~both~~we ~~the~~generally ~~federal~~control ~~government~~access to, and ~~states~~distribution ~~from~~of, ~~time~~our totechnologies, ~~time~~documentation ~~pass~~and ~~legislation~~other ~~that~~proprietary ~~impacts our business~~information. ItThe isefforts ~~likely~~we ~~that~~have ~~additional~~taken ~~laws~~to ~~and~~protect ~~regulations~~our ~~will~~proprietary berights ~~adopted~~may ~~that~~not ~~would~~be ~~affect~~sufficient ~~our~~or ~~business~~effective. WeThird ~~cannot~~parties ~~predict~~may ~~the~~infringe ~~impact~~or ~~future~~misappropriate ~~laws,~~our ~~regulatory~~trademarks ~~changes~~and orsimilar ~~developments~~proprietary ~~may~~rights. ~~have~~If onwe ~~our~~are ~~business,~~unable ~~financial~~to ~~condition,~~protect ~~results~~our ofproprietary ~~operations~~rights orfrom ~~cash~~unauthorized ~~flows.~~use, ~~The~~our ~~enactment~~brand ofimage ~~any~~may ~~additional~~be ~~laws~~harmed orand ~~regulations,~~our ~~increased~~business ~~enforcement~~may ~~activity~~suffer. ofIn ~~existing~~addition, ~~laws~~protecting ~~and~~our ~~regulations,~~intellectual orproperty ~~claims~~and byother ~~individuals~~proprietary ~~could~~rights ~~significantly~~is ~~impact~~expensive ~~our~~and ~~costs~~time orconsuming. ~~the~~Any ~~manner~~increase in ~~which~~the weunauthorized ~~conduct~~use ~~business,~~of ~~all~~our ofintellectual ~~which~~property could ~~adversely~~make ~~impact~~it ~~our~~more ~~results~~expensive ofto ~~operations~~do business and ~~cause~~consequently harm our ~~business~~results toof ~~suffer~~operations.

~~For~~We ~~example,~~may ~~changes~~be inaccused ~~policies~~of orinfringing ~~regulations~~upon ~~mandating~~the ~~new~~intellectual ~~environmental~~property ~~standards~~rights ~~could~~of ~~increase~~third ~~our operating costs~~parties, ~~such~~which asis ~~utility~~costly ~~costs~~to atdefend ~~our switch sites,~~ and ~~changes in tax laws or the interpretation of existing tax laws by state and local authorities~~ could ~~increase~~limit our ~~income,~~ability ~~sales, property or other tax costs. In addition, our operations are subject~~ to ause ~~variety~~certain oftechnologies ~~laws~~in ~~and regulations relating to~~ the ~~protection of the environment, including those governing the cleanup of contamination and the management and disposal of hazardous substances and wastes~~future. As an owner or operator of property, we could incur significant costs as a result of violations or liabilities under such laws and regulations, including fines, penalties, cleanup costs and third-party claims.

From time to time, third parties have alleged that we infringe on their intellectual property rights. We may be unaware of filed patent applications and of issued patents that could be related to our products and services. Some of the largest communications providers, such as AT&T, Sprint and Verizon, have substantial patent holdings. These providers have successfully asserted their claims against some communications companies, and have filed pending lawsuits against various competitive carriers. We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the patents, trademarks and other intellectual property rights of third parties. None of these claims has had an adverse effect on our ability to market and sell and support our services. Such claims, whether or not meritorious, are time-consuming and costly to resolve, and could require expensive changes in our methods of doing business, could require us to enter into costly royalty or licensing agreements, or could require us to cease conducting certain operations. Any of these events could result in increases in operating expenses or could limit or reduce the number of our service offerings.

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~~Other~~If ~~Risks~~we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects.

We are currently a party to various disputes, litigation or other legal proceedings arising from normal business activities, including consumer class action, patent litigation and legal proceedings regarding network easements, the use of rights-of-way for our network and licenses to maintain our fiber optic network. The result of any current or future disputes, litigation or other legal proceedings is inherently unpredictable. Defending against disputes, litigation or other legal proceedings may beinvolve ~~unable~~significant expense and diversion of management’s attention and resources from other matters. Due to ~~retain~~the ~~sufficient~~inherent ~~qualified~~uncertainties ~~personnel~~of litigation, ~~which~~we may not prevail in these actions. In addition, our ongoing operations may subject us to litigation risks and costs in the future. Both the costs of defending lawsuits and any settlements or judgments against us could materially and adversely affect usour results of operations.

~~Our~~The ~~business~~deregulation ~~depends~~of on the ~~continued~~telecommunications ~~services~~industry, the implementation of ~~our~~the ~~senior~~Telecommunications ~~management~~Act ~~and~~of ~~other~~1996, ~~key~~the ~~personnel~~evolution ~~and~~of ~~our~~telecommunications ~~ability~~infrastructure from time-division multiplexing to ~~effectively~~Internet ~~retain~~Protocol, and ~~motivate~~the ~~them.~~distress ~~Competition~~of ~~for~~many ~~qualified~~carriers ~~personnel,~~in ~~including~~the ~~management,~~telecommunications ~~technical~~industry as a result of continued competitive factors and ~~sales~~financial ~~personnel,~~pressures ~~may~~have ~~increase~~resulted in athe ~~recovering~~involvement ~~economic~~of ~~environment.~~numerous ~~Acquisitions~~industry ~~and~~participants ~~workforce~~in ~~reductions~~disputes, ~~may~~lawsuits, ~~affect~~proceedings ~~our~~and ~~ability~~arbitrations tobefore ~~retain~~state orand ~~replace~~federal ~~key~~regulatory ~~personnel~~commissions, ~~harm~~private ~~employee~~arbitration ~~morale~~organizations such as the American Arbitration Association, and ~~productivity~~courts orover ~~disrupt~~many issues that will be important to our ~~business~~financial and operational success. ~~Key~~These ~~employees~~issues ~~may~~include ~~depart~~the ~~because~~interpretation ofand ~~issues~~enforcement ~~relating~~of toexisting ~~the~~interconnection ~~uncertainty~~agreements and ~~difficulty~~tariffs, the terms of ~~integration~~new orinterconnection aagreements, ~~desire~~operating ~~not~~performance toobligations, ~~remain~~intercarrier ~~with~~compensation, ustreatment ~~following~~of adifferent ~~merger~~categories ~~transaction. Effective~~of ~~succession~~traffic ~~planning~~(for isexample, ~~important~~traffic tooriginated ~~our~~or ~~long-term~~terminated ~~success.~~on ~~Failure~~wireless toor ~~ensure~~VoIP), ~~effective~~the ~~transfer~~jurisdiction of ~~knowledge~~traffic for intercarrier compensation purposes, the wholesale services and ~~transitions~~facilities ~~involving~~available ~~key~~to ~~employees~~us, ~~could~~the ~~hinder~~prices ~~execution~~we will pay for those services and facilities and the regulatory treatment of ~~our~~new ~~business~~technologies ~~strategies~~and services.

~~Interruption~~We ormay ~~failure~~be ofrequired ~~our~~to ~~network~~recognize ~~and~~impairment ~~information~~charges ~~systems~~on ~~and other technologies could impair~~ our ~~ability~~goodwill toand ~~provide~~intangible ~~our services~~assets, which ~~could~~would ~~damage~~adversely affect our ~~reputation~~results ~~and~~of ~~harm~~operations ~~our~~and ~~operating~~financial ~~results~~position.

~~Our~~As ~~network,~~of ~~network operations centers~~December 31, ~~central offices~~2011, ~~corporate~~we ~~headquarters~~had ~~and~~approximately ~~those~~$194.8 million of ~~our~~goodwill ~~third~~and ~~party~~$121.1 ~~service~~million ~~providers~~of ~~are~~other ~~vulnerable~~intangible toassets. ~~damage~~We orperform ~~interruption~~an ~~from~~impairment ~~earthquakes,~~test ~~hurricanes~~of ~~and~~our ~~other~~goodwill ~~natural~~and ~~disasters,~~indefinite-lived ~~terrorist~~intangible ~~attacks,~~assets ~~floods,~~annually ~~fires,~~during ~~power~~the ~~loss,~~fourth ~~telecommunications~~quarter ~~failures, break ins, computer denial~~ of ~~service~~our ~~attacks,~~fiscal ~~computer~~year ~~hackings,~~or ~~computer~~when ~~viruses,~~events ~~worms~~occur or ~~other~~circumstances ~~attempts~~change tothat ~~harm~~would ~~our~~more ~~systems,~~likely ~~and~~than ~~similar~~not ~~events.~~indicate ~~Our~~that ~~ability~~goodwill toor ~~provide~~any ~~communications~~such ~~services~~assets ~~also~~might ~~could~~ be ~~materially~~impaired. ~~adversely~~We ~~affected~~evaluate bythe arecoverability ~~cable~~of ~~cut,~~our ~~switch~~definite-lived ~~failure~~intangible orassets ~~other~~for ~~equipment~~impairment ~~failure~~when ~~along~~events ~~our~~occur ~~fiber optic network~~ or ~~along~~circumstances ~~any~~change ~~other~~that ~~fiber~~would ~~optic~~indicate ~~network~~that onthe ~~which~~carrying weamount ~~lease transmission capacity. Some~~ of ~~our~~an ~~systems~~asset ~~are not fully redundant, and our disaster recovery planning~~ may not be ~~adequate~~recoverable. ~~Further,~~Factors ~~any~~that ~~security~~may ~~breaches,~~be ~~such~~considered asa ~~misappropriation,~~change ~~misuse,~~in ~~leakage~~circumstances, ~~falsification~~indicating orthat ~~accidental~~the ~~release~~carrying orvalue ~~loss~~ of ~~information~~our ~~maintained~~goodwill inor ~~our~~intangible ~~information~~assets ~~technology~~may ~~systems~~not ~~and~~be ~~networks~~recoverable, ~~including~~include ~~customer,~~reduced ~~personnel~~future ~~and~~cash ~~vendor~~flow ~~data~~estimates, ~~could~~higher ~~damage~~customer ~~our~~churn ~~reputation~~ and ~~require~~slower usgrowth torates ~~expend~~in ~~significant~~our ~~capital and other resources to remedy any such security breach~~industry. We ~~may~~have ~~experience~~experienced ~~service~~impairment ~~interruptions~~charges ~~or system failures~~ in the ~~future~~past. ~~Any~~As ~~service~~we ~~interruption~~continue ~~adversely~~to ~~affects~~assess ~~our~~the ~~ability~~ongoing toexpected ~~operate~~cash ~~our~~flows ~~business~~ and ~~could~~carrying ~~result~~amounts ~~in an immediate loss~~ of ~~revenues. If we experience frequent or persistent system or network failures,~~ our ~~reputation~~goodwill and ~~brand~~other ~~could~~intangible beassets, ~~permanently~~changes ~~harmed.~~in Weeconomic ~~may make significant capital expenditures to increase the reliability of our systems~~conditions, ~~but~~changes ~~these~~in ~~capital~~operating ~~expenditures~~performance ~~may~~or ~~not~~other ~~achieve~~indicators ~~the results we expect. The occurrence~~ of ~~any~~impairment ~~such~~could ~~network~~cause orus ~~information~~to ~~system-related~~record ~~events~~a orsignificant ~~security~~impairment ~~breaches~~charge ~~could~~during ~~have~~the aperiod ~~material~~in ~~adverse~~which ~~effect~~the onimpairment ~~our~~is ~~business~~determined, ~~financial~~negatively ~~position,~~impacting our results of operations and ~~cash~~financial ~~flows~~position.

~~Our~~We ~~business~~may ~~depends~~have onexposure ~~effective~~to ~~business~~greater ~~support~~than ~~systems~~anticipated ~~and~~tax ~~processes~~liabilities.

Our ~~business~~future ~~relies~~income ontaxes ~~our~~could ~~data,~~be ~~billing~~adversely ~~and~~affected ~~other~~by ~~operational~~changes ~~and~~in ~~financial~~the ~~reporting~~valuation of our deferred tax assets and ~~control~~liabilities ~~systems.~~or Toby ~~effectively~~changes ~~manage~~in ~~our~~tax ~~technical~~laws, ~~support~~regulations, ~~infrastructure~~accounting weprinciples ~~will~~or ~~need~~interpretations tothereof. ~~continue~~Our todetermination ~~maintain~~of our ~~data,~~tax ~~billing,~~liability ~~and~~is ~~other~~always ~~operational~~subject ~~and~~to ~~financial~~review ~~systems,~~by ~~procedures~~applicable ~~and~~tax ~~controls,~~authorities. ~~which~~Any ~~can~~adverse beoutcome ~~costly.~~of Wesuch a review could have ~~experienced~~a ~~system~~negative ~~failures~~effect ~~from~~on ~~time~~our tooperating ~~time,~~results and ~~any~~financial ~~interruption~~condition. inIn addition, the ~~availability~~determination of our ~~business~~provision ~~support~~for ~~systems,~~income intaxes ~~particular~~and ~~our~~other ~~billing~~tax ~~system,~~liabilities ~~could~~requires ~~result~~significant ~~in an immediate~~judgment, and ~~possibly~~there ~~substantial,~~are ~~loss~~many oftransactions ~~revenues.~~and ~~Frequent~~calculations orwhere ~~persistent~~the ~~system~~ultimate ~~failures~~tax ~~could~~determination ~~cause~~is ~~customers~~uncertain. toAlthough we believe our ~~systems~~estimates are ~~unreliable~~reasonable, ~~leading~~the ~~them~~ultimate totax ~~switch~~outcome tomay differ from the amounts recorded in our ~~competitors~~financial statements and ~~could~~may ~~permanently~~materially ~~harm~~affect our ~~reputation~~financial results in the period or periods for which such determination is made.

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

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We may not be able to protect our intellectual property.

We regard our EarthLink Business trademark as a valuable asset to our business. Additionally, our service marks, proprietary technologies, domain names and similar intellectual property are also important to the success of our business. We principally rely upon trademark law as well as contractual restrictions to establish and protect our technology and proprietary rights and information. We require employees and consultants and, when possible, suppliers and distributors to sign confidentiality agreements, and we generally control access to, and distribution of, our technologies, documentation and other proprietary information. The efforts we have taken to protect our proprietary rights may not be sufficient or effective. Third parties may infringe or misappropriate our trademarks and similar proprietary rights. If we are unable to protect our proprietary rights from unauthorized use, our brand image may be harmed and our business may suffer. In addition, protecting our intellectual property and other proprietary rights is expensive and time consuming. Any increase in the unauthorized use of our intellectual property could make it more expensive to do business and consequently harm our operating results.

We may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future.

From time to time, third parties have alleged that we infringe on their intellectual property rights. We may be unaware of filed patent applications and of issued patents that could be related to our products and services. Some of the largest communications providers, such as AT&T, Sprint Nextel and Verizon Communications, have substantial patent holdings. These providers have successfully asserted their claims against some communications companies, and have filed pending lawsuits against various competitive carriers. We have been subject to, and expect to continue to be subject to, claims and legal proceedings regarding alleged infringement by us of the patents, trademarks and other intellectual property rights of third parties. None of these claims has had an adverse effect on our ability to market and sell and support our services. Such claims, whether or not meritorious, are time-consuming and costly to resolve, and could require expensive changes in our methods of doing business, could require us to enter into costly royalty or licensing agreements, or could require us to cease conducting certain operations. Any of these events could result in increases in operating expenses or could limit or reduce the number of our service offerings.

If we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects.

We are currently a party to various legal actions, including patent litigation and legal proceedings regarding the use of rights-of-way for our network. Defending against these lawsuits may involve significant expense and diversion of management’s attention and resources from other matters. Due to the inherent uncertainties of litigation, we may not prevail in these actions. In addition, our ongoing operations may subject us to litigation risks and costs in the future. Both the costs of defending lawsuits and any settlements or judgments against us could materially and adversely affect our results of operations.

We also expect to continue to be subject to the risks associated with the resolution of various third-party disputes, lawsuits, arbitrations and proceedings affecting our business. The deregulation of the telecommunications industry, the implementation of the Telecommunications Act of 1996, the evolution of telecommunications infrastructure from time-division multiplexing to Internet Protocol, and the distress of many carriers in the telecommunications industry as a result of continued competitive factors and financial pressures have resulted in the involvement of numerous industry participants in disputes, lawsuits, proceedings and arbitrations before state and federal regulatory commissions, private arbitration organizations such as the American Arbitration Association, and courts over many issues that will be important to our financial and operational success. These issues include the interpretation and enforcement of existing interconnection agreements and tariffs, the terms of new interconnection agreements, operating performance obligations, intercarrier compensation, treatment of different categories of traffic (for example, traffic originated or terminated on wireless or VoIP), the jurisdiction of traffic for intercarrier compensation purposes, the wholesale services and facilities available to us, the prices we will pay for those services and facilities, and the regulatory treatment of new technologies and services.

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Our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry.

As of December 31, 2010, we had $325.0 million outstanding principal amount of 10.5% senior secured notes due 2016 (the “Notes”). Our indebtedness could have important consequences to us. For example, it could:

· require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund our business activities;

· limit our ability to secure additional financing, if necessary;

· increase our vulnerability to general adverse economic and industry conditions; and

· limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.

The indenture that governs the Notes impose operating and financial restrictions that limit our discretion on some business matters, which could make it more difficult for us to expand, finance our operations and engage in other business activities that may be in our interest. These restrictions include compliance with or maintenance of specified financial tests and ratios and will limit our ability to sell assets; incur or guarantee additional indebtedness; incur certain liens; make loans and investments; enter into agreements restricting subsidiaries’ ability to pay dividends; consolidate, merge or sell all or substantially all of their assets; and enter into transactions with affiliates.

We may incur indebtedness in addition to the foregoing indebtedness. Any additional indebtedness we may incur in the future may subject us to similar or even more restrictive conditions. Our ability to make payments on or to refinance our indebtedness will depend on our ability in the future to generate cash flows from operations, which is subject to all the risks of our business. We may not be able to generate sufficient cash flows from operations for us to repay our indebtedness when such indebtedness becomes due and to meet our other cash needs.

We are a wholly-owned subsidiary of EarthLink and therefore subject to strategic decisions of EarthLink and affected by EarthLink’s performance.

We are fundamentally affected by our relationship with EarthLink. As a wholly-owned subsidiary of EarthLink, we are managed by officers and employees of EarthLink and we are subject to a wide range of possible strategic decisions that EarthLink may make from time to time. Those strategic decisions could include the level and types of financing we provide to support the business of EarthLink and its subsidiaries, subject to the terms of the indenture governing the Notes, and the level and types of transactional or other support made available to us by EarthLink. In addition, circumstances affecting EarthLink can significantly affect us. Significant changes in EarthLink’s strategy or in its relationship with us or material adverse changes in the performance of EarthLink or its other subsidiaries could have a material adverse effect on us. The outstanding debt and other securities of ours are not obligations of EarthLink or other EarthLink subsidiaries.

As a wholly-owned subsidiary of EarthLink, any arrangements or agreements between the two entities may have different terms than would have been negotiated by independent, unrelated parties.

The arrangements and agreements between us and EarthLink may have different terms and provisions than would have been negotiated by independent, unrelated parties. Conflicts of interest could arise relating to the nature, quality and pricing of services or products provided by us to EarthLink or by EarthLink to us, any payment of dividends by us to EarthLink, any prepayment of the borrowings by us from EarthLink and general issues relating to maintaining or increasing our profitability. The terms of the indenture governing our Notes require that transactions we enter into with EarthLink and its other affiliates be conducted on an arm’s length basis; however, there can be no assurance that the terms of these arrangements are the same as would be negotiated between independent, unrelated parties.

Risks Related to Our Liquidity and Financial Resources

Our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry.

As of December 31, 2011, we had $324.8 million outstanding principal amount of 10.5% senior secured notes due 2016 (the “Notes”). We may also incur significant additional indebtedness in the future. Our substantial indebtedness may:

· make it difficult for us to satisfy our financial obligations, including making scheduled principal and interest payments on our indebtedness;

· limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes;

· limit our ability to use our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;

· require us to use a substantial portion of our cash flow from operations to make debt service payments;

· limit our flexibility to plan for, or react to, changes in our business and industry;

· place us at a competitive disadvantage compared to our less leveraged competitors; and

· increase our vulnerability to the impact of adverse economic and industry conditions.

Our ability to make payments on or to refinance our indebtedness will depend on our ability in the future to generate cash flows from operations, which is subject to all the risks of our business. We may not be able to generate sufficient cash flows from operations for us to repay our indebtedness when such indebtedness becomes due and to meet our other cash needs.

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The indenture that governs the Notes imposes significant operating and financial restrictions on us. These restrictions limit or restrict, among other things, our ability and the ability of our restricted subsidiaries to:

· incur or guarantee additional indebtedness or issue preferred stock;

· pay dividends or make other distributions to stockholders;

· purchase or redeem capital stock or subordinated indebtedness;

· make investments;

· create liens or use assets as security;

· enter into agreements restricting such restricted subsidiaries’ ability to pay dividends, make loans or transfer assets to us or other restricted subsidiaries;

· engage in transactions with affiliates; and

· consolidate or merge with or into other companies or transfer all or substantially all of our or their assets.

If we breach any of these covenants, a default could result under the indenture, which may require us to repay some or all of our indebtedness.

We may require additional capital to support business growth, and this capital may not be available to us on acceptable terms, or at all.

We may require substantial capital to maintain, upgrade and enhance our network facilities and operations. We may also require additional capital to support our business growth, including the need to develop new services and products, enhance our operating infrastructure and acquire complimentary businesses and technologies. While we have historically been able to fund capital expenditures from cash generated by operations, the other risk factors described in this section could materially reduce cash available from operations or significantly increase our capital expenditures requirements. We may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. We may not be able to secure additional funds at the time when we need such funding. If we are unable to obtain additional capital when needed, our business could suffer. Any debt financing that we may obtain in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.

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Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We ~~own~~lease ~~and~~or ~~lease~~own several facilities for corporate offices, sales offices, ~~switch~~data ~~sites~~centers, ~~colocation~~switch sites, and other facilities across our nationwide service area. WeThese ~~lease~~leases ~~office~~have ~~space for~~ various ~~functions~~expiration indates ~~Anniston~~through ~~and~~2024. ~~Huntsville,~~We ~~Alabama~~believe ~~and~~our infacilities ~~Raleigh,~~are ~~North~~suitable ~~Carolina,~~ and weadequate ~~lease~~for ~~multiple~~our ~~branch~~business ~~office locations in the southeast under leases that expire on various dates through 2016~~operations. ~~We own an administrative office in Arab, Alabama.~~

WeOur ~~have~~main ~~constructed~~facilities ~~and~~for ~~own~~corporate aoffices ~~multi-service~~include ~~facility~~approximately 34,000 square feet in Anniston, Alabama under a lease that will expire in 2018 and 54,000 ~~which~~square ~~functions~~feet asin Huntsville, Alabama under a ~~centralized~~lease ~~network~~that ~~operations~~will ~~and~~expire ~~switch~~in ~~control~~2013. ~~center~~We ~~for~~also ~~our~~lease ~~network~~multiple ~~and~~sales asoffices in locations throughout the United States. We own an ~~operator~~administrative ~~services~~office ~~center~~in Arab, Alabama.

We own a data center facility in Anniston, Alabama. We own switch sites in Anniston, Birmingham and Montgomery, Alabama and in Nashville, Tennessee. We lease space for ~~our voice~~ switch sites in various cities inthroughout ~~Florida,~~the ~~Georgia,~~southeastern ~~Mississippi,~~United ~~North Carolina and South Carolina~~States. ~~The leases for these switch sites expire on various dates from 2011 to 2018.~~ As part of our fiber optic network, we own or lease rights-of-way, land, and point-of-presence space throughout the southeastern United States.

We believe our facilities are suitable and adequate for our business operations. For additional information regarding our obligations under property leases, see Note 13, “Commitments and Contingencies,” in our Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

Item 3. Legal Proceedings.

We are a party to ~~numerous~~various ~~regulatory~~disputes, ~~proceedings~~litigation ~~affecting~~or ~~the~~other ~~segments~~legal ~~of the communications industry in which we operate, including regulatory~~ proceedings ~~before~~arising ~~various~~from ~~state~~normal ~~public~~business ~~utility~~activities. ~~commissions~~The ~~and~~result ~~the~~of ~~FCC,~~any ~~particularly~~current inor ~~connection~~future ~~with actions by AT&T~~disputes, ~~and~~litigation or other ~~incumbent~~legal ~~local telephone companies. Some of these~~ proceedings ~~are~~is ~~discussed~~inherently ~~above~~unpredictable. ~~under~~Our ~~“Business—Regulatory~~management, ~~Environment.”~~however, Webelieves ~~anticipate~~ that ~~these~~there ~~companies~~are ~~will~~no ~~continue to pursue arbitration~~disputes, litigation, ~~regulation~~or ~~and~~other ~~legislation~~legal inproceedings ~~states~~asserted ~~within~~or ~~our~~pending ~~primary~~against ~~eight-state~~us ~~market~~that tocould ~~reduce~~have, ~~regulatory~~individually ~~oversight~~or ~~and~~in ~~state~~the ~~regulation~~aggregate, ~~over~~a ~~their~~material ~~rates~~adverse ~~and~~effect ~~operations.~~on ~~These~~its ~~companies~~financial ~~also~~position, ~~are~~results ~~actively~~of ~~pursuing~~operations ~~major~~or ~~changes~~cash inflows, ~~the federal communications laws through litigation~~ and ~~legislation~~believes that ~~would~~adequate ~~adversely~~provision ~~affect~~for ~~competitive~~any ~~carriers,~~probable ~~including~~and ~~us.~~estimable Welosses ~~may~~has ~~not~~been ~~succeed~~made in our ~~challenges~~consolidated tofinancial ~~these or other similar actions that would prevent or deter us from successfully competing with the incumbent carriers~~statements.

WeItem ~~are also a party to various legal proceedings that are ordinary and incidental to our business~~4. ~~Management~~Mine ~~does~~Safety ~~not expect that any currently pending legal proceedings will have a material adverse effect on our results of operations or financial position~~Disclosures.

~~Item~~Not 4applicable. ~~[Removed and reserved]~~

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PART II

All of our common stock is owned by EarthLink. As a result, there is no established public market for our common stock. Prior to EarthLink’s acquisition of us, our common stock was traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “ITCD.OB.”

The indenture governing our Notes contains covenants that limit our ability, and the ability of our restricted subsidiaries, to pay dividends on our capital stock.

Item 6. Selected Financial Data.

Omitted pursuant to General Instructions (I)(1)(a) and (b) of Form 10-K.

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

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Safe Harbor Statement

The Management’s Discussion and Analysis and other portions of this Annual Report on Form 10-K include “forward-looking” statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include, without limitation (1) that if we ~~may~~are ~~not~~unable beto ~~able~~adapt to ~~execute~~changes ~~our~~in ~~business~~technology ~~strategy~~and customer demands, ~~which~~we ~~could~~may ~~adversely~~not ~~impact~~remain ~~our~~competitive, ~~results~~and ofour ~~operations~~revenues and ~~cash~~operating ~~flows~~results could suffer; (2) that ~~the~~unfavorable ~~continuing~~general ~~effects of adverse~~ economic conditions could harm our business; (3) that if we doface ~~not~~significant ~~continue~~competition toin ~~innovate~~the ~~and~~communications ~~provide~~industry ~~products~~that ~~and~~could ~~services~~reduce our profitability; (4) that ~~are~~decisions ~~useful~~by tothe ~~customers,~~Federal weCommunications ~~may~~Commission ~~not~~relieving ~~remain~~incumbent ~~competitive,~~carriers ~~and~~of ~~our~~certain ~~revenues~~regulatory requirements, and ~~operating~~possible ~~results~~further ~~could~~deregulation ~~suffer;~~in ~~(4) that~~the wefuture, ~~face~~may ~~significant~~restrict ~~competition~~our ~~that~~ability ~~could~~to ~~reduce~~provide ~~our~~services ~~profitability;~~and ~~(5) that~~may weincrease ~~may~~the ~~not~~costs bewe ~~able~~incur to ~~compete~~provide ~~effectively~~these services; (5) that if we are unable to ~~install~~interconnect ~~additional~~with ~~network~~AT&T ~~equipment~~and orother ~~convert~~incumbent ~~our~~carriers ~~network~~on toacceptable ~~more~~terms, ~~advanced~~our ~~technology;~~ability ~~(6) that failure~~ to ~~obtain~~offer ~~and~~competitively ~~maintain~~priced ~~necessary~~local ~~permits~~telephone ~~and~~services ~~rights-of-way~~will ~~could~~be ~~interfere~~adversely ~~with our network infrastructure and operations~~affected; (76) that our ~~business~~operating ~~may~~performance will suffer if ~~third~~we ~~parties~~are ~~used~~not ~~for~~offered ~~customer~~competitive ~~service~~rates ~~and~~for ~~technical~~the ~~support~~access ~~and certain billing~~ services ~~are~~we ~~unable~~need to provide ~~these~~our ~~services~~long ordistance ~~terminate their relationships with us~~services; (87) that ~~decisions~~we bymay ~~the~~experience ~~Federal~~reductions ~~Communications~~in ~~Commission~~switched ~~relieving~~access ~~incumbent~~and ~~telephone~~reciprocal ~~companies~~compensation ofrevenue; ~~certain~~(8) that ~~regulatory~~failure ~~requirements,~~to obtain and ~~possible~~maintain ~~further~~necessary ~~deregulation~~permits inand ~~the~~rights-of-way ~~future,~~could ~~may~~interfere ~~restrict~~with our ~~ability~~network toinfrastructure ~~provide services~~ and ~~may~~operations; ~~increase~~(9) that ~~the costs~~ we ~~incur~~have tosubstantial ~~provide~~business ~~these~~relationships ~~services;~~with ~~(9) that~~several ~~our~~large ~~wholesale~~telecommunications ~~services~~carriers, ~~including~~and some of our ~~broadband~~customer ~~transport~~agreements ~~services,~~may not continue due to befinancial ~~adversely~~difficulty, ~~affected~~acquisitions, bynon-renewal ~~pricing~~or ~~pressure~~other factors, ~~network~~which ~~overcapacity,~~could ~~service~~adversely ~~cancellations~~affect our revenue and ~~other~~results ~~factors~~of operations; (10) that ~~our~~we ~~operating~~may ~~performance~~be ~~will~~unable ~~suffer~~to ifhire weand ~~are~~retain ~~not~~sufficient ~~offered~~qualified ~~competitive~~personnel, ~~rates~~and ~~for~~ the ~~access~~loss ~~services~~of weany ~~need~~of toour ~~provide~~key ~~our~~executive ~~long~~officers ~~distance~~could ~~services~~adversely affect us; (11) that weprivacy ~~have~~concerns ~~experienced~~relating ~~and~~to ~~may~~our ~~continue~~business tocould ~~experience~~damage ~~reductions~~our inreputation ~~switched~~and ~~access~~deter current and ~~reciprocal~~potential ~~compensation~~users ~~revenue~~from using our services; (12) that ~~our~~security ~~inability~~breaches tocould ~~maintain~~damage our ~~network~~reputation ~~infrastructure,~~and ~~portions~~harm ~~of which we do not own, could adversely affect~~ our operating results; (13) that ifinterruption weor ~~are~~failure ~~unable~~of toour ~~interconnect~~network ~~with~~and ~~AT&T~~information systems and other ~~incumbent~~technologies ~~carriers~~could onimpair ~~acceptable terms,~~ our ability to ~~offer~~provide ~~competitively~~our ~~priced~~services, ~~local~~which ~~telephone~~could ~~services~~damage ~~will~~our bereputation ~~adversely~~and ~~affected~~harm our operating results; (14) that ~~government regulations could adversely affect~~ our business ordepends ~~force~~on useffective tobusiness ~~change~~support ~~our~~systems ~~business~~and ~~practices~~processes; (15) that wegovernment ~~may~~regulations becould ~~unable~~adversely toaffect ~~retain~~our ~~sufficient~~business ~~qualified~~or ~~personnel,~~force ~~which~~us ~~could~~to ~~adversely~~change ~~affect~~our usbusiness practices; (16) that ~~interruption~~our orbusiness ~~failure~~may ofsuffer ~~our~~if ~~network~~third ~~and~~parties ~~information~~are ~~systems~~unable ~~and~~to ~~other~~provide ~~technologies~~services ~~could~~or ~~impair~~terminate ~~our~~ their

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~~ability~~relationships towith ~~provide our services, which could damage our reputation and harm our operating results~~us; (17) that ~~our business depends on effective business support systems and processes; (18) that~~ we may not be able to protect our intellectual property; (1918) that we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (2019) that if we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (2120) that we may be required to recognize impairment charges on our ~~indebtedness~~goodwill ~~could~~and intangible assets, which would adversely affect our ~~financial~~results ~~health~~of operations and ~~limit~~financial ~~our~~position; ~~ability~~(21) tothat ~~react~~we may have exposure to ~~changes~~greater inthan ~~our~~anticipated ~~industry~~tax liabilities; (22) that we are a wholly-owned subsidiary of EarthLink and therefore subject to strategic decisions of EarthLink and affected by EarthLink’s performance; (23) that as a wholly-owned subsidiary of EarthLink, any arrangements or agreements between the two entities may have different terms than would have been negotiated by independent, unrelated parties; (24) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (25) that we may require additional capital to support business growth, and this capital may not be available to us on acceptable terms, or at all. These risks and uncertainties are described in greater detail in Item 1A of Part I, “Risk Factors.”

Overview

ITC^DeltaCom, Inc., together with its ~~wholly-owned~~consolidated subsidiaries, provides integrated communications services in the southeastern United States. We ~~deliver~~provide a ~~comprehensive~~broad ~~suite~~range of ~~high-quality~~ data and voice communications services to businesses and enterprise organizations, 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 and equipment services. We also sell ~~customer~~transmission ~~premises~~capacity ~~equipment~~ to ~~our~~other ~~business~~communications ~~customers~~providers on a wholesale basis. We offer these services primarily over our ~~14-state~~regional fiber optic network. ~~Our fiber optic network provides us with extra transmission capacity that we also sell to other communications providers on a wholesale basis.~~

In December 2010, we were acquired by EarthLink, Inc. (“EarthLink”) for $3.00 per share, with ITC^DeltaCom, Inc. surviving as a wholly-owned subsidiary of EarthLink. Subsequent to the acquisition, our integrated communication services were rebranded as EarthLink Business and our wholesale services were rebranded as ~~Interstate~~EarthLink ~~FiberNet~~Carrier, an EarthLink Business company.

Acquisition

In March 2011, we acquired Saturn Telecommunication Services Inc. and affiliates (“STS Telecom”), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom operates a sophisticated VoIP platform. The primary reason for the acquisition is to leverage STS Telecom’s expertise in managed hosted VoIP as part of our VoIP offerings.

Revenue Sources

We ~~derive~~provide ~~revenues~~a ~~from~~broad ~~providing~~range ~~integrated~~of ~~communications services~~data, ~~wholesale~~voice ~~services~~ and equipment ~~sales~~services to businesses, enterprise organizations and ~~related~~communications ~~services~~carriers. ~~Our~~We ~~five~~present ~~largest~~our revenue in the following three categories: (1) retail ~~customers~~services, ~~combined~~which ~~represented~~includes ~~6.0%~~data, ~~6.6%~~voice and ~~7.1%~~mobile ofdata ~~our~~and ~~total~~voice ~~revenues~~services ~~during~~provided ~~the~~to ~~years~~businesses ~~ended~~and ~~December~~enterprise organizations; (2) 31wholesale services, ~~2008~~which ~~and~~includes ~~2009~~the ~~and~~sale ~~the~~of ~~combined~~transmission ~~year~~capacity ~~ended~~to ~~December~~other telecommunications carriers; and (3) ~~31,~~other ~~2010~~services, ~~respectively.~~which ~~One~~includes ~~retail~~the sale of customer ~~represented~~premises 3equipment.1% Our retail customers range from large enterprises with many locations, ~~3.0%~~to small and 3medium-sized multi-site businesses, to business customers with one site.2% Our wholesale customers consist primarily of ~~our~~telecommunications ~~total~~carriers ~~revenues~~and ~~during~~network ~~the~~resellers. Revenues ~~years~~generally ~~ended~~consist ~~December 31,~~of ~~2008~~monthly ~~and~~recurring ~~2009~~fees; ~~and~~usage ~~the~~fees; ~~combined~~installation ~~year~~fees; ~~ended~~equipment ~~December 31,~~fees ~~2010,~~and ~~respectively~~termination fees.

Integrated Communications Services. We deliver integrated voice and data communications services to end-users on a retail basis, 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. Revenues primarily consist of monthly recurring fees. Revenues from our integrated communications services were approximately 83%, 84% and 82% of our total revenues during the years ended December 31, 2008 and 2009 and the combined year ended December 31, 2010, respectively.

Wholesale Services. We deliver wholesale communications services to other communications businesses. Revenues from these services are generated from sales to a limited number of other communications companies, including incumbent local exchange carriers, competitive local exchange carriers, wireless service providers, cable companies, Internet service providers and other carriers. Our wholesale services include regional communications transmission capacity over our fiber optic network, which we refer to as our “broadband transport” services, local interconnection services to Internet service providers and local dial tone communications services to other competitive exchange carriers, operator and directory assistance services, and dedicated Internet access services through our IP network and our direct connectivity to the IP networks of other Internet service providers. Our broadband transport services

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include private line services, Ethernet private line services and wavelength services, which allow other communications providers to transport the traffic of their end-user or wholesale customers across our local and intercity network. Revenues consist of fees charged for network services, termination fees, fees for equipment and usage fees. Revenues from our wholesale services were approximately 13%, 13% and 14% of our total revenues during the years ended December 31, 2008 and 2009 and the combined year ended December 31, 2010, respectively.

Equipment Sales and Related Services. We derive non-recurring revenues from selling, installing and providing maintenance services for customer premises equipment. Revenues from these services, which are primarily generated from sales to our integrated communications services customers, were approximately 4%, 3% and 4% of our total revenues during the years ended December 31, 2008 and 2009 and the combined year ended December 31, 2010, respectively.

Trends in our Business

We operate in the communications industry,. ~~which~~The iscommunications ~~characterized by~~ industry ~~consolidation,~~is anhighly ~~evolving regulatory environment~~competitive, ~~the~~and ~~emergence~~we ofexpect ~~new~~this ~~technologies~~competition ~~and~~to ~~intense competition~~intensify. WeThese ~~sell~~markets ~~our~~are ~~services~~rapidly tochanging ~~end~~due ~~user~~to ~~business~~industry ~~customers~~consolidation, ~~and~~an toevolving ~~wholesale~~regulatory ~~customers.~~environment ~~Our~~and ~~wholesale~~the ~~customers~~emergence ~~consist primarily~~ of ~~telecommunications~~new ~~carriers~~technologies. Merger and ~~network~~acquisition ~~resellers.~~transactions ~~Our~~have ~~business~~created ~~has~~more ~~become~~significant ~~more~~competitors ~~focused~~for onus ~~end~~and ~~users~~have asreduced athe ~~result~~number of ~~consolidation~~vendors infrom ~~the~~which ~~telecommunications~~we ~~industry.~~may Wepurchase ~~have~~network ~~continued~~elements we leverage to ~~experience~~operate ~~adverse~~our ~~trends~~business. ~~related~~Certain toof our ~~wholesale~~business service ~~offerings~~revenues ~~which~~ have ~~resulted~~been ~~primarily~~declining ~~from~~due ato ~~reduction~~competitive pressures in ~~rates~~the ~~charged~~industry, toand ~~our~~we ~~customers~~expect ~~due~~revenues tofrom ~~overcapacity~~certain inaspects ~~the~~of ~~broadband~~these ~~services~~businesses ~~business~~to ~~and~~continue ~~from~~to ~~service cancellations by some customers~~decline. In addition, ~~merger~~we ~~and~~expect ~~acquisition~~revenues ~~transactions~~to ~~have~~be ~~created~~adversely ~~more~~impacted ~~significant~~as ~~competitors~~a ~~for~~result ~~us and have reduced the number~~ of ~~vendors~~new ~~from~~rules recently ~~which~~adopted weby ~~may~~the ~~purchase~~FCC ~~network~~regarding ~~elements~~intercarrier ~~we leverage to operate our business~~compensation.

Our business customers are particularly exposed to a weak economy. We believe that the financial and economic pressures faced by our business customers in this environment of diminished consumer spending, corporate downsizing and tightened credit have had, and may continue to have, an adverse effect on ~~billable~~our ~~minutes~~results of ~~use and on customer attrition rates~~operations, ~~and~~including ~~have~~longer ~~resulted~~sales incycles and ~~may continue to result in~~ increased customer demands for price reductions in connection with contract renewals. We have experienced pressure on revenue and operating expenses for our business services as a result of current economic conditions, including increased subscriber acquisition and retention costs necessary to attract and retain subscribers.

~~Acquisition~~To combat trends in our revenue, we are focused on building long-term customer relationships based a customizable communications portfolio using a blend of access technologies for connectivity and personalized customer service. However, we have and may continue to experience pressure on revenue and operating expenses for our business services as a result of competition or current economic conditions.

In December 2010, we entered into an agreement to acquire Saturn Telecommunication Services Inc. (“STS Telecom”), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom currently operates a sophisticated voice-over-IP (“VoIP”) platform, for approximately $28.0 million of cash. We plan to leverage STS Telecom’s expertise in managed hosted VoIP on a nationwide basis as part of our VoIP offerings. The completion of the acquisition is subject to customary closing conditions and approvals.

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Results of Operations

On December 8, 2010, we were acquired by EarthLink. The accounting for the acquisition has been “pushed-down” in our consolidated financial statements. Due to EarthLink’s acquisition of us, the financial results have been presented separately for the “Predecessor Entity” period, January 1, 2010 through December 7, 2010, and for the “Successor Entity” period, December 8, 2010 through December 31, 2010. To allow comparison of our results, we combined these periods into a year period from January 1, 2010 through December 31, 2010. Our discussions below will refer to this combined period to compare to the prior periods as we feel this provides useful and more accurate comparisons. However, due to adjustments to our assets and liabilities in connection with purchase accounting, results from the Successor Entity and Predecessor Entity combined may not be indicative of our future results. This combination is not a U.S. GAAP measure and it is only provided to allow the reader to more easily compare the results of the operations for the periods presented.

The following table sets forth statement of operations data for the years ended December 31, 2008 and 2009 (in thousands):

	Predecessor Entity						Change Between
	Year Ended December 31,						2008 and 2009
	2008			2009			Amount			%
Revenues:
Integrated communications services	$	413,981		$	394,156		$	(19,825	)	-5	%
Wholesale services	65,798			59,401			(6,397		)	-10	%
Equipment sales and related services	18,084			15,767			(2,317		)	-13	%
Total revenues	497,863			469,324			(28,539		)	-6	%
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	232,899			212,630			(20,269		)	-9	%
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	183,123			171,579			(11,544		)	-6	%
Depreciation and amortization	73,514			69,064			(4,450		)	-6	%
Total operating costs and expenses	489,536			453,273			(36,263		)	-7	%
Income from operations	8,327			16,051			7,724			93	%
Interest expense and other, net	(31,224		)	(27,026		)	4,198			-13	%
Net loss	$	(22,897	)	$	(10,975	)	$	11,922		-52	%

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The following table sets forth statement of operations data for the years ended December 31, 2009 and 2010 (in thousands):

	Predecessor Entity						~~Sucessor Entity~~	Sucessor Entity
				January 1			~~December 8~~	December 8		~~Combined~~	Combined		~~Change Between~~	Change Between
	Year Ended			through			~~through~~	through		~~Year Ended~~	Year Ended		~~2009 and~~	2009 and
	December 31,			December 7,			~~December 31,~~	December 31,		~~December 31,~~	December 31,		~~Combined 2010~~	Combined 2010
	2009			2010			~~2010~~	2010		~~2010~~	2010		~~Amount~~	Amount		%	%
Revenues:
Integrated communications services	$	394,156		$	341,896		$	21,206		$	363,102		$	(31,054	)	-8	%
Retail services	$	395,939		$	343,227			$	21,307		$	364,534		$	(31,405	)	-8	%
Wholesale services	59,401			58,003			~~4,267~~	4,267		~~62,270~~	62,270		~~2,869~~	2,869		5	%5	%
Equipment sales and related services	15,767			14,947			1,130			16,077			310			2	%
Other services	13,984			13,616				1,029			14,645			661			5	%
Total revenues	469,324			414,846			~~26,603~~	26,603		~~441,449~~	441,449		~~(27,875~~	(27,875	)	-6)	%-6	%
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shownseparately below)	212,630			185,273			12,974			198,247			(14,383		)	-7	%
Cost of revenues (exclusive of depreciation and amortization shown separately below)	225,783			197,567				13,845			211,412			(14,371		)	-6	%
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	~~171~~158,~~579~~426			~~150~~138,~~838~~544			~~10,260~~	9,389		~~161,098~~	147,933		~~(10,481~~	(10,493	)	-6)	%-7	%
Depreciation and amortization	69,064			52,339			~~4,885~~	4,885		~~57,224~~	57,224		~~(11,840~~	(11,840	)	~~-17~~)	%-17	%
Acquisition-related costs	—			7,987			~~6,765~~	6,765		~~14,752~~	14,752		~~14,752~~	14,752			*
Total operating costs and expenses	453,273			396,437			~~34,884~~	34,884		~~431,321~~	431,321		~~(21,952~~	(21,952	)	-5)	%-5	%
Income (loss) from operations	16,051			18,409			~~(8,281~~	(8,281	)	~~10,128~~)	10,128		~~(5,923~~	(5,923	)	~~-37~~)	%-37	%
Interest expense and other, net	(27,026		)	(29,118		)	(2,089		)	(31,207		)	(4,181		)	15	%
Write-off of debt discount and issuance cost	—			(7,948		)		—			(7,948		)	(7,948		)	*
Write-off of debt discount and issuance cost	—			(7,948		)	—			(7,948		)	(7,948		)		*
Interest expense and other, net	(27,026		)	(29,118		)		(2,089		)	(31,207		)	(4,181		)	15	%
Loss before income taxes	(10,975		)	(18,657		)	~~(10,370~~	(10,370	)	~~(29,027~~)	(29,027	)	~~(18,052~~)	(18,052	)	~~164~~)	%164	%
Income tax benefit	—			604			—	—		~~604~~	604		~~604~~	604			*
Net loss	$	(10,975	)	$	(18,053	)	$	~~(10,370~~$	)(10,370	$)	~~(28,423~~$	)(28,423	$)	~~(17,448~~$	)(17,448	~~159~~)	%159	%

* Not meaningful

~~Information About Our Business~~27

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

	As of December 31, 2008	As of December 31, 2009	As of December 31, 2010
Colocations (1)	268	279	294
Voice and data switches, Nortel Call Server 2000 IP, Nortel DMS500 and Alcatel-Lucent 5E	21	20	20
Number of employees (2)	1,565	1,398	1,326

The following table sets forth statement of operations data for the years ended December 31, 2010 and 2011 (in thousands):

	Predecessor Entity			Sucessor Entity						Sucessor Entity
	January 1			December 8			Combined						Change Between
	through			through			Year Ended			Year Ended			Combined 2010
	December 7,			December 31,			December 31,			December 31,			and 2011
	2010			2010			2010			2011			Amount			%

Revenues:
Retail services	$	343,227		$	21,307		$	364,534		$	364,066		$	(468	)	0	%
Wholesale services	58,003			4,267			62,270			71,955			9,685			16	%
Other services	13,616			1,029			14,645			13,693			(952		)	-7	%
Total revenues	414,846			26,603			441,449			449,714			8,265			2	%

Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shownseparately below)	197,567			13,845			211,412			219,400			7,988			4	%
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	138,544			9,389			147,933			138,765			(9,168		)	-6	%
Depreciation and amortization	52,339			4,885			57,224			71,659			14,435			25	%
Acquisition-related costs	7,987			6,765			14,752			5,272			(9,480		)	-64	%
Total operating costs and expenses	396,437			34,884			431,321			435,096			3,775			1	%

Income (loss) from operations	18,409			(8,281		)	10,128			14,618			4,490			44	%
Write-off of debt discount and issuance cost	(7,948		)	—			(7,948		)	—			7,948			-100	%
Interest expense and other, net	(29,118		)	(2,089		)	(31,207		)	(30,882		)	325			-1	%
Loss before income taxes	(18,657		)	(10,370		)	(29,027		)	(16,264		)	12,763			-44	%
Income tax benefit (provision)	604			—			604			(734		)	(1,338		)	-222	%
Net loss	$	(18,053	)	$	(10,370	)	$	(28,423	)	$	(16,998	)	$	11,425		-40	%

Operating Metrics

The following table sets forth certain operating data as of December 31, 2010 and 2011:

	As of December 31,
	2010	2011

Colocations (1)	294	299
Voice and data switches	20	21
Employees (2)	1,326	1,222

Retail business voice lines in service (3)
UNE-T and other UNE lines (4)	370,833	374,643
Resale and UNE-P lines (5)	43,385	44,278
Total retail voice lines in service	414,218	418,921
Wholesale lines in service (6)	6,279	5,382
Total business lines in service (7)	420,497	424,303

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

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

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~~The~~(3) Lines ~~following~~in ~~table~~service ~~presents,~~include ~~information~~only ~~about~~voice ~~the~~lines ~~telephone~~in ~~access~~service. ~~lines~~Conversion weof ~~installed~~data ~~for~~services ~~and~~provided ~~sold~~ to ~~our~~ customers ~~who~~to ~~purchase~~a ~~our~~voice ~~integrated~~line ~~communications~~equivalent ~~services~~is ~~and our wholesale services as of December 31, 2008, 2009 and 2010~~excluded.

	As of December 31, 2008	As of December 31, 2009	As of December 31, 2010
Retail business voice lines in service(1)
UNE-T and other UNE lines(2)	369,496	367,403	370,833
Resale and UNE-P lines(3)	62,629	51,602	43,385
Total retail voice lines in service	432,125	419,005	414,218
Wholesale lines in service(4)	26,151	8,004	6,279
Total business lines in service(5)	458,276	427,009	420,497

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

(15) ~~Lines~~ Resale in service ~~include~~offerings ~~only voice lines~~ in ~~service.~~which ~~Conversion~~we ofprovide ~~data~~local ~~services~~and ~~provided~~mobile ~~to customers to a voice line equivalent is excluded~~services.

(26) ~~Facilities-based~~ Represents ~~service~~primary ~~offering~~rate ininterface ~~which~~circuits weprovided ~~provide~~as ~~local~~part ~~transport~~of ~~through~~ our ~~owned~~local ~~and~~interconnection ~~operated~~services ~~switching~~for ~~facilities~~Internet service providers.

(37) ~~Resale~~ Reported ~~service~~net ~~offerings~~of inlines ~~which~~disconnected weor ~~provide local and mobile services~~canceled.

(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.

Revenues

~~Total~~Retail ~~revenues~~services. Revenues from our retail services decreased $2831.54 million, or 68%, from ~~$497.9 million during~~ the year ended December 31, ~~2008~~2009 to ~~$469.3 million during~~ the combined year ended December 31, ~~2009~~2010. ~~Total~~The ~~revenues~~decrease ~~decreased~~resulted ~~$27.9~~from ~~million~~decreases in local and bundled revenues, ordata 6%revenues, ~~from~~long ~~$469.3~~distance ~~million~~services ~~during~~revenues ~~the~~and ~~year~~revenue ~~ended~~generated ~~December 31,~~by ~~2009~~access billings to ~~$441~~other carriers.4 ~~million~~These ~~during~~decreases ~~the~~were ~~combined~~minimally ~~year~~offset ~~ended~~by ~~December 31,~~an ~~2010.~~increase in mobile revenue. During the ~~years~~year ended December 31, ~~2009 and~~ 2010, we experienced declining business demand and competitive pricing pressures that have adversely affected most of our markets and products. These conditions ~~have~~ negatively affected our operations by accelerating attrition of retail customers that have sustained business declines and that exhibit increased cost sensitivity and by slowing the rate at which we add new customers.

~~Integrated communications services.~~ Revenues from our ~~integrated~~retail ~~communications~~ services decreased $190.84 million, ~~or 5%,~~ from the combined year ended December 31, ~~2008~~2010 to the year ended December 31, ~~2009~~2011. The decrease ~~resulted~~was ~~from~~primarily ~~decreases~~due into ~~local and mobile service and bundled revenues, long distance services revenues,~~ data ~~revenues,~~ and ~~revenue generated by access billings to other carriers. Our~~ local ~~services~~service revenues ~~decreased~~ due to apricing ~~net~~pressures ~~decrease~~related ~~in billable lines. Long distance services revenues decreased due~~ to ~~a decline in our average rate per billable minute. We also experienced~~ increased competition ~~in long distance services from VoIP~~ and ~~wireless~~the ~~competitive~~overall ~~offerings.~~economy, Wemostly ~~expect~~offset ~~additional~~by ~~declines~~the ininclusion ~~our revenues from long distance services in 2011 because~~ of ~~the~~STS ~~foregoing~~Telecom ~~factors and because we will continue to emphasize other service offerings that generate fixed monthly recurring service charges. We expect that pricing pressure on long distance services~~ revenues ~~will continue to have a negative impact on our long distance services and revenues in 2011~~.

Wholesale services. Revenues from our ~~integrated~~wholesale ~~communications~~ services ~~decreased~~increased $312.19 million, or ~~7.9~~5%, from the year ended December 31, 2009 to the combined year ended December 31, 2010 and increased $9.7 ~~The~~million, ~~decrease~~or ~~resulted~~16%, from ~~decreases~~the incombined ~~local~~year ~~and~~ended ~~bundled revenues~~December 31, ~~data~~2010 ~~revenues~~to the year ended December 31, ~~long~~2011. ~~distance~~The increase was primarily attributable to an increase in broadband transport services revenues. The increase 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 our use in serving our customers and ~~revenue~~canceled ~~generated~~contracts bywith ~~access~~the ~~billings~~utilities to ~~other~~market ~~carriers.~~their ~~These~~facilities ~~decreases~~to ~~were~~our ~~minimally~~customers. ~~offset~~Partially byoffsetting anthis increase was a decrease in local interconnection revenues resulting from a decrease in local interconnection lines and a decrease in operator and directory assistance revenues.

Other services. Revenues from other services increased $0.7 million, or 5%, from the year ended December 31, 2009 to the combined year ended December 31, 2010 and decreased $1.0 million, or 7%, from the combined year ended December 31, 2010 to the year ended December 31, 2011. The changes resulted from changes in volume of telephone systems sold each year.

Cost of revenues

Cost of revenues includes costs directly associated with providing services to our customers. Cost of revenues primarily consists of the cost of connecting customers to our networks via leased facilities; the costs of leasing components of our network facilities; costs paid to third-party providers for interconnect access and transport services; and the costs of equipment sold to customers. We utilize other carriers to provide services where we do not have facilities. We utilize a number of different carriers to terminate our long distance calls outside the southeastern United States. The provision of local services over our network generally reduces the amounts we otherwise would be required to pay to other telephone companies to use their networks and facilities in order to provide local services.

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~~mobile~~Total ~~revenue~~cost of revenues decreased $14.4 million, or 6%, from the year ended December 31, 2009 to the combined year ended December 31, 2010, but remained constant at 48% percent of total revenues. The decrease in cost of revenues was the result of a reduction in demand for our services, an increase in disputed billings which we successfully resolved and the continued implementation of our cost-saving initiatives. The effects of these initiatives were partially offset by the increased cost of new facilities required to support services to new and existing customers for our integrated communications services.

WeTotal ~~experienced~~cost aof ~~decrease~~revenues ofincreased ~~approximately~~$8.0 2million,~~100~~ ~~facilities-based~~or ~~local lines and a decrease of approximately 11~~4%,~~000~~ ~~resale~~from ~~and~~the ~~UNE-P~~combined ~~lines~~year ~~from~~ended December 31, ~~2008~~2010 to the year ended December 31, ~~2009,~~2011 ~~for~~and aincreased ~~net~~as ~~decrease of 3%, or 13,100, total lines. We experienced an increase of approximately 3,400 facilities-based local lines and~~ a ~~decrease~~percent of ~~approximately~~revenues ~~8,200~~from ~~resale~~48% ~~and~~during ~~UNE-P~~the ~~lines~~year ~~from~~ended December 31, ~~2009~~2010 to 49% during the year ended December 31, ~~2010,~~2011. ~~for~~The aincrease ~~net~~in ~~decrease~~cost of ~~1%,~~revenues orboth ~~4,800,~~in ~~total~~absolute ~~lines.~~terms Weand ~~continue~~as ~~to pursue~~ a ~~strategy~~percentage ~~to improve the profitability~~ of ~~our~~total ~~integrated~~revenues ~~communications~~was ~~services~~primarily bydue ~~reducing~~to the ~~proportion~~inclusion of ~~our~~STS ~~local~~Telecom ~~lines~~cost ~~provided~~of ~~through~~revenues ~~higher~~and ~~cost~~an ~~resale~~increase ~~and~~in ~~UNE-P~~wholesale services. ~~Approximately~~cost ~~86%, 88% and 90%~~ of ~~our~~revenues ~~retail~~resulting ~~business~~from ~~lines~~new ~~were provided on our own network during the years ended December 31~~contracts, ~~2008,~~as ~~2009~~discussed ~~and 2010, respectively~~above.

Wholesale services. Revenues from our wholesale services decreased $6.4 million, or 9.7%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decrease was primarily attributable to a decline in broadband transport services revenues, a decline in local interconnection revenues primarily associated with our dial-up Internet access business and a decline in our operator and directory assistance revenues.

Revenues from our wholesale services increased $2.9 million, or 4.8%, from the year ended December 31, 2009 to the combined year ended December 31, 2010. The increase was primarily attributable to an increase in broadband transport services revenues. The increase 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 our use in serving our customers and canceled contracts with the utilities to market their facilities to our customers. Partially offsetting this increase was a decrease in local interconnection revenues resulting from a decrease in local interconnection lines and a decrease in operator and directory assistance revenues.

Equipment sales and related services. Revenues from communication equipment sales and related services decreased $2.3 million, or 12.7%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decrease resulted from reduced demand for telephone systems. Revenues from communication equipment sales and related services increased $0.3 million, or 2.0%, from the year ended December 31, 2009 to the combined year ended December 31, 2010. The increase resulted from increase demand for telephone systems.

Cost of revenues

Cost of revenues includes costs directly associated with providing services to our customers. Cost of revenues primarily consists of the cost of connecting customers to our networks via leased facilities; the costs of leasing components of our network facilities; costs paid to third-party providers for interconnect access and transport services; and the costs of equipment sold to customers for use with our services. We utilize other carriers to provide services where we do not have facilities. We utilize a number of different carriers to terminate our long distance calls outside the southeastern United States. The provision of local services over our network generally reduces the amounts we otherwise would be required to pay to other telephone companies to use their networks and facilities in order to provide local services.

Total cost of revenues decreased $20.3 million, or 9%, from the year ended December 31, 2008 to the year ended December 31, 2009 and decreased as a percent of revenues from 47% during the year ended December 31, 2008 to 45% during the year ended December 31, 2009. The reduction in cost of revenues both in absolute terms and as a percentage of total revenues reflected the implementation of various cost-saving initiatives and a reduction in demand for our services. These cost-saving initiatives include capital investments in our network to reduce the amount we pay other telephone companies to use their networks and facilities, renegotiation of our contracts, implementation of new DS1 and DS0 central office colocations with AT&T, audits of invoices, and use of alternative local providers, market profitability analysis and least-cost routing of interexchange carrier calls. Also contributing to the decrease was a decrease in the cost of revenues associated with equipment sales and related services.

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Total cost of revenues decreased $14.4 million, or 7%, from the year ended December 31, 2009 to the combined year ended December 31, 2010, but remained constant at 45% percent of total revenues. The decrease in cost of revenues was the result of a reduction in demand for our services, an increase in disputed billings which we successfully resolved and the continued implementation of our cost-saving initiatives. The effects of these initiatives were partially offset by the increased cost of new facilities required to support services to new and existing customers for our integrated communications services.

Selling, general and administrative expense

Selling, general and administrative expense consists of expenses of selling and marketing, field personnel engaged in direct network maintenance and monitoring, customer service and corporate administration.

Selling, general and administrative expense decreased $1110.5 million, or ~~6.3~~7%, from the year ended December 31, ~~2008~~2009 to the combined year ended December 31, ~~2009~~2010. The decrease was primarily attributable to decreases in outside commissions, cash compensation, ~~employee~~professional ~~benefits~~fees, ~~data~~bad ~~processing~~debt ~~and other corporate overhead expenses~~expense, ~~professional~~data ~~fees~~processing, ~~facilities~~insurance and ~~maintenance costs and~~ property taxes. ~~These~~The decreases were partially offset by increases in ~~bad debt expense and~~ non-cash ~~stock-based~~ compensation ~~expense. We experienced a reduction in the total number of our employees from 1~~,~~565~~ asemployee ofbenefits ~~December 31,~~and ~~2008~~administration toand ~~1,398~~facilities asand ofother ~~December 31,~~corporate ~~2009.~~overhead ~~The reductions were due primarily to voluntary attrition in full-time positions occurring over the year~~expenses.

Selling, general and administrative expense decreased $109.52 million, or 6.1%, from the combined year ended December 31, ~~2009~~2010 to the ~~combined~~ year ended December 31, ~~2010~~2011. The decrease ~~was~~compared ~~primarily attributable~~ to ~~decreases~~the inprior ~~outside~~year ~~commissions,~~periods ~~cash~~was ~~compensation,~~primarily ~~professional~~attributable ~~fees,~~to ~~bad~~a ~~debt~~favorable ~~expense,~~tax ~~data~~settlement ~~processing,~~recognized ~~insurance~~during ~~and~~year ~~property~~ended ~~taxes.~~December 31, ~~The~~2011 and decreases ~~were~~in ~~partially~~facilities ~~offset~~costs, byprofessional ~~increases~~fees, indata ~~non-cash compensation~~processing, ~~employee~~bad ~~benefits~~debt ~~and~~expense ~~administration~~ and ~~facilities and~~ other corporate overhead expenses. We ~~experienced~~Partially aoffsetting ~~reduction~~these indecreases was the ~~total~~inclusion ~~number~~ of ~~our~~STS ~~employees~~Telecom’s ~~from 1~~selling,~~398~~ asgeneral ofand ~~December 31,~~administrative ~~2009~~expenses toand ~~1,326~~an asincrease ~~of December 31, 2010. The reductions were due primarily to voluntary attrition~~ in ~~full~~stock-~~time~~based ~~positions~~compensation ~~occurring over the year~~expense. We have automated various provisioning functions and operations formerly conducted by employees in some of those positions. As a result of the decline in business demand for our services, we experienced attrition in sales positions in some markets.

Depreciation and amortization

Depreciation and amortization includes depreciation of property and equipment and amortization of definite-lived intangible assets acquired in purchases of businesses. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the various asset classes. Definite-lived intangible assets, which primarily consist of customer relationships, developed technology and trade names, are amortized on a straight-line basis over their estimated useful lives, which range from three to six years.

Depreciation and amortization expense decreased $4.5 million, or 6%, from the year ended December 31, 2008 to the year ended December 31, 2009. The decrease was primarily due to property and equipment becoming fully depreciated over the past year. Depreciation and amortization expense decreased $11.8 million, or 17%, from the year ended December 31, 2009 to the combined year ended December 31, 2010. Depreciation expense ondecreased ~~equipment~~primarily ~~assets~~due which were impaired in December 2004 and depreciated thereafter on a five-year remaining life basis caused the decline in depreciation expense beginning in the combined year ended December 31, 2010 and thereafter as compared to ~~depreciation expense for the year ended December 31, 2009. Depreciation and amortization expense for future years will be impacted by the recognition of our~~ property and equipment ~~and~~becoming ~~definite-lived~~fully ~~intangible~~depreciated ~~assets~~during ~~at fair values through purchase accounting for EarthLink’s acquisition of us~~2010.

Depreciation and amortization expense increased $14.4 million, or 25%, from the combined year ended December 31, 2010 to the year ended December 31, 2011. The increase compared to the prior year was due to an increase in amortization expense, offset by a decrease in depreciation expense. The increase in amortization expense was due to amortization related to identifiable intangible assets established in connection with EarthLink’s acquisition of us and our acquisition of STS Telecom. The decrease in depreciation expense was due to a reduction in property equipment recorded at fair value in connection with EarthLink’s acquisition of us and property and equipment becoming fully depreciated over the past year, partially offset by an increase in depreciation expense resulting from property and equipment obtained in the acquisition of STS Telecom.

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Acquisition-related costs

Acquisition-related costs consist of external costs directly related to ~~EarthLink’s~~acquisitions, ~~acquisition~~including oftransaction usrelated costs, such as advisory, legal, accounting, valuation and other professional fees.; ~~Acquisition-related~~employee ~~costs~~severance ~~during~~and ~~the~~retention ~~combined~~costs; ~~year~~costs ~~ended~~to ~~December 31,~~settle ~~2010 also include~~ stock-based ~~compensation~~awards ~~expenses~~attributable ~~and~~to ~~employee~~postcombination ~~severance~~service ~~and~~in ~~benefit~~connection ~~costs.~~with ~~Stock-based~~the ~~compensation~~Acquisition; ~~expense~~and ~~included in acquisition~~integration-related costs, ~~resulted~~such ~~from~~as ~~cash~~system ~~paid~~conversion, torebranding ~~settle~~costs ~~stock-based~~and ~~awards~~integration ~~attributable~~related toconsulting ~~postcombination~~and ~~service~~employee costs. Acquisition-related costs ofare ~~$14.8~~expensed ~~million~~in ~~during~~the period in which the ~~year~~costs ~~ended~~are ~~December 31,~~incurred ~~2010~~and ~~consisted~~the ofservices ~~$8.0~~are ~~million~~received ofand ~~transaction~~are ~~costs,~~included ~~$2.1~~in ~~million~~restructuring ofand ~~stock~~acquisition-~~based~~related ~~compensation~~costs ~~and~~in $4the Consolidated Statement of Operations.7 ~~million~~Acquisition-related costs consisted of ~~severance~~the ~~and~~following ~~retention.~~for the periods presented (in thousands):

	Predecessor Entity				Successor Entity
			January 1,		December 8,
	Year Ended		through		through		Year Ended
	December 31,		December 7,		December 31,		December 31,
	2009		2010		2010		2011

Transaction related costs	$	—	$	7,987	$	—	$	111
Severance and retention costs	—		—		4,699		3,561
Costs to settle postcombination stock awards	—		—		2,066		—
Facility related costs	—		—		—		728
Integration related costs	—		—		—		872
Total acquisition-related costs	$	—	$	7,987	$	6,765	$	5,272

Interest expense and other, net

Interest expense and other, net, is primarily comprised of interest expense incurred on our outstanding indebtedness, including our 10.5% senior secured notes due 2016 (the “Notes”); interest income earned on our cash and cash equivalents; and other miscellaneous income and expense items.

Interest expense and other, net, ~~decreased~~increased $4.2 million, or 1315%, from the year ended December 31, ~~2008~~2009 to the combined year ended December 31, ~~2009~~2010. The ~~decrease~~increase was attributable to ~~reductions~~an increase in outstanding principal amount of debt and an increase in the weighted average interest rates ~~that accrued~~ on our outstanding ~~borrowings~~debt. As of December 31, ~~2009~~2010, our overall weighted average annual interest rate (~~excluding~~including ~~deferred~~premium ~~financing~~on ~~costs and including~~ debt ~~discount~~) was 59.17% compared to 85.71% as of December 31, ~~2008~~2009. The increase was due to due to the issuance of $325.0 million outstanding principal amount of Notes in April 2010 and the use of $305.5 million of proceeds from the Notes offering to repay indebtedness, including all principal plus accrued and unpaid interest, outstanding under our first lien and second lien senior secured credit facilities and revolving credit facility, which were terminated.

Interest expense and other, net, ~~increased~~decreased $40.23 million, or 151%, from the combined year ended December 31, ~~2009~~2010 to the ~~combined~~ year ended December 31, ~~2010~~2011. The ~~increase~~decrease ~~was attributable to an increase~~ in ~~the weighted average~~ interest ~~rates~~expense ~~that~~and ~~accrued~~other, onnet, ~~our~~during ~~outstanding~~the ~~borrowings.~~year Asended of December 31, ~~2010,~~2011 ~~our~~compared ~~overall~~to ~~weighted~~the ~~average~~prior ~~annual~~year ~~interest~~was ~~rate~~primarily ~~(including~~attributable ~~premium~~to onthe amortization of the debt) ~~was~~premium ~~9.7%~~resulting ~~compared~~from tothe ~~5.1%~~increase asin fair value of ~~December 31,~~debt ~~2009~~recorded in the Acquisition. As a result of EarthLink’s acquisition of us, the Notes were recorded at acquisition date fair value. The fair value was based on publicly-quoted market prices. The resulting debt premium is being amortized over the remaining life of the Notes,. ~~which~~This ~~will~~was ~~cause~~partially ~~future~~offset by having a full year of interest expense tofor ~~decrease~~the Notes in 2011.

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Write-off debt issuance cost and discount

The write-off of debt issuance cost and discount of $7.9 million during the combined year ended December 31, 2010 was a result of the issuance of the Notes in April 2010 and the retirement of our first and second lien facilities.

Income ~~Tax~~tax ~~Benefit~~benefit (provision)

We recorded an income tax benefit of $0.6 million during the combined year ended December 31, 2010 and an income tax provision of $0.7 million during the year ended December 31, 2011. We utilize the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance has been recorded against deferred tax assets, as we are unable to conclude under relevant accounting standards that it is more likely than not that deferred tax assets will be realizable.

To the extent we report income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Our ability to use our federal and state net operating loss carryforwards and federal and state tax credit carryforwards may be subject to restrictions attributable to certain transactions such as equity transactions in the future resulting from changes in ownership as defined under the Internal Revenue Code.

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Liquidity and Capital Resources

The following table sets forth summarized cash flow data for the years ended December 31, ~~2008~~2009, ~~2009~~2010 and ~~2010~~2011:

	Predecessor Entity									Successor Entity
																Sucessor
							January 1,			December 8,
	Predecessor Entity									Sucessor Entity						Entity
	Year Ended			Year Ended			through			through
					January 1					December 8			Combined
	December 31,			December 31,			December 7,			December 31,
	Year Ended				through					through			Year Ended			Year Ended
	2008			2009			2010			2010
	December 31,				December 7,					December 31,			December 31,			December 31,
Net loss	$	(22,897	)	$	(10,975	)	$	(18,053	)	$	(10,370	)
	2009				2010					2010			2010			2011
Non-cash items	78,101			74,025			67,965			4,670
Net cash provided by (used in) operating activities	$	68,902			$	47,205				$	(5,138	)	$	42,067		$	37,159
Changes in working capital	7,456			5,852			(2,707		)	562
Net cash used in investing activities	(54,655		)		(53,787		)			(20,514		)	(74,301		)	(72,110		)
Net cash provided by (used in) operating activities	$	62,660		$	68,902		$	47,205		$	(5,138	)
Net cash (used in) provided by financing activities	(3,144		)		(1,967		)			10,000			8,033			26,296
Net cash used in investing activities	$	(69,517	)	$	(54,655	)	$	(53,787	)	$	(20,514	)
Net increase (decrease) in cash and cash equivalents	$	11,103			$	(8,549	)			$	(15,652	)	$	(24,201	)	$	(8,655	)
Net cash provided by (used in) financing activities	$	6,035		$	(3,144	)	$	(1,967	)	$	10,000

Operating activities

Cash provided by operating activities ~~was~~decreased ~~$62.7 million, $68.9 million and $42.1 million~~ during the ~~years ended December 31, 2008 and 2009 and the~~ combined year ended December 31, 2010, ~~respectively.~~compared ~~Cash~~to ~~provided~~the byprior ~~operating~~year ~~activities~~primarily ~~increased~~due ~~during~~to ~~the~~payments ~~year~~for ~~ended~~severance ~~December 31,~~and ~~2009~~benefits ~~compared~~and topayments ~~the~~for ~~prior~~investment ~~year~~advisory ~~primarily~~and ~~due~~other toprofessional afees ~~decrease~~ in ~~total~~connection ~~operating~~with ~~costs~~EarthLink’s ~~and~~acquisition ~~expenses~~of us. ~~The~~Also contributing to the decrease in ~~total~~cash ~~operating~~provided ~~costs~~by ~~and~~operating ~~expenses~~activities was ~~the~~a ~~result~~decrease ofin ~~reduced~~total ~~demand~~revenues. ~~for~~The ~~our~~decrease ~~services~~in asnet ~~well~~cash ~~as cost-saving initiatives. Cash~~ provided by operating activities ~~decreased~~ during the ~~combined~~ year ended December 31, ~~2010~~2011 compared to the ~~prior~~combined year ended December 31, 2010 was primarily due to ~~payments~~an ~~for~~increase ~~severance~~in ~~and~~cash ~~benefits~~used ~~and payments~~ for ~~investment~~prepaid ~~advisory~~assets and ~~other professional fees in connection with EarthLink’s acquisition of us. Also contributing to the decrease in~~ cash ~~provided~~used byfor ~~operating~~accounts ~~activities~~payable, ~~was~~accrued aand ~~decrease~~other ~~in total revenues~~liabilities.

Investing activities

~~Cash~~The decrease in cash used ~~for~~in investing activities ~~was $69.5 million~~ during the combined year ended December 31, ~~2008.~~2010 ~~This~~compared to the prior year was primarily ~~consisted~~due ofto ~~$64.8~~an ~~million~~increase ofin capital expenditures and ~~$5.4 million net~~ cash ~~used~~paid ~~for~~to ~~short~~settle stock-~~term~~based ~~investments.~~awards ~~Cash~~in ~~used~~connection ~~for~~with ~~investing~~EarthLink’s ~~activities~~acquisition ~~was $54.7 million during the year ended December 31, 2009. This primarily consisted~~ of ~~$56~~us.7 ~~million~~The ofincrease ~~capital~~in ~~expenditures,~~cash ~~partially offset by $3.3 million of payments received from sales of short-term investments. Cash~~ used ~~for~~in investing activities ~~was $74.3 million~~ during the ~~combined~~ year ended December 3130, ~~2010.~~2011 ~~This~~compared ~~primarily~~to ~~consisted~~the ofprior ~~$65.4~~year ~~million~~was ofprimarily ~~capital~~due ~~expenditures~~to ~~and~~ $922.19 million of cash ~~paid~~used tofor ~~settle~~the ~~stock-based awards in connection with EarthLink’s~~ acquisition of ~~us.~~STS ~~This was partially offset by $1~~Telecom.7 ~~million~~Partially ~~received~~offsetting ~~from~~this ~~the~~was ~~sale~~a ofdecrease ~~short-term~~in ~~investments.~~

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capital expenditures.

Financing activities

~~Cash~~The ~~provided~~change byin ~~financing~~cash ~~activities~~flows ~~was~~from ~~$6.0~~financing ~~million~~activities during the combined year ended December 31, ~~2008.~~2010 ~~This~~compared ~~was due~~ to ~~proceeds~~the ofprior ~~$29.9~~year ~~million~~was ~~from~~primarily ~~our~~due ~~rights~~to ~~offering~~a ofnet ~~common~~change ~~stock,~~in ~~net~~cash ofused ~~issuance~~for ~~costs,~~long-term debt and ~~proceeds~~capital oflease $8obligations.5 ~~million~~During ~~from~~the ~~our~~year ~~issuance~~ended ofDecember ~~long-term~~31, ~~debt~~2010, ~~through~~we ~~draws~~received on$308.2 ~~our~~million ~~revolving~~from ~~credit~~issuance ~~facility.~~of ~~These~~the ~~proceeds~~Notes ~~were~~and ~~offset by~~ $3010.10 million ~~used~~from tothe ~~redeem~~issuance ~~300,842~~of ~~shares~~stock ofto ~~our~~EarthLink. ~~Series H~~This ~~preferred~~was ~~stock~~offset ~~and~~by $2308.31 million of cash used for repayment of long-term debt and other long-term obligations. Onand January 29, 2008, pursuant to our agreement with the purchasers of the Series H preferred stock, we completed a rights offering for our common stock in which we received gross proceeds of approximately $302.1 million. Apaid ~~total~~for oftaxes ~~300,842 shares~~ of ~~Series H~~vested ~~preferred~~restricted stock ~~were redeemed with these proceeds,~~ units.

The change in cash flows from financing activities during the year ended December 31, 2011 compared to the prior year was primarily due to a $30.0 million received from the issuance of stock to EarthLink during the year ended December 31, 2011. This funding was primarily provided for our acquisition of STS Telecom in March 2011. During the year ended December 31, 2011, we used $3.6 million for repayments of long-term debt and capital leases. Under the indenture for the Notes, following the consummation of EarthLink’s acquisition of us, we were required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 1010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011. Also during the year ended December 31, 2011, we repaid $3.0 million of debt assumed in the STS Telecom acquisition and made $0.4 million payments on capital leases assumed in the STS Telecom acquisition.

Future Uses of Cash and Funding Sources

Future Uses of Cash

Our primary future cash requirements will be to fund outstanding indebtedness and make capital expenditures. We expect to use cash related to our outstanding indebtedness, including payments for interest. We also may use cash to redeem our Notes in accordance with the terms of the related indenture or to purchase them in the open market.

We believe that to remain competitive with much larger telecommunications companies, we will require significant additional capital expenditures to enhance and operate our fiber network. We expect to incur capital expenditures to maintain and upgrade our network and technology infrastructure. The actual amount of capital expenditures may fluctuate due to a number of factors which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment.

We also expect to use cash for required payment of wages and salaries to employees, purchase of network capacity and access under contracts, and payment of fees for other goods and services, including maintenance and commission payments. Although we are parties to legally binding contracts requiring payment for these goods and services, the actual amounts of such payments are contingent upon such factors as volume and/or variable rates that are uncertain or unknown as of December 31, 2011. We are obligated under contracts for network facilities and access that require us to pay a penalty, acquire equipment specific to us or purchase contract specific equipment, as defined by each contract, if we terminate the contract without cause prior to its expiration date. Because these payment obligations are contingent on our termination of the contract, no obligation will exist unless such a termination occurs.

Our cash requirements depend on numerous factors, including the costs required to maintain our network infrastructure, the pricing of our services, and the level of resources used for our sales and marketing activities, among others.

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and the remaining 111,373 shares of Series H preferred stock were converted into common stock.

Cash used by financing activities was $3.1 million during the year ended December 31, 2009. This was due to repayment of long-term debt and other long-term obligations.

Cash provided by financing activities was $8.0 million during the combined year ended December 31, 2010. This consisted of $308.2 million received from issuance of the Notes and $10.0 million received from stock issued to EarthLink. This was offset by $308.1 million of cash used for repayment of long-term debt and other long-term obligations. We also paid $2.1 million for taxes of vested restricted stock units.

Indebtedness

As of December 31, 2010, we had outstanding $325.0 million aggregate principal amount of 10.5% senior secured notes due April 1, 2016. As a result of EarthLink’s acquisition of us, the Notes were recorded at acquisition date fair value. The fair value was based on publicly-quoted market prices. The resulting $26.3 million debt premium is being amortized over the remaining life of the Notes. As of December 31, 2010, including the premium, this indebtedness had an overall weighted average interest rate of 9.7%.

Senior Secured Notes. In connection with our April 9, 2010 bond issue, we issued bonds with a senior secured interest. 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 $318.0 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 facility and our former revolving credit facility, which were terminated. We used approximately $10 million of the offering proceeds, to pay offering fees and expenses, including fees incurred in our exchange offer completed on July 29, 2010, and the remainder for general corporate purposes. For a description of the terms of the Notes, see Note 8, “Debt,” in our Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K.

Compliance With Financial Covenants. We were in compliance with all of the financial covenants under our credit facilities as of December 31, 2010.

Future Uses of Cash and Funding Sources

Uses of Cash

We expect to use cash of approximately $28.0 million upon closing of our acquisition of STS Telecom in the first half of 2011. We believe that to remain competitive with much larger telecommunications companies, we will require significant additional capital expenditures to enhance and operate our fiber network. We expect to incur capital expenditures to maintain and upgrade our network and technology infrastructure. The actual amount of capital expenditures may fluctuate due to a number of factors which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment. We expect to use cash related to our outstanding indebtedness, including payments for interest. We also expect to use cash for required payment of wages and salaries to employees, purchase of network capacity and access under contracts, and payment of fees for other goods and services, including maintenance and commission payments. Although we are parties to legally binding contracts requiring payment for these goods and services, the actual amounts of such payments are contingent upon such factors as volume and/or variable rates that are uncertain or unknown as of December 31, 2010. We are obligated under contracts for network facilities and access that require us to pay a penalty, acquire equipment specific to us or purchase contract specific equipment, as defined by each contract, if we terminate the contract without cause prior to its expiration date. Because these payment obligations are contingent on our termination of the contract, no obligation will exist unless such a termination occurs.

Our cash requirements depend on numerous factors, including the costs required to maintain our

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network infrastructure, the pricing of our services, and the level of resources used for our sales and marketing activities, among others.

Sources of Cash

Our principal sources of liquidity are our cash and cash equivalents, as well as the cash flow we generate from our operations. During the ~~years~~year ended December 31, ~~2008 and~~ 2009, ~~and~~ the combined year ended December 31, 2010 and the year ended December 31, 2011, we generated $6268.79 million, $6842.91 million and $4237.1 million in cash from operations, respectively. As of December 31, ~~2010~~2011, we had $4334.69 million in cash and cash equivalents. ~~During the year ended December 31, 2008, we also received $8.5 million of borrowings under our revolving credit facility.~~

We believe that our cash on hand and the cash flows we expect to generate from operations under our current business plan will provide us with sufficient funds to enable us to fund our planned capital expenditures, ~~fund business acquisitions,~~ 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, we would be able to obtain such debt ~~or equity~~ financing, which would be subject to limitations imposed by covenants contained in our Notes and which would be negatively affected by adverse developments in the credit and capital markets.

Off-Balance Sheet Arrangements

As of December 31, 2010, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Contractual Obligations and Commitments

As of December 31, ~~2010~~2011, we had the following contractual commitments:

			Payments Due by Period
			Less than						More than
	Total		1 Year		1-3 Years		4-5 Years		5 Years
	(in thousands)
Senior secured notes (1)	$	~~325~~324,~~000~~800	$	—	$	—	$	—324,800	$	~~325,000~~—
Interest on debt (2)	~~179~~149,~~156~~205		34,~~125~~104		68,~~250~~208		6846,~~250~~893		~~8,531~~—
Operating leases (3)	57,176		13,795		21,997		11,054		10,330
Purchase obligations (3)	66,716		28,816		32,160		5,080		660
Purchase obligations (4)	4,500		4,500		—		—		—
Operating leases (4)	44,311		12,632		16,771		7,676		7,232
	$	565,832	$	52,420	$	90,247	$	79,304	$	343,861
Capital leases (5)	1,099		445		564		90		—
Total	$	586,131	$	75,997	$	117,703	$	384,539	$	7,892

(1) Includes the principal amount of our long-term debt, which is also included in our consolidated balance sheet.

(2) Includes the interest payments related to our long-term debt. Amounts are fixed at 10.5% for the life of the Notes.

35(3) Includes our noncancelable operating leases.

(4) Purchase commitments represent non-cancellable contractual obligations for services and equipment and minimum commitments under network access agreements with several carriers.

(5) Represents remaining payments under capital leases, including interest, which were assumed from our acquisition of STS Telecom.

The table does not include our reserve for uncertain tax positions, as the specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty. We have $17.6 million of uncertain tax positions. Of this amount, $15.9 million would reduce prior net operating losses if assessed. Of the $1.7 million reflected on the balance sheet, $1.3 million would result in tax payments and $0.4 million would be offset by net operating losses. Of the total uncertain tax positions, none is expected to reverse within the next twelve months.

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~~(3) Includes~~Debt ~~our noncancelable operating leases. We were not a party to any capital leases as of December 31, 2010.~~Covenants

~~(4) Primarily~~Under ~~includes~~the ~~purchase~~indenture ~~obligations~~governing ~~pursuant~~our toNotes, ~~which~~acceleration weon ~~are~~principal ~~required~~payments towould ~~make~~occur ~~minimum~~upon ~~payments~~payment ~~for~~default ~~goods~~or ~~and~~violation ~~services,~~of ~~including~~debt ~~obligations~~covenants. ~~related~~We towere ~~marketing,~~in ~~maintenance,~~compliance ~~technology~~with ~~and~~all ~~other~~covenants ~~third-party~~under ~~services~~the indenture governing our Notes as of December 31, 2011.

WeOff-Balance ~~have~~Sheet $17.6 million of uncertain tax positions. Of this amount, $15.9 million would reduce prior net operating losses if assessed. Of the $1.7 million reflected on the balance sheet, $1.3 million would result in tax payments, $0.3 million would be offset by net operating losses and $0.1 million relates to interest and penalties.Arrangements

OfAs ~~the~~of ~~total~~December 31, ~~uncertain~~2011, ~~tax~~we ~~positions,~~did ~~none~~not ishave ~~expected~~any off-balance sheet arrangements that have or are reasonably likely to ~~reverse~~have ~~within~~a ~~the~~current ~~next~~or ~~twelve~~future ~~months~~effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

In addition to the contractual obligations shown above, we have significant cash obligations that are not included in the table. Such obligations include required payment of wages and salaries to employees, purchase of network capacity and access under contracts, and payment of fees for other goods and services, including maintenance and commission payments. In addition, we are also required to provide matching funds in connection with our federal stimulus grant under the American Recovery and Reinvestment Act through the Broadband Technology Opportunity program. Although we are parties to legally binding contracts requiring payment for these goods and services, the actual amounts of such payments are contingent upon such factors as volume and/or variable rates that are uncertain or unknown as of December 31, 2010. We are obligated under contracts for network facilities and access that require us to pay a penalty, acquire equipment specific to us or purchase contract specific equipment, as defined by each contract, if we terminate the contract without cause prior to its expiration date. Because these payment obligations are contingent on our termination of the contract, no obligation will exist unless such a termination occurs.

See Note 13, “Commitment and Contingencies,” in our Notes to Consolidated Financial Statements included in Item 8 of Part II of this Annual Report on Form 10-K for additional information regarding our debt and operating leases.

Critical Accounting Policies and Estimates

Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition and results of operations and which require complex management judgments, uncertainties and/or estimates. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during a reporting period; however, actual results could differ from those estimates. Management has discussed the development, selection and disclosure of the critical accounting policies and estimates with the Audit Committee of the Board of Directors. Information regarding our other accounting policies is included in the Notes to our Consolidated Financial Statements.

Revenue Recognition

We ~~generate recurring or multi-year operating revenues, as well as non-recurring operating revenues. We~~ recognize ~~operating~~revenue ~~revenues~~ when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. We base our determination of the third and fourth criteria above on our judgment regarding the fixed nature of the fees we have charged for the services rendered and products delivered, and the prospects that those fees will be collected. If changes in conditions should cause us to determine that these criteria likely will not be met for future transactions, revenue recognized for any reporting period could be materially adversely affected.

We generate recurring revenues from our integrated communications services and our wholesale services. Revenues from these sources are recognized as services are provided. Advance billings or cash payments received in advance of services performed are recorded as deferred revenue.

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We generate nonrecurring revenues from the sale of telephone systems, other equipment and services. Revenues from these sources are recognized upon installation or as services are performed. Nonrecurring revenues, such as the sale of telephone systems, may be part of multiple element arrangements. For example, we may provide for the sale of equipment and installation of that equipment or, alternatively, may sell these products separately without installation. We identify the sale and installation of equipment as separate elements in the earnings process, and if a separate element, such as installation, is essential to the functionality of another element, such as an equipment sale, we recognize revenue for a delivered element only when the remaining elements in the arrangement are delivered.

Receivable reserves

Sales credit reserves

We make estimates for potential future sales credits to be issued related to billing errors, service interruptions and customer disputes which are recorded as a reduction in revenue. We analyze historical credit activity and changes in customer demands related to current billing and service interruptions when evaluating our credit reserve requirements. We reserve known billing errors and service interruptions as incurred. We review customer disputes and reserve against those we believe to be valid claims. We also estimate a sales credit reserve related to unknown billing errors and disputes based

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on such historical credit activity. The determination of the sales credit and customer dispute credit reserve requirements involves significant estimation and judgment.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts for accounts receivable amounts that may not be collectible. In assessing the adequacy of the allowance for doubtful accounts, management considers a number of factors, including the aging of the accounts receivable balances, historical collection experience, a specific customer’s ability to meet its financial obligations to us and the general economic environment. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Due to the current economic climate, the competitive environment in the telecommunications sector and the volatility of the financial strength of particular customer segments including our wholesale customers, the collectability of receivables and creditworthiness of customers may become more difficult and unpredictable. Changes in the financial viability of significant customers and worsening of economic conditions may require changes to our estimate of the recoverability of the receivables. The determination of our allowance for doubtful accounts reserve requirements involves significant estimation and judgment.

Cost of Revenues

Experience indicates that the invoices that are received from other telecommunications providers are often subject to significant billing disputes. We typically accrue for all invoiced amounts unless there are contractual, tariff or operational data that clearly indicate support for the billing dispute. Experience also has shown that these disputes can require a significant amount of time to resolve given the complexities and regulatory issues surrounding the vendor relationships. We maintain reserves for any anticipated exposure associated with these billing disputes. We believe our reserves are adequate. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. In view of the length of time it historically has required to resolve these disputes, disputes may be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods.

Recoverability of noncurrent assets

Goodwill and indefinite-lived intangible assets

We test goodwill and indefinite-lived intangible assets for impairment at least annually. We perform an impairment test of our goodwill and indefinite-lived intangible assets annually during the fourth quarter of our fiscal year or when events and circumstances indicate the indefinite-lived intangible assets might be permanently impaired. Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. During the fourth quarter of 2011, we adopted new guidance for goodwill testing that allows us to first assess the qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the estimated fair value of our reporting unit

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. We determined we are one reporting unit for goodwill testing. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates, growth rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment or impact the amount of the impairment.36

~~Impairment~~Table ~~testing~~ of goodwill is required at the reporting unit level and involves a two-step process. The first step of the impairment test involves comparing the estimated fair value of our reporting unit with the reporting unit’s carrying amount, including goodwill. We estimate the fair values of our reporting unit primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. The discounted cash flows for the reporting unit is based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts are estimated using a terminal value calculation, which incorporates historical and forecasted financial trends for the reporting unit.Contents

with the reporting unit’s carrying amount, including goodwill. We estimate the fair values of our reporting unit primarily using the income approach valuation methodology that includes the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the values derived using the discounted cash flow methodology. The discounted cash flows for the reporting unit is based on discrete financial forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts are estimated using a terminal value calculation, which incorporates historical and forecasted financial trends for the reporting unit.

If we determine that the carrying value of a reporting unit exceeds its estimated fair value, we perform a second step. The implied fair value of goodwill is determined in the same manner as utilized to recognize goodwill in a business combination. The implied fair value of goodwill is measured as the excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities. Any impairment loss is measured by the amount the carrying value of goodwill exceeded the implied fair value of the goodwill.

Long-lived assets

For noncurrent assets such as property and equipment and definite-lived intangible assets, we perform tests of impairment when certain events or changes in circumstances indicate that the carrying amount may not be recoverable. Our tests involve critical estimates reflecting management’s best assumptions and estimates related to, among other factors, subscriber additions, churn, prices, marketing spending, operating costs and capital spending. Significant judgment is involved in estimating these factors, and they include inherent uncertainties. Management periodically evaluates and updates the estimates based on the conditions that influence these factors. The variability of these factors depends on a number of conditions, including uncertainty about future events, and thus our accounting estimates may change from period to period. If other assumptions and estimates had been used in the current period, the balances for noncurrent assets could have been materially impacted. Furthermore, if management uses different assumptions or if different conditions occur in future periods, future operating results could be materially impacted.

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assumptions or if different conditions occur in future periods, future operating results could be materially impacted.

Business Combinations

We recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to our consolidated statements of operations.

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, obligations assumed and pre-acquisition contingencies. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of

~~Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to:~~37

· future expected cash flows from customer contracts and acquired developed technologies and patents;

· the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio; and

· discount rates.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

For a given acquisition, we may identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period (up to one year from the acquisition date) in order to obtain sufficient information to assess whether we include these contingencies as a part of the purchase price allocation and, if so, to determine their estimated amounts.

If we determine that a pre-acquisition contingency (non-income tax related) is probable in nature and estimable as of the acquisition date, we record our best estimate for such a contingency as a part of the preliminary purchase price allocation. We often continue to gather information for and evaluate our pre-acquisition contingencies throughout the measurement period and if we make changes to the amounts recorded or if we identify additional pre-acquisition contingencies during the measurement period, such amounts will be included in the purchase price allocation during the measurement period and, subsequently, in our results of operations.

In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the uncertain tax positions estimated value or tax related valuation allowances, changes to these uncertain tax positions’ and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of

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~~operations~~critical estimates in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer contracts and ~~could~~acquired ~~have~~developed atechnologies, ~~material~~the ~~impact~~acquired oncompany’s ~~our~~brand ~~results~~and competitive position, as well as assumptions about the period of ~~operations~~time the acquired brand will continue to be used in the combined company’s product portfolio and ~~financial~~discount ~~position~~rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

~~Cost~~In addition, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of ~~Revenues~~the acquisition date and we reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information in order to determine their estimated values. Subsequent to the measurement period or our final determination of the uncertain tax positions estimated value or tax related valuation allowances, changes to these uncertain tax positions’ and tax related valuation allowances will affect our provision for income taxes in our consolidated statement of operations and could have a material impact on our results of operations and financial position.

Cost of revenues includes direct expenses associated with providing services to our customers and the cost of equipment sold. These costs include the cost of leasing facilities from incumbent local exchange carriers and other telecommunications providers that provide us with access connections to our customers, to some components of our network facilities, and between our various facilities. In addition, we use other carriers to provide services where we do not have facilities. We use a number of different carriers to terminate our long distance calls outside the southern United States. These costs are expensed as incurred. Some of these expenses are billed in advance and some expenses are billed in arrears. Accordingly, we are required to accrue for expected expenses irrespective of whether these expenses have been billed. We use internal management information to support these required accruals. Experience indicates that the invoices that are received from other telecommunications providers are often subject to significant billing disputes. We typically accrue for all invoiced amounts unless there are contractual, tariff or operational data that clearly indicate support for the billing dispute. Experience also has shown that these disputes can require a significant amount of time to resolve given the complexities and regulatory issues surrounding the vendor relationships. We maintain reserves for any anticipated exposure associated with these billing disputes. We believe our reserves are adequate. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. In view of the length of time it historically has required to resolve these disputes, disputes may be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods.

Recently Issued Accounting Pronouncements

In ~~September~~May ~~2009~~2011, the Financial Accounting Standards Board (“FASB”) issued ~~new~~authoritative guidance onrelated ~~revenue~~to ~~recognition.~~fair ~~The~~value ~~new~~measurements. This guidance ~~addresses~~was ~~the~~issued ~~accounting for multiple-deliverable arrangements~~ to ~~enable~~provide ~~vendors~~a toconsistent ~~account~~definition ~~for~~of ~~products~~fair orvalue ~~services~~and ~~(deliverables)~~ensure ~~separately~~that ~~rather~~the ~~than~~fair asvalue ameasurement ~~combined unit~~ and todisclosure ~~modify~~requirements ~~the~~are ~~manner~~similar inbetween ~~which~~U.S. ~~the~~GAAP ~~transaction~~and ~~consideration~~International isFinancial ~~allocated~~Reporting ~~across~~Standards. ~~the~~This ~~separately~~guidance ~~identifiable~~also ~~deliverables~~changes ~~and~~certain ~~how~~fair ~~revenue~~value ismeasurement ~~recognized.~~principles ~~The~~and ~~new~~enhances ~~guidance also significantly expands~~ the disclosure requirements particularly for ~~multiple-element~~Level ~~arrangements.~~3 ~~The~~fair ~~new~~value measurements. This guidance is effective ~~prospectively~~ for ~~revenue~~fiscal ~~arrangements~~years, ~~entered~~and ~~into~~interim orperiods ~~materially~~within ~~modified~~those ~~in fiscal~~ years, beginning ~~on or~~ after ~~June~~December 15, ~~2010~~2011. WeThe doCompany does not expect ~~the~~this ~~adoption of the new~~ guidance to have a material impact on ~~our~~its consolidated financial statements.

In ~~December~~June ~~2010~~2011, the FASB issued ~~new~~authoritative guidance onrelated ~~when~~ to ~~perform~~comprehensive ~~Step~~income. 2This ofguidance ~~the~~was ~~goodwill~~issued ~~impairment~~to ~~test~~increase ~~for~~the ~~reporting~~prominence ~~units~~of ~~with~~items ~~zero~~reported orin ~~negative~~other ~~carrying~~comprehensive ~~amounts.~~income ~~The~~and ~~new~~requires ~~guidance~~that ~~modifies~~all ~~Step~~non-owner 1changes ofin ~~the~~stockholders’ ~~goodwill~~equity ~~impairment~~be ~~test~~presented ~~for~~either ~~reporting~~in ~~units~~a ~~with~~single ~~zero~~continuous orstatement ~~negative~~of ~~carrying~~comprehensive ~~amounts.~~income ~~For~~or ~~those~~in ~~reporting~~two ~~units,~~separate anbut ~~entity~~consecutive isstatements. ~~required~~In toaddition, ~~perform~~reclassification ~~Step~~adjustments 2for ofitems ~~the~~that ~~goodwill~~are ~~impairment~~reclassified ~~test~~from ifother itcomprehensive isincome ~~more~~to ~~likely~~net ~~than~~income ~~not~~must ~~that~~be apresented ~~goodwill~~on ~~impairment~~the ~~exists.~~face Inof ~~determining~~the ~~whether~~financial itstatements iswhere ~~more~~the ~~likely~~components ~~than~~of ~~not~~net ~~that~~income aand ~~goodwill~~the ~~impairment~~components ~~exists,~~of another ~~entity~~comprehensive ~~should~~income ~~consider whether there~~ are ~~any adverse qualitative factors indicating that an impairment may exist~~presented. ~~The~~This ~~new~~ guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, ~~2010~~2011. ~~Early~~The ~~adoption~~Company isdoes not ~~permitted. We do not~~ expect ~~the~~this ~~adoption of the new~~ guidance to have a material impact on ~~our~~its consolidated financial statements.

~~Also~~In ~~in December~~September ~~2010~~2011, the FASB issued ~~new~~authoritative guidance onrelated ~~disclosure~~to ofgoodwill ~~supplementary~~testing. ~~pro~~This ~~forma~~guidance ~~financial~~allows ~~information~~an ~~for~~entity ~~business~~to ~~combinations.~~first ~~The~~assess ~~new~~qualitative ~~guidance~~factors ~~specifies~~to ~~that~~determine ifwhether ait ~~public~~is ~~entity~~necessary ~~presents~~to ~~comparative~~perform ~~financial statements,~~ the ~~entity~~two-step ~~should~~quantitative ~~disclose~~goodwill ~~revenue~~impairment ~~and~~test. ~~earnings~~Under ofthese ~~the~~amendments, ~~combined~~an entity aswould ~~though~~not ~~the~~be ~~business~~required ~~combination(s) that~~to ~~occurred~~calculate ~~during~~ the ~~current~~fair ~~year~~value ~~had occurred as~~ of ~~the~~a ~~beginning of the comparable prior annual~~ reporting ~~period~~unit ~~only.~~unless ~~The new guidance also expands~~ the ~~supplemental~~entity ~~pro~~determines, ~~forma~~based ~~disclosures~~on ~~for business combinations to include~~ a ~~description~~qualitative ~~of the nature and amount of material~~assessment, ~~nonrecurring~~that ~~pro~~it ~~forma~~is ~~adjustments~~more ~~directly~~likely ~~attributable~~than tonot ~~the~~that ~~business~~its ~~combination~~fair ~~included~~value inis ~~the~~less ~~reported~~than ~~pro~~its ~~forma~~carrying ~~revenue and earnings~~amount. This ~~The new~~ guidance is effective ~~prospectively~~ for ~~business~~fiscal ~~combinations~~years ~~for~~beginning ~~which~~after ~~the~~December 15, ~~acquisition~~2011, ~~date~~with isearly onadoption orpermitted. ~~after~~We ~~the~~adopted ~~beginning~~this ofnew ~~the~~guidance ~~first~~in ~~annual~~the ~~reporting~~fourth ~~period~~quarter ~~beginning~~of ~~on or after December 15, 2010~~2011. WeThe doadoption did not ~~expect~~have ~~the~~a ~~adoption~~material ofimpact ~~the~~on ~~new~~our ~~guidance~~consolidated tofinancial ~~have a~~statements.

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material impact on our financial statements.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to interest rate risk with respect to our 10.5% senior secured notes due ~~April 1,~~ 2016 (the “Notes”). The fair value of these notes may be adversely impacted due to a rise in interest rates. In general, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. ~~the~~The Notes bear interest at a fixed rate of 10.5% per year until April 1, 2016. As of December 31, 2010 and 2011, the fair value of the ~~ITC^DeltaCom~~ Notes was approximately $352.6 million and $320.6 million, respectively, based on quoted market prices.

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Item 8. Financial Statements And Supplementary Data.

ITC^DELTACOM, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	42
Reports of Independent Registered Public Accounting Firm	40
Consolidated Balance Sheets as of December 31, 2009 and 2010	43
Consolidated Balance Sheets as of December 31, 2010 and 2011	42
Consolidated Statements of Operations for the years ended December 31, 2008 and 2009 and the period January 1, 2010 through December 7, 2010 (Predecessor Periods) and the period December 8, 2010 through December 31, 2010 (Successor Period)	44
Consolidated Statements of Operations for the year ended December 31, 2009 and the period January 1, 2010 through December 7, 2010 (Predecessor Periods) and the period December 8, 2010 through December 31, 2010 and the year ended December 31, 2011 (Successor Periods)	43
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the years ended December 31, 2008 and 2009 and the period January 1, 2010 through December 7, 2010 (Predecessor Periods) and the period December 8, 2010 through December 31, 2010 (Successor Period)	45
Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss for the year ended December 31, 2009 and the period January 1, 2010 through December 7, 2010 (Predecessor Periods) and the period December 8, 2010 through December 31, 2010 and the year ended December 31, 2011 (Successor Periods)	44
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2009 and the period January 1, 2010 through December 7, 2010 (Predecessor Periods) and the period December 8, 2010 through December 31, 2010 (Successor Period)	46
Consolidated Statements of Cash Flows for the year ended December 31, 2009 and the period January 1, 2010 through December 7, 2010 (Predecessor Periods) and the period December 8, 2010 through December 31, 2010 and the year ended December 31, 2011 (Successor Periods)	45
Notes to Consolidated Financial Statements	4746

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and

Stockholder of ITC^DeltaCom, Inc.

Atlanta, Georgia

We have audited the accompanying consolidated balance ~~sheets~~sheet of ITC^DeltaCom, Inc. as of December 31, 2010 (Successor) and ~~2009 (Predecessor) and~~ the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for the period December 8, 2010 through December 31, 2010 (Successor period) and from January 1, 2010 through December 7, 2010 and for the ~~years~~year ended December 31, 2009 ~~and 2008~~ (Predecessor periods). ~~In connection with our audits of the financial statements, we also audited the financial statement schedule listed in the accompanying index.~~ These financial statements ~~and financial statement schedule~~ are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements ~~and schedule~~ based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor are we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall ~~presentation of the~~ financial ~~statements~~statement ~~and schedule~~presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ITC^DeltaCom, Inc. at December 31, 2010 (Successor) ~~and 2009 (Predecessor)~~, and the results of its operations and its cash flows for the period December 8, 2010 through December 31, 2010 (Successor period) and from January 1, 2010 through December 7, 2010 and for the ~~years~~year ended December 31, 2009 ~~and 2008~~ (Predecessor periods), in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in note 3 to the consolidated financial statements, effective December 8, 2010, EarthLink, Inc. acquired all of the outstanding stock of ITC^DeltaCom, Inc. in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable.

/s/ BDO USA, LLP Atlanta, Georgia March 1, 2011

~~Atlanta~~except for Notes 3, ~~Georgia~~6 and 12 as to which date is May 5, 2011

~~March 1, 2011~~40

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and

Stockholders of ITC^DeltaCom, Inc.

We have audited the accompanying consolidated balance sheet of ITC^DeltaCom, Inc. as of December 31, 2011, and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive loss, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ITC^DeltaCom, Inc. at December 31, 2011, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

	/s/ Ernst & Young LLP

Atlanta, Georgia
February 24, 2012

Table of Contents

ITC^DELTACOM, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	Predecessor			Successor
	December 31,
	Entity			Entity
	2010			2011
	As of			As of
	December 31,			December 31,
	2009			2010
ASSETS
Current assets:
Cash and cash equivalents	$	6743,~~786~~585		$	4334,~~585~~930
Short-term investments	1,706			—
Restricted cash	2,270			1,781
Restricted cash	957			2,270
Accounts receivable, net of allowance of $276 and $2,519 as of December 31, 2010 and 2011, respectively	40,242			43,851
Accounts receivable, net of allowance of $3,631 and $276 as of December 31, 2009 and 2010, respectively	42,835			40,242
Prepaid expenses	8,494			6,143
Prepaid expenses	5,563			8,494
Receivable due from parent	1,292			913
Receivable due from parent	—			1,292
Other current assets	4,230			5,034
Other current assets	2,995			4,230
Total current assets	100,113			92,652
Total current assets	121,842			100,113
Property and equipment, net	206,988			213,438
Property and equipment, net	201,549			206,988
Goodwill	170,126			194,761
Purchased intangible assets, net	2,268			129,650
Other intangible assets, net	129,650			121,115
Goodwill	35,109			188,890
Other long-term assets	170			82
Other long-term assets	7,726			170
Total assets	$	607,047		$	622,048
Total assets	$	368,494		$	625,811
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	11,~~376~~734		$	114,~~734~~680
Accrued payroll and related expenses	94,~~310~~053			48,~~053~~154
Other accrued liabilities	35,593			46,467
Accrued interest	8,622			8,626
Deferred revenue	20,578			19,844
Other accrued liabilities	37,845			29,055
Current portion of long-term debt	4,614			—
Deferred revenue	19,844			25,410
Total current liabilities	81,471			82,098
Current portion of long term debt and capital lease obligations	—			419
Long-term debt	302,059			351,251
Total current liabilities	82,098			76,344
Other long-term liabilities	1,688			7,874
Long-term debt and capital lease obligations	351,251			347,364
Total liabilities	385,218			441,223
Other long-term liabilities	7,874			7,045
Commitments and contingencies (See Note 13)
Total liabilities	441,223			430,753
Stockholders’ equity (deficit):
Commitments and contingencies (Note 13)
Common stock, $0.01 par value, 1,000 shares authorized, 150 shares issued and outstanding as of December 31, 2010 (Successor Entity)	—			—
Stockholders’ equity:
Common stock, $0.01 par value, 350,000,000 shares authorized, 81,674,270 shares issued and outstanding as of December 31, 2009 (Predecessor Entity)	816			—
Common stock, $0.01 par value, 1,000 shares authorized, 150 and 250 shares issued and outstanding as of December 31, 2010 and 2011, respectively	—			—
Additional paid-in capital	~~728~~176,~~700~~194			~~194~~218,~~958~~663
Accumulated deficit	(~~746~~10,~~240~~370		)	(1027,~~370~~368		)
Total stockholders’ equity (deficit)	(16,724		)	184,588
Total stockholders’ equity	165,824			191,295
Total liabilities and stockholders’ equity (deficit)	$	368,494		$	625,811
Total liabilities and stockholders’ equity	$	607,047		$	622,048

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

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ITC^DELTACOM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

	Predecessor Entity									Successor Entity
					January 1,		~~January 1,~~			December 8,
	Year Ended			~~Year Ended~~	through		~~through~~			through			Year Ended
	December 31,			~~December 31,~~	December 7,		~~December 7,~~			December 31,			December 31,
	2008			2009			2010			2010
	2009				2010					2010			2011
Revenues:
Integrated communications services	$	413,981		$	394,156		$	341,896		$	21,206
Retail services	$	395,939			$	343,227				$	21,307		$	364,066
Wholesale services	6559,~~798~~401			~~59,401~~	58,003		~~58,003~~			4,267			71,955
Equipment sales and related services	18,084			15,767			14,947			1,130
Other services	13,984				13,616					1,029			13,693
Total revenues	~~497~~469,~~863~~324			~~469,324~~	414,846		~~414,846~~			26,603			449,714
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	~~232~~225,~~899~~783			~~212,630~~	197,567		~~185,273~~			1213,~~974~~845			219,400
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	~~183~~158,~~123~~426			~~171,579~~	138,544		~~150,838~~			109,~~260~~389			138,765
Depreciation and amortization	7369,~~514~~064			~~69,064~~	52,339		~~52,339~~			4,885			71,659
Acquisition-related costs	—			—	7,987		~~7,987~~			6,765			5,272
Total operating costs and expenses	~~489~~453,~~536~~273			~~453,273~~	396,437		~~396,437~~			34,884			435,096
Income (loss) from operations	816,~~327~~051			~~16,051~~	18,409		~~18,409~~			(8,281		)	14,618
Write-off of debt discount and issuance cost	—			—	(7,948		~~(7,948~~)		)	—			—
Interest expense and other, net	(3127,~~224~~026		)	~~(27,026~~	(29,118	)	~~(29,118~~)		)	(2,089		)	(30,882		)
Loss before income taxes	(2210,~~897~~975		)	~~(10,975~~	(18,657	)	~~(18,657~~)		)	(10,370		)	(16,264		)
Income tax benefit	—			—			604			—
Income tax benefit (provision)	—				604					—			(734		)
Net loss	$	(2210,~~897~~975	)	$	~~(10,975~~$	)(18,053	$)	~~(18,053~~	)	$	(10,370	)	$	(16,998	)

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

4443

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ITC^DELTACOM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

(in thousands, except share data)

												Accumulated
						Additional						Other			Total			Total
	Common Stock					Paid-in			Accumulated			Comprehensive			Stockholders’			Comprehensive
	Shares		Amount			Capital			Deficit			Income (Loss)			Equity (Deficit)			Loss
Predecessor Entity
Balance as of December 31, 2007	67,114,168		$	671		$	684,942		$	(705,296	)	$	(4,241	)	$	(23,924	)
Balance as of December 31, 2008	80,867,040		$	808		$	727,666		$	(735,265	)	$	(5,610	)	$	(12,401	)
Rights offering of common stock	9,928,779		99			29,398			—			—			29,497
Conversion of Series H preferred stock into common stock	3,675,306		37			11,100			—			—			11,137
Deferred compensation	—		—			2,227			—			—			2,227
Amortization of beneficial conversion feature discount on Series H preferred stock	—		—			—			(6,870		)	—			(6,870		)
Common stock units exercised	148,787		1			(1		)	—			—			—
Cash dividends declared and accrued on Series H preferred stock	—		—			—			(202		)	—			(202		)
Other comprehensive loss	—		—			—			—			(1,369		)	(1,369		)	$	(1,369	)
Net loss	—		—			—			(22,897		)	—			(22,897		)	(22,897		)
Total comprehensive loss																		$	(24,266	)
Balance as of December 31, 2008	80,867,040		808			727,666			(735,265		)	(5,610		)	(12,401		)
Deferred compensation	—		—			2,969			—			—			2,969
Change in classification of common stock units to liability	—		—			(1,783		)	—			—			(1,783		)
Common stock units exercised	807,230		8			(8		)	—			—			—
Stock withheld for payment of taxes	—		—			(144		)	—			—			(144		)
Other comprehensive income	—		—			—			—			5,610			5,610			$	5,610
Net loss	—		—			—			(10,975		)	—			(10,975		)	(10,975		)
Total comprehensive loss																		$	(5,365	)
Balance as of December 31, 2009	81,674,270		816			728,700			(746,240		)	—			(16,724		)
Deferred compensation	—		—			1,898			—			—			1,898
Common stock units exercised	2,155,546		22			(22		)	—			—			—
Stock withheld for payment of taxes	—		—			(2,128		)	—			—			(2,128		)
Net loss	—		—			—			(18,053		)	—			(18,053		)	$	(18,053	)
Acquisition transactions	(83,829,816	)	(838		)	(728,448		)	764,293			—			35,007			—
Total comprehensive loss																		$	(18,053	)
Balance as of December 7, 2010	—		$—	—		$—	—		$—	—		$—	—		$—	—
Successor Entity
Push-down accounting adjustment related to valuation allowance	—		$	—		$	(6685,~~531~~295	)	$	—		$	—		$	(6685,~~531~~295	)
Acquisition transactions	100		—			251,489			—			—			251,489
Issuance of common stock	50		—			10,000			—			—			10,000
Net loss	—		—			—			(10,370		)	—			(10,370		)	$	(10,370	)
Total comprehensive loss																		$	(10,370	)
Balance as of December 31, 2010	150		$—	—		$176,194	~~194,958~~		$(10,370	~~(10,370~~	)	$—	—		$165,824	~~184,588~~
Push-down accounting adjustment related to valuation allowance	—		—			8,441			—			—			8,441
Issuance of common stock	100		—			30,000			—			—			30,000
Stock-based compensation	—		—			4,028			—			—			4,028
Net loss	—		—			—			(16,998		)	—			(16,998		)	$	(16,998	)
Total comprehensive loss																		$	(16,998	)
Balance as of December 31, 2011	250		$	—		$	218,663		$	(27,368	)	$	—		$	191,295

The accompanying notes are an integral part of these consolidated financial statements

4544

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ITC^DELTACOM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Predecessor Entity									Successor Entity
					January 1,		~~January 1,~~			December 8,
	Year Ended			~~Year Ended~~	through		~~through~~			through			Year Ended
	December 31,			~~December 31,~~	December 7,		~~December 7,~~			December 31,			December 31,
	2008			2009			2010			2010
	2009				2010					2010			2011
Cash flows from operating activities:
Net loss	$	(2210,~~897~~975	)	$	~~(10,975~~$	)(18,053	$)	~~(18,053~~	)	$	(10,370	)	$	(16,998	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	7369,~~514~~064			~~69,064~~	52,339		~~52,339~~			4,885			71,659
Stock-based compensation	2,~~227~~969			~~2,969~~	5,382		~~5,382~~			109			4,028
Amortization of debt discount, premium and issuance costs	2,441			2,419			2,521			(269		)
Provision for doubtful accounts	5,255				4,244					312			3,024
Write-off of debt discount and issuance costs	—			—			7,948			—
Amortization of debt discount, premium and issuance costs	2,419				2,521					(269		)	(4,195		)
Gain on sale of fixed assets	(81		)	(427		)	(225		)	(2		)
Write-off of debt discount and issuance costs	—				7,948					—			—
Other operating activities	—			—			—			(53		)
(Gain) loss on sale of fixed assets	(427		)		(225		)			(2		)	774
Decrease in accounts receivable, net	4,765			8,643			3,276			(571		)
Other operating activities	—				—					(53		)	(828		)
(Increase) decrease in prepaid expenses and other assets	(147		)	262			(8,897		)	(1,034		)
Decrease (increase) in accounts receivable, net	3,388				(968		)			(883		)	(5,081		)
Increase (decrease) in accounts payable and accrued and other liabilities	2,637			(1,863		)	3,125			227
Decrease (increase) in prepaid expenses and other assets	262				(8,897		)			(1,034		)	(13,315		)
Increase (decrease) in deferred revenue	201			(1,190		)	(211		)	1,940
(Decrease) increase in accounts payable and accrued and other liabilities	(1,863		)		3,125					227			(7,130		)
Net cash provided by (used in) operating activities	62,660			68,902			47,205			(5,138		)
(Decrease) increase in deferred revenue	(1,190		)		(211		)			1,940			5,221
Cash flows from investing activities:
Net cash provided by (used in) operating activities	68,902				47,205					(5,138		)	37,159
Payments for precombination stock awards	—			—			—			(9,062		)
Cash flows from investing activities:
Purchases of property and equipment	(64,776		)	(56,679		)	(54,913		)	(10,517		)
Purchase of business, net of cash acquired	—				—					—			(22,859		)
Proceeds received from sale of fixed assets	1,284			435			691			2
Purchases of property and equipment	(56,679		)		(54,913		)			(10,517		)	(49,811		)
Redesignation of cash equivalent to short-term investments	(25,416		)	—			—			—
Proceeds received from sale of fixed assets	435				691					2			—
Sales of short-term investments	20,040			3,322			1,706			—
Payments to settle precombination stock awards	—				—					(9,062		)	—
Change in restricted cash, net	461			(2		)	(551		)	(937		)
Proceeds from sales of short-term investments	3,322				1,706					—			—
Other investing activities	(1,110		)	(1,731		)	(720		)	—
Change in restricted cash, net	(2		)		(551		)			(937		)	489
Net cash used in investing activities	(69,517		)	(54,655		)	(53,787		)	(20,514		)
Other investing activities	(1,731		)		(720		)			—			71
Cash flows from financing activities:
Net cash used in investing activities	(54,655		)		(53,787		)			(20,514		)	(72,110		)
Proceeds from issuance of stock subscription	—			—			—			10,000
Cash flows from financing activities:
Proceeds from issuance of long-term debt, net of issuance cost	8,500			—			308,220			—
Proceeds from issuance of stock subscriptions	—				—					10,000			30,000
Repayment of long-term debt and other long-term obligations	(2,330		)	(3,144		)	(308,075		)	—
Proceeds from issuance of long-term debt, net of issue costs	—				308,220					—			—
Proceeds from rights offering of common stock, net of issuance cost	29,949			—			—			—
Repayment of debt and capital lease obligations	(3,144		)		(308,075		)			—			(3,650		)
Redemption of Series H preferred stock	(30,084		)	—			—			—
Payments for taxes of restricted shares	—				(2,112		)			—			(54		)
Payments for taxes of restricted shares	—			—			(2,112		)
Net cash (used in) provided by financing activities	(3,144		)		(1,967		)			10,000			26,296
Net cash provided by (used in) financing activities	6,035			(3,144		)	(1,967		)	10,000
Net increase (decrease) in cash and cash equivalents	11,103				(8,549		)			(15,652		)	(8,655		)
Net (decrease) increase in cash and cash equivalents	(822		)	11,103			(8,549		)	(15,652		)
Cash and cash equivalents, beginning of period	56,683				67,786					59,237			43,585
Cash and cash equivalents, beginning of year	57,505			56,683			67,786			59,237
Cash and cash equivalents, end of period	$	67,786			$	59,237				$	43,585		$	34,930
Cash and cash equivalents, end of year	$	56,683		$	67,786		$	59,237		$	43,585

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

4645

Table of Contents

ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

ITC^DeltaCom, Inc. (“ITC^DeltaCom” ~~and~~or the “Company”), together with its wholly-owned subsidiaries, ~~the “Company”)~~ provides integrated communications services in the southeastern United States. The Company ~~delivers~~provides a ~~comprehensive~~broad ~~suite~~range of ~~high-quality~~ data and voice communications services to businesses and enterprise organizations, 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 and equipment services. The Company also sells ~~customer~~transmission ~~premises~~capacity ~~equipment~~ to ~~the~~other ~~Company’s~~communications ~~business~~providers ~~customers~~on a wholesale basis. The Company offers these services primarily over its ~~advanced~~regional fiber optic network. ~~The Company also sells transmission capacity to other communications providers on a wholesale basis.~~

On December 8, 2010, ITC^DeltaCom ~~Egypt~~was ~~Merger~~acquired ~~Corporation,~~by ~~a wholly-owned subsidiary of~~ EarthLink, Inc. (“EarthLink”), ~~merged~~ with ~~and into~~ ITC^DeltaCom, Inc. ~~(the “Acquisition”), for $3.00 per share with ITC^DeltaCom, Inc.~~ becoming a wholly-owned subsidiary of EarthLink, Inc. (the “Acquisition”). The accounting for the Acquisition has been “pushed-down” in the accompanying condensed consolidated financial statements. See Note 3, “Acquisitions,” for more detail.

2. Summary of Significant Accounting Policies

Basis of Consolidation

The consolidated financial statements include the accounts of ITC^DeltaCom and all wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Segment Disclosure

The Company operates in one segment.

Predecessor and Successor Accounting

As a result of the Acquisition, certain of ITC^DeltaCom’s predecessor accounting policies were changed to conform to EarthLink’s current accounting policies. These changes ~~have~~did not ~~had, and are not expected to~~ have, a ~~significant~~material impact on ITC^DeltaCom’s consolidated financial statements. The accounting for the Acquisition has been “pushed-down” to reflect the ~~Acquisition~~assets acquired and liabilities assumed at Acquisition date fair value. Accordingly, the Company’s financial position and results of operations may not be comparable between the ~~assets~~accompanying ~~acquired~~Successor and ~~liabilities~~Predecessor ~~assumed~~periods.

~~Business Combinations~~Reclassifications

~~The~~Certain ~~Company~~amounts ~~accounts~~in ~~for business combinations by recognizing all of~~ the ~~assets~~prior ~~acquired~~year ~~and~~financial ~~liabilities~~statements ~~assumed~~have atbeen ~~the~~reclassified acquisition date fair value. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to ~~accurately~~conform ~~value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject~~ to ~~refinement. As a result, during~~ the ~~measurement~~current ~~period, which may be up to one~~ year ~~from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill~~presentation. ~~Upon the conclusion of the measurement period, any subsequent adjustments are recorded to the Company’s Consolidated Statements of Operations.~~

47Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying footnotes. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts; revenue reserves for billings to other carriers; expected results of disputed vendor charges for cost of services; the use, recoverability, and/or realizability of certain assets, including deferred tax assets; useful lives of intangible assets and property and equipment; the fair values of assets acquired and liabilities assumed in acquisitions of businesses, including acquired intangible assets; facility exit liabilities; stock-based compensation expense; unrecognized tax benefits; contingent liabilities and long-lived asset impairments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable.

Table of Contents

ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Use~~Business ~~of Estimates~~Combinations

The ~~preparation~~Company ofaccounts ~~financial~~for ~~statements~~business incombinations ~~conformity~~by ~~with~~recognizing ~~U.S.~~all ~~generally~~of ~~accepted~~the ~~accounting~~assets ~~principles~~acquired ~~requires~~and ~~management~~liabilities toassumed ~~make~~at ~~estimates~~the ~~and~~acquisition ~~assumptions~~date ~~that~~fair ~~affect~~value. ~~the~~Goodwill ~~reported~~as ~~amounts~~ of ~~assets~~the ~~and~~acquisition ~~liabilities,~~date ~~revenues~~is ~~and~~measured ~~expenses,~~as ~~and~~ the ~~disclosure~~excess of ~~contingent~~consideration ~~assets~~transferred ~~and~~over ~~liabilities~~the innet of the ~~consolidated~~acquisition ~~financial~~date ~~statements~~fair ~~and~~values ~~accompanying~~of ~~footnotes.~~the ~~Actual~~assets ~~results~~acquired ~~could~~and ~~differ~~the ~~from~~liabilities ~~those estimates~~assumed. OnWhile ~~an ongoing basis,~~ the Company ~~evaluates~~uses its best estimates, ~~including,~~and ~~but~~assumptions ~~not~~as ~~limited~~a ~~to,~~part ~~those~~of ~~related~~the topurchase ~~the~~price ~~allowance~~allocation ~~for~~process ~~doubtful~~to ~~accounts;~~accurately ~~the~~value ~~use,~~assets ~~recoverability,~~acquired and~~/or~~ ~~realizability~~liabilities ofassumed ~~certain~~at ~~assets,~~the ~~including~~acquisition ~~deferred~~date, ~~tax~~the ~~assets;~~Company’s ~~useful~~estimates ~~lives~~are ofinherently ~~intangible~~uncertain ~~assets~~ and ~~property~~subject ~~and~~to ~~equipment;~~refinement. ~~the~~As ~~fair~~a ~~values~~result, ofduring ~~assets and liabilities determined in~~ the ~~Acquisition~~measurement period, ~~including~~which ~~pushed-down~~may ~~goodwill;~~be ~~expected~~up ~~results~~to ofone ~~disputed~~year ~~vendor~~from ~~charges~~the ~~for~~acquisition ~~cost~~date, ofthe ~~services;~~Company ~~fair~~records ~~values~~adjustments ofto ~~investments;~~the ~~stock-based~~assets ~~compensation;~~acquired ~~unrecognized~~and ~~tax benefits; contingent~~ liabilities ~~for~~assumed, ~~anticipated~~with ~~results~~the ofcorresponding ~~litigation~~offset ~~and~~to ~~claims and long-lived asset impairments~~goodwill. ~~The~~Upon ~~Company~~the ~~bases~~conclusion ~~its~~of ~~estimates~~the onmeasurement ~~historical~~period, ~~experience~~any ~~and~~subsequent onadjustments ~~various~~are ~~other~~recorded ~~assumptions~~to ~~that~~the ~~are~~Company’s ~~believed~~Consolidated toStatements beof ~~reasonable~~Operations.

Segment Disclosure

The Company operates in one segment.

Cash and Cash Equivalents

~~The~~Cash ~~Company~~and ~~considers~~cash ~~all~~equivalents ~~short-term~~consist of cash and highly liquid investments with an original ~~maturity~~maturities ~~date~~ of three months or less toat bethe ~~cash~~date ~~equivalents~~of acquisition. Cash equivalents are stated at cost, which approximates fair value.

Approximately $31.1 million of cash and cash equivalents as of December 31, 2010 were deposited in operating cash funds in two financial institutions which are insured by the Federal Deposit Insurance Corporation up to the balance of the account. Approximately $0.6 million of the Company’s cash and cash equivalents as of December 31, 2010 were deposited into interest bearing accounts with two financial institutions that are not covered by the Federal Deposit Insurance Corporation as of December 31, 2010. Approximately $11.9 million of the Company’s cash and cash equivalents as of December 31, 2010 consisted of U.S. Treasury money market funds held in the Company’s accounts at two financial institutions. The Company classifies any cash or investments that collateralize outstanding letters of credit or certain operating or performance obligations of the Company as restricted cash. Restricted cash is classified as current or noncurrent in the accompanying consolidated balance sheets according to the duration of the restriction and the purpose for which the restriction exists.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for ~~estimated~~accounts ~~losses~~receivable ~~resulting~~amounts ~~from~~that ~~the~~may ~~inability~~not ofbe ~~its customers to make payments~~collectible. In assessing the adequacy of the allowance for doubtful accounts, management considers ~~multiple~~a number of factors, including the aging of ~~its~~the ~~receivables,~~accounts ~~historical~~receivable ~~write-offs~~balances, ~~the~~historical ~~credit~~collection ~~quality~~experience, ofa ~~its~~specific ~~customers,~~customer’s ~~the~~ability ~~general~~to ~~economic~~meet ~~environment~~its ~~and~~financial ~~other~~obligations ~~factors~~to ~~that~~the ~~may~~Company ~~affect~~and ~~customers’~~the ~~ability~~general toeconomic ~~pay~~environment. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. ~~Account~~Allowances ~~balances~~for ~~are~~doubtful ~~charged~~accounts ~~off~~are ~~against~~recorded ~~the~~as ~~allowance~~a ~~after~~selling, ~~all~~general ~~means~~and ofadministrative ~~collection~~expense ~~have~~in ~~been exhausted and~~ the ~~potential~~Consolidated ~~for~~Statements recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. The Company’s allowance for doubtful accounts was $3.6 million and $0.3 million as of ~~December 31, 2009 and 2010, respectively~~Operations.

48The Company’s allowance for doubtful accounts was $0.3 million and $2.5 million as of December 31, 2010 and 2011, respectively. The Company recorded bad debt expense of $5.2 million for the year ended December 31, 2009, $4.2 million for the period January 1, 2010 through December 7, 2010, $0.3 million for the period December 8, 2010 through December 31, 2010 and $3.0 million for the year ended December 31, 2011. The Company’s write-offs of uncollectible accounts were $6.2 million for the year ended December 31, 2009, $4.2 million for the period January 1, 2010 through December 7, 2010, $36,000 for the period December 8, 2010 through December 31, 2010 and $0.8 million for the year ended December 31, 2011. During the period January 1, 2010 through December 7, 2010, the Company also wrote-off $3.7 million due to purchase accounting.

Restricted Cash

The Company classifies any cash or investments that collateralize outstanding letters of credit or certain operating or performance obligations of the Company as restricted cash. Restricted cash is classified as current or noncurrent in the accompanying consolidated balance sheets according to the duration of the restriction and the purpose for which the restriction exists.

Inventories

Inventories consist of finished goods and are stated at the lower of cost or market value, using the first-in, first-out method. Inventories are included in other current assets in the Consolidated Balance Sheets.

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Inventory

Inventory primarily consists of customer premises equipment held for resale and is valued at the lower of cost or market or acquisition date fair value as a result of the Acquisition, using the first-in, first-out method.

Property and Equipment

Property and equipment as of ~~December 31, 2009 were stated at~~ the ~~Company’s~~Acquisition ~~cost~~on ~~basis. Property and equipment as of~~ December 318, 2010 were ~~stated~~recorded at acquisition date fair value. Property and equipment acquired subsequent to the Acquisition are stated at cost. ~~Depreciation~~less ~~begins~~accumulated ~~when~~depreciation. ~~property~~The ~~and~~costs ~~equipment~~of ~~are~~additions, ~~placed~~replacements inand ~~service.~~substantial ~~The~~improvements ~~cost~~are ~~to maintain~~capitalized, ~~repair~~while ~~and~~the ~~replace~~costs ~~minor~~for ~~items~~maintenance ~~of property~~ and ~~equipment~~repairs isare charged to ~~selling,~~operating ~~general and administrative~~ expense as ~~the cost is~~ incurred. ~~Leasehold~~Upon ~~improvements~~retirements ~~are depreciated using the straight-line method over the shorter of their estimated useful lives~~ or ~~the remaining term of the lease. When leases are extended~~sales, ~~the~~any ~~remaining~~gains ~~useful~~and ~~lives~~losses ~~of leasehold improvements~~ are ~~increased~~included ~~as appropriate, but not for a period~~ in ~~excess~~interest ofexpense ~~the~~and ~~remaining~~other, ~~lease term~~net. ~~Depreciation~~Upon ~~and~~impairment, ~~amortization of property and equipment is provided using~~ the ~~straight-line~~Company ~~method~~accelerates ~~over~~depreciation ~~the estimated useful lives, except that amortization~~ of ~~customer~~the ~~installation~~asset and ~~acquisition~~such ~~costs~~cost is ~~provided~~included ~~using~~in ~~actual~~operating ~~weighted average initial contract terms of customer contracts, as follows:~~expenses.

Buildings		15 - 30 years
Fiber optic network		10 - 20 years
Telecommunciations equipment		2 - 10 years
Computer hardware and software		2 - 5 years
Furniture, fixtures and office equipment		2 - 5 years
Customer acquisition costs		31 - 36 months
Leasehold improvements		Shorter of estimated useful life or lease term

Depreciation expense is determined using the straight-line method over the estimated useful lives of the various asset classes. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life or the remaining term of the lease. When leases are extended, the remaining useful lives of leasehold improvements are increased as appropriate, but not for a period in excess of the remaining lease term. The estimated useful lives of property and equipment are as follows:

The Company capitalizes costs directly related to the design, deployment and expansion of its network and operating support systems, including employee-related costs and internally and externally developed software. Capitalized external software costs include the actual costs to purchase software from vendors. Capitalized internal software costs include personnel costs directly associated with development, enhancement and implementation of software. The Company also capitalizes customer installation and acquisition costs. Customer installation costs represent nonrecurring fees paid to other telecommunications carriers for services performed by the carriers when the Company orders facilities in connection with new customers acquired by the Company. Customer acquisition costs include internal personnel costs directly associated with the provisioning of new customer orders. Such customer acquisition costs represent incremental direct costs incurred by the Company that would not have been incurred absent a new customer contract. Customer installation and acquisition costs are amortized over the actual weighted average initial contract terms of contracts initiated each month, assuming a customer churn factor. Unamortized customer installation costs associated with contract terminations during the initial contract term are written off as incurred.

Buildings		15 - 30 years
Communications and fiber optic network		10 - 20 years
Computer equipment and software		2 - 5 years
Office and other equipment		2 - 5 years
Customer acquisition costs		31 - 36 months
Leasehold improvements		Shorter of estimated useful life or lease term

The Company capitalizes costs directly related to the design, deployment and expansion of its network and operating support systems, including employee-related costs. The Company also capitalizes customer installation and acquisition costs to the extent they are recoverable. Customer installation costs represent nonrecurring fees paid to other telecommunications carriers for services performed by the carriers when the Company orders facilities in connection with new customers acquired by the Company. Customer acquisition costs include internal personnel costs directly associated with the provisioning of new customer orders. Such customer acquisition costs represent incremental direct costs incurred by the Company that would not have been incurred absent a new customer contract. Customer installation and acquisition costs are amortized over the actual weighted average initial contract terms of contracts initiated each month, assuming a customer churn factor.

Goodwill and Purchased Intangible Assets

Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the purchase method of accounting. Purchased intangible assets consist primarily of ~~subscriber bases and~~ customer relationships, acquired software and technology, trade names and other assets valued in conjunction with the ~~Acquisition~~acquisitions. When management determines material intangible assets are acquired in conjunction with the purchase of a company, the Company determines the fair values of the identifiable intangible assets by taking into account management’s own analysis and an independent third party valuation specialist’s appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives. ~~Subscriber~~See ~~bases~~Note ~~acquired~~6, ~~directly~~“Goodwill ~~are~~and ~~valued~~Other atIntangible ~~cost~~Assets,” ~~plus~~for information regarding the Company’s intangible assets.

49The Company does not amortize goodwill and intangible assets deemed to have indefinite lives. The Company tests its goodwill and intangible assets deemed to have indefinite lives at least annually. The Company performs an impairment test of its goodwill and intangible assets deemed to have indefinite lives annually or when events and circumstances indicate that those assets might have an other than temporary impairment. Impairment testing of goodwill is required at the reporting unit level (operating segment or one level below operating segment) and involves a two-step process. The Company determined it is one reporting unit for goodwill testing. The first step of the impairment test involves comparing the estimated fair value of the Company’s reporting unit with the reporting unit’s carrying amount, including goodwill.

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~~assumed~~The ~~service~~Company ~~liabilities,~~estimates ~~which~~the ~~approximates~~fair value of the reporting unit using discounted expected future cash flows. If the carrying amount of the reporting unit exceeds its fair value, ata second step is performed to compare the ~~time~~carrying amount of ~~purchase~~goodwill to the implied fair value of that goodwill. ~~See~~If ~~Note~~the 6,carrying ~~“Goodwill~~amount ~~and~~of ~~Purchased~~goodwill ~~Intangible~~exceeds ~~Assets~~the implied fair value of that goodwill,” ~~for~~an ~~information~~impairment ~~regarding~~loss ~~the~~would ~~Company’s~~be ~~intangible~~recognized ~~assets~~in an amount equal to the excess.

The Company does not amortize goodwill and intangible assets deemed to have indefinite lives. The Company tests its goodwill and intangible assets deemed to have indefinite lives at least annually. The Company performs an impairment test of its goodwill and intangible assets deemed to have indefinite lives annually or when events and circumstances indicate that those assets might be permanently impaired. Impairment testing of goodwill is required at the reporting unit level (operating segment or one level below operating segment) and involves a two-step process. The Company determined it is one reporting unit for goodwill testing. The first step of the impairment test involves comparing the estimated fair value of the Company’s reporting unit with the reporting unit’s carrying amount, including goodwill. The Company estimates the fair value of the reporting unit using discounted expected future cash flows. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.

Long-Lived Assets

The Company evaluates the recoverability of long-lived assets, including property and equipment and purchased definite-lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss, if any, based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.

Debt Issuance Costs

As of December 31, 2009, other long-term assets primarily consisted of debt issuance costs that were amortized using the effective interest rate method over the lives of the related debt. During the period ended December 7, 2010, the Company wrote off these debt issuance costs as a result of the retirement of its first and second lien facilities. In connection with the issuance of senior secured notes in April 2010, the Company recorded $10.0 million of debt issuance costs. However, in connection with the Acquisition, those assets were determined to have no fair value and were reduced to zero by purchase accounting. As a result, the Company no longer has an asset for debt issuance costs as of December 31, 2010.

Leases

The Company categorizes leases at their inception as either operating or capital leases depending on certain criteria. ~~The~~Certain of the Company’s ~~recognizes~~operating lease agreements include scheduled rent ~~expense~~escalations ~~for~~or ~~operating~~rent ~~leases~~holiday over the term of the lease. The Company recognizes rent expense on a straight-line basis ~~without~~over ~~regard~~the toterm ~~deferred~~of ~~payment~~the ~~terms,~~lease. ~~such~~The difference between rent expense and rent paid is recorded as deferred rent ~~holidays~~and orincluded ~~fixed~~in ~~escalations~~other liabilities in the Consolidated Balance Sheets. Incentives granted under certain leases are treated as a reduction of the Company’s rent ~~costs~~expense on a straight-line basis over the term of the related lease agreement. ~~The~~Leasehold ~~Company records leasehold~~ improvements funded by ~~landlords~~the lessor under operating leases are recorded as leasehold improvements and deferred rent. ~~The classification of the Company’s leases were not modified as a result of purchase accounting.~~

~~Deferred~~Asset ~~Revenue~~Retirement Obligations

~~Deferred~~The ~~revenue~~Company ~~includes~~has asset retirement obligations associated with certain assets within leased facilities that the ~~liability~~Company ~~for~~is ~~advance~~contractually ~~billings~~obligated to ~~customers~~retire ~~for~~upon ~~use~~termination of the associated lease agreement and the return of facilities to pre-lease condition. The fair value of the obligation is also capitalized as property and equipment and amortized over the estimated useful life of the associated asset. The Company’s ~~fiber~~asset ~~optic~~retirement ~~network~~obligations ~~and~~were ~~for~~$2.1 ~~recurring~~million ~~monthly~~as ~~charges~~of ~~for~~December 31, ~~local~~2010 and ~~data~~2011 ~~services~~and are included in other long-term liabilities in the Consolidated Balance Sheets.

50Revenue Recognition

General. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. The Company’s customers generally pay in advance for their services, and revenue is recognized ratably over the service period. Advance payments from customers for invoiced services that have not yet been performed are recorded as deferred revenue in the Consolidated Balance Sheets.

The Company earns revenue by providing high-speed or broadband data communications services, which include Internet access; voice services, which include local exchange services, long distance and

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~~Unbilled~~conference ~~Revenue~~calling services; mobile voice and data services; and the sale of transmission capacity to other telecommunications carriers. Revenues from these services, which generally consist of recurring monthly charges for such services, are recognized as the services are provided.

~~The~~Multiple deliverable arrangements. Revenues may be part of multiple element arrangements, such as equipment sold with data and voices services. For multiple element arrangements, the Company ~~records~~separates deliverables into units of accounting and recognizes revenue for ~~long~~each ~~distance~~unit ~~services~~of ~~provided,~~accounting ~~but~~based ~~not~~on ~~yet~~evidence ~~billed,~~of each unit’s relative selling price to ~~customers.~~the ~~Approximately~~total ~~$4.0~~arrangement ~~million~~consideration, ~~and~~assuming $2all other revenue recognition criteria have been met.3 ~~million~~Each deliverable is considered a separate unit of ~~unbilled~~accounting if the delivered item has stand-alone value to the customer. The Company uses a hierarchy to determine the selling price to be used for allocating revenue isto ~~included~~deliverables: in1) ~~accounts~~the ~~receivable~~price inthe Company sells the ~~accompanying~~same ~~Consolidated~~unit ~~Balance~~for ~~Sheets~~when asthe ofCompany ~~December 31,~~sells ~~2009~~it ~~and~~separately; ~~2010,~~2) ~~respectively~~the price another vendor would sell a generally interchangeable item; or 3) the Company’s best estimate of the stand-alone price.

~~Revenue~~Gross ~~Recognition~~versus net revenue recognition. The Company offers certain services that are provided by third-party vendors. When the Company is the primary obligor in a transaction, has latitude in establishing prices, is the party determining the service specifications or has several but not all of these indicators, the Company records the revenue on a gross basis. If the Company is not the primary obligor and/or a third-party vendor has latitude in establishing prices, the Company records revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer and recording the net amount as revenue.

~~General~~Activation and installation. ~~The~~When the Company ~~recognizes~~receives ~~revenue~~service ~~when~~activation ~~persuasive~~and ~~evidence~~installation fee revenues in advance of anthe ~~arrangement~~provision ~~exists~~of services, ~~delivery~~the ~~has~~Company ~~occurred,~~defers the ~~sales~~service ~~price~~activation isand ~~fixed~~installation orfee ~~determinable~~revenues and ~~collectibility~~amortizes isthem ~~reasonably~~over ~~assured.~~the ~~The~~actual ~~Company’s~~weighted ~~customers~~average ~~generally~~initial ~~pay~~contract interms ~~advance~~of ~~for~~contracts ~~their~~initiated ~~services~~each month, ~~and~~assuming ~~revenue~~a iscustomer ~~recognized~~churn ~~ratably~~factor. The ~~over~~costs ~~the~~associated ~~service~~with ~~period.~~such ~~Advance~~activation ~~payments~~and ~~from~~installation ~~customers~~activities, ~~for~~to ~~invoiced~~the ~~services~~extent ~~that~~recoverable ~~have~~based ~~not~~on ~~yet~~future ~~been~~revenues, ~~performed~~ are ~~recorded~~deferred and recognized as ~~deferred~~operating ~~revenue~~expense inover the ~~Consolidated~~same ~~Balance Sheets~~period.

Sales credit reserves. The Company ~~earns~~makes ~~revenue~~estimates byfor ~~providing~~potential ~~high-speed~~future orsales ~~broadband~~credits ~~data~~to ~~communications~~be ~~services,~~issued ~~which~~in ~~include~~respect ~~Internet~~of ~~access;~~earned ~~voice~~revenues, ~~services~~related to billing errors, service interruptions and customer disputes which ~~include~~are ~~local~~recorded ~~exchange~~as ~~services,~~a ~~long~~reduction ~~distance~~in revenue. The Company analyzes historical credit activity and ~~conference~~changes ~~calling~~in ~~services;~~customer ~~mobile~~demands ~~voice~~related to current billing and ~~data~~service ~~services;~~interruptions when evaluating its credit reserve requirements. The Company reserves known billing errors and ~~the~~service ~~sale~~interruptions ofas ~~transmission~~incurred. ~~capacity~~The Company reviews customer disputes and reserves against those we believe to ~~other~~be ~~telecommunications~~valid ~~carriers~~claims. ~~Revenues~~The ~~from~~Company ~~these~~also ~~services,~~estimates ~~which~~a ~~generally~~sales ~~consist~~credit ofreserve ~~recurring~~related ~~monthly~~to ~~charges~~unknown ~~for~~billing ~~such~~errors ~~services,~~and ~~are~~disputes ~~recognized~~based ason ~~the~~historical ~~services~~credit ~~are provided~~activity.

The Company generates revenues from the sale of telephone systems, other equipment, and services. Revenues from these sources are recognized upon installation or as services are performed. Revenues, such as the sale of telephone systems, may be part of multiple element arrangements. For example, the Company may provide for the sale of equipment and installation of that equipment or, alternatively, may sell these products separately without installation. The Company identifies the sale of and installation of equipment as separate elements in the earnings process, and if a separate element (installation) is essential to the functionality of another element (equipment sale), the Company recognizes revenue for a delivered element only when the remaining elements in the arrangement are delivered.

Gross versus net revenue recognition. Generally, when the Company is the primary obligor in the transaction with the customer, has latitude in establishing prices, is the party determining the service specifications or has several but not all of these indicators, the Company records the revenue at the amount billed the customer. If the Company is not the primary obligor and/or the broadband partner has latitude in establishing prices, the Company records revenue associated with the related customers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer and recording the net amount as revenue.

Taxes Collected from Customers and Remitted to Governmental Authorities

The Company currently records all taxes billed to its customers and remitted to governmental authorities, including Universal Service Fund contributions and sales, use and excise taxes, on a net basis in the Consolidated Statements of Operations.

Cost of Revenues

Cost of revenues includes costs directly associated with providing services to the Company’s customers. Cost of revenues does not include depreciation and amortization expense. Cost of revenues primarily consists of the cost of connecting customers to the Company’s networks via leased facilities; the costs of leasing components of its network facilities; costs paid to third-party providers for interconnect access and transport services; and the costs of equipment sold to customers for use with the Company’s services. The Company utilizes other carriers to provide services where the Company does not have facilities. The Company utilizes a number of different carriers to terminate its long distance calls outside the southeastern United States. These costs are expensed as incurred. These costs include an estimate of charges for which invoices have not yet been received, and are based upon the estimated number of transmission lines and facilities in service, estimated minutes of use and estimated amounts

51These costs include an estimate of charges for which invoices have not yet been received, and are based upon the estimated number of transmission lines and facilities in service, estimated minutes of use and estimated amounts accrued for pending disputes with other carriers, as well as upon the contractual rates charged by the Company’s service providers. Subsequent adjustments to these estimates may occur after the bills are received for the actual costs incurred, but these adjustments generally are not expected to be material to operating results. Experience also has shown that these disputes can require a significant amount of time to resolve given the complexities and regulatory issues affecting the vendor relationships. The Company maintains reserves for any anticipated exposure associated with these billing disputes. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. Given the length of time the Company has historically required to resolve these disputes, disputes may be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods. The Company believes its reserves are adequate.

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accrued for pending disputes with other carriers, as well as upon the contractual rates charged by the Company’s service providers. Subsequent adjustments to these estimates may occur after the bills are received for the actual costs incurred, but these adjustments generally are not expected to be material to operating results. Experience also has shown that these disputes can require a significant amount of time to resolve given the complexities and regulatory issues affecting the vendor relationships. The Company maintains reserves for any anticipated exposure associated with these billing disputes. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. Given the length of time the Company has historically required to resolve these disputes, disputes may be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods. The Company believes its reserves are adequate.

Selling, General and Administrative Expense

The Company’s selling, general and administrative expenses consist of expenses related to sales and marketing, customer service, network operations, information technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include salaries and related employee costs (including stock-based compensation), outsourced labor, professional fees, property taxes, travel, insurance, rent, advertising and other administrative expenses.

Advertising Costs

The Company charges the costs of advertising to expense as incurred. Advertising expense was $1.8 million for the ~~years~~year ended December 31, ~~2008 and~~ 2009 ~~was $1.7 million and $1.8 million~~, ~~respectively, and~~ $1.6 million for the period January 1, 2010 through December 7, 2010, ~~and~~ $34,000 for the period December 8, 2010 through December 31, 2010 and $1.9 million for the year ended December 31, 2011.

Stock-Based Compensation

~~The~~ Company ~~recognizes~~measures ~~the~~ compensation cost ~~associated~~for ~~with~~all ~~its~~stock ~~equity~~awards ~~instruments~~at ~~based~~fair value on ~~grant-~~the date ~~fair~~of ~~value~~grant ofand recognizes compensation expense over the ~~award~~requisite service period for awards expected to vest. The Company estimates the fair value of stock options ~~was estimated~~ using the Black-Scholes ~~option~~valuation ~~pricing~~ model., ~~The~~and ~~cost~~determines the fair value of ~~equity~~restricted ~~awards~~stock ~~granted~~units tobased ~~employees~~on the quoted closing price of EarthLink’s common stock on the date of grant. Such value is recognized onas aexpense over the requisite service period, net of estimated forfeitures, using the straight-line ~~basis~~attribution method. For performance-based awards, the Company recognizes expense over the requisite service period., ~~Prior~~net toof ~~the~~estimated ~~Acquisition~~forfeitures, ~~generally,~~using the ~~restricted~~accelerated ~~stock~~attribution ~~units~~method when it is probable that the performance measure will be achieved. The estimate of awards that will ultimately vest requires significant judgment, and ~~stock~~to ~~options~~the ~~awarded~~extent ~~were~~actual ~~classified~~results asor ~~equity;~~updated ~~however~~estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company ~~had~~considers ~~awarded~~many ~~equity~~factors ~~instruments~~when estimating expected forfeitures, including ~~certain~~types ~~restricted~~of ~~stock~~awards, ~~units~~employee class and ~~stock~~historical ~~options~~employee ~~that~~attrition itrates. ~~had~~Actual ~~classified~~results, asand afuture ~~liability~~changes in estimates, may differ substantially from the Company’s current estimates. See Note 10, “Stock-Based Compensation.”

Acquisition-Related Costs

Acquisition-related costs are expensed in the period in which the costs are incurred and the services are received. Acquisition-related costs consist of external costs directly related to ~~the~~acquisitions, ~~Acquisition~~including transaction related costs, such as advisory, legal, accounting, valuation and other professional fees.; ~~Acquisition-related costs also include~~ employee severance and ~~benefit~~retention costs; ~~associated~~facility-related ~~with~~costs, ~~the~~such ~~Acquisition~~as ~~and~~lease ~~costs~~termination ~~resulting~~and ~~from~~asset ~~cash~~impairments; ~~paid~~costs to settle stock-based awards attributable to ~~post~~postcombination ~~combination~~ service in connection with the Acquisition; and integration-related costs, such as system conversion, rebranding costs and integration related consulting and employee costs. See Note 3, “Acquisitions,” for more detail.

Post-Employment Benefits

Post-employment benefits primarily consist of the Company’s severance plans. The Company recognizes severance costs when they are both probable and reasonably estimable.

52Contingencies

The Company accrues for contingent obligations, including estimated legal costs, when the obligation is probable and the amount is reasonably estimable. As facts concerning contingencies become known, the Company reassess its position and makes appropriate adjustments to the consolidated financial statements.

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Income Taxes

The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amounts of net deferred tax assets if there is uncertainty regarding their realization. The Company considers many factors when assessing the likelihood of future realization including the Company’s recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, prudent and feasible tax planning strategies that are available, the carryforward periods available to the Company for tax reporting purposes and other relevant factors.

The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax ~~expense~~benefit in the Consolidated Statements of Operations.

Derivatives

The Company had a receive-floating, pay-fixed interest rate swap agreement that was designated as a cash flow hedge. The ~~derivative~~interest ~~instrument~~rate swap agreement was ~~recorded~~terminated induring the ~~balance~~year ~~sheet~~ended ~~as a liability measured at its fair value~~December 31, ~~and changes in the derivative’s fair value were recognized in earnings unless specific hedge accounting criteria were met~~2009. The Company was required to document, designate and assess the effectiveness of transactions that received hedge accounting treatment. The ~~Company’s interest rate swap agreement, which terminated as of September 30, 2009, qualified as a cash flow hedge. 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~~reporting period 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 for all reporting periods through ~~September 30,~~its ~~2009~~termination. The Company recognized (1) the swap at its fair value as an asset or liability in its Consolidated Balance Sheet and marked the swap to fair value through other comprehensive income, (2) floating-rate interest expense in earnings, (3) the offsetting effect of the interest swap in ~~earnings~~the Consolidated Statement of Operations and (4) hedge ineffectiveness immediately in ~~earnings~~the Consolidated Statement of Operations. Change in unrealized gains (losses) on this derivative instrument designated as a cash flow hedging instrument, net of tax, of $(15.4)6 million ~~and~~for ~~$5.6~~the ~~million~~year ~~are~~ended December 31, 2009 is included in other comprehensive loss in the ~~accompanying~~ Consolidated ~~Statements~~Statement of Stockholders’ Equity (Deficit) and Comprehensive Loss ~~for the years ended December 31, 2008 and 2009~~.

Comprehensive Loss

Comprehensive loss as presented in the Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Loss includes unrealized gains and losses which are excluded from the determination of net loss in the Consolidated Statements of Operations. These amounts included changes in unrealized gains and losses, net of tax, on certain investments classified as available-for-sale and ~~change~~changes in unrealized gains and losses, net of tax, on derivatives.

Certain Risks and Concentrations

~~By their nature, all financial instruments involve risk, including credit risk for non-performance by counterparties.~~ Financial instruments that potentially subject the Company to credit risk consist principally of cash equivalents, ~~investments~~ and trade receivables. InThe ~~addition,~~Company’s ~~credit~~cash ~~risk~~investment ~~for~~policy ~~the~~limits ~~Company’s~~investments ~~cash~~to ~~equivalents~~investment grade instruments. Accounts receivable are typically unsecured and ~~short-term~~are ~~investments~~derived ~~may~~from berevenues ~~exacerbated~~earned byfrom ~~unfavorable~~customers ~~economic~~primarily ~~conditions~~located in the U.S. IfCredit ~~financial~~risk ~~markets~~with ~~experience~~respect ~~prolonged~~to ~~periods~~trade ofreceivables ~~decline,~~is ~~the~~limited ~~value~~due orto ~~liquidity~~the large number of customers comprising the Company’s ~~cash~~customer ~~equivalents~~base. ~~and~~Additionally, ~~marketable~~the ~~securities~~Company ~~could~~maintains ~~decline~~allowances ~~and~~for ~~result~~potential incredit anlosses. ~~other-than-temporary~~No ~~decline~~customer inrepresented ~~fair~~more ~~value,~~than ~~which~~10% ~~could~~of ~~adversely affect~~ the Company’s ~~financial~~consolidated ~~position,~~operating ~~results~~revenues for any of ~~operations~~the ~~and~~three ~~cash~~years ~~flows~~in the period ended December 31, 2011.

5352

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s cash investment policy limits investments to investment grade instruments. Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the U.S. Credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company’s customer base. Additionally, the Company maintains allowances for potential credit losses. No customer represented more than 10% of the Company’s consolidated operating revenues for any of the three years in the period ended December 31, 2010.

Fair Value of Financial Instruments

The ~~Company’s~~carrying ~~financial~~amounts ~~instruments~~of ~~are~~the ~~cash~~Company’s ~~and~~ cash ~~equivalents~~, ~~short-term investments, restricted~~ cash equivalents, ~~liability~~trade ~~for~~receivables ~~option share-based compensation award, liability for restricted stock compensation award, long-term debt~~ and antrade ~~interest~~payables ~~rate~~approximate ~~swap~~their ~~agreement.~~fair ~~See~~values ~~Note~~because ~~14, “Fair Value Measurements,” for a discussion~~ of ~~the~~their ~~methods~~nature and ~~assumptions~~respective ~~used to determine classification and fair values of financial instruments~~durations.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

Recently Issued Accounting Pronouncements

In ~~September~~May ~~2009~~2011, the Financial Accounting Standards Board (“FASB”) issued ~~new~~authoritative guidance onrelated ~~revenue~~to ~~recognition.~~fair ~~The~~value ~~new~~measurements. This guidance ~~addresses~~was ~~the~~issued ~~accounting for multiple-deliverable arrangements~~ to ~~enable~~provide ~~vendors~~a toconsistent ~~account~~definition ~~for~~of ~~products~~fair orvalue ~~services~~and ~~(deliverables)~~ensure ~~separately~~that ~~rather~~the ~~than~~fair asvalue ameasurement ~~combined unit~~ and todisclosure ~~modify~~requirements ~~the~~are ~~manner~~similar inbetween ~~which~~U.S. ~~the~~GAAP ~~transaction~~and ~~consideration~~International isFinancial ~~allocated~~Reporting ~~across~~Standards. ~~the~~This ~~separately~~guidance ~~identifiable~~also ~~deliverables~~changes ~~and~~certain ~~how~~fair ~~revenue~~value ismeasurement ~~recognized.~~principles ~~The~~and ~~new~~enhances ~~guidance also significantly expands~~ the disclosure requirements particularly for ~~multiple-element~~Level ~~arrangements.~~3 ~~The~~fair ~~new~~value measurements. This guidance is effective ~~prospectively~~ for ~~revenue~~fiscal ~~arrangements~~years, ~~entered~~and ~~into~~interim orperiods ~~materially~~within ~~modified~~those ~~in fiscal~~ years, beginning ~~on or~~ after ~~June~~December 15, ~~2010~~2011. The Company does not expect ~~the~~this ~~adoption of the new~~ guidance to have a material impact on its consolidated financial statements.

In ~~December~~June ~~2010~~2011, the FASB issued ~~new~~authoritative guidance onrelated ~~when~~ to ~~perform~~comprehensive ~~Step~~income. 2This ofguidance ~~the~~was ~~goodwill~~issued ~~impairment~~to ~~test~~increase ~~for~~the ~~reporting~~prominence ~~units~~of ~~with~~items ~~zero~~reported orin ~~negative~~other ~~carrying~~comprehensive ~~amounts.~~income ~~The~~and ~~new~~requires ~~guidance~~that ~~modifies~~all ~~Step~~non-owner 1changes ofin ~~the~~stockholders’ ~~goodwill~~equity ~~impairment~~be ~~test~~presented ~~for~~either ~~reporting~~in ~~units~~a ~~with~~single ~~zero~~continuous orstatement ~~negative~~of ~~carrying~~comprehensive ~~amounts.~~income ~~For~~or ~~those~~in ~~reporting~~two ~~units,~~separate anbut ~~entity~~consecutive isstatements. ~~required~~This toguidance ~~perform~~is ~~Step~~effective 2for offiscal ~~the~~years, ~~goodwill~~and ~~impairment~~interim ~~test~~periods ifwithin itthose isyears, ~~more~~beginning ~~likely~~after ~~than~~December 15, ~~not that a goodwill impairment exists~~2011. In ~~determining~~December 2011, ~~whether~~the itFASB isissued ~~more~~authoritative ~~likely~~guidance ~~than~~which ~~not~~deferred ~~that~~the arequirement ~~goodwill~~to ~~impairment~~present ~~exists,~~on anthe ~~entity~~face ~~should~~of ~~consider~~the ~~whether~~financial ~~there~~statements ~~are~~reclassification ~~any~~adjustments ~~adverse~~for ~~qualitative~~items ~~factors indicating~~ that anare ~~impairment~~reclassified ~~may~~from ~~exist.~~other ~~The~~comprehensive ~~new~~income ~~guidance~~to isnet ~~effective~~income ~~for~~while ~~fiscal~~the ~~years,~~FASB ~~and~~further ~~interim~~deliberates ~~periods~~this ~~within~~aspect ~~those~~of ~~years,~~the ~~beginning after December 15, 2010~~proposal. ~~Early adoption is not permitted.~~ The Company does not expect ~~the~~this ~~adoption of the new~~ guidance to have a material impact on its consolidated financial statements.

~~Also~~In ~~in December~~September ~~2010~~2011, the FASB issued ~~new~~authoritative guidance onrelated ~~disclosure~~to ofgoodwill ~~supplementary~~impairment ~~pro~~testing. ~~forma~~This ~~financial~~guidance ~~information~~allows ~~for~~an ~~business~~entity ~~combinations.~~to ~~The~~first ~~new~~assess ~~guidance~~qualitative ~~specifies~~factors ~~that~~to ifdetermine awhether ~~public~~it ~~entity~~is ~~presents~~necessary ~~comparative~~to ~~financial~~perform ~~statements,~~ the ~~entity~~two-step ~~should~~quantitative ~~disclose~~goodwill ~~revenue~~impairment ~~and~~test. ~~earnings~~Under ofthese ~~the~~amendments, ~~combined~~an entity aswould ~~though~~not ~~the~~be ~~business~~required ~~combination(s) that~~to ~~occurred~~calculate ~~during~~ the ~~current~~fair ~~year~~value ~~had occurred as~~ of ~~the~~a ~~beginning of the comparable prior annual~~ reporting ~~period~~unit ~~only.~~unless ~~The new guidance also expands~~ the ~~supplemental~~entity ~~pro~~determines, ~~forma~~based ~~disclosures~~on ~~for business combinations to include~~ a ~~description~~qualitative ~~of the nature and amount of material~~assessment, ~~nonrecurring~~that ~~pro~~it ~~forma~~is ~~adjustments~~more ~~directly~~likely ~~attributable~~than tonot ~~the~~that ~~business~~its ~~combination~~fair ~~included~~value inis ~~the~~less ~~reported~~than ~~pro~~its ~~forma~~carrying ~~revenue and earnings~~amount. This ~~The new~~ guidance is effective ~~prospectively~~ for ~~business~~fiscal ~~combinations~~years ~~for which the acquisition date is on or after the~~ beginning ~~of the first annual reporting period beginning on or~~ after December 15, ~~2010~~2011, with early adoption permitted. The Company ~~does~~adopted ~~not~~this ~~expect~~new guidance in the ~~adoption~~fourth quarter of ~~the~~2011. ~~new~~The ~~guidance~~adoption todid not have a material impact on its consolidated financial statements.

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Acquisitions

Acquisition by EarthLink

On December 8, 2010, the Company was acquired by EarthLink, Inc. in for $3.00 per share. Under the terms of the merger agreement, EarthLink acquired 100% of ITC^DeltaCom in a merger transaction with ITC^DeltaCom surviving as a wholly-owned subsidiary of EarthLink.

The following table summarizes the ~~preliminary~~ fair value of consideration transferred to acquire ITC^DeltaCom (in thousands):

Acquisition of approximately 83.8 million shares of outstanding common stock of ITC^DeltaCom at $3.00 per share in cash	$	251,489
Estimated fair value of restricted stock units assumed and converted	2,275
Total estimated consideration	$	253,764

~~The~~In ~~accounting~~connection ~~for~~with the Acquisition, ~~has~~each ~~been~~ITC^DeltaCom ~~“pushed-down”~~stock tooption ~~reflect~~was ~~the~~cancelled ~~Acquisition~~in atexchange ~~fair~~for ~~value~~cash ofequal to the ~~assets~~difference ~~acquired~~between ~~and liabilities assumed. The Company allocated~~ the ~~purchase~~merger ~~price~~consideration ofand ~~acquisitions to~~ the ~~tangible~~exercise ~~assets~~price, ~~liabilities~~ and ~~intangible~~certain ~~assets~~ITC^DeltaCom ~~acquired~~restricted ~~based~~stock onunits ~~their~~were ~~estimated~~cancelled ~~fair~~in ~~values.~~exchange ~~The~~for ~~excess~~cash ofequal to the ~~purchase~~merger ~~price over those fair values was recorded as goodwill~~consideration. ~~The~~Cash ~~following~~paid ~~table~~to ~~summarizes~~settle ~~the~~stock-based ~~preliminary~~awards ~~amounts~~attributable ofto ~~identified~~precombination ~~assets~~service ~~acquired~~was ~~and liabilities assumed recognized at the acquisition date (in thousands):~~recorded

Acquired Assets:
Cash and cash equivalents	$	59,237
Property and equipment	200,546
Goodwill	188,890
Intangible assets	131,200
Other assets	59,532
Total assets	639,405
Assumed Liabilities:
Senior secured notes due 2016	(351,520		)
Deferred revenue	(17,905		)
Other liabilities	(82,747		)
Total liabilities	(452,172		)
Reduction of additional paid-in capital	66,531
Total consideration	$	253,764

In connection with the Acquisition, each ITC^DeltaCom stock option was cancelled in exchange for cash equal to the difference between the merger consideration and the exercise price, and certain ITC^DeltaCom restricted stock units were cancelled in exchange for cash equal to the merger consideration. Cash paid to settle stock-based awards attributable to precombination service was recorded as goodwill, and cash paid to settle stock-based awards attributable to postcombination service was recorded as operating expense in the postcombination consolidated statement of operations. Of the total amount paid, $9.1 million was attributable to precombination service and recorded as goodwill and $2.1 million was attributable to postcombination service and recorded as operating expense in the postcombination Consolidated Statement of Operations of ITC^DeltaCom.

Also in connection with the Acquisition, certain ITC^DeltaCom restricted stock units were assumed and converted into EarthLink restricted stock units, determined by multiplying the number of

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~shares~~as of common stock subject to the ITC^DeltaCom restricted stock units by the conversion ratio set forth in the merger agreement. Approximately 1.8 million ITC^DeltaCom restricted stock units were converted into 0.6 million EarthLink restricted stock units based on a conversion ratio of 0.33goodwill, ~~which was calculated as the merger consideration of $3.00 divided by the average EarthLink stock price for 20 consecutive trading days ending on (~~and ~~including)~~cash ~~the~~paid ~~second trading day immediately prior~~ to ~~the~~settle ~~closing date. The fair value of the~~ stock-based awards ~~was determined based on the fair value of the underlying shares. The fair value of restricted stock units assumed and converted~~ attributable to ~~precombination~~postcombination ~~services~~service was ~~included in the total consideration transferred, while the fair value of restricted stock units assumed and converted attributable to postcombination services will be~~ recorded as operating ~~expenses~~expense in the postcombination consolidated statement of operations. onOf ~~a straight-line basis over~~ the ~~remaining~~total ~~service~~amount ~~periods~~paid, $9.1 ~~The~~million ~~total~~was ~~fair~~attributable ~~value~~to ofprecombination ~~restricted~~service ~~stock units assumed~~ and ~~converted~~recorded ~~was~~as ~~$5.3~~goodwill ~~million,~~and ~~of which~~ $2.31 million was ~~included~~attributable into ~~the~~postcombination ~~total~~service ~~consideration transferred~~ and ~~$3.0 million will be~~ recorded as operating expense in the postcombination Consolidated Statement of Operations of ITC^DeltaCom ~~on a straight-line basis over the remaining service periods~~.

~~Goodwill~~Also ~~arising~~in ~~from~~connection with the Acquisition, iscertain ~~attributable~~ITC^DeltaCom restricted stock units were assumed and converted into EarthLink restricted stock units, determined by multiplying the number of shares of common stock subject to the ~~assembled~~ITC^DeltaCom ~~workforce~~restricted ~~and~~stock ~~expected~~units ~~synergies~~by ~~and~~the ~~economies~~conversion ratio set forth in the merger agreement. Approximately 1.8 million ITC^DeltaCom restricted stock units were converted into 0.6 million EarthLink restricted stock units based on a conversion ratio of ~~scale~~0.33, ~~from~~which ~~combining~~was calculated as the ~~operations~~merger consideration of $3.00 divided by the average EarthLink stock price for 20 consecutive trading days ending on (and ~~ITC^DeltaCom~~including) the second trading day immediately prior to the closing date. The ~~goodwill~~fair ~~recognized~~value isof ~~not~~the ~~expected~~stock-based toawards bewas ~~deductible~~determined ~~for~~based ~~income~~on ~~tax~~the ~~purposes~~fair value of the underlying shares. The ~~reduction~~fair value of restricted stock units assumed and converted attributable to precombination services was included in ~~additional~~the ~~paid-~~total consideration transferred, while the fair value of restricted stock units assumed and converted attributable to postcombination services will be recorded as operating expenses in ~~capital~~the ~~resulted~~postcombination ~~from~~statement of operations on a ~~valuation~~straight-line ~~allowance~~basis ~~being~~over ~~reported~~the inremaining ~~ITC^DeltaCom’s~~service ~~financial~~periods. ~~statements~~The total fair value of restricted stock units assumed and converted was $5.3 million, ~~but~~of ~~not~~which $2.3 million was included in the ~~consolidated~~total ~~financial~~consideration ~~statements~~transferred ofand ~~EarthLink~~$3.0 ~~See~~million ~~Note~~will ~~12,~~be ~~“Income~~recorded ~~Taxes,”~~as ~~for~~operating ~~more~~expense ~~information~~in the Consolidated Statement of Operations of ITC^DeltaCom on a straight-line basis over the remaining service periods.

The accounting for the Acquisition was “pushed-down” to reflect the Acquisition at fair value of the assets acquired and liabilities assumed. The Company allocated the purchase price of acquisitions to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess of the purchase price over those fair values was recorded as goodwill. The following table summarizes the amounts of identified assets acquired and liabilities assumed recognized at the acquisition date (in thousands):

Acquired Assets:
Cash and cash equivalents	$	59,237
Property and equipment	200,546
Goodwill	170,126
Intangible assets	131,200
Other assets	59,532
Total assets	620,641

Assumed Liabilities:
Senior secured notes due 2016	(351,520		)
Deferred revenue	(17,905		)
Other liabilities	(82,747		)
Total liabilities	(452,172		)

Reduction of additional paid-in capital	85,295

Total consideration	$	253,764

Other assets includes a fair value of $39.7 million assigned to accounts receivable which had a gross contractual value of $43.4 million as of December 8, 2010. The $3.7 million difference represents the Company’s best estimate of the contractual cash flows that will not be collected.

Goodwill arising from the Acquisition is attributable to the assembled workforce and expected synergies and economies of scale from combining the operations of EarthLink and ITC^DeltaCom. The goodwill recognized is not expected to be deductible for income tax purposes. The reduction in additional paid-in capital resulted from a valuation allowance being reported in ITC^DeltaCom’s financial statements,

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

but not in the consolidated financial statements of EarthLink. See Note 12, “Income Taxes,” for more information.

During the year ended December 31, 2011, the Company finalized certain provisional amounts recognized at the acquisition date related to deferred taxes and other tax positions. The Company retrospectively adjusted the provisional amounts recorded at the acquisition date to reflect finalization of provisional accounting. As a result, the carrying amount of additional paid-in capital was reduced by $18.8 million as of December 31, 2010, with a corresponding decrease to goodwill. The reduction in additional paid-in capital resulted from a valuation allowance being reported for an increase in deferred tax assets in ITC^DeltaCom’s financial statements, but not in the consolidated financial statements of EarthLink.

During the year ended December 31, 2011, the Company recorded a $3.2 million increase to goodwill from adjustments in the fair value of assets and liabilities assumed that were not deemed material to retrospectively adjust provisional amounts recorded at the acquisition date. The measurement period for the Aquisition is closed.

The following table summarizes the components of intangible assets acquired in connection with the Acquisition (in thousands):

	Fair Value		Useful Life
Customer relationships	$	117,600	5 - 6 years
Developed technology	9,900		6 years
Trade name	3,700		3 years
Total intangible assets	$	131,200

Customer relationships represent the fair values of the underlying relationships and agreements with ITC^DeltaCom’s customers. Developed technology represents the fair values of ITC^DeltaCom’s processes, patents and trade secrets related to the design and development of ITC^DeltaCom’s internally used software and technology. This proprietary know-how can be leveraged to develop new technology and improve EarthLink’s existing technologies. The trade name represents the fair values of brand and name recognition associated with ITC^DeltaCom’s services.

ITC^DeltaCom’s outstanding $325.0 million aggregate principal amount of 10.5% senior secured notes due 2016 (the “Notes”) were not repaid or guaranteed by EarthLink and remain obligations of ITC^DeltaCom. Under the indenture for the Notes, following the consummation of the Acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, ~~1010~~2010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011. The remaining Notes remain outstanding as obligations of ITC^DeltaCom and its subsidiaries following the Acquisition.

~~ITC^DeltaCom~~Saturn ~~incurred~~Telecommunication ~~$8.0 million of external costs directly related to the Acquisition~~Services, ~~such as advisory, legal, accounting, and other professional fees in 2010 prior to the date of the Acquisition, and incurred $6~~ Inc.~~8 million of such costs subsequent to the date of Acquisition. These expenses are included in acquisition-related costs in the Company’s accompanying Consolidated Statement of Operations.~~

56In March 2011, the Company acquired Saturn Telecommunication Services Inc. and affiliates (“STS Telecom”), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom operates a sophisticated voice-over-Internet-protocol (“VoIP”) platform. The primary reason for the acquisition was for the Company to leverage STS Telecom’s expertise in managed hosted VoIP as part of its VoIP offerings.

The total consideration transferred was $22.9 million, which consisted of cash paid to acquire the outstanding equity interests of STS Telecom. In allocating the consideration transferred based on estimated fair values, the Company recorded approximately $21.4 million of goodwill, $17.9 million of identifiable intangible assets, $2.8 million of tangible assets and $19.2 million of net liabilities assumed. The preliminary allocation of the consideration transferred was based upon a preliminary valuation and the Company’s estimates and assumptions are subject to change. The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income based taxes and residual goodwill. The Company has included the financial results of STS Telecom in its consolidated financial statements from the date of acquisition. Pro forma financial information for STS Telecom has not been presented, as the effects were not material to the Company’s consolidated financial statements.

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Pending~~ Acquisition-Related Costs

InAcquisition-related ~~December 2010,~~costs ~~the~~consist ~~Company~~of ~~entered~~external ~~into~~costs andirectly ~~agreement~~related to ~~acquire~~acquisitions, ~~Saturn~~including ~~Telecommunication~~transaction ~~Services~~related ~~Inc.~~costs, ~~(“STS~~such ~~Telecom”)~~as advisory, alegal, ~~privately-held~~accounting, ~~provider~~valuation ofand IPother ~~communication~~professional fees; employee severance and ~~information~~retention ~~technology~~costs; ~~services~~costs to ~~small~~settle stock-based awards attributable to postcombination service in connection with the Acquisition; and ~~medium~~integration-~~sized~~related ~~businesses~~costs, ~~primarily~~such inas ~~Florida~~system conversion, ~~for~~rebranding ~~approximately~~costs ~~$28.0~~and ~~million~~integration inrelated ~~cash~~consulting and employee costs. ~~STS~~Acquisition-related ~~Telecom~~costs ~~currently~~are ~~operates~~expensed ain ~~sophisticated~~the ~~voice-over-IP~~period ~~(“VoIP”)~~in ~~platform.~~which ~~The~~the ~~Company~~costs ~~plans~~are toincurred ~~leverage~~and ~~STS~~the ~~Telecom’s~~services ~~expertise~~are received and are included in ~~managed~~restructuring ~~hosted~~and ~~VoIP~~acquisition-related oncosts ain ~~nationwide~~the ~~basis~~Consolidated asStatement ~~part~~of Operations. Acquisition-related costs consisted of ~~its~~the ~~VoIP~~following ~~offerings.~~for the periods presented (in thousands):

	Predecessor Entity				Successor Entity
			January 1,		December 8,
	Year Ended		through		through		Year Ended
	December 31,		December 7,		December 31,		December 31,
	2009		2010		2010		2011

Transaction related costs	$	—	$	7,987	$	—	$	111
Severance and retention costs	—		—		4,699		3,561
Costs to settle postcombination stock awards	—		—		2,066		—
Facility related costs	—		—		—		728
Integration related costs	—		—		—		872
Total acquisition-related costs	$	—	$	7,987	$	6,765	$	5,272

4. Investments

The Company’s had short-term investments asconsisting of ~~December 31, 2009 consisted of an investment in~~ the Primary Fund of The Reserve Fund, a registered money market fund. ~~that~~The ~~was~~Company ~~substantially~~ liquidated as$3.3 ofmillion ~~December 31,~~and ~~2009~~$1.7 ~~During~~million of its short-term investments during the ~~year~~years ended December 31, 2009 and 2010, ~~the Company liquidated the remaining $1~~respectively.7 ~~million~~As ~~of its investment, and as~~ a result, the Company no longer held short-term investments as of December 31, 2010 or 2011.

5. Property and Equipment

Property and equipment consisted of the following as of December 31, ~~2009~~2010 and ~~2010 (in thousands)~~2011:

	Predecessor Entity			Successor Entity
	As of December 31,
	December 31, 2009			December 31, 2010
	2010			2011
Land	$	2,505		$	2,739
	(in thousands)
Buildings and leasehold improvements	30,137			34,304
Communciations and fiber optic networks	$	152,379		$	188,376
Vehicles	1,522			866
Computer equipment and software	9,403			11,742
Fiber optic network	92,812			63,034
Office and other equipment	4,582			6,940
Transmission and other equipment	424,143			102,464
Land and buildings	24,995			25,051
Construction in progress	1,311			6,916
Leasehold improvements	12,048			11,757
	552,430			210,323
Work in progress	6,916			17,973
Less accumulated depreciation	(350,881		)	(3,335		)
	210,323			261,839
	$	201,549		$	206,988
Less accumulated depreciation	(3,335		)	(48,401		)
	$	206,988		$	213,438

Depreciation ~~and amortization~~ expense on property and equipment, ~~was~~which ~~$71.0~~includes ~~million~~depreciation ~~and~~expense associated with property under capital leases, was $66.5 million during the ~~years~~year ended December 31, ~~2008 and~~ 2009, ~~respectively,~~ $50.2 million for the period January 1, 2010 through December 7, 2010, ~~and~~ $3.3 million for the period December 8, 2010 through December 31, 2010 and $45.2 million during the year ended December 31, 2011.

5756

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Goodwill and Purchased Intangible Assets

Goodwill

The changes in the carrying amount of goodwill during the year ended December 31, ~~2010~~2011 were as follows (in thousands):

Balance as of December 31, 2009
Goodwill	$	35,109
Accumulated impairment loss	—
	35,109
Goodwill eliminated in purchase accounting	(35,109		)
Goodwill acquired during year	188,890
Balance as of December 31, 2010
Goodwill	~~188,890~~$	170,126
Accumulated impairment loss	—
	$	188,890
	170,126
Goodwill acquired during year	21,399
Goodwill adjustments	3,236
Balance as of December 31, 2011
Goodwill	194,761
Accumulated impairment loss	—
	$	194,761

Goodwill asacquired ofduring ~~December 31,~~the ~~2010~~period resulted from the ~~Acquisition~~Company’s ~~through~~acquisition ~~push-down~~of ~~accounting.~~STS ~~See~~Telecom, which is more fully described in Note 3, “Acquisitions,.” ~~for~~Goodwill ~~more~~adjustments ~~information.~~during ~~The~~the ~~book~~year resulted from adjustments in the fair value of ~~goodwill~~assets ~~prior~~and toliabilities assumed in the Acquisition ~~was~~that ~~attributable~~were not deemed material to anretrospectively ~~acquisition~~adjust byprovisional ~~the~~amounts ~~Company~~recorded inat ~~prior~~the ~~years~~acquisition date.

~~Purchased~~Other Intangible Assets

The ~~following~~gross ~~table~~carrying ~~presents~~value ~~the~~and ~~components~~accumulated ofamortization ~~the~~by ~~Company’s~~major ~~acquired identifiable~~ intangible ~~assets~~asset ~~included~~category ~~in the accompanying Consolidated Balance Sheets~~ as of December 31, ~~2009~~2010 and ~~2010~~2011 were as follows (in thousands):

	Predecessor Entity							SuccessorEntity
	As of December 31, 2010							As of December 31, 2011
	As of December 31, 2009							As of December 31, 2010
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Value		Amortization			Value		Value		Amortization			Value
Intangible assets subject to amortization:
Customer relationships	$	117,600	$	(1,358	)	$	116,242	$	133,300	$	(23,901	)	$	109,399
Customer relationships	$	20,316	$	(18,204	)	$	2,112	$	117,600	$	(1,358	)	$	116,242
Developed technology	9,900		(110		)	9,790		11,600		(2,568		)	9,032
Developed technology	—		—			—		9,900		(110		)	9,790
Trade name	3,700		(82		)	3,618		3,700		(1,316		)	2,384
Trade name	156		—			156		3,700		(82		)	3,618
Other	—		—			—		450		(150		)	300
	$	20131,~~472~~200	$	(181,~~204~~550	)	$	2129,~~268~~650	$	~~131~~149,~~200~~050	$	(127,~~550~~935	)	$	~~129~~121,~~650~~115

The gross carrying value of identifiable intangible assets as of December 31, 2011 includes $15.7 million of customer relationships, $1.7 million of developed technology and $0.5 million of other intangible assets resulting from the STS Telecom acquisition. Customer relationships represent the fair values of the underlying relationships and agreements with the Company’s customers. Developed technology represents the fair values of the Company’s processes, patents and trade secrets related to the design and development of the Company’s internally used software and technology. Trade name represents the fair values of brand and name recognition ~~associated with ITC^DeltaCom’s services~~. AsOther ofrepresents ~~December 31, 2010,~~ the ~~weighted~~fair ~~average~~value ~~amortization~~of ~~periods were 5.8 years for customer relationships, 6.0 years for developed technology and 3.0 years for trade names. The customer relationships are being amortized using the straight~~non-~~line~~compete method because this matches the estimated cash flow generated by such asset, and the developed technology and trade name are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determinedagreements.

58As of December 31, 2011, the weighted average amortization periods were 5.8 years for customer relationships, 5.3 years for developed technology, 3.0 years for the trade name and 2.5 years for other identifiable intangible assets. The customer relationships are being amortized using the straight-line method because this matches the estimated cash flow generated by such assets, and the developed technology and trade name are being amortized using the straight-line method because a pattern to which the expected

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Amortization~~benefits ~~expense~~will ~~for~~be ~~definite-lived~~consumed ~~intangible~~or ~~assets~~otherwise ~~was~~used ~~$2.5~~up ~~million~~could innot each of the years ended December 31, 2008 and 2009, $2.3 million for the period January 1, 2010 through December 7, 2010 and $1.6 million for the period December 8, 2010 through December 31, 2010. Amortization of definite-lived intangible assets is included in depreciation and amortization in the Consolidated Statements of Operations. Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $23.2 million, $23.2 million, $23.2 million, $22.0 million, $21.7 million and $16.4 million during the years ending December 31, 2011, 2012, 2013, 2014, and 2015 and thereafter, respectively. Actual amortization expense to be ~~reported~~reliably ~~in future periods could differ materially from these estimates as a result of asset acquisitions, changes in estimated useful lives and other relevant factors~~determined.

Amortization expense for definite-lived intangible assets was $2.5 million during the year ended December 31, 2009, $2.3 million for the period January 1, 2010 through December 7, 2010, $1.6 million for the period December 8, 2010 through December 31, 2010 and $26.4 million during the year ended December 31, 2011. Amortization of definite-lived intangible assets is included in depreciation and amortization in the Consolidated Statements of Operations.

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $26.9 million, $25.9 million, $24.6 million, $24.3 million, $18.9 million and $0.5 million during the years ending December 31, 2012, 2013, 2014, 2015 and 2016 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of asset acquisitions, changes in estimated useful lives and other relevant factors.

7. Other Accrued Liabilities

Other accrued liabilities consisted of the following as of December 31, ~~2009~~2010 and ~~2010 (in thousands)~~2011:

	Predecessor Entity		Successor Entity
	As of December 31,
	As of		As of
	2010		2011
	December 31, 2009		December 31, 2010
	(in thousands)
Accrued taxes and surcharges	$	13,590	$	16,184
Accrued communications costs	$	10,825	$	10,901
Accrued communications costs	11,505		10,825
Accrued taxes and surcharges	16,184		8,358
Accured interest	580		8,622
Deposits and due to customers	3,285		3,591
Deposits and due to customers	1,968		3,285
Other	7,551		6,205
Other	7,950		7,551
	$	37,845	$	29,055
	$	35,593	$	46,467

8. Long-Term Debt and Capital Lease Obligations

Long-~~Term~~term ~~Debt~~debt and capital lease obligations consisted of the following as of December 31, 2010 and 2011:

Long-term debt obligations as of December 31, 2009 and 2010 consisted of the following (in thousands):

	As of December 31,
	2010		2011
	(in thousands)
Senior secured notes due April 1, 2016	$	325,000	$	324,800
Unamortized premium on senior secured notes due April 1, 2016	26,251		22,056
Capital lease obligations	—		927
Carrying value of debt and capital lease obligations	351,251		347,783
Less current portion of long-term debt and capital lease obligations	—		(419		)
Long-term debt and capital lease obligations	$	351,251	$	347,364

	Predecessor Entity			Successor Entity
	As of December 31, 2009			As of December 31, 2010
10.5% senior secured notes due April 1, 2016, including unamortized premium of $26,251	$	—		$	351,251
First lien term loan facility due July 31, 2013, net of unamortized discount of $1,402	223,173			—
Second lien credit facility due July 31, 2014	75,000			—
Revolving credit facility due July 31, 2012	8,500			—
Total	306,673			351,251
Less current maturities	(4,614		)	—
Total	$	302,059		$	351,251

Senior Secured Notes due April 1, 2016

General. In April 2010, ITC^DeltaCom issued $325.0 million aggregate principal amount of 10.5% senior secured notes due on April 1, 2016 ~~in a registered offering~~ at an offering price of 97.857% ofand ~~the~~received ~~principal~~net ~~amount~~proceeds of ~~the Notes~~$308.5 ~~ITC^DeltaCom~~million ~~used~~after ~~the~~transaction ~~gross~~fees ~~proceeds~~ of ~~approximately~~ $~~318~~9.05 million. itIn ~~received~~July 2010, ~~from~~the Company completed an exchange offer and exchanged the ~~sale~~Notes for an identical series of Notes registered with the ~~Notes~~Securities and Exchange Commission. The Company applied the net proceeds 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. ~~The Notes accrue interest at a rate~~

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Under the indenture for the Notes, following the consummation of the Acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 2010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011. As a result of purchase accounting, the Notes were recorded at acquisition date fair value. The fair value was based on publicly-quoted market prices. The resulting debt premium is being amortized over the remaining life of the Notes.

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

Redemption. ITC^DeltaCom 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. ITC^DeltaCom 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, ITC^DeltaCom 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, ITC^DeltaCom 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) ITC^DeltaCom sells certain of its assets and does not either (a) apply the net sale proceeds to repay indebtedness under the 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, it 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. ITC^DeltaCom 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.

Ranking and guaranty. The Notes are ITC^DeltaCom’s general senior obligations and rank equally in right of payment with any future senior indebtedness. The Notes are secured on a first-priority basis, along with 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 Securities and Exchange Commission Regulation S-X Rule 3-10, “Financial statements of guarantors and issuers of guaranteed securities registered or being registered,” ITC^DeltaCom is not required to provide condensed consolidating financial information for the subsidiary guarantors.

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~of 10~~Covenants.~~5% per~~ ~~year.~~The ~~Interest~~indenture ongoverning the Notes iscontains ~~payable~~covenants ~~semi-annually~~that, inamong ~~cash~~other inthings, ~~arrears~~limit onITC^DeltaCom’s ~~April 1~~ability, and ~~October 1~~the ability of ~~each~~ITC^DeltaCom’s ~~year~~restricted subsidiaries, ~~commencing~~to incur additional indebtedness, create liens, pay dividends on, ~~October 1~~redeem or repurchase ITC^DeltaCom’s capital stock, ~~2010.~~make ~~The~~investments ~~Notes~~or ~~will~~repay ~~mature~~subordinated onindebtedness, ~~April 1~~engage in sale-leaseback transactions, ~~2016. On~~enter ~~April 9~~into transactions with affiliates, ~~2010~~sell assets, ~~the~~create ~~Company~~restrictions ~~also~~on ~~closed~~dividends aand ~~$30.0~~other ~~million~~payments ~~five-year~~to ~~senior~~ITC^DeltaCom ~~secured~~from ~~revolving~~its ~~credit~~subsidiaries, ~~facility~~issue or sell stock of subsidiaries, and engage in mergers and consolidations. ~~Upon~~All ~~closing~~of the covenants are subject to a number of important qualifications and exceptions under the ~~Acquisition~~indenture. As of December 31, 2010 and 2011, the Company ~~terminated~~was ~~that~~in ~~revolving~~compliance ~~credit~~with ~~facility~~all of its financial covenants.

Fair value. As aof ~~result~~December 31, of2010 ~~purchase~~and ~~accounting~~2011, the ~~Notes~~fair ~~were~~value ~~recorded~~of atthe ~~acquisition~~ITC^DeltaCom ~~date~~Notes ~~fair~~was ~~value~~approximately $352.6 ~~The~~million ~~fair~~and ~~value~~$320.6 ~~was~~million, respectively, based on ~~publicly-~~quoted market prices. ~~The~~in ~~resulting~~active ~~debt premium is being amortized over the remaining life of the Notes~~markets.

~~ITC^DeltaCom~~Debt ~~may~~Issuance 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. ITC^DeltaCom 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, ITC^DeltaCom 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, ITC^DeltaCom 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) ITC^DeltaCom sells certain of its assets and does not either (a) apply the net sale proceeds to repay indebtedness under the 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, it 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. ITC^DeltaCom 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.Costs

~~The~~During ~~Notes~~2010, ~~are~~the ~~ITC^DeltaCom’s~~Company ~~general~~wrote ~~senior~~off ~~obligations~~$7.9 ~~and~~million ~~rank equally in right~~ of ~~payment~~debt ~~with~~issuance ~~any~~costs ~~future~~as ~~senior indebtedness. The Notes are secured on~~ a ~~first-priority~~result ~~basis, along with any future pari passu secured obligations, subject to specified exceptions and permitted liens, by substantially all~~ of the ~~assets~~retirement of ~~ITC^DeltaCom and~~ its ~~subsidiaries~~first ~~that~~and ~~are~~second ~~deemed~~lien tofacilities. beIn ~~restricted~~connection ~~subsidiaries~~with ~~under~~ the ~~indenture~~issuance ~~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~~notes byin ~~each~~April 2010, ~~of ITC^DeltaCom’s restricted subsidiaries on~~ the ~~initial~~Company ~~issue~~recorded ~~date~~$10.0 million of ~~the~~debt ~~notes~~issuance ~~and~~costs. ~~will be guaranteed on a senior secured basis by each future domestic restricted subsidiary~~However, ~~other~~in ~~than~~connection ~~certain~~with ~~excluded~~the ~~subsidiaries~~Acquisition, ~~and~~those byassets ~~any~~were ~~foreign~~determined ~~restricted~~to ~~subsidiary~~have ~~that~~no ~~guarantees~~fair ~~any~~value ~~indebtedness~~and ofwere ~~ITC^DeltaCom~~reduced orto ~~any~~zero ~~domestic~~by ~~restricted~~purchase ~~subsidiary~~accounting. ~~The~~As ~~guarantees~~a ~~are~~result, the ~~subsidiary~~Company ~~guarantors’~~no ~~general~~longer ~~senior~~has ~~obligations~~an ~~and~~asset ~~rank~~for ~~equally~~debt inissuance ~~right~~costs ofas ~~payment with all~~ of ~~the~~December 31, ~~subsidiary~~2010 ~~guarantors’~~or ~~existing and future senior indebtedness~~2011.

~~The~~Capital 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.Leases

AsThe ofCompany ~~December 31,~~leases ~~2008,~~certain ~~2009~~equipment ~~and~~that ~~2010,~~is accounted for as capital leases. These capital leases were assumed by the Company ~~was~~through inits ~~compliance~~acquisition ~~with~~of ~~all~~STS ofTelecom. ~~its~~Depreciation ~~financial~~expense ~~covenants~~related to assets under ~~each~~capital ofleases ~~its~~is ~~credit~~included ~~facilities~~in depreciation and ~~other~~amortization ~~debt~~expense ~~obligations~~in ~~then~~the inConsolidated ~~effect~~statements of Operations. The future minimum payments due under the leases are as follows (in thousands):

Year Ending December 31,
2012	$	445
2013	333
2014	231
2015	84
2016	6
Total minimum lease payments	$	1,099
Less amounts representing interest	(172		)
Total capital lease obligations	$	927

Derivative Financial Instrument

The Company had a receive-floating, pay-fixed interest rate swap agreement that was designated as a cash flow hedge. Under terms of the first lien and second lien credit facility agreements, 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 interest rate swap agreement was terminated during the year ended December 31, 2009. The change in unrealized gains (losses) on this derivative instrument designated as a cash flow hedging instrument, net of tax, of $5.6 million is included in other comprehensive loss in the Consolidated Statement of Stockholders’ Equity (Deficit) and Comprehensive Loss for the year ended December 31, 2009.

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Derivative~~9. Shareholder’s ~~Financial Instrument~~Equity

~~The~~In ~~Company~~connection ~~had~~with athe ~~receive-floating~~Acquisition, ITC^DeltaCom ~~pay-fixed~~issued ~~interest~~100 ~~rate~~shares ~~swap~~of ~~agreement~~Common ~~that~~Stock, ~~was~~par ~~designated~~value ~~as a cash flow hedge~~$0.01 ~~Under~~per ~~terms of the first lien and second lien credit facility agreements~~share, ~~the Company agreed~~ to ~~hedge~~EarthLink. atIn ~~least~~December 2010, ITC^DeltaCom issued 50% shares of ~~the~~Common ~~aggregate~~Stock, ~~principal~~par ~~amount~~value of$0.01 ~~borrowings~~per ~~outstanding under the facilities~~share, soto ~~that~~EarthLink ~~such~~for ~~borrowings~~$10.0 ~~would~~million bein ~~effectively~~cash ~~subject~~pursuant to a ~~fixed~~stock orsubscription ~~maximum interest rate~~agreement. ~~The~~In ~~interest rate swap agreement was terminated as of September~~March 302011, ITC^DeltaCom ~~2009.~~issued ~~The~~100 ~~change~~shares inof ~~unrealized~~Common ~~gains~~Stock, ~~(losses)~~par onvalue ~~this~~$0.01 ~~derivative~~per ~~instrument designated as a cash flow hedging instrument~~share, ~~net~~to ofEarthLink ~~tax,~~for of $(130.4)0 million ~~and $5.6 million are included~~ in ~~other~~cash ~~comprehensive~~pursuant ~~loss~~to ina ~~the~~stock ~~accompanying~~subscription ~~consolidated statements of stockholders’ equity and comprehensive loss for the years ended December 31, 2008 and 2009, respectively~~agreement.

9. Equity

Until redeemed or converted on January 29, 2008, the Company had outstanding 412,215 shares of 6% Series H convertible redeemable preferred stock. The Company recognized a beneficial conversion feature discount on the Series H preferred stock which was accreted to the January 29, 2008 date of redemption and conversion, and recognized as a charge to the then common stockholders. Each share of Series H preferred stock had a stated liquidation preference of $100 and was entitled to receive cash dividends at an annual rate of 6% from the date of issue until redeemed or converted.

In December 2010, ITC^DeltaCom issued 50 shares of Common Stock, par value $0.01 per share, to EarthLink for $10.0 million in cash pursuant to a stock subscription agreement.

10. Stock-Based Compensation

The Company recognized stock-based compensation expense of $~~2.2 million and $~~3.0 million during the ~~years~~year ended December 31, ~~2008 and~~ 2009, ~~respectively,~~ $5.4 million ~~during~~for the period January 1, 2010 through December 7, 2010, ~~and~~ $0.1 million for the period December 8, 2010 through December 31, 2010 and $4.0 million during the year ended December 31, 2011. The Company has classified stock-based compensation expense within selling, general and administrative expense, the same operating expense line item as cash compensation paid to employees.

Stock Incentive Plans

Until the Acquisition on December 8, 2010, the Company maintained 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.

The Compensation Committee of ITC^DeltaCom’s Board of Directors administered the ~~Stock~~stock-based ~~Incentive~~employee ~~Plan~~compensation plans and approved the recipients of grants under the plan and the terms of any awards. Awards under the Stock Incentive Plan included stock options and restricted stock units. Stock options were granted with an exercise price equal to the market value of the stock covered by the option on the date of grant. Option vesting schedules generally ranged 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 were subject to vesting over a two-year period. The ~~option~~fair ~~price~~value ~~for~~of ~~any~~restricted ~~option~~stock ~~may~~units ~~not~~awarded bewas ~~less~~calculated ~~than~~using ~~100% of~~ the ~~fair~~closing ~~market~~ value of the common stock ~~covered~~on by the ~~option~~grant ondate and was being amortized over the ~~date~~restriction lapse periods of ~~grant~~the awards.

~~The ITC^DeltaCom, Inc. Amended and Restated Executive~~ Stock Incentive Plan was administered by ITC^DeltaCom’s Board of Directors, and the only participants in this plan were three senior officers whose employment terminated upon completion of the Acquisition.Options

All stock options with an exercise price less than the merger consideration of $3.00 per share were paid out at the Acquisition closing on December 8, 2010.

Restricted Stock Units

In connection with the Acquisition, certain ITC^DeltaCom restricted stock units were assumed and converted into EarthLink restricted stock units, determined by multiplying the number of shares of common stock subject to the ITC^DeltaCom restricted stock units by the conversion ratio set forth in the merger agreement. Approximately 1.8 million ITC^DeltaCom restricted stock units were converted into 0.6 million EarthLink restricted stock units based on a conversion ratio of 0.33, which was calculated as the merger consideration of $3.00 divided by the average EarthLink stock price for 20 consecutive trading days ending on (and including) the second trading day immediately prior to the closing date. The fair value of the stock-based awards was determined based on the fair value of the underlying shares. The fair value of restricted stock units assumed and converted relating to postcombination services of $3.0 million is being recognized as operating expense in the Consolidated Statement of Operations on a straight-line basis over the remaining service periods. As of December 31, 2011, 0.3 million of these restricted stock units were outstanding.

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ITC^DELTACOM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Stock~~Subsequent ~~Options~~to the Acquisition, EarthLink has granted restricted stock units to ITC^DeltaCom employees under EarthLink’s benefit plans. Compensation cost associated with restricted stock units granted under EarthLink’s benefit plans is pushed down from EarthLink based on the employees providing services to ITC^DeltaCom.

The following table summarizes information concerning stock option activity as of and for year ended December 31, 2010:

			Weighted
			Average
			Exercise
	Stock Options		Price
Outstanding as of December 31, 2009	2,365,766		$	3.00
Granted	—		0.00
Settled pursuant to the Acquisition	(2,050,668	)	1.26
Forfeited	(315,098	)	12.74
Outstanding as of December 31, 2010	—		$	—

All stock options with an exercise price less than the merger consideration of $3.00 per share were paid out at the Acquisition closing.

Valuation Assumptions for Stock Options

There were no stock option awards granted under the Stock Incentive Plan during the any of the three years ended December 31, ~~2010~~2011. For stock options granted prior to the Acquisition, the Company selected a Black-Scholes valuation model as the method for determining the fair value of its equity awards and used the modified prospective transition method, which requires that compensation cost be recognized in the financial statements for all awards granted. The Company recognized compensation cost on a straight-line basis over the vesting periods of the awards.

In ~~August~~ 2009, the Company granted nonqualified stock options ~~with an exercise price of $1.25 per option~~ to ~~purchase 1.6 million shares of common stock to a~~ senior ~~officer that vest up to 25% following each of calendar years 2009 through 2012 based on achievement of the performance objectives specified for that calendar year by the terms of the grant~~officers. The grant date fair value ~~of the options equal to the $1.3 million total value~~ was determined based on a Black-Scholes valuation model. ~~These options were included in the options determined by the Company to require liability classification.~~ The Company also granted to the senior officer at the same date nonqualified stock options with an exercise price of $1.25, to purchase 0.4 million shares of common stock that vest ratably over four years on the related anniversaries of the grant date. The grant date fair value of ~~the~~stock options ~~equal to $0.3 million~~ was determined based on a Black-Scholes valuation model. These options were also included in the options determined by the Company to require liability classification. The fair value of each option grant was estimated on the date of grant ~~and at and for each reporting period thereafter~~ using the following assumptions: 3.21% risk free interest rate; 0.00% expected dividend yield; 6.0 years expected lives; and 70% volatility. ~~The rate of estimated forfeitures was based on the expectation for the position of the grant recipient.~~

~~Restricted Stock Units~~11. 401(k) Plan

~~Restricted~~Employees ~~stock~~of ~~units awarded under~~ the ~~Stock~~Company ~~Incentive~~participate ~~Plan~~in ~~were granted to~~ the ~~recipients~~Company’s at401(k) defined nocontribution ~~cost~~plan. The ~~fair~~Company ~~value~~offered matching of ~~restricted~~employee ~~stock~~contributions ~~units~~at ~~awarded~~a ~~was~~rate ~~calculated~~of ~~using~~50% on the ~~closing~~first ~~value~~4% of ~~the~~employee ~~common~~contributions ~~stock~~for on the ~~grant~~year ~~date~~ended ~~and~~December 31, ~~was~~2009. ~~being~~Total ~~amortized~~matching ~~over~~contributions ~~the~~made ~~restriction~~to ~~lapse periods of~~ the ~~awards.~~Company’s ~~The~~plan ~~grant~~and ~~date~~charged ~~fair~~to ~~value~~expense ofby ~~restricted~~the ~~stock~~Company ~~units~~for ~~granted in~~ the years ended December 31, ~~2008~~2009 and ~~2009~~2011 was $40.98 million and $1.50 million, respectively,. ~~and~~The ~~$5.3~~Company ~~million~~offered ~~for~~no ~~the~~matching ~~period~~of ~~January 1,~~employee ~~2010~~contributions ~~through~~during the year ended December 731, 2010. ~~Restrictions~~No ondiscretionary ~~transfer~~contributions ~~lapsed~~were ~~over two-year to four-year periods~~made.

12. Income Taxes

The current and deferred income tax benefit for the periods presented was as follows (in thousands):

Predecessor Entity

Successor Entity

January 1,

December 8,

Year Ended

Filing Compare · ITC DELTACOM INC