UNITED STATES

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, ~~2011~~2012



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.)
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1375 Peachtree ~~Street~~St., Atlanta, Georgia 30309

(Address of principal executive offices,) (Zip ~~including zip code~~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~~Common Stock, $.01 par value

_______________________________________________________

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 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~~the definitions 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(Do not check if a smaller reporting company) Smaller ~~Reporting~~reporting ~~Company~~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

As of ~~January~~February 3115, ~~2012~~2013, ~~250~~350 shares of common stock, $0.01 par value per share, 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.

Table of Contents

ITC^DELTACOM, INC.

Annual Report on Form 10-K

For the Year Ended December 31, ~~2011~~2012

TABLE OF CONTENTS

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



Part I

Item 1. Business	1

Item 1A. Risk Factors	10

Item 1B. Unresolved Staff Comments	18

Item 2. Properties	19

Item 3. Legal Proceedings	19

Item 4. Mine Safety Disclosures	19

Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19

Item 6. Selected Financial Data*	19

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	19

Item 7A. Quantitative and Qualitative Disclosures about Market Risk	32

Item 8. Financial Statements and Supplementary Data	32

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	58

Item 9A. Controls and Procedures	59

Item 9B. Other Information	59

Part III

Item 10. Directors, Executive Officers and Corporate Governance*	59

Item 11. Executive Compensation*	59

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*	59

Item 13. Certain Relationships and Related Transactions, and Director Independence*	59

Item 14. Principal Accounting Fees and Services	60

Part IV

Item 15. Exhibits, Financial Statement Schedules	60

SIGNATURES	62

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

Table of Contents

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~~ Part I

Item 1. Business.

Overview

ITC^DeltaCom, Inc., together with its consolidated subsidiaries, provides integrated communications services in the southeastern United States. We provide a broad range of data and voice communications services to businesses and enterprise organizations, including high-speed or broadband data communications, local exchange, long-distance, mobile data and voice and equipment services. We also sell transmission capacity to other communications providers on a wholesale basis. We offer these services primarily over our regional fiber optic network.

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~~Business™ and our wholesale services were rebranded as EarthLink Carrier™, an EarthLink Business company.

~~Services~~Acquisition

WeOn ~~provide a broad range of data~~March 2, ~~voice and equipment services to businesses~~2011, ~~enterprise~~we ~~organizations~~acquired ~~and~~Saturn ~~communications~~Telecommunication ~~carriers~~Services Inc. We ~~present our revenue in the following three categories: (1) retail services, which includes data~~ and ~~voice~~affiliates ~~services provided to businesses and enterprise organizations;~~ (~~2) wholesale~~“STS ~~services~~Telecom”), ~~which~~a ~~includes~~privately-held ~~the~~provider ~~sale~~ of ~~transmission~~IP ~~capacity~~communication ~~to other telecommunications carriers;~~ and ~~(3) other~~information technology 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, toprimarily ~~business~~in ~~customers~~Florida. ~~with~~STS ~~one~~Telecom ~~site.~~operates ~~Our~~a ~~wholesale~~sophisticated ~~customers~~voice-over-Internet-protocol ~~consist~~("VoIP") ~~primarily~~platform. ofThe ~~telecommunications~~primary ~~carriers~~reason ~~and~~for ~~network~~the ~~resellers. Revenues~~acquisition ~~generally~~was ~~consist~~to ofleverage ~~monthly~~STS ~~recurring~~Telecom’s ~~fees;~~expertise ~~usage~~in ~~fees;~~managed ~~installation~~hosted ~~fees;~~VoIP ~~equipment~~as ~~fees~~part ~~and~~of ~~termination~~our ~~fees~~VoIP offerings.

~~Retail~~ Services

~~Data services.~~ We ~~offer~~provide a broad range of data, voice and ~~Internet~~equipment services to businesses and ~~enterprise~~communications ~~organizations,~~carriers. ~~including~~We ~~high-speed~~present ~~Internet~~our ~~access~~revenue in the following three categories: (1) retail services, ~~dedicated~~which ~~Internet~~includes ~~access~~data, voice and ~~Multiprotocol~~mobile ~~Label~~data ~~Switching~~and voice services provided to business customers; (~~“MPLS”~~2) wholesale services., Wewhich ~~offer~~includes athe ~~full~~sale ~~range~~ of ~~access~~transmission ~~types,~~capacity ~~including~~to ~~DSL,~~other ~~T-1~~telecommunications carriers; and ~~DS3~~(3) other ~~lines~~services, ~~Ethernet~~which ~~and~~includes ~~wireless~~the ~~broadband,~~sale atof ~~speeds~~customer ~~ranging~~premises ~~from 1~~equipment.~~5Mbps~~ toOur ~~over~~retail ~~100Mbps.~~customers ~~All~~range ~~connectivity~~from islarge ~~provided~~enterprises ~~over~~with ~~our~~many ~~facilities-based~~locations, ~~network~~to small and ismedium-sized ~~monitored~~multi-site ~~24/7~~businesses, to ~~keep~~business ~~customer~~customers ~~information~~with ~~secure~~one site. Our ~~high-speed~~wholesale ~~services~~customers ~~also~~consist ~~includes~~primarily ~~enhanced~~of ~~features~~telecommunications ~~such~~carriers asand ~~online~~network ~~faxing,~~resellers. ~~email,~~Revenues ~~POP~~generally ~~services,~~consist ~~web~~of ~~hosting,~~monthly ~~firewall~~recurring ~~and~~fees; ~~Virtual~~usage ~~Private~~fees; ~~Networks~~installation ~~(VPN),~~fees; ~~among~~termination ~~others~~fees and equipment sales.

~~Voice~~Retail ~~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,~~Services

Data services. We offer a broad range of data and Internet services to businesses and enterprise organizations, including high-speed Internet access, dedicated Internet access and Multiprotocol Label Switching (“MPLS”) services. We offer a full range of access types, including DSL, T-1 and DS3 lines, Ethernet and wireless broadband, at speeds ranging from 1.5Mbps to over 100Mbps. All connectivity is provided over our facilities-based network and is monitored 24/7 to keep customer information secure. Our high-speed services also includes enhanced features such as online faxing, email, POP services, web hosting, firewall and Virtual Private Networks (VPN), among others.

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

hosted IP 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.1

WeTable ~~also provide mobile data and voice services using the network~~ of nationwide wireless services provides. 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.Contents

~~Wholesale~~types, ~~Services~~from traditional voice lines to T1 to Ethernet. We also provide enhanced services to our customers by offering a number of calling features.

We also provide ~~voice~~mobile data and ~~data~~voice services tousing ~~other~~the ~~communications~~network ~~carriers~~of ~~and~~nationwide towireless ~~larger-scale~~services ~~providers of network capacity~~provides. ~~Revenues~~Our ~~from~~mobile ~~these~~ services ~~are~~provide ~~generated~~nationwide ~~from~~mobile ~~sales~~access to ~~other communications companies~~voice, ~~including incumbent local exchange carriers (“ILECs”)~~e-mail, ~~competitive~~text ~~local~~and ~~exchange carriers (“CLECs”), wireless service providers, cable companies,~~ Internet ~~Service Providers (“ISPs”) and others~~connectivity. WeOur ~~offer~~customers ~~broadband~~can ~~transport~~select ~~services,~~mobile ~~including~~devices ~~private~~from ~~line~~leading ~~services,~~manufacturers ~~Ethernet private line services~~ and ~~wavelength~~use ~~services,~~our ~~that~~hosted ~~allow other communications providers to transport the traffic of their end~~e-~~user~~mail orexchange ~~wholesale customers across our local and intercity network; local communications~~ services to ~~ISPs~~integrate ~~and~~office-based ~~local~~e-mail, ~~dial~~calendar ~~tone communications services to service providers; nationwide live~~ and ~~automated~~contacts ~~operator~~programs ~~and~~with ~~directory assistance services; and dedicated Internet access services through our IP network and our direct connectivity to~~ the IPmobile ~~networks of other ISPs~~devices.

~~Other~~Wholesale Services

We ~~sell,~~provide ~~install~~voice and ~~perform~~data onservices to other communications carriers and to larger-~~site~~scale ~~maintenance~~providers of ~~equipment~~network capacity. Revenues from these services are generated from sales to other communications companies, ~~such~~including asincumbent ~~telephones~~local exchange carriers (“ILECs”), competitive local exchange carriers (“CLECs”), wireless service providers, cable companies, Internet Service Providers (“ISPs”) and ~~PBX’s~~others. We offer broadband transport services, inincluding ~~all~~private ofline services, Ethernet private line services and wavelength services, that allow other communications providers to transport the ~~markets~~traffic inof ~~which~~their weend-user ~~offer~~or ~~integrated~~wholesale customers across our local and intercity network; local communications services to ISPs and local dial tone communications services to service providers; 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 ISPs.

~~Sales~~Other ~~and Distribution~~Services

WeOther ~~provide~~services ~~our~~includes ~~services~~selling, ~~through~~installing ~~three~~and ~~primary~~performing ~~sales~~on-site ~~channels:~~maintenance ~~direct~~of ~~sales~~equipment, ~~indirect~~such ~~sales~~as telephones and ~~wholesale~~PBX’s, in all of the markets in which we offer integrated communications services. However, we decided to exit telecom systems sales ~~channels~~early in 2013 in order to focus on our hosted VoIP platform for new voice customers.

~~Direct~~Sales ~~sales channel. Our direct sales force is composed of sales personnel, technical consultants~~ and ~~technicians.~~Distribution

~~Indirect~~We market our retail services through direct, inside and independent sales ~~channel~~channels. Our direct sales force is composed of sales personnel and technical consultants. We also maintain an inside sales force and lead generation tools like Search Engine Marketing (SEM) to drive demand. We supplement our direct and inside sales force with our independent 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.

2Customer Service and Retention

~~Table~~We believe that our broad communications portfolio and blend of ~~Contents~~access technologies for connectivity are key differentiators that can help us build long-term customer relationships. We believe that offering a bundled package of communications services to our customers increases retention rates and limits customer churn. Additionally, with our sales structure, we have more distinct sales and support roles that we believe will improve customer retention. 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.

~~Customer~~Network ~~Service and Retention~~Infrastructure

We ~~seek~~provide ~~to differentiate ourselves from~~ our ~~competitors~~integrated 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 toprimarily ~~our customers is an attractive means of delivering communications solutions, thereby increasing retention rates and limiting customer churn. We reinforce our strategy~~ through ~~compensation~~a ~~programs~~regional ~~that~~fiber ~~reward~~optic ~~our~~network ~~sales~~ and ~~account~~switching ~~management staff based on customer retention~~ and ~~revenue~~colocation ~~growth~~facilities.

Fiber Optic Network. ~~Infrastructure~~As of December 31, 2012, our advanced fiber optic network consisted of 16,551 route miles (12,606 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.

WeColocation ~~provide~~Facilities ~~our~~- ~~integrated~~With co-located communications ~~services~~equipment ~~primarily~~within ~~through~~the acentral ~~regional~~offices ~~fiber~~of ~~optic~~ILECs ~~network~~ and ~~switching~~alternative ~~and~~access ~~colocation~~providers in various markets in the United States, we offer remote facilities.-based local and long distance services in markets

Fiber Optic Network. As of December 31, 2011, our advanced fiber optic network consisted of 16,551 route miles (12,606 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.2

~~Switching~~Table ~~and Colocation Facilities. Our network design, together with our interconnection agreements with the incumbent local telephone companies, such as AT&T, has enabled us to be a provider~~ of local and long distance telephone services in all of our markets. Switches are the primary electronic components that connect customers to our network and transmit data and voice communications over our network. As of December 31, 2011, we had 21 voice switches. Our switches are capable of handling both local and long distance voice traffic.Contents

We have colocated communications equipment within the central offices of ILECs 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. ToUsing ~~provide these remote services, we use~~ our fiber optic network and leased facilities to connect our remote equipment to our switches, ~~when~~colocation itprovides iscost-efficient ~~economically~~access ~~and~~to ~~operationally~~last ~~advantageous~~mile ~~for~~facilities us to doconnect soto customers.

~~Network~~Switch ~~backbone Our~~Facilities ~~network~~- ~~backbone~~Our ~~enables~~array usof toswitch ~~offer~~facilities ~~high-quality~~send ~~wavelength,~~voice ~~Ethernet,~~and ~~SONET,~~data ~~Internet~~traffic ~~access~~domestically and ~~virtual~~internationally ~~private~~through ~~networking~~balanced ~~services~~and cost-effective routing. Services ~~The~~are ~~packet-switching~~also ~~portion~~offered ofon ~~our~~Metaswitch's ~~network~~MetaSphere ~~backbone~~MTAS is(Multimedia ~~based~~Telephony ~~upon~~Application ~~Internet~~Server) ~~Protocol,~~providing ~~which~~an isinnovative aportfolio ~~broadly~~of ~~deployed~~hosted ~~standards~~and managed business-~~based~~class ~~protocol~~communications ~~that~~solutions ~~allows~~such ~~for~~as ~~the~~nationwide ~~exchange~~hosted ofPBX ~~data~~and ~~between~~SIP ~~computer~~trunking ~~networks~~services. ~~The~~Metaswitch's ~~network~~voice ~~infrastructure~~portal iscapabilities ~~built~~are onalso ~~our~~integrated ~~Wavelength~~into ~~Division~~customer ~~Multiplexing~~portals, oroffering ~~WDM~~our clients easy access to a ubiquitous, cross-platform, unified messaging, call control and ~~core~~self-service ~~routers~~interface enabling them to access directly and upgrade their entire communications experience.

3Network 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.

~~Table of Contents~~Competition

~~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, Inc., CenturyLink, Inc. and Verizon Communications Inc.; CLECs, such as Level 3 Communications Inc., MegaPath, Inc., Windstream Corporation and XO Communications Inc.; interexchange carriers, such as Sprint Nextel Corporation; wireless and satellite service providers; cable service providers, such as Charter Communications, Inc., Comcast Corporation, Cox Communications, Inc. and Time Warner Cable; and stand-alone VoIP providers. We experience significant pricing and product competition from AT&T and other incumbents that are the dominant providers of telecommunications services in our markets. We have reduced, and may be required to further reduce, some or all of the prices we charge for our retail local, long distance and data services.

~~The~~We believe the primary competitive factors in the communications industry isinclude ~~highly~~price, ~~competitive~~availability, ~~and~~reliability weof ~~expect~~service, ~~this~~network ~~competition~~security, tovariety ~~intensify.~~of ~~These~~service ~~markets~~offerings, ~~are~~quality ~~rapidly~~of ~~changing~~service ~~due~~and toreputation ~~industry~~of ~~consolidation,~~the anservice ~~evolving~~provider. ~~regulatory~~While ~~environment~~we ~~and~~believe ~~the~~our ~~emergence~~business services compete favorably based on some of ~~new~~these ~~technologies.~~factors, Wewe ~~compete~~are ~~directly~~at ora ~~indirectly~~competitive disadvantage with ~~ILECs,~~respect ~~such~~to ascertain ~~AT&T,~~of ~~CenturyLink, Inc~~our competitors. ~~and~~Many ~~Verizon~~of ~~Communications~~our ~~Inc.;~~current ~~CLECs,~~and ~~such~~potential ascompetitors ~~Level~~have 3greater ~~Communications~~market ~~Inc.~~presence, ~~MegaPath~~engineering, ~~Inc.,~~ ~~Windstream~~technical ~~Corporation~~ and XOmarketing ~~Holdings~~capabilities ~~Inc.;~~and ~~interexchange carriers~~financial, ~~such~~personnel asand ~~Sprint~~other ~~Nextel~~resources ~~Corporation~~substantially greater than ours; ~~wireless~~own larger and ~~satellite~~more ~~service~~diverse ~~providers~~networks; ~~cable~~are ~~service~~subject ~~providers/multiple~~to ~~system~~less ~~operators~~regulation; ~~(MSOs),~~or ~~such~~have assubstantially ~~Charter~~stronger ~~Communications, Inc~~brand names., ~~Comcast~~In ~~Corporation~~addition, ~~Cox~~industry ~~Communications, Inc.~~consolidation ~~and~~has ~~Time~~resulted ~~Warner~~in ~~Cable;~~larger ~~and~~competitors ~~stand-alone~~that ~~VoIP~~have ~~providers~~greater economies of scale. WeConsequently, ~~experience~~these ~~significant~~competitors ~~pricing~~may ~~and~~be ~~product~~better ~~competition~~equipped ~~from~~to ~~AT&T~~charge ~~and~~lower ~~other~~prices ~~incumbents~~for ~~that~~their ~~are~~products ~~the~~and ~~dominant~~services, ~~providers~~to ofprovide ~~telecommunications~~more ~~services~~attractive inofferings, ~~our~~to ~~markets.~~develop Weand ~~have~~expand ~~reduced,~~their communications and ~~may~~network beinfrastructures ~~required~~more quickly, to ~~further~~adapt ~~reduce,~~more ~~some~~swiftly to new or ~~all~~emerging oftechnologies ~~the~~and changes in customer requirements, to increase prices that we ~~charge~~pay for wholesale inputs to our ~~retail~~services ~~local,~~and ~~long~~to ~~distance~~devote greater resources to the marketing and ~~data~~sale of their products and services.

~~Competition~~Regulatory 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.Environment

WeOur ~~believe~~services ~~the~~are ~~primary~~subject ~~competitive~~to ~~factors~~varying indegrees ~~the communications industry include price, availability, reliability~~ of ~~service~~federal, ~~network~~state ~~security, variety of service offerings, quality of service~~ and ~~reputation~~local ~~of the service provider~~regulation. ~~While~~Communications ~~we believe our business~~ services ~~compete favorably based on some of these factors, we~~ are atsubject ~~a competitive disadvantage with respect~~ to ~~certain~~particularly ofextensive ~~our~~regulation ~~competitors.~~at ~~Many~~both ofthe ~~our~~Federal ~~current~~ and ~~potential~~state ~~competitors~~levels. ~~have~~Internet ~~greater~~access ~~market presence~~services, ~~engineering,~~which ~~technical~~are ~~and~~not ~~marketing~~communications ~~capabilities and financial~~services, ~~personnel and other resources substantially greater than ours; own larger and more diverse networks;~~ are subject to ~~less~~a ~~regulation;~~lesser ordegree ~~have substantially stronger brand names. In addition, industry consolidation has resulted in larger competitors that have greater economies~~ of ~~scale~~regulation. ~~Consequently~~Federal, ~~these~~state ~~competitors~~and ~~may~~local beregulations ~~better~~governing ~~equipped~~our ~~to charge lower prices for their products and~~ services, toare ~~provide~~the ~~more~~subject ~~attractive~~of ~~offerings,~~ongoing tojudicial ~~develop and expand their communications and network infrastructures more quickly~~proceedings, torulemakings ~~adapt more swiftly to new or emerging technologies~~ and ~~changes~~legislative ininitiatives ~~customer requirements, to increase prices~~ that wecould ~~pay~~change ~~for~~the ~~wholesale~~manner ~~inputs~~in towhich our ~~services~~industry ~~and~~operates ~~to devote greater resources to the marketing~~ and ~~sale~~affect ofour ~~their products and services~~business.

~~Regulatory Environment~~Overview

~~Our~~Through our wholly-owned subsidiaries, we hold numerous federal and state regulatory licenses to provide communications services. ~~are~~The ~~subject~~Federal Communications Commission (“FCC”) exercises jurisdiction over telecommunications common carriers to ~~varying~~the ~~degrees~~extent ofthat ~~federal~~they provide, ~~state~~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 ~~regulation~~telephone competition. ~~Federal~~State regulatory commissions, ~~state~~commonly ~~and~~referred ~~local~~to ~~regulations~~as ~~governing~~public ~~our~~utility ~~services~~commissions ~~are~~(“PUCs”), ~~the~~generally ~~subject~~retain ofjurisdiction ~~ongoing~~over ~~judicial~~telecommunications ~~proceedings~~carriers to the extent that they provide, ~~rulemakings~~originate or terminate intrastate communications. PUCs also have authority to review and ~~legislative~~approve ~~initiatives~~interconnection ~~that~~agreements ~~could~~between ~~change~~incumbent ~~the~~telephone ~~manner~~carriers and competitive carriers such as us, and to conduct arbitration of disputes arising in ~~which~~the ~~our~~negotiation ~~industry~~of ~~operates~~such agreements. Local governments may require us to obtain licenses, permits or franchises to use the public rights-of-way necessary to install and ~~affect~~operate our ~~business~~network. Our operations are also subject to various consumer, environmental, building, safety, health and other governmental laws and

~~Overview~~3

~~Through~~Table 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. PUCs 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.Contents

4regulations.

~~Table~~The regulatory environment relating to our business continues to evolve. Bills intended to amend the Communications Act of ~~Contents~~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 incumbent carrier networks 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.

~~The~~Federal ~~regulatory~~Regulation 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~~Several ~~Regulation~~of our operating subsidiaries are classified as non-dominant telecommunications carriers by the FCC and, as a result, the prices, terms and conditions of our interstate and international communications 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 communications 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 interstate and international communications 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.

~~Several~~Local ofCompetition. ~~our~~The ~~operating~~Communications ~~subsidiaries~~Act ~~are~~preempts ~~classified~~state ~~as non-dominant carriers by the FCC~~ and, aslocal alaws ~~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~~extent ~~requirement~~ that ~~our~~they ~~charges,~~prevent ~~practices~~competition ~~and~~in ~~classifications~~the ~~for~~provisioning ~~communications~~of ~~services must be “just and reasonable,” and that we refrain from engaging in~~ any ~~“unjust~~telecommunications ~~or unreasonable discrimination” with respect to our charges, practices or classifications~~service. The ~~FCC~~Communications ~~must~~Act ~~grant~~imposes ~~its~~a ~~approval~~variety ~~before any change in control~~ of ~~any~~duties ~~carrier~~on carriers providing ~~interstate~~local ortelephone ~~international~~ services, orincluding ofcompetitive ~~any~~carriers ~~entity controlling~~ such aas ~~carrier~~us, ~~and~~to ~~before~~promote ~~the~~competition ~~assignment~~in ~~of any authorizations held by such a carrier. We have~~ the ~~operating~~provisioning ~~authority~~of ~~required~~these ~~by the FCC to conduct our long distance business as it is currently conducted~~services. AsThese aduties ~~non-dominant~~include ~~carrier,~~requirements ~~we may install and operate additional facilities~~ for ~~the~~local ~~transmission~~carriers ~~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.~~interconnect ~~The~~with ~~Communications~~other ~~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~~establish ~~other~~compensation arrangements for the completion of telecommunications service calls originated by customers of other carriers on a reciprocal basis;

~~· establish~~• ~~compensation~~permit ~~arrangements for~~ the ~~completion~~resale of ~~telecommunications~~their ~~service calls originated by customers of other carriers on a reciprocal basis~~services;

· • permit ~~the~~users ~~resale~~to ofretain their ~~services~~telephone numbers when changing carriers; and

~~· permit~~• ~~users~~provide competing carriers access to ~~retain~~poles, ~~their~~ducts, ~~telephone~~conduits ~~numbers~~and ~~when~~rights-of-way ~~changing~~at ~~carriers;~~regulated ~~and~~prices.

~~· provide~~Incumbent ~~competing~~ carriers, ~~access~~which toare ~~poles~~telephone companies that held monopoly local telephone service franchises before the Telecommunications Act of 1996, ~~ducts~~or their successors in interest, ~~conduits~~are ~~and~~subject ~~rights-~~to additional duties. These duties include obligations of~~-way~~ atincumbent ~~regulated~~carriers ~~prices.~~to:

~~Incumbent~~• ~~carriers~~offer ~~are~~interconnection ~~subject~~at toany ~~additional~~feasible ~~duties.~~point ~~These~~in ~~duties~~their ~~include~~networks ~~obligations~~on ofa ~~incumbent~~non-discriminatory ~~carriers to:~~basis;

· • offer ~~interconnection~~colocation atof ~~any~~competitors' ~~feasible~~equipment ~~point~~at in their ~~networks~~premises on a non-discriminatory basis;

~~· offer~~• ~~colocation~~make available some of ~~competitors’~~their ~~equipment~~network atfacilities, ~~their~~features ~~premises~~and oncapabilities, areferred to as Unbundled Network Elements ("UNEs"), on non-discriminatory, ~~basis~~cost-based terms; and

~~· make~~• ~~available~~offer ~~some~~wholesale versions of their ~~network~~retail ~~facilities,~~services ~~features~~for ~~and~~resale ~~capabilities,~~at ~~referred~~discounted ~~to as Unbundled Network Elements, or UNEs, on non-discriminatory, cost-based terms; and~~rates.

~~· offer~~Collectively, ~~wholesale~~these ~~versions~~requirements recognize that local telephone service competition depends on cost-based and non-discriminatory interconnection with, and use of, ~~their~~some ~~retail~~elements ~~services~~of ~~for~~incumbent ~~resale~~carrier atnetworks ~~discounted~~and ~~rates~~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.

~~Collectively,~~FCC ~~these~~rules ~~requirements~~define ~~recognize~~the scope of the facilities that ~~local~~incumbent ~~telephone~~carriers ~~service~~must ~~competition~~make isavailable ~~dependent~~as ~~upon~~UNEs ~~cost-~~to competitive carriers such as us at rates based ~~and~~on ~~non-discriminatory~~the ~~interconnection~~Total ~~with~~Element Long Run Incremental Cost, or TELRIC, standard. Incumbent carriers must offer access to their copper loops and ~~use~~subloops ofin all areas, ~~some~~but ~~elements~~must ofoffer ~~incumbent~~access ~~carrier~~to ~~networks~~certain higher-capacity DS1 and DS3 transmission facilities ~~under~~only ~~specified~~in ~~circumstances~~wire center serving areas with relatively few business lines and colocated competitive carriers, as defined by detailed FCC regulations. ~~Failure~~In general, incumbent carriers are not required to ~~achieve~~offer UNEs at TELRIC-based rates for fiber loops, DS1 and ~~maintain~~DS3 ~~such~~transmission ~~arrangements~~facilities ~~could~~in ~~have~~relatively alarge ~~material~~wire ~~adverse~~centers ~~effect~~or onwire ~~our~~centers ~~ability~~deemed to ~~provide~~already be “competitive” ~~local~~based ~~telephone~~on ~~services~~FCC standards, optical speed transmission facilities or dark fiber. Further, incumbent companies are not required to provide local

~~Over the past decade, decisions of federal courts and the FCC have narrowed significantly the~~4

5Table of Contents

~~Table~~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 ~~Contents~~these facilities and services, either as lightly regulated special access services or under unregulated “commercial agreements,” at prices significantly higher than TELRIC.

~~scope~~Interconnection ofAgreements. Under the ~~facilities~~Communications ~~that~~Act, incumbent ~~telephone~~carriers ~~companies~~are ~~must~~required ~~make~~to ~~available~~negotiate asin ~~UNEs~~good tofaith with competitive carriers such as us atregarding ~~rates~~terms ~~based~~for ~~on the Total Element Long Run Incremental Cost~~interconnection, ~~or TELRIC~~colocation, ~~standard.~~reciprocal ~~Incumbent~~compensation ~~carriers~~for ~~must~~local ~~offer~~traffic ~~access to their copper loops~~ and ~~subloops, but must offer~~ access to ~~certain~~UNEs. ~~higher-capacity~~If ~~DS1~~the ~~and~~negotiating ~~DS3~~carriers ~~transmission~~cannot ~~facilities~~reach ~~only~~agreement inwithin ~~wire~~a ~~center~~prescribed ~~serving~~time, ~~areas~~either ~~with~~carrier ~~relatively~~may ~~few~~request ~~business~~binding ~~lines~~arbitration ~~and~~of ~~colocated~~the ~~competitive~~disputed ~~carriers,~~issues ~~as defined~~ by ~~detailed~~a ~~FCC~~state ~~regulations~~regulatory commission. In ~~general~~addition, ~~incumbent~~carriers ~~companies~~ are ~~not~~permitted ~~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~~adopt” ~~based~~in ontheir ~~FCC~~entirety ~~standards,~~agreements ~~optical~~reached ~~speed~~between ~~transmission~~the ~~facilities or dark fiber. Further,~~ incumbent ~~companies~~carrier noand ~~longer~~another ~~are~~carrier ~~required~~during ~~to provide local switching as a UNE, which means that we cannot rely on~~ the ~~Unbundled~~initial ~~Network~~term ~~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~~that ~~facilities and services, either as lightly regulated special access services or under unregulated “commercial agreements,” at significantly higher rates~~agreement.

~~Interconnection~~An ~~Agreements.~~interconnection ~~Under~~agreement ~~the~~typically ~~Communications~~has ~~Act,~~a ~~incumbent~~term ~~carriers~~of ~~are~~three ~~required~~years, toalthough ~~negotiate~~the inparties ~~good~~may ~~faith~~mutually ~~with~~agree ~~competitive~~to ~~carriers~~extend or amend such asagreements. usWe operate under interconnection agreements with AT&T, ~~colocation~~CenturyLink, ~~reciprocal~~Fairpoint ~~compensation~~Communications, ~~for~~Frontier ~~local~~Communications ~~traffic~~and Windstream. Our retail operating companies each maintain interconnection agreements with the incumbent in each state and ~~access~~for toeach service territory within which we purchase UNEs. IfWe ~~the~~expect, ~~negotiating~~but ~~carriers~~ cannot ~~reach~~assure, that each new interconnection agreement ~~within~~to awhich ~~prescribed~~we ~~time,~~are ~~either~~or ~~carrier~~will ~~may~~be ~~request~~a ~~binding~~party ~~arbitration~~will ofprovide us with the ~~disputed~~ability ~~issues~~to byprovide aservice in each respective state ~~regulatory~~on ~~commission~~a reasonable commercial basis. Many Inof ~~addition,~~our ~~carriers~~interconnection ~~are~~agreements ~~permitted~~provide either that a party is entitled to ~~“adopt”~~demand renegotiation of the entire agreement or particular provisions thereof based on intervening changes in ~~their~~law ~~entirety~~resulting ~~agreements~~from ~~reached~~ongoing ~~between~~legal and regulatory activity, or as a result of an immediately effective change in law, in which case the ~~incumbent~~agreement ~~carrier~~will ~~and~~be ~~another~~resolved ~~carrier~~pursuant ~~during~~to a dispute resolution process if the parties do not agree upon the impact of a change in law. The initial ~~term~~terms of many of our interconnection agreements with AT&T and Fairpoint have expired; however, each of our expired agreements contains an “evergreen” provision that allows the agreement to continue in effect until terminated. New agreements could result in less favorable rates, terms and conditions than our prior agreements.

AnIf ~~interconnection~~we ~~agreement~~cannot ~~typically~~negotiate ~~has~~new ainterconnection ~~term~~agreements ~~of three years, although the parties may mutually agree to extend~~ or ~~amend~~renew ~~such~~our ~~agreements.~~existing ~~We operate under~~ interconnection agreements ~~with~~in ~~AT&T~~each ~~and~~state ~~CenturyLink,~~on ~~Fairpoint~~acceptable ~~Communications~~terms, ~~Frontier~~we ~~Communications~~may ~~and~~invoke ~~Windstream.~~our ~~Our~~ability ~~retail~~to ~~operating~~seek ~~companies~~binding ~~each~~arbitration ~~maintain~~before ~~interconnection agreements with the incumbent in each~~ state ~~and~~regulatory ~~for~~agencies. ~~each~~The ~~service~~arbitration ~~territory~~process, ~~within~~ which weis ~~purchase~~conducted ~~UNEs.~~on Wea ~~expect,~~state-by-state ~~but cannot assure~~basis, ~~that~~can ~~each~~be ~~new~~costly ~~interconnection~~and ~~agreement~~time-consuming, toand ~~which~~the weresults ~~are~~of orarbitration ~~will~~may be aunfavorable ~~party will provide us with the ability~~ to ~~provide service in each respective state on a reasonable commercial basis~~us. ~~Many~~ ofIf ~~our~~we ~~interconnection~~are ~~agreements~~not ~~provide~~able ~~either that a party is entitled~~ to ~~demand~~renegotiate ~~renegotiation of the entire agreement~~ or ~~particular~~enter ~~provisions~~into ~~thereof~~interconnection ~~based~~agreements on ~~intervening~~acceptable ~~changes~~terms, inor ~~law~~if ~~resulting~~we ~~from~~are ~~ongoing~~subject ~~legal~~to ~~and~~unfavorable ~~regulatory~~arbitration ~~activity~~decisions, orour ascost ~~a result~~ of andoing ~~immediately~~business ~~effective~~could ~~change~~increase inand ~~law,~~our inability ~~which~~to ~~case~~compete ~~the~~could ~~agreement will~~ be ~~resolved~~impeded. ~~pursuant~~Moreover, toour ainterconnection ~~dispute~~agreements ~~resolution~~and ~~process~~traffic ifexchange ~~the~~with ~~parties~~companies doother ~~not~~than ~~agree~~ILECs ~~upon~~(such ~~the~~as ~~impact~~wireless ofand aVoIP ~~change~~providers inand ~~law. The~~other ~~initial~~competitive ~~terms~~carriers) ofare ~~many~~not ofsubject ~~our~~to ~~interconnection~~the ~~agreements~~statutory ~~have~~arbitration ~~expired; however~~mechanism, ~~each~~making ofit ~~our~~potentially ~~expired~~more ~~agreements~~difficult ~~contains~~to anreach ~~“evergreen”~~any ~~provision that allows the~~ agreement toon ~~continue in effect until terminated. In addition, new agreements could result in less favorable rates,~~ terms ~~and~~that ~~conditions~~we ~~than~~view ~~our~~as ~~prior agreements~~acceptable.

IfThe wemergers ~~cannot~~of ~~negotiate new interconnection agreements or renew our existing interconnection agreements in each state on acceptable terms~~BellSouth, weSBC ~~may~~and ~~invoke~~AT&T ~~our~~and ~~ability~~of toMCI ~~seek~~and ~~binding~~Verizon ~~arbitration~~have ~~before~~significantly ~~state~~affected ~~regulatory~~the ~~agencies.~~availability ~~The~~of ~~arbitration~~acceptable ~~process,~~interconnection ~~which~~agreements isthat ~~conducted~~competitive oncarriers asuch ~~state-by-state~~as ~~basis,~~us can beadopt ~~costly~~without ~~and~~incurring ~~time-consuming, and~~ the ~~results~~expense of ~~arbitration~~lengthy ~~may~~negotiation beand ~~unfavorable~~arbitration towith ~~us.~~an Ifincumbent wecarrier ~~are~~in ~~not~~each ~~able~~state. toBefore ~~renegotiate~~their orrespective ~~enter~~mergers, ~~into~~AT&T ~~interconnection~~and ~~agreements~~MCI ondedicated ~~acceptable~~significant ~~terms,~~internal orand ifexternal weresources ~~are subject~~ to ~~unfavorable~~negotiate ~~arbitration~~and ~~decisions,~~arbitrate ~~our~~interconnection ~~cost~~agreements ofthat ~~doing~~many ~~business~~competitive ~~could~~carriers ~~increase~~adopted ~~and~~or ~~our~~used ~~ability~~as tomodel ~~compete~~agreements. ~~could~~These beresources ~~impeded.~~and ~~Moreover,~~the ~~our~~resulting ~~interconnection~~model agreements ~~and~~are ~~traffic~~no ~~exchange~~longer ~~with~~available ~~companies~~as ~~other~~a ~~than~~result ~~ILECs~~of ~~(such~~consolidation asamong ~~wireless~~carriers, and ~~VoIP~~it ~~providers~~is ~~and~~likely ~~other~~that competitive carriers) ~~are~~such ~~not~~as ~~subject~~us towill ~~the~~be ~~statutory~~required ~~arbitration~~to ~~mechanism,~~invest ~~making it potentially~~ more ~~difficult~~resources tothan ~~reach~~in ~~any~~the ~~agreement~~past onto ~~terms~~secure ~~that~~acceptable weinterconnection ~~view as acceptable~~agreements.

Internet Protocol-Enabled Services. The ~~mergers~~FCC ofhas ~~BellSouth,~~classified ~~SBC~~cable ~~and~~modem ~~AT&T~~services ~~and~~offered ofby ~~MCI~~cable companies and ~~Verizon~~broadband ~~have~~Internet ~~significantly~~services ~~affected~~offered ~~the~~by ~~availability~~ILECs ofas ~~acceptable~~“information ~~interconnection~~services” ~~agreements~~and ~~that~~not ~~competitive~~telecommunications ~~carriers~~services ~~such~~subject asto usregulation ~~can~~under ~~adopt~~Title ~~without~~II ~~incurring~~of the ~~expense~~Communications ofAct. ~~lengthy~~The ~~negotiation~~FCC's ~~and~~policy ~~arbitration~~has ~~with~~also anbeen ~~incumbent~~to ~~carrier~~classify innarrowband ~~each~~Internet ~~state.~~access ~~Before~~services ~~their~~as ~~respective~~“information ~~mergers~~services,” ~~AT&T~~which ~~and~~are ~~MCI~~not ~~dedicated~~subject ~~significant internal and external resources~~ to ~~negotiate~~traditional ~~and~~telecommunications ~~arbitrate~~services ~~interconnection~~regulation, ~~agreements~~such ~~that~~as ~~many~~licensing ~~competitive carriers adopted~~ or ~~used~~pricing ~~as model agreements~~regulation. Nonetheless, ~~These resources and~~ the ~~resulting~~FCC ~~model~~has ~~agreements~~asserted ~~are~~“ancillary nojurisdiction” ~~longer~~to ~~available~~impose ascertain atypes ~~result~~ of ~~consolidation~~regulation ~~among~~on ~~carriers~~information services, ~~and it is likely that competitive carriers such~~ as usdiscussed ~~will~~further beunder ~~required~~“Network toManagement ~~invest~~and ~~more~~Internet ~~resources~~Neutrality”, ~~than in the past to secure acceptable interconnection agreements~~below.

6The current regulatory environment for VoIP services remains unclear, as the FCC has not decided whether VoIP is an “information service” or “telecommunications service”. The FCC has, however, issued a series of rulings addressing aspects of the regulatory treatment of interconnected VoIP service, so that VoIP services that interconnect with the PSTN are now 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 ruled 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.

~~Table of Contents~~5

~~Internet~~Table 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.Contents

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~~We asexpect ofthese ~~December 29,~~new ~~2011,~~rules ~~default rates for toll VoIP-PSTN traffic will be equal~~ to ~~interstate~~result ~~access rates applicable to non-VoIP traffic both~~ in ~~terms~~a loss of ~~rate~~revenues ~~level~~ and ~~rate~~could ~~structure;~~potentially 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~~volume orof ~~revenues~~carrier ~~relating to access charges we would pay or receive for this traffic~~disputes. 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~~historically have made 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,~~By ~~effective~~July ~~December 29~~2013, ~~2011, the following rates were capped: (1)~~ all ~~interstate~~local carriers' intrastate tariffed access ~~rate~~charges ~~elements~~must ~~and~~be ~~reciprocal~~no ~~compensation~~higher ~~rates;~~than ~~(2) for price cap carriers and CLECs operating in~~ their ~~areas,~~interstate ~~all intrastate~~ access ~~rates;~~charges. ~~and (3) for rate-of-return carriers and CLECs operating in their areas~~Since, ~~terminating~~under ~~access~~existing ~~rates~~FCC ~~only. In addition~~rules, competitive carriers' ~~must~~interstate ~~reduce their intrastate tariffed~~ access charges bymay ~~July 2013~~not tobe ~~those no~~ greater than those of the incumbent carriers with which they compete, asthe isnet ~~currently~~effect ~~required~~of ~~with~~these ~~CLEC’s~~rules ~~interstate~~will be to limit competitive carriers' intrastate access charges to the incumbent carrier's level. 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 (that is, a rate level of zero) for all transport and termination 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 and pay 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. Several ~~Also~~states, itindustry groups, and other telecommunications carriers filed petitions for review of the FCC order, which have been consolidated in the United States Court of Appeals for the Tenth Circuit. The outcome of these petitions is ~~possible~~unpredictable.

7Special Access. Special access is a service offered by incumbent carriers that provides for use of dedicated transmission facilities or private lines 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 has a major effect on our ability 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.

~~Table~~In 1999, the FCC adopted rules that enable incumbent carriers to obtain pricing flexibility for their interstate special access services in particular metropolitan areas depending on the level of ~~Contents~~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 addition, the FCC has granted petitions by the incumbent carriers for forbearance from any regulation of some special access services, including packet-switched services such as Ethernet, and optical carrier services such as OC-3 and higher-capacity services. These services are not subject to any price regulations and are provided by incumbent carriers solely under contracts, which as noted above may contain minimum revenue commitments and other restrictive terms.

~~that~~As a result of the ~~new~~mergers ~~rules will~~of beBellSouth, ~~subject~~SBC and AT&T 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 ~~appeals~~constrain the ability of AT&T and ~~requests~~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 ~~stay~~special byaccess ~~numerous~~services ~~parties~~with current commercial rates. Because a substantial portion of our services are delivered over special access lines purchased from AT&T, ~~further~~a ~~delaying~~significant ~~implementation~~increase in the price for special access could substantially increase our cost of services.

~~Special~~The ~~Access.~~FCC ~~Special~~currently ~~access~~ is aconsidering ~~service~~whether ~~offered by incumbent local telephone companies that consists of dedicated transmission facilities or private lines used by wireline~~ and ~~wireless~~how ~~telecommunications~~to ~~carriers, Internet-based~~reform ~~service~~its ~~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~~rules. As aIn ~~result~~2012, the ~~price~~FCC ofsuspended ~~special~~consideration 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~~new ~~access~~petitions ~~services~~for ~~will~~metropolitan ~~exert~~area ~~pressure~~pricing onflexibility ~~our~~by ~~gross~~incumbent ~~margins. Since special access services are not subject to the unbundling requirements of the Communications Act~~carriers, ~~the~~but ~~prices~~this ~~for~~decision ~~special~~does ~~access services have~~ not ~~been~~affect ~~directly~~previously ~~affected~~approved bypricing ~~the FCC’s modification of network unbundling rules~~flexibility. ToThe ~~the~~FCC ~~extent,~~also ~~however,~~announced ~~that~~a ~~the~~project ~~availability~~to ofgather ~~UNE~~extensive ~~digital~~data T1concerning ~~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.6

AsTable ~~a result~~ of the mergers of BellSouth, SBC and AT&T 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.Contents

~~The~~market ~~FCC~~to ~~currently~~allow isit ~~considering~~to ~~whether~~formulate ~~and~~new ~~how~~pricing rules, but this project is likely to ~~reform~~take ~~its~~considerable ~~special~~time ~~access~~to ~~rules~~complete. 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.

Universal 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. The FCC is considering a number of proposed changes to the method of assessing these USF contributions, but we cannot predict when it may reach a decision or what types of changes may be adopted.

In ~~November 2008~~December 2012, the FCC ~~proposed~~adopted toan ~~base~~order clarifying its USF ~~assessments~~contribution onrules ~~the~~that ~~number~~adversely ofaffects ~~telephone~~companies ~~numbers~~like us that ause ~~telecommunications~~special ~~carrier~~access ~~actively~~services ~~provides~~purchased from incumbent carriers to ~~residential~~provide broadband Internet access to our customers. ~~and~~The FCC stated that in these cases, the incumbent carrier must pay a ~~“connections-based”~~USF contribution ~~methodology~~on ~~for~~its ~~business~~special ~~customers~~access revenues, ~~rather~~which ~~than~~these oncarriers as a ~~percentage~~matter of ~~collected~~course ~~interstate~~pass through to the special access customer. This in turn increases our cost of purchasing special access service and using it as an input in providing broadband Internet services. However, we must compete against broadband Internet access services provided by incumbent carriers and cable television companies, among others, which are not subject to USF contribution requirements and therefore do not incur this added cost. Several companies have petitioned for FCC reconsideration or judicial review of this decision, but we cannot predict whether these petitions will be successful or when they may be decided.

8In November 2011, the FCC adopted extensive revisions to its high-cost support USF program, which largely subsidizes the provision of local telephone service by incumbent carriers in rural areas. Under the new program, it should be difficult for incumbent carriers to receive subsidies for services provided in competition with unsubsidized providers like us, although we cannot be certain that this will never occur. It is also possible, under certain conditions, for competitive providers like us to seek subsidies for constructing and operating broadband Internet access facilities in rural areas. However, we cannot predict whether provision of broadband services in such rural areas will be economically practicable, even with potential subsidies.

~~Table~~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 ~~Contents~~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. CPNI rules include 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.

~~revenues.~~Additional ~~The~~measures ~~objective~~to ~~behind~~protect ~~the~~CPNI ~~proposal~~and isconsumer toprivacy ~~capture~~are ~~USF~~proposed ~~revenues~~ from ~~the~~time ~~expanding number of new service providers using different technologies~~ to ~~offer~~time, ~~communications~~and ~~services.~~both InCongress ~~February 2011,~~and the FCC ~~issued~~currently ~~another~~are ~~notice~~considering ofsuch ~~proposed~~additional ~~rulemaking~~measures. toThese ~~consider~~developments ~~whether~~appear to ~~limit~~be ~~the~~part ~~number~~ of ~~recipients of USF proceeds in~~ a ~~specified~~broader ~~geographic~~trend ~~region and whether~~ to ~~select~~protect ~~these~~consumer ~~recipients~~information ~~through~~as ait ~~“reverse~~continues ~~auction”~~increasingly ~~process, in which the company willing~~ to ~~serve the region using the least amount of USF proceeds would~~ be ~~selected~~transmitted asin ~~the~~electronic ~~proceeds recipient~~formats. ~~Separately,~~We ~~various~~cannot ~~states~~predict ~~maintain,~~whether oradditional ~~are~~requirements ingoverning ~~the~~CPNI ~~process~~or ofother ~~implementing,~~consumer ~~their~~data ~~own~~will ~~universal~~be ~~service programs~~enacted, ~~and~~or ~~the~~whether ~~rules governing~~such ~~these~~additional ~~state~~requirements ~~programs~~will ~~are~~affect ~~also~~our ~~subject~~ability to ~~changes.~~market Itor isprovide ~~difficult~~our services to ~~predict~~current ~~how~~and ~~those~~future ~~changes might affect the telecommunications industry or us~~customers.

InNetwork ~~addition,~~Management inand ~~November 2011~~Internet Neutrality. In August 2005, the FCC ~~expanded~~adopted a policy statement that outlined four principles intended to preserve and promote the ~~USF~~open and interconnected nature of the public Internet, stating that consumers are entitled to ~~include~~access ~~broadband~~lawful Internet content and to run applications and use services asof ~~part~~their choice, subject to the needs of alaw ~~“Connect~~enforcement ~~America~~and ~~Fund~~reasonable network management.~~” The~~ ~~new~~In ~~fund~~an ~~also~~August ~~includes~~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 ~~Mobility~~court ~~Fund~~decision in April 2010, ~~making~~the ~~mobile~~FCC imposed sanctions on a broadband anInternet ~~independent~~access ~~universal~~provider ~~service~~for ~~objective~~managing its network by blocking or degrading some Internet transmissions and applications in a way that the FCC found to be unreasonably discriminatory. ~~Further~~ In December 2010, the FCC ~~reform~~issued new rules to govern network management practices that, among other things, require public disclosure of network management practices and prohibit unreasonable discrimination in the ~~USF~~transmission ~~contribution~~of ~~methodology~~Internet traffic. These rules have taken effect but are currently being challenged in court. It is ~~expected~~not possible to determine what specific broadband network management techniques or related business arrangements may be ~~addressed~~deemed reasonable or unreasonable in ~~2012~~the future. ~~The~~ ~~application~~We ~~and~~cannot ~~effect~~predict ofhow ~~these~~any ~~changes~~future legislative, ~~and~~regulatory ~~similar~~or ~~state~~judicial ~~requirements,~~decisions onrelating ~~the~~to ~~telecommunications~~net ~~industry~~neutrality ~~generally~~might ~~and~~affect onour ~~certain~~ability ofto manage our ~~business~~broadband ~~activities~~network ~~cannot~~or bedevelop ~~predicted~~new products or services.

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 USF, pole attachments, rights-of-way, spectrum allocation and broadband adoption.7

~~The~~Table ~~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.Contents

~~Customer~~Forbearance. The ~~Proprietary~~Communications ~~Network~~Act ~~Information~~provides ~~and~~the ~~Privacy.~~FCC ~~The~~with ~~Communications~~the ~~Act~~authority to not enforce, or “forbear” from enforcing, statutory requirements and regulations if certain public interest factors are satisfied. If the FCC’s ~~rules require~~were ~~carriers~~ to ~~implement~~forbear ~~measures~~from toenforcing ~~prevent~~regulations ~~the~~that ~~unauthorized~~have ~~disclosure~~been ofestablished ~~Customer~~to ~~Proprietary~~enable ~~Network~~competing ~~Information~~broadband Internet access and VoIP, orour ~~CPNI.~~business ~~CPNI~~could ~~includes~~be ~~information~~adversely ~~related~~affected. toIn ~~the~~December ~~quantity~~2005, ~~technological~~the ~~configuration~~FCC granted, ~~type~~in part, ~~destination~~a ~~and~~petition ~~the~~for ~~amount~~forbearance offiled ~~use~~by ofCenturyLink a(formerly ~~communications~~Qwest) ~~service.~~seeking ~~CPNI~~relief ~~rules include~~from ~~restrictions~~specified ondominant ~~telecommunications~~carrier ~~carriers~~regulations, including some unbundling obligations related to high capacity loops and ~~providers~~transport, in those portions of ~~interconnected~~the ~~VoIP~~Omaha ~~service.~~metropolitan Westatistical ~~must~~area ~~file~~where afacilities-based ~~verified~~competition ~~certification~~had ofallegedly ~~compliance~~increased bysignificantly. ~~March 1~~The ofFCC's ~~each~~dominant ~~year~~carrier ~~that~~regulations ~~affirms~~require ~~the~~CenturyLink, ~~existence~~in ofpart, ~~training~~to offer UNEs and also serve as a check on dominant carrier pricing for other ~~sales~~wholesale ~~and~~services, ~~marketing~~such ~~processes~~as ~~designed~~special toaccess ~~prevent~~lines, ~~improper~~that ~~use~~we ~~and~~seek ~~unauthorized~~to ~~release~~purchase ofat ~~CPNI~~commercially acceptable prices. AnSince ~~inadvertent~~being ~~violation~~granted ofrelief ~~these~~by ~~and~~the ~~related~~FCC, ~~CPNI~~CenturyLink ~~requirements~~has bysubstantially usincreased ~~could~~the ~~subject~~prices ~~our~~for ~~company~~the network elements that we use to ~~significant~~provide ~~fines~~services orin ~~other~~eight ~~regulatory~~central ~~penalties~~offices in the Omaha metropolitan statistical area.

~~Additional~~Since ~~measures~~2007, tothe ~~protect~~FCC ~~CPNI~~has denied a series of petitions by CenturyLink and ~~consumer~~Verizon ~~privacy~~seeking ~~are~~similar ~~proposed~~forbearance from ~~time~~dominant tocarrier ~~time,~~regulation ~~and~~in ~~both~~particular ~~Congress~~metropolitan ~~and~~areas. Most recently, the FCC ~~currently~~in ~~are~~a ~~considering~~June ~~such~~2010 ~~additional~~denying ~~measures.~~a ~~These~~CenturyLink ~~developments~~petition ~~appear~~for torelief bein ~~part~~Phoenix ofset aforth ~~broader~~specific ~~trend~~thresholds toand ~~protect~~analytical ~~consumer~~frameworks ~~information~~that asmust itbe ~~continues~~met ~~increasingly~~for togrant beof ~~transmitted~~such inpetitions. That ~~electronic~~FCC ~~formats.~~decision Wewas ~~cannot~~affirmed ~~predict~~by ~~whether~~a ~~additional~~court ~~requirements~~of ~~governing~~appeals. If ~~CPNI~~the FCC grants any forbearance or ~~other~~similar ~~consumer~~petitions ~~data~~filed ~~will~~by beincumbent ~~enacted,~~carriers orin ~~whether~~the ~~such~~future ~~additional~~affecting ~~requirements~~markets ~~will~~in ~~affect~~which we operate, our ability to ~~market~~purchase orwholesale ~~provide~~network services from these carriers at cost-based prices that would allow us to achieve our ~~services~~target profit margins in those markets could be materially adversely affected. The grant of these petitions also would enable incumbent carriers to ~~current~~compete ~~and~~with ~~future~~their ~~customers~~competitors, including us, more aggressively on price in the affected markets.

~~Network~~Other ~~Management~~Federal ~~and Internet Neutrality~~Regulation. In ~~August 2005,~~addition to the ~~FCC~~specific ~~adopted~~matters alisted ~~policy~~above, ~~statement~~we ~~that~~are ~~outlined~~subject ~~four~~to ~~principles~~a ~~intended~~variety toof ~~preserve~~other ~~and~~FCC ~~promote~~filing, ~~the~~reporting, ~~open~~record-keeping and ~~interconnected~~fee ~~nature~~payment ~~of the public Internet~~requirements. The FCC, has the ~~Administration~~authority ~~and~~generally ~~Congress~~to ~~have~~condition, ~~expressed~~modify, ~~interest~~cancel, interminate, ~~imposing~~revoke ~~these~~or ~~so-called~~decline ~~“net~~to ~~neutrality”~~renew ~~requirements~~licenses onand ~~broadband~~operating ~~Internet~~authority ~~access~~for ~~providers,~~failure ~~which~~to ~~address~~comply ~~whether,~~with federal laws and the ~~extent~~FCC's ~~to which~~rules, ~~owners~~regulations ofand ~~network~~policies. ~~infrastructure~~Fines ~~should~~or other penalties also may be ~~permitted~~imposed for such violations. The FCC or third parties may raise issues with regard to ~~engage~~our incompliance ~~network~~with ~~management~~applicable ~~practices~~laws ~~that~~and ~~prioritize~~regulations. ~~data~~Moreover, ~~packets~~we onare ~~their~~subject ~~networks~~to ~~through~~additional ~~commercial~~federal ~~arrangements~~regulation orand ~~based~~compliance onrequirements from other ~~preferences.~~government ~~The~~agencies ~~FCC~~such inas ~~2005~~the ~~adopted~~Federal aTrade ~~policy~~Commission, ~~statement~~the ~~expressing~~Internal ~~its~~Revenue ~~view~~Service ~~that~~and the Securities and Exchange Commission.

9State Regulation

~~Table~~We are subject to various state laws and regulations. Most state PUCs require providers such as us to obtain certificates of ~~Contents~~authority from the commission before offering communications services between points 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. PUCs or third parties may raise issues with regard to our compliance with applicable laws or regulations.

~~consumers~~We ~~are~~have ~~entitled~~authority to ~~access~~offer ~~lawful~~intrastate ~~Internet~~long ~~content~~distance ~~and to run applications and use~~ services ofin ~~their~~49 ~~choice~~states, ~~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~~authority ~~burden~~ to ~~prove~~offer ~~that~~local ~~their~~telephone ~~network~~services ~~management~~in ~~techniques~~13 ~~are reasonable~~states. InWe ~~that~~provide ~~order~~local services, ~~which~~where ~~was overturned by a court decision in April 2010~~authorized, ~~the FCC imposed sanctions on a broadband Internet access provider for managing its network~~ by ~~blocking~~reselling ~~or degrading some Internet transmissions and applications in a way that~~ the ~~FCC~~retail ~~found~~local toservices beof ~~unreasonably discriminatory. In December 2010,~~ the ~~FCC~~incumbent ~~issued~~carrier ~~new rules to govern network management practices and prohibit unreasonable discrimination~~ in ~~the~~a ~~transmission~~given ofterritory ~~Internet traffic. These rules have not taken effect~~ and, ~~are currently being challenged~~ in ~~court. It~~some isestablished ~~not~~markets, ~~possible~~by tousing ~~determine~~incumbent ~~what~~carriers' ~~specific broadband~~ network ~~management~~elements ~~techniques~~and 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~~own tolocal ~~manage~~switching ~~our broadband network or develop new products or services~~facilities.

~~Forbearance. The~~State ~~Communications~~PUCs ~~Act~~have ~~provides~~responsibility ~~the~~under ~~FCC with~~ the ~~authority~~Communications Act to ~~not~~oversee ~~enforce,~~relationships orbetween ~~“forbear”~~incumbent ~~from~~carriers ~~enforcing, statutory requirements~~ and ~~regulations~~their ifcompetitors ~~certain~~with ~~public~~respect ~~interest~~to ~~factors~~such ~~are~~competitors' ~~satisfied.~~use Ifof the ~~FCC~~incumbent ~~were~~carriers' tonetwork ~~forbear~~elements ~~from enforcing regulations that have been established to enable competing broadband Internet access~~ and ~~VoIP,~~wholesale ~~our~~local ~~business~~services. ~~could~~State bePUCs ~~adversely~~arbitrate ~~affected.~~interconnection Inagreements ~~December 2005,~~between the ~~FCC~~incumbent ~~granted,~~carriers inand ~~part,~~competitive acarriers ~~petition~~such ~~for~~as ~~forbearance~~us ~~filed~~when requested by ~~Qwest~~one ~~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~~parties. ~~The~~Under ~~FCC’s~~the ~~dominant~~Telecommunications ~~carrier regulations require Qwest~~Act, inthe ~~part,~~decisions toof ~~offer~~state ~~UNEs~~PUCs ~~and~~with ~~also~~regard ~~serve~~to asinterconnection adisputes ~~check~~may onbe ~~dominant~~appealed ~~carrier pricing for other wholesale services, such as special access lines, that we seek~~ to ~~purchase~~federal ~~at commercially acceptable prices~~courts. ~~Upon~~There ~~being~~remain ~~granted~~important ~~relief~~unresolved byissues ~~the~~regarding ~~FCC, Qwest has substantially increased~~ the ~~prices~~scope ~~for~~of the ~~network~~authority ~~elements~~of ~~that~~PUCs weand ~~use~~the extent to ~~provide~~which ~~services~~the incommissions ~~eight~~will ~~central~~adopt ~~offices~~policies inthat ~~the~~promote ~~Omaha~~local ~~metropolitan~~telephone ~~statistical~~service ~~area~~competition.

InStates ~~January 2007,~~also ~~Qwest~~regulate ~~filed~~in ~~additional~~part ~~petitions~~the ~~for~~intrastate ~~relief from dominant~~ carrier ~~regulation~~access inservices ~~the~~of ~~metropolitan~~carriers ~~statistical~~such ~~areas~~as ~~of Denver, Minneapolis-St~~us. ~~Paul,~~As ~~Phoenix~~an ~~and~~interexchange ~~Seattle. In~~carrier ~~February 2008~~(“IXC”), ~~Verizon~~we ~~re-filed~~are ~~petitions,~~required ~~which~~to ~~had~~pay ~~previously~~intrastate ~~been~~access ~~denied,~~charges ~~for~~to ~~relief~~local ~~from~~exchange ~~dominant~~carriers ~~carrier~~when ~~regulation~~they ~~for~~originate ~~the~~or ~~State~~terminate ofour ~~Rhode~~intrastate ~~Island~~long ~~and~~distance ~~Virginia Beach~~traffic. As Ina ~~July 2008~~CLEC, ~~the~~we ~~FCC~~charge ~~denied~~IXCs ~~the~~intrastate ~~Qwest~~access ~~petitions. Qwest~~charges ~~subsequently refiled a petition~~ for ~~forbearance for~~ the ~~Phoenix~~origination ~~metropolitan service area only in March 2009. The FCC issued an order in June 2010 denying Qwest petition for Phoenix~~ and ~~setting~~termination ~~forth~~services ~~specific~~we ~~thresholds~~provide ~~and~~to ~~analytical frameworks that must be met for grant of such petitions~~them. ~~Qwest~~ Under ~~has since appealed~~ the FCC's ~~decision~~November ~~and~~2011 order, ~~and~~state ~~that~~commissions ~~appeal~~will ~~remains~~have inoversight ~~the~~of ~~courts. If a court or~~ the ~~FCC~~intrastate ~~upholds~~access orcharge ~~grants~~transition ~~any~~process ~~forbearance~~to orensure ~~similar~~that ~~petitions filed by incumbent~~ carriers incomply with the ~~future~~FCC's ~~affecting~~timing ~~markets~~and inrequired ~~which~~reductions. States wewill ~~operate,~~continue ~~our ability~~ to ~~purchase~~review ~~wholesale~~intrastate ~~network~~switched ~~services~~access ~~from~~tariffs, ~~these~~as ~~carriers~~well atas ~~cost-based~~interconnection ~~prices~~agreements ~~that~~and ~~would~~associated ~~allow~~reciprocal uscompensation torates ~~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~~ensure ~~with~~compliance ~~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.8

10Table of Contents

~~Table~~with the FCC's intercarrier compensation framework and transition. States will also have responsibility for determining the network “edge” for purposes of ~~Contents~~bill-and-keep. What these proceedings may entail or to what extent requirements arising from such proceedings will affect our operations is unclear.

~~State~~In ~~Regulation~~addition, state legislatures are considering, and in some cases enacting, new laws that limit the authority of the state PUCs to regulate and oversee the business dealings of carriers. We could be harmed by these actions.

We ~~are~~will ~~subject~~be toaffected ~~various~~by ~~state~~how ~~laws~~states ~~and~~regulate ~~regulations. Generally,~~ the ~~state~~retail ~~PUCs~~prices ~~require~~of ~~providers~~the ~~such~~incumbent ascarriers uswith towhich ~~obtain~~we ~~certificates~~compete. ofAs ~~authority from~~ the ~~commission~~degree ~~before~~of ~~initiating~~intrastate ~~service~~competition ~~within~~is ~~the~~perceived ~~state.~~to Inincrease, ~~most~~ states, ~~we also~~ are ~~required~~offering toincumbent ~~file~~carriers ~~tariffs~~increased orpricing ~~price~~flexibility ~~lists setting forth the terms, conditions~~ and ~~prices~~deregulation ~~for~~of ~~specified~~particular services ~~that~~deemed ~~are~~to ~~classified~~be ascompetitive. ~~intrastate~~This flexibility and toderegulation ~~update~~may orpresent ~~amend~~the ~~our~~incumbent ~~tariffs~~carriers ~~when~~with wean ~~adjust~~opportunity ~~our~~to ~~rates~~subsidize orservices ~~add~~that ~~new~~compete ~~products.~~with Weour ~~also~~services ~~are~~with ~~subject~~revenues togenerated ~~various~~from ~~reporting~~their ~~and record~~non-~~keeping~~competitive ~~requirements and contribute to state USF~~services, ~~E911~~thereby ~~and~~allowing ~~other~~them ~~funds,~~to ~~and~~offer ~~pay~~competitive ~~other~~services ~~taxes,~~at ~~fees~~prices ~~and~~lower ~~surcharges~~than ~~where~~most ~~applicable.~~or ~~Certificates~~all of ~~authority~~their ~~can~~competitors. beFor ~~conditioned~~example, ~~modified,~~AT&T ~~canceled,~~has ~~terminated~~obtained orauthority ~~revoked~~to bycreate ~~state~~affiliates ~~regulatory~~that ~~authorities~~would ~~for~~operate on a ~~carrier’s~~much ~~failure~~less toregulated ~~comply~~basis ~~with~~and, ~~state laws or rules~~therefore, ~~regulations~~could ~~and~~provide ~~policies~~significant ofcompetition ~~state~~in ~~regulatory~~addition ~~authorities. State utility commissions generally have authority~~ to ~~supervise~~the ~~telecommunications~~local ~~service~~services ~~providers~~historically inoffered ~~their~~by ~~states~~a ~~and~~much tomore ~~enforce~~regulated ~~state utility laws and regulations~~AT&T. ~~Fines~~We orcannot ~~other~~predict ~~penalties~~the ~~also~~extent ~~may~~to bewhich ~~imposed~~these ~~for~~developments ~~violations. PUCs or third parties~~ may ~~raise~~affect ~~issues with regard to~~ our ~~compliance with applicable laws or regulations~~business.

WeMany ~~have~~states ~~authority~~require toprior ~~offer~~approval ~~intrastate~~for ~~long~~transfers ~~distance~~of ~~services~~control inof ~~all~~certified 50carriers, ~~U.S.~~corporate ~~states~~reorganizations, ~~and~~acquisitions ~~the~~of ~~District~~telecommunications operations, assignment of ~~Columbia.~~carrier Weassets, ~~provide~~carrier ~~local~~stock ~~services,~~offerings ~~where~~and ~~authorized,~~incurrence by ~~reselling~~carriers ~~the~~of ~~retail~~significant ~~local~~debt ~~services~~obligations. These ofrequirements can delay and increase the ~~incumbent~~cost ~~carrier~~we inincur ato ~~given~~complete ~~territory~~various ~~and~~financing transactions, inincluding ~~some~~future ~~established~~stock ~~markets~~or debt offerings, ~~using~~the ~~incumbent~~sale ~~carriers’~~of ~~network~~part ~~elements~~or ~~and~~all of our ~~own~~regulated ~~local~~business ~~switching~~or ~~facilities~~the acquisition of assets and other entities to be used in our regulated business.

~~State~~Local ~~public~~Government ~~PUCs~~Authorizations ~~have responsibility under the Communications Act to oversee relationships between incumbent carriers~~ and ~~their~~Related ~~competitors with respect to such competitors’ use~~ Rights-of the incumbent carriers’ network elements and wholesale local services. PUCs 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 PUCs with regard to interconnection disputes may be appealed to federal courts. There remain important unresolved issues regarding the scope of the authority of PUCs and the extent to which the commissions will adopt policies that promote local telephone service competition.-Way

~~States~~ ~~also~~We ~~regulate~~are insubject ~~part~~to ~~the~~numerous ~~intrastate~~local ~~carrier~~regulations ~~access~~such ~~services~~as ofbuilding ~~carriers~~codes, ~~such~~municipal asfranchise usrequirements and licensing. AsSuch anregulations ~~interexchange~~vary on a city-by-city and county-by-county basis and can affect our provision of both network services and carrier ~~(“IXC”),~~services. weWe are required to ~~pay~~obtain ~~intrastate~~street ~~access~~use ~~charges~~and toconstruction ~~local~~permits ~~exchange~~and ~~carriers~~licenses ~~when~~or ~~they~~franchises ~~originate~~to orinstall ~~terminate~~and expand our ~~intrastate~~fiber ~~long~~optic ~~distance~~network ~~traffic~~using municipal rights-of-way. As aIn ~~CLEC~~some municipalities where we have installed network equipment, we ~~charge~~are ~~IXCs~~required ~~intrastate~~to ~~access~~pay ~~charges~~license ~~for~~or ~~the~~franchise ~~origination~~fees ~~and~~based ~~termination~~on ~~services~~a wepercentage ~~provide~~of togross ~~them~~revenues or a per linear foot basis. ~~Under~~ Following the ~~FCC’s~~expiration ~~November 2011~~of ~~order~~existing franchises, ~~state~~these ~~commissions~~fees ~~will~~are ~~have~~at ~~oversight~~risk of ~~the~~increasing. ~~intrastate~~In ~~access~~many ~~charge~~markets, ~~transition~~incumbent ~~process~~carriers todo ~~ensure~~not ~~that~~pay ~~carriers~~these ~~comply~~franchise ~~with~~fees ~~the~~or ~~FCC’s~~pay ~~timing~~fees ~~and~~that ~~required~~are ~~reductions. States~~substantially ~~will~~lower ~~continue~~than those required to ~~review~~be ~~intrastate~~paid ~~switched~~by ~~access~~us, ~~tariffs~~although the Telecommunications Act requires that, asin ~~well~~the asfuture, ~~interconnection~~such ~~agreements~~fees ~~and~~be ~~associated~~applied ~~reciprocal~~in ~~compensation~~a ~~rates~~competitively toneutral ~~ensure~~manner. ~~compliance~~To ~~with~~the extent that our competitors do not pay the ~~FCC’s~~same ~~intercarrier~~level ~~compensation~~of ~~framework~~fees ~~and~~that ~~transition. In~~we ~~addition~~do, we could be at a ~~number~~competitive disadvantage. Termination of ~~states~~the ~~have~~existing ~~ordered~~franchise or license agreements before their ~~own~~expiration ~~gradual~~dates, ~~multi-year~~or ~~intrastate~~a ~~access~~failure ~~charge~~to ~~reductions~~renew ~~and~~ the ~~extent~~franchise toor ~~which~~license ~~these~~agreements, ~~state~~and ~~actions~~a ~~are~~requirement ~~preempted~~that bywe remove the ~~FCC’s~~corresponding ~~order~~portion isof ~~unclear.~~our ~~States~~facilities ~~will~~or ~~also~~abandon ~~have~~the ~~responsibility~~corresponding ~~for~~portion ~~determining~~of ~~the~~our network, ~~“edge”~~could ~~for~~harm ~~purposes~~our ~~of bill-and-keep~~business. ~~What~~ ~~these~~In ~~proceedings~~addition, ~~may~~we ~~entail~~would orbe toadversely ~~what~~affected ~~extent~~if ~~requirements~~we ~~arising~~are ~~from~~unable ~~such~~to ~~proceedings~~obtain ~~will~~additional ~~affect~~authorizations ~~our~~for ~~operations~~any isnew ~~unclear~~network construction on reasonable terms.

InA ~~addition,~~number ~~state~~of ~~legislatures~~states are considering, reforming their laws and inregulations ~~some~~governing ~~cases~~the ~~enacting~~issuance of franchises and permits by local governmental authorities, ~~new~~and ~~laws~~some ~~that~~states ~~limit~~already ~~the~~have ~~authority~~enacted laws authorizing some types of ~~the~~entities to secure a state-wide ~~PUCs~~franchise. Congress also has considered from time to ~~regulate~~time, and ~~oversee~~may consider in the ~~business~~future, ~~dealings~~various ofproposals ~~carriers~~intended to reform the relationship between federal, state and local governments in connection with the franchising process. We ~~could~~cannot predict how these issues will be ~~harmed~~resolved, byor the extent to which these ~~actions~~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.

WeOther 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 historicallyRegulation

11Internet Taxation. The Internet Tax Non-Discrimination Act, which is in effect through November 2014, places a moratorium on taxes on Internet access and multiple, discriminatory taxes on electronic commerce. Certain states have enacted various taxes on Internet access and electronic commerce, and selected states' taxes are being contested on a variety of bases. If these state tax laws are not successfully contested, or if future state and federal laws imposing taxes or other regulations on Internet access and electronic commerce are adopted, our cost of providing Internet access services could be increased and our business could be adversely affected.

~~Table~~Consumer Protection. Federal and state governments have adopted consumer protection laws and undertaken enforcement actions to address advertising and user privacy. As part of ~~Contents~~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.

~~offered by a much more regulated AT&T. We cannot predict the extent to which these developments may affect our business.~~9

~~Many~~Table ~~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.Contents

~~Local~~Proprietary ~~Government Authorizations and Related~~ Rights~~-of-Way~~

WeOur trademarks are ~~subject~~valuable assets to ~~numerous~~our ~~local~~business, ~~regulations~~and ~~such~~are asregistered ~~building~~trademarks ~~codes,~~in ~~municipal~~the ~~franchise~~United ~~requirements and licensing~~States. In ~~Such~~particular, ~~regulations~~we ~~vary~~believe onthe astrength ~~city-by-city~~of ~~and~~these ~~county-by-county~~brands ~~basis~~among existing and ~~can~~potential ~~affect~~customers ~~our~~is ~~provision~~important ofto ~~both~~the ~~network~~success ~~services~~of ~~and~~our ~~carrier services~~business. Additionally, Weour ~~are~~service ~~required~~marks, toproprietary ~~obtain~~technologies, ~~street~~domain ~~use~~names and ~~construction~~similar ~~permits~~intellectual ~~and~~property ~~licenses~~are oralso ~~franchises~~important to ~~install~~the ~~and~~success ~~expand~~of our ~~fiber optic network using municipal rights-of-way~~business. Although ~~In some municipalities where~~ we do have ~~installed~~several ~~network equipment~~patents, we ~~are~~do ~~required~~not toconsider ~~pay~~these ~~license~~patents orimportant ~~franchise~~to ~~fees~~our ~~based~~business. We onprincipally arely ~~percentage~~upon oftrademark ~~gross~~law ~~revenues~~as orwell aas ~~per~~contractual ~~linear~~restrictions ~~foot~~to ~~basis.~~establish ~~Following~~and ~~the~~protect ~~expiration~~our oftechnology ~~existing~~and ~~franchises,~~proprietary ~~these~~rights ~~fees~~and ~~are~~information. We atrequire ~~risk~~employees ofand ~~increasing.~~consultants Inand, ~~many~~when ~~markets~~possible, ~~incumbent~~suppliers ~~carriers~~and dodistributors ~~not~~to ~~pay~~sign ~~these~~confidentiality ~~franchise~~agreements, ~~fees~~and orwe ~~pay~~generally ~~fees~~control ~~that~~access ~~are substantially lower than those required~~ to, beand ~~paid~~distribution ~~by us~~of, ~~although~~our ~~the~~technologies, ~~Telecommunications~~documentation ~~Act~~and ~~requires~~other ~~that,~~proprietary ininformation. ~~the~~We ~~future,~~will ~~such~~continue ~~fees~~to beassess ~~applied~~appropriate inoccasions afor ~~competitively~~seeking ~~neutral~~trademark ~~manner.~~and Toother ~~the~~intellectual ~~extent~~property ~~that~~protections ~~our~~for ~~competitors~~those doaspects ~~not~~of ~~pay~~our ~~the~~business ~~same~~and ~~level~~technology ~~of fees~~ that we ~~do,~~believe weconstitute ~~could~~innovations beproviding atus with a competitive ~~disadvantage~~advantage. From ~~Termination~~time ~~of the existing franchise or license agreements before their expiration dates, or a failure~~ to ~~renew the franchise or license agreements~~time, ~~and~~third aparties ~~requirement~~have alleged that wecertain ~~remove the corresponding portion~~ of our ~~facilities~~technologies orinfringe ~~abandon~~on ~~the~~their ~~corresponding~~intellectual ~~portion~~property ofrights. ~~our~~To ~~network~~date, ~~could~~none ~~harm~~of ~~our~~these ~~business.~~claims Inhas ~~addition,~~had wean ~~would~~adverse beeffect ~~adversely~~on ~~affected~~our ifability ~~we are unable~~ to ~~obtain~~market ~~additional~~and ~~authorizations~~sell ~~for~~our ~~any new network construction on reasonable terms~~services.

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.Employees

~~Other~~As ~~Regulation~~of December 31, 2012, we had 1,202 employees. None of our employees are represented by a labor union, and we have no collective bargaining agreements. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

~~Internet~~Item ~~Taxation~~1A. Risk ~~The Internet Tax Non-Discrimination Act, which is in effect through November 2014, places a moratorium on taxes on Internet access and multiple, discriminatory taxes on electronic commerce~~Factors. Certain states have enacted various taxes on Internet access and electronic commerce, and selected states’ taxes are being contested on a variety of bases. If these state tax laws are not successfully contested, or if future state and federal laws imposing taxes or other regulations on Internet access and electronic commerce are adopted, our cost of providing Internet access services could be increased and our business could be adversely affected.

~~Consumer~~The ~~Protection.~~following ~~Federal~~risk factors and ~~state~~other ~~governments~~information ~~have~~included ~~adopted~~in ~~consumer~~this ~~protection~~Annual ~~laws~~Report ~~and~~on ~~undertaken~~Form 10-K ~~enforcement~~should ~~actions~~be tocarefully ~~address~~considered. The ~~advertising~~risks and ~~user~~uncertainties ~~privacy.~~described Asbelow ~~part~~are ofnot ~~these efforts,~~ the ~~Federal~~only ~~Trade~~ones ~~Commission~~we ~~(“FTC”)~~face. Additional risks and ~~some~~uncertainties ~~state~~not ~~Attorney~~presently ~~General~~known ~~offices~~to ~~have~~us ~~conducted~~or ~~investigations~~that ~~into~~we ~~the~~currently ~~privacy~~deem ~~practices~~immaterial ofalso ~~companies~~may ~~that~~adversely ~~collect~~impact ~~information~~our ~~about~~business ~~individuals on the Internet~~operations. ~~The~~If ~~FTC~~any ~~and~~of ~~various~~the ~~state~~following ~~agencies~~risks asoccur, ~~well~~our ~~as individuals have investigated and asserted claims against~~business, orfinancial ~~instituted inquiries into~~condition, ~~ISPs~~ inoperating ~~connection~~results ~~with~~and ~~marketing,~~cash ~~billing,~~flows ~~customer~~could ~~retention,~~be ~~cancellation~~materially ~~and~~adversely ~~disclosure practices~~affected.

12Risks Related to our Business and Industry

~~Table~~If ofwe ~~Contents~~are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer.

~~Proprietary~~We ~~Rights~~operate in an industry characterized by changing technology, changes in customer needs and frequent new service and product introductions. Our success will depend, in part, on our ability to use leading technologies effectively, to continue to develop our technical expertise, to enhance our existing services and to develop new services that meet changing customer needs on a timely and cost-effective basis. We may not be able to adapt quickly enough to changing technology, customer requirements and industry standards.

~~Our~~The ~~trademarks~~development ~~are valuable assets to our business,~~ and ~~are~~offering ~~registered trademarks in the United States. In particular, we believe the strength~~ of ~~these~~new ~~brands~~services ~~among~~in ~~existing~~response ~~and potential customers is important~~ to ~~the~~new ~~success of our business. Additionally, our service marks, proprietary~~ technologies, ~~domain~~or ~~names~~consumer ~~and~~demands ~~similar~~may ~~intellectual~~require ~~property~~us ~~are also important~~ to ~~the~~increase ~~success of~~ our ~~business. Although~~capital weexpenditures ~~do have several patents, we do not consider these patents important to our business~~significantly. We ~~principally~~are ~~rely~~currently ~~upon~~investing ~~trademark~~capital ~~law as well as contractual restrictions~~ to ~~establish~~extend and ~~protect~~enhance our ~~technology~~core ~~and~~fiber ~~proprietary~~IP ~~rights and information~~network. We ~~require~~may ~~employees~~be ~~and~~required ~~consultants~~to ~~and,~~further ~~when possible~~invest, ~~suppliers and distributors~~ to ~~sign~~replace ~~confidentiality~~outdated ~~agreements,~~or ~~and~~incompatible weequipment ~~generally~~or ~~control access~~ to, ~~and~~convert ~~distribution~~our ~~of,~~existing ~~our~~network ~~technologies,~~to ~~documentation~~a ~~and~~network ~~other~~using ~~proprietary~~more ~~information~~advanced technology. WeIf ~~will~~we ~~continue~~are unable to ~~assess~~successfully ~~appropriate~~install ~~occasions~~or ~~for~~operate ~~seeking~~new ~~trademark~~network ~~and~~equipment ~~other~~or ~~intellectual~~convert ~~property~~our ~~protections~~network, ~~for~~or ~~those~~if ~~aspects~~the oftechnology ~~our~~choices ~~business~~we ~~and~~make ~~technology~~prove ~~that~~to webe ~~believe~~incorrect, ~~constitute~~ineffective ~~innovations~~or ~~providing~~unacceptably uscostly, ~~with~~we amay ~~competitive~~not ~~advantage. From~~be ~~time~~able to ~~time,~~compete ~~third~~effectively. ~~parties~~In ~~have~~addition, ~~alleged~~new ~~that~~technologies ~~certain~~may ofbe ~~our~~protected ~~technologies~~by ~~infringe~~patents onor ~~their~~other intellectual property ~~rights.~~laws, Toand, ~~date~~therefore, ~~none~~may ofbe ~~these~~available ~~claims~~only ~~has had an adverse effect on our ability~~ to ~~market and sell~~ our ~~services~~competitors.

~~Employees~~Unfavorable general economic conditions could harm our business.

AsUnfavorable ofgeneral ~~December 31~~economic conditions, ~~2011~~including recession and disruptions to the credit and financial markets, wecould ~~had~~negatively 1affect our business. These conditions could adversely affect the affordability of,~~222~~ ~~employees~~and customer demand for, some of our products and services and could cause customers to delay or forgo purchases of our products and services. ~~None~~Many of our ~~employees~~existing and target customers are ~~represented~~small and medium-sized businesses. We believe these businesses are more likely to be affected by aeconomic ~~labor~~downturns ~~union~~than larger, ~~and~~more weestablished ~~have~~businesses. noUnfavorable ~~collective~~general ~~bargaining~~economic ~~agreements~~conditions could cause business customers to reduce technology spending. WeIn ~~consider~~addition, our ~~relationship~~business ~~with~~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 ~~employees~~revenues to bedecline, ~~good~~churn ~~and~~to ~~have~~increase, ~~not~~allowance ~~experienced~~for ~~interruptions~~doubtful accounts and write-offs of ~~operations~~accounts ~~due~~receivable to ~~labor~~increase ~~disagreements~~or otherwise adversely affect our business, financial position, results of operations and cash flows.

~~Item 1A. Risk Factors.~~10

~~The~~Table 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.~~Contents

~~Risks~~Unfavorable ~~Related~~general economic conditions could also negatively impact third-party vendors we rely on for services and network equipment integral to ~~Our~~our ~~Business~~business. If these vendors encounter financial difficulties, their ability to supply services and ~~Industry~~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.

IfWe weface ~~are~~significant ~~unable~~competition ~~to adapt to changes~~ in ~~technology~~the ~~and~~communications ~~customer~~industry ~~demands,~~that wecould ~~may~~reduce ~~not remain competitive, and~~ our ~~revenues and operating results could suffer~~profitability.

The communications industry is ~~characterized~~highly bycompetitive, and we expect this competition to intensify. These markets are rapidly changing ~~technology~~due to industry consolidation, ~~changes~~an inevolving ~~customer~~regulatory ~~needs~~environment and ~~frequent~~the emergence of new ~~service~~technologies. ~~and~~We ~~product~~compete ~~introductions,~~directly ~~particularly~~or inindirectly ~~the~~with ~~areas~~incumbent oflocal ~~voice-over-Internet-Protocol~~exchange carriers (“~~VoIP~~ILECs”), ~~broadband~~such ~~services~~as AT&T, Inc., CenturyLink, Inc. and ~~advanced~~Verizon ~~wireless~~Communications ~~offerings~~Inc.; ~~Our~~competitive ~~future~~telecommunications ~~success~~companies ~~will~~(“CLECs”), ~~depend~~such as Level 3 Communications Inc., inMegaPath, ~~part~~Inc., onWindstream ~~our~~Corporation ~~ability~~and toXO ~~use~~Communications ~~leading~~Inc.; ~~technologies~~interexchange ~~effectively~~carriers, tosuch ~~continue~~as toSprint ~~develop~~Nextel ~~our~~Corporation; ~~technical~~wireless ~~expertise~~and satellite service providers; cable service providers, tosuch ~~enhance~~as ~~our~~Charter ~~existing~~Communications, ~~services~~Inc., Comcast Corporation, Cox Communications, Inc. and toTime ~~develop~~Warner ~~new~~Cable; ~~services~~and ~~that~~stand-alone ~~meet~~VoIP ~~changing~~providers. ~~customer~~We ~~needs~~experience onsignificant apricing ~~timely~~and product competition from AT&T and ~~cost-effective~~other ~~basis~~incumbents that are the dominant providers of telecommunications services in our markets. We ~~may~~have ~~not~~reduced, and may be ~~able~~required to ~~adapt~~further ~~quickly~~reduce, ~~enough~~some toor ~~changing~~all ~~technology~~of the prices we charge for our retail local, ~~customer~~long ~~requirements~~distance and ~~industry~~data ~~standards~~services.

~~Specifically,~~We ~~new~~believe ~~technologies~~the ~~such~~primary ascompetitive ~~4G,~~factors ~~Ethernet~~in orthe ~~other~~communications ~~alternatives~~industry toinclude price, availability, reliability of service, network ~~access~~security, ~~could~~variety ~~result~~of inservice ~~the~~offerings, ~~development~~quality of ~~additional~~service ~~products~~and orreputation ~~services~~of ~~that~~the service provider. While we believe our business services compete ~~with~~favorably orbased ~~displace~~on ~~ours~~some of these factors, orwe ~~that~~are ~~enable~~at ~~current~~a ~~customers~~competitive disadvantage with respect to ~~bypass~~certain ~~use~~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, ~~communications~~industry ~~customers~~consolidation ~~are~~has ~~increasingly~~resulted ~~using~~in ~~wireless~~larger ~~forms~~competitors that have greater economies of ~~communication~~scale. Consequently, ~~such~~these ascompetitors ~~handheld~~may ~~Internet-access~~be ~~devices~~better equipped to charge lower prices for their products and ~~mobile~~services, ~~phones~~to provide more attractive offerings, ~~which~~to ~~has~~develop ~~resulted~~and inexpand atheir ~~decline~~communications inand ~~the~~network ~~volume~~infrastructures ofmore ~~voice~~quickly, ~~traffic~~to ~~carried~~adapt bymore ~~traditional~~swiftly ~~wireline~~to ~~communications~~new ~~networks.~~or ~~Any~~emerging oftechnologies ~~these~~and ~~factors~~changes ~~could~~in ~~adversely~~customer ~~affect~~requirements, to increase prices that we pay for wholesale inputs to our ~~revenues~~services and ~~profitability~~to devote greater resources to the marketing and sale of their products and services.

~~The~~Competition ~~development~~could ~~and~~adversely ~~offering~~impact ofus ~~new services~~ in ~~response~~several toways, ~~new~~including: ~~technologies~~(i) orthe ~~consumer~~loss ~~demands~~of ~~may~~customers ~~require~~and usresulting torevenue; ~~increase~~(ii) ~~our~~the ~~capital~~possibility ~~expenditures~~of ~~significantly.~~customers Wereducing ~~may~~their beusage ~~required~~of toour ~~invest~~services or toshifting ~~convert our existing network~~ to aless ~~network~~profitable ~~using~~services; ~~more~~(iii) ~~advanced~~reduced ~~technology.~~traffic Ifon ~~we are unable successfully to install or operate new network equipment or convert~~ our ~~network,~~networks; or(iv) if the ~~technology~~need ~~choices we make prove~~ to beexpend ~~incorrect,~~substantial ~~ineffective~~time or ~~unacceptably~~money ~~costly,~~on wenew ~~may~~capital ~~not~~improvement beprojects; ~~able~~and to(v) ~~compete~~the ~~effectively.~~need Into ~~addition,~~lower ~~new~~prices ~~technologies may be protected by patents~~ or ~~other~~increase ~~intellectual~~marketing ~~property~~expenses ~~laws, and, therefore, may be available only~~ to ~~our~~remain ~~competitors~~competitive.

13Decisions by legislative or regulatory authorities, including the Federal Communications Commission relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services.

~~Table~~We rely in significant part on purchasing wholesale services, including special access services, and leasing network facilities from AT&T, CenturyLink and other incumbent carriers. Over the past several years, the FCC has reduced or eliminated a number of ~~Contents~~regulations governing the incumbent carriers' offerings, which has had the impact of reducing these carriers' competition-related obligations. These FCC actions include removal of local switching and other network elements from the list of elements that the incumbent carriers must provide on an unbundled basis at TELRIC cost-based rates, as well as the grant of broad pricing flexibility to incumbents for their special access services in many areas. If the FCC continues to reduce or eliminate regulations governing incumbent carriers, and if the incumbent carriers do not continue to permit us to purchase these services from them under commercial arrangements at reasonable rates, our business could be adversely affected and our cost of providing local service could increase. This can have a significant adverse impact on our operating results and cash flows.

~~Unfavorable~~The ~~general~~incumbent ~~economic~~carriers ~~conditions~~regularly attempt to further reduce their competition-related obligations to non-incumbent carriers like us. Most recently, in November 2012 AT&T filed a petition with the FCC requesting that the FCC open a proceeding “to facilitate… the transition” from technology platforms such as copper loops to IP-based platforms, which proceeding could ~~harm~~have ~~our~~the ~~business~~effect of further reducing the local competition-related obligations of the incumbent carriers. In addition, the FCC has established a task force to coordinate its efforts on IP interconnection. Likewise, certain states have taken steps to address IP interconnection. If the FCC, Congress, state legislatures or state regulatory agencies were to adopt measures further reducing the local competition-related obligations of the incumbents or allowing those carriers to increase further the rates we must pay, we could experience

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.11

~~Unfavorable~~Table 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.Contents

additional increases in operating costs that would negatively affect our operating results and cash flows. In addition, the FCC currently is considering whether and how to reform its special access rules. We ~~face~~rely ~~significant~~to ~~competition~~a considerable extent on interstate special access services purchased from the incumbent carriers in order to connect to our customers. If the ~~communications~~FCC ~~industry~~adopts rules that ~~could~~do ~~reduce~~not protect our ~~profitability~~ability to purchase these services at reasonable prices on non-discriminatory terms as compared to our competitors, our business could be adversely affected.

~~The~~If ~~communications industry is highly competitive, and~~ we ~~expect this competition to intensify. These markets~~ are ~~rapidly~~unable ~~changing due~~ to ~~industry~~interconnect ~~consolidation, an evolving regulatory environment and the emergence of new technologies. We compete directly or indirectly~~ with ~~incumbent local exchange carriers, such as~~ AT&T, ~~CenturyLink, Inc.~~ and ~~Verizon Communications Inc.;~~ other ~~competitive~~incumbent ~~telecommunications companies, such as Level 3 Communications Inc., MegaPath, Inc., Windstream Corporation and XO Holdings Inc.; interexchange~~ carriers, ~~such~~on asacceptable ~~Sprint Nextel Corporation; wireless and satellite service providers; cable service providers/multiple system operators (MSOs)~~terms, such as Charter Communications, Inc., Comcast, Cox Communications, Inc. and Time Warner Cable; and stand-alone VoIP providers. We experience significant pricing and product competition from AT&T and other incumbents that are the dominant providers of telecommunications services in our ~~markets.~~ability ~~We have reduced, and may be required~~ to ~~further~~offer ~~reduce,~~competitively ~~some~~priced ~~or all of the prices we charge for our retail~~ local, ~~long~~telephone ~~distance~~services ~~and~~will ~~data~~be ~~services~~adversely affected.

~~Competition~~To ~~could~~provide ~~adversely~~local ~~impact~~telephone usservices, inwe ~~several~~must ~~ways,~~interconnect ~~including~~with ~~(i)~~ and resell the ~~loss~~services of ~~customers~~the ~~and~~incumbent ~~resulting~~carriers ~~revenue~~to supplement our own network facilities, ~~(ii)~~ pursuant to interconnection agreements between us and the ~~possibility~~incumbent ofcarriers. ~~customers~~We ~~reducing~~operate ~~their~~under ~~usage~~interconnection agreements with AT&T, CenturyLink, Fairpoint Communications, Frontier Communications and Windstream. An interconnection agreement typically has a term of ~~our~~three ~~services~~years, although the parties may mutually agree to extend or ~~shifting~~amend such agreements. Federal law requires these carriers to ~~less~~negotiate ~~profitable~~the ~~services~~terms of interconnection agreements with us in good faith, ~~(iii) reduced~~but ~~traffic~~if such negotiations are unsuccessful, we may be forced into an expensive arbitration proceeding before state PUCs, with an uncertain outcome. 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 ~~networks~~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 (ivsuch as wireless and VoIP providers and other competitive carriers) ~~our~~ ~~need~~are not subject to ~~expend~~the ~~substantial~~statutory ~~time~~arbitration ormechanism, ~~money~~making it potentially more difficult to reach any agreement on ~~new~~terms ~~capital~~that ~~improvement~~we ~~projects,~~view ~~(v) our~~as ~~need~~acceptable. If we are unable to ~~lower~~enter ~~prices~~into or ~~increase~~maintain ~~marketing~~favorable ~~expenses~~interconnection agreements in our markets, our ability to ~~remain~~provide local services on a competitive and ~~(vi)~~ profitable basis may be adversely affected. Any successful effort by the incumbent carriers to deny or substantially limit our ~~inability~~access to ~~diversify~~their bynetwork ~~successfully~~elements ~~offering~~or ~~new~~wholesale ~~products~~services (in commercial agreements or by regulatory petition) also 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 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~~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, to increase prices that we pay for wholesale inputs to our services. ~~and to devote~~

14We 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. In late 2011, the FCC adopted policy changes that over time are reducing carriers' access rates. These 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 rules have generally reduced the rates that we pay for our access services. 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.

~~Table~~We ofmay ~~Contents~~experience reductions in switched access and reciprocal compensation revenue.

~~greater~~We ~~resources~~may experience declines in revenues for switched access and 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. In late 2011, the FCC adopted policy changes that over time are reducing carriers' access rates. In July 2012, we modified our applicable state access tariffs and billing to implement the ~~marketing~~FCC's required reduction in intrastate access charges. These rules have resulted in a loss of revenues and ~~sale~~an increase in our volume of ~~their~~carrier ~~products~~disputes, and ~~services~~we expect this to continue. 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.

~~Decisions~~Failure byto ~~the~~obtain ~~Federal~~and ~~Communications~~maintain ~~Commission~~necessary ~~relieving~~permits ~~incumbent~~and ~~carriers~~ rights-of-way ~~certain~~could ~~regulatory~~interfere ~~requirements,~~with ~~and possible further deregulation in the future, may restrict~~ our ~~ability~~network toinfrastructure ~~provide services~~ and ~~may increase the costs we incur to provide these services~~operations.

We ~~rely~~must innegotiate ~~significant part on purchasing wholesale services~~ and ~~leasing~~manage ~~network~~agreements ~~facilities~~with ~~from~~state ~~AT&T~~highway ~~and~~authorities, ~~other~~local ~~incumbent carriers. Over the past several years~~governments, ~~the~~transit ~~FCC has reduced or eliminated a number of regulations governing the incumbent carriers’ offerings~~authorities, ~~including removal of~~ local ~~switching~~telephone companies and other ~~network~~utilities, ~~elements~~railroads, ~~from~~long ~~the~~distance ~~list of elements that the incumbent~~ carriers ~~must~~and ~~provide~~other onparties anto ~~unbundled~~obtain ~~basis~~and atmaintain ~~TELRIC cost~~rights-~~based rates, as well as the grant~~ of-way ~~broad~~and ~~pricing~~similar ~~flexibility~~franchises toand ~~incumbents~~licenses ~~for~~needed ~~their special access services in many areas. If the incumbent carriers do not continue~~ to ~~permit us to purchase these services from them under commercial arrangements at reasonable rates~~install, ~~our~~operate ~~business~~and ~~could~~maintain befiber ~~adversely~~optic ~~affected~~cable and our ~~cost~~other ofnetwork ~~providing local service could increase~~elements. ~~This can have a significant adverse impact on our operating results and cash flows.~~ If ~~the~~any ~~FCC,~~of ~~Congress,~~these ~~state~~authorizations ~~legislatures~~terminate or ~~state regulatory agencies were to adopt measures further reducing the local competition-related obligations of the incumbents or allowing those carriers to increase further the rates we must pay~~lapse, ~~we could experience additional increases in operating costs that would negatively affect~~ our ~~operating~~operations ~~results~~could ~~and~~be ~~cash~~adversely ~~flows~~affected.

~~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.~~12

ToTable ~~provide local telephone 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. We operate under interconnection agreements with AT&T, CenturyLink, Frontier Communications, Fairpoint Communications and Windstream. An interconnection agreement typically has a term of three years, although the parties may mutually agree to extend or amend such agreements. 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 incumbent local exchange carriers (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. 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.Contents

~~Our~~We ~~operating~~have ~~performance~~substantial ~~will~~business ~~suffer~~relationships ifwith weseveral ~~are~~large ~~not~~telecommunications ~~offered~~carriers, ~~competitive~~and ~~rates~~some ~~for~~of ~~the~~our ~~access~~customer ~~services~~agreements wemay ~~need~~not continue due to ~~provide~~financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our ~~long~~wholesale ~~distance~~revenue ~~services~~and results of operations.

We ~~depend~~generate onwholesale ~~other~~revenue ~~communications~~from ~~companies~~the tosale ~~originate and terminate a significant portion~~ of ~~the~~transmission ~~long~~capacity ~~distance~~to ~~traffic~~other ~~initiated~~telecommunications bycarriers ~~our~~and ~~customers.~~have ~~The~~substantial ~~FCC~~business ~~regulates~~relationships ~~the~~with ~~access~~several ~~rates~~large ~~charged~~telecommunications ~~by local~~ carriers ~~to interexchange carriers~~ for ~~the~~whom ~~origination~~we ~~and~~provide ~~termination of long distance traffic~~services. ~~These~~Replacing ~~access~~this ~~rates~~wholesale ~~make~~revenue upmay abe ~~significant~~difficult ~~portion~~because ofindividual ~~the~~enterprise ~~cost~~and ofsmall ~~providing~~to ~~long~~medium ~~distance~~business ~~service.~~customers ~~The~~tend ~~FCC~~to ~~has~~place ~~recently~~smaller ~~adopted~~service ~~policy~~orders ~~changes~~than ~~that~~our ~~over~~larger ~~time~~carrier ~~are reducing carriers’ access rates~~customers. ~~These~~ ~~new~~In ~~rules significantly alter the manner in which all carriers~~addition, ~~including~~pricing ~~carriers~~pressure ~~that~~on ~~use~~services ~~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~~sell ~~for~~to our ~~access~~carrier ~~services.~~customers Wemay ~~expect~~challenge ~~these~~our ~~new~~ability ~~rules~~ to ~~result~~grow inrevenue afrom ~~loss of revenues and could potentially increase our volume of~~ carrier ~~disputes~~customers. ~~Our~~ ~~operating~~As ~~performance~~a ~~will~~result, ~~suffer~~ if weour ~~are~~larger ~~not~~carrier ~~offered~~customers ~~these~~terminate ~~access~~the services atthey ~~rates~~receive ~~that~~from ~~are substantially equivalent to the costs of~~us, ~~and rates charged to,~~ our ~~competitors~~wholesale revenues and ~~that~~results ~~permit profitable pricing~~ of ~~our~~operations ~~long~~could ~~distance~~be ~~services~~adversely affected.

15We obtain a majority of our network equipment and software from a limited number of third-party suppliers.

~~Table~~We obtain the majority of ~~Contents~~our network equipment and software from a limited number of third-party suppliers. We also rely on these suppliers for technical support and assistance. If any of these relationships is terminated or if the third-party suppliers were to otherwise fail to provide necessary equipment and software, our ability to efficiently maintain, upgrade or expand our network could be impaired. Although we believe that we would be able to address our future equipment needs with equipment obtained from other suppliers, we cannot assure that such equipment would be compatible with our network without significant modifications or cost, if at all. If we were unable to obtain the equipment necessary to maintain our network, our ability to attract and retain customers and provide our services would be impaired.

WeWork ~~may~~stoppages ~~experience~~experienced ~~reductions~~by inother ~~switched~~communications ~~access~~companies on whom we rely for service could adversely impact our ability to provision and ~~reciprocal~~service ~~compensation~~our ~~revenue~~customers.

WeTo ~~may~~offer ~~experience~~voice ~~declines~~and indata ~~revenues~~services, ~~for~~we ~~switched~~must ~~access~~interconnect ~~and~~our ~~reciprocal~~network ~~compensation~~with asthe anetworks ~~result~~ of ~~lower~~the ~~volume~~incumbent carriers. We place a significant amount of ~~traditional~~reliance ~~long~~on ~~distance~~these ~~voice~~carriers ~~minutes~~to ~~and~~provide ~~FCC~~these ~~and~~connections ~~state~~soon ~~regulations~~after ~~compelling~~we aplace ~~reduction~~the oforder, ~~switched~~so ~~access~~that ~~and~~we ~~reciprocal~~can ~~compensation~~complete ~~rates.~~the ~~The~~provisioning ~~FCC~~of ~~recently~~services ~~adopted~~for ~~policy~~our ~~changes~~customers. ~~that~~Work ~~over~~stoppages ~~time~~experienced ~~are~~by ~~reducing~~AT&T ~~carriers’~~or ~~access~~any ~~rates. We~~other ~~expect~~carrier ~~these~~on ~~new~~which ~~rules to~~we ~~result~~rely, inwhether adue ~~loss~~to oflabor ~~revenues~~disputes ~~and~~or other matters, could ~~potentially~~adversely ~~increase~~affect our ~~volume~~business ofthrough ~~carrier~~unanticipated ~~disputes.~~delays Inin ~~addition,~~ the ~~FCC~~delivery ~~currently~~of isservices ~~considering~~purchased ~~whether~~to our customers and ~~how~~increased prices to ~~reform~~source ~~its~~purchases ~~special~~through ~~access~~alternative ~~rules.~~vendors, Weand ~~rely~~ultimately tocould aresult ~~considerable~~in ~~extent~~cancellation onof ~~interstate~~pending ~~special~~orders. ~~access~~Additionally, ~~services~~work ~~purchased~~stoppages ~~from~~could ~~the~~result ~~incumbent~~in ~~carriers~~delays in ~~order~~scheduled toor ~~connect~~necessary tomaintenance ~~our~~events ~~customers. Switched~~in ~~access~~response ~~and~~to ~~reciprocal~~trouble ~~compensation~~tickets ~~together~~or ~~have~~outages ~~been~~on ~~declining~~our ~~over~~vendor's ~~time.~~networks ~~There~~for ~~can~~existing becustomer noservices ~~assurance~~or for services that we ~~will~~purchase befrom ~~able~~them tofor ~~compensate~~our ~~for~~own ~~the~~needs. ~~reduction~~Any insuch ~~intercarrier~~disruption ~~compensation~~could ~~revenue~~have ~~with~~an ~~other~~adverse ~~revenue~~effect ~~sources~~on orour ~~increased~~business, ~~volume~~our results of operations and cash flows.

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

ToIf ~~obtain and maintain rights-of-way and similar franchises and licenses needed to install~~we, ~~operate~~or ~~and maintain fiber optic cable and our~~ other ~~network~~industry ~~elements~~participants, weare ~~must~~unable ~~negotiate~~to ~~and~~successfully ~~manage~~defend ~~agreements~~against ~~with~~disputes ~~state~~or ~~highway~~legal ~~authorities~~actions, ~~local~~we ~~governments,~~could ~~transit~~face ~~authorities,~~substantial ~~local~~liabilities ~~telephone~~or ~~companies~~suffer ~~and~~harm ~~other~~to ~~utilities,~~our ~~railroads,~~financial ~~long distance carriers~~ and ~~other~~operational ~~parties~~prospects. ~~If any of these authorizations terminate or lapse, our operations could be adversely affected.~~

We ~~have~~are ~~substantial~~currently ~~business~~a ~~relationships~~party ~~with~~to ~~several~~various ~~large~~disputes, ~~telecommunications~~litigation ~~carriers~~or other legal proceedings arising from normal business activities, including regulatory audits, trademark and ~~some~~patent infringement, billing disputes, rights of ~~our~~access, ~~customer~~tax, ~~agreements~~consumer ~~may~~protection, ~~not~~employment ~~continue~~and ~~due~~tort. toThe ~~financial~~result ~~difficulty~~of any current or future disputes, ~~acquisitions~~litigation or other legal proceedings is inherently unpredictable. Defending against disputes, ~~non-renewal~~litigation or other ~~factors~~legal proceedings may involve significant expense and diversion of management's attention and resources from other matters. Due to the inherent uncertainties of litigation, ~~which~~we ~~could~~may ~~adversely~~not ~~affect~~prevail in these actions. In addition, our ~~wholesale~~ongoing ~~revenue~~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 adversely affect our results of operations.

We ~~generate~~are ~~wholesale~~also ~~revenue~~subject ~~from~~to the ~~sale~~risks ofassociated ~~transmission~~with ~~capacity~~the toresolution ~~other~~of ~~telecommunications~~various ~~carriers~~third-party disputes, lawsuits, arbitrations and ~~have~~proceedings ~~substantial~~affecting our business. ~~relationships~~The ~~with~~deregulation ~~several~~of ~~large~~the telecommunications ~~carriers~~industry, ~~for~~the ~~whom~~implementation weof ~~provide~~the ~~services.~~Telecommunications ~~The~~Act ~~highly~~of ~~competitive~~1996, ~~environment~~the evolution of telecommunications infrastructure from time-division multiplexing to Internet Protocol, and the ~~industry~~distress ~~consolidation~~of many carriers in the ~~communications~~telecommunications ~~markets~~industry ~~has~~as ~~challenged~~a ~~the~~result ~~financial~~of ~~condition~~continued competitive factors and ~~growth~~financial ~~prospects~~pressures ofhave ~~some~~resulted in the involvement of ~~our~~numerous ~~carrier~~industry ~~customers,~~participants ~~and~~in ~~has~~disputes, ~~caused~~lawsuits, ~~such~~proceedings ~~carrier~~and ~~customers~~arbitrations tobefore ~~optimize~~state ~~the~~and ~~telecommunications~~federal ~~capacity~~regulatory ~~that~~commissions, ~~they~~private ~~use~~arbitration ~~among~~organizations ~~competing~~such ~~telecommunications~~as ~~services~~the ~~providers’~~American ~~networks~~Arbitration Association, ~~including~~and ~~ours.~~courts ~~Replacing~~over ~~this~~many ~~wholesale~~issues ~~revenue~~that ~~may~~will be ~~difficult~~important ~~because~~to ~~individual~~our ~~enterprise~~financial and ~~small~~operational tosuccess. ~~medium~~These ~~business~~issues ~~customers~~include ~~tend~~the tointerpretation ~~place~~and ~~smaller~~enforcement ~~service~~of ~~orders~~existing ~~than~~interconnection ~~our~~agreements ~~larger~~and ~~carrier~~tariffs, ~~customers.~~the Interms ~~addition,~~of ~~pricing~~new ~~pressure~~interconnection onagreements, ~~services~~operating ~~that~~performance weobligations, ~~sell~~intercarrier tocompensation, ~~our~~treatment ~~carrier~~of ~~customers~~different ~~may~~categories ~~challenge~~of ~~our~~traffic ~~ability~~(for toexample, ~~grow~~traffic ~~revenue~~originated ~~from~~or ~~carrier~~terminated ~~customers.~~on Aswireless aor ~~result~~VoIP), ifthe ~~our~~jurisdiction ~~larger~~of ~~carrier~~traffic ~~customers~~for ~~terminate~~intercarrier compensation purposes, the wholesale services ~~they~~and ~~receive~~facilities ~~from~~available to us, ~~our~~the ~~wholesale~~prices ~~revenues~~we ~~and~~will ~~results~~pay offor ~~operations~~those ~~could~~services beand ~~materially~~facilities and ~~adversely~~the ~~affected~~regulatory treatment of new technologies and services.

~~General Risks~~13

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

~~Our~~We ~~business~~may ~~depends~~be onaccused ~~our~~of ~~ability~~infringing toupon ~~hire~~the ~~and~~intellectual ~~retain~~property ~~senior~~rights ~~management, sales and other key personnel, many~~ of ~~whom~~third ~~have significant experience in our industry. In the communications and technology industry~~parties, ~~there~~which is ~~substantial~~costly ~~and~~to ~~continuous~~defend ~~competition for highly skilled sales~~ and ITcould ~~personnel~~limit ~~in particular. Acquisitions and workforce reductions may affect~~ our ability to ~~retain~~use orcertain ~~replace~~technologies ~~key~~in ~~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~~future. 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.

16From time to time third parties have alleged that we infringe on their intellectual property rights and we expect to continue to be subject to such claims. 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, have substantial patent holdings. These providers have successfully asserted their claims against some communications companies, and have filed pending lawsuits against various competitive carriers. Certain of these claims are made by patent holding companies that are not operating companies. The alleging parties generally seek royalty payments for prior use as well as future royalty streams. Defending against disputes, litigation or other legal proceedings, whether or not meritorious, 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. Both the costs of defending lawsuits and any settlements or judgments against us could adversely affect our results of operations.

~~Table~~We ofmay ~~Contents~~not be able to protect our intellectual property.

~~Privacy~~We ~~concerns~~regard ~~relating~~our trademarks as valuable assets to our business. ~~could~~In ~~damage~~particular, we believe the strength of these brands among existing and potential customers is important to the success of our ~~reputation~~business. Additionally, our service marks, proprietary technologies, domain names and ~~deter~~similar ~~current~~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 ~~potential~~protect ~~users~~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 ~~using~~unauthorized use, our ~~services~~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 results of operations.

~~Concerns~~We ~~about~~may ~~our~~be ~~practices~~unable ~~with regard~~ to ~~the~~hire ~~collection,~~and ~~use,~~retain ~~disclosure~~sufficient orqualified ~~security of personal information or other privacy-related matters~~personnel, ~~even if unfounded, could damage our reputation~~ and ~~operating~~the ~~results.~~loss Weof ~~strive~~any toof ~~comply with all applicable data protection laws and regulations, as well as~~ our ~~own~~key ~~posted~~executive ~~privacy~~officers ~~policies. However, any failure or perceived failure to comply with these laws, regulations or policies may result in proceedings or actions against us by government entities or others, which~~ could ~~potentially~~adversely ~~have~~affect ~~an adverse effect on our business~~us.

~~Federal~~Our ~~and~~business ~~state~~depends ~~governments~~on ~~have~~our ~~adopted~~ability ~~consumer~~to ~~protection~~hire ~~laws~~ and ~~undertaken~~retain ~~enforcement~~key ~~actions~~executive toofficers, ~~address~~senior ~~advertising~~management and ~~user~~other ~~privacy~~key personnel, many of whom have significant experience in our industry. ~~Our~~There ~~services~~is substantial and ~~business~~continuous ~~practices,~~competition orfor ~~changes~~highly toskilled ~~our~~personnel. ~~services~~Acquisitions and ~~business~~workforce ~~practices~~reductions ~~could~~may ~~subject~~affect usour ability to ~~investigation~~retain or ~~enforcement~~replace ~~actions~~key ifpersonnel, weharm ~~fail~~employee tomorale ~~adequately~~and ~~comply~~productivity ~~with~~or ~~applicable~~disrupt ~~consumer~~our ~~protection laws~~business. ~~Existing~~Key ~~and~~employees ~~future~~may ~~federal~~depart ~~and~~because ~~state~~of ~~laws~~issues relating to the uncertainty and ~~regulations~~difficulty ~~also~~resulting ~~may~~from ~~affect~~integration ~~the~~changes ~~manner~~or ina ~~which~~desire wenot ~~are~~to ~~required~~remain with us following a merger transaction or a restructuring. Effective succession planning is important to ~~protect~~our ~~confidential~~long-term ~~customer~~success. ~~data~~Failure to ensure effective transfer of knowledge and ~~other~~transitions ~~information,~~involving ~~which~~key employees could ~~increase~~hinder execution of our business strategies. Finally, the ~~cost~~loss of any of our ~~operations~~key ~~and~~executives could impair our ~~potential~~ability ~~liability~~to ifexecute ~~the~~our ~~security~~business ofstrategy ~~our~~or ~~confidential~~otherwise ~~customer~~have ~~data~~a ismaterial ~~breached~~adverse effect on us.

~~Security~~Our ~~breaches~~business ~~could~~depends ~~damage~~on ~~our~~effective ~~reputation~~business ~~and~~support ~~harm~~systems ~~our~~and ~~operating results~~processes.

WeOur ~~are~~business ~~subject~~relies toon ~~cyber~~our ~~security~~data, ~~risks~~billing and ~~may~~other ~~incur~~operational ~~increasing~~and ~~costs~~financial inreporting anand ~~effort~~control ~~to minimize those risks~~systems. ~~The~~To ~~services~~effectively wemanage ~~offer~~our ~~involve the storage and transmission of customers’ proprietary~~ information. ~~Security~~technology ~~breaches~~infrastructure, ~~such~~we aswill ~~unauthorized~~need ~~access,~~to ~~accidents,~~continue ~~employee~~to ~~error~~maintain orour ~~malfeasance~~data, ~~computer~~billing ~~viruses,~~and ~~computer~~other ~~hackings~~operational orand ~~other~~financial ~~disruptions~~systems, ~~can~~procedures ~~occur~~and ~~that could compromise the security of our infrastructure~~controls, ~~thereby~~which ~~exposing~~can ~~such~~be ~~information to unauthorized access by third parties~~costly. ~~Techniques~~We ~~used~~have toexperienced ~~obtain~~system ~~unauthorized~~failures ~~access~~from ~~to,~~time or to ~~sabotage systems~~time, ~~change frequently~~ and ~~generally~~any ~~are~~interruption ~~not~~in ~~recognized~~the ~~until~~availability ~~launched~~of ~~against~~our abusiness ~~target.~~support Wesystems, ~~may~~in beparticular ~~required~~our tobilling ~~expend~~systems, ~~significant~~could ~~capital~~result ~~and~~in ~~other~~an ~~resources to remedy~~immediate, ~~protect against or alleviate these~~ and ~~related~~possibly ~~problems~~substantial, ~~and~~loss weof ~~may~~revenues. Our ~~not~~inability ~~be able~~ to ~~remedy these problems in a timely manner~~maintain, expand or atupgrade ~~all.~~our ~~Any~~technology ~~security~~infrastructure ~~breaches that occur~~ could ~~damage~~have ~~our~~adverse ~~reputation~~consequences, ~~increase~~which ~~our~~could ~~security~~include ~~costs,~~service ~~expose~~or usbilling tointerruptions ~~litigation~~ and ~~lead to~~ the ~~loss~~diversion of ~~existing~~development ~~or potential customers~~resources. ~~If our services are perceived as not being secure, our business may be adversely impacted.~~

~~Interruption~~Privacy orconcerns ~~failure~~relating ofto our ~~network~~business ~~and information systems and other technologies~~ could ~~impair~~damage our ~~ability~~reputation toand ~~provide~~deter ~~our~~current ~~services,~~and ~~which~~potential ~~could~~users ~~damage~~from ~~our~~using ~~reputation and harm~~ our ~~operating results~~services.

~~Our~~Concerns ~~success~~about ~~depends~~our onpractices ~~our~~with ~~ability~~regard to ~~provide~~the ~~reliable service. Our network~~collection, ~~network operations centers~~use, ~~central~~disclosure ~~offices,~~or ~~corporate~~security ~~headquarters and those~~ of ~~our~~personal ~~third~~information ~~party service providers are vulnerable to damage~~ or ~~interruption from fires, earthquakes, hurricanes, tornados, floods and~~ other ~~natural~~privacy-related ~~disasters~~matters, ~~terrorist~~even ~~attacks,~~if ~~power loss~~unfounded, ~~capacity~~could ~~limitations,~~damage ~~telecommunications failures, software and hardware defects or malfunctions, break ins, sabotage and vandalism, human error and other disruptions that are beyond~~ our ~~control.~~reputation ~~Some of our systems are not fully redundant,~~ and ~~our~~operating ~~disaster recovery planning may not be adequate~~results. We ~~have~~strive ~~experienced interruptions in service in the past due~~ to ~~factors~~comply ~~such~~with asall ~~cable~~applicable ~~damage,~~data ~~theft~~protection oflaws ~~our~~and ~~equipment~~regulations, ~~power~~as ~~outages,~~well ~~inclement~~as ~~weather and service failures of~~ our ~~third-party~~own ~~service~~posted ~~providers. We~~privacy ~~may experience service interruptions or system failures in the future~~policies. ~~In addition~~ However, inany ~~connection~~failure ~~with enhancement, expansion~~ or ~~consolidation~~perceived offailure ~~our existing network, we may experience service interruptions despite our efforts~~ to ~~minimize~~comply ~~the~~with ~~impact~~these ~~to customers. We may make significant capital expenditures to increase the reliability of our systems~~laws, ~~but~~regulations ~~these capital expenditures may not achieve the results we expect. The occurrence of any disruption~~ or ~~system~~policies ~~failure~~ may result in aproceedings ~~loss~~or ofactions ~~business,~~against ~~increase expenses, damage our reputation for providing reliable service, subject~~ us toby ~~additional~~government ~~regulatory~~entities ~~scrutiny~~ or ~~expose us to litigation and possible financial losses~~others, ~~any of~~ which could have aan ~~material~~ adverse effect on our business~~, financial position, results of operations and cash flows~~.

1714

Table of Contents

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

~~Our~~Cyber ~~business~~security ~~relies~~breaches oncould ~~our~~harm ~~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 data, billing and other operational and financial systems, procedures and controls, which can be costly. 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 result in an immediate, and possibly substantial, loss of revenues~~. Our ability to maintain, expand and update our information 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.

~~Government~~The ~~regulations~~services we offer involve the storage and transmission of customers' proprietary information and cyber security breaches expose us to a risk of unauthorized access to this information. We are regularly subject to cyber security attacks and are also subject to employee error or malfeasance or other disruptions, although no attack or other disruption has had material consequences to date. Techniques used to obtain unauthorized access to, or to sabotage systems, change frequently and generally are not recognized until launched against a target. We may be required to use significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. A material security breach could ~~adversely~~damage ~~affect~~our reputation, increase our ~~business~~security orcosts, ~~force~~expose us to ~~change~~litigation and lead to the loss of existing or potential customers. If our services are perceived as not being secure, our business ~~practices~~may be adversely affected.

~~Our~~Interruption ~~services~~or ~~are~~failure ~~subject to varying degrees~~ of ~~federal,~~our ~~state~~network and ~~local~~information ~~regulation.~~systems ~~Federal, state~~ and ~~local~~other ~~regulations~~technologies ~~governing our services are the subject of ongoing judicial proceedings, rulemakings and legislative initiatives that~~ could ~~change~~impair ~~the manner in which~~ our ~~industry~~ability ~~operates and affect our business. The Federal Communications Commission (FCC) exercises jurisdiction over telecommunications common carriers~~ to ~~the extent that they~~ provide, ~~originate~~our or terminate interstate or international communications. The FCC also establishes rules and has other authority over some issues related to local telephone competition. State regulatory commissions retain jurisdiction over telecommunications carriers to the extent that they provideservices, ~~originate~~which orcould ~~terminate~~damage ~~intrastate~~our ~~communications.~~reputation ~~State commissions also have authority to review~~ and ~~approve~~harm ~~interconnection~~our ~~agreements~~operating ~~between incumbent telephone carriers and competitive carriers such as us, and to conduct arbitration of disputes arising in the negotiation of such agreements~~results. ~~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.~~

~~Bills~~Our ~~intended~~success depends on our ability to ~~amend~~provide ~~the~~reliable ~~Communications~~service. ~~Act~~Our ofnetwork, ~~1934~~network operations centers, ascentral ~~amended~~offices, bycorporate ~~the~~headquarters ~~Telecommunications~~and ~~Act~~those of ~~1996 (“Communications~~our ~~Act”)~~third party service providers are ~~introduced~~vulnerable into ~~Congress~~damage or interruption from ~~time~~fires, toearthquakes, ~~time~~hurricanes, tornados, floods and ~~their~~other ~~effect~~natural ondisasters, usterrorist ~~and~~attacks, ~~the~~power ~~communications~~loss, ~~industry~~capacity ~~cannot~~limitations, ~~always~~telecommunications befailures, ~~predicted.~~software ~~Proposed~~and ~~legislation~~hardware defects or malfunctions, ifbreak ~~enacted~~ins, ~~could~~sabotage ~~have~~and avandalism, ~~significant~~human ~~effect~~error onand other disruptions that are beyond our ~~business,~~control. ~~particularly~~Some ifof ~~the~~our ~~legislation~~systems ~~impairs~~are not fully redundant, and our ~~ability~~disaster recovery planning may not be adequate. We have experienced interruptions in service in the past due to ~~interconnect~~factors ~~with~~such ~~incumbent~~as ~~carrier~~vulnerabilities ~~networks~~in equipment, ~~lease~~configuration, ~~portions~~design ofand ~~other~~operating ~~carriers’~~procedures. ~~networks~~We oralso ~~resell~~experience ~~their~~interruptions ~~services~~due atto ~~reasonable~~cable ~~prices~~damage, ortheft ~~lease~~of ~~elements~~our ofequipment, ~~networks~~power outages, inclement weather and service failures of our third-party service providers. We may experience service interruptions or system failures in the ~~ILECs~~future. ~~under~~We ~~acceptable~~are ~~rates~~investing significant capital to enhance, ~~terms~~expand and ~~conditions.~~increase Wethe ~~cannot~~reliability ~~predict~~of our network, but these capital expenditures may not achieve the ~~outcome~~results we expect. The occurrence of any ~~ongoing~~disruption ~~legislative~~or ~~initiatives~~system orfailure ~~administrative~~may orresult ~~judicial~~in ~~proceedings~~a orloss ~~their~~of ~~potential~~business, ~~impact~~increase ~~upon~~expenses, ~~the~~damage ~~communications~~our ~~and~~reputation ~~information~~for ~~technology~~providing ~~industries~~reliable ~~generally~~service, subject us to additional regulatory scrutiny or ~~upon~~expose us ~~specifically~~to litigation and possible financial losses, any of which could adversely affect our business, financial position, results of operations and cash flows.

~~Failure~~Government ~~to make proper payments for federal Universal Service Fund assessments, FCC regulatory fees or other amounts mandated by federal and state~~ regulations; ~~failure~~could toadversely ~~maintain~~affect ~~proper~~our ~~state~~business ~~tariffs and certifications; failure to comply with federal, state~~ or ~~local~~force ~~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~~change inour ~~public~~business ~~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~~practices.

WeOur services are subject to ~~regulatory~~varying ~~audits~~degrees inof ~~the~~federal, ~~ordinary~~state ~~course~~and oflocal ~~business~~regulation. ~~with~~Federal, ~~respect~~state toand ~~certain~~local ofregulations ~~these~~governing ~~regulatory~~our ~~matters,~~services ~~including~~are ~~audits by~~ the ~~Universal~~subject ~~Service~~of ~~Administrative~~ongoing ~~Company~~judicial onproceedings, ~~Universal~~rulemakings ~~Service~~and ~~Fund~~legislative ~~assessments~~initiatives ~~and~~that ~~payments. These~~could ~~audits~~change ~~can~~the ~~cover~~manner ~~periods~~in ~~for~~which ~~several~~our ~~years~~industry ~~prior~~operates toand ~~the~~affect ~~date~~our ~~the~~business. Changes ~~audit~~in isregulations ~~undertaken~~or ~~and~~in ~~could~~governing ~~result~~legislation, insuch as the ~~imposition~~Telecommunications Act of ~~liabilities~~1996, ~~interest~~could ~~and~~have ~~penalties~~a ifsignificant ~~our~~effect ~~positions~~on ~~are~~our ~~not~~business, ~~accepted~~particularly byif the ~~auditing~~change ~~entity.~~impairs ~~Our~~our ~~financial~~ability ~~statements~~to ~~contain~~interconnect ~~reserves~~with ~~for~~incumbent ~~certain~~carrier networks, lease portions of ~~such~~other ~~potential~~carriers' ~~liabilities~~networks ~~which~~or weresell ~~consider~~their services at reasonable~~. However~~ prices, ~~calculation~~or oflease ~~payments~~elements ~~due~~of ~~with~~networks ~~respect~~of tothe ~~these~~ILECs ~~matters~~under ~~can~~acceptable berates, ~~complex~~terms and ~~subject~~conditions. toWe ~~uncertainty. As~~cannot apredict ~~result,~~the ~~these~~outcome ~~audits~~of ~~could~~any ~~result~~ongoing inlegislative ~~liabilities~~initiatives inor ~~excess~~administrative ofor ~~such~~judicial ~~reserves~~proceedings ~~which~~or ~~could~~their ~~adversely~~potential impact ~~our~~upon ~~results~~the ofcommunications ~~operations~~and information technology industries generally or upon us specifically.

~~Our~~Failure ~~business also is subject~~ to amake ~~variety~~proper ofpayments ~~other~~for ~~U.S.~~federal ~~laws~~Universal ~~and~~Service ~~regulations~~Fund ~~from various entities~~assessments, ~~including~~FCC ~~the~~regulatory ~~Federal~~fees ~~Trade~~or ~~Commission,~~other ~~the~~amounts ~~Environmental~~mandated ~~Protection~~by ~~Agency~~federal and ~~the~~state ~~Occupational~~regulations; ~~Safety~~failure ~~and~~to ~~Health~~maintain ~~Administration,~~proper ~~as well as by~~ state tariffs and ~~local~~certifications; ~~regulatory~~failure ~~agencies,~~to ~~that~~comply ~~could~~with ~~subject us to liabilities~~federal, ~~claims~~state or ~~other~~local ~~remedies. Compliance with these~~ laws and regulations; isfailure ~~complex~~to obtain and ~~may~~maintain ~~require~~required ~~significant~~licenses, ~~costs.~~franchises Inand ~~addition,~~permits; ~~the~~imposition ~~regulatory~~of ~~framework~~burdensome ~~relating~~license, tofranchise ~~Internet~~or ~~and~~permit ~~communications~~requirements ~~services~~for isus ~~evolving~~to ~~and~~operate ~~both~~in ~~the~~public ~~federal~~rights-of-way; ~~government~~ and ~~states~~imposition ~~from~~of ~~time~~new toburdensome ~~time~~or ~~pass~~adverse ~~legislation~~regulatory ~~that~~requirements ~~impacts~~could ~~our~~limit ~~business.~~the Ittypes isof ~~likely~~services ~~that~~we ~~additional~~provide ~~laws~~or ~~and~~the ~~regulations~~terms ~~will~~on bewhich ~~adopted~~we ~~that~~provide ~~would~~these ~~affect~~services. ~~our~~

18Our 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 business. We cannot predict the impact future laws, regulatory changes or developments may have on our business, financial condition, results of operations or

~~Table of Contents~~15

~~business.~~Table ~~We cannot predict the impact future laws, regulatory changes or developments may have on our business, financial condition, results~~ of operations or cash flows. The enactment of any additional laws or regulations, increased enforcement activity of existing laws and regulations, or claims by individuals could significantly impact our costs or the manner in which we conduct business, all of which could adversely impact our results of operations and cause our business to suffer.Contents

~~Our~~cash ~~business~~flows. ~~may~~The ~~suffer~~enactment ifof ~~third~~any ~~parties~~additional ~~are~~laws ~~unable~~or toregulations, ~~provide~~increased ~~services~~enforcement activity of existing laws and regulations, or ~~terminate~~claims ~~their~~by ~~relationships~~individuals ~~with~~could ussignificantly impact our costs or the manner in which we conduct business, all of which could adversely affect our results of operations and cause our business to suffer.

~~Our~~Regulatory ~~business~~audits ~~and~~have ~~financial results depend,~~ in ~~part, on~~ the ~~availability and quality of certain third-party service providers~~past, ~~including certain billing~~ and ~~collection~~could ~~services.~~in ~~In addition, our VoIP services, including our E911 service, depend on~~ the ~~proper functioning of facilities and equipment owned and operated by third parties and is~~future, ~~therefore,~~result beyond our control. If one or more of our service providers does not provide us with quality services, or if our relationship with any of our third party vendors terminates and we are unable to provide those services internally or identify a replacement vendor in anincreased ~~orderly, cost-effective and timely manner, our business, financial position, results of operations and cash flows could suffer~~costs.

We ~~may~~are subject to regulatory audits in the ordinary course of business with respect to various matters, including audits by the Universal Service Administrative Company on USF 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. During the second quarter of 2012, we recorded an $8.3 million charge to increase our reserves for regulatory audits, primarily an audit currently being conducted by the Universal Service Administrative Company on previous Universal Service Fund assessments and payments. Calculation of payments due with respect to these matters can be ~~able~~complex and subject to ~~protect~~differences in interpretation. As a result, these audits could result in liabilities in excess of such reserves which could adversely affect our ~~intellectual~~results ~~property~~of operations.

WeOur ~~regard our trademarks as valuable assets to our~~ business. 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. 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~~suffer beif ~~sufficient~~third ~~or effective. Third~~ parties ~~may infringe or misappropriate our trademarks and similar proprietary rights. If we~~ are unable to ~~protect~~provide ~~our~~services ~~proprietary~~or ~~rights~~terminate ~~from~~their ~~unauthorized~~relationships ~~use,~~with ~~our brand image may be harmed and our business may suffer~~us. 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 results of operations.

WeOur ~~may~~business beand ~~accused~~financial ofresults ~~infringing~~depend, ~~upon~~in part, on the ~~intellectual~~availability ~~property~~and ~~rights~~quality of certain third-party ~~parties~~service providers. We may have to increase the price we pay or find a new supplier, which iscould ~~costly~~impact our customers' experience and increase churn. We are not currently equipped to ~~defend~~provide the necessary range of service and ~~could~~support ~~limit~~functions in the event that any of our ~~ability~~service providers become unable or unwilling to ~~use~~offer ~~certain~~these ~~technologies~~services to us. If one or more of our service providers does not provide us with quality services, or if our relationship with any of our third party vendors terminates and we are unable to provide those services internally or identify a replacement vendor in ~~the~~an ~~future~~orderly, cost-effective and timely manner, our business, financial position, results of operations and cash flows could suffer.

~~From time to time, third parties have alleged that we infringe on their intellectual property rights.~~ We may be ~~unaware~~required ~~of filed patent applications and of issued patents that could be related~~ to ~~our~~recognize ~~products~~additional ~~and~~impairment ~~services. Some~~charges 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~~goodwill ~~to market~~ and ~~sell~~intangible ~~and support our services. Such claims~~assets, ~~whether~~which orwould ~~not~~adversely ~~meritorious,~~affect ~~are time-consuming and costly to resolve, and could require expensive changes in~~ our ~~methods~~results of ~~doing business, could require us to enter into costly royalty or licensing agreements, or could require us to cease conducting certain~~ operations. ~~Any~~and offinancial ~~these events could result in increases in operating expenses or could limit or reduce the number of our service offerings~~position.

19As of December 31, 2012, we had approximately $194.7 million of goodwill and $94.2 million of other intangible assets. We perform an impairment test of our goodwill annually during the fourth quarter of our fiscal year or when events occur or circumstances change that would more-likely-than-not indicate that goodwill or any such assets might be impaired. We evaluate the recoverability of our definite-lived intangible assets for impairment when events occur or circumstances change that would indicate that the carrying amount of an asset may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or intangible assets may not be recoverable, include a decline in stock price and market capitalization, reduced future cash flow estimates, higher customer churn and slower growth rates in our industry. We have experienced impairment charges in the past. As we continue to assess the ongoing expected cash flows and carrying amounts of our goodwill and other intangible assets, changes in economic conditions, changes to our business strategy, changes in operating performance or other indicators of impairment could cause us to record a significant impairment charge during the period in which the impairment is determined, negatively impacting our results of operations and financial position.

~~Table~~We ofmay ~~Contents~~have exposure to greater than anticipated tax liabilities.

IfOur wefuture income taxes could be adversely affected by changes in the valuation of our deferred tax assets and liabilities or by changes in tax laws, regulations, accounting principles or interpretations thereof. Our determination of our tax liability is always subject to review by applicable tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial condition. In addition, the determination of our provision for income taxes and other ~~industry~~tax ~~participants~~liabilities requires significant judgment, and there are ~~unable~~many totransactions ~~successfully~~and ~~defend~~calculations ~~against~~where ~~legal~~the ~~actions,~~ultimate tax determination is uncertain. Although we ~~could~~believe ~~face~~our ~~substantial~~estimates ~~liabilities~~are orreasonable, ~~suffer~~the ~~harm~~ultimate totax outcome may differ from the amounts recorded in our financial statements and ~~operational~~may ~~prospects~~materially affect our financial results in the period or periods for which such determination is made.

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 rightswholly-~~of-way~~owned ~~for~~subsidiary ~~our network and licenses to maintain our fiber optic network. The result~~ of ~~any~~EarthLink ~~current or future disputes, litigation or other legal proceedings is inherently unpredictable. Defending against disputes, litigation or other legal proceedings may involve significant expense~~ and ~~diversion~~therefore ~~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~~strategic ~~risks~~decisions ~~and costs in the future. Both the costs~~ of ~~defending~~EarthLink ~~lawsuits~~ and ~~any~~affected ~~settlements~~by orEarthLink's ~~judgments against us could materially and adversely affect our results of operations~~performance.

~~The~~We ~~deregulation~~are offundamentally ~~the~~affected ~~telecommunications~~by ~~industry,~~our ~~the~~relationship ~~implementation~~with ofEarthLink. As ~~the~~a ~~Telecommunications~~wholly-owned ~~Act~~subsidiary of ~~1996~~EarthLink, ~~the~~we ~~evolution~~are ofmanaged ~~telecommunications~~by ~~infrastructure~~officers ~~from time-division multiplexing to Internet Protocol,~~ and ~~the~~employees ~~distress~~ of ~~many~~EarthLink ~~carriers~~and inwe ~~the~~are ~~telecommunications~~subject ~~industry~~to as a ~~result~~wide ofrange ~~continued competitive factors and financial pressures have resulted in the involvement~~ of ~~numerous~~possible ~~industry~~strategic ~~participants~~decisions inthat ~~disputes,~~EarthLink ~~lawsuits,~~may ~~proceedings~~make ~~and~~from ~~arbitrations~~time ~~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~~time. Those ~~These~~strategic ~~issues~~decisions could include the ~~interpretation~~level and ~~enforcement~~types of ~~existing~~financing ~~interconnection~~we ~~agreements~~provide ~~and~~to ~~tariffs,~~support the ~~terms~~business of ~~new~~EarthLink ~~interconnection~~and ~~agreements,~~its ~~operating performance obligations~~subsidiaries, ~~intercarrier~~subject ~~compensation,~~to ~~treatment~~the ofterms ~~different categories~~ of ~~traffic~~the ~~(for~~indenture ~~example,~~governing ~~traffic~~our10.5% ~~originated~~senior orsecured ~~terminated~~notes ondue ~~wireless~~2016 or(the ~~VoIP~~“Notes”), and the ~~jurisdiction~~level ofand ~~traffic~~types ~~for~~of ~~intercarrier~~transactional ~~compensation~~or ~~purposes,~~other ~~the~~support ~~wholesale~~made ~~services and facilities~~ available to us, ~~the~~by ~~prices~~EarthLink. In weaddition, ~~will~~circumstances ~~pay for those services and facilities and the regulatory treatment of new technologies and services.~~

~~We may be required to recognize impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position.~~16

AsTable of December 31, 2011, we had approximately $194.8 million of goodwill and $121.1 million of other intangible assets. 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 occur or circumstances change that would more likely than not indicate that goodwill or any such assets might be impaired. We evaluate the recoverability of our definite-lived intangible assets for impairment when events occur or circumstances change that would indicate that the carrying amount of an asset may not be recoverable. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or intangible assets may not be recoverable, include reduced future cash flow estimates, higher customer churn and slower growth rates in our industry. We have experienced impairment charges in the past. As we continue to assess the ongoing expected cash flows and carrying amounts of our goodwill and other intangible assets, changes in economic conditions, changes in operating performance or other indicators of impairment could cause us to record a significant impairment charge during the period in which the impairment is determined, negatively impacting our results of operations and financial position.Contents

Weaffecting ~~may~~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 ~~exposure~~a tomaterial ~~greater~~adverse ~~than~~effect ~~anticipated~~on ~~tax~~us. The ~~liabilities~~outstanding debt and other securities of ours are not obligations of EarthLink or other EarthLink subsidiaries.

~~Our~~As ~~future~~a ~~income~~wholly-owned ~~taxes~~subsidiary ~~could be adversely affected by changes in the valuation~~ of ~~our deferred tax assets and liabilities or by changes in tax laws~~EarthLink, ~~regulations,~~any ~~accounting~~arrangements ~~principles~~ or ~~interpretations~~agreements ~~thereof.~~between ~~Our~~the ~~determination~~two ofentities ~~our~~may ~~tax~~have ~~liability~~different isterms ~~always~~than ~~subject~~would ~~to review by applicable tax authorities. Any adverse outcome of such a review could~~ have abeen ~~negative~~negotiated ~~effect~~by ~~on our operating results and financial condition. In addition~~independent, ~~the~~unrelated determination of our provision for income taxes and other tax liabilities requires significant judgment, and there are many transactions and calculations where the ultimate tax determination is uncertainparties. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

20The 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.

~~Table~~Risks ofRelated ~~Contents~~to Our Liquidity and Financial Resources

WeOur ~~are~~indebtedness acould ~~wholly-owned~~adversely ~~subsidiary~~affect ofour ~~EarthLink~~financial health and ~~therefore~~limit ~~subject~~our ability to ~~strategic~~react ~~decisions~~to ofchanges ~~EarthLink~~in ~~and~~our ~~affected by EarthLink’s performance~~industry.

~~We are fundamentally affected by our relationship with EarthLink.~~ As aof ~~wholly-owned~~December ~~subsidiary~~31, ~~of EarthLink~~2012, we ~~are~~had ~~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~~$292. ~~Those~~3 ~~strategic~~million ~~decisions~~outstanding ~~could~~principal ~~include~~amount ~~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 Our ~~addition,~~substantial ~~circumstances~~indebtedness 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.may:

As• amake ~~wholly-owned~~it ~~subsidiary~~difficult offor ~~EarthLink,~~us ~~any~~to ~~arrangements~~satisfy orour ~~agreements~~financial ~~between~~obligations, ~~the~~including ~~two~~making ~~entities~~scheduled ~~may~~principal ~~have~~and ~~different~~interest ~~terms~~payments ~~than~~on ~~would~~our ~~have been negotiated by independent, unrelated parties.~~indebtedness;

~~The~~• ~~arrangements~~limit ~~and~~our ~~agreements~~ability ~~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~~borrow ~~nature,~~additional ~~quality~~funds ~~and~~for ~~pricing~~working ~~of services or products provided by us to EarthLink or by EarthLink to us~~capital, ~~any~~capital ~~payment of dividends by us to EarthLink~~expenditures, ~~any~~acquisitions ~~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~~general bebusiness ~~conducted on an arm’s length basis~~purposes; ~~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~~limit our ability to ~~Our~~use ~~Liquidity~~our ~~and~~cash ~~Financial~~flow ~~Resources~~or obtain additional financing for future working capital, capital expenditures, acquisitions or other general business purposes;

~~Our~~• ~~indebtedness~~require ~~could~~us ~~adversely~~to ~~affect~~use ~~our~~a ~~financial~~substantial ~~health~~portion ~~and~~of ~~limit~~ our ~~ability~~cash toflow ~~react~~from operations to ~~changes~~make indebt ~~our~~service ~~industry.~~payments;

As• oflimit ~~December 31,~~our ~~2011,~~flexibility weto ~~had~~plan ~~$324.8~~for, ~~million~~or ~~outstanding~~react ~~principal~~to, ~~amount~~changes ~~of 10.5% senior secured notes due 2016 (the “Notes”). We may also incur significant additional indebtedness~~ in ~~the~~our ~~future.~~business ~~Our~~and ~~substantial indebtedness may:~~industry;

~~· make~~• itplace ~~difficult for~~ us toat ~~satisfy~~a ~~our~~competitive ~~financial~~disadvantage ~~obligations,~~compared ~~including~~to ~~making~~our ~~scheduled~~less ~~principal~~leveraged ~~and interest payments on our indebtedness~~competitors; and

~~· limit~~• increase our ~~ability~~vulnerability to ~~borrow~~the ~~additional~~impact ~~funds~~of ~~for~~adverse ~~working~~economic ~~capital,~~and ~~capital~~industry ~~expenditures, acquisitions or other general business purposes;~~conditions.

~~· limit~~Our ~~our~~ ability to ~~use~~make payments on our ~~cash~~indebtedness ~~flow~~will ordepend ~~obtain~~on ~~additional~~our ~~financing~~ability ~~for~~in the future ~~working~~to ~~capital,~~generate ~~capital~~cash ~~expenditures~~flows from operations, ~~acquisitions~~which oris ~~other~~subject ~~general~~to all the risks of our business. ~~purposes;~~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 may require ussubstantial capital to ~~use~~support abusiness ~~substantial~~growth ~~portion~~or ofrefinance ~~our~~existing ~~cash~~indebtedness, ~~flow~~and ~~from~~this ~~operations~~capital may not be available to ~~make~~us ~~debt~~on ~~service~~acceptable ~~payments;~~terms, or at all.

~~· limit~~We ~~our~~may ~~flexibility~~require tosubstantial ~~plan~~capital ~~for~~to maintain, orupgrade ~~react~~and toenhance our network facilities and operations, ~~changes~~including fiber network expansion and investment in our nationwide data center footprint. We may require additional capital to support our business growth, including the need to develop new services and ~~industry;~~products, enhance our operating infrastructure or acquire complementary businesses and technologies. While we have historically funded capital expenditures from cash generated by operations, we may be required to raise additional capital.

~~· place~~We usalso may raise additional funds to refinance the Notes. We may not be able to secure additional debt or equity financing on favorable terms, or at aall, ~~competitive~~at ~~disadvantage~~the ~~compared~~time we desire to obtain such funding. If we are unable to obtain additional capital when desired, we may not be able to pursue our ~~less~~growth ~~leveraged~~strategy ~~competitors;~~or refinance indebtedness and our business could suffer.

~~· increase~~If we raise additional funds through further issuances of equity or convertible debt securities, our ~~vulnerability~~existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to ~~the~~those ~~impact~~of holders of ~~adverse~~our ~~economic~~common stock. In addition, any debt financing that we may obtain in the future could have restrictive covenants relating to our capital raising activities and ~~industry~~other ~~conditions~~financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.

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.17

21Table of Contents

~~Table~~Our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of ~~Contents~~payment of outstanding indebtedness.

The ~~indenture~~agreements that ~~governs~~govern the Notes ~~imposes~~impose 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~~one ~~indenture~~or more of these agreements, 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.~~18

WeTable ~~may~~of 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.Contents

22Item 1B. Unresolved Staff Comments.

~~Table of Contents~~None.

Item 1B2. ~~Unresolved Staff Comments~~Properties.

~~None~~We lease or own several facilities for corporate offices, sales offices, data centers, switch sites and other facilities across our nationwide service area. These leases have various expiration dates through 2024. We believe our facilities are suitable and adequate for our business operations.

~~Item~~Our 2main facilities for corporate offices include approximately 34,000 square feet in Anniston, Alabama under a lease that will expire in 2018 and 54,000 square feet in Huntsville, Alabama under a lease that will expire in 2016. ~~Properties~~We also lease multiple sales offices in locations throughout the United States. We own an administrative office in Arab, Alabama.

We ~~lease or~~ own ~~several~~a ~~facilities~~data ~~for~~center ~~corporate~~facility ~~offices,~~in ~~sales offices~~Anniston, ~~data~~Alabama. ~~centers,~~We own switch sites ~~and~~in ~~other~~Anniston, ~~facilities~~Birmingham ~~across~~and ~~our~~Montgomery, ~~nationwide~~Alabama ~~service~~and ~~area~~in Nashville, Tennessee. ~~These~~We ~~leases~~lease ~~have~~space for switch sites in various ~~expiration~~cities ~~dates~~throughout ~~through~~the ~~2024~~southeastern United States. WeAs ~~believe~~part of our ~~facilities~~fiber ~~are~~optic ~~suitable~~network, we own or lease rights-of-way, land, and ~~adequate~~point-of-presence ~~for~~space ~~our~~throughout ~~business~~the ~~operations~~southeastern United States.

~~Our~~Item main facilities for corporate offices include approximately 34,000 square feet in Anniston, Alabama under a lease that will expire in 2018 and 54,000 square feet in Huntsville, Alabama under a lease that will expire in 20133. WeLegal ~~also lease multiple sales offices in locations throughout the United States~~Proceedings. ~~We own an administrative office in Arab, Alabama.~~

WeThe ~~own~~Company ais ~~data~~party ~~center~~to ~~facility~~various inlegal ~~Anniston,~~and ~~Alabama~~regulatory proceedings and other disputes arising from normal business activities. WeThe ~~own~~Company’s ~~switch~~management ~~sites~~believes inthat ~~Anniston~~there are no disputes, ~~Birmingham~~litigation ~~and~~or ~~Montgomery~~other legal or regulatory proceedings asserted or pending against the Company that could have, ~~Alabama~~individually ~~and~~or in ~~Nashville~~the aggregate, ~~Tennessee.~~a Wematerial ~~lease~~adverse ~~space~~effect on its financial position, results of operations or cash flows, and believes that adequate provision for ~~switch~~any ~~sites~~probable inand ~~various~~estimable ~~cities~~losses ~~throughout~~has been made in the ~~southeastern~~Company’s ~~United~~consolidated ~~States~~financial statements. AsHowever, ~~part~~the result of ~~our~~any ~~fiber~~current ~~optic~~or ~~network~~future disputes, welitigation ~~own~~or other legal or ~~lease~~regulatory ~~rights-of-way,~~proceedings ~~land,~~is inherently unpredictable and ~~point-of-presence~~could ~~space~~result ~~throughout~~in ~~the~~liabilities ~~southeastern~~that ~~United~~are ~~States~~higher than currently predicted.

Item 34. Mine ~~Legal~~Safety ~~Proceedings~~Disclosures.

WeNot ~~are party to various disputes, litigation or other legal proceedings arising from normal business activities~~applicable. The result of any current or future disputes, litigation or other legal proceedings is inherently unpredictable. Our management, however, believes that there are no disputes, litigation or other legal proceedings asserted or pending against us that could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows, and believes that adequate provision for any probable and estimable losses has been made in our consolidated financial statements.

~~Item 4. Mine Safety Disclosures.~~Part II

~~Not~~Item ~~applicable~~5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

23All 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 in December 2010, our common stock was traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol “ITCD.OB.”

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

~~PART II~~Item 6. Selected Financial Data.

~~Item~~Omitted 5.pursuant ~~Market~~to ~~for~~General ~~Registrant’s~~Instructions ~~Common Equity, Related Stockholder Matters~~ (I)(1)(a) and ~~Issuer Purchases~~ (b) of ~~Equity Securities~~Form 10-K.

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.”19

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

Item 67. Management’s ~~Selected~~Discussion and Analysis of Financial ~~Data~~Condition and Results of Operations.

~~Omitted~~The ~~pursuant~~following todiscussion ~~General~~should ~~Instructions~~be ~~(I)(1)(a)~~ read in conjunction with the accompanying unaudited Consolidated Financial Statements and ~~(b)~~ related Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements and the Notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2012.

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

~~The~~ITC^DeltaCom, Inc., ~~following~~together ~~discussion~~with ofits ~~our~~consolidated ~~financial~~subsidiaries, ~~condition~~provides ~~and~~integrated ~~results~~communications services in the southeastern United States. We operate one reportable segment. We provide a broad range of ~~operations~~data ~~should~~and bevoice ~~read~~communications inservices ~~conjunction~~to ~~with~~business ~~the~~customers, ~~consolidated~~including ~~financial~~high-speed ~~statements~~or broadband data communications, local exchange, long-distance, mobile data and ~~notes~~voice ~~thereto~~and ~~included~~equipment ~~elsewhere~~services. inWe ~~this~~also ~~Annual~~sell ~~Report~~transmission capacity to other communications providers on ~~Form 10-K~~a wholesale basis. We offer these services primarily over our regional fiber optic network.

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

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 are unable to adapt to changes in technology and customer demands, we may not remain competitive, and our revenues and operating results could suffer; (2) that unfavorable general economic conditions could harm our business; (3) that we face significant competition in the communications industry that could reduce our profitability; (4) that decisions by the Federal Communications Commission relieving incumbent carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (5) that 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; (6) that our operating performance will suffer if we are not offered competitive rates for the access services we need to provide our long distance services; (7) that we may experience reductions in switched access and reciprocal compensation revenue; (8) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (9) that we have substantial business relationships with several large telecommunications carriers, and some of our customer agreements may not continue due to financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our revenue and results of operations; (10) that 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; (11) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (12) that security breaches could damage our reputation and harm our operating results; (13) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (14) that our business depends on effective business support systems and processes; (15) that government regulations could adversely affect our business or force us to change our business practices; (16) that our business may suffer if third parties are unable to provide services or terminate theirAcquisition

24On March 2, 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 was to leverage STS Telecom’s expertise in managed hosted VoIP as part of our VoIP offerings.

~~Table~~Revenue ~~of Contents~~Sources

~~relationships~~We ~~with~~provide ~~us;~~a ~~(17)~~broad ~~that~~range ~~we may not be able to protect our intellectual property; (18) that we may be accused~~ of ~~infringing upon the intellectual property rights of third parties~~data, ~~which~~voice isand ~~costly~~equipment services to ~~defend~~businesses and ~~could~~communications ~~limit~~carriers. ~~our~~We ~~ability~~present toour ~~use~~revenue ~~certain technologies~~ in the ~~future;~~following three categories: (191) retail ~~that if we~~services, orwhich ~~other~~includes ~~industry participants~~data, ~~are~~voice ~~unable~~and tomobile ~~successfully~~data ~~defend~~and ~~against~~voice ~~legal~~services ~~actions,~~provided ~~we could face substantial liabilities or suffer harm~~ to ~~our~~business ~~financial and operational prospects~~customers; (202) wholesale ~~that we may be required to recognize impairment charges on our goodwill and intangible assets~~services, which ~~would~~includes ~~adversely~~the ~~affect~~sale ~~our results~~ of ~~operations~~transmission ~~and~~capacity ~~financial position; (21) that we may have exposure~~ to ~~greater~~other ~~than~~telecommunications ~~anticipated tax liabilities~~carriers; ~~(22) that we are a wholly-owned subsidiary of EarthLink~~ and ~~therefore subject to strategic decisions of EarthLink and affected by EarthLink’s performance;~~ (233) other ~~that~~services, aswhich aincludes ~~wholly-owned~~the ~~subsidiary~~sale of ~~EarthLink,~~customer ~~any~~premises ~~arrangements~~equipment. orOur ~~agreements~~retail ~~between~~customers ~~the~~range ~~two~~from ~~entities~~large ~~may~~enterprises ~~have~~with ~~different~~many ~~terms than would have been negotiated by independent~~locations, ~~unrelated~~to ~~parties;~~small ~~(24) that our indebtedness could adversely affect our financial health~~ and ~~limit~~medium-sized ~~our~~multi-site ~~ability~~businesses, to ~~react~~business tocustomers ~~changes~~with inone ~~our~~site. ~~industry;~~Our ~~(25)~~wholesale ~~that~~customers weconsist ~~may~~primarily ~~require~~of ~~additional~~telecommunications ~~capital~~carriers ~~to support business growth,~~ and ~~this~~network ~~capital~~resellers. ~~may~~Revenues ~~not~~generally beconsist ~~available~~of tomonthly usrecurring onfees; ~~acceptable~~usage ~~terms,~~fees; orinstallation atfees; ~~all.~~termination ~~These~~fees ~~risks~~ and ~~uncertainties~~equipment ~~are described in greater detail in Item 1A of Part I, “Risk Factors~~sales.”

~~Overview~~Trends in our Business

~~ITC^DeltaCom, Inc.,~~Our ~~together~~financial ~~with~~results ~~its~~are ~~consolidated~~impacted ~~subsidiaries,~~by ~~provides~~several ~~integrated~~significant ~~communications services in the southeastern United States. We provide a broad range of data and voice communications services to businesses and enterprise organizations~~trends, ~~including~~which ~~high-speed~~are ordescribed ~~broadband data communications, local exchange, long-distance, mobile data and voice and equipment services~~below. ~~We also sell transmission capacity to other communications providers on a wholesale basis. We offer these services primarily over our regional fiber optic network.~~

InIndustry ~~December 2010~~factors. We operate in the communications industry, wewhich ~~were~~is ~~acquired~~characterized by ~~EarthLink~~intense competition, ~~Inc.~~ ~~(“EarthLink”)~~industry ~~for~~consolidation ~~$3.00~~resulting ~~per~~in ~~share~~larger competitors, ~~with~~an ~~ITC^DeltaCom~~evolving regulatory environment, ~~Inc.~~ ~~surviving~~changing astechnology aand ~~wholly-owned~~changes ~~subsidiary~~in ofcustomer ~~EarthLink~~needs. We ~~Subsequent~~expect these trends to ~~the~~continue. ~~acquisition~~In addition, ~~our~~merger ~~integrated~~and ~~communication~~acquisition ~~services~~transactions ~~were~~and ~~rebranded~~other asfactors ~~EarthLink~~have ~~Business~~reduced ~~and~~the ~~our~~number ~~wholesale~~of ~~services~~vendors ~~were~~from ~~rebranded~~which aswe ~~EarthLink~~may ~~Carrier,~~purchase annetwork ~~EarthLink~~elements ~~Business~~that ~~company~~we leverage to operate our business.

~~Acquisition~~Revenue declines. Our traditional voice services have been declining due to competitive pressures and changes in the industry, and we expect this trend to continue. Churn has been improving, but the rate of new customer bookings of legacy products have not kept up with expectations. In addition, revenues have been adversely impacted as a result of rules adopted by the FCC in late 2011 regarding intercarrier compensation. The rules include the elimination of terminating switched access rates and other per-minute terminating charges between service providers by 2018, through annual reductions in the rates. To counteract 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 expect to continue to experience pressure on revenue.

InEconomic ~~March 2011,~~conditions. weMany ~~acquired~~of ~~Saturn~~our ~~Telecommunication~~existing ~~Services Inc.~~ and ~~affiliates~~target ~~(“STS~~customers ~~Telecom”),~~are asmall ~~privately~~and medium-~~held~~sized ~~provider~~businesses. ofWe IPbelieve ~~communication~~these ~~and~~businesses ~~information~~are ~~technology~~more ~~services~~likely to ~~small~~be ~~and~~affected ~~medium-sized~~by ~~businesses~~economic ~~primarily~~downturns inthan ~~Florida~~larger, more established businesses. ~~STS~~We ~~Telecom~~believe ~~operates~~that athe ~~sophisticated~~financial ~~VoIP~~and ~~platform.~~economic ~~The~~pressures ~~primary~~faced ~~reason~~by ~~for~~our ~~the~~customers ~~acquisition~~in isthis toenvironment ~~leverage~~of ~~STS~~diminished ~~Telecom’s~~consumer ~~expertise~~spending, incorporate ~~managed~~downsizing ~~hosted~~and ~~VoIP~~tightened ascredit ~~part~~have ofhad, and may continue to have, an adverse effect on our ~~VoIP~~results ~~offerings.~~of operations, including

~~Revenue Sources~~20

WeTable ~~provide a broad range~~ of data, voice and equipment services to businesses, enterprise organizations and communications carriers. We present our revenue in the following three categories: (1) retail services, which includes data, voice and mobile data and voice services provided to businesses and enterprise organizations; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications 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 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.Contents

25longer sales cycles and increased customer demands for price reductions in connection with contract renewals. Additionally, our consumer access services are discretionary and dependent upon levels of consumer spending. Unfavorable economic conditions could cause customers to slow spending in the future, which could adversely affect our revenues and churn.

~~Table~~Results of ~~Contents~~Operations

~~Trends~~On December 8, 2010, we were acquired by EarthLink. The accounting for the acquisition was “pushed-down” in our ~~Business~~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 period as we feel this provides a useful and more accurate comparison. 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.

~~We operate in the communications industry.~~ The ~~communications~~following ~~industry~~table issets ~~highly~~forth ~~competitive,~~statement ~~and~~of weoperations ~~expect~~data ~~this~~for ~~competition~~the tocombined ~~intensify.~~year ~~These~~ended ~~markets~~December ~~are rapidly changing due to industry consolidation~~31, an2010 ~~evolving regulatory environment~~ and the ~~emergence~~years ofended ~~new~~December ~~technologies. Merger~~31, ~~and~~2011 ~~acquisition transactions have created more significant competitors for us~~ and ~~have~~2012 ~~reduced the number of vendors from which we may purchase network elements we leverage to operate our business. Certain of our business service revenues have been declining due to competitive pressures~~ (in the industry, and we expect revenues from certain aspects of these businesses to continue to decline. In addition, we expect revenues to be adversely impacted as a result of new rules recently adopted by the FCC regarding intercarrier compensation.thousands):

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 our results of operations, including longer sales cycles and increased customer demands for price reductions in connection with contract renewals.



	Predecessor Entity			Successor Entity						Successor Entity
	January 1,			December 8,			Combined
	through			through			Year Ended			Year Ended
	December 7,			December 31,			December 31,			December 31,
	2010			2010			2010			2011			2012
Revenues:
Retail services	$	343,227		$	21,307		$	364,534		$	364,066		$	349,703
Wholesale services	58,003			4,267			62,270			71,955			76,474
Other services	13,616			1,029			14,645			13,693			14,167
Total revenues	414,846			26,603			441,449			449,714			440,344
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	197,567			13,845			211,412			219,400			225,793
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	138,544			9,389			147,933			138,765			136,154
Depreciation and amortization	52,339			4,885			57,224			71,659			70,912
Acquisition and integration-related costs	7,987			6,765			14,752			5,272			2,491
Total operating costs and expenses	396,437			34,884			431,321			435,096			435,350
Income (loss) from operations	18,409			(8,281		)	10,128			14,618			4,994
Interest expense and other, net	(29,118		)	(2,089		)	(31,207		)	(30,882		)	(29,117		)
Write-off of debt discount and issuance cost	(7,948		)	—			(7,948		)	—			—
Loss before income taxes	(18,657		)	(10,370		)	(29,027		)	(16,264		)	(24,123		)
Income tax benefit (provision)	604			—			604			(734		)	(183		)
Net loss	$	(18,053	)	$	(10,370	)	$	(28,423	)	$	(16,998	)	$	(24,306	)

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.21

26Table of Contents

~~Table~~The following table sets forth certain operating data as of ~~Contents~~December 31, 2011 and 2012:

Results of Operations



	December 31, 2011	December 31, 2012
Colocations (1)	299	299
Voice and data switches	21	21
Employees (2)	1,222	1,202
Retail business voice lines in service (3)
UNE-T and other UNE lines (4)	374,643	367,105
Resale and UNE-P lines (5)	44,278	40,279
Total retail voice lines in service	418,921	407,384
Wholesale lines in service (6)	5,382	4,761
Total business lines in service (7)	424,303	412,145

~~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~~(1) Two ~~following~~colocations ~~table~~in ~~sets forth statement of operations data for~~ the ~~years~~same ~~ended~~physical ~~December 31,~~facility ~~2009~~are ~~and~~reflected ~~2010~~as ~~(in~~one ~~thousands):~~location.

	Predecessor Entity						Sucessor Entity
				January 1			December 8			Combined			Change Between
	Year Ended			through			through			Year Ended			2009 and
	December 31,			December 7,			December 31,			December 31,			Combined 2010
	2009			2010			2010			2010			Amount			%
Revenues:
Retail services	$	395,939		$	343,227		$	21,307		$	364,534		$	(31,405	)	-8	%
Wholesale services	59,401			58,003			4,267			62,270			2,869			5	%
Other services	13,984			13,616			1,029			14,645			661			5	%
Total revenues	469,324			414,846			26,603			441,449			(27,875		)	-6	%
Operating costs and expenses:
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)	158,426			138,544			9,389			147,933			(10,493		)	-7	%
Depreciation and amortization	69,064			52,339			4,885			57,224			(11,840		)	-17	%
Acquisition-related costs	—			7,987			6,765			14,752			14,752			*
Total operating costs and expenses	453,273			396,437			34,884			431,321			(21,952		)	-5	%
Income (loss) from operations	16,051			18,409			(8,281		)	10,128			(5,923		)	-37	%
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		)	(29,027		)	(18,052		)	164	%
Income tax benefit	—			604			—			604			604			*
Net loss	$	(10,975	)	$	(18,053	)	$	(10,370	)	$	(28,423	)	$	(17,448	)	159	%

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

* Not(3) Lines ~~meaningful~~in service include only voice lines in service. Conversion of data services provided to customers to a voice line

27equivalent is excluded.

~~Table~~(4) Facilities-based ofservice ~~Contents~~offering in which we provide local transport through our owned and operated switching

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

	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	%

(5) Resale service offerings in which we provide local and mobile services.

~~Operating~~(6) Represents ~~Metrics~~primary rate interface circuits provided as part of our local interconnection services for Internet service

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

	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

(7) Reported net of lines disconnected or canceled.

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

~~(2) Includes~~The ~~full-time~~following table presents revenues by groups of similar services for the combined year ended December 31, 2010 and ~~part-time~~the ~~employees.~~years ended December 31, 2011 and 2012:



	Combined
	Year Ended		Year Ended
	December 31,		December 31,				2011 vs 2010					2012 vs 2011
	2010		2011		2012		$ Change			% Change		$ Change			% Change
	(dollars in thousands)
Retail services	$	364,534	$	364,066	$	349,703	$	(468	)	—	%	$	(14,363	)	(4	)%
Wholesale services	62,270		71,955		76,474		9,685			16	%	4,519			6	%
Other services	14,645		13,693		14,167		(952		)	(7	)%	474			3	%
Total revenues	$	441,449	$	449,714	$	440,344	$	8,265		2	%	$	(9,370	)	(2	)%

~~Table~~Retail services. The decrease in retail services revenues from the combined year ended December 31, 2010 to the year ended December 31, 2011 was primarily due to declines in traditional local and long-distance voice revenues due to continued loss of ~~Contents~~retail voice lines in service. Retail voice revenues and voice lines in service have been decreasing due to competition in the industry and customers migrating to more advanced services. This was mostly offset by the inclusion of STS Telecom revenues. The results of operations of STS Telecom have been included since the acquisition date on March 2, 2011.

~~(3) Lines~~The decrease in ~~service~~retail ~~include~~services ~~only~~revenues ~~voice~~from ~~lines~~the year ended December 31, 2011 to the year ended December 31, 2012 was primarily attributable to continued declines in local and long-distance voice service revenues. Also ~~Conversion~~contributing ofto ~~data~~the ~~services~~decrease ~~provided~~was a decrease in carrier access billing revenues due to ~~customers~~new rules adopted by the FCC in November 2011 regarding intercarrier compensation. The new rules include the elimination of terminating switched access rates and other per-minute terminating charges between service providers by 2018, through annual reductions in the rates. We expect these trends to continue. The decreases in retail services revenues were partially offset by the inclusion of STS Telecom revenues for a ~~voice~~full ~~line~~period ~~equivalent~~in is2012 ~~excluded~~compared to a partial period in 2011.

~~(4) Facilities-based service offering in which we provide local transport through our owned and operated switching facilities.~~22

~~(5) Resale~~Table ~~service~~of ~~offerings in which we provide local and mobile services.~~Contents

~~(6) Represents~~Wholesale ~~primary~~services. ~~rate~~The ~~interface~~increases ~~circuits~~in ~~provided~~wholesale asservices ~~part~~revenues ofduring ~~our~~the years ended December 31, 2011 and 2012 compared to the prior years were primarily due to increases in broadband capacity revenues and voice revenues. Partially offsetting the increases was a decrease in local interconnection ~~services~~revenues ~~for~~resulting ~~Internet~~from ~~service~~a ~~providers~~decrease in local interconnection lines.

~~(7) Reported~~Other ~~net~~services. The change in revenues from other services during the years ended December 31, 2011 and 2012 compared to the prior years resulted from changes in volumes of ~~lines~~telephone ~~disconnected~~systems orsold. ~~canceled~~We decided to exit telecom systems sales early in 2013 to enable focus on our hosted VoIP platform for new voice customers, which will negatively impact future revenues from equipment services. We will continue to provide equipment maintenance to existing customers.

~~Revenues~~Cost of revenues

The following table presents cost of revenues for the combined year ended December 31, 2010 and the years ended ended December 31, 2011 and 2012:

Retail services. Revenues from our retail services decreased $31.4 million, or 8%, from the year ended December 31, 2009 to the combined year ended December 31, 2010. The decrease resulted from decreases in local and bundled revenues, data revenues, long distance services revenues and revenue generated by access billings to other carriers. These decreases were minimally offset by an increase in mobile revenue. During the year ended December 31, 2010, we experienced declining business demand and competitive pricing pressures that have adversely affected most of our markets and products. These conditions 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.



	Combined
	Year Ended		Year Ended
	December 31,		December 31,				2011 vs 2010				2012 vs 2011
	2010		2011		2012		$ Change		% Change		$ Change		% Change
	(dollars in thousands)
Cost of revenues	$	211,412	$	219,400	$	225,793	$	7,988	4	%	$	6,393	3	%

~~Revenues~~Cost ~~from~~of ~~our~~revenues ~~retail~~includes costs directly associated with providing services ~~decreased~~to $0our customers.4 ~~million~~Cost ~~from~~of revenues primarily consists of the ~~combined~~cost ~~year~~of ~~ended~~connecting ~~December 31,~~customers ~~2010~~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 ~~year~~costs ~~ended~~of ~~December 31,~~equipment ~~2011~~sold to customers. ~~The~~We ~~decrease~~utilize ~~was~~other ~~primarily~~carriers ~~due~~to provide services where we do not have facilities. We utilize a number of different carriers to ~~data~~terminate ~~and~~our long distance calls outside the southeastern United States. The provision of local ~~service~~services ~~revenues~~over ~~due~~our network generally reduces the amounts we otherwise would be required to ~~pricing~~pay ~~pressures~~to ~~related~~other telephone companies to ~~increased~~use ~~competition~~their networks and ~~the~~facilities ~~overall~~in ~~economy,~~order ~~mostly~~to ~~offset~~provide bylocal ~~the~~services ~~inclusion~~related ofto ~~STS~~the ~~Telecom~~decline in revenues for these services.

~~Wholesale~~The ~~services.~~increase ~~Revenues~~in ~~from~~cost ~~our~~of ~~wholesale~~revenues ~~services increased $2.9 million, or 5%,~~ from the ~~year ended December 31, 2009 to the~~ combined year ended December ~~31,~~ ~~2010 and increased $9.7 million, or 16%, from the combined year ended December~~ 31, 2010 to the year ended December 31, 2011. ~~The increase~~ was primarily ~~attributable~~due to anthe ~~increase~~inclusion inof ~~broadband~~STS ~~transport~~Telecom ~~services~~cost ~~revenues.~~of ~~The increase in broadband transport service~~ revenues ~~resulted~~and ~~from~~an ~~actions~~increase ~~on our part to secure our customer relationships~~ in ~~which~~wholesale weservices ~~entered~~cost ~~into~~of ~~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~~revenues. ~~Partially~~These ~~offsetting~~were ~~this~~partially ~~increase~~offset ~~was~~by a ~~decrease~~decline in local ~~interconnection~~voice ~~revenues~~services ~~resulting~~and ~~from a decrease in local~~ interconnection ~~lines and a decrease in operator and directory assistance revenues~~services.

~~Other~~The ~~services.~~increase ~~Revenues~~in ~~from~~cost ~~other~~of ~~services~~revenues ~~increased $0.7 million, or 5%,~~ from the year ended December 31, ~~2009~~2011 to ~~the combined~~ year ended December 31, ~~2010~~2012 ~~and~~was ~~decreased~~primarily due to an $18.03 million, orcharge ~~7%,~~recorded ~~from~~in the ~~combined~~second ~~year~~quarter ~~ended~~of ~~December 31~~2012 to increase our reserves for regulatory audits, ~~2010~~primarily toan audit currently being conducted by the ~~year~~Universal ~~ended~~Service ~~December 31,~~Administrative ~~2011.~~Company ~~The~~on ~~changes~~previous ~~resulted~~Universal ~~from~~Service ~~changes~~Fund assessments and payments; an increase in ~~volume~~reserves for billing disputes with certain vendors; and the inclusion of ~~telephone~~STS ~~systems~~Telecom ~~sold~~cost ~~each~~of ~~year~~revenues for a full period in 2012 compared to a partial period in 2011. Partially offsetting these increases was a decline in local voice services.

~~Cost~~Selling, ofgeneral ~~revenues~~and administrative expense

~~Cost~~The offollowing ~~revenues~~table ~~includes~~presents ~~costs directly associated with providing services to~~ our ~~customers.~~selling, ~~Cost~~general ofand ~~revenues~~administrative ~~primarily~~expenses ~~consists~~for of the ~~cost~~combined ofyear ~~connecting~~ended ~~customers~~December to31, ~~our~~2010 ~~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~~years ofended ~~equipment~~December 31, ~~sold~~2011 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.~~2012:



	Combined
	Year Ended		Year Ended
	December 31,		December 31,				2011 vs 2010					2012 vs 2011
	2010		2011		2012		$ Change			% Change		$ Change			% Change
	(dollars in thousands)
Selling, general and administrative expenses	$	147,933	$	138,765	$	136,154	$	(9,168	)	(6	)%	$	(2,611	)	(2	)%

~~Table~~Selling, general and administrative expenses consist of ~~Contents~~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.

Total 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.23

~~Total~~Table ~~cost~~ of revenues increased $8.0 million, or 4%, from the combined year ended December 31, 2010 to the year ended December 31, 2011 and increased as a percent of revenues from 48% during the year ended December 31, 2010 to 49% during the year ended December 31, 2011. The increase in cost of revenues both in absolute terms and as a percentage of total revenues was primarily due to the inclusion of STS Telecom cost of revenues and an increase in wholesale services cost of revenues resulting from new contracts, as discussed above.Contents

~~Selling~~The decrease in selling, general and administrative expenses from the combined year ended December 31, 2010 to the year ended December 31, 2011 was primarily due to a favorable tax settlement recognized during year ended December 31, 2011, which was recorded as a offset to selling, general and administrative expenses. Also contributing were decreases in facilities costs, professional fees, data processing, bad debt expense and other corporate overhead expenses due to a reduction in headcount during the year and synergies recognized from EarthLink's acquisition of us. Partially offsetting these decreases was the inclusion of STS Telecom's selling, general and administrative expenses and an increase in stock-based compensation expense.

~~Selling~~The decrease in selling, general and administrative ~~expense~~expenses ~~consists~~from ofthe ~~expenses~~year ofended ~~selling~~December ~~and~~31, ~~marketing~~2011 to the year ended December 31, ~~field~~2012 ~~personnel~~was ~~engaged~~primarily attributable to decreases in ~~direct~~stock-based ~~network~~compensation, repairs and maintenance, bad debt expense and ~~monitoring~~payment processing. Partially offsetting this was the inclusion of STS Telecom’s selling, ~~customer~~general ~~service~~and administrative expenses for a full period in 2012 compared to a partial period in 2011 and ~~corporate~~the ~~administration~~favorable tax settlement recognized during 2011.

~~Selling,~~Depreciation ~~general~~ and administrative expense decreased $10.5 million, or 7%, from the year ended December 31, 2009 to the combined year ended December 31, 2010. The decrease was primarily attributable to decreases in outside commissions, cash compensation, professional fees, bad debt expense, data processing, insurance and property taxes. The decreases were partially offset by increases in non-cash compensation, employee benefits and administration and facilities and other corporate overhead expenses.amortization

~~Selling,~~The ~~general~~following ~~and~~table ~~administrative~~presents ~~expense~~our ~~decreased~~depreciation ~~$9.2~~and ~~million,~~amortization orexpense ~~6%,~~for ~~from~~ the combined year ended December 31, 2010 toand the ~~year~~years ended December 31, 2011. ~~The decrease compared to the prior year periods was primarily attributable to a favorable tax settlement recognized during year ended December 31, 2011~~ and decreases in facilities costs, professional fees, data processing, bad debt expense and other corporate overhead expenses. Partially offsetting these decreases was the inclusion of STS Telecom’s selling, general and administrative expenses and an increase in stock-based compensation expense.2012:

Depreciation and amortization



	Combined
	Year Ended		Year Ended
	December 31,		December 31,				2011 vs 2010				2012 vs 2011
	2010		2011		2012		$ Change			% Change	$ Change			% Change
	(dollars in thousands)
Depreciation expense	$	53,506	$	45,229	$	43,977	$	(8,277	)	(15)%	$	(1,252	)	(3)%
Amortization expense	3,718		26,430		26,935		22,712			611%	505			2%
Total	$	57,224	$	71,659	$	70,912	$	14,435		25%	$	(747	)	(1)%

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. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life or the remaining term of the lease. 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. The customer relationships are being amortized using the straight-line 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 determined.

~~Depreciation~~The ~~and~~decrease ~~amortization~~in depreciation expense ~~decreased~~from ~~$11.8~~the ~~million,~~combined oryear ~~17%~~ended December 31, ~~from~~2010 to the year ended December 31, ~~2009~~2011 was due to property and equipment becoming fully depreciated over the past year and a reduction in property and equipment recorded at fair value in connection with EarthLink's acquisition of us, partially offset by an increase in depreciation expense resulting from property and equipment obtained in the acquisition of STS Telecom. The increase in amortization expense from the combined year ended December 31, 2010. ~~Depreciation~~to ~~expense~~the ~~decreased~~year ~~primarily~~ended December 31, 2011 was due to ~~property~~amortization of identifiable intangible assets established in connection with EarthLink's acquisition of us and ~~equipment~~our ~~becoming~~acquisition ~~fully~~of ~~depreciated~~STS ~~during~~Telecom. In December 2010, we began amortizing the intangible assets arising from the EarthLink acquisition, and in March 2011 we began amortizing the STS intangible assets.

~~Depreciation~~The ~~and~~decrease ~~amortization~~in depreciation expense ~~increased $14.4 million, or 25%,~~ from the ~~combined~~ year ended December 31, ~~2010~~2011 to the year ended December 31, ~~2011. The increase compared to the prior year~~ 2012 was primarily due to anproperty ~~increase~~and inequipment ~~amortization~~becoming ~~expense,~~fully ~~offset~~depreciated byduring athe ~~decrease in depreciation expense~~year. The increase in amortization expense ~~was~~from ~~due~~the toyear ~~amortization~~ended ~~related~~December to31, ~~identifiable~~2011 ~~intangible~~to ~~assets~~the ~~established~~year inended ~~connection~~December 31, ~~with~~2012 ~~EarthLink’s acquisition of us and our acquisition of STS Telecom. The decrease in depreciation expense~~ was due to including a ~~reduction~~full inperiod ~~property equipment recorded at fair value in connection with EarthLink’s acquisition~~ of usamortization ~~and~~expense ~~property~~for ~~and equipment becoming fully depreciated over~~ the ~~past~~STS ~~year,~~Telecom ~~partially~~identifiable ~~offset~~intangible byassets ~~an increase~~ in ~~depreciation~~2012 ~~expense~~compared ~~resulting~~to ~~from~~a ~~property~~partial ~~and~~period ~~equipment obtained~~ in ~~the acquisition of STS Telecom~~2011.

30Acquisition and integration-related costs

~~Table~~Acquisition and integration-related costs consist of ~~Contents~~costs related to acquisitions. Such costs include: 1) transaction-related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other professional fees; 2) severance and retention costs; 3) costs to settle postcombination stock awards; 4) integration-related costs, such as system conversion, rebranding costs and integration-related consulting and employee costs; and 5) facility-related costs.

~~Acquisition-related costs~~24

~~Acquisition-related~~Table ~~costs consist~~ of external costs directly related to acquisitions, including transaction related costs, such as advisory, legal, accounting, valuation and other professional fees; employee severance and retention costs; costs to settle stock-based awards attributable to postcombination service in connection with the Acquisition; and integration-related costs, such as system conversion, rebranding costs and integration related consulting and employee costs. Acquisition-related costs are expensed in the period in which the costs are incurred and the services are received and are included in restructuring and acquisition-related costs in the Consolidated Statement of Operations. Acquisition-related costs consisted of the following for the periods presented (in thousands):Contents

	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

Acquisition and integration-related costs are expensed in the period in which the costs are incurred and the services are received and are included in acquisition and integration-related costs in the Consolidated Statements of Comprehensive Loss. Acquisition and integration-related costs consisted of the following for the periods presented (in thousands):

Interest expense and other, net



	Predecessor Entity		Successor Entity
	January 1,		December 8,
	through		through		Year Ended		Year Ended
	December 7,		December 31,		December 31,		December 31,
	2010		2010		2011		2012

Transaction-related costs	$	7,987	$	—	$	111	$	—
Severance and retention costs	—		4,699		3,561		938
Costs to settle postcombination stock awards	—		2,066		—		—
Integration-related costs	—		—		872		1,246
Facility-related costs	—		—		728		307
Total acquisition and integration-related costs	$	7,987	$	6,765	$	5,272	$	2,491

~~Interest~~We ~~expense~~incurred more acquisition and ~~other,~~integration-related ~~net~~costs during the year ended December 31, is2010 ~~primarily~~as ~~comprised~~EarthLink's acquisition of ~~interest~~us ~~expense~~was ~~incurred~~transacted onin ~~our~~December ~~outstanding~~2010 ~~indebtedness,~~and ~~including~~such ~~our~~costs 10were pushed down.5% ~~senior~~The ~~secured~~decreases ~~notes~~in ~~due~~acquisition ~~2016~~and ~~(the~~integration-related ~~“Notes”);~~costs ~~interest~~during ~~income~~the ~~earned~~years onended ~~our~~December ~~cash~~31, 2011 and ~~cash~~2012 ~~equivalents;~~compared ~~and~~to ~~other~~the ~~miscellaneous~~prior ~~income~~years were primarily due to a decline in severance and ~~expense~~transaction-related ~~items~~costs costs. Partially offsetting the decrease was an increase in integration-related costs, as we incur costs to integrate operating support systems and networks.

Interest expense and other, net, increased $4.2 million, or 15%, from the year ended December 31, 2009 to the combined year ended December 31, 2010. The increase was attributable to an increase in outstanding principal amount of debt and an increase in the weighted average interest rates on our outstanding debt. As of December 31, 2010, our overall weighted average annual interest rate (including premium on debt) was 9.7% compared to 5.1% as of December 31, 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~~The following table presents our interest expense and other, net, ~~decreased~~for ~~$0.3 million, or 1%, from~~ the combined year ended December 31, 2010 toand the ~~year~~years ended December 31, 2011. ~~The decrease in interest expense~~ and other, net, during the year ended December 31, 2011 compared to the prior year was primarily attributable to the amortization of the debt premium resulting from the increase in fair value of debt 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. This was partially offset by having a full year of interest expense for the Notes in 2011.2012:



	Combined
	Year Ended			Year Ended
	December 31,			December 31,						2011 vs 2010				2012 vs 2011
	2010			2011			2012			$ Change		% Change		$ Change		% Change
	(dollars in thousands)
Interest expense and other, net	$	(31,207	)	$	(30,882	)	$	(29,117	)	$	325	1	%	$	1,765	6	%

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

~~Write~~The decrease in interest expense and other, net, from the combined year ended December 31, 2010 to the year ended December 31, 2011 was primarily attributable to the amortization of the debt premium resulting from the increase in fair value of debt 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-~~off~~quoted market prices. The resulting debt ~~issuance~~premium ~~cost~~is ~~and~~being ~~discount~~amortized over the remaining life of the Notes using the effective interest method. This was partially offset by having a full year of interest expense for the Notes in 2011.

The ~~write-off~~decrease ofin ~~debt~~interest ~~issuance~~expense ~~cost~~ and ~~discount~~other, ofnet, ~~$7.9~~from ~~million~~the ~~during~~year ~~the~~ended ~~combined~~December 31, 2011 to the year ended December 31, ~~2010~~2012 was primarily attributable to a ~~result~~the redemption of a portion of our outstanding Notes. In December 2012, we exercised our right to call for the ~~issuance~~redemption of 10% of the aggregate principal amount of our outstanding Notes. inWe ~~April 2010~~redeemed $32.5 million aggregate principal amount of the Notes on December 6, 2012. The redemption price was equal to 103% of the principal amount thereof, plus accrued and unpaid interest, resulting in an $0.8 million gain on redemption of debt. After the ~~retirement~~redemption, $292.3 million aggregate principal amount of ~~our~~the ~~first~~Notes remained outstanding. Also contributing to the decrease was a $0.4 million decrease in loss on sale and ~~second~~disposal ~~lien~~of ~~facilities~~fixed assets.

~~Income tax benefit (provision)~~25

WeTable ~~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.Contents

ToWrite-off ~~the~~debt ~~extent~~issuance wecost ~~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.discount

~~Liquidity~~The write-off of debt issuance cost and ~~Capital~~discount ~~Resources~~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.

~~The~~Income ~~following~~tax ~~table~~benefit ~~sets forth summarized cash flow data for the years ended December 31, 2009, 2010 and 2011:~~(provision)

													Sucessor
	Predecessor Entity						Sucessor Entity						Entity
				January 1			December 8			Combined
	Year Ended			through			through			Year Ended			Year Ended
	December 31,			December 7,			December 31,			December 31,			December 31,
	2009			2010			2010			2010			2011
Net cash provided by (used in) operating activities	$	68,902		$	47,205		$	(5,138	)	$	42,067		$	37,159
Net cash used in investing activities	(54,655		)	(53,787		)	(20,514		)	(74,301		)	(72,110		)
Net cash (used in) provided by financing activities	(3,144		)	(1,967		)	10,000			8,033			26,296
Net increase (decrease) in cash and cash equivalents	$	11,103		$	(8,549	)	$	(15,652	)	$	(24,201	)	$	(8,655	)

We recorded an income tax benefit of $0.6 million during the combined year ended December 31, 2010. We recorded an income tax provision of $0.7 million and $0.2 million during the years ended December 31, 2011 and 2012, respectively. 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.

~~Operating~~To ~~activities~~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.

~~Cash~~Liquidity ~~provided by operating activities decreased during the combined year ended December 31, 2010 compared to the prior year primarily due to payments for severance~~ and ~~benefits~~Capital and payments for investment advisory and other professional fees in connection with EarthLink’s acquisition of us. Also contributing to the decrease in cash provided by operating activities was a decrease in total revenues. The decrease in net cash provided by operating activities during the year ended December 31, 2011 compared to the combined year ended December 31, 2010 was primarily due to an increase in cash used for prepaid assets and cash used for accounts payable, accrued and other liabilities.Resources

~~Investing~~The ~~activities~~following table sets forth summarized cash flow data for the combined year ended December 31, 2010 and the years ended December 31, 2011 and 2012 (in thousands):

The decrease in cash used in investing activities during the combined year ended December 31, 2010 compared to the prior year was primarily due to an increase in capital expenditures and cash paid to settle stock-based awards in connection with EarthLink’s acquisition of us. The increase in cash used in investing activities during the year ended December 30, 2011 compared to the prior year was primarily due to $22.9 million of cash used for the acquisition of STS Telecom. Partially offsetting this was a decrease in



	Predecessor Entity			Successor Entity						Successor Entity
	January 1,			December 8,			Combined
	through			through			Year Ended			Year Ended
	December 7,			December 31,			December 31,			December 31,
	2010			2010			2010			2011			2012

Net cash provided by (used in) operating activities	$	47,205		$	(5,138	)	$	42,067		$	37,159		$	50,615
Net cash used in investing activities	(53,787		)	(20,514		)	(74,301		)	(72,110		)	(52,813		)
Net cash (used in) provided by financing activities	(1,967		)	10,000			8,033			26,296			(392		)
Net decrease in cash and cash equivalents	$	(8,549	)	$	(15,652	)	$	(24,201	)	$	(8,655	)	$	(2,590	)

32Operating activities

~~Table~~Net ofcash ~~Contents~~provided by operating activities decreased during the year ended December 31, 2011 compared to the combined year ended December 31, 2010 primarily due to an increase in cash used for prepaid assets and cash used for accounts payable, accrued and other liabilities.

~~capital~~Net ~~expenditures~~cash provided by operating activities increased during the year ended December 31, 2012 compared to the year ended December 31, 2011 primarily due to an increase in accounts payable and accrued liabilities, primarily related to timing of certain payments to network providers. Also contributing to the increase was a reduction in operating expenses, a decrease in cash used for severance and other acquisition-related expenses and incremental cash generated by the operating activities of STS Telecom.

~~Financing~~Investing activities

~~The~~Net ~~change in~~ cash ~~flows~~used ~~from~~in ~~financing~~investing activities decreased during the ~~combined~~ year ended December 31, ~~2010~~2011 compared to the ~~prior~~combined year ~~was primarily due to a net change in cash used for long-term debt and capital lease obligations. During the year~~ ended December 31, 2010, primarily wedue ~~received~~to a $~~308~~15.26 million ~~from~~decrease ~~issuance~~in ofcapital ~~the~~expenditures ~~Notes~~ and a $109.01 million ~~from~~decrease ~~the~~in ~~issuance~~cash ofused ~~stock~~ to ~~EarthLink~~settle postcombination stock awards. ~~This~~Partially ~~was~~offsetting ~~offset~~this bywas $~~308~~22.19 million of cash used for ~~repayment~~the ofacquisition ~~long-term debt and other long-term obligations and $2.1 million paid for taxes~~ of ~~vested~~STS ~~restricted~~Telecom ~~stock~~in ~~units~~2011.

~~The~~Net ~~change in~~ cash ~~flows~~used ~~from~~in ~~financing~~investing activities decreased during the year ended December 31, ~~2011~~2012 compared to the ~~prior~~ year ~~was~~ended December 31, 2011 primarily due to a $3022.09 million ~~received~~of ~~from~~cash ~~the~~paid ~~issuance~~to ofacquire ~~stock~~STS toTelecom ~~EarthLink~~ during the year ended December 31, 2011. ~~This~~No ~~funding~~cash was ~~primarily~~used ~~provided~~ for ~~our~~acquisitions ~~acquisition~~during ~~of STS Telecom in March 2011. During~~ the year ended December 31, ~~2011, we used $3~~2012.6 ~~million~~Partially ~~for~~offsetting ~~repayments~~this 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 $~~3.08 million ofincrease ~~debt assumed~~ in ~~the STS Telecom acquisition and made $0.4 million payments on~~ capital ~~leases assumed in the STS Telecom acquisition~~expenditures.

~~Future Uses of Cash and Funding Sources~~26

~~Future~~Table ~~Uses~~ of ~~Cash~~Contents

~~Our~~Financing 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.activities

WeThe ~~believe~~change ~~that~~in tonet ~~remain~~cash ~~competitive~~flows ~~with~~from ~~much~~financing ~~larger~~activities ~~telecommunications~~during ~~companies,~~the weyear ~~will~~ended ~~require~~December ~~significant~~31, ~~additional~~2011 ~~capital~~was ~~expenditures~~primarily due to ~~enhance~~$30.0 ~~and~~million ~~operate~~received ~~our~~from ~~fiber~~the ~~network.~~issuance Weof ~~expect~~stock to ~~incur~~EarthLink ~~capital~~during ~~expenditures~~the year ended December 31, 2011, compared to ~~maintain~~$10.0 ~~and~~million ~~upgrade~~received during the combined year ended December 31, 2010 . This funding was primarily provided for our ~~network~~acquisition ~~and~~of ~~technology~~STS ~~infrastructure~~Telecom in March 2011. ~~The~~During ~~actual~~the ~~amount~~year ended December 31, 2011, we used $3.6 million for repayments of long-term debt and capital ~~expenditures~~leases. ~~may~~Under ~~fluctuate~~the ~~due~~indenture tofor athe ~~number~~Notes, following the consummation of ~~factors~~EarthLink's ~~which~~acquisition ~~are~~of ~~difficult~~us, we were required to ~~predict~~offer ~~and~~to ~~could~~repurchase ~~change~~any ~~significantly~~or ~~over~~all ~~time~~of the Notes at 101% of their principal amount. The ~~Additionally~~tender window was open from December 20, ~~technological~~1010 ~~advances~~through ~~may~~January ~~require~~18, us2011. toAs ~~make~~a ~~capital~~result, ~~expenditures~~approximately to$0.2 ~~develop~~million oroutstanding ~~acquire~~principal ~~new~~amount ~~equipment~~of orthe ~~technology~~Notes was repurchased in ~~order~~January to2011. ~~replace~~Also ~~aging~~during orthe ~~technologically~~year ~~obsolete~~ended ~~equipment~~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.

WeNet ~~also~~cash ~~expect~~provided toby ~~use~~(used ~~cash~~in) ~~for~~financing ~~required~~activities ~~payment~~decreased ofduring ~~wages~~the ~~and~~year ~~salaries~~ended ~~to employees~~December 31, ~~purchase~~2012 ofcompared ~~network~~to ~~capacity~~the ~~and~~year ~~access~~ended ~~under contracts~~December 31, ~~and~~2011 ~~payment~~primarily ofdue ~~fees~~to ~~for~~a ~~other~~decrease ~~goods~~in ~~and~~repayment ~~services,~~of ~~including~~debt ~~maintenance~~ and ~~commission~~capital ~~payments~~lease obligations. ~~Although~~During wethe ~~are~~year ~~parties~~ended toDecember 31, ~~legally~~2011, ~~binding~~we ~~contracts~~repaid ~~requiring~~$3.0 ~~payment~~million ~~for~~of ~~these~~debt ~~goods~~assumed ~~and~~in ~~services,~~ the ~~actual~~STS ~~amounts~~Telecom ofacquisition ~~such~~and ~~payments~~repurchased ~~are~~approximately ~~contingent~~$0.2 ~~upon~~million ~~such~~outstanding ~~factors~~principal asamount ~~volume~~of ~~and/or~~the ~~variable~~Notes. ~~rates~~During ~~that~~the ~~are~~year ~~uncertain~~ended ~~or unknown as of~~ December 31, ~~2011.~~2012, Wewe ~~are~~repaid ~~obligated~~$34.0 ~~under~~million ~~contracts~~of ~~for~~debt ~~network~~and ~~facilities~~capital ~~and~~lease ~~access~~obligations. ~~that~~Partially ~~require~~offsetting usthis tochange ~~pay~~was aan ~~penalty,~~increase ~~acquire~~in ~~equipment~~EarthLink's ~~specific~~investments toin us, orwhich ~~purchase~~was ~~contract~~$33.5 ~~specific~~million ~~equipment,~~during asthe ~~defined~~year byended ~~each contract~~December 31, if2012 weused ~~terminate~~to fund the ~~contract~~debt ~~without~~repayment, ~~cause~~compared ~~prior~~ to ~~its expiration date~~$30.0 ~~Because~~million ~~these~~during ~~payment~~the ~~obligations~~year ~~are~~ended ~~contingent~~December 31, on2011 ~~our~~used ~~termination~~to offund the ~~contract,~~STS noTelecom ~~obligation will exist unless such a termination occurs~~acquisition.

~~Our~~Future ~~cash~~Uses ~~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.~~Cash

33Our primary future cash requirements will be for outstanding indebtedness, capital expenditures and general business working capital requirements.

~~Table~~Debt and interest. We expect to use cash related to our outstanding indebtedness, including payments for interest. In December 2012, we redeemed 10%, or $32.5 million aggregate principal amount, of ~~Contents~~our outstanding ITC^DeltaCom Notes at a redemption price of 103% pursuant to the terms of the related indenture, which was funded by EarthLink. However, we may use additional cash to redeem our Notes in accordance with the terms of the related indenture, to purchase them in the open market or to refinance with new debt.

~~Sources~~Capital expenditures. We believe that to remain competitive with much larger communications companies, we will require significant additional capital expenditures to enhance and operate our fiber network. We plan to make capital expenditures relating to acquiring new customers and to maintain and upgrade our network and technology infrastructure. The actual amount of ~~Cash~~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 obsolete equipment.

~~Our~~Other. ~~principal~~We ~~sources~~also ofexpect ~~liquidity~~to ~~are~~use ~~our~~ cash ~~and~~for ~~cash~~required ~~equivalents,~~payment asof ~~well~~wages asand ~~the~~salaries ~~cash~~to ~~flow we generate from our operations. During the year ended December 31~~employees, ~~2009,~~purchase ~~the~~of ~~combined~~network ~~year~~capacity ~~ended December 31, 2010~~ and ~~the~~access ~~year~~under ~~ended December 31~~contracts, ~~2011,~~and wepayment ~~generated~~of ~~$68.9~~fees ~~million,~~for ~~$42.1~~other ~~million~~goods and ~~$37.1 million in cash from operations~~services, ~~respectively.~~including Asmaintenance ~~of December 31, 2011, we had $34.9 million in cash~~ and ~~cash~~commission ~~equivalents~~payments.

WeOur ~~believe~~cash ~~that~~requirements ~~our~~depend ~~cash~~ on ~~hand~~numerous ~~and~~factors, including the ~~cash~~costs ~~flows~~required ~~we expect~~ to ~~generate~~maintain ~~from operations under~~ our ~~current~~network ~~business plan will provide us with sufficient funds to enable us to fund our planned capital expenditures~~infrastructure, ~~satisfy our debt service requirements, and meet our other cash needs under our current business plan for at least~~ the ~~next~~outcome ~~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,~~telecommunications-related ~~including~~disputes ~~an increase in customer attrition, employee turnover, service disruptions~~ and ~~associated customer credits~~proceedings, ~~acceleration~~the ofpricing ~~critical operating payables, lower than expected collections~~ of ~~accounts~~our ~~receivable~~services, and ~~other~~the ~~circumstances~~level ~~outside~~ of ~~our~~resources ~~immediate~~used ~~and~~for ~~direct control. We may determine that it is necessary or appropriate to obtain additional funding through new debt financing to address such contingencies or changes to~~ our ~~business~~sales ~~plan.~~and Wemarketing ~~cannot provide any assurance as to whether~~activities, oramong as to the terms on which, we would be able to obtain such debt 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 marketsothers.

~~Contractual~~Sources ~~Obligations~~of ~~and Commitments~~Cash

AsOur principal sources of liquidity are our cash and cash equivalents, as well as the cash flow we generate from our operations. During the combined year ended December 31, 2010 and the years ended December 31, 2011 and 2012, we generated $42.1 million, $37.2 million and $50.6 million in cash from operations, respectively. As of December 31, 2012, we had ~~the~~$32.3 ~~following~~million ~~contractual~~in ~~commitments:~~cash and cash equivalents.

			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)	$	324,800	$	—	$	—	$	324,800	$	—
Interest on debt (2)	149,205		34,104		68,208		46,893		—
Purchase obligations (3)	66,716		28,816		32,160		5,080		660
Operating leases (4)	44,311		12,632		16,771		7,676		7,232
Capital leases (5)	1,099		445		564		90		—
Total	$	586,131	$	75,997	$	117,703	$	384,539	$	7,892

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, 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

~~(1) Includes the principal amount of our long-term debt, which is also included in our consolidated balance sheet.~~27

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

~~(3) Includes~~control. We may determine that it is necessary or appropriate to obtain additional funding through new debt financing to address such contingencies or changes to our ~~noncancelable~~business ~~operating~~plan. ~~leases~~We cannot provide any assurance as to whether, or as to the terms on which, we would be able to obtain such debt 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.

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

~~(5) Represents~~The ~~remaining~~following ~~payments~~table ~~under~~sets ~~capital~~forth ~~leases,~~our ~~including~~contractual ~~interest,~~obligations ~~which~~and ~~were~~commercial ~~assumed~~commitments ~~from~~as ~~our acquisition~~ of ~~STS~~December 31, ~~Telecom.~~2012:

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.



			Payment Due by Period
	Total		2013		2014- 2015		2016- 2017		After 5 Years
	(in thousands)
Long-term debt (1)	$	292,300	$	—	$	—	$	292,300	$	—
Interest payments on long-term debt (2)	130,448		30,694		61,387		38,367		—
Purchase commitments (3)	53,233		27,341		24,959		919		14
Operating leases (4)	42,165		12,117		15,514		8,632		5,902
Capital leases (5)	623		302		321		—		—
Total (6)	$	518,769	$	70,454	$	102,181	$	340,218	$	5,916

34__________________________________________

~~Table~~(1) Long-term debt includes principal payments on outstanding debt obligations. Long-term debt excludes unamortized premiums. As of ~~Contents~~December 31, 2012, we had $292.3 million of 10.5% senior secured notes due on April 1, 2016.

~~Debt~~(2) ~~Covenants~~Interest payments on long-term debt includes interest due on outstanding debt through maturity.

~~Under~~(3) ~~the~~Purchase ~~indenture~~commitments ~~governing~~represent ~~our~~non-cancellable ~~Notes,~~contractual ~~acceleration~~obligations onfor ~~principal~~services ~~payments~~and ~~would~~equipment ~~occur~~and ~~upon~~minimum ~~payment~~commitments ~~default~~under ornetwork ~~violation~~access ofagreements ~~debt covenants. We were in compliance~~ with ~~all~~several ~~covenants under the indenture governing our Notes as of December 31, 2011~~carriers.

~~Off~~(4) These amounts represent base rent payments under non-~~Balance~~cancellable ~~Sheet~~operating ~~Arrangements~~leases for facilities and equipment that expire in various years through 2020.

As(5) ofRepresents ~~December 31,~~remaining ~~2011,~~payments weunder ~~did~~capital ~~not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition~~leases, ~~changes~~including ~~in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors~~interest.

~~Critical~~(6) ~~Accounting~~The ~~Policies~~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. The remaining $1.7 million has been reflected on the balance sheet as of December 31, 2012 and ~~Estimates~~would impact the effective tax rate upon settlement. Of the total uncertain tax positions, none is expected to reverse within the next twelve months.

~~Set~~Debt 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.Covenants

~~Revenue~~Under ~~Recognition~~the indenture governing our Notes, acceleration on principal payments would occur upon payment default or violation of debt covenants. We were in compliance with all covenants under the indenture governing our Notes as of December 31, 2012.

WeOff-Balance ~~recognize~~Sheet revenue 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.Arrangements

WeAs ~~generate nonrecurring revenues from the sale~~ of ~~telephone systems~~December 31, ~~other equipment and services. Revenues from these sources are recognized upon installation or as services are performed. Nonrecurring revenues~~2012, ~~such~~we asdid ~~the~~not ~~sale~~have ofany ~~telephone~~off-balance ~~systems,~~sheet ~~may be part of multiple element~~ arrangements. ~~For example, we may provide for the sale of equipment and installation of~~ that ~~equipment~~have or, ~~alternatively,~~are ~~may~~reasonably ~~sell~~likely ~~these~~to ~~products~~have ~~separately~~a ~~without~~current ~~installation.~~or Wefuture ~~identify~~effect ~~the~~on ~~sale~~our ~~and~~financial ~~installation~~condition, ofchanges ~~equipment as separate elements~~ in ~~the~~financial ~~earnings process~~condition, ~~and~~revenues ifor ~~a separate element~~expenses, ~~such~~results ~~as installation, is essential to the functionality~~ of ~~another element~~operations, ~~such as an equipment sale~~liquidity, wecapital ~~recognize~~expenditures ~~revenue~~or ~~for~~capital aresources ~~delivered~~that ~~element~~are ~~only~~material ~~when~~to ~~the remaining elements in the arrangement are delivered~~investors.

~~Receivable~~Related ~~reserves~~Party Transactions

~~Sales~~We ~~credit~~have ~~reserves~~a services agreement with EarthLink pursuant to which EarthLink and its subsidiaries provide us certain support services in exchange for management fees. In addition, we provide EarthLink and its subsidiaries certain support services in exchange for management fees. The management fees are determined based on the costs to provide such services. Net operating expenses recorded were $0.6 million and $1.5 million during the years ended December 31, 2011 and 2012, respectively.

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 28

35Table of Contents

~~Table~~Critical ofAccounting ~~Contents~~Policies and Estimates

onSet ~~such~~forth ~~historical~~below ~~credit~~is ~~activity~~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 ~~determination~~preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the ~~sales~~reported ~~credit~~amounts of assets and ~~customer~~liabilities, ~~dispute~~the ~~credit~~disclosure ~~reserve~~of ~~requirements~~contingent ~~involves~~assets ~~significant~~and ~~estimation~~liabilities and ~~judgment~~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.

Allowance for doubtful accounts



Description	Judgments and Uncertainties	Effect if Actual Results Differ From Assumptions
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. Experience indicates that the invoices that are provided to other telecommunications providers are often subject to significant billing disputes. Experience also has shown that these disputes can require a significant amount of time to resolve given the complexities and regulatory issues surrounding the customer relationships.	The determination of the general sales credit and customer dispute credit reserves contain uncertainties because they require management to make assumptions and apply judgment about the amount and timing of unknown billing errors and disputes.	We have not made any material changes in the accounting methodology we use to record sales credit reserves during the past three years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to record sales credit reserves. A 10% difference in our sales credit reserves as of December 31, 2012 would have affected net loss by approximately $0.4 million during the year ended December 31, 2012.
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 and a specific customer's ability to meet its financial obligations to us.	The determination of our allowance for doubtful accounts contains uncertainties because it requires management to make assumptions and apply judgment about future uncollectible accounts.	We have not made any material changes in the accounting methodology we use to record our allowance for doubtful accounts during the past three years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions used to record our allowance for doubtful accounts. A 10% difference in our allowance for doubtful accounts as of December 31, 2012 would have affected net loss by approximately $0.2 million during the year ended December 31, 2012.
Cost of Revenues
We rely on other carriers to provide services where we do not have facilities, and we use a number of different carriers to terminate our long distance calls. These costs are expensed as incurred. Experience indicates that the invoices that are received from other telecommunications providers are often subject to significant billing disputes. 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. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available.	Our cost of revenues methodology contains uncertainties because it requires management to make assumptions and apply judgment regarding the amount of future billing dispute resolutions.	We have not made any material changes in the accounting methodology we use to estimate reserves for billing disputes during the past three years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use for these reserves.

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.29

~~Cost~~Table of ~~Revenues~~Contents

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.



Goodwill
We perform an impairment test of our goodwill annually during the fourth quarter of our fiscal year (October 1) or when events and circumstances indicate goodwill might be impaired. Impairment testing of goodwill is required at the reporting unit level and involves a two-step process. However, we may 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 units with the reporting unit's carrying amount, including goodwill. If we determine that the carrying value of a reporting unit exceeds its estimated fair value, we perform a second step to compare the carrying amount of goodwill to the implied fair value of that goodwill. The implied fair value of goodwill is determined in the same manner as utilized to recognize goodwill in a business combination. 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. We evaluate our reporting units on an annual basis and allocate goodwill to our reporting units based on the reporting units expected to benefit from the acquisition generating the goodwill.	Application of the goodwill impairment test requires judgment, including performing the qualitative assessment, 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 estimate the fair values of our reporting units using the income approach. This models uses significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under the income approach, we calculate the fair value of the reporting unit based on the present value of estimated cash flows using a discounted cash flow method. The significant assumptions used in the discounted cash flow method include internal forecasts and projections developed by management for planning purposes, available industry/market data, strategic plans, discount rates and the growth rate to calculate the terminal value. The assumptions with the most significant impact on the fair value of the reporting unit are those related to the discount rate, the terminal value, future operating cash flows and the growth rate. This type of analysis contains uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies.	We have not made any material changes in the accounting methodology used to evaluate impairment of goodwill during the last three years other than the adoption of the new guidance allowing the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test. We did not record any impairment of goodwill during the years ended 2010, 2011 or 2012. As of December 31, 2012, we had approximately $194.7 million of goodwill. We elected to forgo the qualitative assessment on our goodwill for our fiscal 2012 impairment test. We determined we were one reporting unit for evaluating goodwill for the 2012 impairment test. Our fiscal 2012 impairment test indicated the estimated fair value of our reporting unit substantially exceeded the carrying value and therefore was not at risk of future impairment. We continue to monitor events and circumstances which may affect the fair value of this reporting unit. There have been no significant events since the timing of our impairment test that would have triggered additional impairment testing.

~~Experience~~Long-lived ~~indicates~~assets ~~that~~We depreciate property and equipment and amortize intangible assets using a straight-line method over the ~~invoices~~estimated ~~that~~useful ~~are~~lives ~~received~~of ~~from~~the ~~other~~assets. ~~telecommunications~~Estimates ~~providers~~of useful lives are ~~often~~based ~~subject~~on tothe ~~significant~~nature ~~billing~~of ~~disputes~~the underlying assets as well as our experience with similar assets and intended use. We ~~typically~~perform ~~accrue~~tests of impairment for ~~all~~long-lived ~~invoiced~~assets ~~amounts~~such ~~unless~~as ~~there~~property ~~are~~and ~~contractual,~~equipment ~~tariff~~and definite-lived intangible assets when certain events or ~~operational~~changes ~~data~~in circumstances indicate that ~~clearly~~the ~~indicate~~carrying ~~support~~amount ~~for~~may ~~the~~not ~~billing~~be ~~dispute~~recoverable. ~~Experience~~Estimates ~~also~~of ~~has~~useful ~~shown~~lives ~~that~~can differ from actual useful lives due to the inherent uncertainty in making these ~~disputes~~estimates.Our ~~can~~impairment tests contain uncertainties because they require amanagement ~~significant~~to ~~amount~~make ofassumptions ~~time~~and apply judgment to ~~resolve~~estimate ~~given~~future ~~the~~cash ~~complexities~~flows and ~~regulatory~~asset ~~issues~~fair ~~surrounding~~values ~~the~~including, ~~vendor~~subscriber ~~relationships~~additions, churn, prices, marketing spending, operating costs and capital spending. Significant judgment is involved in estimating these factors, and they include inherent uncertainties. We ~~maintain~~have ~~reserves~~not ~~for~~made any ~~anticipated~~material ~~exposure~~changes ~~associated~~in ~~with~~the ~~these~~accounting ~~billing~~methodology ~~disputes~~we use to account for long-lived assets during the past three years. We ~~believe~~did not recognize any material impairment charges for our ~~reserves~~long-lived ~~are~~assets ~~adequate~~during the past three years.We ~~The~~do ~~reserves~~not ~~are~~believe ~~reviewed~~there onis a ~~monthly~~reasonable ~~basis,~~likelihood ~~but~~that ~~are~~there ~~subject~~will tobe ~~changes~~a material change in the future estimates ~~and~~or ~~management~~assumptions ~~judgment~~used asto ~~new~~account ~~information~~for ~~becomes~~long-lived ~~available~~assets.However, Inif ~~view~~other ofassumptions ~~the~~and ~~length~~estimates ofhad ~~time~~been itused ~~historically~~in ~~has~~the ~~required~~current toperiod, ~~resolve~~the ~~these~~balances ~~disputes,~~for ~~disputes~~noncurrent ~~may~~assets becould ~~resolved~~have orbeen ~~require~~materially ~~adjustment~~impacted. inFurthermore, ~~future~~if ~~periods~~management ~~and~~uses ~~relate~~different toassumptions ~~costs~~or ~~invoiced,~~if ~~accrued~~different orconditions ~~paid~~occur in ~~prior~~future periods, future operating results could be materially impacted.

~~Recoverability~~Business Combinations We recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of ~~noncurrent~~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 comprehensive loss. 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, including uncertain tax positions and tax-related valuation allowances, reserves for billing disputes and revenue reserves. Examples of critical estimates in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer contracts and acquired developed technologies, 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. 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. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

~~Goodwill and indefinite-lived intangible assets~~30

WeTable ~~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 Contents



Loss Contingencies
We are party to various legal proceedings and other disputes arising in the normal course of business, including, but not limited to, regulatory audits, trademark and patent infringement, billing disputes, rights of access, tax, consumer protection, employment and tort. We accrue for such matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, we accrue at the low end of the range. We review our accruals each reporting period.	The determination of our loss contingencies contain uncertainties because they require management to make assumptions and apply judgment about unknown resolution of matters. In addition, regulatory matters are subject to differing interpretations.	During the year ended December 31, 2012, we recorded an $8.3 million charge to increase our reserves for regulatory audits, primarily an audit currently being conducted by the Universal Service Administrative Company on previous Universal Service Fund assessments and payments, because the amount became probable and estimable during the period. We have not made any material changes in the accounting methodology used to accrue for loss contingencies during the last three years.

~~Table of Contents~~31

~~with~~Table ~~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

IfSafe weHarbor 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.Statement

~~Application~~The Management’s Discussion and Analysis and other portions of ~~the~~this ~~goodwill~~Quarterly ~~impairment~~Report ~~test~~on ~~requires~~Form 10-Q ~~judgment,~~include ~~including~~“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 ~~identification~~expectations ofexpressed ~~reporting~~in ~~units~~these forward-looking statements are reasonable, ~~assigning~~we ~~assets~~cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and ~~liabilities~~worse than our expectations. With respect to ~~reporting~~such ~~units~~forward-looking statements, ~~assigning~~we ~~goodwill~~seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks and uncertainties (1) that if we are unable to ~~reporting~~adapt ~~units~~to changes in technology and customer demands, we may not remain competitive, and ~~determining~~our revenues and operating results could suffer; (2) that unfavorable general economic conditions could harm our business; (3) that we face significant competition in the ~~fair~~communications ~~value~~industry that could reduce our profitability; (4) that decisions by the Federal Communications Commission relieving incumbent carriers of ~~each~~certain ~~reporting~~regulatory ~~unit. We~~requirements, ~~determined~~and possible further deregulation in the future, may restrict our ability to provide services and may increase the costs we incur to provide these services; (5) that if we are ~~one~~unable ~~reporting~~to ~~unit~~interconnect ~~for~~with ~~goodwill~~AT&T ~~testing.~~and ~~Significant~~other ~~judgments~~incumbent ~~required~~carriers on acceptable terms, our ability to ~~estimate~~offer competitively priced local telephone services will be adversely affected; (6) that our operating performance will suffer if we are not offered competitive rates for the ~~fair~~access ~~value~~services we need to provide our long distance services; (7) that we may experience reductions in switched access and reciprocal compensation revenue; (8) that failure to obtain and maintain necessary permits and rights-of-way ~~reporting~~could ~~units~~interfere ~~include~~with ~~estimating~~our ~~future~~network ~~cash~~infrastructure ~~flows~~and operations; (9) that we have substantial business relationships with several large telecommunications carriers, ~~determining~~and ~~appropriate~~some ~~discount~~of ~~rates~~our customer agreements may not continue due to financial difficulty, ~~growth~~acquisitions, ~~rates~~non-renewal or other factors, which could adversely affect our wholesale revenue and results of operations; (10) that we obtain a majority of our network equipment and software from a limited number of third-party suppliers; (11) that work stoppages experienced by other ~~assumptions. Changes~~communications companies on whom we rely for service could adversely impact our ability to provision and service our customers; (12) that if we, or other industry participants, are unable to successfully defend against disputes or legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (13) 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 ~~these~~the ~~estimates~~future; (14) that we may not be able to protect our intellectual property; (15) that we may be unable to hire and ~~assumptions~~retain sufficient qualified personnel, and the loss of any of our key executive officers could ~~materially~~adversely affect ~~the~~us; ~~determination~~(16) that our business depends on effective business support systems and processes; (17) that privacy concerns relating to our business could damage our reputation and deter current and potential users from using our services; (18) that cyber security breaches could harm our business; (19) that interruption or failure of ~~fair~~our ~~value~~network ~~for~~and ~~each~~information ~~reporting~~systems ~~unit~~and other technologies could impair our ability to provide our services, which could ~~trigger~~damage ~~impairment~~our reputation and harm our operating results; (20) that government regulations could adversely affect our business or ~~impact~~force us to change our business practices; (21) that regulatory audits have in the ~~amount~~past, ofand could in the future, result in increased costs; (22) that our business may suffer if third parties are unable to provide services or terminate their relationships with us; (23) that we may be required to recognize impairment charges on our goodwill and intangible assets, which would adversely affect our results of operations and financial position; (24) that we may have exposure to greater than anticipated tax liabilities; (25) that we are a wholly-owned subsidiary of EarthLink and therefore subject to strategic decisions of EarthLink and affected by EarthLink’s performance; (26) 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; (27) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (28) that we will require substantial capital to support business growth or refinance existing indebtedness, and this capital may not be available to us on acceptable terms, or at all; and (29) that our debt agreements include restrictive covenants, and failure to comply with these covenants could trigger acceleration of payment of outstanding indebtedness. These risks and uncertainties are described in greater detail in Item 1A of Part I, "Risk Factors."

~~Long-lived~~Item ~~assets~~7a. Quantitative and Qualitative Disclosures about Market Risk.

~~For~~We ~~noncurrent~~are ~~assets~~exposed ~~such~~to asinterest ~~property~~rate ~~and~~risk ~~equipment~~with ~~and~~respect ~~definite-lived~~to ~~intangible~~our ~~assets,~~10.5% senior wesecured ~~perform~~notes ~~tests~~due of2016 ~~impairment~~(the ~~when~~“Notes”). ~~certain~~The ~~events~~fair orvalue ~~changes~~of inthese ~~circumstances~~notes ~~indicate that the carrying amount~~ may ~~not~~ be ~~recoverable.~~adversely ~~Our~~impacted ~~tests~~due ~~involve critical estimates reflecting management’s best assumptions and estimates related~~ to, ~~among~~a ~~other~~rise ~~factors,~~in ~~subscriber~~interest ~~additions, churn, prices, marketing spending, operating costs and capital spending~~rates. ~~Significant~~In ~~judgment is involved in estimating these factors~~general, ~~and~~securities ~~they~~with ~~include~~longer ~~inherent~~maturities ~~uncertainties.~~are ~~Management~~subject ~~periodically~~to ~~evaluates~~greater ~~and~~interest ~~updates~~rate ~~the~~risk ~~estimates~~than ~~based~~those onwith ~~the~~shorter ~~conditions that influence these factors~~maturities. The ~~variability~~Notes ofbear ~~these~~interest ~~factors~~at ~~depends on~~ a ~~number~~fixed rate of ~~conditions,~~10.5% per ~~including~~year ~~uncertainty~~until ~~about future events~~April 1, ~~and thus our accounting estimates may change from period to period~~2016. IfAs ~~other~~of ~~assumptions~~December 31, 2011 and ~~estimates had been used in the current period~~2012, the ~~balances~~fair ~~for~~value ~~noncurrent~~of ~~assets~~the ~~could~~Notes ~~have~~was ~~been~~approximately ~~materially impacted~~$320.6 ~~Furthermore,~~million ifand ~~management~~$306.9 ~~uses~~million ~~different~~million, ~~assumptions or if different conditions occur in future periods~~respectively, ~~future~~based ~~operating~~on ~~results~~quoted ~~could~~market ~~be materially impacted~~prices.

~~Business Combinations~~32

WeTable ~~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.Contents

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 contingenciesItem 8. Financial ~~Although~~Statements weAnd ~~believe~~Supplementary 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 uncertainData. ~~Examples of~~

37ITC^DELTACOM, INC.

~~Table~~INDEX ofTO ~~Contents~~CONSOLIDATED FINANCIAL STATEMENTS

critical estimates in valuing certain of the intangible assets include, but are not limited to, future expected cash flows from customer contracts and acquired developed technologies, 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.



Reports of Independent Registered Public Accounting Firms	34

Consolidated Balance Sheets as of December 31, 2011 and 2012	36

Consolidated Statements of Comprehensive Loss for the period January 1, 2010 through December 7, 2010 (Predecessor Period) and the period December 8, 2010 through December 31, 2010 and the years ended December 31, 2011 and 2012 (Successor Periods)	37

Consolidated Statements of Stockholder's Equity (Deficit) for the the period January 1, 2010 through December 7, 2010 (Predecessor Period) and the period December 8, 2010 through December 31, 2010 and the years ended December 31, 2011 and 2012 (Successor Periods)	38

Consolidated Statements of Cash Flows for the the period January 1, 2010 through December 7, 2010 (Predecessor Period) and the period December 8, 2010 through December 31, 2010 and the years ended December 31, 2011 and 2012 (Successor Periods)	39

Notes to Consolidated Financial Statements	40

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 operations and could have a material impact on our results of operations and financial position.33

~~Recently~~Table ~~Issued~~of ~~Accounting Pronouncements~~Contents

InREPORT ~~May 2011,~~OF ~~the~~INDEPENDENT ~~Financial~~REGISTERED ~~Accounting~~PUBLIC ~~Standards~~ACCOUNTING Board (“FASB”) issued authoritative guidance related to fair value measurements. This guidance was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This guidance also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements.FIRM

InThe ~~June 2011,~~Board ~~the FASB issued authoritative guidance related to comprehensive income. This guidance was issued to increase the prominence~~ of ~~items~~Directors ~~reported in other comprehensive income~~ and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, reclassification adjustments for items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

InStockholder September 2011, the FASB issued authoritative guidance related to goodwill testing. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of ~~a reporting unit unless the entity determines~~ITC^DeltaCom, ~~based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount~~Inc. ~~This~~ guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. We adopted this new guidance in the fourth quarter of 2011. The adoption did not have a material impact on our consolidated financial statements.

38Atlanta, Georgia

~~Table~~We have audited the accompanying consolidated statements of ~~Contents~~comprehensive loss, stockholder's equity (deficit), and cash flows for the period December 8, 2010 through December 31, 2010 (Successor period) and from January 1, 2010 through December 7, 2010 (Predecessor period). 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 audits.

~~Item~~We 7aconducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). ~~Quantitative~~Those standards require that we plan and ~~Qualitative~~perform ~~Disclosures~~the audit to obtain reasonable assurance about ~~Market~~whether ~~Risk~~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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

WeIn ~~are exposed to interest rate risk with respect to~~ our ~~10.5% senior~~opinion, ~~secured notes due 2016 (~~the ~~“Notes”).~~consolidated ~~The~~financial ~~fair~~statements ~~value~~referred ~~of these notes may be adversely impacted due~~ to aabove ~~rise~~present fairly, in ~~interest~~all ~~rates.~~material ~~In general~~respects, ~~securities~~the ~~with~~results ~~longer~~of ~~maturities~~ITC^DeltaCom, ~~are~~Inc.'s ~~subject~~operations toand ~~greater~~its ~~interest~~cash ~~rate~~flows ~~risk~~for ~~than~~the ~~those~~period ~~with~~December ~~shorter~~8, ~~maturities.~~2010 ~~The~~through ~~Notes~~December ~~bear~~31, ~~interest~~2010 at(Successor aperiod) ~~fixed~~and ~~rate~~from ofJanuary ~~10.5% per year until April~~ 1, ~~2016.~~2010 Asthrough of December 31 7, 2010 ~~and~~(Predecessor ~~2011~~period), ~~the~~in ~~fair~~conformity ~~value~~with ofaccounting ~~the~~principles ~~Notes~~generally ~~was~~accepted ~~approximately~~in ~~$352.6~~the ~~million~~United ~~and~~States ~~$320.6~~of ~~million, respectively, based on quoted market prices~~America.

~~Item~~As discussed in note 3 to the consolidated financial statements, effective December 8, 2010, EarthLink, Inc. ~~Financial~~acquired ~~Statements~~all ~~And~~of ~~Supplementary~~the ~~Data~~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.

~~ITC^DELTACOM~~/s/ BDO USA, ~~INC.~~ LLP

~~INDEX~~Atlanta, TOGeorgia ~~CONSOLIDATED FINANCIAL STATEMENTS~~

	Page
Reports of Independent Registered Public Accounting Firm	40
Consolidated Balance Sheets as of December 31, 2010 and 2011	42
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 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 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	46

March 1, 2011

39except for Notes 3, 5 and 10 as to which date is May 5, 2011

~~Table of Contents~~34

~~REPORT~~Table OFof ~~INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~Contents

~~The~~REPORT ~~Board~~OF ofINDEPENDENT ~~Directors~~REGISTERED ~~and~~PUBLIC ACCOUNTING FIRM

~~Stockholder~~The Board of ~~ITC^DeltaCom, Inc.~~Directors and

~~Atlanta~~Stockholder of ITC^DeltaCom, ~~Georgia~~Inc.

We have audited the accompanying consolidated balance ~~sheet~~sheets of ITC^DeltaCom, Inc. as of December 31, ~~2010~~2011 ~~(Successor)~~and 2012, and the related consolidated statements of ~~operations~~comprehensive loss, ~~stockholders’~~stockholder's equity (deficit) ~~and comprehensive loss~~, and cash flows for ~~the~~each ~~period~~of ~~December 8,~~the ~~2010~~two ~~through~~years ~~December 31,~~in ~~2010~~the ~~(Successor~~ period) ~~and from January 1, 2010 through December 7, 2010 and for the year~~ ended December 31, ~~2009 (Predecessor periods)~~2012. 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 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~~We ~~Company~~were is not ~~required to have, nor are we~~ engaged to perform, an audit of ~~its~~the Company's 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, asand ~~well as~~ evaluating the overall financial statement 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 consolidated financial position of ITC^DeltaCom, Inc. at December 31, ~~2010~~2011 ~~(Successor)~~and 2012, and the consolidated results of its operations and its cash flows for ~~the~~each ~~period~~of ~~December 8,~~the ~~2010~~two ~~through~~years ~~December 31,~~in ~~2010~~the ~~(Successor~~ period) ~~and from January 1, 2010 through December 7, 2010 and for the year~~ ended December 31, ~~2009 (Predecessor periods)~~2012, in conformity with ~~accounting~~U.S. ~~principles~~ generally accepted inaccounting ~~the United States of America~~principles.

As/s/ ~~discussed~~Ernst in& ~~note~~Young 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.LLP

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

~~except~~February ~~for Notes 3~~20, ~~6 and 12 as to which date is May 5, 2011~~2013

4035

Table of Contents

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~ITC^DELTACOM, INC.

~~The~~CONSOLIDATED ~~Board~~BALANCE ~~of Directors and~~SHEETS

~~Stockholders~~(in ~~of ITC^DeltaCom~~thousands, ~~Inc.~~except per share data)

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.



	December 31, 2011			December 31, 2012

ASSETS
Current assets:
Cash and cash equivalents	$	34,930		$	32,340
Restricted cash	1,781			1,013
Accounts receivable, net of allowance of $2,519 and $3,091 as of December 31, 2011 and 2012, respectively	43,851			42,652
Prepaid expenses	6,143			4,015
Receivable due from parent	913			4,714
Other current assets	5,034			4,921
Total current assets	92,652			89,655
Property and equipment, net	213,438			218,734
Goodwill	194,761			194,690
Other intangible assets, net	121,115			94,180
Other long-term assets	82			843
Total assets	$	622,048		$	598,102

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable	$	4,731		$	8,326
Accrued payroll and related expenses	9,362			8,289
Other accrued liabilities	35,324			45,242
Deferred revenue	25,410			17,635
Current portion of long term debt and capital lease obligations	419			259
Total current liabilities	75,246			79,751
Long-term debt and capital lease obligations	347,364			308,270
Other long-term liabilities	8,143			7,466
Total liabilities	430,753			395,487

Commitment and contingencies (See Note 12)

Stockholder's equity:
Common stock, 0.01 par value, 1,000 shares authorized, 250 and 350 shares issued and outstanding as of December 31, 2011 and 2012, respectively	—			—
Additional paid-in capital	218,663			254,289
Accumulated deficit	(27,368		)	(51,674		)
Total stockholder's equity	191,295			202,615
Total liabilities and stockholder's equity	$	622,048		$	598,102

WeThe ~~conducted~~accompanying ~~our~~notes 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~~integral ofpart ~~the Company’s internal control over financial reporting. Our audit included consideration~~ of ~~internal~~these ~~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. 36

~~/s/~~Table ~~Ernst~~of ~~& Young LLP Atlanta, Georgia February 24, 2012~~Contents

41ITC^DELTACOM, INC.

~~Table~~CONSOLIDATED ofSTATEMENTS ~~Contents~~OF COMPREHENSIVE LOSS

~~ITC^DELTACOM, INC.~~(in thousands)

CONSOLIDATED BALANCE SHEETS



	Predecessor Entity			Successor Entity
	January 1,			December 8,
	through			through			Year Ended			Year Ended
	December 7,			December 31,			December 31,			December 31,
	2010			2010			2011			2012
Revenues:
Retail services	$	343,227		$	21,307		$	364,066		$	349,703
Wholesale services	58,003			4,267			71,955			76,474
Other services	13,616			1,029			13,693			14,167
Total revenues	414,846			26,603			449,714			440,344
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shown separately below)	197,567			13,845			219,400			225,793
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	138,544			9,389			138,765			136,154
Depreciation and amortization	52,339			4,885			71,659			70,912
Acquisition and integration-related costs	7,987			6,765			5,272			2,491
Total operating costs and expenses	396,437			34,884			435,096			435,350
Income (loss) from operations	18,409			(8,281		)	14,618			4,994
Interest expense and other, net	(29,118		)	(2,089		)	(30,882		)	(29,117		)
Write-off of debt discount and issuance cost	(7,948		)	—			—			—
Loss before income taxes	(18,657		)	(10,370		)	(16,264		)	(24,123		)
Income tax benefit (provision)	604			—			(734		)	(183		)
Net loss	$	(18,053	)	$	(10,370	)	$	(16,998	)	$	(24,306	)

Comprehensive loss	$	(18,053	)	$	(10,370	)	$	(16,998	)	$	(24,306	)

~~(in~~The ~~thousands,~~accompanying ~~except~~notes ~~per~~are ~~share~~an ~~data)~~integral part of these financial statements.

	December 31,
	2010			2011
ASSETS
Current assets:
Cash and cash equivalents	$	43,585		$	34,930
Restricted cash	2,270			1,781
Accounts receivable, net of allowance of $276 and $2,519 as of December 31, 2010 and 2011, respectively	40,242			43,851
Prepaid expenses	8,494			6,143
Receivable due from parent	1,292			913
Other current assets	4,230			5,034
Total current assets	100,113			92,652
Property and equipment, net	206,988			213,438
Goodwill	170,126			194,761
Other intangible assets, net	129,650			121,115
Other long-term assets	170			82
Total assets	$	607,047		$	622,048
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,734		$	4,680
Accrued payroll and related expenses	4,053			8,154
Accrued interest	8,622			8,626
Other accrued liabilities	37,845			29,055
Deferred revenue	19,844			25,410
Current portion of long term debt and capital lease obligations	—			419
Total current liabilities	82,098			76,344
Long-term debt and capital lease obligations	351,251			347,364
Other long-term liabilities	7,874			7,045
Total liabilities	441,223			430,753
Commitments and contingencies (Note 13)
Stockholders’ equity:
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	176,194			218,663
Accumulated deficit	(10,370		)	(27,368		)
Total stockholders’ equity	165,824			191,295
Total liabilities and stockholders’ equity	$	607,047		$	622,048

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

42ITC^DELTACOM, INC.

~~Table~~CONSOLIDATED ofSTATEMENTS ~~Contents~~OF STOCKHOLDER'S EQUITY (DEFICIT)

~~ITC^DELTACOM~~(in thousands, ~~INC.~~ except share data)

CONSOLIDATED STATEMENTS OF OPERATIONS



	Common Stock					Additional Paid-in Capital			Accumulated Deficit			Total Stockholder's Equity (Deficit)
	Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Total Stockholder's Equity (Deficit)
Predecessor Entity
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		)
Acquisition transactions	(83,829,816	)	(838		)	(728,448		)	764,293			35,007
Balance as of December 7, 2010	—		—			—			—			—
Successor Entity
Push-down accounting adjustment related to valuation allowance	—		$	—		$	(85,295	)	$	—		$	(85,295	)
Acquisition transactions	100		—			251,489			—			251,489
Issuance of common stock	50		—			10,000			—			10,000
Net loss	—		—			—			(10,370		)	(10,370		)
Balance as of December 31, 2010	150		—			176,194			(10,370		)	165,824
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		)
Balance as of December 31, 2011	250

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